/ 7 May 2020

Macroeconomic policy options beyond Covid-19 depression

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Since shops shut on March 26, the South African economy has taken a huge knock.(Delwyn Verasamy/M&G)


Reliable forecasts suggest that South Africa’s national economic output for the current year might slump by at least 5%, a situation likely to worsen as the Covid-19 depression endures. In response to this economic crisis, the country started phasing in a multifaceted macroeconomic recovery plan. It is unclear, however, whether this plan is adequate in light of the acuteness of the socioeconomic crisis and if it incorporates measures to evade policy mistakes of the global Great Recession of 2007-2009. 

Enough fiscal and monetary interventions? 

South Africa has been lauded for its early and aggressive anti-Covid19 interventions. Stringent global travel restrictions blocked the importation of the coronavirus through infected travellers, the conduit for the country’s first wave of positive cases. The extended lockdown has helped to slow local transmissions, shutting down non-essential economic sectors. In addition, the community screening, tracing and test referrals with the aid of community health workers, a jobs scheme premised on public works principles, is the hallmark of the Ramaphosa administration’s proactiveness to prevent an uncontrollable escalation of viral infections in poor communities. 

These measures appear sensible if the Covid-19 pandemic is confined to a health crisis. Hard realities, however, suggest that such a constricted view is skewed and distorted. After all, the Covid-19 pandemic is first and foremost a socio-ecological crisis, with its economic devastation set to last several months if not years beyond curbing the disease burden. On the face of it, the government has embraced and incorporated this broader view in its fiscal and monetary interventions against the Covid-19 economic depression. 

When the government decided to gradually ease anti-Covid-19 lockdown restrictions, it also launched a macroeconomic stimulus package which is roughly 10% of gross domestic product. Compared to stimulus plans amounting to 2%-3% of national output in severely depressed economies in the Global North, South Africa’s intervention looks ambitious. Details of this macroeconomic recovery package will be revealed with the passage of time according to the finance ministry. Even though this current iteration of the stimulus plan lacks substantive detail, it is inadequate to judge it only in terms of its extraordinary monetary value. Many factors will determine if and how the R500-billion recovery package will improve quality of life outcomes for the worst-affected victims of the Covid-19 depression. Another big unknown is how the sourcing of some of the required financial support from multilateral financial institutions will affect immediate macroeconomic policy decisions as well as conditions imposed on long-run policy options. If history may serve as a guide, learning from the responses to the 2007-2009 Great Recession can help avoid repeating some of the mistakes observed in many developing countries during the subsequent recovery period, which exacerbated social inequality and failed to lower unemployment.

Great Recession stimulus packages 

When the 2007-2009 global financial crisis erupted and threatened the global economy with a gigantic shock, most advanced economies devised unprecedented fiscal and monetary interventions aimed to stabilise their markets and avert the worst consequences of a possible meltdown. The intricate nature of the globalised production and trading systems propagated the crisis to developing countries through massive financial outflows and a sharp reduction in the prices and demand of natural resource exports. 

For many developing countries, especially the resource-dependent, non-oil exporters, the ensuing food price inflation shocks pushed 100-million people into poverty. Consequently, many developing countries had to roll out fiscal and monetary policy measures of their own in order to stabilise domestic markets and cushion their economies from the consequence of exogenous shocks. Most observers agree that such interventions enabled those economies to recover more rapidly than it would have been in the cases without stimulus.

Macroeconomists disagree on the content and composition of stimulus packages. In the Great Recession, this disagreement pivoted on a fundamental question: should governments use tax payers’ money to bail out large banks and powerful corporations at the expense of the working poor? Contrarians won this dispute as evidenced in the weak economic upturn and rapid rise of corporate bankruptcy filings in the post-bailout years. A study conducted by the ILO in 2009 showed that much less effort has been expended in boosting income and employment protection by taking the particular circumstances of vulnerable groups into account. Unsurprisingly, the sluggish recovery failed to counter rising inequality and poverty, with food and nutrition insecurity and economic exclusion reaching new heights. 

Pro-poor macroeconomic agenda 

Most available evidence agrees that Covid-19 economic meltdown will be closer to the Great Depression (1929-1933) than the Great Recession (2007-2009) in its severity, pervasiveness and endurance. This calls for anchoring macroeconomic responses firmly around the needs of poor and vulnerable households. Prioritising investment in deliberately pro-poor macroeconomic stimulus packages is urgent but does not yet exist. What does this mean for orienting the facets, mechanics and outcomes of fiscal and monetary stimulus interventions? Against exclusionary fiscal and monetary policies, the focus ought to be on sustainable and active economic participation. A pro-poor macroeconomic stimulus agenda must prioritise: employment and growth recovery, the distributional effects on inequality and poverty and the trade-offs between bailing out corporations versus supporting household purchasing power.

Pro-poor macroeconomic stimulus is a vital immediate response to counter the economic downturn but not sufficient for constructing the post-Covid-19 society that is better than the current highly unequal one, with its cohorts of poverty and massive unemployment. Strategic responses to it ought to include instruments and resources to carry out the structural changes needed to give shape to that new human society. For this reason, macroeconomic responses to the current pandemic need to be designed in such a way that they contribute to laying the foundation of the post-Covid-19 economy, which ought to be engineered as more equitable and more responsive to the needs of local communities, therefore more resilient to external shocks. Building such an equitable society must be at the heart of Covid-19 relief measures and the structural macroeconomic policy that South Africa needs now. 

Dr Alexis Habiyaremye is incoming associate professor in the Chair of Industrial Development at the University of Johannesburg and senior research specialist in the Inclusive Economic Development division of the Human Sciences Research Council (HSRC); Pelonthle Lekomanyane is junior researcher and Olebogeng Molewa is research assistant in the division while Dr Peter Jacobs is research director and strategic lead in the Changing Economies section of the division.