WHEN THE ANC TOOK POWER, IT INHERITED an economy shaped by colonial dispossession and apartheid, which resulted in huge inequalities and increasing poverty, rising unemployment and unsustainable government debt. Despite this legacy, the ANC-led government has made great progress. It has ensured:

• high levels of confidence, certainty and stability;
• lower government debt and inflation;
• substantial growth in exports of manufactured goods, especially in the auto industry and minerals other than gold, and generally rising productivity and improved skills;
• a sharper regional and continental focus;
• increased empowerment opportunities for black people, women and the poor;
• labour-market reforms that have greatly improved labour relations.

It has become clear over the last year that our strategies and tactics with regard to the economy have yielded important results. While still not high enough, the growth of the economy has moved onto a higher trajectory. The economy is creating more jobs than before as a result of a structural improvement in the job-creating capacity of growth. We expect the momentum of these structural shifts to continue over the coming years. At the same time, lower government debt and good management of our budget has enabled us to shift towards a more expansionary macroeconomic stance. Government will also massively increase its own investment in the economy over the coming years, which will further propel our growth and development.

Great challenges remain, however. Key among these are:

• high unemployment, with continuing job losses in the formal sector and rising joblessness especially among the youth;
• low growth, low savings and low levels of investment;
• continued mass poverty and deep inequalities based on class, race, gender and region.

Addressing these challenges requires a choice in favour of a broadly accepted developmental approach that will underpin sustained reform and transformation of major sectors, regions and key domestic economic markets. Our choice of approach must involve focussed state-led interventions to ensure the integration of the two economies, poverty alleviation, job creation and, most importantly, sustained economic growth.

Such an approach rests on a correct understanding of the successful efforts to defeat poverty and underdevelopment in the last half of the twentieth century, which we analyse below. In all these cases, a central component of success was the ability of government to act as a ‘developmental state’.

This means creating the capacity at every level of the state to mobilise and direct social, economic and political resources where they are needed most.

But government alone cannot resolve these challenges. Rather they require that we unite South Africans in a people’s contract to create work and fight poverty. Building this united front requires us to continue to mobilise support for our economic policies and strategies. We must seek to reach consensus on our development approach in society in general.

LEARNING FROM EXPERIENCE

In the period since the Second World War, the world has experienced three successful development programmes specifically and consciously aimed at the eradication of poverty and underdevelopment. These were:

• the Marshall Plan,
• the East Asian growth and development programme,
• the European Union integration programme.

Each of these programmes was successful. The results they achieved demonstrated that it is indeed possible to eradicate poverty and underdevelopment and create an economy capable of self-generated, independent economic development without abnormal outside help. In each of these cases however, this success required the necessary political will on the part of the wealthy and industrialised nations of the world.

At the dawn of the twenty-first century it is commonly agreed that Africa constitutes the biggest challenge in the global struggle against poverty and underdevelopment. What can Africa, and South Africa in particular, learn from these historic experiences? The question which must be posed and answered today is what was done in these instances that produced the results which, some argue, are impossible to achieve in Africa.

THE MARSHALL PLAN

The success of the Marshall Plan represented the first example in the post-war years of what could be done to achieve the objective of the defeat of the twin challenges of poverty and underdevelopment. The determination to succeed in implementing this plan was driven, in part, by the fear among United States (US) policy makers that, without significant steps to address poverty and underdevelopment, Europe could be the theatre of a communist revolution.

Taking account of the destruction that had been visited upon Europe during the Second World War, one of the fundamental objectives of the Marshall Plan was to move Western Europe progressively from its post-war condition of crisis towards a working economy independent of abnormal outside support. The plan was a rational and calculated effort by the US aimed at reducing the hunger, homelessness, sickness, unemployment, and political restlessness of the 270 million people in sixteen nations in Western Europe.

The plan involved concrete proposals for the recovery of agriculture and basic industries – coal, steel, transport, and power – which were regarded as fundamental to a viable European economy. These proposals were designed to correlate with individual national and industry programmes. Priority was given to projects promising quickest expansion of output and hence the generation of employment and income that could drive independent capital accumulation investment.

Funds were not mainly directed towards feeding individuals or building individual houses, schools or factories, but at strengthening the economic superstructure (particularly the iron-steel and power industries).

