The state should spend its money saving the sectors we need the most

First Published in Fin24 on   June 9th, 2020   |   by   Isaah Mhlanga

The state should spend its money saving the sectors we need the most

Countries around the world have taken unprecedented measures in their response to the Covid-19 pandemic, yet the thrust of their responses has been broadly similar.

The main focus is saving lives and livelihoods, which simply means capacitating the healthcare sector to be able to deal with those that will require hospitalisation due to Covid-19 and cushioning citizens from hunger by providing income directly through cash transfers for those permanently unemployed and indirectly for those that might lose their jobs.

Interventions on the latter have been through provision of access to cash flow for companies that are in distress. The effects of Covid-19 are similar everywhere, but with a difference in magnitude. While capacitating the healthcare sector is straightforward, reigniting the economy and safeguarding livelihoods has proven to be complex.

It was easier, for example, to promulgate lockdown measures, but not so to managing the phasedown to full openness and accessing the impact of the pandemic on businesses in the economy. Yet the economy must open to avoid a much deeper economic catastrophe, which might result in frightening levels of unemployment.

So far all policy responses, though well intended and necessary, have exhibited some shortcomings. These shortcomings must, as a matter of practicality, be expected because dealing with a once in a century health crisis is difficult especially for emerging markets countries like South Africa whose public health infrastructure is parlous.

I recognise that the hardest-hit countries by the pandemic thus far are part of the developed world. In managing the process of opening the economy governments need to be careful and avoid haste in making decisions. There is so much at stake. Government will need to think about various groups in society, especially those that are most vulnerable. It also needs to think seriously about how to use this crisis to tackle deep-seated socio-economic challenges.  

This question was explored in a recent webinar hosted by Dr Thabi Leoka, one of the leading economic thinkers in South Africa, in conversations with business leaders, policy makers and social activists. What was clear in this discussion is that people of different persuasions agree that it is important to save lives and safeguard livelihoods.

There was also consensus on the need to be more adaptive to crisis period and to strive for an inclusive economy. The difference, however, is how to get there. One of the approaches that were proposed, and came out strongly, in this discussion was that government needs to do more to help citizens out of work. Some have even proposed direct financing of government and companies by the South African Reserve Bank (SARB), an option that may appear well intended, as in other countries which are largely developed but not suitable for South Africa. 

Purpose and dignity

One of the participants in this discussion was Reserve Bank governor Lesetja Kganyago, who said that citizens must be given money through work instead of free cash transfers because it gives them purpose and dignity. Can this be applied to the recipients of Covid-19 social support grants? I think it can, however, the modalities of how may prove complex. There has to be an alternative to how the current social security set up is designed. In its current form, it may be breeding a dependency culture while not adequately capacitating those that it seeks to helps to meaningfully participate in the economy and add value.

Secondly, food parcels as relief are understandable but confine those assisted to determine for themselves what is best. Sure, there could be considerations of costs to travel to and from areas where they could buy these items, but these could be circumvented by helping small businesses to be able to supply these food items. After all, spaza shops have long existed to supply basic goods more conveniently than the big retailers were willing to.

Having pointed out the last two points, there more radical departure from what could be done is this. Perhaps we do not need to save companies, especially if the main objective is to save livelihoods, which is household incomes. Income transfer can be done directly to households, which will then decide what products and services they want to consume.

Those companies that supply these products and services will naturally find a market, while those that supply products and services which consumers deem unnecessary or no longer ideal die a natural death. The point here is this, Covid-19 has shown that there are deficit industries such as health, in addition to those we already know such as transport, telecommunication and energy, among others. It has also shown that there are surplus industries such as entertainment, which society can live with little of.

One of the outcomes of financial or economic crisis is that it cleans up badly run companies and those that have stopped innovating in line with consumer preferences.

During this crisis, the usually natural selection that usually comes with the financial crisis to extinguish those sectors that no longer serve what society truly need for its progress will likely be short-circuited because of the need to save livelihoods through keeping companies afloat. Despite the support that will be given to some of these sectors, they will still go extinct in the post-Covid-19 economy.

The state must not waste resources saving these sectors; instead, the state must create excess capacity in health, housing, energy, transport and education. Countries that are dealing relatively better with this pandemic all have visible excess capacities in these, and as such, in thinking about a post-Covid-19 economy, these factors must be considered. 

This column first appeared on Fin24 on 8 June 2020

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