The coronavirus pandemic requires unprecedented health and economic responses. The health response is an example of efficiency and speed. The economic response is lagging behind and seems uncertain. It is not for a lack of will, but a lack of ammunition. The upheaval will leave South Africa poorer and may set it back a decade, so we must formulate the principles on which to base reconstruction.
The crisis arrives after ten years of low growth and low public and private investment. The country is fragile and ill-prepared. The fiscal position is compromised and there is little space to implement the necessary fiscal measures. The government needs alternative forms of financing, and this is where the main problem lies. Without access to international financial markets, the only possibilities are slashing nonessential parts of the budget, doing extraordinary tax collection, asking for a loan from the International Monetary Fund or World Bank, or monetisation. Probably all of these measures will be necessary if social distancing last for longer than a few weeks.
Abandoning strong fiscal management in the hope of a monetary free lunch would be a grave mistake. SA risks entering in a cycle of boom and bust Argentina style. The country is extremely fragile, with very little protective buffer stocks. Resources have been used (and squandered) to support current consumption and the economy has become increasingly dependent on international financial markets to finance the double deficit on the fiscal and external balance. Monetary policy has been constrained in maintaining a real interest rate high enough to make the capital continue to flow in. In two weeks, the coronavirus crisis has accelerated this decline to breaking point. Now economists and commentators rail against the international rating agencies as if by stopping the priest giving the last rites we can delay the inevitable: discussing rating agencies now is just a waste of time. What we need to discuss is the way to finance the necessary measures and the policy framework that will emerge after this crisis.
In fact, the way we respond to the crisis will ultimately define the economy in the future. SA after the crisis will be poorer, probably as poor as ten years ago. This increase in poverty must be redistributed so that we can protect the most vulnerable. Those that have secure jobs will see their wages cut, either by increasing in taxes, by increasing inflation or by newly bargained wages, German-style. A lot of the wealth in the country will be devalued and entire sectors of the economy will be unsustainable.
After the crisis, SA will need to grow fast and build strong resilience. Like Asian countries after the Asian financial crisis, SA needs to establish principles guiding policies towards this new path. Let me put forward four principles:
Fiscal balance is the cornerstone of a progressive policy for growth and resilience. There is no correlation between deficit spending, debt and progressive policies. Progressive policies limit the use of deficits to extraordinary circumstances, such as the present one. After the crisis, SA needs to build insurance by running surpluses and building reserves, to base growth and redistributive policies on solid, long-term grounds. Deficit spending and debt accumulation are possible only if national and international rentiers are willing to finance. A policy framework dependent on external finance will be constrained by the interests of the rentiers.
Capital inflows and consumption-led expansions do not provide a solid base for long-term growth. Relying on international capital flows to finance private and public consumption above the productive capacity of the country makes the economy very sensitive to international events. It increases economic volatility and uncertainty, depressing investment and moving national policies away from long-term objectives. It also favours non-traded sectors, limiting the export potential of the economy and reducing its long-term growth and employment.
Export expansion and diversification are the main drivers of long-term growth. Exporting is the way national firms become more productive, competitive and innovative. Productivity increases wages and standards of living and generates resources for public services and redistribution. To move from a consumption-driven to an export-driven economy, a whole set of infrastructures, regulations and industrial policies needs to be reconsidered. This is now urgent because a long-term trade surplus is necessary for stabilising the economy. The devaluation of the rand exchange rate gives a competitive boost to South African firms that should not be wiped out by increasing inflation.
Long-term growth and resilience need productive public investment in health, education and infrastructure. The operative word is productivity. In all three sectors SA has invested a lot of resources, without many returns. This cannot be accepted any longer. The productivity of the state is as important as the productivity of the private sector. SA needs to combat any position of rent-seeking in the private and in the public sector: limiting monopoly power, promoting innovation, increasing accountability, transparency and competitive pressure anywhere.
Fiscal balance allows monetary activism. An export and investment strategy requires a monetary and fiscal policy mix that lower the real interest rate compatible with stable inflation. Fiscal policy is the dominant instrument because it defines the constraints in which monetary policy operates. A fiscal policy that targets the economy’s savings-investment balance would allow monetary policy to target macroeconomic stability at a lower level of real interest rate.
Health intervention and household support is the first priority, but policies should also protect the integrity of supply chains and the integrity of labour contracts, even with a temporary reduction of wages and public guarantees. The partial economic freeze allows the speeding up of infrastructure maintenance and renewal. Bureaucracy in business licensing and exporting should be simplified to the point of irrelevance. To finance this interventions, SA needs instruments that are efficient and coherent, with long-term objectives.
Professor Nicola Viegi is the South African Reserve Bank Chair in Monetary Policy Studies, University of Pretoria.
This article was first published in the Sunday Times on 12 April 2020.