Although valuing and encouraging integrated and well-functioning markets, the approach to the Marshall Plan recognised the centrality of state agencies in creating demand to assist markets to function effectively and leading investments in social and economic infrastructure.

Over the four years of the programme, Americans paid around $14 billion in aid, around 2% of US gross national product for the period. Of this, around $1.5 billion was made available in the form of loans that were repaid. But the bulk of the programme’s transfers to Europe consisted of grants. Those conceiving of the plan believed the sums required to fund Europe’s reconstruction were so large, and the capacity of Europe to repay loans so weak, that to succeed the bulk of the financing would have to be regarded as a national (US) investment in peace and prosperity.

THE EAST ASIAN GROWTH AND DEVELOPMENT PLAN

As the Marshall Plan succeeded in its goals, the perceived threat of ‘communism’ also became apparent in East Asia, where the Chinese revolution of 1949 had installed a communist party in power in the world’s most populous nation. At that time the largest communist party in the world was in Indonesia, while communists and nationalists were uniting in a powerful anti-imperialist insurgency that was to triumph in Vietnam.

Once again, the US government concluded that a dedicated programme to create a set of prosperous and stable capitalist states would best serve the long-term interests of the American people. From the 1950s onwards no region in the world received more US aid than South East Asia.

One factor underpinning the rapid development of East Asia was that, since the US undertook to provide for the security needs of the region, countries such as Japan were able to direct investment towards social and economic priorities. At the same time the US instituted a special programme to procure as much of its defence requirements from Japan as possible, which provided about 30% of Japan’s foreign currency receipts in the early 1950s, when the Korean War was raging.

Later, South Korea and Taiwan received vast quantities of grants, as well as soft loans on very generous terms. Between 1951 and 1967 foreign aid and loans made up 86% of capital flows to South Korea and 74% of capital flows to Taiwan. The US also opened its markets to imports from these countries without requiring reciprocal opening up of Asian markets.

As had been the case during the Marshall Plan, the development of East Asia also rested on an understanding that the state had a key role to play in ensuring the proper functioning of markets. In the East Asian case, expenditure on social and economic infrastructure was key. So too was the creation of ‘rents’ for domestic firms that were clearly linked to identified economic targets for growth and export performance. These rents were created by a variety of policies including the selected protection of firms, controls over interest rates, the direct allocation of credit through government-controlled financial institutions, state management of competition (including the encouragement of mergers), coordination of capacity expansion, and restrictions on entry into specific industries.

These policies were directed in a deliberate and focussed manner on creating self-generated economic growth and new cycles of accumulation in the future.

Over a period of thirty years these policies, in the context of vast amounts of aid, grants and soft loans, succeeded in raising the South East Asian nations out of the conditions of poverty and underdevelopment in which they had languished in the aftermath of colonialism.

THE EUROPEAN INTEGRATION PROGRAMME

Following the success of the Marshall Plan, Europe once again emerged as one of the richest parts of the world. However, as the European Union (EU) expanded it realised that striking internal disparities of income and opportunity existed within and between the countries that constituted the EU. In May 2004 ten new member countries joined the EU, all of which had national incomes well below the European average, thus widening the gaps between the ‘haves’ and the ‘have-nots’.

Inequality in Europe is regarded as the product of various factors, including handicaps imposed by geographic remoteness or by more recent social and economic change, or a combination of both. These disadvantages are reflected in social deprivation, poor quality of schooling, high unemployment and inadequate infrastructure.

To integrate these poorer areas the EU has a ‘regional policy’, which transfers resources from affluent to poorer regions. The EU regards this as “an instrument of financial solidarity and a powerful force for economic integration”. Areas that qualify for this solidarity are identified within the EU as regions that show a deficit in socio-economic development in that they have a low level of investment, a higher than average unemployment rate, lack of services for businesses and individuals and poor basic infrastructure.

Most assistance is granted in the form of non-repayable grants or ‘direct aid’, and to a lesser degree refundable aid, interest-rate subsidies and financial guarantees. These programmes are directed toward financing productive investments to create and safeguard sustainable jobs, investment in infrastructure that contributes to development, the revitalisation of economies and the regeneration of areas suffering from economic decline; the creation of infrastructure for trans-European networks in the areas of transport, telecommunications and energy; and investment in education and health.

