Download Integrated social development as the accelerator of shared growth

Focus on key economic issues, no. 55 – March 2007
Integrated social development as the accelerator of shared growth
University of Pretoria
Integrated social development as the accelerator of shared growth
Executive summary
South Africa has embarked on an initiative to accelerate economic growth in support of shared
income (ASGI-SA), which succeeds the RDP and GEAR strategies. The latter policies, which
focussed on macroeconomic stabilisation and trade liberalisation, have contributed significantly in
improving the economic growth performance in South Africa over the past decade. The recent
momentum in GDP growth has been predominantly propelled by demand-side stimuli, like lower
interest rates, reduced tax rates and enhanced accessibility to credit and financial markets.
However, despite the increases in GDP growth rates, economic growth has proven to be
unsuccessful in making significant progress towards eradicating poverty by addressing the
unemployment, redistribution and associated socio-economic problems in the economy. Focus 55
builds a case for the persistent prevalence of structural rather than cyclical impediments to
employment and consequently shared output growth. Cyclical factors are contributing very little to
the current high and unresponsive rates of unemployment. The inability of output growth to translate
into significant employment creation and poverty reduction has created a dualistic economy. A
“second economy” has consequently emerged with distinctly different features, based on unstable
fundamentals and offering limited social protection to those forming part of this economy. The more
stable and robust first economy represents the basis of the “era of hope” with high levels of output
growth, low inflation and fiscal debt, buoyant financial markets and strong consumption spending.
However, the crumbling foundation, or second economy, with high and sticky unemployment,
unacceptable levels of extreme poverty associated with poor socio-economic conditions for the
larger part of the population, have all contributed to a poverty trap – a situation that requires
innovative and targeted external interventionist programmes. It is furthermore imperative that this
poverty trap is eliminated in an effort to unlock South Africa's ability to grow sustainably at levels of 6
per cent.
Policy making in South Africa has to find a new paradigm - one where employment creation and
resultant poverty alleviation is not merely accepted as a by-product of economic growth, but where
employment creation is viewed as a key accelerator of economic growth. Social development
targeted at mobilising and empowering the unemployed needs to constitute the backbone of any
growth, employment and redistribution policy. This calls for an integrated strategy on social
development to address the imbalances and structural impediments of the past facing the poverty
stricken communities. The focus here should be on designing and implementing policies that truly
empowers and mobilises this untapped potential of society towards spurring higher levels of future
economic growth rather than merely awarding handouts.
The innovative and skilful redesign of existing policies will significantly impact on the returns of social
spending on employment and growth. Focus provides empirical evidence that a 10 per cent
improvement in the socio-economic environment would increase South Africa's growth potential to
about 6.5 per cent, thereby generating sustainable levels of output and shared income growth.
These results clearly highlight the importance of job creation through socio-economic development
as a key accelerator of growth.
The proposed policy paradigm is based on an integrated national strategy for social development,
where growth initiatives focus more intensively on employment creation. This broad based approach
will ensure that any future accelerated income creation is truly “shared” by all levels of society. It also
represents the only way to eradicate the growth and poverty trap once and for all and to realise goals
envisaged in ASGI-SA .
Focus is compiled by
The Bureau for Economic Policy and Analysis
[BEPA] of the
Department of Economics
University of Pretoria
Compilers of this issue
HR Bohlmann, CB Du Toit, R Gupta & NJ Schoeman
Focus 55 is sponsored by the South African National
Government, Department of Social Development in terms of the
Charlotte Maxeke Collaboration in the Economics of Social
Protection.
