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Time for SA to rethink austerity policies

SOUTH Africa’s economic and business establishments, whose weight of economic opinion has considerable influence on government policy, enjoy remarkable singularity of economic thought. Any public comment, debate or policy suggestion that deviates from their received wisdom is airily dismissed. Crude caricatures usually accompany such dismissal.

There is perhaps no better example of the establishments’ pervasive groupthink than in the area of national finances. They exalt with aplomb budget cuts, deficit reductions and wish for budget surplus. During budget speeches economists, businessmen and politicians scramble for interviews; vying for budget areas where deeper cuts could have been possible to reduce the deficit and thus debt. The common refrain is “government must tighten its belt, like everyone of us”.

What makes this fiscal probity call sound even more credible are the repeated trumpet calls and warnings by the IMF, the OECD, the World Bank and rating agencies for government to rein in expenditure. But despite religiously following these calls, the nation’s economic malaise continues. Yet no one stands back to question whether this groupthink is leading us anywhere.

With an ANC that assumed power without a clear macroeconomic compass of its own, legitimacy is bought by appropriating the collective compasses of these institutions and the establishment as its own.

Empirically, our malaise does not require fiscal consolidation and structural reforms as its cure, especially in depressed times like these. Austerity does not and won’t work. All talk about budget cuts, as espoused by these institutions and their local cheerleaders, are as ideological as they are stuck in the gold standard era economic frameworks.

'Kindergarten economics'

Such delusional calls and warnings have no basis whatsoever in macroeconomics. The whole intellectual edifice behind these claims is bankrupt and long discredited. The microeconomic analogy of households and firms tightening belts does not hold true for governments. How can the whole nation be so misguided? Debunking similar calls, prescient economist Professor Steve Keen put it simply: “Austerity policies are nothing but kindergarten economics”.

By blindly following such defunct economics, the ANC has invariably taken a political decision to create, on a grand scale, poverty, inequality and unemployment while escalating the already high costs of doing business and living. One has to look no further than the savaged economy of Greece for the perfect example of what fiscal consolidation and structural reforms can do to a nation.

The incessant decay seeping through our entire national fabric is being occasioned by these policies coupled with epochal leadership decay. The resulting jolt at the polls for the ANC portends ominous societal dislocations, if the current economic course is not reversed.

Perhaps smelling the rot, Pravin Gordhan in a speech at a Johannesburg investment conference on July 26 2016 said: “What’s very clear is that austerity, which we in some parts of the G20 thought was absolutely necessary... is no longer the answer. In South Africa, as well, we have some austerity fans amongst our public commentators and its time to rethink." Barely six months ago, the same minister was championing austerity policies in his budget speech, and the entire nation applauded.

This was perhaps the most profound policy statement ever made by an ANC government minister in two decades. Yet, it barely received comment by media or the economic establishment. Surprising?

“South Africa cannot rely on austerity measures to reduce public debt and boost economic growth, as previously thought,” he added. The minister proffered no alternative to his government's austerity policies. This mea culpa by government should have been roundly welcomed; instead, deafening silence abounds - a sign of nationwide cluelessness.

Elsewhere, while government issues a mea culpa for its macro-economically incompetent policies, the Reserve Bank  assumes the spokesperson role for the OECD, intoning that structural reforms are necessary and must be urgently implemented. Yet, sadly, there is no empirical foundation, none whatsoever, to arguments in favour of such reforms especially in a weak, deficient demand economy.

The alarming intellectual laziness among our domestic institutions and individuals is fodder for obsolete ideas and has made the nation susceptible to pervasive intellectual capture, inevitably translating into policy or regulatory capture.

What ails this economy is lack of aggregate demand. The constraints are equally binding on the demand side. Whereas medium- to lon- term sustainable inclusive growth lies in the redesign of the macroeconomic framework, short-term remedies include but are not limited to an urgent dose of non-inflationary debt-free stimulus, followed by quantitative monetary easing injected into the productive sector.

Therefore perverse calls for fiscal consolidation, like those for structural reforms, are indeed fallacious and thus culpable. In the apt words of Nobel economist Prof Krugman: “Structural reforms are the last refuge of scoundrels.”

* Redge Nkosi is executive director at Firstsource Money. Opinions expressed are his own.

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