Inclusive growth and radical economic transformation have become contending ideas about SA’s future growth path. In a series of articles based on a new report entitled OPPORTUNITIES FIRST: A new lens for tackling poverty and inequality in middle-income democracies produced by the Centre for Development and Enterprise, ANN BERNSTEIN, CDE’s executive director, has made the case for a different way of thinking about the goal of development that gives considerable policy content to the slogan of inclusive growth. The final article in this series summarises the argument.
Read previous installments in the Centre for Development and Enterprise series here:
CDE’s Opportunities First: Don’t compensate the poor for their exclusion – focus on inclusion
CDE’s Opportunities First: How to achieve social justice through equality?
CDE’s Opportunities First: Jobs are the vehicle for posterity
CDE’s Opportunities First: The key to urban growth is creating cities of hope for the poor
CDE’s Opportunities First: Create an enabling environment for all entrepreneurs
Over the past six weeks, in a series of extracts from a new report by the Centre for Development and Enterprise, we have made the case for a new way of conceiving how policy-makers should think about the goals of development. In societies characterised by poverty, unemployment and inequality the CDE approach upholds the ideal of equality of opportunity while arguing that societies should emphasize a slightly different ambition. Proposing as a goal the fastest possible expansion of opportunities for the poor, we have argued that in an imperfect world, this is the best possible approach. Instead of programmes that ameliorate poverty we should focus more attention on eradicating it; focus less on inequality and more on how to expand dramatically the opportunities available to poor people.
The argument for focusing on the expansion of opportunities for the poor rests, ultimately, on pragmatic grounds. The pursuit of equality of wealth and income has historically led to very poor (and sometimes horrific) outcomes. Besides, from the point of view of long-term prosperity, it is undesirable because the structure of incentives created leads to much lower growth. For these reasons, some have proposed a goal of equality of opportunity (rather than of outcome). This ideal conforms with our deepest ideas about justice, but the practical challenges here are no less serious. The vast range of social, economic, political and cultural factors that shape access to opportunities, means that trying to equalise opportunity is at least as implausible a goal as the pursuit of equality itself, and may be even more unachievable.
It is self-evident that, just because neither full equality of income nor full equality of opportunity can be attained, it does not follow that societies should not seek to reduce inequalities in either sphere. And it is for this reason that the aim of accelerating the expansion of opportunities for the poor is proposed as a more coherent, practical and attainable goal than either of the alternatives.
Expanding opportunities for poor people as the key policy framework can be applied to a number of important areas of economic and social policy.
Let’s start with the pursuit of the fastest possible, most labour-intensive economic growth. Rapid employment growth – especially if the jobs are in the formal sector – is the critical vehicle for reducing the most powerful constraints on poor people’s opportunities. Job rich growth was the dynamic that explains the single most important fact about global development of the late 20th and early 21st centuries: the rapid decline in the proportion of the world’s people living in poverty. So rapid was this, that the Millennium Development Goal of halving poverty by 2015 that was set in 1990, was achieved five years early.
Impressive as this has been, far too many people still live in poverty. And far too many people live just above the poverty line, always at risk of slipping back. In seeking to deal with large scale poverty, governments often seek solutions that have the effect of compensating people for their exclusion rather than pushing for the labour-intensive economic growth that would include them. Redistributive interventions of this sort may ameliorate poverty, but do very little to empower individuals to move out of poverty. Doing that requires a relentless focus on expanding employment.
This dynamic is well-captured by the World Bank, which has argued that: “Jobs are the cornerstone of economic and social development. Indeed, development happens through jobs. People work their way out of poverty and hardship through better livelihoods. Economies grow as people get better at what they do, as they move from farms to firms, and as more productive jobs are created and less productive ones disappear. Societies flourish as jobs bring together people from different ethnic and social backgrounds, and nurture a sense of opportunity. Jobs are thus transformational – they can transform what we earn, what we do and even who we are.”
