Vol.6 No.14, 12 April 2006

South Africa's 'Dual Economy'

Part 1.

During his 2003 State of the Nation address, President Mbeki acknowledged, for the first time, that South Africa is a ‘dual economy’. Since then that fundamental policy insight has, regrettably, degenerated into a piece of trivia, yet another politically correct phrase: the ‘Second Economy'. For many, it is simply a new name for the 'informal economy'.

Government still has to reflect on what a ‘dual economy’ is, how it came about and is structured, and what such economic duality requires in policy and programme terms. How can such an understanding promote economic activity for all South Africans?

The promise of a new insight has ended up as further justification for more-of-the-same state ‘delivery’ rather than asking, “Why ‘delivery’ contributes so little to the transformation of the historically poor areas of the country?” Most citizens still live as virtual economic prisoners of the still non-working, marginalised local economies of township and rural areas.

President Mbeki has presented a picture of the First and the Second Economies as a double storey house. On the top floor are the rich, living well. Stuck in the bottom floor, with no ladders to access the top floor, are the majority of South Africans who are poor. This depiction calls for investment, for more ‘delivery’, in education and skills, in economic infrastructure etc. that creates the ladders the poor to join the rich on the top floor.
There are two problems with this analogy and its solution.
• Today, the ‘global’ economy that provides for the rich on the top floor can no longer provide employment for all. Under globalisation, in order to compete, there has to be highly capital intense production that displaces labour and rewards internationally privileged capital, distorted exchange rates, subsided exports, or exploited labour. There is simply no employment ‘highway’ to the top floor for all South Africans. As the respected British commentator James Robertson, has recently stated, "Full employment, as we knew it in the past, will not return".
• Government’s R240 odd billion annually spent in the ‘marginalised’ areas generates very little local economic activity.

The developed first economy of South Africa has indeed been growing. It mainly rewards capital and international corporate investment and is wedded to cheap energy. This ‘growth’ is seen in rising profits and tax revenues. Meanwhile, our overall unemployment and poverty problems continue to worsen.

An appropriate depiction of the ‘dual’ economy starts from the fact that the bottom floor of the double storey house contains the historically ‘marginalised’ (and recently re-marginalised by globalisation) majority of the population whose dependence on the ‘global’ first economy for jobs, goods and services remains almost total. Money does not ‘stay to work’, to stimulate new economic activity in these poor areas. Incomes are almost immediately 'spent back' into the ‘global’ economy of South Africa.
These areas are characterised by not just high levels of unemployment (the national average is some 40% which here translates into 50% to 70%) but very high levels of overall economic inactivity. In two recent surveys in Sekhukhune and Soweto, some 80% of families reported no significant economic activity by unemployed adults. At present, these communities are so economically dysfunctional that they are incapable of self-generated growth and development. Hence, the recent urgency to provide a comprehensive social welfare net - even if that 'solution' only treats the symptoms of poverty and digs a big expenditure hole. It also, at great cost – some 70 billion a year - increases basic economic dependency and inactivity.

The main difference between the two economies can be simply illustrated via the concept of the local 'income multiplier':
•R100 that enters Sandton or any other part of South Africa’s ‘global’ economy 'stays to work': it circulates some 7 to 10 times (higher amongst Jews and Muslims) before it 'leaks outside' to pay for imports or is sent by government to pay a teacher’s salary in a village. That R100 of new income generates some R800 or more of additional economic activity in the ‘global’ economy.

•R100 that arrives by way of income, remittance or pension in Soweto or the Transkei leaves almost immediately on a taxi to buy ‘global’ goods and services in the nearest town or shopping mall. The local income multiplier in these poor areas is around just 1.3. That means that it generates only R30 of new local economic activity. Small wonder that there is little or no local production in the townships and rural areas! They are ‘cash deserts’ for 20 or more days of each month. There is simply no regular, effective local demand to stimulate, reward and sustain new local economic activity.

The ‘dual economy’ is what it says: two separate economies that operate differently. Consequently, they require two different sets of policies and programmes to stimulate their internal development and growth. This basic policy insight has remained unrecognised by the government and its advisers.

The emerging truth is that the ‘global’ first economy cannot, on its own, achieve high levels of growth and stable development for all. The ‘marginalised’ second economy must also become a major driver of the national economy. What should be a vast mass market for locally produced goods and services serving some 30 million poor citizens currently limps along at, probably, just 25% of its potential. Crime, poor health and schooling hurt the ‘global’ economy and might yet undermine it.
Today it is realised that the dual economy model requires a set of 'localisation' policies and programmes that focus on the non-functioning nature of South Africa's many marginalized local economies. It is only once these marginalized areas become economically active, and over half the population can enjoy rewarding local economic activity, that the national economic potential can rise to the point where our major poverty and unemployment problem would finally be eliminated - not just alleviated.

A more appropriate economic model for the marginalized areas would start from the amended proposition, not as per ‘Say’s Law’ that “Supply Creates its Own Demand”, suited to the closed economies of 19th Century Europe, but that here we must learn to aim for 'Demand Creation that Calls Forth Local Supply (Production). This will take special measures to ensure that such production remains substantially local. These local demand and production creating measures include a variety of specific new instruments. The second article explains these. They are part of a new framework for Local Economic Development that government is currently examining.
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Part 2.