Among the goals of the programme are to generate endogenous (ie. self generating) potential for economic growth by measures that support local development and employment initiatives and the activities of small and medium-sized enterprises. The funds support the takeoff of economic activities in these areas by providing the infrastructure they lack, encouraging investment in businesses and supporting human resource development.

Attention is also paid to overcoming labour market and economic barriers, overcoming social, ethnic, cultural and communications barriers and providing technical assistance to ensure local implementation monitoring and assessment of the development programmes. These interventions help to restructure and modernise the economies of the less developed regions, reducing their dependence on primary products and improving their economic competitiveness.

The EU makes these interventions based on the determination that market forces alone will not result in balanced economic development across the continent. Funds allocated for regional policy are vast, amounting to EUR15.2 billion in 2000-2005, far in excess of the allocations made by the EU for development assistance in other parts of the world. Indeed, the top five recipients of EU regional policy funds each receive grants which far exceed the amount that the EU allocates to the least developed countries of the world.

To date, the EU’s regional policy has succeeded in its central objective of reducing and eradicating poverty and underdevelopment in the least developed regions with the EU, ensuring that these regions attain the average GDP level of the EU as a whole. Building on this success, the regional policy will be extended to meet the challenge posed by the accession of another ten states, all of which have GDP levels significantly below the European average.

LESSONS OF POST-WAR DEVELOPMENT AND THE FAILURE OF THE ‘WASHINGTON CONSENSUS’

We have summarised three examples of programmes that have succeeded in overcoming underdevelopment and poverty in the post war era. There are a number of common factors in all these programmes from which we need to draw appropriate lessons:

• Each grew out of a powerful strategic consensus, which translated into political will on the part of the affluent to act decisively to overcome conditions of poverty and underdevelopment. This political will resulted in a conscious, purposeful and determined response that involved the allocation of vast amounts of resources on the part of the affluent.
• Each was based on the understanding that the regions concerned were too poor to generate the savings and capital they required for their development, and that the extent of poverty and underdevelopment made it impossible to attract significant volumes of private capital.
• Accordingly, public sector grants, soft loans and other forms of aid constituted the bulk of the funds allocated for development in each case. This assistance was augmented, in one case or another, by preferential and asymmetric market access agreements, the deliberate engineering of undervalued currencies, the creation of rents linked to performance, and other measures that required substantial government intervention.
• As such, each programme has been premised on the understanding that development could not be left to the market alone, and that it would be critical for the state to be directly involved, through, in particular, the planning and implementation of detailed and comprehensive development programmes.

In the 1990s the ‘Washington Consensus’ emerged as a shorthand for the package of policies that the richest and most powerful nations of the world had agreed would best address the problems of underdevelopment and poverty among the poorest. The measures proposed included fiscal discipline, reordering of public expenditure priorities, tax reform, liberalising interest rates, abolishing exchange-rate control, trade and capital market liberalisation, privatisation, deregulation, and the entrenchment of property rights.

We can summarise of the main assumptions that underlie the ‘Washington Consensus’ as follows:

• Development of the poorest countries should largely be financed through private capital rather than public sector funds.
• The conditions for overcoming poverty and underdevelopment can best be established by reliance on the market, and that minimal state intervention is required.
• To secure the benefits of market-led developments, these countries should become fully integrated within the global economies, interacting with all other countries through unfettered free trade and relying on the global capital markets for the investments they require.

This developmental model has not produced any success with regard to sustained development. Despite all the efforts by developing countries to create the political, policy and other conditions that the developed countries set as pre-conditions for economic take-off, this has not happened.

This is because, rather than sincerely drawing on the lessons of the programmes described above, the ‘Washington Consensus’ was designed not primarily with the needs of the less-developed countries in mind. Rather, it was a response to the interests and needs of the developed countries themselves. Through opening the markets of developing countries, but failing to reciprocate, and by a host of other measures, the developed countries have sought through the ‘Washington Consensus’ to provide new outlets and investments for their own businesses.

The ‘Washington Consensus’ constitutes a development model based on the ideology of ‘market fundamentalism’. It has obliged the developing countries to depend on ‘the market’ for the investment and other interventions that would enable them to achieve their takeoff point, contrary to what happened to post-war Western Europe and the Far East, as well as the more recent EU regional policy.

