OP-ED: Will the Real Middle Class Please Stand Up? | American Interest

CDE Executive Director Ann Bernstein published an article in a leading international magazine, The American Interest, titled “Will the Real Middle Class Please Stand Up?” Read it online at the American Interest here.

“Middle class” is defined differently in India, Brazil, and South Africa, but all three countries share the same need: for a second wave of reforms to make their middles classes less state-oriented and more entrepreneurial.

There are few prouder boasts for the government of an emerging economy to make than that it is “raising millions of citizens out of poverty.” It is a boast that several governments have made with confidence in recent years. They are generally joined by a chorus of approval from boosters looking to promote the next great consumer market opportunity, and to reassure investors with the prospect of social and political stability that a large and growing middle class is conventionally assumed to guarantee. At the moment, the entire continent of Africa is receiving this kind of broad-brush treatment. Yet who exactly constitutes the “middle class”? As a study of India, Brazil, and South Africa shows, the answer varies from country to country, and sometimes within one. The question couldn’t be more crucial, however, for these countries’ chances of reaching the next rung of prosperity.

Definitions of the “Middle Class”

Inevitably, figures supporting the claims of an expanding middle class vary from study to study, yet some have achieved wide currency. For instance, the Workers’ Party (PT) in Brazil has been able to make enormous political capital in the last few years from the narrative of the country’s growing middle class, especially the claim—a favorite of President Rousseff’s—that “40 million Brazilians were lifted from poverty into the middle class between 2001 and 2011.”

Studies of the Brazilian middle class largely employ a definition developed by the federal government’s Secretariat for Strategic Affairs, which classifies people as middle class if they have the relatively low household income of between $161 and $564 per month. The growth of this “new middle class” has been impressive. Between 2001 and 2011 the proportion of people that could be thus classified grew from 35 percent to nearly 50 percent. In 2011 Brazil’s population was almost 197 million, so the middle class now consists of nearly 98 million people.

Black Brazilians account for 80 percent of new entrants into this class. People from rural areas and from the relatively impoverished northeast, along with workers in the informal sector and domestic servants, also account for a growing proportion. This increased social mobility has had an effect on Brazil’s extremely high rate of inequality: the income share of the new middle class and the poor has risen rapidly at the expense of the richest 10 percent. Between 2000 and 2009 the accumulated rate of real per capita income growth of the richest 10 percent was only 10 percent. By comparison, the real per capita income of the poorest 50 percent grew by 68 percent. The Brazilian poor averaged a Chinese-style growth rate of 6.8 percent per year during that period, a rate nearly six times greater than that of the traditional middle classes.

India has achieved significantly higher growth rates than Brazil and South Africa recently, but with a population of 1.2 billion it is much poorer than the other two. Gross national income (GNI) per capita in 2013 was $5,350, compared to South Africa’s $12,530 and Brazil’s $14,750.

To cope with the considerable variation between India’s middle class incomes and those of other countries, it is useful to employ a distinction between “local” and “global” middle classes. This allows analysts to assess the rate at which people are moving out of lower income quintiles, while also permitting an evaluation of the much smaller income group near the upper end, which has standards of living and aspirations comparable with middle classes in richer countries.

The “local middle class” consists of urban Indians earning between 75 and 150 percent of the median income. The local middle class makes up 40 percent of the urban population and consists of about 150 million people. The “global middle class” is defined as people in households that consume between $10 and $100 per person per day. About 12.5 percent of India’s urban population fits into this category, or about 50 million people. Together the two classes comprise some 200 million people, just under a fifth of the population.

The local middle class is more diverse and widely spread. It is split along language, ethnic and caste lines. Access to higher education is the key to becoming a member of the global middle class. People in this class are largely English-speaking and mainly upper caste. They are heavily concentrated in two states, Delhi and Maharashtra.

By global standards, unusually large numbers of both classes work in the informal sector. The proportion of the local middle class working in this way is 70 percent, and for the global middle class it is still very high, at 40 percent. Of course, the informal sector spans a wider range in India than in most other developing countries. Literally hundreds of laws push firms and people into informal, unregistered work.

In South Africa, researchers use two definitions to encompass very different income groups. The first is the “literal middle”, that is, the 4.2 million households that are middle class by virtue of being in the middle of the country’s income distribution. This group is made up of households with monthly per capita incomes between $190 and $570. They constituted 31 percent of the population in 2008. By comparison, those in the “relatively affluent middle” (a further 4.1 million households) find themselves in income brackets that are more typically middle class by global standards, ranging between $700 and $5,000. They constituted 30 percent of the population in 2008. Clearly this is far too wide a range of life circumstances from which to draw meaningful social and political generalizations.

