OPINION: Investment multiplier could revive economy
JOHANNESBURG - The Covid-19 pandemic has caused widespread disruption and detrimental damage to the economy.
Statistics South Africa recently conducted two surveys on the impact of the pandemic during the national lockdown, which found that 36.4percent of companies had reported laying off of workers in the short term, while 45.6percent of companies expected a reduction in their workforce soon.
The CCMA has received a swelling number of large scale and individual retrenchment applications.
Further exacerbating the economic meltdown, the SA Revenue Service (SARS) reported that the 2019/20 tax revenue was R66.3 billion lower than estimated in the 2019 Budget.
To cushion the economic blow, President Cyril Ramaphosa recently announced several measures to stimulate the economy and to protect the poor.
The government will pay an additional R5bn to social grant recipients to assist poor households, while providing a special Covid-19 grant of R350 a month for unemployed South Africans.
The government will provide an R200bn Covid-19 Loan Guarantee Scheme for small and medium-sized businesses. The SA Reserve Bank also cut the repo rate three times recently to 3.75percent to help support the economy amid the Covid-19 crises.
Amongst several tax relief measures introduced by Finance Minister Tito Mboweni was tax adjustments through the tax subsidy to employers of up to R500 per month for the next four months for private-sector workers earning below R6 500 under the Employment Tax Incentive.
These measures introduced by the government are welcome, however, more must be done to strengthen aggregate demand to stimulate employment creation and the achievement of higher inclusive economic growth.
Even before the pandemic hit South Africa, the official unemployment rate according to Quarterly Labour Force Survey released on February 11 stood on 29.1percent, an increase from 27.1percent measured in the last quarter of 2018.
To help countries faced with this situation, the International Labour Organisation (ILO) designed a policy framework for countries to follow that helps to lessen the impact of Covid-19 on businesses, jobs and the most vulnerable members of society. The four pillars of action include stimulating the economy and jobs, supporting enterprises, employment and incomes, protecting workers in the workplace and the use of social dialogue between the government, workers and employers to find sustainable solutions.
Although the ILO's policy framework is helpful, South Africa is faced with serious structural challenges, high unemployment and massive inequalities, where the majority is excluded from participating in the economy.
We can learn important lessons from history.
John Maynard Keynes developed policy instruments to assist the world to emerge from the Great Depression and other countries like China, which lifted millions out of poverty.
The Great Depression, which began around 1929 and lasted almost a decade, resulted in massive unemployment , exacerbated by the non-availability of alternate job sources.
South Africa can take heed of Keynes knowledge and create new sources of employment and decent work at the centre of its recovery plan.
South Africa has several potential new job generators.
The Integrated Resources Plan correctly submitted that renewable technologies can create new industries, job creation, and localisation across the value chain. Localisation and industrialisation mean that products used in the country must be beneficiated and manufactured in South Africa.
However, a stable electricity supply is vital to growth and this vision. The country must shorten the implementation date of the strategy of “electrification of everything” and strengthen the revenue streams of Eskom .
Keynes would agree with the policy instruments of localisation and industrialisation that lay the foundation for manufacturing together with the Keynes multiplier in the economy.
The multiplier would result in the money going to workers as salaries.Also benefiting would be the South African beneficiation and manufacturing value chain as well as local companies that supply the materials and the equipment for the new industry. Local companies would deduct the PAYE from the salary of workers and pay the tax to SARS, while the workers would use the income to buy food and other consumables. The food stores use the same money to pay their workers and suppliers on time.
The result of the original investment of, for example R100bn, the national income increases by R300bn if the multiplier is equal to 3.If as a result of an investment of R100bn, total national income increases by R400bn, the multiplier is 4. Keynes must be smiling from heaven, hoping that South Africa should reflect deeply how the investment multiplier and urgent implementation could assist the country to increase decent jobs to strengthen the tax revenue of the government.
The government should in turn spend the tax revenues on education, health and security. The South African Reserve Bank would see beneficiation, localisation and manufacturing supporting the balance of payment account because the country would be less dependent on importing technology and goods.
The country must introduce an import substitution strategy that underscores the replacement of some agricultural or industrial imports to encourage local production for local consumption and the surplus could be exported.
Import substitutes are meant to generate employment, reduce foreign exchange demand, stimulate innovation and make the country self-reliant in critical areas such as food, defence and advanced technology.
The promotion of active economic policies by South Africa to promote inclusive economic growth and industrialisation have generally been viewed with suspicion by neoliberal economists and right-wing media.
The historical record indicates that the previous government successfully used active economic policies to deal with the poor white unemployment from 1948 to improve the economic and social challenge the community into the highest standard of living in the world.
This intervention was, however, done at the expenses of the oppressed majority. The state has always played an important role in facilitating structural change and facilitating the state-owned companies (SOCs) and private sector sustain it across time.
So removing binding constraints to facilitate SOCs and private firms’ entry into those identified industries, while the interventions aim to provide information, compensate for externalities and coordinate improvements in the “hard” and “soft” infrastructure that are needed for the private sector to grow in sync with the dynamic change in the economy’s
More important are those policies aimed at protecting some selected firms and industries that defy the comparative advantage determined by the existing endowment structure: either in new sectors that are too advanced or in old sectors that have lost the comparative advantage.
The same approach should be applied across all the sectors of the economy, including the removal of impediments that prevent the achievement of higher inclusive economic, as well as the bureaucratic red and the payments to small, medium and micro enterprises within 15 days to ensure they can pay their workers and suppliers.
Dr Dennis George is the executive chairperson of African Quartz and writes in his personal capacity. [email protected]