AGAINST ECONOMIC RECKLESSNESS I - FIVE ILLUSTRATIVE QUOTES AND THEIR IMPLICATIONS

There is a widespread sense that the dismissal of Pravin Gordhan and Mcebesi Jonas and the two rating agency downgrades which followed have altered our economic prospects and policy space.  There is less agreement on how.  South Africans will have to grapple for some time with conceptualization of the new situation and how to cope with it.  This brief will deal with five early responses, embodied in comments, and what they reveal about initial understandings.

 

 

In other words:  Don’t blame us, the downgrade was inevitable.  But this is to gloss over the clear statements by both Standard and Poor’s and Fitch that what prompted the downgrades was the actions of the President.  Thus Standard and Poor’s:

The executive changes initiated by President Zuma have put at risk fiscal and growth outcomes.[2]

 

and Fitch:

The cabinet reshuffle, which involved the replacement of the finance minister and the deputy finance minister, is likely to result in a change in the direction of economic policy.[3]

 

Moreover, it is not clear that the downgrade was inevitable.  For sixteen difficult months, Gordhan and Jonas led a successful effort to fend off a downgrade, with the co-operation of business and labour.  The comment of Mohammed el-Erian, a frequent and respected commentator on Bloomberg is apposite:

 

We are seeing the movie play yet again.  And it’s sad because the economy was turning the corner, not only the currency, but growth after the commodity shock.[4]

 

 

How odd this is – to introduce a slogan without a conceptualization behind it, and then to try to give it content ex post.  Consider the two ‘elaborations’ offered this year>

i. The 2017 SONA identified two components of radical economic transformation:  a revision of state and infrastructural procurement policy and enhancement of competition policy.  It is unusual to characterise competition policy as ‘radical’.  It is a standard component of economic policy in all affluent economies and in many emerging ones.

ii. The Economic Transformation Discussion Document prepared for the ANC’s National Policy Conference in July refers to radical economic transformation, but it fails to make a clear distinction between aspirations and programme.  The result is twofold: the document rehearses long-held ANC aspirations and adds a long list of policies already in place or announced, all to be achieved by a ‘developmental state [6]’.You can be rebrand existing aspirations and policies as ‘radical economic transformation’, but that merely rearranges the deck chairs.

 

 

No apologies, then, but also no explanation of the consequences.  Measures designed to manipulate procurement – including those already taken – in order to create rents for preferred groups inevitably push up costs.  They also result in infrastructural project delays as ESKOM’s experience has shown.  Fiscal policy ceilings plus price increases must result in the procurement of a lower quantity of goods and services than would otherwise be possible.  Given a ceiling the trade-off works on a one-to-one basis:  a 1% price increase entails a 1% quantity decrease.  Fewer school and health facilities infrastructural upgrades, fewer improvements in the network of roads and passenger transport, a lower level of community services – the list is endless.

 

There is a theorem in public choice analysis that, in democratic contexts, it is the preferences of the median voter which prevail.  The reason is straightforward: a successful coalition of interests must capture the allegiance of the voter in the middle.  This is why United States presidential contests are often so close.  Initial platforms elicit public responses which can be discovered by polls and, nowadays, big data analysis of social media.  Analysis of polls identify the components of the platforms which do and do not appeal to the median voter and adjustments are made accordingly.  Long campaign periods allow for several rounds of adjustment.  The candidate who aces it in the end is up against an opposition with formidable platform adjustment capacity, with swings in popularity as new preference discoveries are made and an outcome too close to call on the eve of the election.  Donald Trump’s victory was based on the behaviour of no more than 100 00 voters in three states, with 128 million votes cast.

 

The question for South Africa is:  given the trade-off between price and quantity in state procurement, what choice will the median voter make?

 

 

Malikane means it.  In a single article, he proposed expropriation of white monopoly capitalist establishments, such as banks, insurance companies and mines, a state bank amalgamating all state owned financial institutions and nationalization of the Reserve Bank, expropriation of all land without compensation to the state which will then collect rentals from it.  In Malikane’s view, the cornerstone of the control of the state has always been the National Treasury and the Reserve Bank. 

 

There are just two problems with all of this.  These ideas were consigned to the lumber room of history in the last decade of the twentieth century, and they have not been rehabilitated since then.  This was one of the things that made the political transition possible and, in this respect, the choices made then remain valid now.

 

The second is that the Ministry of Finance has felt obliged to place on record that the opinion piece by the advisor to the Minister of Finance, Professor Malikane, was written in his personal capacity as an academic and an activist, and that the views expressed are not necessarily government policy.  The Ministry of Finance will continue to be guided by the policies of the ANC. The nationalisation of banks is not government policy.  The start of Malikane’s advisory role seems to have been inauspicious, but one must reckon with the possibility that he was appointed so that advocates of radical economic transformation would feel that they have a friend at court. 

 

This has been a fire that Minister Gigaba has had to put out.  It will not be the only one.  The Minister will be busy keeping his hand on the hose.  Occupied as he will be in this way, two dangers remain.  The first is that the Treasury’s capacity to maintain the promised public expenditure will be sapped, and the second is that he may just have the time to sign off on damaging deals, including nuclear procurement.

 

So you don’t want to play with us?  Fine.  It leaves us free to have the domestic economic dustup we’ve always wanted.  We shall emerge victorious from it, at which stage we start a new game with the global economy.

 

There are two issues here.  For Dante, hell was not a simple place.  It had nine circles, within each circle sinners are various types were to be found in each circle, and some circles had a complicated internal structure.  So it is with ‘the junk status’.  The third major ratings agency – Moody’s – has South Africa under review, but it has not pronounced its assessment yet.  There are circles of junk.  The first circle is known to Standard and Poor’s as BB+, and this is the circle we currently inhabit.  Below that is BB, and BB-, all described as non-investment grade: speculative.  Then comes B+, B and B-: highly speculative.  After that, comes CCC+ (substantial risk), CCC (extremely speculative) and CCC-, CC and C (in default with little prospect of recovery) and D (in default with no prospect of recovery).  Moreover, the ratings have several dimensions.  The most commonly quoted (and the one referred to above) is the long term foreign currency sovereign credit rating.  But there is also a long term local currency rating, as well as short term foreign and local currency ratings.  The upshot is that South Africa has a long way it might still fall, and the fires get hotter as one descends.

 

The second point is that the intuition, so artlessly presented by Maine, may well command adherence in circles beyond the ANC Youth League who prefer not to make such a blunt statements.

 

 

It is not surprising that, at this stage, views are diverse and not properly thought through.  To make progress, one needs an analytical framework to locate and debate the issues more precisely.  The second brief will outline one.

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

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[1] Reported by News24 on 16 April 2017

[2] Standard and Poor’s statement on South Africa, 31 March 2017

[3] Fitch’s statement on South Africa, 7 April 2017

[4] Bloomberg Video, 28 March 2017

[5] Podcast:  Interview with Stephen Grootes on Cape Talk, 10 April 2017

[6] On any definition, a developmental state cannot be reconciled with a kleptocratic state.  At this level. a credibility gap remains to be bridged. 

[7] Treasury 101:  Malusi Gigaba, radical economic transformation and the elephant in the room,  Daily Maverick, 19 April 2017

[8] Sunday Times, 16 April 2017

[9] As reported on News 24, 7 April 2017