Approaches other than measurement of income tend to find smaller middle classes in South Africa. The South African Advertising Research Foundation uses Living Standards Measures (LSMs), which include variables such as location (metropolitan, urban, rural), access to services (including financial services) and possession of consumer durables. It found that 23.5 percent of South Africans (about 12.2 million people) were middle class in 2010. It is interesting to note that in 2006 some 42 percent (19.9 million) of South Africans self-identified as middle class, according to the global World Values Survey.

The racial makeup of the middle class is also important. A study in 2012 by the Unilever Institute of Strategic Marketing, based at the University of Cape Town (UCT) defined black middle class adults as meeting at least three of four requirements: car ownership, a post-secondary degree, and a household income between $1,400 and $5,000 per month. It found that:

  • The black middle class more than doubled between 2004 and 2012, from 1.7 million to 4.2 million individuals.
  • The average monthly income for a black middle class household in 2012 was $2,100, compared to $2,500 for a white middle class household.
  • The annual spending power of the black middle class is $42 billion, compared to $32 billion for the white middle class (3 million adults).

The myriad definitions and local peculiarities of middle classes in emerging democracies signal that changing patterns of growth, employment and the organization of work, as well as government-mandated schemes of redistribution, have transformed many of the traditional assumptions about and expectations of working and middle classes.

If our definition of middle class is so broad that almost everyone but the poor or the very rich is middle class, what has happened to the working class? “Working class” is as slippery a term as middle class. Organized labor’s assumption (especially powerful in South Africa) that the unemployed, the informal sector and semi-skilled, skilled and even lower professional workers in the formal sector can be covered by the uniform category “working class” simply does not fit reality. At the same time, people who are middle class in terms of their place in the income distribution and perhaps even by virtue of possessing post-secondary qualifications may be militant trade unionists.

The Politics of Emerging Middle Classes

The expansion of middle classes across the emerging world poses many tricky political questions, including that of apportioning credit for this success between state-led programs of redistribution (including affirmative action to remedy past exclusions) and market-driven economic reforms.

In Brazil and South Africa, market and state have both played roles. In both countries, long-term ruling parties have been in a position to claim the lion’s share of credit for the state. They have no room to be complacent, however. Beginning in 2013, several democracies across the emerging world were shaken by angry protests that were remarkable for their size and suddenness. What shook the governments most was that the people driving the protests were mainly the new middle classes, the beneficiaries of the economic growth and the government policies that had lifted them out of poverty.

Far from passively and gratefully enjoying their new status, however, citizens in Brazil, India, and elsewhere took to the streets to express their frustration with corruption, rising prices, poor services, and other grievances, and to demand more accountable government. This was a wake-up call to governments in several countries—most of which had been in power for multiple terms—not to take this growing constituency of upwardly mobile, mainly urban voters for granted.

South Africa has had its share of protests, many of them violent, by the poor and marginalized, mainly about corruption and failures of service delivery. The new middle classes are more tightly bound into South Africa’s ruling alliance, however, that those of other countries. Their militancy is more likely to be expressed through lobbying within it for increased affirmative action and empowerment policies as well as by organizing strikes and other forms of activism by public sector unions.

This spirit of challenge was carried over into the Brazilian and South African general elections of 2014, though without decisive result. Incumbent President Rousseff barely scraped home in Brazil, while in South Africa, the ANC’s massive majority was slightly dented nationally and more significantly impaired in the country’s main cities. However, such defection from the ANC as there was by different levels of middle class voters has proved difficult to interpret. It seems likely that such switched votes were shared between the liberal Democratic Alliance (DA) and the newly-founded, radical, populist, nationalist Economic Freedom Fighters (EFF)—a sign of dissatisfaction among the new middle class citizens, but not of organization.

In contrast, the Bharatiya Janata Party (BJP) won a landslide victory in the Indian election in 2014, and secured the first parliamentary majority by a single party in the lower house, the Lhok Sabha, since 1984. The party, which ran on an explicitly market-oriented, jobs, growth, and good governance platform routed the Indian National Congress, which had been in power since 2004. In contrast to the BJP, Congress had run an election campaign focused on expanded entitlements. There was a swing towards the BJP among all classes in India: just under 50 percent of the middle class voted for the BJP and over 50 percent of the upper class.

People who are at the middle of developed and developing countries’ income distributions may experience radically different living circumstances according to which they belong to, which makes comparisons and generalizations difficult. The middle classes of the U.S. and Europe may be “stressed” or “struggling”, but the economic hazards and deficits of good public services experienced by the “fragile” middle classes of Latin America and Africa, who risk relapsing into poverty, are of a different order.

