Political opposition to restructuring the economy has cracked but, while before Covid-19 a growth plan was lacking, the margin for error has now narrowed as urgency and complexity have spiked. Policy pivots must accompany reprofiling of much sovereign, corporate and consumer debt.
Our fiscal deficit and national debt were swelling unsustainably before Covid’s arrival. The economy was more than midway into a decade of modest inflation outpacing meagre per capita income growth. Against such a background, SA’s sovereign bonds have suddenly lost much value while those of healthier economies have rallied. The variations in repayment confidence trace to how policies affect outcomes.
As lockdowns preclude many purchases, various wage, rent and loan payments are derailed. This compels us to understand why SA’s herd vulnerabilities to sudden economic downturns is well above average. In short, most countries’ policies expand prosperity whereas ours do not.
Whereas biologists can look through microscopes and conduct lab experiments, social sciences rely heavily on comparisons and trends. That nearly 90% of China’s population was extremely poor 40 years ago versus about 1% today traces directly to its abrupt policy pivots in the late 1970s.
Disease suppression via an aggressive lockdown places less reliance on sophisticated institutional capacity than it does on broad prosperity. That China defeated poverty through intense global integration increased Covid-19’s transmission avenues. But China’s successful pursuit of broad prosperity also advanced prudent household financial management. Astute management of national government finances now further buttresses China’s resilience.
Scientists seeking solutions have traced Covid-19 to an animal, probably a bat, in a Hubei market for wild meat. To pivot policies effectively we must trace the sources of our low immunity to economic shocks. The evidence points clearly to households and government placing excessive reliance on expensive debt while productivity stagnates. Such blending further traces to electoral support for making a majority of South Africans dependent on government.
The blueprint which has produced four decades of rapid advancement across East Asia and beyond is not a secret. It emphasises value-add exporting, diffusion of knowledge and skills, and high household savings. SA’s economic policies are polar opposites and they have produced opposite results.
Expanding prosperity is about increasing productivity. Higher productivity follows from increasing employment and output per worker. Capital to fund highly productive initiatives remains globally abundant. The “new dawn” emphasised the pursuit of investment funding yet SA’s economy does not cover its cost of capital.
The economy is suffering from a sudden lack of access to purchasing power. This highlights that the binding constraint for high poverty countries is invariably access to deep reservoirs of consumer purchasing power. SA has far too many households which are economically vulnerable relative to those that are resilient. This creates a low ceiling for economic growth. In the absence of surging value-added exports, it takes decades to meaningfully expand sustainable domestic consumption. This, however, is only possible if emerging households avoid expensive debt.
While many commitments made in good faith have ceased being viable, if SA pivots its policies to achieve a much steeper long-term growth rate, the country’s long-term bonds would spike in value. Rather, debt “reprofiling” must create the fiscal space to minimise “viable” companies going bust. Much reprofiling of debt is required across the economy.
That so many of our households have low savings and high debts means that economic immunity to a sharp contraction has been impaired while the transmission rate has been elevated. We will probably dodge a liquidity crisis but this would be easier if the nation’s creditworthiness was sufficient to follow wealthier countries by rapidly surging deficit spending. Rather, a credit crisis has arrived. This is manageable but, as with Covid-19 virology, thorough analysis must inform bold policy actions.
Consumer default rates are well correlated with loan payments as a percentage of household disposable income. But a further level of analysis is required to reveal community effects. Herd susceptibilities to income shocks will be compounding when those loan payments reflect high interest margins.
Initiation and default costs can provoke very high lending rates. Meanwhile, many consumers are insufficiently price sensitive. Thus unsecured consumer lending has been profitable for lenders through passing on high costs. The systemic effect has been to impede upliftment while compromising resilience to shocks.
Once low-income households maximise their access to unsecured lending, so much of their disposable income is consumed by interest expense that wealth accumulation evaporates. Also, once most disposable income is going toward servicing debt, to maintain a constant level of purchasing power, debt must be continuously ratcheted higher. When borrowers stop increasing their borrowing, their purchasing power declines. This limits flexibility in wage negotiations.
Workers in many parts of the world can borrow to buy a house paying about two or three percent above inflation. If they are steadily increasing their productivity, their wages can compound faster than inflation without creating inflationary pressures. In SA, our high prevalence of households weighed down by expensive debts stunts growth while undermining economic resilience.
We weren’t prepared for the sudden decline in political resistance to policy shifts. Our updated economic assessments must be no less urgent and thorough as those of Covid-19 virologists.
Shawn Hagedorn is an independent strategy adviser shawn-hagedorn.com
