Sunday Times, South Africa, 22 March 2020 by Duma Gqubule ✼ Gqubule is an econ​o​mist


Think Bigger, Much Bigger

The Re​serve Bank’s rate cut was a timid ges​ture in the face of dis​as​ter. Like its global coun​ter​parts, it needs to go on a war foot​ing, 

A pan​demic-in​duced re​ces​sion fells an econ​omy with right and left hooks. While the world is at war, with many coun​tries fir​ing big bazookas — fi​nan​cial mar​ket jar​gon for the bold mea​sures taken to counter the eco​nomic im​pact of
Covid19 — SA has re​sponded with an in​ter​est rate cut equiv​a​lent to squirt​ing a wa​ter pis​tol.

On Mon​day, UK Prime Min​is​ter Boris John​son said: “We must act like any wartime gov​ern​ment and do what​ever it takes to sup​port our econ​omy.” Dur​ing World War 2, the UK ran a bud​get deficit of 20% of GDP for five years. Its debt-to-GDP ra​tio soared to 250%.

French Pres​i​dent Em​manuel Macron says: “We are at war. We will im​ple​ment ev​ery​thing we can to pro​tect em​ploy​ees and French com​pa​nies. What​ever the cost will be, we will do it.”

Olivier Blan​chard, the for​mer chief econ​o​mist at the In​ter​na​tional Mone​tary Fund (IMF), says: “The world is de facto at war against the virus.” He points out that the US bud​get deficit in​creased to 26% of GDP dur​ing World War 2. “Let us not be squea​mish,” he says. Over the past month, ad​vanced and de​vel​op​ing coun​tries have pur​sued two cour​ses — pub​lic health mea​sures to con​tain, mit​i​gate and re​verse the spread of the virus, and macroe​co​nomic pol​icy mea​sures. A pan​demic-in​duced re​ces​sion is not a nor​mal re​ces​sion be​cause it fells an econ​omy with right and left hooks to its sup​ply (or pro​duc​tion) and de​mand (spend​ing) sides. 

There are sim​i​lar​i​ties with a war econ​omy, but there is more to a pan​demic-in​duced re​ces​sion. As Guardian colum​nist Aditya Chakrabortty says: “The essence of our eco​nomic prob​lem is eas​ily summed up: to con​tain this dis​ease, the econ​omy must grind to a halt.” Also, bil​lions of peo​ple through​out the world now face what Macron calls “life in slow mo​tion”. This is some​thing that has not hap​pened in my life​time or that of my par​ents. 

This means that there is a limit to which tra​di​tional macroe​co​nomic poli​cies can ad​dress the prob​lem. US Fed​eral Re​serve chair Jerome Pow​ell says: “An in​ter​est rate cut can’t re​duce the in​fec​tion rate. It can’t fix a bro​ken sup​ply chain. We get that.” Aus​tralian modern mone​tary the​ory econ​o​mist Bill Mitchell says: “This is a very spe​cial type of calamity that doesn’t fit the usual types of shocks that economies en​dure. It makes the task of de​sign​ing an eco​nomic pol​icy re​sponse more dif​fi​cult.” De​spite the con​straints, Pow​ell still thinks that tra​di​tional mone​tary poli​cies can pro​vide a mean​ing​ful boost to the econ​omy. 

These com​plex​i​ties partly ex​plain the ir​ra​tional be​hav​iour of world stock mar​kets. Mitchell says: “The un​seemly fights in su​per​mar​kets over toi​let pa​per (or chicken, as I am in​formed from Spain) are an​other ver​sion of the brain-snap share mar​ket selloffs in re​cent days.” 

As global Covid-19 deaths rise past 11,000, the world is at a cross​roads, with many coun​tries ready to do what​ever it takes and ditch or​tho​dox poli​cies to pre​vent an eco​nomic col​lapse. 

The Or​gan​i​sa​tion for Eco​nomic Co-op​er​a​tion and Devel​op​ment says world GDP growth will de​cline to 2.4% in 2020 from 2.9% in 2019. The IMF de​fines a global re​ces​sion as GDP growth of less than 2.5%.  As a re​sult, cen​tral banks have made 64 cuts in in​ter​est rates since the be​gin​ning of March 2020. The US Fed led the way with two emer​gency cuts in in​ter​est to a range of 0%-0.25% and an​nounced plans to pump $700bn (the equiv​a​lent of about R12.3tril​lion on Fri​day after​noon) into the econ​omy in a re​sump​tion of the quan​ti​ta​tive eas​ing poli​cies that were im​ple​mented af​ter the global fi​nan​cial cri​sis of 2007–2009. The Euro​pean Cen​tral Bank (ECB) an​nounced a $1.2-tril​lion quan​ti​ta​tive eas​ing pro​gramme un​til the end of the year. Many cen​tral banks have pro​vided fa​cil​i​ties for small and medium en​ter​prises.