What is less well understood is that generalizations are as difficult to make across emerging economies as they are between emerging and advanced ones. This means that there is no reliable template of the implications for democracy and economic growth of the expansion of middle classes in (relatively) fast growing middle-income countries, never mind in the developing world as a whole.

South Africa provides a good example of this.

A Militant Middle Class

Growth in South Africa’s new middle class has been driven very largely (but not exclusively) by expansion in numbers of public servants and their ability in recent years to achieve above-inflation wage increases unrelated to productivity.

In short, South Africa’s public servants are numerous and comparatively well remunerated. This is largely because they are highly unionized and trade unions wield political power quite disproportionate to their numbers in the population by virtue of the main trade union federation, the Congress of South African Trade Unions (Cosatu), being embedded in the ruling ANC Alliance.

In 2013, 1.25 million people worked for national and provincial governments. This was a 25 percent increase over the 2005 figure, although to some extent this represented a recovery after job losses in the period of fiscal retrenchment between 1996 and 2000. The increase was also due to the fiscal space allowed by a period of sustained economic growth between 2000 and 2009. If employees of municipal government and state-owned enterprises are added, the figure is 1.96 million, representing about one in seven of South Africans in formal employment (13.7 million).

The public sector wage bill is the largest component of government expenditure. In the 2014–5 budget, R450 billion was earmarked for the wage bill, 36 percent of the 1.25 trillion budget. This was an improvement on the 40 percent in the 2013 budget and 45 percent in the 2011 budget, indicating the importance of a three-year wage deal, concluded in 2012, in controlling public sector remuneration.

In its 2015 Budget Review, the National Treasury (the Ministry of Finance) noted that “most” public servants were in the top 30 percent of earners nationally. Cosatu’s own figures in 2013 revealed that over half its members earned more than $500 a month, which in a country where nearly 40 percent of the potential labor force is unemployed, or has left the labor market in discouragement, is a comparatively substantial salary.

Take schoolteachers, for example. In 2011 the National Planning Commission (the body responsible for the government’s flagship National Development Plan) reported that South African teachers are, in terms of purchasing parity, among the highest paid in the world. Over 80 percent of South Africa’s 425,000 teachers and lecturers belong to trade unions: 240,000 of them belong to the Cosatu-affiliated South African Democratic Teachers Union (SADTU). SADTU is the biggest public sector union in the federation, which has become largely dominated by public sector unions, whose members are middle class by any of the definitions in common usage. In 2014–15, the education budget accounted for 20 percent of government expenditure: salaries, the overwhelming amount for teachers, take up 78 percent of this expenditure.

Rating agencies and international financial institutions have identified the expanding public sector wage bill as the greatest threat to the country’s fiscal stability. Negotiations began in late 2014 for an agreement to replace the 2012 deal, which has now lapsed. The unions’ initial demand was for an increase of 15 percent (three times the current inflation rate) for a one year deal and a more than tripling of the housing subsidy, which helps public servants to buy homes—a typical South African middle class benefit. The government offered 5 percent in each of three years.

Over six months of standoff followed during which it became clear that a settlement substantially above inflation for only one year could trigger a downgrading of South Africa’s sovereign debt to junk status. The government’s stance was that any such settlement would be paid for by shrinking the size of the public service. In the end, the public servants settled for 7 percent in the first year of a three-year settlement, inflation plus 1 percent in the two subsequent years and a 30 percent increase in housing subsidy. In 2007 and 2010 public servants went on strike for more than three weeks in each case. Strike action was avoided this year, possibly due to the unions’ awareness of the macroeconomic consequences. However the combination of wildly unrealistic militancy followed by acceptance of much more modest gains, without any concessions to productivity typifies the instability of “middle class” industrial relations in South Africa.

South Africa provides an unusually good example of how diverse middle classes can be and how varied their political roles are in a democracy. In each of the three countries described here, new middle classes have made it plain that they cannot be taken for granted by governments—no matter how much these rulers claim that their policies have legislated these classes into existence—nor do they make generalizations about democracy, growth, and middle classes easy to draw up.

One conclusion that the South African example does invite, however, is that middle-class growth too heavily biased toward the public sector is dangerous. This in turn highlights the importance of structural reforms, which all three of these developing democracies neglected in their years of (relatively) high growth. It is these economic reforms that will encourage the growth of a more independent, less state-oriented, more entrepreneurial middle class that is less of a special interest and more of a force for accountability.

