Before we go BIG, let's learn to build big
Investing in infrastructure rather than paying grants is how we fix South Africa
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The fourth bullet in Nedbank’s recently released Capital Expenditure Project Listing report for 2023 is almost beyond belief. ‘General government’, it reads, ‘announced R101.6 billion worth of (infrastructure) projects, 60% of which are projects by the City of Cape Town.’
Read that carefully and consider that less than 10% of South Africans live in the city that spends more than 60% of South Africa’s public infrastructure investment. This factoid summarises precisely the challenge the Minister of Finance faces when he delivers his budget speech on the 21st of February: delivering public services South Africans deserve requires more than just a budget allocation. It requires capacity at the local level to design, execute, and maintain infrastructure projects effectively. In short, it requires builders, not burglars.
It was not too long ago that the president sold us a vision of new cities, of a country transformed by (public) investment in new and advanced infrastructure, from reliable, environmentally-friendly electricity, rapid-rail connections, highways into Africa, and high-tech digital access that would allow South African entrepreneurs to conquer the world. Yet, as the Nedbank report shows, very little of that has materialised. Total capital expenditures on new projects are down considerably, from R260 billion in 2022 to R185 billion last year. That is mainly due to a slump in private investment, the consequences of Eskom’s miserable performance. The irony is that much of the investment that has been promised has been in the renewable energy sector; the need for reliable energy has crowded out not only other infrastructure but also our dreams of a better future.
Can Minister Godongwana, in his Budget Speech next week, return our gaze to the city on a hill? He has his work cut out. The South African economy is stagnant, meaning tax revenue has not increased. Our debt will soon be nearly 80% of GDP; we now spend more than a fifth of our total budget to service our debt. And it is election season, so there will be considerable pressure on him to avoid the fiscally sound belt-tightening that is required when costs spiral out of control.
The truth is that few of those mega projects are realistic in an economy like ours. But that does not mean there is no place in the budget for public works. A new paper forthcoming in the American Economic Review offers some inspiration.
The authors investigate a large urban public works programme that provided employment at high wages on small-scale neighbourhood projects in Addis Ababa, Ethiopia. These were not highly skilled jobs: the most common activities encompassed cleaning streets, maintaining drains and ditches, garbage disposal, and planting trees and gardening. In a few rare cases, the work included the construction of small cobbled streets in townships. The low skill requirement meant that the programme could be comprehensive; at completion, 18% of households in the city were enrolled.
The authors then cleverly exploit the gradual roll-out of the programme across randomly chosen neighbourhoods to calculate its short-run effect on income and employment. The results are startling: while the direct effect of the full rollout of the programme was a 19% increase in private sector wages, when the indirect effects on private wages and local amenities were added, welfare gains were six times larger. Addis Ababa’s simple yet effective public works raised income levels and significantly improved living conditions, especially for the city’s poorest.
Such public works have sadly fallen out of favour in South Africa for two reasons: 1) they require local state capacity, and 2) the lobby for social grants has grown stronger over time. Take the Institute for Economic Justice, a think tank that has called for a Basic Income Grant (BIG) for some time. The IEJ argues correctly that such a comprehensive grant system would reduce malnutrition and increase the opportunities for the poorest in the short run. They also argue that it will stimulate spending, boosting job creation and growth, and should, therefore, be a policy priority.
But economists know better than only to consider the short-run consequences or, to put it in economics jargon, the partial equilibrium effects. That is why we build models of the economy to help us think through all the likely (and sometimes unintended) consequences of a policy choice.
And there are many potential consequences of a policy such as a Basic Income Grant. For one, it is incredibly expensive. The IEJ claims that a ‘BIG has been shown to be fiscally sustainable’. Yet for this to be true, they propose several additional taxes: A social security tax (SST), a graduated tax where higher-income earners pay more than they receive from the UBIG, and lower-income earners gain a net benefit, a wealth tax targeting the wealthiest 1% and a higher VAT rate on luxury goods. Also, they propose reducing subsidies on retirement funds and medical aids. And, they argue, additional revenue could be sourced from new taxes like a Financial Transactions Tax and a Resource Rent Tax.
So what would be the net effect of all these taxes? Well, that is precisely the question three macroeconomics asked in a recent paper published in the South African Journal of Economics. They employ a state-of-the-art dynamic stochastic general equilibrium model to understand how various funding strategies to support a BIG would affect the economy. The model reveals that transitioning the Social Relief of Distress (SRD) grant into a permanent BIG would be the least costly option but still slow economic growth, increasing unemployment. A larger BIG, set at the food poverty line (as the IEJ proposes), would necessitate significant increases in public debt and taxes, crowding out consumption and investment, and ultimately resulting in severe job losses. The most extensive BIG scenario considered would lead to a substantial rise in debt, significant tax hikes, and nearly a million job losses over five years.
In short, the authors conclude that while a BIG would temporarily reduce poverty, it has enormous trade-offs in the current fiscal climate. The only way to afford a BIG, they argue, is to have structural economic reforms that promote growth through ‘increased government infrastructure investment’. If we want a BIG, perhaps we should first build big.
Minister Enoch Godongwana has the unenviable task of trying, as best as he can, to improve the lives of ordinary South Africans through the budget. Yet the truth is that there is little that the Minister or his Ministry can do about the real challenges facing our economy. Quick and popular solutions like a BIG or equivalent grant scheme will only hurt our chances of sustainable economic growth. And, sadly, cadre deployment, skill shortages, and corruption have collapsed the capacity of many local and provincial governments to think and build big things, those things – from cobbled streets to a major water treatment facility, from planting trees to efficient ports, high-speed railways and, yes, new city neighbourhoods – that can raise productivity, lift incomes and grow the economy. Yet until such bottlenecks are addressed, ordinary South Africans – at least those outside Cape Town – will be forced to live with the unfulfilled promises of elections past.
An edited version of this article was published on News24. Support more such writing by signing up for a paid subscription. The image was created with Midjourney v6.