Private capital, however, is inherently driven by the profit motive and is incapable on its own of addressing the challenge of poverty and underdevelopment. Consequently, with regard to the majority of developing countries, in the context of weak supportive intervention by the governments of the developed countries, the pursuit of profit by global private capital has worked against the goal of people-centred development.

Globally, the vast bulk of capital is in the hands of the private sector. The strategic posture represented by the ‘Washington Consensus’ to rely on this sector to achieve development means that the governments of the developed countries continue to resist all efforts to transfer a portion of global private capital to the public sector, which would give this sector the possibility to intervene.

Whereas the ‘Washington Consensus’ has few overt supporters among the global decision makers today, it has not been replaced by any serious programmes that seek to replicate the examples of successful development cited above. Perhaps the reason for this is that, freed of any challenge equivalent to the perceived threat posed by ‘communism’, the developed capitalist countries will devote only such resources to meet the needs of the poor billions in the world as would ensure that these billions do not act in a manner that threatens their survival as prosperous capitalist countries. Believing such a threat to be absent, the developed countries are ready to argue against substantial resource transfers to the poor, on the basis that their constituencies suffer from ‘donor fatigue’ and that, in any case, they have a responsibility to address the serious challenge of poverty within their own societies.

SOUTH AFRICA’S ‘TWO ECONOMIES’

South Africa is fully integrated within the global economy. It is therefore open to the pressures imposed on all medium-sized middle-income countries of the South by the process of globalisation. At the same time, a large part of our population is caught in an underdeveloped sector, the Second Economy, which cannot escape the trap of poverty and underdevelopment through reliance on the market.

In South African ‘two economies’ persist in one country. The first is an advanced, sophisticated economy, based on skilled labour, which is becoming more globally competitive. The second is mainly an informal, marginalised and unskilled economy, populated by the unemployed and those unemployable in the formal sector. Despite the impressive gains made in the First Economy over the last decade, the benefits of growth have yet to reach the Second Economy, and with the enormity of the challenges arising from the social transition, the Second Economy risks falling further behind if there is no decisive government intervention.

The First and Second economies in our country are separated from each other by a structural fault. The Second Economy emerged during the long period of colonialism and apartheid as a result of the deliberate imposition of social, political and economic exclusion of the African majority by a racist state. This process aimed to achieve the enrichment of the white minority at the cost of the impoverishment of the black majority. Consequently, the Second Economy is today caught in a ‘poverty trap’. It is unable to generate the internal savings that would enable it to achieve the high rates of investment it needs. Accordingly, on its own, it is unable to attain the rates of growth that would ultimately end its condition of underdevelopment.

The Second Economy is linked to the First Economy by the extent to which it can still supply the cheap, unskilled labour this economy may require. It survives on money transfers sent by family members who have been able to secure regular or occasional employment within the First Economy, as well as social grants and elements of the social wage provided by the democratic state. It is also linked to the First Economy by the goods, equipment and services it purchases with the meagre resources at its disposal. Those resources also make it possible for the Second Economy to maintain an informal economic sector of small traders, artisans and service providers. Such positive ‘trickle-down’ effects as would result from higher earnings of family members who would benefit from growth in the First Economy, as well as individual and social transfers by the state, would not be sufficient to raise the standard of living in the Second Economy, or close the ever-widening wealth and development gap between the two economies.

The market economy, which encompasses both the First and Second economies, is unable to solve the problem of poverty and underdevelopment that characterises the Second Economy. Neither can welfare grants and increases in the social wage. The level of underdevelopment of the Second Economy also makes it structurally inevitable that the bulk of such resources as flow into the Second Economy will inevitably leak back into the First Economy. Such public and private interventions as may produce a positive outcome in the First Economy cannot have any strategic impact on the Second Economy because the latter constitutes the structural periphery of the former, inherently positioned to remain on the periphery. Its internal objective reality in terms of the forces of production and their interaction makes it impossible for it to respond to the impulses that drive the growth and development of the First Economy.

INTERVENING FOR DEVELOPMENT AND GROWTH

These problems make decisive government intervention imperative. This intervention would set the preconditions for market-led economic growth. Fortunately, South Africa can draw on a wide range of experiences, including the examples we have discussed above, to learn the lessons of successful government intervention to overcome conditions of poverty and underdevelopment.

