What a recovery package for South Africa should contain

20th March 2009 By: Seeraj Mohamed

An economic recovery plan for the South African economy is being developed to respond to the impact of the global economic crisis on the country. There is pressure for government bailouts in many sectors of the economy.

For a South African bail-out to have any long-term impact, it will have to complement and improve on existing government economic development policies. Further, the South African financial sector does not seem too badly affected by the global financial crisis at present but there should be government plans to deal with the role played by the financial sector in the economy.

An economic recovery plan and a bailout of industries in South Africa were required long before the global economic downturn. The relatively high level of economic growth in South Africa before the crisis was a result of debt-driven consumption and speculation in financial and real estate asset markets.

This growth left South African households more indebted. The increased use of credit by the private sector was not used for long-term productive invest- ment but for consumption and specula- tion.

The investment that occurred went into building services industries for consumption and speculation. Much of these investments are wasted now that consumption and speculation can no longer drive economic growth. In fact, the South African economy may be worse off than it was before the relatively high levels of economic growth from 2003 to 2007.

The recovery plan must be aimed at the poorest and the unemployed. The poor are much more negatively affected by financial crises than more affluent members of society and the business sector. The affluent have more opportunities to change their jobs, to draw on savings and existing credit facilities and to shift their portfolio of assets. The poor and unemployed who already live precarious existences have very little room for manoeuvre when there is a crisis.

The negative distributive impact of the current crisis is already being witnessed in South Africa as jobs are lost in mining and manufacturing. A large part of the recovery should be to put in place government spending that begins to increase the social wage of the poor in South Africa. Increased welfare spending, and better and cheaper access to basic services should be a priority.

Higher-quality education and health services should also be a priority. At the same time, the State should focus on creating a huge amount of jobs in these sectors. It should stop outsourcing these ser- vices and build a strong system of ser- vices delivery within the State. If this programme increases the social wage and increases public-sector employment, South Africa could have the correct kind of con- sumption-led economic growth in the future.

The promotion of a successful industrial policy that develops downstream, labour-intensive industrial sectors should be supported. The mines and minerals sectors are hurting but the main focus should be on industries that add more value to raw materials, not minerals producers. In order for this kind of industrial policy to work, there would have to be State pressure for reorientation of the financial system to support long-term productive investment rather than consumption and short-term speculative behaviour.

Further, there would have to be a change in macro- economic policy that allows it to support long-term investment. Removing exchange control policies has caused volatility and uncertainty. Currently, inflation targets hurt productive investment. Growth in investment levels can cause inflation to rise. Increasing interest rates in response to investment-driven inflation stifles investment.

A recovery package for South Africa must deal with the long-term socioeconomic and industrial development problems of the economy. If there are bail-outs to tackle short-term problems, we risk ending up with the same problems we had before the global economic crisis.