In the first part two key points were made:

•There is still considerable misunderstanding around the basics of the dual, ‘global’ and ‘marginalised’, economy of South Africa.
•This is reflected in inappropriate policy making that still misses the critical insight: South Africa requires both ‘globalisation’ and ‘localisation’ policies and programmes.
The economic challenge is to enable greater economic self-reliance and vitality in the marginalised 'second’ economy so that, quite quickly, the two economies / societies become mutually dynamic and more interdependent. Present policies build greater dependence and economic fragility.
The missing set of policies and programmes needed to attend to the structural poverty of the marginalised 'second' economy are contained in “The Community Investment Programme” (CIP). It forms the ‘localisation’ component of the new LED framework currently being considered by government. It enables ‘community’ at street, neighbourhood and village to become a vital new partner of government. It contains a number of measures aimed at raising the local income multiplier by some 300% i.e. from 1.3 to 4.0 or higher. This would create a considerably larger effective local demand in poor areas. The basic elements are: -

Child Rights. These are public funds (R300 p.m. for all children under 18 years old) provided to Community Trusts. First, communities feed all their children under 18 years old. As a major buyer, they set prices that reward local production (local effective demand) so that this expenditure stimulates the local economy. In addition, payments for locally produced food are taxed, the tax being deposited in each child’s school account to cover school fees.
The ‘social contract’ thus formed is that, in return for budgets and activity (which raises the local income multiplier three or more times), communities undertake to pay a greater share of (even higher) school and health fees. Government moves from ‘expenditure’ to the considerable dynamics of ‘finance’; that is to investor in citizens who, becoming competent, multiply state expenditure and begin to act as buyer of social consumption services: health and education in particular. This reverses the present policy of more free schooling, more inefficient social spending and greater dependence creation.
Child Rights can eventually replace the gross local economic inefficiency of the Child Support Grant, a simplistic private consumption grant that is often abused.

Community Investment Rights. These are granted to all adult community members (R1, 500p.a. for four years). This would enable communities to build up their local productive base so that they can, for example, produce locally most of the food they require to feed themselves and their children. Investment Rights would unlock the enormous labour power of the poor to match the cash available, making them highly dynamic investors. Such 'community-as-business' ventures could become very effective local investment vehicles, especially for local infrastructure service providers.
In this manner, Government gains a competent financial partner able to use funds locally and effectively (a form of local currency!) for community / public purposes. This system will allow government to increasingly redirect funds, funds that are today spent inefficiently, to citizens for investment in children and also in local production bases.
Government can re-direct some R150 billion per year of state salaries, other expenses and grants in this manner, gaining a ‘competent’ citizenry enjoying an increased local economic activity of R600 billion per year! Tax, given the new high local multipliers, would recoup around 75% of expenditure; all of it re-directed anyway!

Community Trusts. The potential is for some 30 million community members (adults and children) to register some 3,500 Primary Community Trusts that ‘modernise’ the traditions of joint ownership and ‘Ubuntu’. These will be served by some 650 odd Secondary Trusts, or roughly three per Municipality. Each would found Cooperatives to manage the pure business activities. This would be the biggest possible SMME programme!

A National Local Trading System.

Until the mid-1970s, South Africa had a local trading system. The 1910 Constitution required the government to provide “Peoples’ Markets” (some 500 municipal markets) complemented by the large network of local trading stores in the ‘black’ countryside that financed and purchased crops. It ended when the new National Party government chose to support only 13 'national, wholesale fruit and vegetable markets' under a false pretence of 'modernisation' and when Homeland governments ‘indigenised’ trading stores without securing the network of services they provided. Some 30% of all families were left economically high and dry.

We must rebuild an ‘economy of participation’ formed by 3,000 odd periodic markets in some 250 ‘rings’ of markets in cities, towns and rural areas so that every one can live in a ‘working local economy’, linked competitively into the national economy. Then, local people can take the fish they caught and/or the few tomatoes/potatoes each can supply and sell them in a local market every two or three days. These goods are sold to other locals or they are bulked for ‘export’. With the cash earned, they can fill small containers with essentials like oil, sugar and maize meal. Unit costs may be higher, but at least all can first produce and then sell (which they cannot do now), as well as mingle with neighbours to gain information, participate in a vast market for cultural activities, and build communities and regional economies.

‘City’ functions, such as various official services and administration (Land Bank, Home Affairs, Education Committees, TB Screening, Pension payouts, Crop deliveries, cattle auctions etc.) would also be present on market days. Lowered transaction costs to buy, to sell and to access services would greatly enhance regional competitiveness and the integration of regions would drive higher economic growth.

An intra-district public transport system to serve each ‘market day’ would be essential to knit regions together. By contrast, the present taxi industry cements the old migrant and commuter movement patterns i.e. mainly inter-district which hinders local trade.

Local Currencies.
No one discusses the fact that South Africa does not have ‘working local currencies’ and hence finds it difficult to generate ‘working local economies’. The Rand works well in the domestic global ‘first' economy and, largely for speculative reasons and without tax or other obligations, in the international global economy. It does not 'stay to work' in poor local areas, that is, in the marginalised 'second' economy.

Yet, there are actually hundreds if not thousands of local ‘currencies’ in South Africa. SAA’s Voyager Miles is one. Many shops and services reward users by allowing a ‘saving’ to be re-spent within the business. A recent study for the Club of Vienna recommended that every major city introduce its own currency. Otherwise, the many and growing ‘backward areas’ of Europe would remain depressed.

In South Africa, the extensive old ‘black areas’ (the Soweto’s, the Transkei and so on) remain seriously underdeveloped. They desperately need new localisation policies such as the Community Investment Programme, local currencies, and periodic markets if they are to enjoy the basic economic right, promised by Cabinet in 1997, to live in “Working Local Economies”.

© South African New Economics Network 2006. Page generated at 17:08; 24 September 2006