Investment multiplier could revive economy
THE INTERNATIONAL Labour Organisation (ILO) has designed a policy framework for countries to follow that helps to lessen the impact of Covid19 on businesses, jobs and the most vulnerable members of society.
The four pillars of the framework include stimulating the economy and jobs; supporting enterprises, employment and incomes; protecting workers in the workplace; and social dialogue between the government, workers and employers to find sustainable solutions.
Although the ILO’S policy framework is helpful, South Africa is faced with serious structural challenges, high unemployment and massive inequalities, where the majority is excluded from participating in the economy.
We can learn important lessons from history.
British economist John Maynard Keynes developed policy instruments to assist the world to emerge from the Great Depression, and other countries, such as China, to lift millions out of poverty.
South Africa can take heed of Keynes’s knowledge and create new sources of employment and decent work at the centre of its recovery plan.
South Africa has several potential new job generators.
The Integrated Resources Plan correctly submitted that renewable technologies can create new industries, job creation and localisation across the value chain. Localisation and industrialisation mean that products used in the country must be beneficiated and manufactured in South Africa.
However, a stable electricity supply is vital to growth and this vision. The country must shorten the implementation date of the strategy of “electrification of everything”, and strengthen the revenue streams of Eskom.
Keynes would agree with the policy instruments of localisation and industrialisation that lay the foundation for manufacturing, together with the Keynes multiplier in the economy.
The multiplier would result in the money going to workers as salaries. Also benefiting would be the South African beneficiation and manufacturing value chain, as well as local companies that supply the materials and the equipment for the new industry. Local companies would deduct the PAYE from the salary of workers and pay the tax to Sars, while workers would use the income to buy food and other consumables. The food stores use the same money to pay their workers and suppliers on time.
The result of the original investment of, for example, R100 billion, would be that the national income increases by R300bn if the multiplier is equal to three. If, as a result of an investment of R100bn, total national income increases by R400bn, the multiplier is four. Keynes must be smiling from heaven, hoping that South Africa would reflect deeply how the investment multiplier and urgent implementation could assist the country to increase decent jobs to strengthen the government’s tax revenue.
The government should spend the tax revenues on education, health and security. The SA Reserve Bank would see beneficiation, localisation and manufacturing supporting the balance of payment account, because the country would be less dependent on importing technology and goods.
The country must introduce an import substitution strategy that underscores the replacement of some agricultural or industrial imports to encourage local production for local consumption and the surplus could be exported.
Import substitutes are meant to generate employment, reduce foreign exchange demand, stimulate innovation and make the country self-reliant in crucial areas such as food, defence and advanced technology.
The promotion of active economic policies by South Africa to promote inclusive economic growth and industrialisation have generally been viewed with suspicion by neo-liberal economists and right-wing media.
The historical record indicates that the previous government successfully used active economic policies to deal with the white unemployment from 1948 to provide the community with the highest standard of living in the world.
This intervention was, however, done at the expense of the oppressed majority. The state has always played an important role in facilitating structural change and facilitating the stateowned companies (SOCS) and private sector sustains it across time.
So removing binding constraints to facilitate SOCS and private firms’ entry into those identified industries, while the interventions aim to provide information, compensate for externalities and co-ordinate improvements in the “hard” and “soft” infrastructure that are needed for the private sector to grow in sync with the dynamic change in the economy’s comparative advantage.
More important are policies aimed at protecting some selected firms and industries that defy the comparative advantage determined by the existing endowment structure: either in new sectors that are too advanced or in old sectors that have lost the comparative advantage. The same approach should be applied across all the sectors of the economy.
Dr Dennis George, the executive chairperson of African Quartz, writes in his personal capacity. To read the full version of this article go to www.iol. co.za/business-report.