YONELA DIKO: Can Godongwana succeed where Mboweni failed?
The challenges Finance Minister Enoch Godongwana faces are the results of multiple blows over years to our economy, writes Yonela Diko.
When Tito Mboweni was Reserve Bank governor, economic management had a clear predictable path. Rising inflation rates triggered a tightening of monetary policy. This meant that the governor, in order to manage the rising inflation, would have to push interest rates up until the inflation responded downwards. Once inflation was down, interest rates would also have to be brought back down, and this would make investments attractive. Higher investments meant higher business activities and therefore lower unemployment rate and sometimes, higher wages.
For this economic management pattern to be effective, however, it had to happen on the back of high economic growth, rising exports and a growing supply of money and credit buoyed by low short term rates (which encourage borrowing and investment). Higher economic growth would then lead to high revenue collections and lower welfare payments from the government fiscus, and this would also help to bring the deficit down. This was a defining story of success of governors and finance ministers of the turn of the century.
Then 2008 happened. A violent shock hit the economies of the world so that in less than a year, $2 trillion in global growth was lost, according to Moody’s Analytics. In the United States alone, the stock market lost $8 trillion in value between 2007 and 2009. Americans lost $9.8 trillion in wealth as their home values took a huge knock and their retirement accounts disappeared. The loss of America’s consumer power had implications for the world’s exports, which began to shrink dramatically.
In South Africa, according to the Minister of Trade and Industry Ebrahim Patel in 2009, the manufacturing sector shrank by 20% between 2007 and 2009, with over a million jobs lost in 2009 alone.
A decade later, surveys of workers revealed that many of them have not fully recovered from the economic crisis. Many workers have struggled to regain the kind of work and pay they once had before the crunch. The Transamerica Center for Retirement Studies showed 56% of respondents to its studies said they have not fully recovered from the great recession. Seven percent say they may never recover.
In South Africa, unemployment hit 25% during the catastrophe, and that brought a lot of anxiety. Houses were repossessed and people lost their businesses. Today, unemployment is above 30%. Many people who lost their jobs during the crisis have not been able to find work again, now with millions more having joined them in unemployment lines since. Others have not been able to find work that paid the equivalent of their pre-crisis work and have therefore lost a lot of lifetime income. Private investments have just not been able to rise to its pre-crisis levels. Banks have not supplied the kinds of short term credits they used to and money supply has been shrinking.
This is the world Mboweni came back to as finance minister - completely different from the one he thrived in for over a decade as governor of the Reserve Bank. This is the world Finance Minister Enoch Godongwana is coming into.
Although the pre-crisis years may seem to have been our economic golden years, the situation exposed reckless, debt-driven growth along with governments who shirked their regulatory responsibilities, hoodwinked by corporate thugs who claimed they were best positioned to self-regulate. It’s not clear what bringing back Mboweni from that era would achieve except an attempt to dismantle the state, be an executive of the business class and set us up for the next crisis.
READ: Tito Mboweni, the reluctant politician
The crisis naturally led to political pressure around the world including South Africa to review our economic policy. The economics that was being taught at universities and business schools, the irrational and risky practices by the banks, hedge funds and insurance companies and the role or lack thereof of government regulation had to be reviewed and new governing institutions had to be set up to monitor the markets. The message was clear to corporate and their stock brokers: behave, play by the rules, and pay your taxes.
The economic crisis was not caused by a steep rise in the cost of borrowing, as is the case in normal economic downturns. The usual fiddling with monetary policy was not sufficient to stop the economic fall and the bleeding. Mboweni’s successor, Lesetja Kganyago, seeing that monetary policy has been unsuccessful in affecting the money supply and growth in the economy for a while, decided to distance the Reserve Bank from growth, as if there was another purpose for all the economic policies of the government.
The economic crisis has cast a long shadow on the economies and their attempts to recover in the aftermath, and most aspects of our economies have not fully recovered ten years on.
ELUSIVE ECONOMIC GROWTH
Economies need a rise in aggregate demand and aggregate supply to grow. This means a rise in consumer demand, Investments, Government spending and Exports. With lack of growth in the supply of money and in short term credit as a result of commercial banks not lending money in the scale they used to, growth remains elusive and up to now, the government has been unable, if not unwilling to close the economic gaps left by the commercial markets.
Today, commercial banks, due to the 2007 financial crisis which saw runway credit extended to people who did not deserve it are now singularly focused on lending only to those with pristine credit records and since the economic crisis, that number has shrunk dramatically. This lack of credit availability is delaying the economic recovery of our economies. While banks like the Federal Reserve and Bank of England have pumped so much money into the economy to compensate for lack of lending by commercial banks and allowed borrowing to rise to much higher levels, South Africa has somehow been stuck on its economic management pattern that is missing a very critical element – Growth.
Other countries which today are seeing some modicum of growth have had to embark on what experts consider activist economic policies to bring back growth into their economies.
Unless Godongwana embarks on his own activist economic policies, where the government actively participates in the markets to plug in the gaps left by commercial players, his term will also be marked by very little growth and an ever rising demand on the fiscus for socio-economic needs.
GODONGWANA'S DIFFICULT CHOICES
The lack of aggregate demand in the economy is on the back of high levels of unemployment, with those lucky to be employed trapped in low wages, and as stated, there is the lack of access to credit. Investments are also very low due to unattractive interest rates (cost of borrowing) compared to places like Britain at 0.5% and our general low levels of savings. The fiscus is also squeezed due to a low tax base, growing demands and high levels of public debt. Our export market has also been flat-footed for a long time due to low commodity prices and a strong rand that makes our other exports less attractive.
One option Godongwana can take, which was Mboweni’s favorite, is to do nothing except to keep telling us how he was unable to do nothing. In normal times waiting out an economic cycle is not irrational but these have not been normal times. You can also sing the "All South African" song that missing private sector investments are due to policy uncertainty and political instability. Even in countries with the most predictable market fundamentals, private investors have just not come back to play in a decade, consumers are still in homes worth less than what they owe to the banks, there are no jobs and no wage increases, and the global economy is just not what it used to be.
The other option, the only option, is for the government to ask itself these fundamental questions and answer them with great vigour and determination. What can the government do for consumers to boost their spending? Can the government plug in and fill the missing private sector investments through its own spending and availing credit to small businesses? What measures can the government put in place to boost exports?
COVID-19 IN AN UNRECOVERED ECONOMY
In just over a decade since the last devastating economic crisis, we are now faced with another violent shock that has effectively frozen the means of trade and forced us to shut down our economies. It is most likely the right moment for us to start accepting that we are living in times of serious blows and old economic models are not going to be enough.
Godongwana has to come up with a strategy of how to revive the economy after these batterings so that we can have better and more consequential responses, which must assist us not only to lift ourselves out of the current COVID-19 crisis but also to be better prepared for the next one.
These are the challenges that the new finance minister is facing and nothing less than economic activism will suffice.
Yonela Diko is the former spokesperson to the Minister of Human Settlements, Water and Sanitation. You can follow him on Twitter: @yonela_diko