The sustainability of government’s COVID-19 Social Relief of Distress Grant (SRD Grant) came into sharp focus when the University of Cape Town’s (UCT) director of the Development Policy Research Unit, Professor Haroon Bhorat, took to the podium at a recently hosted South African Reserve Bank (SARB)-UCT financial stability research conference in Cape Town.
The conference brought together policy makers and the academic community to discuss how financial-stability-focused research could be leveraged to inform and enhance practical macroprudential policy making.
Professor Bhorat, who was appointed to the Presidential Economic Advisory Council in 2019, had policy observations and concerns, such as: Is there micro-econometrics evidence from South Africa that we can use to improve macro decision-making?
“From an SRD perspective, we look at the pre- and post-grant period and model the impact on dependent variables such as the probability of a job search, starting a business or finding employment. The question is, does the SRD grant contribute to you finding a job or not, relative to someone who is not on the grant in the post-COVID-19 grant period relative to pre-COVID-19, and we asked that in relation to starting a business and job search,” he said.
Opening the conference, the governor of the SARB, Lesetja Kganyago, said: “To academics, we are interested [in] how the research you are conducting [will help] us solve real-life problems that we grapple with as policy makers. The conference comes at a time when the global financial system is contending with several challenges. The post-COVID-19 surge in inflation necessitated a resolute response from central banks.
“Such a strong and persistent response was crucial as price stability is necessary for a well-functioning economy that works for everyone. The tightening of monetary policy has lifted borrowing costs and has brought an end to the post-global financial crisis era of ultra-low interest rates.”
Kganyago added: “By enhancing the resilience of the banking system, the use of macroprudential tools such as capital buffers can also help a financial system withstand restrictive monetary policy for longer, which in turn allows the central bank to address the task of containing inflation.”
The South African government, through Finance Minister Enoch Godongwana, recently extended the grant period for another year, allocating R34 billion to it.
“The average results (for the full post-COVID-19 period) show that receipt of the grant increased the probability of employment by about three percentage points post the COVID-19 period relative to the pre-period for grant recipients, relative to non-grant recipients. So, when you take this number from a micro-econometrics point of view and have debates with National Treasury through some government departments and public policy discourse, you can conclude that the grant is useful because it improves the probability of employment,” noted Bhorat.
However, Bhorat added, “What’s lost in the storm, is if I break it down per quarter post the grant period, you find that when you receive the grant for one additional quarter, it raises the probability of getting a job to about nine percentage points. Thereafter, the effect dissipates to zero and in the last period, the effect is negative. So, you have the perverse effect of the SRD reducing the chance of you finding employment.
“Essentially, when you dig deep into the micro-econometric evidence, you don’t have support for the SRD as a labour market strategy. What are the implications for macro policy? If you are to use the SRD for labour market policy, you’re not going to achieve positive labour market output.
“Micro-econometrics … questions what it is you are trying to solve. You can’t assume the SRD is the best strategy because it’s the policy you have on the table.”
For Bhorat, it is important to think about where social grants can effectively be aimed. His answer is that it should support “firms in the informal sector, or small, medium and micro-enterprises”. “Our informal sector is remarkably low compared with other developing countries, where the ratio of wage employment to informal employment to unemployment was 45:45:10. In South Africa this ratio is 50:16:34,” he explained.
“Broadly, rethinking our macro policy, and I think the idea that we continue having a growth story, when the elasticity is not the issue, in terms of unemployment, is the wrong way to go about it. To bring it all together, we must think about what I call the supply side of the economy, moving from households to firms.”
The conference also heard from other UCT lecturers, including Professor Allan Donald and senior research associate Andrew Donaldson.