Populism will not fix problems of economy

Late in 2016, on the same day the ANC leadership met in Irene near Pretoria to discuss the future of its president, senior policymakers met some of the country’s top economic researchers just down the road to examine the social crises that threaten the fundamentals of South African democracy: poverty, unemployment and inequality.

The meeting was convened by the Research Project on Employment, Income Distribution and Inclusive Growth (REDI3x3), a three-year national project initiated by the Treasury to fill in key gaps in the evidence base in support of inclusive growth.

President Jacob Zuma survived the ANC’s Irene meeting. But as he now prepares to deliver his state of the nation address, the question is whether his government can tackle the big questions raised at the other Irene meeting: rising unemployment, which affects young people in particular; huge disparities in earnings and wealth; and an education system that perpetuates inequality.

The research shows that many of the structural imbalances in the economy are interrelated and too complex to be solved by simple populist measures. A major question is how to make growth more inclusive, but this is difficult to answer when it has barely nudged above 0.5% in the past year.

While better growth could create breathing space for a heavily burdened Treasury, the findings indicate that this can do little on its own to tackle some of the country’s deep structural imbalances. Among the findings is that earnings inequality has increased in SA. Research by Martin Wittenberg of the University of Cape Town (UCT) shows that earnings at the top end have increased faster than earnings at the bottom. The latter have also increased, but not as fast. Earnings in the middle, though, have stagnated.

Younger people already in the labour market find it harder to move into higher-paying jobs. Moreover, the average age at the bottom of the curve has not changed much, indicating that young people find it difficult to enter the workforce.

Interestingly, 40% of those in the top half of the earnings distribution are unionised and those employees in the public sector are likely to be above
the median.

The research has also found that inequality persists across generations. Research by Arden Finn, Murray Leibbrandt and Vimal Ranchhod estimates that if your parents are poor, the chances of your being poor are 90%. The lack of a transformative education system is a key factor in this persistence.

And inequality of wealth is more extreme than income inequality. Researcher Anna Orthofer shows that about 10% of the population owns 95% of the wealth. This profile, combined with youth unemployment of about 50%, is a recipe for anger and frustration.

Social grants, which now sustain more than 17-million people, have done much to alleviate poverty, as UCT’s Ingrid Woolard has shown. But grants cannot catapult poor children off the bottom end of income distribution. Personal income tax is the government’s largest source of revenue, yet only about 7-million people earn enough to pay income tax.

So what can policymakers do? Some answers have emerged from the research.

SA’s education should be fixed as it is a central source of inequality. This is shown in a number of REDI3x3 papers by Servaas van der Berg and his colleagues at the University of Stellenbosch and Ranchhod and his colleagues at UCT.

Although years of schooling have increased substantially since 1994, the returns to schooling in the form of wages have not — unless a student passes matric or, better still, gets a tertiary qualification. Earnings are likely to be in the same ballpark whether you have three years of schooling or nine.

Although there are high returns to a tertiary education, the public education system is generally so poor that only 4% of those who enter school are likely to get a tertiary degree — and most of those students attended former model C or private schools.

For instance, only one in four grade 5 pupils could correctly answer the question: "If Pam has R40 and spends R28, what does she have left?"

Combating inequality has to start with the quality of teaching in public schools that serve poorer students.

Industrial and competitions policy should be used to favour labour-intensive projects.

Since 1994, manufacturing in SA has become more capital intensive and employment has declined, a team of researchers under UCT economist Anthony Black has found. Industrial policy interventions since 1994 – such as those in the vehicle and components industry – have largely favoured capital-intensive projects.

More worrying is that one of the policy prescriptions of the National Development Plan – support for small companies – may be misplaced. Employment in small companies is much lower than previously thought, according to University of Stellenbosch economist Neil Rankin. More than 80% of jobs are created in companies that employ 50 or more people.

Competition policy specialists Simon Roberts and Pamela Mondliwa have found that many small enterprises are blocked by anticompetitive practices. For instance, the plastics sector shed about 15,000 jobs from 2002 to 2014, partly because it struggled with uncompetitive pricing of a key input produced by Sasol.

Some megacompanies that have benefited from state support — such as ArcelorMittal and Sasol — have used their entrenched position to extract high profits from downstream industries, the research finds, rather than boosting industrialisation.

Local and national government should work in tandem to support the informal sector.

Although most informal sector enterprises are "survivalist", many are employers, according to economists Frederick Fourie and Nwabisa Makaluza.

The "growth-oriented" part of the sector employs about 850,000 people and makes an important contribution to reducing poverty.

The government needs to understand these dynamics around vulnerable survivalists and more stable informal enterprises so that it can craft policies that support rather than hamper those trying to make a living in both types of enterprises.

The spatial legacy of apartheid needs to be dismantled. People who live in urban areas and earn the least use up to 40% of their income to pay for transport because they live far from their work, researcher Andrew Kerr has found. National, provincial and local government, as well as parastatals, own significant areas of land near and in city centres but are not co-ordinating with each other to ensure better-integrated living areas — and thus easier access to jobs for working-class people.

Edgar Pieterse, head of UCT’s African Centre for Cities, has identified tracts of publicly owned land in Cape Town that could become integrated housing projects, and the still extant— “buffer-zones” of the apartheid era that could be used to develop safer housing projects.

Even worse off are those who live in rural areas that were once apartheid “homelands”. Case studies of the old Transkei show that many agricultural projects have collapsed. Moreover, the administration of land rights and the cadastre system is a mess. Independent researcher Siyabu Manona says the collapse of land governance puts severe constraints on any development initiative.

Neva Makgetla of Trade and Industrial Policy Strategies (TIPS) puts together these rural and urban dynamics to show how spatial policies fuelled the Marikana conflict. A toxic combination of a fall in the price of platinum mine workers are among the better-paid workers in SA, but those in Marikana faced a choice of "going from places where their families lived but where they couldn’t find work [or] going to places they hated".

With economic growth limping, it may be that to rely on it to create a more equitable society is futile. As the Treasury’s Michael Sachs pointed out at a recent Treasury/UNU-Wider conference, "a binding constraint on economic growth is social policy". We need to address the "basic failure of our education system and … the spatial conditions of the labour market", he said.

The political leadership needs to embrace the challenge of changing the structure of the economy in a way that does not inhibit growth. To do so successfully requires an unusual degree of common purpose and focus, including an imperative to draw on all the evidence generated in support of this endeavour. The future of SA’s citizens depends on it.

• Leibbrandt is pro vice-chancellor of poverty and inequality at UCT and heads REDI3x3; Green is media manager for REDI3x3