Bold programmes are needed to mitigate the economic crisis

27 March 2020 - Imraan Valodia

The ÍøÒ×ÌåÓý crisis is first and foremost a health and humanitarian crisis is likely to have lasting impacts on how we live.

It is also likely to have a lasting impact, in the long term, on how we conduct our economic lives. In the short term, we need to urgently consider how we manage the economic impacts in a way that does the least long-term harm.

The economic fallout from ÍøÒ×ÌåÓý is unique for at least five reasons. First, unless you have lived through the Great Depression in the 1930s, the extent of the economic decline takes us into uncharted territory.

Second, and more complex, is the fact that we are unable to deal with the crisis employing the normal set of tools we traditionally use in an economic crisis. When an economic crisis occurs, and the level of aggregate demand in the economy falls, we find ways ¨C typically through increasing government expenditure or loosening monetary policy ¨C to boost the level of aggregate demand. In other words, policymakers act to counteract the factors leading to a fall in demand. The uniqueness of the current situation is that we are, from a health perspective, actively trying to suppress the level of aggregate demand. 

In order to manage the spread of ÍøÒ×ÌåÓý, governments are being forced to ask the population to stay at home, closing schools and universities, and restricting spending in restaurants and bars. In other words, our policy response is further reducing the level of demand. Furthermore, our health policy actions are also impacting on the supply side of the economy. Asking workers to stay at home impacts negatively on firms¡¯ ability to supply goods to the market. 

As the level and rate of infections increases, we can expect that not only will we have to deal with increasing costs of healthcare service provision, but the economic dimensions of the crisis will deepen. Both the demand and supply side of the economy will have to be further constrained to manage the infections. In short, this is no time for traditional economic policy tools ¨C we need a bold and different response.

Third, in designing a response to the economic challenges, it is worth noting that the economic fallout has very little to do with purely economic factors. However, unless we act to address the economic fallout, vast swathes of our economic system will be significantly undermined, if not destroyed. 

Moreover, we cannot succeed in our health policy objectives to reduce infection rates and ¡°flatten the curve¡±, if we ignore the realities of our economic life. How does one ask an informal worker not to operate her food stall at a busy intersection without providing relief to ensure that she can feed her family?

Fourth, we don¡¯t know how long the crisis will last and what its final impact will be, but this crisis is a temporary phenomenon, which will end. From an economic perspective, it would be prudent for policies to assist to ride out the storm rather than pick up the pieces at the end. We should be implementing emergency measures to ensure that economic agents ¨C firms, workers and households ¨C are able to maintain as much of their economic infrastructure as possible. 

Policies should be aiming to ensure that, as far as is possible, firms do not close down, workers do not lose their jobs and households are able to maintain their current economic standards. The economic costs of retaining firm capacity, jobs and economic life are likely to be much lower than the costs of re-establishing these after the crisis has run its course. Moreover, we cannot ignore the risks to peoples¡¯ health and economic wellbeing.

In South Africa, the economic problems that we have faced for the last few years have already significantly undermined our productive capacity and that of households across the board, but especially so the lowest-income households, who have fewer resources than in previous years. The economic impacts of the ÍøÒ×ÌåÓý infections will have to be absorbed by an already stressed economy.

Fifth, the pace at which the infections are spreading and will continue to spread, notwithstanding the social distancing measures, is exponential. The economic impacts are also being felt at a pace that we have not experienced before. Thus, governments need to act urgently. The Cabinet has acted decisively on the strategy to flatten the curve. We now need urgent action on the economic front.

The following is a set of programmes that could feasibly be implemented on an urgent basis:

1. The most urgent need is to adequately resource the health system, both public and private, to manage the immediate response to a rise in the level of infections. At least two areas of the health system will be severely challenged ¨C our abilities to test and our abilities to manage the emergency response in hospitals. While healthcare professionals can design the response, they will require substantial additional resources. Based on the experiences of other countries who are further along the path than we are, the health department should be able to estimate, under different scenarios, the economic resources that will be required in the coming weeks. From a fiscal policy perspective, the government should urgently investigate the efficacy of a special appropriation bill to make the necessary resources available to the health system. If need be, the National Treasury will need to revise our fiscal policy and adjust the budget deficit. The economic and social costs of not acting now will be more significant than the economic costs of a temporary adjustment of our fiscal targets. The evidence from South Korea indicates that this health system response is a critical factor in reducing the infection rates and managing the crisis.

2. Given the challenges in aggregate demand and the complexities with supply chains, firms, both large and small, will have a significant fall in revenue, but not in costs (which may well increase). This will temporarily place pressure on firms¡¯ and households¡¯ liquidity and balance sheets. Unless we have measures to tide firms and households over this temporary ¡°financial shock¡±, many will be forced to lay off workers and cease operations (for firms), or plunge into severe stress (for households). Here, collaborative strategies with development finance institutions and the commercial banking sector are likely to have significant ameliorative impacts ¨C policies such as temporary mortgage holidays will give firms and households the breathing space to manage the challenge. Interventions of this sort are needed for more systemic temporary relief. Mortgage holidays for owners of a property will allow them to, in turn, allow temporary rent holidays to tenants. In short, we need to investigate temporary financial instruments to manage the pressure on the liquidity of firms and households.

