By Tiisetso Makhele – In his article, ‘Small towns are collapsing across South Africa. How it’s starting to affect farming’, Wandile Sihlobo, Visiting Research Fellow at the Wits School of Governance, argues that South African municipalities are generally in a state of collapse. “A growing number are also failing to collect revenue from residents and businesses for electricity, water and property taxes”, Sihlobo posited.
As will be expected, local authorities overseeing rural and small towns will be worst affected. The constraints by municipalities to collect revenue has, and will continue to, impact service delivery. Research shows that service delivery not only affects the people negatively, but also contributes to disinvestment and, ceteris paribus, economic decline.
Long before the outbreak of the Covid-19 pandemic, the South African economy was already under severe strain, caused mainly by the global economic crisis, and other structural flaws of the structure of our economy. It is impossible, at least at present, to estimate, scientifically, what the impact of Covid-19 will be on our economy. But there is no doubt that the effects will be extraordinarily negative, at least in the short to medium term.
In order to cushion off the economy from these macroeconomic shocks, as imposed by both Covid-19 and the global economic crisis, we need a drastic, extraordinary policy response. Any effort to reduce public expenditure will not assist the economy to recover, and to address the current constraints for growth. The above policy direction, which is referred to as contractionary fiscal policy, cannot, and has never assisted during periods of economic crisis and stagnation, as is the case now.
What is then required is an expansionary fiscal policy, where the state increase public expenditure in, amongst others, road and rain infrastructure, research and development, increased spending on education and health, etc. This increased public expenditure policy position will lead to a rightward shift in aggregate demand and, if all other things remain constant, higher real Gross Domestic Product (GDP). History is amass with real experiences where higher public expenditure has addressed recessionary economic cycles.
There is little, if any, record of historical instances where austerity has been implemented to stimulate an economy, especially during a period of crisis, like we find ourselves in right now. In his book; ‘Is fiscal policy the answer: A developing country perspective (2013)’, Moreno-Dodson emphasizes the importance of fiscal policy as an instrument for “countercyclical stabilization in the face of large macroeconomic shocks”.
As part of the book above, extensive work was done to assess extents of social spending in a number of countries during times of crises. These countries included, Argentina, Republic of Korea, Peru and Indonesia. In Argentina, for example, although the 2002 government budget decreased by 25%, expenditure on public health increased by 70% in real terms. In the immediate term, this resulted in child and maternal health outcomes.
After the crisis above, GDP increased by an annual rate of 8.8% and unemployment declined from 20% in 2002 to 8.5% in 2007. The actual size of the stimulus was about 5% of GDP, and contained was subdivided into two major expenditure streams; v.z. 1) renationalization of the pension system and a massive public works programme; and 2) temporary relief measures to specific industries to maintain existing jobs and protect low-income earners.
There is no doubt that austerity measures as proposed by National Treasury will devastate our already struggling economy, with far-reaching consequences for rural areas and small towns. There is also no doubt that our economy requires a well-planned and well-implemented expansionary fiscal and monetary policy. All these, we must warn, require a capable and well-oiled state machinery. A capable state, which is able to direct development, whilst preventing all forms of wastage, is what will assist us to address the ravaging consequences of a shocked economy.
Makhele is a public sector Economist and an African Marxist. He writes in his personal capacity
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