Approaches to Poverty Eradication and Economic Development VII
Transform the Second Economy
In 2003, to prepare for our First Decade of Democracy in 2004, our government published the major study, 'Towards a Ten Year Review'. Among other things, the Review said: "One of the major consequences of the change in the structure of the (South African) economy is that 'two economies' persist in one country. The first is an advanced, sophisticated economy, based on skilled labour, which is becoming more globally competitive. The second is a mainly informal, marginalised, unskilled economy, populated by the unemployed and those unemployable in the formal sector. Despite the impressive gains made in the first economy, the benefits of growth have yet to reach the second economy, and with the enormity of the challenges arising from the social transition, the second economy risks falling further behind, if there is no decisive government intervention."
In his well known book, 'Development as Freedom', the Nobel Prize winner in economics, Amartya Sen says: "Development requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as intolerance or overactivity of repressive states. Despite unprecedented increase in overall opulence, the contemporary world denies elementary freedoms to vast numbers - perhaps even the majority - of people. Sometimes the lack of substantive freedoms relates directly to economic poverty, which robs people of the freedom to satisfy hunger, or to achieve sufficient nutrition, or to obtain remedies for treatable illnesses, or the opportunity to be adequately clothed or sheltered, or to enjoy clean water or sanitary facilities. In other cases, the unfreedom links closely to the lack of public facilities and social care, such as the absence of epidemiological programmes, or of organised arrangements for health care or educational facilities, or of effective institutions for the maintenance of local peace and order. In still other cases, the violation of freedom results directly from a denial of political and civil liberties by authoritarian regimes and from imposed restrictions on the freedom to participate in the social, political and economic life of the community."
He contrasts what he calls "growth mediated" with "support-led" development, expressing preference for the latter. He writes: "In contrast with the growth-mediated mechanism, the support-led process does not operate through fast economic growth, but works through a programme of skilful social support of health care, education and other relevant social arrangements." In this context he argues that "Despite their very low levels of income, the people of Kerala (in India), or China, or Sri Lanka enjoy enormously higher levels of life expectancy than do much richer populations of Brazil, South Africa and Namibia, not to mention Gabon (with wealth measured by GNP per capita).An income-centred (GNP) view is in serious need of supplementation, in order to have a fuller understanding of the process of development."
Everything Sen says indicates the challenge we face as we work to transform the Second Economy. Fortunately we no longer have the burden of the "unfreedom" imposed by tyranny and the denial of political and civil liberties by an authoritarian regime. Nevertheless the Second Economy in our country is characterised by many of the "unfreedoms" that Sen wrote about.
Contrary to what was stated in the 'Ten Year Review' the challenge we face extends beyond "(economic) growth" and relates to the complex of "unfreedoms" mentioned by Sen. The very fact of the existence of the Second Economy side by side with the First argues against a simple focus on growth. In his article "Paradoxical Growth" in the book, 'The Post-Development Reader', Serge Latouche, Professor of Economics at the University of Paris XI, wrote: "In a World Bank report of 1991, we read: 'During its first two decades of existence, the World Bank tended to identify development with economic growth. The benefits of growth were assumed to trickle down, the poor automatically benefiting from the creation of jobs and the increase in goods and services.'"
The famous trickle-down effect.
He continues: "The claim of economic growth to be the basic objective of human society is therefore mainly based on the famous trickle-down effect, magnified by the euphoria of the myths of modernity. However, this seductive formulation cannot stand up to a serious examination. So many paradoxes beset the reasoning that the miracle effect, in fact, turns out to be the mirage effect.What invalidates the whole ideology of growth is the fact that the trickle-down effect is an imposture.At the planetary level, the mechanism never functioned anyway. Between 1950 and 1987, according to the World Bank's own statistics, while the world's revenues multiplied by 2.5, the gap between the richest and the poorest fifths of the population grew from 30:1 to 60:1." ('The Post-Development Reader', compiled by Majid Ranhema & Victoria Bawtree: David Philip, Cape Town, 1997).