The views expressed are those of the authors
and do not necessarily represent those of the
Department of Social Development
See back page
for sources of statistics, abbreviations, etc. used
The information contained in this publication may be reproduced
in whole or in part provided that acknowledgment is given to
BEPA: Focus on Key Economic Issues
Spending
1
Demand for
goods and
services
Imports
versus
1
income
Spending
No Domestic
production
Imports
Demand for
goods and
services
No
Exports
Balance of payments deficit
Exports < Imports
Exchange rate depreciation
STRUCTURAL SUPPLY / CAPACITY CONSTRAINTS
Low levels of
saving and
investment
Low living conditions
- Absolute poverty
- Inadequate health, nutrition,
housing and transport
- Poor education and social services
Inadequate skills
Low GDP growth and
limited employment
opportunities
Prices and Interest Rate
Demand > Supply
NO
EMPLOYMENT
No
Expansionary Monetary and/or Fiscal Policy
Demand-side Policy Intervention
Figure 1: A demand-side fuelled growth strategy
income
Domestic
production
Exports
Neutral balance of payments:
Exports = Imports
Neutral Exchange rate effect
Illegal immigrants
High labour supply
Discouraged
Low levels of
- Self-esteem
- Respect
- Recognition
Low income
Limited labour absorption
capacity
High unemployment
Neutral Price and Interest Rate effects:
Demand = Supply
EMPLOYMENT
High population
growth rates
Figure 2: The poverty trap
NO SUPPLY / CAPACITY CONSTRAINTS
Accelerated economic growth may not necessarily be
sustainable and translate into accelerated employment
Demand-side fiscal and monetary policy intervention aiming
at accelerating gross domestic output will be effective in an
economic environment without structural constraints
impeding the capacity of the economy to absorb everyone
willing and able to work. It will also serve to attract sufficient
investment capital. In an environment unfettered by
structural constraints, this course of action will achieve the
goal of higher economic growth without putting pressure on
the balance of payments, the exchange rate and domestic
inflation. Figure 1 shows that a demand-side based strategy,
such as the lowering of taxes and/or interest rates will cause
increased demand/spending assuming little or no capacity
constraints,which will translate into higher domestic
production and subsequent higher shared income for the
owners of domestic production factors (labour, capital and
land). However, in a scenario where the economy is faced
with structural supply-side constraints, domestic production
will fail to meet increased demand. In this case, accelerated
growth represented by increased domestic expenditure on
gross domestic product will not cause an equivalent
increase in employment and hence fail to have everyone
share in the higher income generated in the economy. The
lack of domestic production to meet the increased domestic
demand will merely be supplemented by increased imports,
which, in turn will impact negatively on the balance of
payments, the rand exchange rate and domestic inflation.
Unemployment in an environment subjected to
capacity constraints will generate a poverty trap
The limited capacity of an economy to absorb labour will
result in high and increasing levels of unemployment with
depressing socio-economic and growth implications. Figure
2 indicates that high and rising levels of unemployment will
cause a large portion of the population to be subjected to
low income levels and poverty, thereby limiting their access
to a range of economic and social services and which further
diminishes their chances to be absorbed into the economy.
The problem is further exacerbated by those who have
become discouraged and have lost faith in the ability of the
system to generate jobs, resulting in them remaining
unemployed “by choice”. In addition, low income and
poverty-stricken groups have little financial manoeuvrability
and make little to no contribution to savings, which in itself
hampers investment, output growth and employment. While
adverse socio-economic conditions contribute to the
creation of only a limited amount of job opportunities, a high
level of relatively unskilled labour supply, supplemented by
the high influx of illegal immigrants, further exacerbates the
unemployment problem. Unemployment and poverty
thereby becomes a self-fulfilling prophecy – unemployment
creates a poverty trap which requires innovative intervention
targeted at eliminating the significant structural
impediments.
South Africa's accelerated growth is diverging from its employment and development performance
There is a significant and sustained decrease in the employment rate as measured by the ratio of the total
number of employed people, formal and informal sectors, to the economically active population. The
declining trend in this ratio implies that the labour market has not sufficiently absorbed new job-market
entrants, causing growth in the economically active population to outstrip the amount of new jobs created,
resulting in increased unemployment. The most disconcerting about the overall employment rate is that
even though GDP growth rates have recently been on the increase as indicated by the trend GDP in figure
3(a), the trend employment rate is still declining. This negative relationship between GDP growth and the
employment rate suggests that the employment problem is not only a cyclical problem, but is structural in
nature.
Trend in GDP growth rate
Employment rate
Figure 3: South Africa’s growth-poverty performance
a) Growth-employment divergence
5
4.5
4
3.5
1
0.95
0.9
0.85
2
2.5
0.6
0.65
0.7
0.75
0.8
1.5
0.55
3
1
0.5
1970 72 74 76 78 80 82 84 86 88 90 92 94 96 98 2000 02 04
-60
-55
-50
-45
-40
-35
0
GDP (%) rank minus HDI rank (rhs)
HDI rank
0.5
b) Growth-development divergence
90
95
100
110
-65
105
115
-70
2005
120
2004
-75
2003
125
2002
-80
2001
130
2000
0.70
0.60
0.65
0.70
74
76
78
80
82
United
States
84
86
88
90
Morocco
92
94
Norway
Selected Gini indicies
United
Kingdom
0.40
0.35
0.30
60
50
40
30
20
Gini index
0
10
Percentage
72
Zambia
GDP rank minus HDI rank
0.65
70
Nigeria
0.45
0.55
a) Household income share
Figure 4: Lack of shared income and inequality
135
04
0.60
68
98 2000 02
0.50
(Expenditure exceeds income
Household expenditure / GDP due
to credit and remittances)
66
Wage income / GDP (Income due to economic activity only)
64
96
0.55
1960 62
0.50
0.45
0.40
0.35
0.30
South
Africa
b) Inequality: South Africa relative to other emerging economies
60
50
40
30
20
10
0
Employment rate
The problem is also evidenced by South Africa's unimpressive development performance. South Africa is
ranked 55th in the world with regard to GDP per capita. However, as indicated by figure 3(b), the country’s
overall development performance in the UNDP's Human Development Index is 66 positions lower at 121.
