Spending, not austerity, is the way out of this economic crisis
Three emergency measures that will get our moribund economy going again
● After nine years of dismal economic growth, South Africa is in its worst post-apartheid economic crisis.
Yet the ANC does not have a plan, the presidential candidates have said nothing, and it’s unlikely there will be meaningful discussions at its conference about how to boost growth in the short term.
To understand how we got into this mess, we must look at the country’s macroeconomic policies over the past three decades.
The economy grew by 2.9% a year between 1994 and 2016. GDP per capita rose by 1.2% a year. As a result, GDP per capita was 30% higher in 2016 than it was in 1994. For a deeper understanding of the postapartheid economy, I looked at four periods.
The first is 1987 to 1996. Between March 1988 and October 1989, the Reserve Bank raised the bank rate by 850 basis points to 18% from 9.5%. The country entered its deepest depression since 1929. GDP per capita growth fell between 1990 and 1993.
The second period, between 1996 and 2003, started with the cabinet approving Gear — the growth, employment and redistribution strategy — which emphasised austerity and debt reduction. The slashand-burn fiscal policies — which included cuts to capital spending and sky-high interest rates implemented in the wake of the emerging-market crisis of 1998 — depressed the economy.
There was an annual average GDP growth rate of 2.6% between 1996 and 2003. GDP per capita increased by 0.9%. Unemployment between 1995 and 2003 reached 8.3 million, an increase of 4.3 million. It was claimed Gear stabilised the economy, but the deficit and the inflation rate had stabilised before that.
In the third period, the post-Gear phase, there was an improved global and domestic economic environment due to expansionary monetary and fiscal policies. The repo rate dropped by 650 basis points to a low of 7% in April 2005 from a high of 13.5% in June 2003. This stimulated a recovery and government spending added an impetus.
There were double-digit increases in gross fixed capital formation between 2003 and 2008 as the government and state-owned enterprises made up for years of underinvestment. Gross fixed capital formation rose to 23.5% of GDP in 2008 from 16% in 2003. Between 2004 and 2008, the economy grew by an annual average of 4.8%. GDP per capita grew by an annual average of 3.2%, creating 1.9 million jobs between September 2003 and September 2008.
The current economic crisis is due to dismal economic growth between 2009 and 2016. Between June 2006 and June 2008, the Reserve Bank increased its repo rate by 500 basis points to 12%. While virtually every central bank in the world cut key policy rates in the wake of the global financial crisis, half of the Reserve Bank’s rate increases (250 basis points) took place after the start of the crisis in June 2007.
GDP dropped by 1.5% in 2009. There was a R70-billion revenue shortfall and the budget deficit rose to 4.5% of GDP. Between December 2008 and March 2010, the economy shed a million jobs as employment fell to 13.8 million from 14.8 million. By comparison, 153 emerging and developing countries grew by 2.9% in 2009, according to the IMF.
The Reserve Bank cut its repo rate by 700 basis points between December 2008 and July 2012. There was a modest recovery as the economy grew by an annual average of 2.8% between 2010 and 2013.
However, tighter monetary and fiscal policies since 2014 contributed to a slowdown in GDP growth to an annual average of 1.1% between 2014 and 2016.
Between 2009 and 2016, GDP grew by an annual average of 1.6%. GDP per capita grew by just 0.4% a year, far lower than 153 emerging and developing countries, which grew by an annual average of 5% over the same period, according to the IMF.
The low GDP growth rates and the resulting reduced tax revenues have resulted in deteriorating debt ratios and downgrades by rating agencies.
Between December 2009 and September 2017, unemployment increased by 3.4 million to 9.4 million. The expanded unemployment rate rose to 36.8% in September 2017 from 29.5% in September 2008. The unemployment rate for black Africans was 41% in September 2017, according to Stats SA’s Labour Force Survey.
The current crisis has nothing to do with the global economy.
The orthodox prescription for a country in our situation is vaguely defined structural reforms (privatisation and the labour market) and austerity, comprising tax increases and cuts in expenditure.
Everyone agrees structural reforms and austerity will result in lower GDP growth in the short term. But the argument is that vaguely defined confidenceboosting measures (such as creating policy certainty and resolving the mining charter impasse) will counter the negative impact of the policies.
I am scared. Doubling down on austerity will send us back into recession. Unemployment will rise to more than 10 million. The debt-to-GDP ratio will increase. South Africa will end up at the IMF.
There is no link between structural reforms and growth in the short term. Even if there were a link, there is zero chance of them increasing economic growth in the short term. It would take two years to prepare a tender to privatise Eskom.
Ever since the great economist John Maynard
Keynes invented macroeconomics in the 1930s, nobody has come up with any other way to stimulate a moribund economy in the short term except expansionary fiscal and monetary policies.
I propose the following emergency measures to get the economy going. First, we must suspend the inflation target until the economy has achieved a higher growth rate. The mandate of the Reserve Bank must be changed to include growth and employment.
Second, we must implement a R450-billion stimulus over three years to be funded by the public and private sectors.
Third, the stimulus can be deficit neutral if we have a once-off restructuring of our national balance sheet through the release of funds from the Public Investment Corporation. The level of funding in the PIC is obscene for a country with such high levels of poverty.
Gqubule is the founder of the Centre for Economic Development and Transformation