By Ebrahim-Khalil Hassen · 30 Jan 2014
“A rising tide lifts all boats.” This aphorism means that in a growing economy everyone benefits, and by extension that government’s role is to focus on the macroeconomic environment. Moreover, it suggests that distributional changes occur after economic growth. In the days following the end of the cold war, this was the conventional wisdom emerging from the World Economic Forum. Today, that singular faith in the power of economic growth is fraying, even at Davos.
Minister of Finance, Pravin Gordhan speaking at Davos last week argued that focusing on inclusive growth is more important today than simply the rate of economic growth. The problem for Minister Gordhan and the accompanying Ministers is that the National Development Plan (NDP), which was marketed at Davos, remains too focused on economic growth as an indicator and on the quantum of growth.
The NDP approach to questions of ownership is illustrative of the relationship between equity and growth. Page 114 of the NDP argues, “The long-term solution to skewed ownership and control is to grow the economy rapidly and focus on spreading opportunities to black people as it grows.” In other words, questions of equity are reliant on a growing economy.
This conception of equity following growth has deep roots in South Africa. One of the earliest incarnations of this idea is from the Mount Fluer Scenarios, which warned of an “Icarus” scenario, where a well-meaning democratic government spends irresponsibly and in the process bankrupts the country. The warning was heeded and successive government plans starting with GEAR (the growth, employment and redistribution macro-economic strategy) have had a singular commitment to growing the economy with the intent of creating more jobs, growing and reprioritising government spending as well as improving skewed economic ownership. The idea runs through GEAR and even finds a place in the putative social compacts reached in the Growth and Development Summit.
The NDP acknowledges the ambition in the target, noting that only 13 countries have grown at an average of 7% for 20 years. Importantly, the NDP requires this sort of quantum based on its models to reach its goals of 6% unemployment by 2030. Under conditions where growth is less robust, the goals of the plan are unlikely to be met. To support economic growth, it argues for an iterative process of addressing “binding constraints to industrial expansion, eliminating them, then advancing to the next round of constraints”.
There is nothing significantly new in this idea, as under various labels, this has been the strategy of our government for close on two decades.
Two decades of development data provide an important rebuttal to the idea of chasing economic growth targets. The headline statistics are well known with unemployment remaining high and inequality largely unchanged since the bad old days of apartheid. Digging deeper into the statistics paints an even more worrying picture. According to a recent “Development Indicators” report released by the Presidency, gains on reducing poverty may have been eroded in the wake of the global financial crises.
The official labour force data paints a deeply concerning picture in the rise of long-term unemployment over the last five years, and the trap faced by young people “not in employment, education or training” (NEET). Taken together, the impacts of reforms to stimulate the economy have failed to widen access to economic opportunities for the poor, even as delivery of housing, access to education and other areas of service delivery has increased.
The NDP is not blind to questions of equity and economic participation. However, its approach to small business development, government procurement systems, rural development and competition policy deserves careful scrutiny. The NDP demonstrates ambivalence to these instruments of economic inclusion. For instance, it argues that smaller businesses satisfying local demand could be a major source of employment, but than warns that these very activities could “dampen economic growth” due to low levels of productivity.
Similarly, it supports local procurement rules, but warns that this should not reinforce higher costs to purchasers such as government and business because it will “undermine growth and job creation”. The caveats raised in relation to small business and local procurement could be accounted for as simply careful policy making. However, it arguably suggests an incongruity with respect to the efficacy of the instruments proposed and definitely from the perspective of the NPC, implies tensions between these initiatives and economic growth.
Given the commitment to rapid economic growth since 1996, why have the anticipated rates of economic growth not emerged? Are the projections in the NDP likely to be realised?
The NDP argues that the nature of the social compact over two decades has benefited insiders, meaning organised business and organised labour. The NDP, seemingly drawing on the work of Jeremy Seekings and Nicoli Nattrass, argues for a social compact that has lower wages and more flexible labour markets at its core. It argues that this will require a social compact, which would be foundational to unleashing the job creating potential of small business. The linkage is important to note, greater growth and greater employment creation will occur only when a social compact that lowers wages is reached.
An alternative explanation to understanding moderate economic growth would be to draw the link to inequality and economic concentration. Equity in this view is directly linked to growth rates and importantly; as equity improves so will economic participation. In turn, more economic activity, especially in the productive sector, would expand wealth and create employment. This alternative perspective would however not have economic growth as an overarching goal, but rather view it as an outcome that is incidental to the process of development.
Potential goals in this perspective could include creating 25 000 opportunity based businesses annually for twenty years in South Africa or supporting asset equality through matched savings programmes for 80% of households living below the poverty line by 2030. The exact goals that link equity and economic growth are less important than their impact on allocating resources within government and in the rallying of support for an equity enhancing social compact. Crucially, it would be much easier to allocate resources for such equity-based goals as well as track performance.
In fact, within the NDP there are ideas that could be built into these equity goals, which have a greater likelihood of linking growth and equity. More to the point, they have a significantly better prospects of reaching lower unemployment, higher growth and reducing poverty than the current growth focussed approach of the NDP.
To be certain, equity enhancing growth is not an easy path to follow. It is for instance easier, as the NDP does, to support the building of dams to support new mining initiatives or to argue for greater loans and venture capital for small business. It is much more difficult to link dam building to small-scale farming and to link these farmers into value chains. Doubly so for financial support for small businesses, which would require significant restructuring of government budgets if there is any likelihood of the NDP reaching its target of 11 million jobs.
There is also what strategists refer to as the “insanity test”. The test is simply that doing the same thing over and over again and expecting a different result is not merely delusional, but insane. For two decades, as a society, we have placed our faith on macroeconomic fundamentals and tackling binding constraints to ramp up economic growth and in turn reduce unemployment, inequality and poverty. The NDP asks us to remain faithful to this course for another two decades. The emphasis remains on a tried and failed approach to economic growth. The drafters of the NDP, however, have the raw materials to shift our thinking from focussing on economic growth to focussing on economic democracy.
The NDP’s emphasis is on economic growth, and with it the hope that a rising tide will lift all boats. Within the NDP there are deeper and more important questions that become subordinate to the quest for economic growth. A more appropriate starting point would be to ask and answer questions such as, who owns the boats and who has none, how do we expand ownership of boats and run profitable businesses. The point being that to benefit from a rising tide, one needs to own a boat, to have a stake in the economy.
The Starting Point
In my view the starting point for everything economic is people. Without people there can be no economy of any kind. So we need to make the development of people our top priority, followed by the removal of any humanly introduced impediments to the economic activities of individuals. Individuals are after all the only economic agents who matter in any economy. The SA government has for the past 20 yeas largely failed in this regard. I think because at heart the leadership in the governing elite have no faith in the innate capacities of their fellows.