3. Government has already announced measures to use the R180-billion surplus in the Unemployment Insurance Fund (UIF) to assist firms and workers. While these measures are to be welcomed, a short-term holiday on UIF contributions is unlikely to have a major impact. On a more positive note, using the Training Layoff scheme, which suspends the employment relationship and pays the worker 75% of the wage, will have a positive impact. Even this, however, may well be insufficient. It is interesting to note that even right-wing governments like the UK are providing guarantees to cover 80% of the salary of workers that may be temporarily laid off work.

4. Our most vulnerable group of South Africans are poor pensioners. This group has the highest level of risk and the least ability to themselves manage the challenge. South Africa is in the very fortunate position of having direct access to this group via the old-age pension and grants system. Policy interventions like one (or more) additional payments to this group (a 13th cheque) may go a long way to increasing their ability to manage the shock.

5. One particularly vulnerable group is workers in the informal economy. South Africa has approximately 3-million informal workers. This group is especially vulnerable because their daily work activity ¨C selling small batches of tomatoes, preparing meals, collecting waste, etc. ¨C is the only way by which they and their families are able to survive. Many of these workers are itinerant, and operate in areas like taxi ranks, where large numbers of people congregate. Unfortunately, we do not have an easy mechanism to provide support to this group, but unless we find a mechanism to do so, the repercussions will be serious, on both health and economic considerations. I am not, under normal circumstances, a supporter of a universal income grant, but in these extraordinary times, the government will have to provide income support to this group. A short-term, emergency universal grant to all South Africans for a fixed period of time, to be recovered later through the tax system, may well be a necessary and effective measure. A measure such as this, linked to an ID number to be cashed through the banking system or even at retail outlets, may well be feasible to implement, even for those without bank accounts.

6. The government should be careful not to focus exclusively on the poorest among our citizens. The economic impacts of ÍøÒ×ÌåÓý will be felt by the middle classes too (in South Africa, the middle classes do not have particularly high incomes). Policies such as interest-free credit card purchases of food and medical supplies for a period of six months would go a long way toward protecting middle-income groups.

7. From a health response perspective, we are likely to face severe shortages of vital medical equipment and drugs ¨C gloves, ventilators, drugs such as prednisone, etc. Special procurement arrangements with manufacturers, similar to those entered into for antiretrovirals, will not only boost economic output, but also build the capacity of the healthcare system to manage the upcoming challenge.

8. Our scientific capabilities to better understand the medical and social dimensions of the ÍøÒ×ÌåÓý challenge will likely have a significant impact on our ability to manage the challenge. South Africa has excellent capacity in its universities and science councils to assist with the global effort to manage the crisis. Two interventions may be useful: first, to appoint a high-level scientific committee to advise (like many South Africans I am concerned about the plethora of advisory bodies, but this is a crisis and we should have the best minds advising); and to make available a competitive research grant fund for short-term research interventions to assist in managing the crisis.

9. Government has acted speedily to address the challenges of price gouging of critical products like food and medical supplies. In general, price controls are not a good idea because it creates further opportunity for hoarding and ¡°black markets¡±. However, there may be a good case for the government to work with the private sector to establish price controls in a few very specific medical items. If the pandemic spreads as it is expected to, South Africa will need a significant capacity to test for the virus. We should urgently be developing local capacity to produce testing kits. Also, the price of a testing kit, whether in the public or private sector, should be set at a price that will be affordable. Currently, a ÍøÒ×ÌåÓý test in the private sector costs between R1,000 and R1,200 ¨C this is clearly unaffordable. If we are to make ÍøÒ×ÌåÓý testing kits available to all, this price will have to be reduced.

10. Our economic policymakers need to be working in concert with each other. While respecting the independence of the South African Reserve Bank, we need a fiscal and monetary policy to be fully coordinated. Furthermore, it is important that our policies, both on health and economics, are aligned with countries in the region. While it is important to close borders to reduce the spread of infections, South Africa¡¯s health and economic systems, however inadequate, are much better resourced than our neighbouring countries. We should be working collaboratively to manage the health challenges and coordinate our economic measures.

In summary, these are extraordinary times. The impact of ÍøÒ×ÌåÓý will have to be absorbed by an already fragile economy. Millions of South Africans live well below any benchmark of a reasonable economic life and, unfortunately, this is precisely the group that will be most affected by the economic fallout from ÍøÒ×ÌåÓý. The 100-basis points reduction in the repo rate by the South African Reserve Bank provides some relief. However, this is hopelessly inadequate for the task at hand. What we need is an urgent economic policy action. Unless we address the economic challenges, our health policy efforts to flatten the curve will be compromised and the risks of economic inaction are significantly higher than decisive action now.

Professor Imraan Valodia is the Dean of the Faculty of Commerce, Law and Management at Wits University. This article was first published in the Business Maverick.