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On My Mind
– Could increased social grants boost economic growth?
Former CEO of Sanlam Private Wealth
Jun 15, 2017
Last week, I had the privilege of listening to a most insightful lecture by political commentator Max du Preez at the annual i3 Summit presented by Sanlam Investments and Glacier by Sanlam. Max, who has on more than one occasion been a guest speaker at our biannual client events, proposed that rapid wealth distribution to the poor in the form of higher social grants would go a long way towards addressing South Africa’s socio-economic ills.
It’s a thorny issue and many economists won’t agree. South Africa currently spends more than 4% of its gross domestic product (GDP) on social grants – significantly more than many other countries. Around 17 million South Africans – a third of our nation – currently rely on welfare handouts, and in the 2017/18 financial year, total spend on grants will amount to more than R150 billion. The argument is that our economy simply can’t support further increases in welfare spend for fear of nudging our country even further towards the edge of the fiscal cliff.
There’s another side to the story, however, and we feel Max’s suggestion may well be worthy of consideration – especially if one looks at the success story of Brazil in this regard. In that emerging market, the Bolsa Familia (family allowance) conditional cash transfer programme – the biggest of its kind in the world – has uplifted 50 million people since it was introduced in 2003, leading to reduced poverty levels, and importantly, boosting the Brazilian economy.
The concept is based on decreasing levels of inequality through income distribution – in other words, the opposite of the trickle-down economics against which much of the populist backlash across the globe today is directed. Increased income for large swathes of the population of course means increased consumer demand, which in turn stimulates economic growth. It also creates a fallback system for entry-level entrepreneurs, leading to job creation.
The programme in Brazil is reported to have worked partly because it’s conditional. The social grant isn’t just a handout. In exchange for the monthly cash, recipients need to prove they’ve spent it on education and other initiatives meant to improve their conditions, such as health checks, vaccinations and nutritional programmes. Those who can provide the required proof of school attendance of their children, for example, qualify for higher grants.
Brazil’s social grant system has been so successful that it’s been adopted by several other Latin American countries. According to the World Bank, between 2003 and 2014, inequality in Brazil dropped significantly, and the income level of the poorest 40% of the population rose, on average, 7.1% in real terms, compared to 4.4% for the population as a whole.
Could it work in South Africa? We’re known to be one of the most unequal societies in the world, and markedly raising our social welfare spend is certainly one way of addressing this. And it’s not as though the country can’t afford it. If Treasury can redirect the billions of rands currently being lost due to corruption, wasteful state-owned enterprises and Dubai drop-offs, we should have more than sufficient state funds to implement such a programme.
Introducing conditionality to a social grant system is a more challenging prospect, however. Firstly, the South African Social Security Agency (Sassa) would urgently need to sort out its current distribution problems. Secondly, monitoring compliance of conditions set for cash handouts could result in an increased administrative burden on the State, and may prove costly. Also, adequate infrastructure – in terms of educational and healthcare facilities, for example – would need to exist.
But given that after a second quarter of negative gross domestic product (GDP) growth, we’ve just entered into a technical recession, South Africa can ill afford not to take drastic action in order to boost the economy. If Brazil, whose economic context and social dynamics are similar to ours, can succeed in reducing inequality, going some way toward rooting out corruption and growing the economy by means of a conditional social grant programme, then surely we can too?
Of course it can’t be denied that the main reason South Africa is currently in an economic slump when the rest of the world appears to be in recovery mode, is politics. Political infighting and uncertainty were a major contributor to the decision last week by credit rating agency Moody’s to take us down a notch, with a negative outlook – a move largely expected by the market.
Although it’s good news that the agency hasn’t junk rated us yet, unless we take meaningful steps to increase political stability, it may well join the other major rating agencies in declaring us non-investment grade with the next review toward the end of the year. Moody’s cited the reason for the negative outlook as ‘reflecting the continued downside risks for growth and fiscal consolidation associated with the political outlook’.
Coupled with our country’s decline to recession, the commentary by Moody’s – which on Monday also downgraded five of South Africa’s banks and four insurers – doesn’t augur well for our growth prospects. We now require the country’s best minds to develop an economic stimulus plan. Unfortunately, we can forget about relying on the political establishment – our two main parties are far too consumed by navel-gazing and internal wars to be tackling our economic challenges with the vigour they deserve.
What we need is accountability on the part of our politicians, and fearless reporting – of the kind for which the amaBhungane Centre for Investigative Journalism is becoming renowned – to expose the widespread chaos, capture and corruption in government. And since a lack of political will is preventing South Africa’s growth trajectory from getting back on track, it’s going to be up to ordinary South Africans and the business sector to move to the frontline and take action.
The bottom line is that for a social grant system similar to the Brazilian model to have the desired impact in South Africa, it will have to be accompanied by a marked reduction in the political turbulence posing a threat to our economic growth over the short term. Despite all the doom and gloom, this may yet be achieved – President Jacob Zuma’s house of cards does appear to be slowly crumbling. Ben Ngubane has resigned his position as chair of Eskom, not long after Brian Molefe’s reappointment as CEO was rescinded. And the SABC’s former COO Hlaudi Motsoeneng has been given the boot.
If these movements are in any way indicative of imminent broader leadership changes, then there’s light at the end of the tunnel. If, under new command, we can loosen the grip of greed and corruption on our country and start weathering our socio-economic woes by channelling funds to those who really need it – through increased social welfare spend, for instance – we might still be in with a fighting chance.
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