The First and Second Economies in our country are separated from each other by a structural fault. The Second Economy emerged during the long period of colonialism and apartheid as a result of the deliberate imposition of the "unfreedoms" described by Sen. This process aimed to achieve the enrichment of the white minority at the cost of the impoverishment of the black majority.
That process of impoverishment included ensuring that the white economy had access to unlimited supplies of cheap unskilled black labour, and that this economy did not waste any money on the development of the localities in which the black workers lived. This did not even allow for the possibility of improving the lives of the oppressed majority through the "trickle-down effect".
Accordingly, what we now have is the reality described in the 'Ten Year Review', of a "mainly informal, marginalised, unskilled economy, populated by the unemployed and those unemployable in the formal sector". The Second Economy is caught in a "poverty trap". It is therefore unable to generate the internal savings that would enable it to achieve the high rates of investment it needs. Accordingly, on its own, it is unable to attain rates of growth that would ultimately end its condition of underdevelopment. It does not have the internal means to effect the "support-led" development Amartya Sen spoke about, resulting in targeted improvements in the health, education, training and social development of those imprisoned within the Second Economy, despite its low level of economic development as measured by per capita GDP.
It is linked to the First Economy by the extent to which it can still supply the cheap, unskilled labour this economy may require. It survives on money transfers sent by family members who have been able to secure regular or occasional employment within the First Economy, as well as social grants and elements of the social wage provided by the democratic state.
It is also linked to the First Economy by the goods, equipment and services it purchases with the meagre resources at its disposal. Those resources also make it possible for the Second Economy to maintain an informal economic sector of small traders, artisans and service providers. Such positive trickle-down effects as would result from the higher earnings of family members who would benefit from higher incomes in the First Economy, as well as individual and social transfers by the state, would not be sufficient significantly to raise the standard of living in the Second Economy, or close the ever-widening wealth and development gap between the two economies. The market economy, which encompasses both the First and the Second economies, is unable to solve the problem of poverty and underdevelopment that characterises the Second Economy. Neither can welfare grants and increases in the social wage. The level of underdevelopment of the Second Economy also makes it structurally inevitable that the bulk of such resources as flow into the Second Economy will inevitably "leak" back into the First Economy.
Such public and private interventions as may be made producing a positive outcome in the First Economy cannot have any strategic impact on the Second Economy because it constitutes the structural periphery of the former, inherently positioned to remain on the periphery. Its internal objective reality in terms of the forces of production and their interaction makes it impossible for it to respond to the impulses that drive the growth and development of the First Economy. All this makes decisive government intervention imperative, as the 'Ten Year Review' said, which would "set the preconditions for market-led economic growth". Fortunately, in this regard, we have the possibility to draw on the positive examples and lessons of the Marshall Plan, the post-war development of the Asian Far East, and the EU Regional Policy. We can also learn from the negative examples of the ACP-EU Lome and Cotonou Agreements and the implementation of the policies of the "Washington Consensus".
Reliance on domestic resources.
One of the lessons from these experiences is that we should, to the greater extent, finance the transformation of the Second Economy relying on domestic resources. These should be made available through the state in the form of grants. This does not rule out accessing commercial loans by the state, or equity participation funds, to finance economically viable projects that have the possibility to generate profits that would be used to finance debt. Necessarily, therefore, decisive government intervention in the Second Economy requires that the government should have the resources to make this intervention. The successful management of the macro-economy, coupled with policies that have resulted in the growth of the First Economy, have enabled the government to generate these resources. These results must therefore rank among our most important achievements during the First Decade of Freedom, precisely because they create the possibility for our country seriously to confront the challenge of the Second Economy.
