Nouriel Roubini and Colin Coleman,
NEW YORK – South Africa is at a crossroads. To save its democratic project, it needs to put itself on a path to inclusive, dynamic growth, creating a virtuous cycle that delivers on Nelson Mandela’s promise of “a better life for all.”
For the past decade, the country has been locked in a low-growth trap, with falling per capita income, rising inequality, and skyrocketing unemployment, which is now at a record-high 34%.
In a world beset by economic vulnerabilities, South Africa still manages to stand out for its poor performance and racially skewed outcomes – a tragic legacy of centuries of colonialism and apartheid.
The combination of low growth, high unemployment, large deficits and debt ratios, and a lack of effective structural reforms has created an unstable disequilibrium.
After being skillfully managed by Mandela and then by Thabo Mbeki, the country was torn asunder by Jacob Zuma’s decade-long reign of state capture and corruption. Zuma’s successor, Cyril Ramaphosa, is now trying to turn things around, but the challenge is enormous.
The economy could go one of two ways. In one direction, weak growth leads to a fiscal crisis, further reducing incomes and employment, and inviting more civil unrest like that in July, when riots and looting swept the country.
There is good reason to worry that South Africa is already on this path, given its troubled medium-term debt outlook.
When a country runs a flat or negative primary budget balance (excluding interest payments), real (inflation-adjusted) growth must exceed the real rate of interest on its debt stock.
Otherwise, its debt-to-GDP ratio will grow continuously. That is what is now happening in South Africa. To avoid a debt crisis, real yields must decrease, and/or real growth must increase.
Austerity alone cannot fix the problem. To put itself on a firmer economic footing, South Africa needs a program to expand social welfare and recapitalize businesses while also undertaking structural reforms and pursuing fiscal consolidation.
Social welfare can be expanded with a $55 monthly Unemployed Relief Grant. Costing 2% of GDP, this should be a multi-year, if not permanent, replacement for the $24 monthly Social Relief of Distress Grant that expires in April 2022.
That program has been highly effective and thus merits being doubled. It would put more money into the hands of the 12 million unemployed, who would then spend it (unlike wealthy savers), stimulating economic activity and job creation.
The new grant could be financed in part by government saving measures and tax reforms to remove deductions targeted at higher-income taxpayers.
In the short term, however, it will require around $7 billion of additional debt on the government’s balance sheet. Fortuitously, that is roughly equal to the anticipated incremental corporate-tax revenues this year, following the recent commodity boom.
Grants are not a panacea; but they have an integral role to play in attacking the unemployment and growth crisis, as do other interventions such as wage subsidization, when properly applied.
There is ample evidence to show that grants alleviate poverty and hunger, and help recipients start new businesses. Expanding this form of support is a no-brainer.
South African businesses also need support in the form of recapitalization. Here, a sizable hybrid equity funding scheme for small and medium-sized enterprises could go a long way, as would grants funded by the national treasury, in partnership with financial institutions.
An injection of risk-sharing equity into eligible businesses would help to stimulate both investment and job creation.
The government also should work with the state electricity utility, Eskom, to devise a credible operational and structural plan that includes recapitalizing the company’s balance sheet.
The aim should be to normalize Eskom’s debt within a five-year period, thereby defusing a ticking financial time bomb while enabling a green energy transition with concessional funding.
Ultimately, the government must demonstrate to rating agencies and investors that it has a credible growth plan that includes structural reforms, and that resets the fiscal path to align with faster medium-term consolidation as growth kicks in.
Other reforms must target higher rates of fixed investment. Aside from a COVID-19 vaccination program, policymakers should focus on aggressive tourism marketing; fast-tracking bankable public-private infrastructure, including ports and railways; implementing spectrum allocation; creating new incentives to adopt renewables, embrace electric-vehicle production, establish data centers, and transform agriculture and mining; and reviewing industrial and labor policies to draw investment into both labor-intensive and high-skilled production.
The test of a credible fiscal consolidation path lies in the public-sector wage bill, which is currently consuming an unsustainable share of overall budget expenditures.
The solution here requires that unions and the government agree to medium-term public-sector wages without subsequent slippage.
The key is to professionalize the public service, crackdown on corruption, and improve the efficiency of public spending in health, education, and security.
South Africa should deploy the best private- and public-sector expertise and skills available for these purposes.
As GDP increases faster than debt, successful deficit reduction should result in the net tightening of bond yields, delivering significant savings on the government’s cost of borrowing.
This is an interdependent package deal: extending the stimulus and implementing the structural reforms are prerequisites for meeting the fiscal consolidation targets over time.
Successful implementation of the entire package would put South Africa’s economy and society on a more sustainable path, bringing Mandela’s original vision within striking distance. We dare not countenance the alternative.
Nouriel Roubini, Professor Emeritus of Economics at New York University’s Stern School of Business, is Co-Founder of TheBoomBust.com. Colin Coleman is a former senior fellow at Yale University and a former partner at Goldman Sachs.
Copyright: Project Syndicate, 2021.