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?
- Ann Bernstein is executive director of the Centre for Development and Enterprise (CDE); Anthony 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? Read the report or executive summary here and read the press release here.