Even more alarming is the downward trend in South Africa's HDI ranking since 2000. This indicates that little
of the new wealth generated in the country contributes to the socio-economic development of the country's
poorest. South Africa's downward trend in its HDI ranking may be largely attributed to its poor health
performance, but other indicators such as education show no significant improvement over the last decade.
Whilst the rich are getting richer, the poor is caught in a poverty trap of which they are seemingly unable to
escape. This is also illustrated by the high level of income inequality in the country. A new approach to
achieving economic growth is required if South Africa are to reach its goal of halving poverty by 2014.
A lack of opportunity to participate in the accelerated economic activity has caused a lack of shared
income and has exacerbated the extend of inequality
Households have secured progressively less of the income generated in South Africa. Figure 4(a) shows
that the compensation of employees, or wage income, as a percentage of GDP has declined considerably in
recent years. This has happened despite relatively high GDP growth and consumer expenditure growth.
The relative strong growth in total household expenditure, whilst the compensation of employees has been
declining, further emphasises the demand-side driven nature of South Africa's growth policies. This
divergence can mainly be explained by credit to consumers, especially those in the growing middle income
class. Consumers presented with new opportunities to borrow large amounts of money often spend more
than they are able to repay, leading to a host of other socio-economic problems. In order to reduce poverty
and inequality more of this potentially productive part of the population needs to be empowered to contribute
to the economy, instead of being reliant on transfer payments from government or being lured into a false
sense of prosperity by unsustainable demand-side driven growth policies.
The decrease in household's income share is intensifying the already skewed distribution of income in
South Africa relative to other countries as shown in figure 4(b). The Gini index is a measure of the inequality
of income in a country. A value of zero would indicate perfect income equality with every individual sharing
equally to the income generated in the country. A value of one indicates perfect income inequality.
Therefore, a lower Gini index value indicates a better or more equal distribution of income. South Africa's
distribution of income is one of the major barriers to achieving a better life for all. According to the World
Bank, South Africa has a Gini index value of 0,58, which again highlights the challenge the country faces in
achieving a more equitable distribution of income and wealth. High levels of income inequality often lead to
social instability and economic inefficiency within a country. The poorest 40 per cent of South Africa's
population contributes very little to the GDP, and further highlights the need to mobilise and empower those
currently excluded from economic activity.
GDP percentage change
HDI rank
Percentage
Gini index
A large part of South Africa's potentially productive population is immobilised and incapacitated – a
number of structural rigidities prevent them from being employed or participating in any form of
income-generating economic activity
Structural unemployment may be crudely defined as that portion of unemployment that do not adjust with
changes in wage rates and economic activity, and may be measured in terms of the “non-accelerating wage rate
of unemployment” (NAWRU). Figure 5(a) demonstrates that the South African labour market has failed to
reverse the increasing unemployment trends – depicted here by a decline in the employment rate.
Figure 5(b) not only indicates that structural unemployment in South Africa has been upward trending since the
1970s and has reached levels of 25 per cent, but the larger part of the official rate of unemployment is structural
in nature – cyclical factors or the lack of sufficient GDP growth are contributing very little to the current high and
unresponsive rates of unemployment.
90
92
94
96
98
2000
02
04
The failure of output growth to translate into significant employment creation and poverty reduction has created
a dualistic economy – two “sub-economies” with opposing fundamentals, causing potentially for severe
instability. The stable and healthy “first economy” lays the foundation for an “era of hope” by exhibiting high
levels of output growth, low inflation and fiscal debt, buoyant financial markets and strong consumption
spending. However, the “second economy”, with high and sticky unemployment, unacceptable levels of
extreme poverty associated with poor socio-economic conditions for the larger part of the population demands
innovative and targeted external interventionist programmes.
88
Figure 5: Structural impediments: A socio-economic dimension
a) An unresponsive labour market
86
-5%
Trend GDP (rhs)
-2.5%
•
•
•
•
•
Lack of labour mobility, exacerbated by high and
increasing transport costs on the back of the rising
fuel prices and the lack of infrastructure maintenance
and development;
Little opportunities for the unemployed to learn-bydoing or on-the-job-training;
Prolonged periods of unemployment may lead to a
deterioration of skills and motivation of individual job
seekers;
Insufficient access to effective education and skills
development opportunities;
Mismatches between skills supplied and demanded;
Building human capacity inter alia means good quality education…
In Figure 6(a) a comparison is made of public expenditure on education as a
percentage of GDP and GDP per capita. The figure shows that expenditure on
education in South Africa compares favourably with that in other developing
countries included in the selection. Although not a perfect match, there seems
to be a correlation between per capita income and expenditure on education
with higher levels of income in those countries where more is spent on
education. However, Figure 6(b) shows that the quality of education as
reflected in differences in reading and mathematical skills differs substantially
between the various socio-economic groupings. Groupings at a lower level of
socio-economic status (groupings 1-3) perform much worse than those in the
highest status group (group 5). The figure indicates that the percentage of
pupils in 2000 with a mark above the SACMEQ (Southern and East African
Consortium for Monitoring Educational Quality) mean of 500 (see Van der
Berg, 7) ranges from an average of 14.3 per cent to 82.5 per cent in the case of
reading and from 16.8 to 76.4 per cent in the case of mathematics between the
various socio-economic status groups.
