Comparing the economic impact of the 2008 global recession and Covid-19 on South Africa and finding new pathways for recovery.

By: Jason Musyoka

There are ongoing conversations on how the economic impact of Covid-19 compare`s with the 2008 global recession. From the beginning of the Covid-19 pandemic spread, it was clear that the world was facing more than a health crisis. Closing of international borders would translate to trade and tourism decline, and, lockdowns imposed by governments across the world meant that economic production would fall significantly.

In the above light, three months since the pandemic was first spotted in Wuhan, China, the International Monetary Fund (IMF) Managing Director Kristalina Georgieva cited that “the human costs of the Coronavirus pandemic [were] already immeasurable and that by end of 2020 we should expect “…a recession at least as bad as during the global financial crisis or worse”. In June, the IMF returned with a projected global output of minus 4.9% by end of 2020, slightly below World Bank’s prediction of minus 5.2%.  The World Bank would go on to suggest that the pandemic-induced recession would be the deepest since the Second World War. The comparison of the pandemic with the 2008 global recession points to the gravity by which Covid-19 would make a landfall.

Economic forecasts in South Africa were tethered on the same bleak prediction. In June the National Treasury predicted that the pandemic would deliver the worst recession since the Great Depression. This prediction was of course an overkill, viewed from the point of view of the IMF and the World Bank’s measured forecasts. But South Africa had been descending in and out of recession since the 2008 global recession. South Africa experienced the first impact of the global economic crisis during the fourth quarter of 2008 (-2,3%), the first quarter of 2009 (-6,1%), and the second quarter of 2009 (-1,4%), when the economy posted negative growth in three consecutive quarters. In 2014, the economy narrowly missed a recession, following an extended strike in the platinum sector. Just two years later, in 2017, the economy would return to a second recession since 2009, then to a third during the second quarter of 2018. The economy would post a fourth recession since 2009, during the second half of 2019.

Thus, when the pandemic officially arrived in South Africa in March 2020, the economy was recording high unemployment (29.1%) and low growth (0,7%). It was inevitable that the impact on such a vulnerable economy would be catastrophic. Let us then draw some parallels between the economic impact of the Covid-19 pandemic and the 2008 recession with regard to South Africa. I would like to focus on 2006/7 as the preamble for the global recession, and 2018/19 as the preamble for the Covid-19 pandemic.

South Africa’s GDP grew at 5.6% in 2006 and 5.4% in 2007. Over these two years preceding the global recession, the economy was growing fastest than any year since 1994. Unemployment rate in 2006  was 28.49%, declining to 26.67% in 2007. This was a notable decline from 30.14% in 1994. The government debt to GDP in 2006 was 31.36%, less than China’s 45% at the time.

In the run up to the global economic crisis, South Africa’s macro-economic indicators pointed to a booming economy. All the macroeconomic indicators recorded positive performance, if we compare the state of the economy in 2007/8, with the shape of the same economy in 1994. Following a decade of uninterrupted growth, real GDP growth contracted by 2 per cent in the first half of 2009. Roughly half a million people lost their jobs, and a growing number were squeezed between falling incomes and high levels of debt. The impact of the recession was notable, of course, considering that it produced the first recession in South Africa, in 17 years.

In sum, if we consider the state of the economy just before covid-19, the following picture emerges. Unemployment had increased to 28.18% in 2019. Compared to 2007/8, government debt to GDP had doubled to 62.20% in 2019. Inflation rate was within the regular 3-6% South African Reserve Bank (SARB) target in 2019.

Table 1: Comparative analysis of Global recession and Covid-19 economic impact on South Africa

I have already shown how domestic economic conditions in South Africa before the global recession were reasonably prepared for an economic storm.  I have also pointed to just how vulnerable the economy was before Covid-19. And as illustrated above, the impact of Covid-19 is far reaching than the global economic crisis.

Returning to the 2008 global crisis, it arrived in South Africa at the same time when  a new administration was taking power. President Mbeki would resign on September 20th 2008, five days after the Lehman brothers filed for bankruptcy (15th September 2008). A series of policy blunders and entrenchment of kleptocratic practice within the state forced South Africa’s economy into a low growth trap through the decade which followed. Which is to mean, government action and inaction played a major role in enabling economic vulnerability.

