Inclusion and growth can reinforce one another – South Africa’s false dilemma

What economic policies are pro-growth? In recent weeks, a heated debate has been raging in South Africa over the pros and cons of a basic income grant. Underlying this debate are some radically different views as to the relationship between growth and inclusion. The debate revolves less around whether accelerated growth is a necessary part of any hopeful way forward for South Africa – on that there is broad agreement –  and more around questions of what it will take to kickstart growth  and, indeed, whether growth plus the existing package of social policies can adequately address the challenge of inclusion.

Having spent the better part of four decades wrestling with this conundrum, I couldn’t resist adding my two-cents-worth to the debate,  in a piece published earlier this month in The Conversation.  This blog piece reproduces part of that piece – and also locates the argument in a broader context.

That growth and inclusion are in tension with one another is commonplace – but the tension plays out to an extreme extent in South Africa. In an April 2021 discussion of  economic policy in South Africa, Harvard University’s Dani Rodrik reflected on:

“…the inadequacy of prevailing economic ideas to effectively address the structural problems that the South African economy faces – a mismatch between what South Africa produces, and what the country’s factor endowments are.  South Africa’s production structure largely is biased towards skill-intensive sectors, while the labor force largely is unskilled…..”

“[A crucial challenge] is to stimulate labor-intensive production…..This is structural transformation in reverse – low-skill activities tend to be non-tradeable, and generally have lower total factor productivity… It requires an industrial policy that promotes productive employment of a very different kind,  the kinds of things we don’t normally associate with industrial competitiveness:  relatively low-productivity activities; small and medium enterprises;  perhaps informal activities that are mostly service-oriented.  This takes us into such new terrain that it is not entirely clear how to proceed….. we don’t know a lot about how to do it…..”.

Rodrik usefully locates South Africa’s challenge within the context of the contemporary globalized economy. However, the dilemma confronting South Africa hardly is new. As Jonny Steinberg put it in a recent article in Business Day:

“South Africa’s labour markets have been unable to provide work for the able-bodied for two generations now. There is no reason to believe they will provide work for all…..”

Three decades ago, I wrote a piece (the first in the World Bank’s informal working paper series on the South Africa economy) that laid out the dilemma, and explored the possibility of addressing it via the promotion of labor-intensive, light manufacturing. (Actually, my pre-occupation with the dilemma dates back to a  SALDRU working paper I wrote in 1981). As I put it the 1992 piece:

“South African manufacturing increasingly has failed to generate jobs, with virtually no increase in employment between 1976 and 1988.  This failure cannot simply be attributed to a poor overall growth performance….. Indeed, between 1976 and 1981 manufacturing growth was associated almost entirely with an increase in capital input, with the capital-labor ratio increasing by almost 75% and virtually no growth in employment….”

The working paper went on to propose:

“….  a strategy for fostering labor-intensive, export-oriented growth….[focused on]…. the upmarket segments of labor-demanding activities….. Policy initiatives may be an important source of encouragement for South Africa’s private sector to invest in the acquisition of competitive capability in labor-rather than capital-intensive sectors of industry.”

Those ideas failed to gain traction at the time I championed them – and indeed, as Rodrik implies, confront an even less propitious global environment in the 2020s. Steinberg describes vividly the contemporary challenge:

“We could go on pretending that we live in the 1960s, and that our welfare system really is for the frail. Or we could say the days of full employment are just around the corner. But that takes us into dubious ethical terrain. Like Vladimir and Estragon, we can keep waiting for Godot while generations of South Africans live and die.”

What, then, is to be done? As I explored in the article in The Conversation (and reproduce in what follows),  in South Africa’s current circumstances pro-inclusion policies may be necessary to kickstart growth.  Albert Hirschman’s classic analysis of  Latin America’s ‘changing tolerance for inequality’ lays out the logic:

““It can happen that society’s tolerance for increasing disparities may initially be substantial [for example, South Africa in the first fifteen years of democracy] post-1994…..] Tolerance for inequality  is extended in the expectation that eventually the disparities will narrow again. … Nonrealization of the expectation that my turn will soon come will at some point result in my ‘becoming furious’ that is, in my turning into an enemy of the established order……

Hirschman distinguished between:

“Two principal tasks or functions  [that] must be accomplished in the course of the growth process. The first is the unbalancing function, the entrepreneurial function, the accumulation function…… Increasing social and income inequalities are an important part of this picture.”

Once hope has curdled into anger and despair, renewing growth will depend on :

the ‘equlibrating’ distributive, or reform function… to correct some of these imbalances,  to improve the welfare and position of groups that have been neglected or squeezed, and at redistribution of wealth and income in general.”

Viewed from this perspective, employment subsidies, basic income grants and other social interventions to address poverty and improve prospects for upward mobility  all become part of an (extended) pro-growth policy.  These don’t come free. They  will require both a move away from pro-austerity fiscal policies, and (in time) some tax increases on higher-income earners  – with the latter dependent for their legitimacy  on the likely effectiveness with which the public sector implements the social agenda. (For more on this last,  see a second recent article in The Conversation – also elaborated in THIS upcoming companion blog piece).  

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