Figure 6: A socio-economic dimension: Human capital
development
7%
Egipt
Phillipines Nigeria
Public expenditure on Education (% of GDP)
GDP/capita US$ (2003)
$5 000
$6 000
$7 000
a) Income and expenditure on education trends: a country comparison
6%
5%
China
1%
2%
$0
$1 000
$2 000
$3 000
Brazil
$4 000
Argentina
4%
Chile
0%
3%
Mexico
South
Africa
Level 4
Level 5
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
b)Pupil performance across different levels of socio-economic status
Reading
90%
Maths
Level 3
Socio-economic status
Level 2
80%
Level 1
70%
60%
50%
40%
30%
20%
10%
0%
Per capita income (US$)
45%
20%
•
Lack of sufficient social support services, which
increase the demand for social security grants; etc.
Several explanations can be offered for this
increasing trend, which, to a large extent is the
inheritance of apartheid and relates to a lack of
human capital investment:
Real wage rate (rhs)
0.65%
Employment rate
0.6%
7.5%
84
0.85%
82
5%
80
0.8%
78
0%
76
2.5%
74
0.75%
72
0.7%
1970
b) Structural unemployment
45%
40%
35%
40%
35%
30%
Unemployment rate: official
Unemployment rate: expanded
Rate of structural unemployment
(NAWRU)
30%
20%
15%
25%
15%
5%
10%
1972 74 76 78 80 82 84 86 88 90 92 94 96 98 2000 02 04
10%
5%
Public expenditure on Education
Percentage with mark above 500
Percentage (employment)
Percentage
Percentage (Wage rate and GDP)
Physicians / 100 000
400
Figure 7: A socio-economic dimension: Health
a) Public health expenditure and the availability of doctors - a country comparison
Health expenditue as % of GDP (2002)
4.5%
300
3%
3.5%
4%
250
2.5%
350
No. of physicians/100 000
200
2%
Nigeria
150
Phillipines
1.5%
Egipt
100
China
1%
Brazil
0.5%
Argentina
0
Chile
50
Mexico
South
Africa
Dentists
Nurses
02
03
0.010%
0.015%
Expenditure as % of GDP
Doctors
01
b) Growth in the number of medical practitioners and nurses per 100 000 of the population
0.015%
0.010%
2000
0.005%
99
0.005%
98
0%
97
0%
96
-0.005%
95
-0.005%
94
-0.010%
93
-0.010%
92
-0.015%
1991
-0.015%
In Figure 11(a) - presented later in Focus 55 - it is shown that government expenditure on health as a
percentage of total expenditure remained fairly constant between 1983 and 2003 (9.4%) and Figure 7(a) shows
that the level of expenditure compares favourably with that in other countries at similar levels of development.
However, despite this tendency, the number of medical practitioners available per 100 000 of the population is
disproportionately lower. Also, Figure 7(b) shows a downward trend in the numbers of doctors, dentists and
nurses over the past 15 years. Given the prevalence of life threatening illnesses and the impact of these
illnesses on quality of life and labour productivity, this trend is a cause for concern.
While the percentage of government expenditure on health compares favourably with most other developing
countries, the availability of medical practitioners and nurses is a concern especially given the prevalence of
illnesses such as HIV (Aids), tuberculosis and malaria that affect labour productivity.
…as well as sufficient and quality health services…
Percentage growth
Burglary at
residential
premises
2003/04
Drug related
crime
Common
assault
0
50,000
100,000
150,000
200,000
250,000
300,000
Figure 8: Growth in selected criminal activities between
1994/95 and 2003/04
300,000
250,000
200,000
150,000
100,000
50,000
0
Common
robbery
Type of crime
1994/95
Despite figures released by the Commissioner of Police at the end of
September 2006 that indicate a marginal decline in some crime-related events,
the South African society is still subjected to rampant criminal activity. Of
particular concern is the high and increasing level of violent crime associated
with organised crime. Figure 8 shows that between 1994/95 and 2003/04,
common assault increased from approximately 200 000 cases to more than
270 000 cases while burglary at residential premises increased from about 230
000 to 300 000 cases. In a lead story in Business Day, one of South Africa's
leading entrepreneurs said that crime is beginning to affect business
negatively. This leads both directly and indirectly, to job losses and social
misery.
The weakening in the social welfare of a large part of the population and the
massive inflow of work seekers from neighbouring countries of which many live
in precarious conditions have contributed to an increase in various criminal
activities – a concern to investors and entrepreneurs.
