Macroeconomic stimulus packages and inequality in developing countries: Lessons from the 2007-2009 crisis for South Africa
The COVID-19 pandemic continues to spread relentlessly across the planet and has disrupted economic activities wherever it has spread. Rarely do health crises of this global magnitude result in such extreme macroeconomic destabilisation and devastation. Health and economic systems have been ill-prepared to counter the calamities of a pandemic of this scale. While lockdowns have been a chief instrument to protect weakened health systems from being overwhelmed by the pandemic, this immediate benefit pales against the escalating macroeconomic costs of this health crisis. The COVID-19 pandemic threatens to turn the global economic downturn into an extended Twenty-first Century Acute Depression, write Dr Alexis Habiyaremye, Dr Peter Jacobs, Pelontle Lekomanyane and Olebogeng Molewa.
Reflecting the country-wide halt of economic activity, the normally bustling Greenmarket Square in Cape Town is eerily quiet on the first day of the COVID-19 lockdown in March 2020.
Photo: Discott, Wikimedia Commons
Containing the spread of the COVID-19 pandemic is an immediate socioeconomic priority. In addition, countries urgently need appropriate fiscal and monetary interventions to limit the macroeconomic damage from these overlapping and compounding crises. Enormous mitigation measures coordinated across countries and multilateral agencies are unlikely to wipe out the losses suffered in the foreseeable future.
This scramble for new macroeconomic stimulus measures against the acute economic depression in almost all forecasts needs to consider lessons from past stimulus and recovery packages. Specifically, learning from the responses to the 2007-2009 Great Recession can help to avoid repeating some of the mistakes observed in many developing countries during the subsequent recovery period, which exacerbated social inequality and failed to lower unemployment.
Great Recession (2007-2009) insights
When the 2007-2009 global financial crisis erupted and threatened the global economy with a gigantic shock, most advanced economies devised unprecedented fiscal and monetary interventions to stabilise their markets and avert the worst consequences of a possible meltdown. The intricate nature of the globalised production and trading systems propagated the crisis to developing countries through massive financial outflows and a sharp reduction in the prices of and demand for natural resource exports.
For many developing countries, especially the resource-dependent non-oil exporters, the ensuing food price inflation shocks pushed 100 million people into poverty. Consequently, many developing countries had to roll out fiscal and monetary policy measures of their own to stabilise domestic markets and cushion their economies from exogenous shocks. Most observers agree that such interventions enabled those economies to recover more rapidly than they would have without stimulus.
Macroeconomists disagree on the content and composition of stimulus packages. In the Great Recession, this disagreement pivoted on a fundamental question: should governments use tax payers’ money to bail out large banks and powerful corporations at the expense of the working poor? Contrarians won this dispute as evidenced in the weak economic upturn and rapid rise of corporate bankrupt filings in the post-bailout years. Unsurprisingly, the sluggish recovery failed to counter rising inequality and poverty, with food and nutrition insecurity and economic exclusion reaching new heights.
South Africa is often lauded for the way it handled the Great Recession. Because of its pre-crisis policies that favoured expansive spending, the government was well positioned to deal with the 2007-2009 financial crisis and is generally credited for the adequacy of its fiscal and monetary response. Despite all these prudent measures, however, massive job losses were resulting from the onslaught of the crisis on the South African commodity sector, employment has not recovered and growth has remained sluggish in the recovery period.
Macroeconomic agenda against poverty and inequality
All the evidence indicates that the COVID-19 economic meltdown will be closer to the Great Depression (1929-1933) than the Great Recession (2007-2009) in its severity, pervasiveness and endurance. This calls for anchoring macroeconomic responses firmly to the needs of poor and vulnerable households.
After all, these households ultimately bear a disproportionately large burden of economic slumps, as they lack the resources to counter the resulting livelihoods crises. The way in which they cope with the consequences of economic downturns creates social costs that often translate into aggravated inequality. In developing countries without adequate safety nets, such distributional effects usually go hand in hand with increased incidence of poverty, as cautioned by the International Labor Organization.
Prioritising investment in deliberately pro-poor macroeconomic stimulus packages is urgent but does not yet exist. What does this mean for orienting the facets, mechanics and outcomes of fiscal and monetary stimulus interventions? Against exclusionary fiscal and monetary policies, the focus ought to be on sustainable and active economic participation, first and foremost. A pro-poor macroeconomic stimulus agenda must prioritise employment and growth recovery, the distributional effects on inequality and poverty and the trade-offs between bailing out corporations versus supporting household purchasing power.
Pro-poor macroeconomic stimulus to counter the economic downturn is a vital immediate response but not sufficient for constructing a post-COVID-19 society. Strategic responses ought to include instruments and resources to carry out the structural changes needed to give shape to that new human society. For this reason, macroeconomic responses to the current pandemic need to be designed in such a way that they contribute to laying the foundation of the post-Covid-19 economy, which ought to be engineered as more equitable and more responsive to the needs of local communities, and therefore more resilient to external shocks. Building an equitable society must be at the heart of the structural macroeconomic policy South Africa needs now.
To avoid a response that could prolong the crisis and leave the high rate of unemployment unchallenged, it is necessary to adopt a comprehensive strategy involving multiple stakeholders, whereby the government partners with business sectors to tackle the persistently high unemployment rates as part of the country’s societal crisis to be solved. For a multi-stakeholder strategy to emerge, it is necessary that social scientists and macroeconomists in our society engage in macroeconomic policy dialogues, so that out of their multiple theoretical approaches, a judicious choice can emerge and guide the national strategy to come stronger out of the current calamity. That is why the Inclusive Economic Development division of the Human Sciences Research Council is launching its flagship programme “Macroeconomic Policy Dialogues”, with the objective of bringing together social scientists and economists of different persuasions to stimulate alternative macroeconomic analytical approaches that enhance the quality of policy recommendations for South Africa.
In the first two years of the Macroeconomic Policy Dialogues programme, the HSRC will be a catalyst that promotes evidence-informed conversations about designing, strengthening and implementing pro-poor macroeconomic policies. Grounded in the principles of transformative participation and constructive interaction, the programme will exploit multiple communication platforms. Towards this end, the HSRC team spearheading this initiative is busy strengthening networks with representatives from the policy arena, research communities, civil-society formations and business enterprises to optimise their active involvement.
Authors: Dr Alexis Habiyaremye, Dr Peter Jacobs, Pelontle Lekomanyane and Olebogeng Molewa in the HSRC’s Macroeconomic Policy Dialogues programme
ahabiyaremye@hsrc.ac.za
pjacobs@hsrc.ac.za
plekomanyane@hsrc.ac.za
omolewa@hsrc.ac.za