CONEXIG RSA ARTICLE – Part 2

The SIP that could Overturn the NEGATIVE Economic Impact of COVID-19 in South Africa

This is part 2 of a three-part series comprising:

Part 1 – Economic impact of the COVID-19 and the state of the global and South African economies pre-COVID-19 outbreak
Part 2 – Reflections on the 2008 Financial Crisis and how South Africa and the rest of the global community responded
Part 3 – Perfect time for South Africa to Accelerate Implementation of Strategic Infrastructure Projects (SIPs).

We have been here before

The COVID-19 global pandemic is already considered, or at least projected to be, worse than the 2008 Financial crisis but it is important to draw comparisons between the two, as well as reflect on the global response to the 2008 Financial Crisis.

Based on the Euromonitor data (figure 5 below), prior to the 2008 financial crisis, the GDP of the USA was already trending downwards in 2006, whilst the Eurozone and the rest of the world were still on an upward, albeit slow, GDP trajectory propped up by China, which was in double-digit growth. Global real GDP growth declined from 5.6% in 2007 to 0.1% in 2009.[1]

Figure 1 – The Global Economy 10 years after the Financial Crisis

The following summarises the global response to stymie the impact of the 2008 financial crisis:

  • On February 17, 2009 US President Obama signed the American Recovery and Investment Act (ARRA), which was a USD 787 billion stimulus package and the Congressional Budget Office (CBO) projected that ARRA would stimulate gross domestic product by 1.4% to 3.8% for the fourth quarter in 2009.[2]

As Kimberly Amadeo of Balance reflected in March 2020, the stimulus    was successful as the economy grew 1.7% in the third quarter and 3.8% in the fourth quarter of 2009.[3]

  • In November 2008, China approved a four trillion yuan ($586 billion) stimulus package to be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection.[4]

One year later, these programs seemed to have been even more successful than expected, so that on November 4, 2009, the World Bank group enhanced its “prognosis” of the Chinese GDP, by +1.2%, to a value of +8.4%.[5] [6]

  • The International Monetary Fund recommended that G-20 countries implement fiscal stimulus measures equal to 2% of their GDP to help offset the global contraction, whilst the European Commission recommended that member nations’ stimulus plans amount to at least 1.2% of the EU’s GDP.[7] [8]

Research by Panu Kalio, of Aalto University School of Business, concluded that the European Recovery Plan had a relatively sizable effect on the real GDP growth and, that without it, the European growth levels would have been less positive or even more negative.[9]

In the case of South Africa, the global financial crisis had a severe economic impact. The economy went into recession in 2008/09 for the first time in 19 years. Nearly a million jobs were lost in 2009 alone and the unemployment rate continued to remain high at 25%.[10]

As shown in figure 6 below, the GDP rate plummeted from the record high of over 6.0% in 2006 to -1.5 % in 2009.

Figure 2 – South African GDP Growth Rate

Therefore, the government had to respond, and South Africa’s response to the 2008 financial crisis was mainly made up of the following interventions:

  • Formation of Joint Economic Work Group

A group, the Joint Economic Work Group, consisting of national government, business, organized labour and community organizations, was formed and tasked with developing a response to the financial crisis; the broad principles of the group was to protect the poor, the vulnerable, the unemployed and low-income workers, to strengthen capacity to grow decent work in the future, to maintain high levels of investment and to intervene in a timely, tailored and targeted manner.[11]

  • Stimulating employment growth through infrastructure investment

The main thrust of the state’s response to the crisis was the public sector’s R 846 billion investment in infrastructure in order to stimulate growth and employment through to 2013/14, which also included R33 billion spent on building stadia and other infrastructure in preparation for the 2010 FIFA world Cup. However, it has been noted that this was not a crisis-driven stimulus so much as a planned investment to improve the productive and employment capacity of the economy that fortuitously coincided with the downturn.[12]

  • Using the Expanded Public Works Programme (EPWP)