…a stable and crime free environment…
Number of criminal activities
55%
50%
40%
30%
35%
55%
Means of access
b) Household access to piped water
60%
Type of dwelling
Non-formal
60%
50%
40%
30%
20%
50%
30%
40%
50%
60%
10%
0%
Other sources
Type of energy source
40%
20%
10%
0%
c) Energy: sources available to households
60%
20%
50%
40%
0%
10%
All Other
30%
Paraffin
20%
Electricity from mains
Figure 10(a) shows that of the estimated 12.2 million households in South Africa,
approximately one third still live in housing structures that can be described as “non-formal”.
Of the latter group 2.5 million households live in structures that can be described as “not
suitable for families”. Figure 10(b) indicates the means of access to household water. Piped
water inside the dwelling is only available to about 38 per cent of households while the rest
have to fetch water from community taps, boreholes, dams, etc. Electricity as energy source
is only available to close to 60 per cent of households (Figure 10(c)). The other 40 per cent
mainly use wood or paraffin.
Poverty reduction does not only mean the eradication of extreme poverty but also relative
poverty i.e. all the factors that prevent an individual from reaching his/her full potential to
contribute to the economy in a more meaningful way. The supply-side constraints severely
impeding the realisation of South Africa's true growth potential of the economy need to be
addressed. Factors such as inadequate transport infrastructure, housing, piped water,
electricity, etc. all impact on living conditions and as such negatively affect productivity and
access to available opportunities. Structural impediments in accessing these basic facilities
cause wider inequalities, further constraining not only human capacity building but also the
fundamental principle of equal opportunity.
…adequate infrastructure and support services…
0%
10%
Wood
30%
Piped in dwelling
80%
70%
60%
50%
40%
30%
20%
10%
0%
Figure 10: A socio-economic dimension: Infrastructure and support services
50%
35%
40%
Formal structures described as "houses"
Figure 9: A socio-economic dimension: Access to financial resources and markets
45%
% of unbanked adults
2006
35%
25%
Percentage
30%
25%
b) Access to financial markets
Access to a bank account
Debit/cheque card
Never banked before
Savings/transactions accounts
Funeral coverage
Credit cards
Pension fund
Short term policies
Mortgage bond
Mzansi account (low cost banking)
15%
80%
70%
60%
50%
40%
30%
20%
10%
0%
a) Housing infrastructure
% of banked adults
30%
a) Growth in access to financial markets (2004 - 2006)
55%
25%
45%
2005
20%
40%
10%
50%
5%
45%
2004
0%
…access to financial markets…
Those in the lower income groups have limited access to financial markets – a barrier that
prevents them from developing entrepreneurial skills and therefore from sharing in the wealth of
the economy. Numbers revealed by Finscope South Africa (Figure 9(a)) show that more than 48
per cent of the adult population in South Africa are not using any formal financial service but the
number has declined from more than 54 per cent in 2004. The number of banked adults increased
sharply from 2005 to 2006 (about 5 per cent) which mirrors the growth in consumer spending over
the past year. Of those using financial services provided by the formal financial sector, most use
saving/transaction accounts while a relatively large number also have funeral coverage (see
Figure 9(b). Only a limited number of adults use financial services such as insurance policies,
pension schemes and mortgage bonds. In October 2004 a special low cost banking scheme was
introduced (Mzansi), but its current membership is still limited to about 6 per cent of all adults. On
the question in the Finscope survey why people do not bank, most indicated that they simply
cannot afford it.
Thus, the poor community in South Africa is largely excluded from the country's relatively
sophisticated financial sector. For them to have access to financial intermediation, innovative
informal mechanisms will have to be devised in addition to the formal structures with
supplementary financial literacy programs. Microfinance institutions that provide basic credit,
saving and a range of financial services to the very poor such as transfer payments, insurance and
even pension schemes could be a powerful tool in reducing the poverty problem and allow those
who have been locked out of formal financing to be financially sustainable, provided that such
services are affordable.
Percentage
Percentage
Percentage
Percentage
Type of service
…and a comprehensive and targeted social security net
Figure 11(a) shows the composition of socio-economic expenditure as a percentage of
total government expenditure. Since the beginning of the nineties there has been a
marginal increase in the share of expenditure on education but a substantial increase
in social security (14.4 per cent in 2004 compared to only 6.3 per cent in 1990).
However, despite this increase, poverty as measured in terms of individuals eligible for
grants has also increased, which could be interpreted as an increase in poverty
amongst the poorest (Figure 11(b)). Attempts at reducing poverty through grants
exclusively, is overtly unsustainable and should be complemented by an extended and
comprehensive socio-economic agenda to develop and enhance human capacity.
When scrutinising the dependency on grants, growth in child support grants tops the
list of increases in grants, followed by foster care and care dependency. The actual
overall amounts spent on the above-stated grants, are however far below that of old
age pensions, disability and child support (R20 billion, R15 billion and R14.5 billion,
respectively).
