The concept and scope of President Cyril Ramaphosa’s Economic Reconstruction and Recovery Plan delivered last week bear a strong resemblance to President Franklin Delano Roosevelt’s New Deal of the 1930s.

Ramaphosa’s plan is big and bold, and, like the New Deal, aims at relief and recovery mainly through a new infrastructure-building programme. Like the New Deal, there is also a massive public employment component to the recovery plan in sectors ranging from public works and education to the arts.

Unlike with the New Deal, there is little of real substance in the plan about reform. As an official from the credit rating agency, Standard and Poor’s, told Business Day: ‘It seems to be more of a spending plan than a reform plan.’

And, unlike the New Deal, the Recovery Plan is about big spending that risks catapulting the country deeper into a debt trap and financial crisis. The New Deal barely raised US debt as a percentage of GDP and would have lost political support had it not been fiscally conservative.

Key parts of the New Deal were reforms to reduce the chances of bank failures and to better regulate stock trading, and new forms of protection for labour. There is nothing in the big African National Congress (ANC) plan about the sort of growth-enhancing reforms that the IMF and credit rating agencies would like to see. There are no reforms to change South Africa’s inflexible job-killing labour market or for privatisation or liquidation of state-owned enterprises (which require endless bailouts) or a restoration of fiscal discipline.

The Reconstruction and Recovery Plan is an attempt to dance around the need for reforms with state-led investment and job creation to stimulate growth. It avoids politically tough decisions on policy changes that are key to growth but would mean the ANC would run up against its union allies.

Speeding up of SA’s economic woes

And that is the reason it is likely to lead to a speeding-up of South Africa’s economic woes. How the plan’s financing requirements can be accommodated in view of the Treasury’s aim to peak public debt at 87 percent of GDP in the 2023/4 fiscal year is the mystery that must be answered next week. That is when Finance Minister Tito Mboweni will deliver the Medium-Term Budget Policy Statement and outline plans for the next three years. This was delayed by a week, probably to allow the Treasury to try to solve the insoluble puzzle thrown up by the big plan.

In addition to the R500bn Covid-19 emergency package, there are now the big new stimulus plans from the Reconstruction and Recovery Plan. That includes R100bn over ten years to finance the Infrastructure Fund, another R100bn over the next three years to provide public and social employment, R6bn for a three-month extension of the Covid-19 grant, and a further R10.4bn bailout for SAA.

While the IMF and World Bank have said it is best for governments to boost spending to deal with the Covid-19 nightmare, South Africa is simply not in a position to follow this advice. Besides, the IMF has said the country must deal with its profligate spending in the short term. As a percentage of GDP, South Africa spends almost as much as advanced industrial countries like the US and Canada.

Under the plan, the country will aim to spend R1 trillion in total in infrastructure spending over 10 years. With the years of neglect in roads, railways and bridges, South Africa certainly needs new infrastructure. Massive infrastructure-building programmes tend to develop common problems. First, there are inevitably project management problems, something that has been experienced by Eskom at its mega coal-fired plants of Kusile and Medupi, which were meant to be fully on stream some years ago. Skills shortages make for delays and cost escalation and, over time, the marginal return on projects declines, often due to poor project selection.

Growth-enhancing, or white elephants

Then there is the problem of financing. South Africa has long experienced the problem of users not wanting or willing to pay for water and electricity. That means these projects are unlikely to be self-financing. And then there is the issue of maintenance of infrastructure. Ultimately it all depends on management and the political environment whether projects turn out to be growth-enhancing, or white elephants.

There is a definite role for expanded public works programmes in the depressed Covid-19 environment. Mass employment for civil and public works could offer immediate relief for many, but a public works programme is limited by state resources. If the private sector were able to pay the minimum wage rate of R11.42 an hour, as paid by the Expanded Public Works Programme, many more sustainable jobs could be created without a burden to the taxpayer.

The R100bn jobs programme under the Ramaphosa plan only lasts for three years, which raises the question of what happens to the 800 000 jobs after this period. As a political force might well have been created by those benefiting from this mass employment initiative, it is likely that the state may have to ultimately make an open-ended financial commitment to the programme. But the ANC would prefer a limited public works programme to allowing the private sector to pay what the government pays.

Part of the reason for the success of the New Deal in the 1930s was that it did not drive the country off a fiscal cliff and worsen the hardships of the Depression.

