How to put SA’s economy on a bold, sustainable and inclusive growth path
As SA approaches its own social, political and economic crossroads, partly induced by the pandemic, it urgently needs to reach consensus that it should take the fork in the road to an inclusive and dynamic growth path, and place the nation onto a virtuous cycle, a sustainable pathway that truly delivers “a better life for all”.
As laid out in the article, SA doesn't have a debt problem, it has a growth problem, SA has, for the past decade, been locked in a low-growth trap, with falling per capita income, rising inequality and rocketing unemployment.
SA is in a “crisis of growth” sitting on a ticking unemployment time bomb. The country’s economy is essentially stuck in an unstable disequilibrium: low growth and high unemployment, uncomfortable deficits and debt ratios, high income inequality and lack of effective structural reforms.
This structural disequilibrium can lead to two possible outcomes: one, a disorderly vicious cycle where the growth crisis deepens, a fiscal crisis ensues leading to lower incomes, fewer jobs and more inequality, inviting further insurrectionist episodes. Many warn, SA is on this path.
The other outcome, requiring a bold new economic trajectory, promises a stable equilibrium where inequality reducing policies, a stimulus together with structural reforms, are implemented to increase potential growth and investment; rising growth and reduced inequality leads to job creation, reduced poverty and sustainable public finances. This is the path SA can now choose.
Old-style austerity with structural reforms alone, as proposed by two conservative economist critics in their co-ordinated response to the article above, will fail to kick-start the economy. Ratings agencies and investors have been disappointed by a decade’s track record of missed growth and fiscal targets. These critics miss the central point of the article: SA is stuck in a growth trap, SA needs to rethink economic policy and stimulate an inclusive growth path.
In reality, the current path condemns 12-million unemployed SA’s to no realistic hope of jobs or incomes, and, cruelly, their families to starvation, while they wait for promised, but constantly delayed, structural reforms to create jobs years down the line. This can only take SA further down the path of structural disequilibrium. SA’s challenge is, therefore, not simply to recover from this low growth trap; its challenge is to transform the economic growth trajectory, akin to the country adopting a coherent business plan and drive investment to equitise its sheet.
We are very much alive to SA’s fiscal pressures, but see the solution as executing on a coherent growth plan.
Pramol Dhawan, head of emerging markets at Pimco, explains: “Unfortunately, SA’s medium-term debt outlook is in deep trouble without decisive action, SA needs a comprehensive growth plan, equally it needs a co-ordinated solution between the National Treasury and the SA Reserve Bank (Sarb) to address debt management. The mathematics of a country running a flat or negative primary budget balance is that real growth has to exceed the real rate of interest on its debt stock, or else its debt will grow continuously as a proportion of GDP, which is the case in SA.
“The broad government deficit continues to be large -8% of GDP which is largely driven by the yawning interest bill. In a vicious cycle, fears about the fiscal outlook — partially driven by the interest bill — keeps the yield on long-term SA treasuries at elevated levels (20-year government bonds yield 11%). Real yields must come lower and/or real growth must increase, or else SA is headed for a debt crisis,” says Dhawan.
“Austerity alone will be insufficient to fix this spiral, confidence is needed to help anchor local bond yields and that will come from credible and bold structural reforms. These structural reforms could also include improvements in channelling SA’s huge pool of domestic savings into improving its own debt dynamics, for instance with more aggressive involvement of the Sarb to flatten the government bond curve, structurally lower funding costs for bonds, or by providing incentives for SA’s pension plans to deploy more assets domestically.”
We, therefore, have joined together here to propose a bold new package of pro-inclusive growth economic measures to place SA on this transformative growth trajectory, made up of interdependent components: first, a set of initiatives to remove structural impediments to growth, investment and employment creation, and second, an economic stimulus targeting income for the unemployed, and recapitalising businesses. These initiatives harness the untapped potential of the poor, and unlock the productive potential of SME’s and millions of marginalised, destitute individuals.
The international consensus is radically changed relative to a few decades ago: excessive fiscal austerity is now shunned; growth targets both reduction in inequality and environmental goals. The global economic response to the Covid-19 pandemic has seen unprecedented waves of stimulus.
Accommodative monetary policies have been adopted (including SA), fiscal stimulus measures (for example, Brazil) have targeted the most vulnerable segments of society to dampen the severity of the recession, and credit easing policies implemented to prevent the bankruptcy of illiquid but solvent firms and households.
We, therefore, unreservedly support and propose that SA’s economy, with its crisis of growth, elevated unemployment levels and widespread food hunger, should undertake a fresh round of economic stimulus, backed by an inclusive growth plan.
The interdependent foundational pillars we propose are:
• Social welfare expansion;
• Recapitalising businesses;
• Undertaking structural reforms to open up the economy for fixed investment; and
• Fiscal consolidation.
First, expand social welfare via an R800 per month unemployed relief grant, costing 2% of GDP. This should be a multiyear, if not permanent, successor to the R350 per month “social relief of distress grant” ending April 2022, whose positive impact only demonstrates the power that a stimulus we propose, more than twice its size and reaching almost twice the number of recipients over a number of years, promises.