2000
02
04
25%
30%
35%
40%
45%
50%
Figure 11: A socio-economic dimension: social security safety net
50%
a) Government socio-economic expenditure
45%
40%
35%
30%
25%
98
0%
Education
0%
5%
20%
20%
96
15%
94
15%
88
92
10%
86
90
Health
5%
1984
Housing and
Community Services
Social Security
10%
60%
50%
40%
30%
20%
10%
0%
Disability
Type of grant
Old age
Average annual growth in beneficiaries since 2001
Foster care
Child support
Total
60%
50%
40%
30%
20%
10%
0%
Average annual growth in social grants since 2001
Care
dependency
b) Growth in number of beneficiaries and real growth in social grants (2001-2005)
Percentage
Percentage
While accelerated demand-driven economic growth is not translating into significant
employment and poverty reduction (“well-being” of all), lack of shared well-being inhibits the
growth potential of the economy, thereby exacerbating the problem
In the preceding analysis it was shown that South Africa's higher economic growth rates have not been
effective in significantly lowering unemployment and poverty. Figure 12(a) depicts the flipside of the
“growth-to-employment” coin: unemployed South Africans do not share in the income generated by the
economy, caused by their inability to participate in significant income-generating economic activity. The
economy is therefore under utilising its labour resources – the high and sticky levels of unemployment
hamper South Africa's ability to grow sustainable at levels of 6 per cent.
Not
participating
in economic
activity
An analysis of South Africa's growth potential by Du Toit (2005) indicates that South Africa's growth
potential is limited to approximately 4 per cent. The implication thereof is that if actual GDP growth rates
exceed 4 per cent (figure 12(b)), that is, if actual output exceeds the potential of the economy, the
economy is “overheated” and production prices and wages will start rising. Given the subsequent
impact on consumer prices and the balance of payments, monetary policy will ultimately have to
intervene by deflating the economy through increased interest rates. A growth potential of 4 per cent
does not imply that the economy can indeed grow at levels exceeding this rate, but actual growth rates
in excess of 4 per cent will be unsustainable in the medium and longer run. If growth in “supply” through
employment, productivity and investment growth, does not meet the growth in “demand” mainly fuelled
by lower tax and interest rates, it will jeopardise the balance of payments position, destabilise the
exchange rate and ultimately give rise to increased domestic inflation.
Figure 12: Poverty - a self-fulfilling prophesy
Lack of shared
income
Excess capacity
Actual < Potential
Interest rates
R/$ depreciate
Under-utilisation
of
resources
a) Growth potential constrained by lack of shared well-being
Lack of shared
well-being
Limited
growth
potential
Inflation
Overheat
Actual > Potential
BOP deficit
b) Current growth potential and consequences
GDP
growth
performance
Current
growth
potential 4%
Excess capacity
Actual < Potential
income
Spending
1
Demand-side
policy intervention
Figure 13: Adjusting the growth strategy
a) Status quo
No
Imports
Demand for
goods and
services
No
Exports
Balance of payments deficit
Exports < Imports
Exchange rate depreciation
b) New paradigm
income
Spending
Demand for
goods and
services
Imports
Neutral balance of payments:
Exports = Imports
Neutral Exchange rate effect
Exports
Domestic
production
EMPLOYMENT
Neutral Price and Interest Rate effects:
Demand = Supply
Investment in Human
Capital and Socioeconomic Conditions
1
Figure 14: Model evidence
10%
a) Results from the Macro-econometric model
8%
6%
Employment
Inflation
Disposable Income
GDP growth
Productivity
8
9
10
Impact on selected macro-economic variables
8%
10%
6%
4%
20%
30%
40%
50%
-6%
2%
7
0%
6
2%
5
Period
-2%
4%
4
0%
3
-4%
2
-2%
1
-4%
-6%
50%
40%
30%
Exports
Textiles
Transport
services
Business
activities
0%
0.5%
1%
1.5%
2.0%
2.5%
0%
Employment
10%
Food
Impact on activity level in selected industries
10%
0%
2.5%
2.0%
1.5%
1%
0.5%
0%
STRUCTURAL SUPPLY / CAPACITY CONSTRAINTS
Similarly, factor productivity was increased by 10 per cent in the CGE model to
simulate this scenario. As indicated in figure 14(b), the CGE model shows the
impact of this shock could increase the GDP by up to 12 per cent in the medium
term. This increase would be driven by higher exports as a result of the
increased competitiveness of the South African economy. On a sectoral level,
the biggest winners are the mining and textile industries, but a number of other
industries employing many primary factors also show significant gains.