For this to happen, all three countries now need a second wave of remarkably similar and bold reforms: a deepening of democracy, transparency, and accountability; further market liberalization; a more competent state with a positive attitude toward business; and a new approach to expanding opportunities for the poor. These policies will return a higher, more inclusive growth and ensure political stability, both greater achievements to boast about even than an expanding middle class.




PODCAST: Why South Africa must chase “jobs” instead of “decent jobs” | 702

The Money Show presenter Bruce Whitfield interviewed Ann Bernstein, Executive Director at the Centre for Enterprise and Development, who argues there are many good reasons why South Africa should pursue jobs, as opposed to decent jobs.

  • — South Africa has a crisis of unemployment. Mass unemployment requires a new approach.
  • — We need jobs for the workforce we actually have in the country; not some ideal highly skilled workforce we would like to have.
  • — For almost 20 years policy makers have been driven by a set of ideas that are completely unsuited to South African conditions.
  • — It’s hard to think of any country (other than oil rich states) that have industrialised, got rid of mass poverty and built middle class societies without going through a phase of low level, low wage employment for millions.
  • — The public sector is creating low skill, low wage jobs in the Public Works Programme. Wy do we not create the environment for the private sector to do this?
  • — A job is far better than being unemployed.

Read more at 702.co.za.

 




Cities and the economy: Heartbeats of growth | Financial Mail

In Financial Mail’s cover story, CDE says South Africa needs to place cities at the heart of the national economic growth and jobs debate

“In SA metropolitan areas as merely one of a long list of priorities. We need to place cities at the heart of the national economic growth and jobs debate, and this has consequences,” says Bernstein.

Read the article online here.




Op-ed Crisis demands we ditch our aversion to lowly paid jobs

BY ANN BERNSTEIN, 30 June 2015. Originally published in Business Day. Read this article on BDLive.

IT is time SA had a realistic jobs strategy with the potential to create millions of new jobs for the workforce we actually have. The roots of SA’s overlapping economic, social and political crises can be found in the failure of our economy to create jobs. It is time to stop the wishful thinking and grand but empty promises. SA needs to make some bold new choices and change course.

By some measures, SA’s unemployment crisis is the deepest in the world: in a country of about 30-million working-age adults, about 7.3-million people are unemployed.

SA is exceptionally bad at creating jobs. There is virtually no other country in the world that has anything like as few adults in productive employment or self-employment as SA does. The norm is for about 60% of adults to be employed in most developing countries (Cambodia, Mexico, India, Poland, Thailand). In SA, it is a little more than 40%.

The implications of this are devastating. SA’s mass unemployment is the key cause of poverty and inequality, contributing immeasurably to social dysfunction and political instability. Worst of all, unemployment is a terrible waste of human potential and an assault on human dignity. Almost every unemployed person should be doing remunerated work that improves their lives and develops the country.

There is nothing inevitable about SA’s scandalously high unemployment rate. While it is true SA must deal with the unique and terrible legacy of apartheid, we could be doing considerably better. One reason for the unemployment crisis is that policy makers have been driven by a set of ideas about employment and the labour market that are completely unsuited to the challenges we face. In essence, SA has chosen an approach to employment that says it will accept only jobs that are “decent”. In other words, all South African employees must receive relatively high minimum wages, enjoy considerable legal protection from dismissal and enjoy a high level of basic conditions of employment. Jobs that do not meet these requirements are not the kind of jobs employers should be allowed to offer, and not the kind of jobs the unemployed should be allowed to accept.

In practice, what this means is labour market policy has prevented the creation of the kinds of jobs that were the first point of entry for unskilled workers into modernising economies in the rest of the developing world. These jobs — mainly in light manufacturing and assembly as well as low-end services — represent a real step forward for hundreds of millions of workers in the developing world (think Hong Kong 50 years ago, Vietnam, Thailand, Malaysia and, of course, China). But these kinds of jobs are deemed by policy makers as insufficiently “decent”.

This aversion is disastrous for unskilled work seekers, particularly those who lack experience. It is also in direct contravention of the advice of many international experts. Time and again these experts have said SA must create jobs for the workforce that we actually have and not the workforce policy makers wish we had. Creating the kinds of jobs that could be offered to the undereducated and inexperienced workers who are unemployed is a far more plausible development strategy than one that seeks to create jobs for the workforce that policy makers hope to create in time.

Compared with the alternatives they actually have (unemployment, rural or urban misery and hopelessness, dependence long into adulthood on support from parents and grandparents), working in a factory for low wages and often long hours would be attractive to many hundreds of thousands of people. And these basic jobs are not an endpoint, they can lead — as they have in almost every other country — to better jobs in time.

