South African Economic Policy in the COVID-19 context

A New South African Economic Policy for a New Reality

Over the past two months, South Africa has emerged as a leader in its response to COVID-19. President Ramaphosa’s proactive response included implementing an early hard national lockdown and rolling-out mass testing using the country’s substantial community health system developed as a response to the HIV epidemic. While the President’s response borrowed from the best global strategies, like New Zealand and South Korea, it was also rooted in the reality of giving South Africa time to prepare its fragile healthcare system for an inevitable pandemic.

The strategy has, at least so far, been a success on the healthcare front. South Africa has been able to bring its infections under control and has not yet had an unmanageable burden on healthcare capacity. The WHO has praised the government for acting swiftly and following scientific advice. However, epidemiologists predict the country will still hit the point of an inevitable exponential growth in the rate of infections, with peak expected only in September.

At the same time, the very dire consequences of the shutdown on an already weak economy are being sharply felt, and it is clear that the continuation of a hard lockdown is unsustainable. Despite last week’s announcement of a R500 billion relief package, aimed at the informal sector, increased social grants, SME relief and unemployment payments, the situation remains dire. A survey by Stats SA revealed that 4 in 10 local businesses did not believe they could survive the lockdown, and the vast majority of the population who live on daily wages or the informal economy are in a desperate situation.

On Thursday evening, President Ramaphosa provided much-needed strategic clarity and a framework for making reopening decisions by announcing a risk-adjusted strategy to open the economy.

A Risk-Adjusted Strategy to Open the Economy

The country will adopt a “return to work” framework that will guide when industry sectors can open and to what extent. This consists of three key elements: (1) An alert system to measure the degree of risk – Level 5 represents the highest and Level 1 the lowest; (2) An industrial classification system; and (2) A comprehensive set of public health and social distancing measures.

At each level of risk, certain sectors, or at least parts of sectors, can re-open, as are certain categories of personnel movement. The system is intended to both allow sectors to “stress test” return-to-work measures, and to ensure that the country can properly balance public health and economic concerns. The alert system will allow the country to dance, or walk the tightrope, between the 5 levels – very likely for at least the next 18 months or until a vaccine, treatment or effective prophylactics are available.

Under the Industrial Classification system, four factors have been taken into account:

1. Risk of transmission in a sector or workplace

2. Expected impact on the sector of a continued full lock down

3. The contribution and the economic linkage of every sector to the broader economy (including contribution to GDP, the number of jobs the sector supports, the multiplier effect on the broader economy, export earnings, supply chain linkages, and industrial policy goals)

4. The Promotion of community well-being, and the livelihoods of the most vulnerable in our society

To rank sectors, both quantitative and qualitative methods have been used, meaning that there is a level of value judgement involved.

On May 1st, the country will move from the current Level 5 to a slightly less restrictive Level 4 risk. This will allow an additional 1,5 million South Africans to return to the workplace. Taking into account those already working in essential services sectors, South Africa will theoretically then have 40% of its workforce back to work.

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Emerging Trends

A full list of re-opening measures as they apply to the different levels of alert are available here. The Presidency and Department of Trade and Industry have made clear that these draft rankings and prioritisations are open to re-examination, and industry bodies are encouraged to make submissions.

In emphasising sectors for reopening in the short term, certain key trends are emerging, which display the matrix of decision making as explained by the Minister of Trade and Industry in a briefing this past Saturday morning.

Digital Economy

A crucial trend to watch is the emphasis on participation in the digital economy (a key goal prior to the pandemic outbreak). As a result, all concomitant services, manufacturing and retail related to internet connectivity and personal devices have been given precedence.

A New Deal?

Another strategy that appears to be emerging is the gear up towards construction and large public works programmes. The Presidency has suggested that the recovery will include putting large sections of unskilled labour to work in major infrastructure programmes.

Localisation and Protectionism

As is the case globally, a key trend is the very clear emphasis on localisation – this is reflected in the relief measures announced so far, and in the reopening rankings.

Intercontinental Co-operation

We are also starting to see a move towards greater African self-reliance and continental coordination, building upon the previous work towards building the African Continental Free Trade Agreement (AfCFTA). The AU has been in constant dialogue, and the African CDC is receiving a greater profile and taking on more responsibility than before, resulting in an AU / Africa CDC partnership to establish warehousing and distribution hubs to roll-out testing across the continent.

Clearly, this need is made urgent by a virus that travels across borders. However, it could also see eases in the movement of goods between countries as well as greater regulatory harmonisation both to address the immediate threat of food security and for the economic growth of the region in the longer term.

Shifts in political power

Before the outbreak, the South African economy was already in recession, having laboured under President Jacob Zuma’s corrupt presidency for almost a decade. The capture of state-owned entities and corrupt municipalities plunged the government into debt. Hamstrung by factionalism within the African National Congress (ANC), the ruling party, President Ramaphosa and his allies were unable to make any significant policy changes.

COVID-19 has forced a “new reality” on the world and has given President Ramaphosa an opportunity to forge a new economy and a new ANC. Finance Minister Tito Mboweni has emerged as its public face, announcing a plethora of decisive directives which are unpopular with old rent-seeking divisions in the party. The country’s large unions, previously a backbone of the ruling party’s coalition, also seem to be losing power. State-owned entities will finally be radically reformed using massive cost-cutting exercises. South Africa will also work with international partners to help fund its recovery.

Globally it is becoming apparent that there is no right way to “fight” COVID-19. It’s also clear that COVID-19 has changed the way we live and do business around the world. For South Africa, a cautious yet highly structured and evidence-based approach looks to be working. Going forward, a coordinated economic response presents new opportunities for Africa as a whole.

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