But just as government was responsible for poor economic performance between 2009 and 2019, government action will be critical in managing a successful recovery from the devastating impact of Covid-19. There are positive actions on the part of government. In April, president Ramaphosa announced R500-billion economic stimulus package, equivalent to 10% of the national gross domestic product (GDP). The stimulus package would cover tax relief, wage support, funding for small business, as well as substantial infrastructure development. We have also seen the pragmatics within the governing party take more central role in guiding development policy. An economic recovery plan document has been produced, although the pandemic seems to have stifled meaningful public debate on the document. Even the nationalists (on both the left and the right) have partly muted their habitually loud voices in defence of the coalitions of interests which they represent.

Notwithstanding, the public has been treated with inefficiency of the state on a range of areas, including SASSA’s inability to timely administer social grants. Corruption cases related to public procurement have surged during the pandemic. These actions of the state might point to a continuity of the same state which presided over what has come to be referred as the lost decade.

A number of new initiatives will have to be adopted, if there will be any meaningful and rapid economic recovery. I would like to make the following propositions in this context. First, I would like to borrow President Ramaphosa’s idea of a new dawn. Although the notion carried with it a reasonable measure of national euphoria, the meaning was largely obscure. The narrative did raise expectations and hopes, but only in so far as these were projected to a new president and a new administration. The notion has largely seen its light of day, and perhaps fully eclipsed by Covid-19. So much for the new dawn, which was never to be. So I herewith return the borrowed term, without dividends.

Second, in April 2020, while announcing government’s economic response to Covid-19, the president introduced to national economic debate the concept of New Economy (NE), which typically means  an economy characterised by new, high-growth industries that are on the cutting edge of technology and drive economic growth and productivity. The adjective ‘new’ in NE therefore points to innovative economic policies which guide economic processes towards meaningful outcomes. Consequently, in July 2020, the government released an economic policy document titled “Reconstruction, Growth and Transformation: Building a New, Inclusive Economy”. This is a loaded title, but at the very least it suggests that a new inclusive economy is one that simultaneously fosters economic growth and distribution. But growth and redistribution are not new themes in South Africa. The dilemma lies in how to achieve these goals. The proposed focus is an outcome-based implementation plan which will transform the material conditions of South Africans.

A new state will have to be re-build. This is the second proposition. Such a state should build around efficient delivery of basic services.  Regardless of the aspirational promise of economic recovery, State owned Enterprises (SoEs) will need to efficiently promote growth and development. Before they do so, however, internal ‘good governance’ should be achieved. Eskom, SASSA, Transnet, as well as South African Airways (SAA) should form part of this ‘new state’ discourse. A new state should also be able to efficiently coordinate markets without stifling individual liberty.

South Africa falls broadly under the category of a Coordinated Market Economy (CME). CMEs in theory rely on formal institutions to regulate the market and coordinate the interaction of firms and firm relations with suppliers, customers, employees, and financiers. CMEs are also characterized by relatively long-term relations between economic actors. Finally, CMEs tend to have high levels of job security, a good record on training and development, institutionalized forms of worker participation, and relatively cooperative relations between trade unions and employers’ associations. A new state will be required to implement these coordination measures. The proposed notion of a new state takes the circle arc to three quarters.

The final arc quarter will have to do with new politics, whose key objective should be to revitalise democracy. I see this as a collaborative task between political parties, the state, and civil society. For a meaningful recovery post Covid-19, the development question will have to be mainstreamed in political discourses. This idea counters the tendencies by political parties to maintain procedural democratic conversation. In other words, the kind of politics which focus almost exclusively on five-year election cycles.

In the final analysis, any possibility for rapid and meaningful recovery will have to include a new economy, new state, and new politics. Such new enterprises should borrow a leaf from the British economist John Maynard Keynes, who observed that “the political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty.”

Dr. Jason Musyoka is an associate researcher at the Department of Political Science, University of Pretoria.