For those who have them, there are big advantages to having a “decent” job. But the cost of setting high minimum standards all employers must meet is that very few jobs are created. The key questions advocates of the “decent work” agenda fail to tackle include: what do they offer all those people whose skills levels are too low to have any real prospect of securing a “decent job”? Where should they go? To whom should they turn? What do we offer them today and tomorrow if our policy is to prevent low-skill and inevitably low-wage jobs from being created? Why do we want those jobs to go to other countries? For many years now, all we have offered is growing unemployment, exclusion from the modern economy, and no way to find a ladder into work and all the learning and personal self-worth benefits of regular employment.

Ironically, given the supposed sanctity of the “decent work” agenda, there is one area in which the government exempts itself from some of its more aspirational goals — and boasts about doing so.

The Expanded Public Works Programme is the main driver behind the government’s plan to offer 6-million “work opportunities” between last year and 2019. The programme offers only short-term, contractor work, with a minimum wage of less than R80 a day. The jobs offer little training and no opportunities to progress. And, as many consist of little more than picking up litter or waving red flags at passing motorists, they’re not exactly dignity enhancing. Why is it acceptable for the state to employ people on these terms but not for private employers to do so?

The kinds of jobs private sector employers would create — if the environment were right — are almost certainly better than those that the government boasts about in the Expanded Public Works Programme. The experience of almost every country that has ever emerged from poverty has shown it is these kinds of jobs that help put a society and millions of poorer people on the escalator to modernity.

It would be unprecedented for a country to move from mass unemployment to seeing millions of unskilled, inexperienced workers entering global supply chains at a position of their choosing.

Ever since the 18th century, newly industrialising countries, from the UK and Sweden in the past to Vietnam and Bangladesh today, have added most jobs, initially, at the bottom of the value chain, not the top.

SA’s approach has resulted in the worst possible option: mass unemployment. It is time to acknowledge these policies have failed. Sipho Pityana, former labour and foreign affairs director-general and now a leading businessman, says: “SA is an economy in deep trouble … (the) transformation project has become increasingly superficial and separated from the growth imperative we so desperately need … we need to start a proper and honest conversation.”

One place to start that honest conversation is around our approach to mass unemployment. If you are truly interested in broad-based black economic empowerment, getting a job is the most effective and quickest form of empowerment there is.

• Bernstein is executive director of the Centre for Development and Enterprise and author of the award-winning book, The Case for Business in Developing Economies.




Business and cities: The magic of interaction |Financial Mail

CDE hosted a public conversation featuring Harvard economist Ed Glaeser, he addressed cities in the developing world, the challenges and possibilities, and how urban cities can provide the kind of inclusive growth South Africa needs.

He also touched on the following topics: entrepreneurialism, innovation, spacial density and productivity in cities.

Speakers: Ed GlaeserAnn Bernstein, Sithole Mbanga. 

“A city’s success is not dependent on how shiny its skyline is but on how productive and happy its inhabitants are,” says Glaeser.”

Read the article online here.




SPECIAL ECONOMIC ZONES: Proof of the pudding | Financial Mail

The Financial Mail quotes CDE’s 2012 study on Special Economic Zones in their cover story on SEZs.

“[CDE] found in a 2012 report that 3000 SEZs in 135 countries accounted for a high percentage of foreign direct investment and were a significant source of global manufacturing exports.

But the report also says that businesses and entrepreneurs need to be involved in designing and running SEZs.

“It’s vital that the structures that will govern SEZs have strong representation from small and medium-sized businesses and from potential new investors,” it says.”

Read more.




Media release: Raising South Africa’s “Speed Limit”

9 December 2014

This release is based on CDE’s report RICARDO HAUSMANN: RAISING SOUTH AFRICA’S ‘SPEED LIMIT’

Low levels of labour participation, contracting export sectors, and stagnant manufacturing prevent South Africa from ‘raising its economic speed limit,’ according to Professor Ricardo Hausmann.

If South Africa wants to create opportunities for the poor he said, it has to start by raising employment levels nearer to those achieved in Latin America. A similar labour force employment ratio would have 66% more people working in South Africa today. The country also needs to overcome its skill constraints by encouraging immigration.

These were some of the messages Professor Hausmann delivered during a recent return to South Africa, at an event hosted by the Centre for Development and Enterprise (CDE). Professor Hausmann, a former Venezuelan minister of planning and now director of Harvard’s Centre for International Development, chaired the International Panel on the Accelerated and Shared Growth Initiative that advised the South African government between 2004 and 2008.

