Reforms, integration: Africa’s only chance for recovery post-Covid-19

Kevin Tutani :Economist

As the coronavirus pandemic reaches the probable end of its life cycle, the world economy has been devastated and may possibly crash with it. It is more concerning to note that there are still possibilities of a second wave of the pandemic according to some health experts.

In Europe and the United States, the statistics have already pointed out to the emergence of a second wave with the United Kingdom introducing new restrictions and contemplating enacting further measures if the need arises.

On the other hand, developing economies have had much less fatalities to their advantage but they have been the most affected in terms of economic regression. With a global economic contraction of 5,4%, South Africa will perform worse and register a contraction of 7,2% and Zimbabwe will be closely in that region with a contraction of 7,4%. Both South Africa and Zimbabwe have highlighted the importance of introducing structural reforms in order to make their respective economies more efficient and thus make the post-pandemic recovery more certain and enduring.

In Zimbabwe, the pandemic emerged in the midst of Finance minister Mthuli Ncube’s two-year structural programme labelled the Transitional Stabilisation Programme (TSP) which is expected to run its full course by the end of 2020 and will be replaced by the National Development Plan (NDP).

Under the TSP, there was fiscal consolidation, liberalisation of the exchange rate, reintroduction of the Zimbabwean dollar, achievement of a balance of payments surplus and in the recent months, a stabilisation of out of hand inflation and exchange rates. Similarly, in South Africa, Finance minister Tito Mboweni highlighted the urgency to introduce a structural programme for the South African economy towards the end of March.

A special unit set up to oversee the structural changes in the South African economy called vulindlela, which means, “lead the way”, in isiZulu, was also reported to be operational, in the foreseeable future. The decision by the South African minister to concentrate more on structural reforms came hard on the foot of a ratings downgrade of South Africa’s sovereign credit rating by Moody’s, which left South Africa without an investment-grade credit rating.

Some traditional focus areas of structural reforms are: rationalisation of government operations and expenditure, labour market rigidities, strengthening the legal framework and institutions, addressing inequality and so forth. The four aforementioned structural reforms will be explained later on in more detail and weighed for their effectiveness and relevance.

Reforms are imperative as they increase the chances of a country to get credit from international institutions such as the IMF and world bank. As the structural reforms are introduced to developing economies, will they be impactful? Do developing economies need more than the traditional template of structural reforms for enduring economic recovery? These are important questions that should be part of the policy-makers’ day to day inquisition.

Developing economies are usually branded as inefficient and largely depend on commodities and foreign capital in order to sustain. This year, economic recovery has been made more uncertain and complex due to the fact that advanced economies which traditionally bail out the developing economies have limited capacity and may not avail themselves sufficiently, leaving developing economies with no choice but to go along with the old adage which says, “adapt or die”. Indeed, it is a tall order and without proper policy intervention livelihoods are at risk.

An argument may be presented that economic Integration of the region can make the process of economic recovery much swifter when coupled with structural reforms. Zimbabwe may start by aligning its economic system with South Africa, for example, or vice-versa. Thereafter, the two countries may take another step forward and integrate more and more countries within the region until the whole continent is integrated, ideally.

With a global record low of weak demand, poor exchange rate positions and less capital inflows, African countries now have to take the lead and work towards comprehensive structural reforms plus economic integration for an African inspired solution to attend to African problems.

In June, Mboweni conveyed that with the current global economic contraction, the world was facing the broadest collapse of per capita incomes since 1870. Africa has a chance to break away from a history of reliance for direction and assistance with regards managing its own economic affairs. There is probably no better time to work towards this goal than now.
By definition, economic integration can be viewed as cooperation amongst countries to enhance trade and coordinate their respective monetary and fiscal policies. Advantages such as availability of a larger common market, scale economies and flexibility of doing business through the scrapping of tariffs and other regulatory processes are enjoyed. Examples of economically integrated systems include the South African Customs Union (SACU) which includes the following member countries: Botswana, Eswatini, Lesotho and South Africa.

With SACU, there is a common external tariff which encourages trade amongst member states as it is favourable compared to non member states. There is also the sharing of customs revenues and a coordination of trade policies. A more advanced economic union is the European Union (EU) made up of 27 European states. With the EU, member states enjoy the free movement of financial flows, labour, capital and a common market of over 500 million consumers. With such a large common market, European companies have a competitive advantage where they enjoy scale and marketing economies.

Sadc and regional countries have an opportunity to integrate economically for a sustainable post-pandemic recovery. Without integration, regional countries will continue to be outpaced by global players such as China, the US and Europe. The advanced global players have the natural advantage of large domestic markets therefore competing with them on the basis of structural reforms only, will not be enough.

There is need to couple reforms with economic integration for creating larger domestic markets and other pertinent benefits. When the region doesn’t develop, the cycle of poverty and underdevelopment will persist. There is an opportunity to break from this cycle of dependence on advanced economies at this point in time. Since regional economies have the same political, social and economic challenges, it may be advisable for them to co-ordinate and address their challenges.

In Zimbabwe, the TSP managed to reign in a civil service wage bill which comprised 92% of all government revenue in 2017 and currently sits at below 50%. The government was unable to commit funds towards other important economic assignments such as capital expenditure, of which it is now capable to some extent. In South Africa, Mboweni has pronounced his keenness to curtail a runaway civil service wage bill and overall fiscal consolidation. The country now awaits the presentation of the mid-term budget which will give the formal direction of actual steps that will be taken for fiscal consolidation.

It is also important for government to contain its borrowings and the resultant debt burden. Under the TSP, Ncube managed to turn around perennial budget deficits into budget surpluses.

Difficult as it was, the people of Zimbabwe and the minister deserve to be recognised for their sacrifices which led to the surpluses. It takes cold austerity to realise such a turnaround within only a two year period.

