You’ve probably heard the panicked words ‘junk status’ thrown around a fair bit these past few weeks, which to be honest sounds like a real kick in the nether regions.
It sounds like when they told you that you had to redo Grade 10, then convinced you it was a good thing because you’d have a solid base to build from as you finished high school.
The thing is, you see, that when it comes to the world of finance there is actually a large body of evidence that supports the notion of a downgrade being a good thing in the long run. It’s the whole ‘things must get worse before they can get better’ argument, outlined below in the Sunday Times:
Economists have shown that crises can be welfare-improving in the medium term, because their heavy costs force economic adjustment and reform, eventually leading to faster growth.
In their paper “Do crises induce reform? Simple empirical tests of conventional wisdom”, Allan Drazen and William Easterly argue that a crisis does not only induce reform, but is also necessary for it.
Therefore, in countries where the political system does not lead to reform when needed, forced adjustment may be the only solution.
A related argument is that easily available external funding may delay economic reform further and therefore make the eventual adjustment more difficult.
For example, a government that can easily borrow abroad may use such borrowing to postpone necessary reforms, because there is less urgency to cut a high fiscal deficit when it can be easily financed by borrowing abroad.
As argued by the IMF, external financing acts like a “pain reliever”, postponing the much-needed treatment.
If this is indeed the case, a sovereign rating downgrade may not be as bad as it’s made out to be because it could be the rude awakening we need.
Now we know that there are a number of uphill struggles hindering the growth of our economy – a shortage of skills, infrastructure blockages and the structure of the labour market to name just a few – but we have usually kept it together due to global growth and other mitigating factors.
A strong finish then:
The Treasury revised downwards GDP forecasts to below 1% this year, 1.7% next year and 2.4% in 2018. The forecasts are above market expectations but definitely lower than we ought to grow.
Kicking the can down the road is as good as delaying the necessary reforms.
We continue to increase social grants without dealing with the problem of job creation and education.
We increase our education budget without dealing with the issue of our low quality of education. Policy measures that provide short-term solutions are counterproductive and delay the needed reforms.
So perhaps it isn’t time to pack it all in and move to Perth if we are downgraded to junk status, although if you’re going to be one of those insufferable naysayers then don’t let the plane door hit you on the way out.
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