CDE has released a report summarising Professor Hausmann’s observations and advice, much of which echo positions set out in recent CDE reports. These include Jobs for Young people: Is a wage subsidy a good idea? which called for a youth wage subsidy, and Skills, Growth, and Borders: Managing migration in South Africa’s national interest which recommended an easing of immigration restrictions to attract skilled migrants. These, and other policy publications can be found on CDE’s website, www.cde.org.za

Professor Hausmann called for a number of critical reforms in government’s approach to unemployed young people, black economic empowerment (BEE) and a unified national narrative. He also lamented a costly focus on mineral beneficiation, which prevents policy makers from identifying other developmental opportunities.

Having argued for a youth wage subsidy in 2008 he was gratified to see South Africa had adopted the Employment Tax Incentive, but found it difficult to understand why it had taken such a long time to pass. He suggested that our politics is not sufficiently competitive for those who represent the real interests of young unemployed people to have a significant impact.

While acknowledging the need for BEE he said that current BEE laws were hampering the creation of new companies, and retarding the growth of existing ones. He argued that the BEE scorecards should be rebalanced, and rather reward firms which created jobs and opportunities which would begin to make inroads into South Africa’s employment crisis.

He recommended that rather than the tightening of immigration laws, ‘making bad policy even worse,’ South Africa should urgently loosen its immigration policy. He noted that successful countries were those that welcomed immigrants.

He concluded by saying that he still believed that South Africa could reach its full economic potential, and reduce poverty, inequality, and unemployment, but that this would require a concerted co-ordinated effort by all sectors of South African society. He cited the 2010 Football World Cup as a successful example, but warned that without improving capacity and levels of trust between different parts of government and the private sector structural transformation will be elusive.




Cities can curb youth unemployment

11 March2014

 

This release is based on CDE’s report Cities of Hope: Young people and opportunity in SA’s cities. Read the report and executive summary here.

South Africa’s ambivalence about urbanisation will undermine its plans to create economic opportunities for young people, says Ann Bernstein, Executive Director at the Centre for Development and Enterprise (CDE).

Commenting on the latest CDE report titled Cities of Hope: Young people and opportunity in SA’s cities, Ms Bernstein said cities are where our economic future will be decided. “We need competitive, well run cities in which to do business as this will ensure that large numbers of young people can find work, start businesses and improve the quality of their lives.”

“South Africa,” she said, “is relatively under-urbanised. About 60% of people live in urban areas, many of which are small by international standards. Compare this to Brazil, for example, where nearly 90% of people are urbanised, and many live in very large cities.”

CDE estimates that there are about 32 million South Africans who are urban, of whom 12,5 million are between 15 and 34. While getting a job is easier in larger cities than elsewhere in the country, 35% of young people in South Africa’s largest cities are unemployed (compared to nearly 45% in the rural areas).

Ms Bernstein says, “Well-managed cities, with competitive business environments are by far the most effective platform for development that South Africa is likely to find.” This is something that policy-makers don’t appreciate sufficiently. Well-run, opportunity rich, prosperous and expanding cities could play an enormous and vital role in resolving the lack of jobs and opportunities for young people.

CDE’s report argues that cities are critical to “the miracle of productivity”, which was made possible by the scale of cities’ economies and the way that allowed firms and workers to specialise.

“For thousands of years, human labour was worth about $2 a day. Today, scale and specialisation mean that in some places, human labour generates hundreds of dollars a day in value.” This is only possible because of the increased size and density of the world’s cities.

CDE argues that despite the role played by cities in fostering growth, South African policy-makers remain ambivalent about urbanisation.

“The ANC’s manifesto prioritises rural development and aspects of housing policy, but it fails to devote equivalent attention to the importance of good urban management, the opportunities forSouth Africa if our urbanisation process was better managed and the potential that a focus on getting our cities working better could play in generating faster economic growth.”

South Africa’s economic growth is disproportionately generated in the biggest cities especially in its largest metros.

“The largest metros generate 59% of the country’s economic output but are home to only 37% of its population; between 1996 and 2011, economic growth was faster in the big cities than it was in the rest of the country,” says Bernstein.

“Our policy-makers should be doing everything they can not only to reverse the anti-urban biases of apartheid, but to ensure more effective urban management and increased urbanisation,” says Ms Bernstein.