One of the first measures of the New Deal was the Economy Act which aimed to gain the support of many key southern Democrats who had a strong belief in balanced budgets. The Economy Act brought in cuts of 15 percent to the salaries of civil servants and the pensions of war veterans. This was all before John Maynard Keynes’ General Theory, which introduced the idea of government spending to promote growth.

Overlooked

In 1929, the year of the stock market crash, the US deficit was 3 percent of GDP and, despite a three-fold rise in government spending, it averaged 3.7 percent of GDP from 1933 to 1939. It was only with America’s entry into the Second World War that the deficit as a share of GDP sharply rose, reaching 40 percent of GDP in 1944.  In light of many South Africa private sector workers enduring layoffs or pay cuts, this is a lesson that the recovery plan may well have overlooked.

There is much debate to this day over the extent to which the New Deal helped the US to emerge from the Depression. It was only America’s entry into the Second World War that allowed full employment, due to war production raising the demand for workers and the exit of others for military service. Had the US been running unsustainable deficits in the early 1930s, there would have been no scope for a New Deal, and indeed the later war effort would have been hampered.

The lessons from the New Deal for South Africa in its current predicament are not so obvious.

[Picture: Detail from William Gropper’s mural “Construction of a Dam” (1939)]

The views of the writer are not necessarily the views of the Daily Friend or the IRR

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20 COMMENTS

  1. The only new so-called deal that Papbroek needs to put into effect is the one that includes closing down this fantasy virus street theatre that has been hobbling the economy for the past 8 months and getting rid of 90% of his cabinet troughers.
    Oh, and making sure that all racial discrimination in the awarding of state tenders and at the real workplace is stopped, asap!
    I do not hold my breath waiting. Do you?

  2. You mention the 800 000 jobs but you have it wrong, he promised job opportunities and not jobs.
    A job is something that continues year on year but a job opportunity only lasts for as long as it takes which could be an hour, a day, a week or a month.
    For as long as the job creation is done by government it is a waste of money. What the government should do is to create projects that the private sector can execute creating jobs for these.
    Long term job creation can also be made possible if money is spent on development and research.
    Dishing out money for grants and job opportunities is pouring money down a bottomless pit.

    • We have LOST approx. 4m jobs during covid & Ramaloser has promised 800 000 job ”opportunities” which leaves 3.2m LOST
      WHO do they think they are talking to…….BRAINDEADS?

    • True, my son’s black friend was employed in a Land and Rural Department youth program for 2 years, had a 3 months “discipline” training that I thought was like army basics and then he spend months doing nothing. His pay of R1200pm was reduced to half because he had to pay his lodgings. After that he was still unemployed!! What a miserable government we have.

  3. I can foresee Swiss bank accounts bursting at the seems.
    What’s the remaking balance of the R500 billion Covid emergency fund?
    To top it all he’ll be spending an additional R100 billion here, there, and don’t forget over there.
    The tenders for these projects & the materials supply agreements all complete with price gouging of huge proportions.
    And we haven’t even begun to imagine the ministers & hangers on elbowing each other to get their share of the loot!
    It’ll just be repeat of the theft, graft & paydays of the last 26 years.
    Give me 1 good reason not to judge the outcomes before the proposal even begins to materialise.

  4. In support of, “Unlike with the New Deal, there is little of real substance in the plan about reform” In a letter to parliament I wrote the following:

    A stunning example on how poverty is about to be reinforced!

    The President is in the process of revealing how to reinforce poverty and human degradation on the 15 October 2020 in Parliament where he will present a new economic recovery plan.

    From what I have read so far and with one of his advisors, one thing that is guaranteed will be the maintenance of high levels of poverty and unemployment. This is because one of his advising economists, Prof Alan Hirsch as we will show, is an economist with no technical and industrial knowledge, and the rest lack the industrial competence to provide jobs for the two thirds of the population marginalized from the economy.

    Similarly, we have NEDLAC, who in over six months failed to understand this simple GWD industrial development plan.

    By excluding science, engineering, and relying solely on pseudo-science, it is safe to say that the Economic Recovery plan will meet all of government’s prime objectives, and these are that there will still be millions of people living in poverty to provide handouts to and buy votes at election time.

    Therefore, this new policy debated at a technically incompetent Nedlac, where BUSA, BLSA and the trade unions, have never been able to understand this simple plan, will guarantee another stunning example where all those who do not know how to create industry, advise the President on how to exclude two third of the population from the economy.

    With Hirsch and other technical incompetent advisors putting the Apartheid government to shame by marginalizing black people more quickly from the formal economy as Hirsch as done since 1996.

