Macroeconomic stimulus packages and income inequality in developing countries: lessons from the 2007-9 great recession for the Covid-19 crisis in South Africa

Abstract

In 2020, the South African government announced that it was planning to implement an ambitious macroeconomic rescue package worth about 10% of the country's gross domestic product (GDP) to cushion the economy from the socioeconomic impact of Covid-19 lockdown. However, it was unclear what the likely effects of the package's measures would be on income growth and employment in the post-crisis recovery period. This paper uses a fiscal multiplier framework to examine the links between such packages and patterns of growth, employment and inequality in nine developing counties during the recovery period following the Great Recession of 2007-2009. The findings indicate that countries which privileged larger fiscal packages enacted through public infrastructure investments had more favourable outcomes in terms of employment recovery and preventing the worsening of poverty. Moreover, the implementation of deficit-financed stimulus packages did not lead to unsustainable debt levels or persistent inflation. As South Africa contemplates rolling out a crisis, insights from those experiences may provide useful lessons for building a more equitable and more shock-resilient post-Covid-19 economy.