economic policy Uncategorized

Resilience to counter inevitable economic turbulence

(This column first appeared in Business Day here)

ECONOMIC misfortune is always with us. We might put one bad episode behind us, but soon enough we discover that there’s always one more thing. For a while, the thing has been the global financial crisis. As SA recovers from that shock, the electricity crisis is the constraint of the moment. When figures such as those for mining and manufacturing production come out, the supply and pricing of power is bound to be part of the explanation, be it from the lips of an analyst or the president.

And thus the illusion is created: once electricity is fixed, we’ll be off to the promised land. But there are other challenges waiting in the wings for their day to dominate the headlines — water, commodity prices or even new diseases.

Soon it will be 2019, economic growth will be nowhere near 5% and unemployment unbearably high. The same can be said for external shocks.

We can take it as guaranteed that in this frail, interconnected global economy a small, fairly open economy like SA’s is vulnerable to developments in the major economies. Before we can put the financial crisis safely behind us, China is set to become a significant risk factor as it transitions to a lower-growth, consumption-driven model. Constantly to accept negative shocks such as this as justification for poor economic performance is tantamount to planning for failure.

The trick to economic progress is not only figuring out how to achieve high economic growth rates when the stars align, as SA did before 2008, but also ensuring that it is sustained. If the experience of successful east Asian economies is anything to go by, at least a generation of solid growth is required to truly change the fortunes of a nation.

The ability to minimise the effects of inevitable economic shocks, and to recover from them, is an important part of economic policy making. This aspect is not completely neglected. SA’s counter-cyclical fiscal policy stance has kept the economy going since 2008.

This has run into difficulty, pushing the country’s debt towards uncomfortable territory.

Some might argue that the financial crisis was of such a magnitude that very little could protect a small, open economy against it. Even if that point is taken, consider how relatively difficult it has been for SA to recover from it.

Economic resilience, at the nation-state level, is not a popular subject of study.

Work by economist Lino Briguglio and his co-authors presents a useful conceptualisation of economic resilience as the “nurtured” ability of an economy to recover from or to adjust to the effects of adverse shocks to which it may be inherently exposed.

This framing of the issue presents vulnerability as a fact of economic life, beyond the control of many small, open economies, but resilience as a quality that can be developed deliberately in response to that.

It can be thought of in two main ways — as the ability to withstand shocks and the ability to recover speedily from them.

The ability to withstand adverse effects speaks to shock-absorption measures such as a multi-skilled and flexible labour force that can move between sectors in a diverse economy. The ability to recover quickly depends on the ample fiscal space that is earned when times are good.

But before you dismiss this as more of the same, consider this: a sharper focus on resilience by policy makers will ensure an economy that keeps volatility in check.

Short-term growth based on speculative investment and consumption would win little applause. In good times, risk management would be better.

The bad times would not be as devastating, paving the way for a larger middle class, a significant proportion of whom would not be a pay cheque away from slipping back into poverty.

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