SANE Views

Vol.6 No.33, 13 September 2006

New Challenges To Old Unemployment

Margaret Legum

Some radical ideas can be found behind the detail of a study by the International Poverty Centre called An employment-targeted economic programme for South Africa published in June this year. The U.N.D.P.-supported Poverty Centre buries its most courage-requiring suggestion among impeccably researched facts and prognostications about our economy under present mainstream policy assumptions. More of that later.

The study wonderfully summarises detailed facts around mass unemployment and the solutions being mooted, their pros and cons. Wonderful, that is, if you can wade through sentences like: there is only negligible evidence showing a negative relationship between growth and single-digit inflation. That language certainly slows down one's reading; and accounts for the sad nonsense that economics can be understood only by economists, which is why they are so seldom challenged.

Why are more people not being employed? That is the question without frills. The business community claims it is because labour is too expensive and government regulation too onerous. So their solution is to cut wages and end rules around conditions of employment - political and humane considerations being ignored. The authors of the study - professors at Massachusetts-Amherst University with support from some South African academics - disagree that high labour costs are the main problem. In any case, they reckon, the price of labour is best tackled through a system of employment subsidies, which would cut costs, while paying enough to keep people alive. Excellent ideas.

Underlying all that is the fact that the capital intensity of growth has grossly intensified in the past fifteen years. Growth is increasingly jobless. Globally the private sector inevitably substitutes a scarce resource - capital, which needs artificial energy - for one which is most abundant - labour. The digital technological revolution sheds labour. This is inevitable if you expect companies to compete globally on price.

So what can be done? The report points out there are four sources of demand for labour: private investment, private consumption, exports and government spending. The first three are subject to the aforesaid jobless growth. Of course some sectors are more labour intensive than others; and the report recommends various government schemes for targeted subsidies and incentives to those sectors. Relatively speaking, this is tinkering.

The fourth - government spending - is the real point. Globally, we will all come to understand that restoring employment on a large scale will involve various forms of government spending. Currently in South Africa that means the Expanded Public Works Programme (EPWP) and the Accelerated Shared Growth in SA (ASGISA) initiative. But both theory and experience suggest that the private sector cannot create enough jobs to enable enough people to buy its products. Therefore it needs the public sector to do so.

The report does not go as far as this. But it shows that under even the most optimistic - indeed unrealistic - assumptions we cannot expect less than 15% unemployment in ten years' time. And it points out the 'growth-enhancing effects of expanding public infrastructure investment'. You can say that again. Not only the nation in general, but the private sector in particular, depends crucially on public investment in people and facilities - roads, ports, railways, public health, epidemic control, transport, police and prisons and courts, schools and higher education, and so on and on.

Above all, the private sector needs employed people to buy its output. Rightly, therefore, the report considers the arena of taxation to raise revenue. It shows that even within the current taxation system, extra government revenue can be raised without affecting our standing relative to taxation in comparable countries. The report does not go further than that. But if government wanted to make a serious dent in employment through unashamedly expanding, say, the education, health, justice, housing and/or transport systems, then it would need better and wider taxation systems.

The authors make a series of suggestions about ending the tight controls over debt and inflation, as well as development banks' spending, which the government has maintained as a sign of its financial 'prudence'. It is refreshing to see questioned the decades old dogma about fiscal and monetary policy. In the interests of money-lenders economies have been constricted by interest rates, and government spending clamped to keep inflation at virtually nil. Those policies have benefited the financial sector and its clients - at the expense of the rest of us.

Then the authors bite the bullet of the response of the financial sector to the absolute necessity of 'a more expansionary set of fiscal, monetary and credit allocation policies'. The way capital holds government to ransom by threatening to leave is usually referred to in whispers. But the report comes out with '... the possibility that financial market investors might react negatively to such a programme and might sell off their holdings of rand.'

This has always been the problem. But the report speaks the unspeakable solution: 'Capital controls, exchange controls and other capital management techniques have been utilized as mechanisms for reducing the sensitivity of domestic financial markets, including sensitivity of exchange rates, to macroeconomic policy.' It goes on to show that such measures would prevent severe volatility on currency markets, while expanding the economy; and suggests that 'such measures are again becoming increasingly common'.

That means we can prevent them sabotaging the economy - because we have done something they don't like-just by deciding to do so. Al avai.