The view that South Africa should look towards the International Monetary Fund (IMF) to be rescued from the unfolding economic meltdown seems to be growing by the day. It has been touted in the most unlikeliest of places. Even the new finance minister, Malusi Gigaba, a proponent of so-called radical economic transformation, has expressed willingness to engage the IMF.
There is no doubt about the seriousness of South Africa’s economic crisis. The country entered a technical recession after the economy contracted in the fourth quarter of last year and first quarter of this year. Unemployment seems to be rising towards the 30% mark.
And global credit rating agencies are uneasy about South Africa’s economic prospects. After a spate of downgrades early this year, they have threatened further downgrades that will take the country deeper into junk status.
While the South African situation is getting more desperate, which calls for desperate measures, the idea to turn to the IMF is a bad idea and must be dismissed. There are a number of reasons why I think this is the case.
First, historical evidence suggests that IMF-administered rescue programmes are actually a recipe for disaster. They worsen rather than rescue the situation.
Second, to suggest that South Africa’s problems are financial in nature is a dangerous misdiagnosis. It will distract the government from the critical issues it needs to address which have little to do with the finances.
Third, one of the main driving factors of the current economic predicament is a loss of investor confidence. This is linked to other factors such as policy uncertainty, political instability within the ruling party and mismanagement of public resources mixed with corruption. An IMF bailout won’t address these problems.
And, lastly, hopping on to the IMF programme would disturb the country’s commitment to reforming the global multilateral financial world. South Africa is part of the Brics bloc which is grooming a new and perhaps alternative multilateral development finance institution called the New Development Bank. If anything, South Africa must look to Brics if it needs financial rescue.
I believe that the solutions to the country’s economic crisis are within. It needs internal discipline to address them – not an external force.
The IMF does not have a good historical record. A view of the many countries that have subjected themselves to the IMF doesn’t inspire confidence. Instead of bailing out countries, it has created a list of countries suffering from debt dependency.
Of all the countries in the world that have been bailed out by the IMF:
- 11 have gone on to rely on IMF aid for at least 30 years;
- 32 countries had been borrowers for between 20 and 29 years; and
- 41 countries have been using IMF credit for between 10 and 19 years.
This shows that it’s nearly impossible to wean an economy from the IMF debt programmes. Debt dependency undermines a country’s sovereignty and integrity of domestic policy formulation. The debt conditions usually restrict pro-growth economic policies, making it difficult for countries to come out of recession.
The IMF’s poor record is partly influenced by the policy choices that it imposes on countries it funds. The IMF policy choices for developing countries, known as a structural adjustment programme, have been widely condemned. The main reason is that they insist on austerity measures that include: cutting government borrowing and spending, lowering taxes and import tariffs, raising interest rates and allowing failing firms to go bankrupt. These are normally accompanied by a call to privatise state-owned enterprises and deregulate key industries.
These austerity measures would cause great suffering, poorer standards of living, higher unemployment as well as corporate failures. The current technical recession would be magnified into a full-blown crisis, leading to even greater shrinking of investment.
South Africa and the IMF
South Africa has always been aware of the dangers of taking IMF money. In December 1993, five months before the country became a democracy, the National Party government, under the guise of transitional executive committee, signed an IMF loan agreement.
When the African National Congress (ANC) came to power after the elections in April 1994 it walked away from the IMF offer. Its concern was mainly that the IMF would undermine the sovereignty of the newly established democracy by imposing inappropriate policy choices that would have further harmed poor people.
Over the past 23 years South Africa has stayed away from the IMF. There is no reason to change this. In fact there are more reasons today for South Africa to maintain its position.
The Brics factor
South Africa is set to assume the rotational chair of the Brics bloc in 2018. The bloc was formed, in part, to challenge, the dominance of western Bretton Woods institutions – the IMF and the World Bank.
It would be politically naive and economically counterproductive for South Africa to give itself to the IMF. It would undermine South Africa’s integrity and tarnish its place within the Brics bloc. And it would undermine the idea that Brics’ New Development Bank can offer an alternative to the Bretton Woods institutions.
Brics promises to yield real economic benefits to South Africa because it can leverage trade between the member countries as well as public and private investment from within the bloc.
A better way to deal with the crisis
Advancing any financial assistance to South Africa without addressing the current bad policies would not address the current economic turmoil. Rather, it would result in the country sliding deeper into debt.
And any assistance would be entrusted to a government that has created the crisis because of imprudent policies. The result would be an extension of the crisis because the pressure would have been taken off government, leaving the architecture of the meltdown intact.
What needs to happen is that policymakers need to turn their minds to the real problems.
This can be done without a bailout.