Duma Gqubule asserts in his column Why state can spend itself out of trouble (November 20) that the post-World War 2 experiences of the UK and the US hold important lessons for SA as they demonstrate that increasing public spending can cause the economy to grow and reduce the national debt burden. He is brave but wrong.

The UK and the US are special cases of economies that enjoyed the exorbitant privilege of being the sources of international money, otherwise known as reserve currencies — the UK on account of a colonial empire in which the pound sterling circulated as the sole medium of general exchange and the US on account of having been spared any bombs during the war.

US production continued unabated and the country became the primary source of agricultural and industrial goods for the non-communist world. Its currency became the principal reserve currency for the post Bretton Woods world.

This meant the US and UK could finance their government and external (balance of payments) deficits, in part or whole, by printing currency. 

SA has neither colonies nor an economy of world proportions. The rand is a reserve currency only within the Common Monetary Area comprising Lesotho, Namibia and Eswatini and its circulation is governed by a legal agreement. So SA has to finance both its government and external accounts by conventional means: taxes, reserves and borrowing.

The paradox of thrift to which Gqubule refers is of relevance to policy only in cyclical downturns during which the animal spirits desert investors, or households and companies find themselves in financial difficulty.

But the problem in SA is structural, not cyclical. Contracts have to be enforceable, property rights have to be inviolable, the constabulary has to be able to function without hindrance, labour has to be substitutable, professional bodies have to uphold standards. Otherwise, infrastructure projects — as in Giyani — serve only to enrich the miscreants. The state spends itself into trouble.

XP Guma
Via e-mail