At its height, the apartheid state spent nine times more on each white person than on each black person; today, the state spends twice as much per capita on blacks as on whites. Social grant beneficiaries are up from 2-million in 1999 to 14-million last year; 3-million RDP houses have been funded, 40% of schools offer free schooling (soon to be 60%), we have introduced subsidies for water, transport, electricity and land reform, to say nothing of our aggressive programmes of affirmative action and billions spent on black economic empowerment.
Despite all this, SA is no less unequal than in the early 1990s, and may even be more so. What should we make of this, and what does it mean for public policy?
Poverty and inequality are not identical. Reducing one may require very different interventions than reducing the other. Experience elsewhere, and SA’s own record of the past 15 years, all point to one overarching conclusion. The country will be better off pursuing a strategy that focuses on much higher economic growth — job- intensive and inclusive — that will lift millions out of poverty through employment.
Why do we argue for this choice? Insights gained from a series of important research papers and a recent workshop of about 50 decision makers include the following:
- The depth of poverty in SA is a major challenge with absolute deprivation blighting the lives of millions of South Africans. We have done far too little to address this over the past 15 years.
- Poverty cannot be reduced without high and sustained rates of economic growth. Faster economic growth is the only sustainable way of generating large numbers of jobs in a relatively short period. It also produces the resources that smart states can use to improve public services and infrastructure.
- A tension exists between steps needed to lift people out of poverty and those that reduce inequality. Rapid economic growth sometimes increases inequality in the short term, even as it lifts large numbers of people out of poverty. By contrast, attempts to address income inequality through public spending often negatively affect rates of growth. If redistributive spending diverts and reduces public and private expenditure on the infrastructure (social and physical) essential for higher growth, the growth rate will be lower than it could be. As a result, mass poverty may be alleviated more slowly.
- The South African state is already highly redistributive, more so than most developing countries. More than a quarter of SA’s residents receive social grants. Combined with high levels of public spending on education, healthcare and housing, SA may well have built the most redistributive state in the developing world. Despite this, we remain one of the world’s most unequal societies.
- One of the reasons for this failure is that public spending is often very inefficient. This mostly affects the poor, who are most dependent on effective public services. Moreover, state-driven redistribution programmes can create a culture of dependency. This is why many governments now introduce time limits to grants.
- Many current policies have actually deepened inequality. SA’s current growth path raises the returns for those with education and skills, and excludes those without them. The effects have been compounded by wage settlements that have widened the gap between the employed and the unemployed. Black economic empowerment has also helped to widen inequality, as has an ineffective skilled migration policy. Many policies help to ensure the incomes of black people in the professional and higher classes have risen faster than those of the poor.
- In order to address poverty and inequality, we need to improve our education and training systems. The dismal performance of the majority of schools traps millions of poorer children in a life of poverty. We also need to improve our training systems, including vocational training for those in school and those who have left school. Further education and training needs to be improved, and private sector training should be expanded.
- However, this will not reduce inequality in the short term. Educational reform will take time to have a meaningful effect on the structure of skills in the labour market, and even longer to affect levels of inequality. While their improved education will prepare younger workers for better-paying jobs, it will do nothing for the millions whose education has already been compromised.
- Faster and more job-intensive growth is SA’s best strategy for dealing with poverty. One of the consequences of long-term unemployment is declining employability, as the unemployed lose the skills and aptitudes needed for work. Given the weaknesses of our school system, many young people whose education was compromised have seen their employability decay further because they have not found employment in which to learn these skills. By contrast, job-intensive growth creates powerful self-reinforcing processes, as people acquire the skills and aptitudes that workplace experience delivers, making them more productive and more employable.
SA faces a difficult choice. We could choose to intensify existing redistributive policies via increased welfare spending, expanded public works programmes and more spending on the “social wage”. Properly implemented, this would make a marginal difference to poverty and inequality. Poorly implemented, the extra money would simply be captured by the non-poor — “tenderpreneurs”, public servants and others.
Increased spending on redistributive policies would also have adverse effects on our growth potential. Every rand spent on transfers is a rand not spent on fixing schools, building telecommunications and ports, and creating more efficient cities and towns. Increased redistributive spending would also deepen costly forms of dependency, and further restrict economic growth.
This approach traps the government in a never-ending spiral to expand redistribution even further — increasing the value of each grant, widening eligibility for grants, increasing the number of no-fee schools, higher subsidies for rising costs of electricity, housing, water, etc. The only way to pay for all this will be to raise taxes, which will further dampen growth prospects.
The current redistributive model is unsustainable. Instead, we should learn from the impressive performance of many countries in the developing world, and focus as single-mindedly as possible on adopting and implementing policies that will promote sustained economic growth.
A vital lesson can be learnt from Brazil, our longtime rival for the title of the world’s most unequal society.
In Brazil, rapid economic growth, combined with a modest increase in welfare expenditure, has dramatically reduced poverty — from nearly 30% of the population in the late 1990s to about 16% today — coupled with a fall in inequality.
The dirty secret about SA’s redistributive state is that more energy has gone into redistributing resources to people who are not poor than has gone into changing life chances for the poor. To reduce poverty, we need rapid economic growth. Only this has the capacity to address large-scale poverty and inequality.
Dramatically increased employment is the essence of broad-based empowerment.
This article is based on a CDE report, Poverty and Inequality: Facts, trends, and hard choices