If ever the stars were aligned for a leap into economic reform, it is now.
With his victory late last month over the forces of African National Congress (ANC) Secretary General Ace Magashule, and former president Jacob Zuma, President Cyril Ramaphosa has firmly secured his position as leader of the ANC. At the key ANC National Executive Committee meeting he was able to institute a probe into state capture and thwart attempts to dislodge him.
His victory presents an opportunity for big bang reform. This is a victory over detractors who have led a push for radical economic transformation and have stood up against serious reform.
South African economy in crisis
The depth of the South African economic crisis should also allow Ramaphosa to act with urgency. The economy was well into a crisis due to high government spending, high debt, and a large pre-Covid-19 deficit, and our circumstances have greatly deteriorated since. The country is badly positioned to come through the Covid-19 mess with strength.
The second quarter contraction of 16.4 percent from the previous quarter was mammoth, but hardly a shock in view of the dire lockdown. Unemployment at over 30 percent, and a rate of 45 percent if those who have given up their job search are included, underscores the need for policy change.
For this year, most economists are predicting a contraction of between seven and ten percent, taking the economy back to a GDP level of about six years ago. Equity markets in the US and Europe are expecting a fair recovery in earnings and therefore growth performance. But in South Africa stocks have been heavily discounted indicating market scepticism about reform and growth prospects. Without serious reform we are stuck.
Reformists could be well positioned
With Ramaphosa’s enhanced authority and the dire economic situation, reformists like Finance Minister Tito Mboweni should be well-positioned to embark on full structural reform – credible budget cuts, curbing wage rises for civil servants, ceasing bailouts and even privatising state-owned enterprises, and introducing flexibility into the South African labour market to make it easier to employ people.
Any reform programme that is now presented had best not disappoint with half measures that fail to address the fundamentals. If deference to labour demands on public sector wages and layoffs, as well as greater flexibility on the labour markets mean half measures, reform will be off course. Labour has said it will not agree to any of these measures. That must raise questions about whether there is a deal to be done on what is required, even with the Ramaphosa victory over his challengers.
If there is not a deal to be done we will have to wait for either divisions within the ANC or an IMF programme to unleash the SA economy.
Government is in the final stages of drawing up a recovery plan and talking to its “social partners”, big business, labour, and community groups in the National Economic Development and Labour Council. The risk of seeking compromise is that any plan that emerges will be based on a lowest common denominator. Also promised is Operation Vulindlela, which Mboweni says is “aimed at accelerating structural reforms” and is all about “fast-tracking implementation”. There is also likely to be a nearly R20bn job plan.
Mboweni must come up with credible budget cuts to stabilise public debt in next month’s Medium-Term Budget Policy Statement. Anything less than what is required will show that stabilising government finances has become a political impossibility.
Government recently came up with key infrastructure projects to boost the economy. South Africa has long faced a net depreciation of its infrastructure, but investment alone cannot give the economy a boost. There will also have to be changes in policies that will allow infrastructure to be better maintained and yield its full potential.
Without substantial room through drastic cuts, there is no space for any big ideas on how the country might improve its social safety net with an expansion of grants or indeed a Basic Income Grant in some form. That would require abolition of a number of departments and programmes, which might be a good idea as part of a post-Covid-19 rethink about the role of government.
In thinking about any post-Covid-19 lockdown policy initiative, the role of black empowerment will have to be questioned. The DA has rejected the idea of BEE saying it simply does not work for development. It is central to the ANC’s economic offer, but the role of BEE could have less of a role in a reformulation of government functions and role that might be triggered by the Covid-19 crisis.
In any new policy initiative, potential investors will also want some certainty on what the new plans mean for proposals on prescribed assets, expropriation without compensation, the state bank, a state pharmaceutical company, and National Health Insurance.
Missed opportunities
Ramaphosa has failed to take up previous favourable moments for reform raising questions about whether it is all just politically impossible for the party. The months of “Ramaphoria” soon after his election in December 2017 would have been an opportune moment as would the months immediately after the lockdown. His victory in the internal political battle against the economic populists could be squandered if we see reform half-measures in the coming weeks.
In the post-Covid-19 lockdown world economy, we will be especially poorly placed if reform is half-baked. Much of the world economy has begun to recover with an easing of lockdowns and the massive stimulus given by central banks and governments. A Covid-19 vaccine is awaited for a sustained global recovery, but over the next few months and perhaps afterwards governments and central banks will have to give added stimulus to businesses and incomes, and support a social safety net.
Government’s R500bn Covid-19 emergency package, the efforts of the private sector, as well as the massive easing in monetary policy by the Reserve Bank have supported the economy over the past few months. But South Africa is now running out of fiscal and monetary firepower to support the economy. The option which can yield real results is policy change.
As a country that underperforms its emerging market peers, South Africa will find financing its deficit increasingly difficult. With economies constrained, governments will have considerably larger funding requirements. South Africa has already been downgraded by the international credit rating agencies and will be faced with more severe borrowing constraints in the post-Covid-19 world.
The Great Recession in the aftermath of the Lehman Brothers collapse in 2008 and the Covid-19 pandemic have reminded the world that we should better prepare for crises. That means resources will have to be set aside to see economies through bad times. This ultimately creates extra demands on governments, but ones they will have to bear for resilience. We are in no position to do this.
With Covid-19, there is no room for sluggishness on policy changes and implementation. South Africa’s private schools were rapidly able to come up with online classroom solutions for children in lockdown, but those attending many government schools went without education. Dealing with that and the need for telemedicine should have been priorities for the government. This would have allowed far more effective delivery to the poor.
Countries that are fleet of foot on making policy changes are the ones that will emerge strong in the post-Covid-19 world.
Covid-19 and the lockdown have made reform a lot more critical. The question in South Africa is how long it will take to unlock the politics that will allow proper reform to happen.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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