    The plan I am referring to is a plan to use industrial development and farming to lift squatter camps out of poverty into the formal economy and here is the latest version of the plan that government has rejected without providing reasons, confirming that it was governments intention from the start no to address poverty and unemployment https://bit.ly/3a9nTNG How to lift seven squatter camps out of poverty from Diepsloot to Zandspruit

  5. If our Africans does not stop striking companies to forced closure and then cry about being unemployed, this economy will just go from bad to worse to total collapse. It is not so complicated to understand, produce something that has got a market outside your country. This way you get cash from other countries flowing in. We are importing items we can make ourselves and even export it. Instead, we just get poorer every day as our money flows out of the country. Africans are their own worst enemy.

  6. so another R 1 Trillion identified for theft. AWESOME! sounds like just the plan the ANC would like to have in play.

  7. Setting themselves up for ANOTHER ROUND of LOOTING, every one of them has to hatch a plan to have a turn at the feeding trough.
    It’s TRIBALISM, it is in their Genes they can not help themselves !!!

    A case of F… the Poor and the working class.
    The History of Africa tells us so.

  8. The biggest difference between the US and the SA plan is that the majority of the US population are not mentally retarded.

  9. Socialist and communist roots bearing fruit in Ramaphosa’s version of the New Deal. Instead of Pragmatism and Realism..

  10. Call me paranoid but:
    Not many of the so called Covid prevention regulations were based on medical fact but in reality looked more like “informal trade” profiteering and power abuse, such as the cigarette fiasco and alcohol ban.
    The extension of the “State of disaster” looks like more of the same.
    It serves to keep NDZ in power (according to the Constitution) and out of jail while CR is powerless.
    Why the 12-4 curfew? Could it be to move cash or worse still gold in military vehicles to SAA holding areas ready for transport to foreign destinations?
    Just a thought-use it, don’t use it!

  11. The government can not create jobs – they use the money of people who can provide jobs and grow the economy to pay the salaries and overheads of the “businesses” they come up with. The ones they have inherited from the Old South Africa have been driven into bankruptcy (Escom, Denel, Railways etc) The reason is simple: they don’t have to make a profit to survive they just take more and more from the tax payers. The other reason is the deployment of ANC cadres to positions they are totally unfit to fill. Governments cannot create business. Government is supposed to see to it that businessmen have a safe environment to do their business. Government is supposed to create a fair and equitable legal system wherein business can flourish. Fact is the government we have in South Africa is so involved with correcting what happened since Jan van Riebeeck got of his ship that they are totally blind to the fact that they are screwing up the future for everyone. They don’t feel it because they get paid fat salaries and they steal – all courtesy of the long suffering tax payer. What should happen is a) All discriminatory laws should be scrapped immediately. The nonsense of BEE, AA et al must be ended immediately. b) The labour laws that makes it impossible for small and medium businesses to function effectively must be scrapped forthwith – basic safety standards must be laid down in law and that is all. A whole industry has been created around the non-sensical, socialist labour laws in this country that creates nothing but reams of red tape. c) Any government employee that gets suspended for any reason must have his/her case settled within fourteen days and no pay from date of suspension if found guilty; d) We must revert to the old four provinces – there are too many people sitting in positions where they do little and earn a lot; e) The number of parliamentarians must be reduced by 50% and they must be chosen on a constituency basis so that they can be recalled by their constituents; f) The president must be chosen by voters with a specified set of qualifications on a country-wide basis. In my humble opinion the above will be a good start if South Africa is to be saved because in spite of all the nice sounding plans, we are already over the cliff edge and falling fast.

  12. The IMF has just announced that it will establish a Central banking system using crypto. Possibly Stellar as its chosen centralized coin. Various countries will establish, if not already, their own centralized crypto but all transactions will be made through the IMF Central banking system. Do you see globalized control playing out already. Why would anyone still believe and trust a corrupt and criminal financial institution that has put most countries in dire debt ? This is supposed to be part of the global reset to make things better. What a load of balldadash.
    It would be interesting to see whether this criminal regime of ours will adopt it’s own crypto asset or use another, possibly the Chinese digital Yuan.
    Whatever it does it will only continue its destructive, racist path. It has to be replaced at whatever cost to avoid complete collapse.

  13. I’m glad that they are bailing out the village bicycle at SAA yet again. With a publicly owned clearly non-profit airline, emigration would just be that little bit easier.

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