Keep powder dry for life after ‘doomsday’
IF YOU can get people to listen to you only by threatening doom, what do you do when the doom happens —– and those you have been threatening find it isn’t the end of the world after all? The doom in question is a downgrade by the ratings agencies to junk status, which has been used by media, commentators and interest groups as a sword to encourage some behaviours and discourage others.
At times, this is legitimate — when it warns against spending money we don’t have and wasting it on patronage projects. At times, it is not — when it is used to deter spending on the poor or to shut down policy discussions, or to portray political ferment in the country as a problem rather than a sign of a working democracy. But it has been fairly effective. Threats of a downgrade have not only strengthened those who want to curb government spending, they have spurred co-operation between business and the Treasury, which, if broadened to include other interests, could become a trigger for the negotiated economic change the country needs.
But there is a glaring weakness in this strategy: none of those who use it seem to have given thought to what they will do if there is a downgrade to junk status.
Since this is a strong possibility, they are taking a huge risk.
As long as preventing a downgrade is presented as the sole aim of economic policy, the chances are that the strategy will backfire horribly.
If the downgrade happens, it will not be long before patronage politicians in the African National Congress pin the blame for failing to avoid it on the Treasury and its minister. And if the only reason for curbing waste is to avoid the dangling sword of junk status, what incentive will there be to continue to do this if the sword falls?
This might not matter if a downgrade to junk really was the end of the world, but it isn’t. Of course junk status would be a setback, raising the cost of borrowing and discouraging investment. But it is not an economic death sentence.
If we follow the debate here, we would be forgiven for thinking that only economic basket cases are downgraded to junk. But countries that have suffered this fate include South Korea, India and Turkey — hardly the most impoverished countries on the planet. If this country suffers the same fate, we will still, like them, have a functioning economy. Market analysts also agree that most of the negatives that are supposed to follow a downgrade — such as capital outflows — have already happened, which means we are being told to fear something with which we are already living.
None of this means the economy is in great shape. It faces severe problems, the product of a failure to negotiate a new growth model after the end of apartheid. But that is so whether or not the country is downgraded to junk, and fixating on a downgrade obscures this.
So, if the country can avoid a downgrade to junk, it should. If it can’t, it will face not the end of the world but the continuing need to negotiate a way out of its current bind. And it is more likely to be able to do this if we stop seeing the downgrade as the sole problem facing the economy and as a death sentence from which we cannot recover. If the debate does not recognise the difference between a downgrade and avoiding one is not nearly as great as we are told, an event that should be a temporary setback could become a serious threat to the economy.
The parties in the best position to change this debate are the two that have partly found each other — the Treasury and businesses, particularly in the financial sector. It is in the interests of both to think through how to manage the political fallout of a downgrade and to respond to it by keeping afloat attempts to find ways of growing the economy in ways that spread the benefits of growth more widely.
But none of this will be of much use if it does not come with an attempt to change the debate from one in which a downgrade to junk is the end of civilisation to one in which it is seen in perspective — as a manageable problem that will, if the key actors respond effectively, be a further spur to fix problems that need tackling whatever the rating agencies do.