By Frans Cronje
The poverty data recently released by Statistics South Africa are a useful warning that South Africa needs to change the way it makes empowerment policy if it is to remain a stable society. At the IRR, we have invested considerable energy in developing a new approach.
What was reflected in the Statistics South Africa poverty data was not poverty essentially, but rather South Africa’s very low rate of labour market absorption. The labour market absorption rate measures what proportion of people of working age actually work. South Africa averages a rate of just over 40%, which is extremely low by emerging market standards.
Our analysts have also been able to show that the rate for an individual hinges in large part on the education they have received. For people who have not completed high school, the rate averages 40% or less. For those who have completed high school as their highest level of education the rate approaches, and in some years exceeds, 50%. But send a young South African to university and his labour market absorption rate rises to over 80%.
South Africa’s very low levels of labour market absorption explain why poverty numbers remain high (and have been rising over the short term) even though living standards are much higher than they were in 1994. The apparent contradiction is explained by the successes of the government’s service delivery efforts. Since 1994 the number of families with a formal house, clean water, and electricity has essentially doubled. The proportion of households with such services has also shown impressive increases. Readers who believe that service delivery efforts failed should consider that, over the past 20 years, in the region of ten formal houses were built for every newly erected shack.
Yet, even though living standards have been rising, the very low levels of labour market absorption mean that far too few families have been placed in a position to take the first tentative steps into the middle classes through employment and entrepreneurship.
One of the reasons for this is the very poor standard of education in roughly eight out of ten government schools – our analysts show, for example, that almost half of children will exit school before getting to matric. A second is the changing structure of South Africa’s economy, which has seen the share of total GDP of primary and secondary industries (such as mining, manufacturing, and agriculture) slip in favour of the high-tech and high-skilled services economy. Manufacturing’s share of GDP has been cut in half over the past 20 years.
At the same time, empowerment policy as practised is increasingly coming to serve as a tool of wealth extraction for a politically connected elite. More and more, the recent Mining Charter being a prime example, we see a pattern of policy makers using harsh regulatory mechanisms, passed in the supposed interests of transformation or redress, to extract wealth from private sector companies.
Where these efforts further deter fixed investment they further tilt the playing field against the poor – and not in favour of them, as empowerment policy should.
It is against this context that we are developing a new approach to empowerment policy.
Our approach is unique in that its empowerment scorecard seeks to reflect, in the main, the contribution made by the private sector to job creation and maintenance, tax payments, contribution to fix investment, and contribution to exports.
These four ingredients are essential to shaping South Africa as a competitive high-growth economy that is capable of creating the jobs and entrepreneurial activities to lift large numbers of people out of poverty. Failure in any of these four areas will condemn South Africa to remaining a largely poor society.
Jobs are the single most important ingredient in beating poverty, and our scorecard, as some of our analysts envisage it, would reward companies for new job creation and job maintenance, while companies would see their scores decline on the back of mass retrenchments.
Tax is a second critical ingredient, as it allows for the provision of services in education and healthcare and the maintenance and construction of infrastructure that a growing economy will need if it is to succeed in pulling a significant proportion of its population out of poverty. Our scorecard would reward companies who pay their taxes and penalise those who engage in tax dodges.
Factoring in the consequences of labour market policy we have identified a correlation between levels of fixed investment and job creation in South Africa. Yet South Africa’s levels of fixed investment are very low – and have fallen sharply over the past eight or nine years.
Incentivising such investment would counter trends of deindustrialisation and export substitution by rewarding firms who commit hard capital to projects in South Africa.
The fourth pillar of our scorecard would prioritise exports and the importance of these in raising South Africa’s level of international economic competitiveness while stabilising its currency.
That fourth pillar would also serve as an incentive to reverse South Africa’s deindustrialisation trend, as seen in manufacturing, and reward those companies who process and export goods from South Africa.
Too often in our engagements with a host of companies and economic sectors, empowerment policy as currently practised is seen as a disincentive to invest and create jobs.
As long as that remains the case, South Africa will not defeat poverty. Our new approach is an effort to better align the interests of the country and its people with those of the business and investment community.
It is only by finding that common ground that poverty will be beaten.
*Frans Cronje is a scenario planner and CEO of the IRR, a think tank that promotes political and economic freedom.
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