The battle over post-Covid-19 economic policy has begun with diametrically opposed policy approaches from organised business and the African National Congress (ANC) being released last week.
Academics from the left have also stepped into the fight with a letter to President Cyril Ramaphosa from about 100 mostly university economists. The letter says the government is not spending nearly enough to counter the wider social impact of Covid-19.
Government can no longer go for the options of delay or a messy compromise solution to get the country out of its economic mess. If it wants a turnaround, the government will have to cut spending, cut subsidies to state-owned enterprises, not so easily accede to public sector unions when average state wages are above those in the private sector, and go for serious economic reform. There is no middle ground for a turnaround solution.
So far, in the face of a contracting economy, a widening budget deficit, and a staggeringly large debt burden, the government has only kicked the can down the road.
Both the proposal from Business for South Africa (B4SA) and the ANC’s discussion document have ‘new’ and ‘inclusive’ in their titles and declare that massive investment in infrastructure is needed. Apart from that, there is no substantive common ground between the two documents. What they both want might be growth and investment, but, realistically, the business plan is the only one that recognises the country’s dire predicament.
B4SA, which brought together the main organised business groups to develop positions on the Covid-19 crisis, warns that the government cannot dawdle any longer on the tough decisions needed to improve the business environment.
Above all, business wants an enabling environment with reforms and policy certainty so that investors face no dramatic changes from the government. Policy certainty has to imply, although not stated in the B4SA report, that there is no room for expropriation without compensation.
ANC hardliners
What ANC hardliners appear to want is a heavily state-led, if not planned, economy that guides the private sector and can draw on its savings pool. The academic economists want vastly expanded spending and do not mention anything about structural reforms that could give post-lockdown growth a push.
It is not clear what the government wants. There has been no decisiveness in halting the South African Airways or Eskom bailouts and there is an overall inertia on economic policy. That is because the ANC top leadership is divided. Government seems caught between the desired fiscal prudence and reform proposals advocated but not implemented by Finance Minister Tito Mboweni, and the economic planning mind-set of hardliners within the party.
The option of stalling reform and not doing enough on budget cuts when the Medium Term Budget Policy Statement is presented in October will be the same as handing victory to the ANC hardliners, the unions, and the academic left. It will be a step on the path to debt distress and, ultimately, must raise the chance of a debt default.
In an environment of continuing downgrades by credit rating agencies, and ever-larger government deficits and borrowing requirements, the government is up against an increasingly tight borrowing constraint. For every additional amount it needs to borrow, interest rates will increasingly rise, adding to the debt burden and the risk of default. That is the reality that is ignored in the ANC discussion document and in the open letter from the academics.
Pretty comprehensive vision
The B4SA plan represents a pretty comprehensive vision, but it is full of attempts at leaving things open to compromise by not providing detail. It does not call for outright privatisation of the failing public enterprises, there are no specifics on changes it wants in empowerment legislation and industry codes, and there is also a lack of detail on reform to the labour laws. Nevertheless, it is significant that the document does raise questions about the hallowed ground of empowerment and labour issues.
B4SA says that empowerment has been insufficient and only led to a narrow base of beneficiaries, and that current legislation is ‘overly complex’. Any recovery strategy, it says, should include a look at all empowerment legislation and industry codes to ensure that they are fit for purpose. B4SA says labour laws are ‘overly rigid’ and often deter businesses from employing workers. Is it prepared to fight for changes to the national minimum wage?
Financing new big infrastructure spend is a key issue. B4SA says this can be raised on the capital markets once the government makes the big decisions about a turnaround. The ANC wants the Development Bank and the Industrial Development Corporation to provide concessionary loans for infrastructure projects. To obtain this capital, it wants below-market-rate lending from the Reserve Bank, something that would be way beyond the central bank’s mandate.
Importantly, the ANC paper does not seem to be insisting on a regime of ‘prescribed assets’ for pension funds. It says that Rule 28 should be changed to allow direct investment by pension funds in infrastructure projects rather than through an intermediary. In its commentary this week, the Bureau for Economic Research says the real problem is not that the private sector is unwilling to finance infrastructure, but rather the dearth of bankable projects.
Undermines hope
What really undermines hope for a turnaround in the ANC document are the proposals for yet more state-owned companies – a land company, an infrastructure development agency, a state-owned bank, and a pharmaceutical company. No lessons learned here from the past decade.
The ANC also wants a return to protectionism, with a proposal to make it compulsory for government bodies to procure South African-made goods. Imports are bought when locally made equivalent products are more expensive or of inferior quality. This is not a proposal that can help the economy or government run more cost-effectively.
What is so extraordinary about the academics’ open letter to President Ramaphosa is that it is an un-costed plan. Their rationale for saying that additional measures are required to support the economy is that the major world economies have injected far more into recovery, as a share of GDP, than South Africa has. SA’s emergency R500bn Covid-19 support package is proportionally short of that of the world’s largest economies, but, at 10 percent of GDP, is well within a reasonable range, given the debt burden and budget deficit.
The wide ideological gulf between business and party makes far-fetched the idea of an accord that can effectively take the economy out of its rut. Given the ANC stance, any ‘social compact’, as the government calls such accords between itself, big government and big labour, is likely to be based on lowest common denominators rather than plans that can boost growth.
South Africa is in the somewhat absurd situation where small groups relative to the entire population – party cadres and trade unionists – can call the key economic shots.
Without the government taking big decisions on structural reform, we are stuck.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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