Simulations by the research team using both a macro-econometric and a
computable general equilibrium (CGE) model of the South African economy
show that the productivity increases resulting from an improvement in the
socio-economic environment holds significant benefits for the domestic
economy. In the macro-econometric model, a scenario was created assuming
a 10 per cent improvement in the socio-economic environment through the
socio-economic index included in the model. The socio-economic index
captures elements of education, energy, health, crime and various
government transfers to households.
Figure 14(a) indicates that an
improvement in the socio-economic conditions significantly contribute to
employment growth (an additional 2 per cent over the sample period);
productivity, output and income growth (additional growth of between 4 to 7 per
cent); as well as a substantial reduction in inflation (2 to 4 percentage points
lower), which again supports the sustainability of output and income growth.
Modelling evidence support the view that an improvement in the socioeconomic environment will benefit the economy on various levels
Mining
industries
20%
GDP
b) Results from the Computable General Equilibrium (CGE) model
Percentage change
Percentage
Percentage
No Domestic
production
NO
EMPLOYMENT
Prices and Interest Rate
Demand > Supply
Supply-side
policy intervention
However, figure 13(b) represents a new paradigm for the role and contribution, but more specifically the design
and implementation of social security practices to ensure the sustainability of these programmes by facilitating
employment creation as the main thrust in poverty reduction and output growth. Policy intervention should aim
at fuelling economic growth from the supply side by mobilising and empowering the potentially productive
population. This calls for a strategy to address the imbalances and structural impediments of the past, however,
designed and implemented to focus on the development of an untapped and poverty stricken workforce. The
notion of social spending as an expense item needs to be replaced by significant investment in the development
of human capital. Only then will external programmes of intervention be successful in achieving their objectives
and become sustainable by contributing to GDP growth through employment creation. This approach also
demands a new philosophy regarding the expanded role of social development, which is much broader than the
traditional reactionist/interventionist/survival strategy aiming at providing security to the most vulnerable. Social
development needs to be pro-active and needs to be perceived as an essential investment in human capital.
Figure 13(a) depicts the current policy and growth performance of the South African economy; where demandfuelled economic growth in an economy subjected to structural impediments has failed to make significant
inroads into the alleviation of unemployment and associated poverty (refer to the discussion of figure 1).
Policy making in South Africa has to enter a new paradigm, where employment creation and resultant
poverty alleviation is not considered to be a mere consequence of growth, but where employment
creation and shared well-being through addressing the socio-economic impediments is targeted as a
key accelerator of economic growth.
STRUCTURAL SUPPLY / CAPACITY CONSTRAINTS
3
2
GROWTH
1
1
1
3
Social
Partners
3
3
4
Social
Pensioners
(60+ years) Development
Social
Partners
Excess capacity
Actual < Potential
Sustainable
growth
Stable prices
Civil society
(nominal + social wage)
Challenge:
growth potential
1
Empower
Dependency
2
Community social package
Growth
engine
1
Poverty stricken
population
(18-60 years)
Household
social
package
2
Dependency
Mobilize
Job creation
and
Poverty alleviation
2
Figure 15: Integrated social development as an important accelerator of growth
4
2
Youth
(0-17 years)
Social
Partners
3
GOVERNMENT
3
Social
Development
3
Social
Partners
4
Business
(nominal + social wage)
Interest rates
R/$ depreciate
Excess capacity
Actual < Potential
Overheat
Actual > Potential
Inflation
BOP deficit
Figure 16: Realising the ASGI-SA ideals
GDP
growth
performance
ASGISA
target 6%
Current
growth
potential 4%
Excess capacity
Actual < Potential
This new paradigm demands an integrated national strategy on social
development as a key accelerator of employment and shared growth…
As government embarks on the Accelerated and Shared Growth Initiative (ASGISA), expectations arise that more jobs will be created. However, based on the
preceding analysis, little evidence exists that the employment opportunities created
through the normal course of expansionary economic policy will be sufficient.
Furthermore, no guarantees exist that the most destitute will share in the growth
benefits nor that the most vulnerable will gain opportunities to engage in meaningful
and sustainable economic activity. Social development must therefore step in to
build human capital with the aim to ensure inclusivity for all.
An integrated social development strategy proposes the expansion of the social
safety net, in a sustainable fashion, while deliberate efforts are made by all
stakeholders to mobilise beneficiaries to enjoy the dignity and benefits of work and
not become dependent on the state. The poor needs to be given the necessary
support either to pursue self-employment or to secure the adequate skills and/or
other employment in the “first economy”.
The conceptual framework (figure 15) is presented in four phases:
1. Strategies need to focus on mobilising and empowering the potentially
employable, thereby enabling them to move from poverty and welfare
support to gainful employment, which again will support higher,
sustainable and shared economic growth.
2. The target needs to be broader than the individual – it needs to consider
the households as an economic unit in an attempt to lower the
dependency and subsequent impediments or constraints that children
and pensioners may pose on the economically active poor.