One of these lessons is that we should, as far as possible finance the transformation of the Second Economy through domestic resources. These should be made available through the state in the form of grants. This does not rule out accessing commercial loans by the state, or equity participation funds to finance economically viable projects that have the possibility to generate profit that would be used to finance debt.

Necessarily, therefore, decisive government intervention in the Second Economy requires that the government should have the resources to make this intervention. The successful management of the macro-economy, coupled with policies that have resulted in the growth of the First Economy, have enabled the government to generate these resources. These results must therefore rank among our most important achievements during the First Decade of Freedom, precisely because this creates the possibility for our country to seriously confront the challenge of the Second Economy.

Using these resources, and applying the lessons of other successful development approaches, our interventions must focus on:

• productive investment to create and safeguard sustainable jobs;
• investment in infrastructure which contributes to development, structural adjustment and the creation and maintenance of sustainable jobs; or, in eligible regions, to diversification, revitalisation, improved access and regeneration of economic sites and industrial areas suffering from decline, depressed urban areas, rural areas and areas dependent on fisheries. Such investment may also target the development of trans-Southern African networks in the areas of transport, telecommunications and energy;
• development of the endogenous potential by measures which support local development and employment initiatives and the activities of small and medium sized enterprises. Such assistance should be aimed at services for enterprises and cooperatives, transfer of technology, development of financing institutions, direct aid to investment, provision of local infrastructure, and aid for structures providing neighbourhood services;
• investment in education and training and health.

In the end, as was the objective of the Marshall Plan, those currently caught within the Second Economy should be able to grow and develop without the need for exceptional outside interventions.

The success of our own vigorous and targeted interventions in the Second Economy are dependent on the success of the First Economy and building the structural links between these two economies. Therefore, even as we pay concentrated attention to the Second Economy, we must not reduce our focus on the growth and development of the First Economy. It should be understood that successful interventions in the Second Economy can in their own right impact positively on our overall economic growth objectives.

At the same time, given the responsibilities that fall on the democratic state with regard to the development and transformation of both the First and Second Economies, we have to ensure that the state machinery is so organised, empowered and motivated that it can discharge its responsibilities effectively. We must also mobilise the people to participate in the eradication of the legacy imposed on them by a long history of colonialism and apartheid.

Simultaneously we have to maintain the social expenditures targeted at providing a social security net for the poor and disadvantaged, as well as social development to achieve higher levels of education, better health and nutrition, and other outcomes to improve the quality of life and empowerment of all our people, including women and youth in both urban and rural areas.

South Africa’s strategy has to be to raise the level of investment and economic activity, while at the same time reforming the labour market so that more labour is absorbed, the fruits of economic growth are spread more evenly, and the Second Economy is empowered to generate higher levels of growth endogenously and in collaboration with the First Economy.

The two elements of this strategy entail reducing the cost of capital and allowing for a more competitive currency aimed at raising investment and exports, while at the same time allowing for labour demand to be expanded through more flexible and appropriate labour market policies. Because of the duality of our economy the methods and strategies to achieve a reduction in the cost of capital and a more appropriate labour regime for the First and Second economies will differ. As such a dual track approach must underpin the final basket of interventions, with strict respect being paid to the interconnectedness of the two economies. Contradictory policies or those generating unintended negative consequences and distortions will make the balancing of the final basket of measures a difficult task.

THE COST OF CAPITAL

Within the First Economy a policy aimed at reducing the cost of capital should not be based on artificial reduction of real interest rates. Under Apartheid, low and even negative real interest rates resulted in a decline in savings and hence a decline in investment. Lower real interest rates must come from prudent fiscal policy, a more nuanced inflation targeting policy, deeper capital markets, more efficient use of capital in the state-owned enterprises and the achievement of a more competitive unit labour cost.

Government can also pursue a more competitive currency through the accumulation of reserves and through freer foreign exchange markets. It must be noted that lowering the cost of capital on its own may raise investment but will not necessarily achieve our objective of raising employment. Cheaper capital without reforms to reduce the relative cost of labour is likely to result in higher investment that displaces labour. Some would argue that this is what has already happened over the past decade. The cost of capital has been brought down while labour costs have gone up, resulting in a switch from labour to capital. An increase in investment is only likely to result in an increase in employment if the cost of labour is reduced relative to capital.