Government borrowings must ideally be avoided as they crowd out lending to the private sector. Failure to utilise debt effectively can also result in social unrest and political instability. Moreover, some loans will only be provided with stringent conditions which may compromise the economy’s performance. Some conditions attached to the loans given to developing economies are a political hard sell given that they lead to the shedding of jobs, inflation and other consequences as a result of the austere measures which are part of the conditions as part of the debt.

For Zimbabwe , government ownership of resources and privatisation of state entities have also been incorporated in the TSP with POSB, Zesa, TelOne, NetOne and GMB being marked for immediate reform.

In South Africa, the privatisation debate is still present and questions on whether to privatise entities such as South African Airways, Eskom and Transnet are still to be ultimately addressed. These public entities have been bleeding the South African “fiscus” through perennial economic packages known as bailouts which were being dispersed by government in order to keep these corporations afloat.

It is regrettable that after several years with these entities getting economic assistance they are still in dire debt and are facing operational problems. Since the privatisation question is very polarising , alternative proposals should be welcome. What would the outcome of one electricity company supplying the whole of Sadc be like? Will economic integration and mergers of parastatals within the region offer different results? Will scale economies be enjoyed? Will market size economies be enjoyed? Will these mega companies bring about a rise in technological development through specialised research and development departments? Will the cost of public goods be lower? Answering these questions will help guide valid proposals for the future of state owned enterprises in the region.

Labour market rigidities are a present structural challenge that needs to be attended to by developing economies. The lack of highly skilled workers or their emigration, failure of economies to serve a growing population through creation of jobs, use of capital and technology to replace workers and a poorly structured informal sector are some of the prominent labour market rigidities that are troubling developing economies.

It is unfortunate that the use of capital and the fourth industrial revolution (the rise of artificial intelligence and technology) are advancing at an alarming stage with employees being replaced easily by more efficient technology. There is need to develop social contracts which refer to these existential issues so that the human component in work is not eradicated completely.

With economic integration, the large common markets give room for negotiating better social contracts as investors are willing to choose a trade off with keeping workers in employment at the benefit of access to massive common markets. Without integration, stand alone economies do not have leverage at the bargaining table as they have nothing to offset heavy taxes and minimum wages that they may require investors to adhere to as response to solving labour market rigidities.

Job-rich industries such as sustainable agriculture must also be prioritised. Mining and conventional agriculture, on the other hand, have failed to solve labour market rigidities as businesses are largely dependent on capital and technology to replace labour and reduce costs. Manufacturing may have the capability to absorb more labour but unfortunately developing economies have limited industrialisation and are fairing poorly in light of competition from global manufacturing entities from the advanced economies.

The US has a population of over 300 million, China and India exceed one billion and Europe is over 500 million in terms of the population. Without access to large common markets, local manufacturers will fail in the face of global competitors and labour market rigidities will persist. Addressing rigidities in the labour market whilst overlooking the need for economic integration may be a waste of time and resources because whatever outcome secured may not be sustainable.

Income inequality may be referred to as the unevenness of the distribution of income and wealth throughout the population. South Africa is characterised by severe income inequalities and its neighbour Zimbabwe might not have severe inequality but the Zimbabwean population has very modest and unenviable GDP per capita.

The problem with structural income inequality is that it limits economic growth through suffocating the amount of personal consumption expenditure that is available to the economy. Consumption is usually a large contributor towards economic activity. The rich usually hoard their wealth and keep it in the form of financial and other assets whereas the less privileged spend almost all of what they earn.

As a result, stifling income accruing to the middle class and the poor will stifle an economy’s ability to grow. If income inequality is coupled with financial deregulation it has been seen that it can cause economic instability and financial market crashes. This was, for instance, the case with the 2008 financial crash.

The poor and middle class where consistently in debt whilst the rich were purchasing financial and other assets to preserve their wealth and reportedly for speculative purposes. Asset prices then surged and with that, the poor were unable to service their loans leading to what was termed as an “asset bubble”. The result was massive bank failures and the global recession of 2008.

Returning to developing economies, there is need to avert inequality by using traditional approaches such as progressive tax, social security expenditure and creating jobs through government investment in capital expenditure and parastatals. New approaches will also be welcome but without economic integration the problem of inequality may be difficult to solve.

Sound and ethical institutions are imperative for the development of economies. These include institutions that pass laws, arbitrate during commercial disputes and any other institutions that uphold the rule of law and regulations. When there are strong and transparent institutions, an economy can attract more local and foreign investment. Wealth realised from local enterprise will not be hoarded or externalised, but there will be a propensity to reinvest as there is assurance that the business environment is safe and investments will yield more returns in the future. It is not to say that advanced economies are free from corruption but developing economies have some work to do in order to maintain and build strong institutions.

Red tape also known as bureaucracy must not inhibit business growth since capital can be directed to markets where there are less delays and cumbersome regulations. Innovative approaches such as establishing a one stop shop investment centre are highly encouraged.

Working on processes that increase the ease of doing business will also yield positive results for economic growth. These include reducing the time for process application for business permits, among others. In this regard, the establishment of the Zimbabwe Investment Authority (ZIDA) is considered a step in the right direction. Regionally, the coordination of procedures and regulatory processes of countries will also make the region attract more capital.

Structural reforms are therefore necessary for developing economies to grow and attract more investment. Nevertheless, the emergence of the corona virus pandemic has made the expectation of stabilising an economy through attracting foreign capital flows very limited. Thus developing economies have to compound their structural reforms with regional economic integration.

Bountiful benefits await the other side of integration as the advantages of a common market and inter-governmental cooperation are enjoyed.

Tutani is an economic analyst and pan African ideologist. — tutanikevin@gmail.com

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