The importance of employment means that the principal goal of policy-makers in developing countries like South Africa should be to ensure that everyone who wants to work has the opportunity to do so. To do this, countries that want to grow quickly need to invest in building the right kinds of institutions, and must adopt the right kinds of policies so that firms thrive but are also forced to compete and therefore innovate. Countries also need to recognise a reality some may find unpalatable: that the jobs they need must be suited to the workforce they have today, not the highly skilled one they hope to have in the future.
In many countries, highly regulated labour markets make it difficult for the economy to generate a rapid expansion of formal sector jobs. Workers are pushed out of the labour market altogether or forced into the informal economy, where opportunities to get ahead are much more challenging. And, limiting the creation of low-skill, low-wage jobs harm poor people most: permitting low, entry-level wages is an important way to generate new opportunities, which then lead to improvements and progress towards ending poverty.
No-one thinks that “sweat shop” jobs ought to be the high point of developing countries’ ambitions. These jobs are low-skilled, low-waged and are sometimes offered in unsafe and unhygienic conditions. However, apart from finding oil, labour-intensive export-oriented activities – especially in manufacturing – are the one tried-and-true method for developing countries to escape poverty. They are the vehicle for prosperity, and the principal source of opportunities for hundreds of millions of people.
If formal sector jobs are the one key to opportunity expansion for the poor, the other is the building of cities that work much better for the poor. These goals are tightly wound together because, for obvious reasons, mass formal sector employment can only happen in large, dense human settlements, i.e. cities.
The link between prosperity and high levels of urbanisation is one of the strongest correlations in the social sciences, with the relationship rooted in the all but magical effect that dense agglomerations of firms, workers and consumers has on productivity. Historically, countries with higher levels of urbanisation have enjoyed greater prosperity.
There is, however, nothing inevitable about urbanisation and the achievement of greater prosperity. The existence and growth of poor megacities – urbanisation without industrialisation – has cast doubts on this relationship, especially for many cities in Africa. As Harvard’s Ed Glaeser puts it, the ‘demons of density must be dealt with: congestion, crime, disease, unaffordable land and housing prices’ if cities are to deliver on their enormous potential.
Part of the problem here is that there are too many “reluctant urbanisers” – governments, politicians and leaders from civil society who think that cities shouldn’t grow and that the poor should not urbanise. This is a huge mistake, and one that will be leave future generations much worse off than they might otherwise be. Much more sensible would be investment in urbanisation and urban growth. This requires cities that plan for expansion: addressing growing demands for infrastructure and services, planning ahead for incremental affordable housing settlements, schools and clinics, ensuring that the business environment in cities is attractive and secure, ensuring that the urban workforce has the desired mix of skills, and harnessing the technology needed to participate in the global economy. National governments need to recognise the importance of cities as well: investment decisions must take account of increased urbanisation, and national policy priorities need to catch up with the increasing reality of urban led societies.
Cities need to plan ahead especially with respect to delivery of basic services and infrastructure tailored to inevitable demand from firms and households. These pressing realities have profound implications for the national allocation of resources and incentives for cities to expand their economies.
The political implications are also profound: powers and revenue needs to be decentralised to increasingly important urban centres. Large cities need greater accountability and authority for many functions from transport to skills to labour markets. Investment in infrastructure including affordable public transport is vital for successful, cities of hope for the poor. Cities must be able to reap the benefits of growth as that will create the proper incentive structure needed to foster the pursuit of economic growth that is also more inclusive.
Pursuing policies that lead to accelerated employment growth in rapidly growing cities is a recipe for inclusion and developmental success. This should be coupled with an approach that places competitive firms at the centre of national development, operating in an environment where a capable state knows how to regulate and encourage the dynamism of markets. Together all of this could lead to a rapid expansion of opportunities for poor people enabling more and more people to move out of poverty and into a more middle-class life.
Improving the lives of the poor, and expanding dramatically the set of opportunities to which they have access – should be the core goal of a successful government. Anything else is a recipe for failure.