A difficult issue to broach, but one that must be confronted, is the capital requirements of financing black economic empowerment (BEE). As an illustration, suppose a black company borrows from a bank to buy 10% of shares in a mining company. The mining company cannot invest in the sector for a number of reasons including domestic regulatory and policy constraints. Their only option is to buy a mine in Chile or Ghana. The financing of BEE deals that do not necessarily raise productive investment levels in the domestic economy is therefore a drain on scarce capital assets and will impact on the medium term investment level. This is just one example where policy decisions in South Africa sometimes contradict each other resulting in the failure to meet our most important objectives.

While these policies aimed at the First Economy will naturally permeate the cost of capital faced by the Second Economy, additional measures will be required to directly address the specific issues relating to the cost of capital in the Second Economy. Ultimately, reducing the cost of capital in the Second Economy can only be achieved by the state carrying the cost of this price reduction, which adds to fiscal pressure. It is however possible that the magnitude of this burden could potentially be limited by the government seeking soft monies from international multilateral institutions as well as leveraging ‘under utilised’ domestic assets via some form of prescription. In addition the state could consider establishing limits to its exposure and possibly a limited period in which such dual pricing could be accessed.

Also critical is the role of South Africa’s development finance institutions, such as the Public Investment Corporation (PIC), the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC), as well as parastatal corporations, in directing investment and capital access in favour of the Second Economy. In the context of sustained investment from domestic public sources, these development finance institutions will also have a critical role in leveraging further resources from global development finance institutions such as the World Bank.

It is meaningless to deal with the cost of capital in the periphery without addressing access to capital. Three possible policy options exist. First, it could be possible to create a set of measures that improve the credit-worthiness of potential borrowers in the periphery. For example, a lower tax rate applicable to Second Economy businesses and lower effective labour costs would improve their profitability standing and improve their likelihood of accessing credit. A second policy option, which does exist but has been largely unsuccessful, is to re-look at the institutional depth of financial intermediaries and their ability to penetrate this under serviced market. It is necessary to investigate how the state-backed substitute intermediaries operate and perform and to consider how more appropriately existing private sector intermediaries can be incentivised to expand their coverage.

A third option to improve access to capital is the formal and legal recognition of assets that are currently unregistered and cannot be used as collateral (especially rural land and township houses). The failure to ensure that legal title of assets ‘belonging’ to individuals in the periphery is documented contractually sterilises the enormous value of these existing assets, which could so easily be turned into collateral to secure access to capital.

THE LABOUR MARKET AND SMALL BUSINESS

Without wanting to deregulate labour markets or erode the gains of the democratic order, a number of small adjustments to the current regulation of the labour market could produce substantial returns for job creation. Some of these apply to the First Economy and some to the Second Economy.

Government should consider adapting the present bargaining arrangements to limit the effect of agreements on parties outside of the agreement, such as smaller firms. In amending this policy, government must aim to support increased employment in small businesses. For example, a small component manufacturer in Soshanguve is less able to deal with higher wage increases than a large manufacturer such as Lear in Rosslyn. Policy must also aim to support increases in employment in labour intensive sectors and high value added sectors that are able to export. These measures may include investment incentives such as the present strategic investment incentive and the critical infrastructure programme as well as the possibility of a special labour dispensation for labour intensive sectors.

A sensitive point, which must be raised here, is that often we refer to labour-intensive and capital-intensive activities when in reality with respect to absorbing labour we are talking about skilled and unskilled activities. Similarly we often characterise a sector in isolation of the value chain to which it belongs. For example, while high value added manufacturing in the motor vehicle or information and communications technology (ICT) industry may not be labour intensive, the inputs, packaging and distribution of these final goods may give rise to increased levels of activity in the intermediate stage, which is more labour intensive.

Similarly as one moves further down the value chain so the opportunities for less skilled jobs increases. While we chase direct labour intensive sectors, there is also much to be gained from supporting non-labour intensive industries whose inputs in the total value chain may indirectly create jobs. >From a policy perspective, the unintended consequences of the Labour Relations Act and the Basic Conditions of Employment Act need to be properly understood and unpacked, and a strategy to address this needs to be developed. One of the symptoms of the problems arising from these pieces of legislation is the proliferation of labour brokers. Companies outsource the “hassle factor” in employment contracts to labour brokers. These brokers often exploit employees by charging an exorbitant amount for managing the cost of employment. The solution to this problem lies in reducing the hassle factor associated with employing workers. While the legislation has good intentions, the effect is higher costs for companies and the alienation of these protective rights from the employees they were designed to protect. Other unintended consequences include the use of short-term contracts and consultancies, which distort jobs that in the absence of the legislation might be permanent positions.