On fis​cal pol​icy, gov​ern​ments have im​ple​mented two types of in​ter​ven​tions: econ​omy-wide in​creases in gov​ern​ment spend​ing and so-called “timely, tar​geted and tem​po​rary mea​sures” to ad​dress the plight of vul​ner​a​ble com​pa​nies, house​holds and peo​ple, the ca​su​al​ties at the front​line of the war against Covid-19. These in​clude small and medium en​ter​prises and ca​sual em​ploy​ees in the re​tail, hos​pi​tal​ity and tourism sec​tors. 

The US is re​port​edly plan​ning a fis​cal stim​u​lus of more than $1-tril​lion that could in​volve a “he​li​copter drop” of $1,000 for ev​ery cit​i​zen. At the end of last month, all Hong Kong cit​i​zens re​ceived a cash pay​out of $1,300. Numer​ous other gov​ern​ments in ad​vanced and de​vel​op​ing coun​tries have an​nounced mas​sive fis​cal stim​u​lus pack​ages. The Fi​nan​cial Times re​ports that tar​geted mea​sures im​ple​mented by Euro​pean countries in​clude mort​gage and debt re​pay​ment hol​i​days, state loans and credit guar​an​tees, in​come sub​si​dies for af​fected work​ers, tax de​fer​rals and so​cial se​cu​rity pay​ment de​fer​rals and sub​si​dies. 

For ex​am​ple, the UK will pro​vide loans and loan guar​an​tees of $390bn for af​fected busi​nesses. A sim​i​lar scheme in France will of​fer $320bn. Italy has sus​pended mort​gage and in​ter​est pay​ments for three months. Den​mark will cover 75% of the salaries of af​fected work​ers. France has de​ferred taxes for af​fected busi​nesses. Other coun​tries have pro​vided for ex​tended sick leave pay for af​fected work​ers. In SA, the econ​omy had a “lost decade” in terms of eco​nomic devel​op​ment be​tween 2009 and 2019 when per capita GDP barely in​creased. There have been five con​sec​u​tive years of de​clin​ing GDP per capita. The coun​try has had three re​ces​sions over the past decade. 

It has had two re​ces​sions in two years since Cyril Ramaphosa be​came pres​i​dent. Dur​ing this pe​riod, there have been six out of eight quar​ters of de​clin​ing in​vest​ment, de​spite two sum​mits where com​pa​nies al​legedly pledged R600bn. There have been five out of eight quar​ters of de​clin​ing GDP. Un​em​ploy​ment has in​creased by 1-mil​lion peo​ple. 

Be​fore the Covid-19 out​break spooked world stock mar​kets, the coun​try was al​ready ex​pected to record the third con​sec​u​tive quar​ter of de​clin​ing GDP dur​ing the first three months of 2020, partly due to load​shed​ding. The Re​serve Bank has fore​cast that GDP will de​cline 0.2% for the whole of 2020. Given the Bank’s sorry track record of fore​cast​ing GDP growth, we should as​sume that the con​trac​tion will be more se​vere. The coun​try could be head​ing for a de​pres​sion. This is a truly dis​mal eco​nomic record, which​ever way one slices the data.

The gov​ern​ment has treated Covid-19 as just a pub​lic health cri​sis and pro​vided no macroe​co​nomic pol​icy mea​sures to counter its im​pact. There is no al​ter​na​tive, ex​cept to ditch the or​tho​dox eco​nomic poli​cies that have failed SA for so long and in​tro​duce a sig​nif​i​cant mone​tary and fis​cal stim​u​lus, which will in​clude econ​omy-wide and tar​geted mea​sures. This week’s in​ter​est rate cut of 100 ba​sis points was a case of too lit​tle, too late, given the scale of the eco​nomic cri​sis, but just enough to pre​vent a pub​lic ston​ing.

We need more ag​gres​sive in​ter​est rate cuts and a fis​cal stim​u​lus of at least R600bn over the next three years. A sov​er​eign na​tion that is​sues its own cur​rency can​not fail to meet its own obli​ga​tions in its own cur​rency un​less it chooses to do so. The Bank must have a wider range of pol​icy tools than just set​ting in​ter​est rates. Like other coun​tries, a devel​op​men​tal cen​tral bank can use other pol​icy tools to grow the econ​omy. 

It can pro​vide mone​tary fi​nanc​ing of gov​ern​ment spend​ing, pur​chase gov​ern​ment bonds in the event of a rat​ings down​grade or in​sta​bil​ity in bond mar​kets, and re​cap​i​talise devel​op​ment fi​nance in​sti​tu​tions.

It can also pro​vide devel​op​men​tal win​dows — at cheap in​ter​est rates like the ECB and the Bank of Eng​land — for banks to lend to small and medium en​ter​prises or other pri​or​ity sec​tors. Bank gover​nor Le​setja Kganyago says such pol​icy tools can only be used when the in​ter​est rate is at zero. But that is the equiv​a​lent of a child who de​cides to make up his or her own rules dur​ing a crazy eight-card game.