This will put money into the hands of the 12-million unemployed who have no other income support. Grants will be spent back into the economy, and have a multiplier effect on stimulating economic activity and jobs.
This unemployment relief grant may be paid for in part by some government saving measures and tax reforms such as removing deductions targeted at higher-income tax payers, but in the short term will require about R100bn of additional debt on the government’s balance sheet.
This is roughly equal to anticipated incremental SA corporate tax revenues this year from the commodity boom.
As Dani Rodrik, professor at Harvard University’s John F Kennedy School of Government, stated in a recent article for Project Syndicate: “Aggregate growth may not always help everyone, especially the poor. Consequently, antipoverty programmes will be necessary even when growth policy is doing its job properly.”
Let’s be clear: grants are not an end in themselves, they are part of a broad arsenal of economic actions to attack the unemployment and growth crisis. Other interventions such as wage subsidisation have their place, too. But the evidence of grants strongly relieving poverty and food hunger, is undeniable, as is data that grant recipients use grants to start micro businesses. Providing grants and getting jobless into permanent employment are mutually reinforcing. We must do both through grants and structural reforms.
Second, a sizeable small and medium business hybrid equity funding scheme, plus grants for SMEs, should be funded by the National Treasury, in partnership with financial institutions, to help recapitalise businesses. This injection of risk-sharing equity into qualifying businesses would be aimed at stimulating investment and job creation.
As Rodrik states: “Social policy and growth policy will increasingly overlap. The best social policy — enabling sustainable poverty reduction and enhanced economic security — is to create more productive, better jobs for workers at the bottom of the skill distribution. In other words, social policy must focus on firms as much as households. And the new global and technological context implies that economic growth is now possible only by raising productivity in smaller, informal firms that employ the bulk of the poor and lower-middle classes.”
The government should work with Eskom towards a credible operational and structural plan that includes recapitalising the Eskom balance sheet. This should aim to normalise Eskom’s debt within a five-year period, remove a ticking time bomb that cannot be ignored, while transitioning to green energy generation and exploiting green concessional funding.
The government must also communicate to ratings agencies, and investors, a credible growth plan that includes structural reforms, and resets the fiscal consolidation path to achieve faster medium-term fiscal consolidation as growth kicks in.
Structural reforms to target higher rates of fixed investment include:
• Following an effective rollout of the Covid-19 vaccination programme, an aggressive marketing of SA as a tourism destination, backed by a user friendly visa regime;
• Bankable infrastructure projects identified for private public partnerships, including port and rail infrastructure concessions should be fast tracked for competitive bidding;
• Spectrum allocation and migration to digital broadcasting, delayed for a decade now, needs to be implemented;
• Transforming energy (renewable), agriculture, mining, automotive (electric vehicle production), and technology (data centres) sectors to respond to technological advances, backed by attractive incentives, can unlock jobs and investment; and
• Industrial and labour policy should be reviewed to attract investment into both labour intensive and high tech skilled worker absorbing production and manufacturing facilities. Linking expansion of industrial parks with manufacturing for export to African markets is key.
Such medium-term structural reforms, working together with immediate stimulus and relief measures described above, can provide a sustained sequence of economic reforms that over time produces a harmonious cycle of immediate poverty relief, job creation and a conducive environment for investment and growth, which in combination can reverse the tide on mounting debt.
A cornerstone test of a credible fiscal consolidation path is managing the public sector wage bill, currently enjoying an unsustainable proportional share of overall budget expenditure. This requires unions and government to agree medium term public sector wages without subsequent slippage. The public sector wage bill reflects the government’s priorities. While the overall envelope of spending should be negotiated one can focus on service delivery by more front-line workers in some places and less back-office workers in others.
Central to this balance is the professionalisation of the public service, a crackdown on corruption, and targeting greater “bang for the buck” on public spending in health, education and security. To this end, SA should deploy the best private and public sector expertise and skills available.
Should our growth enhancing and economic stimulus proposals be implemented, it can be expected that the market will reward successfully implemented structural reforms, cost control and growth targets. As GDP increases faster than debt, successful deficit reduction should result in the net tightening of bond yields, resulting in significant savings on the government’s cost of borrowing.
In conclusion, extending this stimulus, implementing the structural reforms to drive growth AND meeting fiscal consolidation targets over time is an interdependent package deal.
One cannot cherry-pick aspects of this package one likes and forgo aspects one doesn’t. The successful implementation of this package, as a whole, will, we believe, put SA’s economy on a bold, new, sustainable and inclusive economic growth trajectory. Here lies the path to breaking out of SA’s low growth trap. Here lies the path to a stable equilibrium and a better life for all SA’s.
• Coleman is a senior fellow at Yale University and a former CEO of Goldman Sachs for Sub-Saharan Africa. He is co-chair of the Youth Employment Service. Dhawan is MD, a portfolio manager in the New York office and head of the emerging markets portfolio management team at Pimco. Roubini is professor emeritus at the Stern School of Business, New York University. He predicted the global financial crisis of 2007-2009.
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