Theoretically, when a floor is placed on wages in the formal sector, the informal sector absorbs those who cannot obtain gainful employment in the formal sector. Government must increase the employment opportunities for unskilled people. The Expanded Public Works Programme is a good example of how labour-based techniques can be used to achieve the same output in the same time with the same financial resources. We need to explore other sector s where this is possible. Home-based and community based care services also have the potential to increase employment. Simultaneously we must ensure that the different spheres of government are not placed in a situation where they are contributing to unemployment or moving staff from their own services into the expanded public works programme. For example, a metro council recently invested in new capital and technology, which made refuse removal less labour intensive. They did this for sound economic reasons from a company perspective but it was contrary to the larger job creation strategy. Numerous examples of these apparent contradictions exist (eg. government garages and fleet management).

Increasing the limit of the size of companies that comply with certain aspects of the labour legislation from 50 to 200 may stimulate more small business development. Government must look at reducing the compliance burden from the tax system and the regulatory environment to stimulate the informal sector. A strengthened land reform programme and supportive subsistence agriculture programme, and better access to credit for small businesses (including agricultural businesses), would stimulate the informal economy and increase employment.

The application of the minimum wage in sectors that potentially could employ more people must be examined. High transport costs and high reservation wages in the South African economy (the wage rate at which people will not work) already places a floor on the labour market. Addressing high transport costs and the spatial pattern of apartheid’s ‘location’ policy is a more effective way of increasing real incomes to poorer people.

Some European countries with similar generous labour regimes to our own have experimented with accommodating some amount of duality in the labour market as a means of raising employment prospects for those outside the labour market. A dual labour market model is an attempt to break the insider-outsider divide. The model looks something like this: One set of labour laws (the existing ones normally) are used to govern one set of employees and more flexible labour laws apply to another set of people. This is often done informally through policy rather than legislation. More flexibility is accommodated (sometimes temporarily) rather than formally legislated.

There are many ways in which the criteria for splitting the labour market can be determined. Under apartheid, race was used to differentiate the applicability of labour laws. In some countries, geographic area is used, where more flexible labour laws are allowed in a specific geographic area, sometimes associated with industrial development zones or export processing zones. China is a good example of this. Age has also been used as differentiating criteria to break the insider-outsider problem. Companies are allowed to employ younger people under more flexible arrangements. They often fall outside of the collective bargaining and minimum wage arrangements and it’s easier to dismiss people for non-performance. The theory is that young workers are able to get their foot into the door of the labour market, get some experience and then they are able to break into the labour market permanently. A fourth approach to labour market segregation is by industry. You have one set of rules for certain industries, typically the financial services, government, etc. and another set of rules for specific labour-intensive industries that government wants to boost. These usually include textiles and clothing, tourism and many of the personal services sectors. A fifth way of segregating the market is by size of business.

Government, either formally or informally, allows for more labour flexibility in smaller companies. Japan is the most successful example of such a country where labour rights were very generous in large corporates while small businesses were able to have more flexible arrangements. The main criticism of the dual labour market approach is that it will encourage labour displacement. The fear is that business would move to the export processing zones, companies would get rid of older employees and hire younger people and so forth.

Perhaps South Africa should consider accommodating some flexibility in its labour regime. The first option is to allow younger people to be regulated under a more flexible regime. That is, waive the minimum wage and other collective bargaining arrangements (including limits on overtime work) and make it easier (less costly) to dismiss non-performers. The advantage of this option is that it might help break the very high rates of youth unemployment. On the other hand, the criticism of possible displacement of older workers with younger workers will be immense.

A second option is to use the present industrial development zones as geographic areas where labour laws will be made more flexible. This will encourage investment and employment growth in poorer provinces such as the Eastern Cape and KwaZulu Natal. The criticism of this approach will be that it smacks of Bantustan industrial policy, which may not be sustainable in the long-term.