The 2004 Budget Review of our National Treasury makes a number of important observations in this regard. It says: "Greater impetus to economic restructuring began in 1996, with a macroeconomic strategy (GEAR) that emphasised improved industrial competitiveness, inflation reduction, gradual relaxation of exchange controls, strengthened funding of training, tax incentives to stimulate investment, deficit reduction and budget reform focused on the redistributive thrust of expenditure. Having laid these secure foundations, a more expansionary fiscal policy stance could be adopted in 2001. "Against the background of the fiscal consolidation achieved over the past decade - expenditure reprioritisation, a lower budget deficit, improved management of the public debt, lower interest rates and a buoyant tax structure - the 2004 Budget aims to invigorate the recovery evident in the last quarter of 2003 while continuing to build firm foundations for long-run growth and development.
"Prudent fiscal management has resulted in public debt levels falling within manageable limits, lowering debt service costs and freeing resources for more important socio-economic programmes, including infrastructure development, job creation and social security. Enhanced management and governance, together with improving delivery capacity, ensure that this expenditure contributes meaningfully to economic growth and development." In the context of the success of the post-1996 macro-economic policies resulting in "freeing resources for more important socio-economic programmes", various policies and programmes have already been decided. The Integrated and Sustainable Rural Development and Urban Renewal Programmes are central to the success of our response to the Second Economy. They must focus on addressing the "unfreedoms" mentioned by Sen, and not just the goal of economic growth.
Similarly, we also have to ensure the success of our Expanded Public Works, the Human Resource Strategy, and Comprehensive Agricultural Support Programmes, all of which relate directly to the transformation of the Second Economy. Other interventions in other areas, ranging from the Municipal Infrastructure Grant to the development of e-government through the use of modern information and communication technologies, must, in part, be geared towards ensuring the success of the major programmes we have mentioned, specifically directed at the transformation of the Second Economy.
With regard to all these interventions in both the First and Second economies, on 26 October this year, Minister of Finance Trevor Manuel said: "Our policy agenda focuses on both growing the formal economy and expanding the economic opportunities of those who are marginalised, those who, without direct policy interventions, will not benefit from the fruits of a growing economy. Reducing this social exclusion through drawing in the millions who find themselves trapped in the second economy is a fundamental principle of our policy stance. To achieve this objective, we will have to intervene directly in the way in which the fruits of economic growth are shared, in the way in which economic opportunities are parcelled out. "South Africa's development challenge is to build a single and integrated economy that benefits all, encompassing both growing, competitive relations with the global economy and a caring, inclusive network of social services and support for the disadvantaged. This is, on a larger scale, the central challenge also of international relations - the struggle for modernisation and solidarity against deeply embedded inequalities, conflict and prejudice."
As with the European Union (EU) Regional Policy, we must aim to achieve:
- productive investment to create and safeguard sustainable jobs;
- investment in infrastructure which contributes to development, structural adjustment and creation and maintenance of sustainable jobs, or, in all eligible regions, to diversification, revitalisation, improved access and regeneration of economic sites and industrial areas suffering from decline, depressed urban areas, and rural areas;
- development of the endogenous potential by measures which support local development and employment initiatives and the activities of small and medium-sized enterprises; such assistance should be aimed at services for enterprises and cooperatives, transfer of technology, development of financing institutions, direct aid to investment, provision of local infrastructure, and aid for structures providing neighbourhood services;
- Investment in education and training and health.
We must also take note of the observation made by the EU that "the dynamic effects of EU membership, coupled with a vigorous and targeted regional policy, can bring results".
Success in the First Economy.
We must fully understand that the success of our own vigorous and targeted interventions in the Second Economy is also dependent on the success of the First Economy and building the structural links between these two economies. In the end, as was the objective of the Marshall Plan, those currently caught within the Second Economy should ultimately be able to grow and develop without the need for exceptional outside interventions.
