The President’s Economic Recovery Plan - Some observations

Click here to read the President's full speech.

The observations

1. There are two recovery problems, not just one, and they require different policies. Contemporary approaches distinguish between the potential rate of economic growth, and the output gap, the gap between actual and potential growth at any point in time. Right now, both are unsatisfactory. According to a recent study published by the Reserve Bank[1], reaching rates close to 4% in the mid-2000s, but it has since been on a downward trajectory, reaching lows of 1.1% by early 2017. This means that the potential growth rate in real per capita GDP is zero. On top of this, the output gap is markedly negative at present. Managing the output gap is the goal of macroeconomic policy, which consists of an uneasy holding of the repo rate (which determines short run interest rates) constant, and an equally uncomfortable fiscal situation, characterised by limited fiscal space and uncertainty about SARS’s ability to collect taxes efficiently. On the other hand, structural reform is needed to improve the potential growth rate. 

2.  There is no mention of macroeconomic risk, the greatest of which is a marked deterioration in international portfolio flows. Macroeconomic policy is being conducted with a nervous eye directed at the International Monetary Fund and the ratings agencies. The other eye should be nervously directed at the campaign for the coming election, since the gap between political appeal and economic confidence may become quite wide. It is true that reversal of the downward trend in the potential growth rate would be helpful, but the recovery plan correctly identifies the worsening risks for the weaknesses in our economic structure: commodity prices, weakening sentiment towards emerging markets, and trade wars. How we weather the storm is not discussed at all.

3. Can infrastructural investment really ‘ignite’ economic growth? The real problem is making both the public and private sectors attractive to investors.  The implicit assumption is that the private sector is sitting on a pile of cash it is unwilling to invest. The intention is to use public investment spending to leverage additional resources from developmental finance institutions, multilateral development banks, and private lenders and investors. Here there are several questions. Why is there such vagueness about the application and terms of Chinese funds? On what terms is the private sector expected to enter into meaningful partnerships with government, or to be engaged to manage delivery? Since 1994, there has been unbroken success in resisting privatisation of even the most insignificant state owned enterprises. It has been suggested on occasion that the private sector take minority equity positions in them[2] but, given their state, this is hardly an enticing offer. And private sector loans to the public sector would have to be government guaranteed in a situation where current guarantees already pose a significant risk to the fiscus. There is also plenty of evidence that public infrastructural investment is often not constrained by the availability of funds but by the capacity to spend them. And will an Infrastructure Execution Team in the Presidency help? Once popular, centralisation as a response to efficiency problems is a dead duck now

4. When should we take jobs to people and when should we take people to jobs? Is a particular emphasis on township and rural economies appropriate, or should the aim be to concentrate people where the economies already are? How would we decide on the optimal mix? Which are the 57 municipalities identified for infrastructural spending in the short term? What is to be done about the rapid increase of households in metros?

5. The examples of support to education and health are odd. Improving sanitation at public schools reduces the risk of small children drowning in them, but does it promote the ability to read for meaning or master the rudiments of arithmetic? And an allocation to hospitals to buy beds and linen – what? Can this not be afforded within the regular budget?

6. Can the tiger change its stripes, or the leopard its spots? The President’s speech announced that the visa requirements for highly skilled foreigners will be revised, making business travel easier. This is certainly desirable, but it likely to be pushed back by a long-standing desire to protect South Africans from competition in the labour market. In 2015, just 12 354 temporary residence permits and 4 354 permanent residence permits were awarded to people for the purpose of working in the country. Equally, it has been asserted that the Mining Charter, accepted by Cabinet on 18 September, will revitalise the industry, but no details of how were spelt out. The first draft of the Charter published by Minister Zwane was outrageous, and the second, while an improvement, offered no hope of reversing the collapse of profitability to virtually zero in recent years. (On this, see the HSF submission on the Mining Charter, available here). The only points mentioned were a withdrawal of oil and gas legislation and a review of administered prices.

7. What is the opportunity cost of the recovery plan?  Questions followed the President’s speech, and one was where the funds allocated to the plan would be allocated from? The President promptly referred the question to the Minister of Finance, who in turn referred to the Medium Term Budget Policy Statement, due for delivery in October. So we shall have to wait. For now, the costs are conveniently invisible.

Conclusion

The phrase ‘turnaround strategy’ is much used in the public sector. State owned enterprises are particularly fond of using it when they approach the Treasury for the umpteenth time to secure a bail out. A poll on the Fin24 website asked respondents to vote for one of four options. By late evening on 21 September, the distribution of responses was:

• Yes! SA is getting a much-needed jump-start 8%
• There’s potential, but key details are missing 31%
• OK, but show me the money 32%
• Plan? What plan? 28%

Or to echo the title of a 1980s film: Yes, but can she bake a cherry pie?

Charles Simkins
Head of Research
charles@hsf.org.za