Government stimulus has not worked, let's try something else

19 June 2020
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The Covid-19 coronavirus crisis is not a go-ahead for greater state control over the economy.

The reason this needs to be said is the alarming statements being made by the ruling ANC party and some government officials. The first impulse that needs to be restrained is the temptation to seize the savings of South Africans.

While the head of the ANC's Economic Transformation Committee, Enoch Godongwana, is reported to have proposed a relatively minor change to regulation 28 of the Pension Funds Act, to allow funds to choose to invest in Development Finance Institutions (DFIs), other proposals are not so benign. Ranging from proposals to have the South African Reserve Bank (SARB) directly funding the same DFIs through a R500 billion fund, to the creation of more state-owned enterprises (SOEs) in the form of a state bank and a state pharmaceutical company.

Firstly, the ruling party needs to be very careful when messaging about pensions. Already some commentators have taken Mr Godongwana's proposal as supporting prescribed assets. This is not true. In fact, loosening restrictions under regulation 28 is something that advocates of a free market can get behind.

Of course, it is arbitrary to simply limit the extent of the liberalisation to investments in DFIs. Why not liberalise direct funding (private equity?) for township small business and small rural farms?

Nevertheless, it is not a 'bad' proposal. Repealing regulation 28 would be even better. Unfortunately, the same cannot be said of a state bank and state pharmaceutical company.

South Africa's experience with government-run businesses is overwhelmingly negative. Many of them certainly qualify as zombie companies, mimicking Japanese companies that were supported by the central bank via commercial banks after the asset bubble crash in the early 1990s, and relying on government bailouts instead of revenues from operations for their continued existence.
The same zombie-company phenomenon occurs whether the mechanism of the bailout is through fiscal or monetary policy as demonstrated by the differences between Japan's zombie companies and South Africa's.

South Africa, over the past 12 years, has experienced fiscal and monetary stimulus while economic conditions have continued to worsen. Infrastructure build programmes, bailouts for SOEs and some private companies seem to have only exacerbated the problem. While everyone blames state capture, corruption, very few people seem to have considered that perhaps state capture is a symptom rather than a cause.

If that is the case, what is the disease that has been eating at South Africa’s economy for the past 12 years? The answer to the question is important. We are likely already in an economic depression with much worse economic numbers than pre-Covid-19, with 40% unemployment.

National Treasury estimates that the country could lose a further 3-7 million jobs. An inaccurate understanding of the impact of the policies of the past 12 years will certainly lead to the government making more of the same mistakes.

It cannot be a rational act to simply repeat the fiscal and monetary stimulus policies of the past 12 years at a higher intensity. Coming out of the lockdown, the country's unemployed youth deserve a rational policy programme that allows them to free themselves from poverty. The same is true for our aspiring entrepreneurs.

It is said that insanity is repeating the same thing over and over again and expecting different results.

This article was first published on City Press on 12 June 2020

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