“South Africa’s future is overwhelmingly urban, and city competitiveness and vitality must be seen as key to the country’s prospects and performance. The big cities need the powers and institutional capacity to build competitive business environments. One of the most important aspect of this is the quality of the workforce, so cities need to be demanding better education systems and lobbying for more education and training opportunities through markets, entrepreneurs and companies.”
ENDS




Media release: South Africa desperately needs higher economic growth

This media release is based on a report by the CDE: “GROWTH IN A TIME OF UNCERTAINTY: Does South Africa have a growth plan?”. Read the report or executive summary here.

Despite near universal agreement that economic growth is central to resolving the country’s most pressing challenges, South Africa’s attitude to growth continues to be ambiguous and ambivalent.

This is according to Ann Bernstein, Executive Director at the Centre for Development and Enterprise (CDE).

Commenting on the latest CDE report, Growth in a time of uncertainty:  Does South Africa have a growth plan?, Ms Bernstein noted that South Africa needed to take urgent action on some of the “tough choices” facing the economy.

“What kind of economy can South Africa reasonably expect to build? This is a question that ought to be at the centre of the debate about economic policy,” says Ms Bernstein.

A key choice, she says, relates to low-skill, labour-intensive industries which, if they were to flourish, would enable rapid growth in employment.

“Policy-makers have accepted too easily the argument that South Africa cannot compete for labour-intensive industries. We think much more should be done to test this conclusion. In the meantime, the onus ought to be on those who say this to explain how we will ever provide jobs for millions of unskilled young people without expanding labour intensive manufacturing,” Ms Bernstein notes.

Another issue requiring more open debate relates to the respective roles of the state and the private sector.

“Private sector involvement in the delivery of infrastructure, education, healthcare and much more has been critical to raising living standards in developing countries across the world,” said Antony Altbeker, CDE’s director of research. “The need for this in South Africa is increasingly obvious.”

The third area in which policy clarity is needed is urbanisation, which Ms Bernstein notes has been under-emphasised by South Africa’s policy-makers.

“Successful national development requires increased urbanisation. Cities’ economies are so much more productive than those of rural areas. South Africa needs to embrace this reality.”

“Of course the country needs a rural strategy,” says Bernstein, “but the future of South Africa is urban and the relationship between effective urbanisation and economic growth is very strong. We are holding back growth with our ambivalent attitude to urbanisation.”

At the centre of challenges facing government are the considerable differences between its three key economic strategy documents and the departments they originate from—the economic development department’s New Growth Path (NGP), the department of trade and industry’s Industrial Policy Action Plan (IPAP), and the national planning commission’s National Development Plan (NDP).

While all three documents emphasise the importance of employment creation, they offer conflicting assessments of what is obstructing employment growth; what kinds of new jobs could be created; in what sectors and at what pace.

“On the one hand, government has repeatedly proclaimed a desire to see the economy grow more quickly; on the other, it has emphasised policy initiatives that undermine growth,” Ms Bernstein explains.

Without a push for more open, reasoned debate and the resolution of some fundamental issues, South Africa will fail to achieve higher growth and significantly more employment, she emphasises.

“Achieving higher growth in South Africa is urgently necessary. Making sure that this growth results in millions of new jobs is equally important. The country needs to move beyond its present impasse and make the ‘tough choices’ to enable faster and more labour intensive growth,” Ms Bernstein concludes.

ENDS




Op-ed: SA needs to facilitate growth in labour-intensive industry

27 November 2013, Ann Bernstein and Antony Altbeker for Business Day.

Read the op-ed on BDLive.

 

This article is based on a report by the CDE: “GROWTH IN A TIME OF UNCERTAINTY: Does South Africa have a growth plan?”. Read the report or executive summary here and read the press release here.

Business Day - SA needs to facilitate growth

BUSINESS DAY: The country’s economic policy debate is a morass of conflicting views and contending ideologies. But one area of consensus is that faster economic growth is needed if we are to address our many social and economic challenges. The power of sustained economic growth to transform a society is well illustrated by the example of India, where a dramatic acceleration of growth between 1990 and 2010 pushed about 200-million people above the poverty line.

Far from being a story of the benefits of economic growth “trickling down”, India’s experience demonstrates that growth is the consequence of people pulling themselves up out of poverty. This became possible as economic reforms made new kinds of economic activity viable, increasing incomes and allowing people to move into higher productivity activities.

In addition, faster economic growth generated the expanded tax revenues that were used for poverty alleviation initiatives such as the well-known rural employment guarantee scheme.

South Africa has had some experience of the power of economic growth. Between the start of 2003 and the end of 2008, South Africa’s growth averaged 5% a year, in the process adding 2-million net new jobs. Over the same period, South Africa was able to fund the rapid expansion of social grants through more tax revenues.