This means that even as we pay concentrated attention to the Second Economy, we must not reduce our focus on the growth and development of the First Economy. Even as we do so, given the continuing imperative for our economy to create jobs, we should pay attention to an empirical observation made by the German Bundesbank. Commenting on the impact on growth of foreign direct investment (FDI), on 24 February 2003 its International Relations Department said: "FDI can act as a significant impetus to growth but only if the level of human capital has crossed a certain threshold. The intuition behind this result is that the more advanced technologies can be fruitfully put to use only after the required human capital has been acquired. Should the technology, however, exceed the absorptive capability of the host country, no trickle-down effects will ensue. Similarly, it can be argued that the products of MNEs (multinational enterprises) may often be too capital intensive for the needs of the host country. The effect may then be to create 'dual economies', with one modern sector and distinct from it a backward domestic sector with only limited overlap. FDI of this kind might consequently result in an excessively capital-intensive production process, leading to a less favourable development of the overall employment situation."
This emphasises the need for us to pay very close and sustained attention to the success of our Human Resource Development Programme to prepare our people to have the vocational and professional skills required by the modern global economy, which includes our First Economy. In this regard, we have to be aware of the increased global mobility of skills, which results in skilled people being drawn to other countries because of higher pay and opportunities for professional development. This also gives us the possibility to meet our skills shortages by improving immigration of the right people into our country.
We must also ensure the success of the interventions to gain access to private capital for targeted investments, as visualised by the Growth and Development Summit, and properly to utilise the capital available to the government and the public sector Development Finance Institutions. Given the responsibilities that fall on the democratic state with regard to the development and transformation of both the First and Second Economies, we have to ensure that the state machinery is so organised, empowered and motivated that it can discharge its responsibilities effectively. We must also mobilise the people to participate in the eradication of the "unfreedoms" imposed on them by a long history of colonialism and apartheid. Simultaneously, we have to maintain the social expenditures targeted at providing a social security net for the poor and disadvantaged, as well as social development to achieve higher levels of education, better health and nutrition, and other outcomes to improve the quality of life and empowerment of all our people, including the women and the youth in both urban and rural areas.
However, the democratic state will have to take great care to ensure that expenditure on social security does not lead to such misallocation of public resources that there is nothing to direct to the fundamental task of the transformation of the Second Economy. In this regard, on 26 October this year, Minister of Finance Trevor Manuel, said: "We need to acknowledge that our social security net is under severe strain. Rapid growth in disability and foster care grant applications indicate both rising income support needs and apparent deficiencies in administrative systems. A sustainable social security system must balance bringing in everyone who is entitled to grants and keeping out everyone who is not entitled to them."
From all this we can draw the following conclusions:
- We must understand the irrationality of depending on "market mechanisms" and/or private investment to advance the Second Economy to reach its takeoff point.
- The Second Economy is too poor to generate the savings and capital it needs for its development. Its levels of poverty and underdevelopment make it impossible for it to attract significant volumes of private capital.
- Accordingly, public sector transfers must constitute the bulk of its development funds.
- However, it will also be possible to use private sector capital to finance profit making ventures within the Second Economy. Some public sector funds should also be devoted to the development of such ventures on a recoverable basis.
- Contrary to arguments about minimal state intervention in the economy, we must proceed on the basis of the critical need for the state to be involved in the transformation of the Second Economy.
- This state intervention must entail detailed planning and implementation of comprehensive development programmes, fully accepting the concept of a developmental state.
- The government must commit the necessary human and material resources to ensure that the state machinery is able to discharge its development responsibilities. Among other things, this must entail the necessary progress with regard to the government's efforts to achieve an integrated system of government, affecting all the national departments and the three spheres of government.
- The government must ensure the success of its interventions with regard to the development of small, medium and micro business within the Second Economy.
- As part of the process of monitoring and evaluating its interventions in the Second Economy, the government should set some benchmarks against which to measure the success of these interventions. These could include the reduction in the relative share of social welfare spending within the national budget, caused by the increase in numbers of people dependent for their income on productive employment.
Taken together, the interventions in the Second Economy should, as Sen said, ensure "the removal of major sources of unfreedom: poverty.poor economic opportunities as well as systematic social deprivation, neglect of public facilities.", responding to a view of development that goes beyond a narrow "income-centred (GNP) view" of development.
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