The real pandemic

The South African government's COVID-19 "rescue plan" is an opportunity to rethink its economic model, if it can break with market orthodoxy.

Tito Mboweni, South Africa’s Finance Minister, surrounded by colleagues, at South Africa’s parliament in 2019. Image via Government of South Africa Flickr CC.

South Africa’s COVID-19 economic stimulus plan—announced recently by President Cyril Ramaphosa—contains several of the features of a solid emergency plan, albeit cobbled together under the most unusual circumstances, at least on the surface. The plan calls for 10% of South Africa’s GDP to go to coronavirus relief—far higher than Spain though less than the United Kingdom at 20% of GDP and less than Italy. It is one of the largest stimulus packages in the world. The United States has committed 11% of its GDP to keeping the lights of its economy on.

President Ramaphosa’s announcement arrives at a time that global economic markets are hemorrhaging, a sad consequence of withdrawing large percentages of the working population from public spaces. Like so many components of the COVID-19 pandemic, we are presented with ongoing trade-offs and dilemmas, all of which lead to their own landmines. The largest fork in the road globally has been the cost of closing down the economy while livelihoods are increasingly precarious, many communities are restless, and some families are starving to death. For countries in the global south such as South Africa with lower social welfare spending, it is made all the more complicated by the uneven pace of dispensing relief to small businesses who employ the largest chunk of the employed workforce. And it is hampered further by the disgraceful diversion of food parcels to economically vulnerable communities by parts of the very state machinery that should be distributing relief.

That said the plan offers clusters of interventions, many of which encouragingly are based on social welfarist principles. It is not dissimilar to the basic income grant (BIG) for all South Africans, a form of social assistance for the very poor, first suggested by social policy analysts and formulated by several NGOS post-1994.

The measures suggested by Ramaphosa might be bringing us closer to the recognition that structural deficits need to be addressed by investment to develop key sectors of the economy, enabling workers to remain in the economy and cushioning those who are not able to participate in that economy.

Part of this compact is the R200 billion loan scheme to provide companies with the relief to remain operational and to, importantly, pay salaries. This is happening at a time when almost a third of the workforce have either been retrenched or are uncertain of their post-lockdown future. A R50 billion grant has been introduced to augment existing grants for a six-month period. Significantly, relief will be offered to people who are out of the current benefits matrix and receive neither unemployment insurance or social grants.

The R100 billion grant to small businesses includes informal small grocery stores known as “spazas” and those often bypassed and “informalized” by conventional market policy. These industries, including chisa nyamas (basically a BBQ mixed with a bar) are largely bootstrapped businesses playing a significant role in job creation, community welfare and even a space to report domestic violence. They act as a meeting place for many and the intimacy of the relationships represents an important part of community welfare in ways that larger supermarkets cannot replicate.

The R70 billion suggested for larger businesses and individuals represents tax respite. This amount will represent direct payments and tax relief to individuals and businesses who are currently in good tax standing. It is currently unclear how these will be adjudicated or dispersed.

The second major fork in the plan will be in the distribution of all this money to various stakeholders. To be fully effective, cash transfers and relief subsidies must reach their intended targets including indigent communities, people in the parallel or informal sector and women who largely run household economies. They must also represent value for money. The modalities of transfer funds are risk filled, not least because the state itself has often been unreliable and corrupt.

The strained and compromised South African Social Security Agency (SASSA) machinery, which administers and pays out state grants, will require far greater capacity. Perhaps one mechanism to maximize fast, transparent disbursement of state grants would be via partnering with other state agencies, the private and the nonprofit sectors to minimize risk and maximize fast, transparent disbursement. Bringing in conditional cash transfers linked to particular goods like school uniforms, services like medical access or specific food items at listed outlets have often worked better than unconditional transfers in other developing economies to avert the flaws in the systems. The sustainability of these transfers and subsidies was debated as soon as Ramaphosa mentioned the six-month time horizon. Most economies, sectors, companies and families will still be on the difficult road to recovery beyond November 2020 and probably into the next 24 to 60 months.

All this comes at a cost and herein is the other fork in the road. Reserve Bank Governor Lesetja Kganyago has consistently asserted that South Africa’s finances are not dire enough to warrant International Monetary Fund (IMF) loans, but the world post-COVID-19 has opened up new alternatives for how governments raise revenue.

Economically orthodox political actors like hawkish South African finance minister Tito Mboweni have however long advocated for external funding from the IMF, World Bank and unspecified private sector. Ramaphosa’s announcement depends on large loans from these entities and Mboweni opines that South Africa has the mettle to resist IMF’s long term loan conditionalities that have left many countries rightly suspicious of and almost impossibly indebted to the IMF conditions.

The IMF as an entity presents a sharp departure from South Africa’s correct historical aversion to securing their assistance. The IMF works on capital account liberalization, or removing barriers to the flows of capital as well as fiscal consolidation, or what is now more commonly called austerity. Structural conditions, or Structural Benchmarks (SBs), demand economic reforms, necessitating onerous legislation and critical policy changes in order to be implemented. The loan requested by South Africa is separate to the IMF’s Catastrophe Containment and Relief Trust that is being extended to 25 economically fragile member states. Worryingly, South Africa’s economy was already struggling before COVID-19 tipped it over the edge with a current account deficit and a massive shortfall of export revenue. Though a short term concessionary loan will probably be easy for South Africa to secure, and purportedly carries fewer of the shady structural conditionalities that the IMF is notorious for, South Africa’s payment capacity is premised on a much healthier export revenue.

In 2008, researchers already demonstrated that IMF program conditionalities are associated with worsening health outcomes by examining 21 countries where the IMF intervened over the course of two decades. So while South Africa’s coronavirus inspired compact is an opportunity to rethink our economic model, it is crucial to appreciate that this moment is partly a manifestation of historical neglect and an overly market friendly model. The solution in the form of IMF and World Bank funding models may in fact lead to even more indebtedness and brutal conditionalities in the future. Based on past experiences, the impact of the current crisis might be stretched across generations in a full cycle of market led, corporatist disaster. That will be the real pandemic.

Further Reading

Out of sight

In South Africa, social distancing to bring down COVID-19 infections takes a decidedly local shape. In a racialized society, it manifests primarily as white melancholia and black Afro-pessimism.