Formed in 2004 as a catalyst for work opportunities, growth and development and targeting lowly skilled, poor unemployed South Africans, the EPWP was used to boost short term employment and skills development.  In 2009 government announced it would create half a million work opportunities through this programme by the end of that year, and reportedly achieved 97 per cent of that target.[13] [14]

  • Maintaining levels of social expenditure and effecting savings through reprioritization

Maintaining existing expenditure was essential to protect the poor, stimulate long term growth, and give effect to the new government’s policy priorities.[15]

Other interventions by the South African government included increasing deficit spending and public borrowing to fund expenditure, introduction of a wage subsidy for the youth and making moderate cuts in the interest rate.[16]

Therefore, based on the information above, the global response to the 2008 financial crisis was largely effective in attaining economic recovery caused by the crisis. For South Africa, as shown above, GDP growth had recovered to just over 2% by the end of 2010. Furthermore, the IMF reported that sound policies shielded South Africa from the worst recession since 1992.[17]

With respect to COVID-19, the UN has projected global GDP to shrink by around 1% instead of a growth of about 2.5%; by comparison, the world economy contracted by 1.7 per cent during the global financial crisis in 2009.[18] Therefore, this calls for bold, decisive and coordinated national and global economic response, just as we witnessed during the 2008 financial crisis.

Part 3, and the last, of the series will deal with why South Africa’s acceleration of economic infrastructure roll-out, and particularly the Strategic Infrastructure Programme (SIP), is critical for the recovery and growth of the economy during, and in the aftermath of, the COVID-19 pandemic.

About the Author: Eugene Mwansa is South Africa’s country head for Construction Experts International Group CONEXIG, as well as Director and Co-founder of BIIS, a South African based Management Consulting firm focussing on Infrastructure development.

NOTA: ESTE ARTÍCULO FUE ESCRITO SOLAMENTE EN INGLÉS

[1] Daniel Solomon, and Ugne Saltenyte, Global Economy 10 Years after the Financial Crisis, Euromonitor International, 9 Sep 2020
[2] Douglas Elmendorf, Congressional Budget Office letter, CBO, March 2, 2009
[3] Kimberly Amadeo,’ Did Obama’s Stimulus Plan work? ‘, The Balance, 30 March 2020
[4] Paul Maidment, China Announces Massive Stimulus Package’, Forbes News, 11 September 2008
[5] Prognosis of the world bank for 2009 Chinese GDP, ’International Heralds Tribune, 4 November 2009
[6] Shahrokh Fardoust, Demystifying China’s Fiscal Stimulus’, World Bank, 12 October 2012
[7] IMF Staffer, Global Economic Policies and Prospects, G-20 meeting, 13-14 March 2009
[8] Com (2008) 800, A European Economic Recovery Plan, European Union, 26 November 2008
[9] Panu Kallio, ‘The Effectiveness of the European Economic Recovery Plan-the fiscal policy multiplier’, AUSB, Fall 2017
[10] Nico Steytler and Derek Powell, ‘the impact of the global financial crisis on decentralized government in South Africa, April 2010
[11] South Africa’s Response to the Global Economic Crisis: Ministerial briefing, Economic development, 27 August 2009
[12] Nico Steytler and Derek Powell, ‘the impact of the global financial crisis on decentralized government in South Africa, April 2010
[13] Stanley Henderson, The Expanded Public Works Programme as a Catalyst for Work Opportunities, Growth and Development, 15 September 2017
[14] Zuma, Jacob, “State of the Nation address by the President to Parliament”, 11 February 2010
www.info.gov.za/speeches/2010/10021119051001.htm
[15] Nico Steytler and Derek Powell, ‘the impact of the global financial crisis on decentralized government in South Africa, April 2010
[16] Nico Steytler and Derek Powell, ‘the impact of the global financial crisis on decentralized government in South Africa, April 2010
[17] Rodney Ramcharan, IMF Survey: Sound Policies Shield South Africa from Worst of Recession, IMF African department, 25 September 2009
[18] COVID-19 likely to shrink global GDP by almost one per cent in 2020, UN Press Release, 1 April 2020

Eugene Mwansa
Executive Consultant
Country Director South Africa
southafrica@conexig.com

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