If the importance of growth is widely recognised, there is considerable controversy about how faster growth is to be achieved.

Important differences concerning how South Africa should pursue economic growth can be found within the organisations that comprise the ruling alliance in the government and in the Cabinet. This is evident in the differences and contradictions that can be found in the government’s three main economic strategy documents and the departments that authored them.

These are the Department of Economic Development’s New Growth Path (NGP), the Department of Trade and Industry’s Industrial Policy Action Plan (Ipap) and the National Planning Commission’s National Development Plan (NDP). Apart from wide differences in the number and type of jobs the documents envisage being created, they offer contrasting diagnoses of the country’s challenges and different, often mutually exclusive, lists of policy recommendations.

There are real costs to South Africa from this lack of agreement on economic strategy that creates confusion for economic actors here and abroad, and generates uncertainty about what policies will be pursued and with what vigour. Further, this makes it difficult for those tasked with implementing policy to know what to do.

Should the labour market be liberalised and subsidies offered to firms that place matriculants in jobs as the NDP suggests? Or should regulations governing “labour-broking” be tightened as the NGP calls for? Is the financial services industry a constraint on growth as Ipap and the NGP say? Or is it one of the country’s comparative advantages as the NDP argues? A resolution is needed if the country is to lay the groundwork for more rapid growth.

In this regard, the NDP is the most plausible document on which to take the debate forward and build an agreed foundation. Its diagnoses of the country’s challenges are frank and accurate. Determined implementation of many of its key recommendations would go a long way to improve South Africa’s growth prospects.

This is not to say that the NDP is without weaknesses. These include the oft-noted concern that it is not really a plan, but reads instead as an analysis of various options. In addition, its length and breadth means that diverse emphases during implementation could lead to different policy mixes and outcomes. These concerns aside, if South Africa is to raise its growth rate, it will probably be because we have embraced many of the ideas inherent in the thrust of the NDP.

But trying to implement everything in the NDP at once is unlikely to be successful. We need, therefore, to prioritise. In doing so, there are three critical choices that need to be debated frankly and then resolved most urgently. These relate to the kind of growth South Africa needs, the degree to which our future should be urban and the role of the market in addressing the country’s many challenges.

One of the main reasons that estimates of the amount of growth needed by South Africa seem to be so high — about 6% a year for 20 years — is the assumption that future growth will look like past growth. But while the creation of a more conducive environment for all parts of the economy to grow much faster is something we should pursue, a focus on growing labour-intensive industries would mean that much less growth would be needed to achieve much higher levels of employment.

Importantly, this would also have more of an effect on poverty and inequality because rapid growth in labour-intensive industry is likely to create many more immediate opportunities for the poor than growth in the capital-and skill-intensive sectors that dominate our economy and which have driven recent growth.

Focusing on increased labour intensity at the scale required means dealing with the many challenges that the labour market regime creates, especially for employers of unskilled workers. As the NDP puts it, policymakers need to focus on “breaking the disincentive to hire young, unskilled work seekers by incentivising the employment of young, unskilled work seekers”.

Similarly, a genuine focus on growth would mean embracing urbanisation much more strongly than hitherto. The international experience is clear — successful developing countries are increasingly urban with effective urbanisation processes and well-managed cities. This success is based on the economies of agglomeration: increased density makes it easier and cheaper to produce goods and to get them to market while also increasing the sharing of ideas and the stimulation of innovation.

Finally, South Africa needs to resolve the fraught question of states and markets. Smart states are essential to the stories of the successful developing countries, but those successes would not have happened without strong, expanding and competitive private sectors in which new firms are created and inefficient ones are allowed to die.

Neither is this just a question of the private sector providing jobs and incomes. Across the world, individuals’ needs — including health, housing, electricity and education — are often better and more cheaply provided by firms rather than only the pubic service. South Africa needs to embrace the idea not just that firms create jobs, but that, in the right environment, markets and entrepreneurs can go a long way in helping to address social challenges too.

Ours is a small economy in an uncertain world and it therefore cannot completely control its destiny. The turbulence of the global economy means we need to ensure the environment for investment, risk-taking, and firm creation and expansion is highly competitive. South Africa needs to build a far more labour-intensive, increasingly urban growth path in which competition drives productivity. This will give it its best chance of dealing with mass poverty and unemployment.

The NDP points us in the right direction. Do we have the leadership to push through the decisions that have to be made?

Bernstein is executive director of the Centre for Development and Enterprise (CDE); Altbeker is its research director. This article is based on a new CDE report, Growth in a Time of Uncertainty: Does SA have a growth strategy?