Isaah Mhlanga, chief economist at Alexander Forbes.
- SA’s is at risk of perpetuating income inequality
despite efforts to overcome it. - For example, government has put in place a programme
to help SMMEs – but these businesses have to be in good standing to qualify. - Yet 91% of small businesses in 2019’s Late Payment
Survey were owed money, and the biggest culprit was government itself. - Before deciding on policies, we must consider the
practicalities of implementation.
South
Africa must think hard about the impact of the policy response to Covid-19, or
else it will risk perpetuating income and wealth inequality, one of the worst
economic evils of our time.
Income
and wealth inequality everywhere is an outcome of the institutional frameworks
a country has elected to enact for its society. It is also an outcome of how
the established institutions decide to implement the policies at their
disposal.
For some
institutions, the implementation of their policies results in higher income and
wealth inequality unintentionally due to the broader institutional framework
they operate in. One such institution is the South African Reserve Bank (SARB) and
all other central banks globally.
Consider
the R200 billion credit guarantee scheme announced by the Finance Minister Tito
Mboweni as part of the R500 billion fiscal package to fight Covid-19 and its
impact on the health and the economy. It is guaranteed by the state through
National Treasury, administered by the SARB and implemented by commercial
banks.
That is
an institutional framework put in place by the government to help small, micro
and medium (SMMEs) firms with a turnover of R300 million or less. The companies
are relatively small and do not have the same financial muscle as the blue-chip
ones. However, they are globally acknowledged for creating significant employment
opportunities.
In South
Africa, SMMEs employed 10.8 million people (66% of all jobs) and contributed
between 52%-57% to GDP, according to data from Statistics South Africa. This
makes the focus on this sector even more important.
Risks
However,
the arrangement that commercial banks must be the implementing agencies comes
with shortcomings. Historically, SMMEs are not a market commercial banks have an
appetite for; they are extremely risk-averse to this sector, in part due to
lack of collateral, among other factors.
The 2019 State
of Late Payments survey of 500 SME owners revealed that 91% of SMEs were owed
money outside of their terms of payment; 47% saw cash flow and late payments as
a threat to their business and 30% would clear their business or personal debt
if paid on time.
The biggest
culprit
This
biggest late payer to SMEs is government. Even with this data available, the government
somehow agreed that, as a qualifying criterion, a business must have been in
good standing with its bank before Covid-19.
Effectively,
91% of the SMMEs that need financing would not qualify for this R200 billion
scheme. No wonder Deputy Governor of the SARB, Kuben Naidoo, is reported to
have said that the big four banks have only lent about R2 billion to R3 billion
each since the launch of the scheme in the middle of May.
The
institutional framework itself constraints the very purpose it was designed to
address, which is to lend to the SMMEs that usually do not get easy access to
bank funding. The question is whether there is low take-up due to lack of
demand or because these businesses know that they were not up to date with
their banks before Covid-19. I suspect it’s the latter.
Non-bank
financiers need to take part to address this shortcoming. That said, this is
not the objective of this column, but merely to demonstrate that the
institutional setup can exclude without intend to do so, and as a result
perpetuate inequality.
The
collapse in economic growth across the world due to Covid-19 have revived the
use of quantitative easing (QE) in advanced economies. Emerging markets have
now joined what used to be unconventional monetary policy to boost their
economies. Critics of QE have labelled these emerging markets copycats that do
not take local context into account.
The issue
of inequality
South
Africa is the most income- and wealth-unequal society in the world, such that
it cannot afford tunnel vision on the distributional impact of the policies
being put in place to fight Covid-19. Monetary policy is no exception. Many
that are calling for the aggressive use of QE to directly finance government
spending beyond merely yield curve control through buying government bonds in
the secondary market have not answered the question of how will this impact
income and wealth inequality.
Global monetary
policy has largely confined itself to price stability in the interest of boosting
balanced economic growth and creating employment through lower long-term
interest rates, increased liquidity and higher asset prices. Naturally, higher
asset prices favour asset owners more compared to wage-earning labour. In the
South African context, where income and wealth inequality is institutionalised,
monetary policy tools such as QE will likely increase income and wealth
inequality.
That
economic growth and employment will rise by implementing QE is not a given
because it will depend on many other factors not related to financing, such as
implementation of the various policies, of which South Africa has been very
poor at historically.
However,
the evidence on asset price inflation due to QE is well documented and it
largely favours the holders of financial assets. The recovery in stock markets
since mid-March demonstrate this point. Economies are flooded with liquidity,
markets recover and benefit those with financial assets but the real economy
continues to bleed jobs.
To those
that are advocating for QE, the one aspect they would need to answer is what to
do with the distributional effects which will likely increase income and wealth
inequality in a country with the heist level of inequality.
This
question does not only need to be asked of monetary policy, it needs to extend
across all of government’s policy response as standard practice. Where there
are limitations because of institutional frameworks and design, other tools
could be put in place outside of these frameworks to counter the inequality
that comes from the distributional effects of policies.
Isaah
Mhlanga is chief economist of Alexander Forbes. Views expressed are his own.