A third option is to allow for greater labour flexibility in the tourism, textile and clothing, household and child-care, and agricultural sectors. These are all labour-intensive industries, which can attract investment and will create jobs if investment rises. Is this approach politically feasible? A fourth approach would be to have much more flexible labour laws for companies that employ less than 200 people. While the present legislation does have some flexibility for companies that employ less than 50 people, this flexibility is very limited and the threshold is too low.

Aside from these changes to labour market regulation, we also need to streamline our efforts to promote small business. Already, the 2005 budget has announced a number of tax reforms designed to benefit small businesses. The creation of a single small business development agency is also an important development. Further discussion on how to promote small business is required so that all areas of government policy are aligned in support of small businesses.

CONCLUSION

The ANC’s vision has always been one of a prosperous, equitable, stable and democratic society. In the economy, our vision has been one of decent work and living standards for all, in the context of qualitatively improved equity in ownership, management skills and access to opportunities. It is imperative that we mobilise the ANC’s core constituencies – the poor, workers, women, youth and black business – around our economic strategies. Realising this vision requires that we make a clear choice in favour of a developmental approach characterised by state intervention to unblock the constraints to growth and focus directly on the battle to defeat poverty and underdevelopment.

Decisive government intervention in the Second Economy requires that the government should have the resources to make this intervention. The successful management of the macro-economy, coupled with policies that have resulted in the growth of the First Economy, have enabled the government to generate these resources. Using these resources, and applying the lessons of other successful development approaches, our interventions must focus on:

• productive investment to create and safeguard sustainable jobs;
• investment in infrastructure which contributes to development;
• measures which support local development and employment initiatives and the activities of small and medium sized enterprises;
• investment in education and training and health.

Our growth strategy must aim to balance the need to raise investment and increase economic growth with the need to meaningfully share the benefits of economic growth to a wider group of people. This strategy requires policies that will increase investment while allowing for a strong State to direct the dividends of growth towards raising the human capital potential of the poor and maintaining a social security net for certain vulnerable groups. It is a strategy aimed at growing the First Economy, growing the value addition of the Second Economy while building staircases between the two economies.

The three elements must be devised so that they are all reinforcing thereby creating a situation in which the growth of the whole is greater than the growth of the constituent parts.

The growth strategy aims to secure lower capital costs while also lowering the cost of labour so that higher investment translates into higher employment. One strategy without the other may increase investment without raising employment (labour substituting capital investment). Macroeconomic strategies must be complemented by microeconomic reforms aimed at absorbing more labour.

The growth strategy must seek to reduce the contradictions present in policy. You cannot aim for small business development while imposing such a high regulatory burden on small businesses. You cannot provide a comprehensive social security system, invest in economic infrastructure, the criminal justice sector and keep the tax and debt burdens stable. You cannot extend wage agreements to non-parties and expect geographic concentration on investment to be diversified. The balance between social security and investment in education and infrastructure must be appropriate and it is probably not optimal at the moment. In the words of President Thabo Mbeki, the objective must be to reduce the number of people on social grants and increase the number of people who earn an income from normal participation in a growing economy.

South Africa should pursue a policy that allows for a more competitive exchange rate without abandoning the inflation-targeting model. Aggressive buying of dollar assets when the Rand is strong is one option; faster liberalisation of exchange controls is another avenue to pursue to weaken the currency. South Africa should also pursue policies aimed at lowering domestic real interest rates through prudent fiscal policy, encouraging savings, making progress in reducing the cost of utility services and encouraging competitiveness in the economy. These policies should help to provide cheaper capital for investment and provide a more competitive currency. Achieving both will not be easy, but is also not impossible.

As a country with a 40% unemployment rate and a youth unemployment rate of almost 60%, the insider-outsider model of our labour market must be examined carefully. We have to introduce elements of flexibility in the labour market. In particular, reforms are needed to address the extension of agreements to non-parties, the cost of dismissing non-performers and the rate of increase of minimum wages. Introducing elements of a dual labour market either for young people, for small business or for certain labour-intensive sectors have to be considered given the high unemployment rate, even though this will be very difficult to sell.

Building linkages between the First Economy and the Second Economy is crucial. These linkages include providing quality education and health care to the poor, implementing a land reform programme and providing access to credit to small-scale businesses, investing in infrastructure that lowers transport costs and extends basic services and consolidating a social security safety net. This strategy, a South African strategy, taking into account the historical context is a realistic and workable strategy that will succeed if implemented effectively.