Isaah Mhlanga | SA's response to coronavirus risks perpetuating a great economic evil

Isaah Mhlanga, chief economist at Alexander Forbes.
Isaah Mhlanga, chief economist at Alexander Forbes.
  • SA's is at risk of perpetuating income inequality despite efforts to overcome it.
  • For example, government has put in place a programme to help SMMEs – but these businesses have to be in good standing to qualify.
  • Yet 91% of small businesses in 2019's Late Payment Survey were owed money, and the biggest culprit was government itself.
  • Before deciding on policies, we must consider the practicalities of implementation.

 


South Africa must think hard about the impact of the policy response to Covid-19, or else it will risk perpetuating income and wealth inequality, one of the worst economic evils of our time.

Income and wealth inequality everywhere is an outcome of the institutional frameworks a country has elected to enact for its society. It is also an outcome of how the established institutions decide to implement the policies at their disposal.

For some institutions, the implementation of their policies results in higher income and wealth inequality unintentionally due to the broader institutional framework they operate in. One such institution is the South African Reserve Bank (SARB) and all other central banks globally.

Consider the R200 billion credit guarantee scheme announced by the Finance Minister Tito Mboweni as part of the R500 billion fiscal package to fight Covid-19 and its impact on the health and the economy. It is guaranteed by the state through National Treasury, administered by the SARB and implemented by commercial banks.

That is an institutional framework put in place by the government to help small, micro and medium (SMMEs) firms with a turnover of R300 million or less. The companies are relatively small and do not have the same financial muscle as the blue-chip ones. However, they are globally acknowledged for creating significant employment opportunities.

In South Africa, SMMEs employed 10.8 million people (66% of all jobs) and contributed between 52%-57% to GDP, according to data from Statistics South Africa. This makes the focus on this sector even more important.

Risks

However, the arrangement that commercial banks must be the implementing agencies comes with shortcomings. Historically, SMMEs are not a market commercial banks have an appetite for; they are extremely risk-averse to this sector, in part due to lack of collateral, among other factors.

The 2019 State of Late Payments survey of 500 SME owners revealed that 91% of SMEs were owed money outside of their terms of payment; 47% saw cash flow and late payments as a threat to their business and 30% would clear their business or personal debt if paid on time.

The biggest culprit

This biggest late payer to SMEs is government. Even with this data available, the government somehow agreed that, as a qualifying criterion, a business must have been in good standing with its bank before Covid-19.

Effectively, 91% of the SMMEs that need financing would not qualify for this R200 billion scheme. No wonder Deputy Governor of the SARB, Kuben Naidoo, is reported to have said that the big four banks have only lent about R2 billion to R3 billion each since the launch of the scheme in the middle of May.

The institutional framework itself constraints the very purpose it was designed to address, which is to lend to the SMMEs that usually do not get easy access to bank funding. The question is whether there is low take-up due to lack of demand or because these businesses know that they were not up to date with their banks before Covid-19. I suspect it’s the latter.

Non-bank financiers need to take part to address this shortcoming. That said, this is not the objective of this column, but merely to demonstrate that the institutional setup can exclude without intend to do so, and as a result perpetuate inequality.

The collapse in economic growth across the world due to Covid-19 have revived the use of quantitative easing (QE) in advanced economies. Emerging markets have now joined what used to be unconventional monetary policy to boost their economies. Critics of QE have labelled these emerging markets copycats that do not take local context into account.

The issue of inequality

South Africa is the most income- and wealth-unequal society in the world, such that it cannot afford tunnel vision on the distributional impact of the policies being put in place to fight Covid-19. Monetary policy is no exception. Many that are calling for the aggressive use of QE to directly finance government spending beyond merely yield curve control through buying government bonds in the secondary market have not answered the question of how will this impact income and wealth inequality.

Global monetary policy has largely confined itself to price stability in the interest of boosting balanced economic growth and creating employment through lower long-term interest rates, increased liquidity and higher asset prices. Naturally, higher asset prices favour asset owners more compared to wage-earning labour. In the South African context, where income and wealth inequality is institutionalised, monetary policy tools such as QE will likely increase income and wealth inequality.

That economic growth and employment will rise by implementing QE is not a given because it will depend on many other factors not related to financing, such as implementation of the various policies, of which South Africa has been very poor at historically.

However, the evidence on asset price inflation due to QE is well documented and it largely favours the holders of financial assets. The recovery in stock markets since mid-March demonstrate this point. Economies are flooded with liquidity, markets recover and benefit those with financial assets but the real economy continues to bleed jobs. 

To those that are advocating for QE, the one aspect they would need to answer is what to do with the distributional effects which will likely increase income and wealth inequality in a country with the heist level of inequality.

This question does not only need to be asked of monetary policy, it needs to extend across all of government’s policy response as standard practice. Where there are limitations because of institutional frameworks and design, other tools could be put in place outside of these frameworks to counter the inequality that comes from the distributional effects of policies.

Isaah Mhlanga is chief economist of Alexander Forbes. Views expressed are his own.

ZAR/USD
17.62
(-1.25)
ZAR/GBP
23.01
(-0.54)
ZAR/EUR
20.78
(-0.41)
ZAR/AUD
12.62
(-0.16)
ZAR/JPY
0.17
(-0.83)
Gold
2031.70
(-1.76)
Silver
28.22
(-5.12)
Platinum
963.00
(-3.55)
Brent Crude
45.10
(-0.18)
Palladium
2177.00
(-2.22)
All Share
56757.73
(-1.56)
Top 40
52435.65
(-1.72)
Financial 15
9897.96
(+0.10)
Industrial 25
74671.49
(-1.98)
Resource 10
58948.78
(-1.89)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 926 votes
It depends on how the funds are used.
74% - 6217 votes
No. We should have gotten the loan elsewhere.
15% - 1278 votes
Vote