3. Based on the specific needs and characteristics of the community, which
will directly be linked to their geographical location, attempts need to be
made to identify socio-economic packages, consisting of nominal
wages, social wages, in kind compensation, infrastructure and services
needs. This again requires an integrated national strategy from all social
partners such as health, education, etc.
4. A “shared” initiative between government (policy), business, labour and
civil society, with government providing clear guidelines and incentives in
support of clearly defined social development objectives. This initiative
should however be sufficiently flexible to allow for industry and society
specific interventions.
…with such an investment in the well-being of all breaking the growth and
poverty trap to realise the ASGI-SA goals.
Focus 55 proclaims that the impediments on the country's growth and poverty
alleviating potential are predominantly supply side in nature. This finding critically
affects policy decisions regarding a concerted effort to increase the productive
capacity and future growth path of the South African economy, hence effectively
translating into employment creation and poverty alleviation.
Notably, the most important challenge for government is a redesign and redirection
of its budget allocation priorities away from operational expenses towards
investment in human capital and the socio-economic environment. Such a strategic
intervention will improve productivity levels, increase the labour absorption
capacity of the economy and raise its growth potential to ensure higher sustainable
output growth and shared income. A policy change whereby investment in
integrated socio-economic development, will act as a key accelerator of shared
future economic growth.
Sources
Du Toit, C.B., Van Eyden, R. & Ground, M. (2005a). Does South Africa have the potential and capacity to
grow at 7 per cent?: a labour market perspective. Paper presented at the Tenth Annual AES Conference:
AERC, Nairobi, Kenya, 6-8 July 2005.
Du Toit, C.B., Du Toit, A., Ehlers, N., Kuhn, K. & Mashiane, M. (2005b). South Africa's growth potential:
prospects and challenge. Research paper for the South African Reserve Bank.
Du Toit, C.B. (2005). The economy of social development. Conference on Leadership Foresight,
Nedbank Head Office, Johannesburg, November 2005.
FinMark Trust. 2006. Finscope, South Africa
National Treasury Budget Review. 2006. Social Development. Chapter 4, Tables 4.8 & 4.11
South African Reserve Bank. Quarterly Bulletin (various issues).
South African National Government. 2006. A catalyst for accelerated and shared growth – South
Africa. Media Briefing by Deputy President Phumzile Mlambo-Ngcuka, 6 February 2006.
South African Police Crime Information Analysis Centre. Crime statistics for South Africa,
www.capegateway.gov.za/eng/pubs/public_info/c/86878/1
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E-mail: [email protected]
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Layout and design by CartoCom
Previous issues of Focus on Key Economic Issues
1. Government expenditure and taxation, October 1971
2. Labour trends, March 1972
3. The balance of payments, July 1972
4. Price trends, November 1972
5. The capital market, March 1973
6. Manpower, July 1973
7. Gold, November 1973
8. International balance of payment problems, March 1974
9. The homelands, July 1974
10. Money and banking, November 1975
11. The metropoles, March 1975
12. The Southern African market, July 1975
13. The business cycle, November 1975
14. Financing of public expenditure, March 1976
15. Price and wage trends, July 1976
16. The agricultural sector, October 1976
17. The economic creditworthiness of South Africa, March 1977
18. Economic growth, July 1977
19. Urban Blacks, November 1977
20. Manufacturing, March 1978
21. The public sector, July 1978
22. The exchange rate of the rand, December 1978
23. The economy and the people, June 1979
24. Inflation, November 1979
25. The gold price bonanza, March 1980
26. Political stability, July 1980
27. Employment through education, November 1980
28. Financial rates, March 1981
29. Socio-economic priorities, October 1981
30. Financing of the Central Government, April 1982
31. Income distribution and cross subsidisation, November 1982
32. Combating inflation, May 1983
33. Export-led growth, October 1983
34. Power in the market economy, May 1984
35. The tax burden, October 1984
36. Industrialisation and growth, May 1985
37. The logic of the federal option, November 1985
38. The debt standstill and beyond, April 1986
39. Direct and indirect control, November 1986
40. Political reform and the economy, May 1987
41. The long-term growth potential, November 1987
42. The growth in the government debt, May 1988
43. Monetary policy and export promotion, November 1988
44. Monetary and fiscal discipline, May 1989
45. Economic growth strategy, September 1989
46. Financing of education in South Africa, June 1990
47. The role of small and medium sized businesses in the
South African economy, November 1991
48. Requirements for growth and development in
South Africa, October 1992
49. The entrepreneur and the economy, October 1994
50. Fiscal and monetary policy in a changing South Africa,
June 2000
51. Economic growth and development constraints in
South Africa, November 2001
52. South African exchange rate policy dilemmas,
November 2002
53. Unemployment, economic growth and social inequities:
How government could make a difference, October 2003
54. Prudent environmental management:
A catalyst for economic development, December 2004
Sponsored by the South African National Government
Department of Social Development
in terms of the
Charlotte Maxeke Collaboration
in the Economics of Social Protection