economic development human capital inequality

The private sector’s contribution to inclusive growth

IN RECENT weeks business, labour and the government have presented a united front to fight economic uncertainty and stagnation. Too many people are excluded from meaningful economic activity in SA, manifest in high levels of unemployment (catastrophic for the youth) and inequality.

The toll of exclusion is felt in many other economies across the world. International Monetary Fund economists Ravi Balakrishnan, Chad Steinberg and Murtaza Syed have found that even in Asia, economic growth is now accompanied by rising inequality. In addition, the higher the level of income inequality in a country, the less economic growth contributes to poverty reduction.

The nature of the economic bargain behind American success is also under threat. As many authors including Joseph Stiglitz and Rana Foroohar, have argued, capitalism seems to serve super-elites in a country that once prided itself as the land of opportunity.

The resounding response from mainstream economists has been a prescription of inclusive growth that benefits the poor as much as, if not more than, the wealthy. It is also becoming increasingly clear which government policies favour inclusion. Public investments in infrastructure, early childhood development, quality basic education, a sound social safety net and transparent institutions are likely to boost widespread productivity.

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Breaking the cycle of lost generations

IT WAS said of the class of 1976. It was said of the youth who came of age in the early 1990s, just before the dawn of democracy. Each generation was declared as “lost”.

Now, just more than two decades into democracy, another generation faces the grim prospects of unemployment and underemployment. It’s not difficult to understand how human potential was wasted under apartheid. That was the point: to create a marginal underclass to serve an elite.

But it is disheartening to see post-apartheid SA trapped in that toxic cycle of lost generations. Even the born-frees, who were cloaked with so much hope and expectation, have not managed to shake off this term. This is not to diminish the strides that have been made in the past 22 years. Yet, it is clear that the scale of the developmental deficit was underestimated and continues to be under-appreciated.

The dire statistics released by Statistics SA recently on the state of the youth (those between the ages of 15 and 34) challenge the policy approach taken by successive post-apartheid administrations. Further, they underline the true cost of corruption, weak governance and incompetent administration. Under the circumstances, every rand that is wasted is a rand too much.

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The war against inequality [audio]

You don’t have time to read? Listen to Trudi’s Business Day column here: SoundCloud link

An edited version of this column appears here.

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Fiscal policy with Ayabonga Cawe and Zwelinzima Vavi

Days before Finance Minister Nhlanhla Nene delivered the national budget, I spoke to Ayabonga Cawe of Rethink Africa and Dalberg; and Cosatu’s Zwelinzima Vavi on the state of fiscal policy. Some enduring insights about inequality, economic policy and the state of South Africa.

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Wealth Divide

Unedited version of my column in this week’s Business Report:

On my flight to India to attend the third BRICS competition conference held last week, I was struck by how our respective countries – Brazil, India, China, Russia and South Africa – have to grapple with the challenge of inequality.

The growth stories of Brazil, India and China in particular have captured investor imagination. However, the impressive rise of these economies has been accompanied by a rise in inequality. In Russia, the post-communism privatisation wave created oligarchs, who now face backlash and negative public sentiment. Though progressive policies have lifted many households out of poverty, large segments of Brazil’s population remains trapped in the favelas. The lower castes and the rural poor in India have not shared in the outsourced services boom that has powered that economy. China also suffers from a similar dynamic where large segments of the population have been excluded from export-led growth. South Africa remains one of the most unequal societies in the world, with racial and increasingly class tensions dominating economic policy discussions.

Inequality threatens the sustainability of economic growth because it generates tensions that may upset an already fragile political economy. Countries experiencing rapid but uneven growth face the risk of being stuck in a ‘middle income trap’; where popular protest rises, production is threatened and private investment slows down. Policymakers struggle to justify the market-oriented policies that led to the initial growth spurt to the poor and marginalised. Demands for more state-led and redistributive policies follow. Profits and executive salaries become easy targets for politicians striving to maintain their legitimacy. Investors became wary of the fraught political climate and seek market-friendly reassurances that policymakers find increasingly difficult to make in the face of popular discontent.

The immigration hall in Mumbai’s international airport provides a strange, inverted metaphor for inequality. The immigration hall divides into two wings, with long winding queues on both sides. But in the middle, there are two straight queues reserved for business and first class passengers.

Yet all is not as it seems. What one may imagine to be priority lines are serviced by two booths, whereas the winding masses have about ten booths on each wing. A small, slow-moving cluster of mostly westerners inches slowly towards the front of the room. I could be mistaken but I sense a mild air of amusement in the massive hall as the other passengers whizz past the befuddled group trapped between queue dividers. The authorities may have intended to provide a dedicated express service for the elite, but they simply have not backed up their intention with resources. My colleagues and I split into different queues. Suffice to say, the colleague who stuck to the business class ghetto missed her connecting flight to Delhi.

In the real world, skewed access to opportunity cripples individuals’ ability to function effectively. All our economic policies, including competition law enforcement and advocacy, have to contend with this challenge if they are to be relevant. Fortunately competition policy lends itself towards expanding opportunity because breaking up cartels, preventing anti-competitive mergers and challenging exclusionary behaviour are interventions that create the conditions for greater participation in the economy.

As Prime Minister Manmohan Singh of India emphasised in his speech at the BRICS competition conference, developing countries need to develop credible institutions for sustained and equitable growth. Competition authorities do so by maximising the beneficial effects of the market and ensuring that they deliver efficient outcomes.

In South Africa, competition legislation addresses inequality directly. The competition act aims to ensure that our markets are fair and efficient. Not only that, but the law goes on to state as its objectives the promotion of small businesses and also those owned by historically disadvantaged individuals. The preservation of employment is also a strong theme throughout the legislation. This is important as it has been shown that lack of access to job opportunities is one of the drivers of inequality in South Africa.

Various speakers at the BRICS conference commended the South African authorities for being sensitive to the challenge of inequality. Indeed, this can be seen in the way that the Commission selects cases, with priority given to sectors that poor households spend a high proportion of their income on, such as food. The focus on construction and input markets also means that sectors that affect industrial competitiveness, and thus manufacturing employment, can be rid of practises that increase barriers to entry and costs.

A prominent feature of Prime Minister’s Singh’s address touched on a certain type of inequality in the economy; that perpetuated by governments in the way they treat state-owned enterprises that compete against private companies. The preferential treatment of such entities is often seen as a way to facilitate development. However, the prime minister threw his intellectual support behind the concept of ‘competitive neutrality’ in the way that the state treats its assets in relation to other competitors.

Bemoaning a time when state-owned enterprises were sheltered from competition, the PM argued that the state should refrain from using its legislative and fiscal power to privilege such enterprises. Such preferences may lead to the exclusion and eventual exit of companies that are run on purely commercial lines, leading to loss of employment and dynamism in the market. The state-owned enterprises become like the business class line in Mumbai’s airport, slow-moving and stagnant despite their alleged privilege (or because of it).

As BRICS countries continue to face the challenges of economic growth and inequality, including those inequalities that emerge from state action itself, competition law and policy will play an important role in levelling the playing field.

Trudi Makhaya is an economist in the public service.

Image credit: Etienne Creux