Economic Policy

Has redistribution as policy run its course?

Agreement on redistribution?
SACP and WB.jpg

Have we reached the end of the road for redistribution in South Africa? Recent publications by the World Bank (WB) and the South African Communist Party (SACP) suggest that the time for redistribution may well be over.

The oddness of the pairing - usually with different ideological stances - is remarkable in itself, but the underlying logic for reaching the conclusion is even more remarkable, writes Ebrahim-Khalil Hassen in an article for the South African Civil Society Information Service.

The policy recommendation is similar: After a strong focus on expanding services, South Africa must now focus on the economy.

The detailed proposals from the SACP differ from the standard set of recommendations from the WB, but the argument that we have reached the limits of redistribution in South Africa is a common thread.

The solutions for the SACP are to be found in policies aimed at industrialisation and infrastructure development. For the WB’s part, there are no detailed proposals in its report, but a general call for inclusive economic growth and a warning that the fiscal limits have been reached.

There are, of course, important differences as well, but they share a remarkable circumvention: the failure to unpack how the poor, especially the young and unemployed, will be able to participate in the envisaged economic reforms.

WB report

The publication of the WB report, “South Africa Economic Update: Fiscal Policy and Redistribution in an Unequal Society”, provides an important analysis of the impact of government expenditure on the poor and for the first time, provides incidence reports on taxation, which shows that personal income tax is progressive.

The study uses methodologies used in other countries, which allows for comparisons.

South Africa is an outlier. The impact of government spending on the poor in SA has the biggest impact on inequality, compared to other countries, but remains the most unequal country in the sample.

This paradox is an important one. The WB uses this finding to argue that redistributive efforts via government spending are unlikely to lead to major changes in inequality – that social grants reduce inequality, but play a limited role in economic growth. The evidence, however, shows that social grants play a role in supporting poorer people’s involvement in the economy.

Importantly, the WB combines good redistributive impacts with a warning that SA is required to “consolidate its fiscal position” and ultimately suggests that the answer lies in inclusive economic growth. But the WB also pays scant attention to the highly concentrated nature of the South African economy, the major obstacle to inclusive economic growth.

SACP policy document

In a recent SACP policy document titled: "Going to the Root: A Radical Second Phase of the National Democratic Revolution - Its Context, Content and Our Strategic Tasks”, the core distinction it makes is a division between the first and second phases of transformation.

During the “first phase” it is argued that radical changes to political rights and redistributive efforts have resulted in major improvements in service delivery. However, despite these improvements in service delivery, inequality and unemployment remain extremely high.

To rectify this failure a “second phase” is needed. The SACP makes a call for “radical economic transformation”, which includes an attempt to grow the capitalist economy whilst also nurturing the solidarity economy. This phase is about radical economic transformation with industrial policy and infrastructure development playing a foundational role in supporting structural change.

Underlying message

The starting points for the WB and the SACP may be different, but the underlying message is the same. South Africa needs to focus on the economy and the time and space for expanding redistribution is limited.

This is not the first time that the WB and the SACP have been in agreement. The SACP also endorsed the WB inspired Growth, Employment and Redistribution (GEAR) plan. Eighteen years later, the same argument, which brought these strange bedfellows together, is being repeated.

Like in 1994, the argument is that restructuring government finances combined with market-based reforms will lead to higher economic growth and greater social equity. The variables are obviously different, but the underlying logic is jarringly similar:

• social spending has limited impact; and

• economic restructuring will stimulate growth and inclusion.

However, GEAR policy failed to deliver on the anticipated levels of economic growth and employment. Neither did it increase investment levels. In fact, major increases to the social grant system only occurred after the GEAR period – supporters arguing that this was due to the fiscal space created by GEAR and critics arguing that it was due to GEAR’s failure to create employment.

The core question of how poor people are supposed to share the benefits of economic reform remains unsatisfactorily answered.

Specifically, the relationship between the agency of the poor and the structure of the economy is glossed over. Unemployment data provides an important reminder of the interaction between structure and agency. Youth unemployment best illustrates this.

In SA, there are over three million unemployed young people who are not employed or in education and training. It’s not just that these young people merely have limited opportunities to enter their first job; they can be more accurately described as being structurally excluded. Importantly, they receive no social security support.

Government interventions to reduce youth unemployment in several instances are producing encouraging results. However, scaling these programmes to have substantial impacts requires expanding government budgets.

Moreover, as analysis undertaken by the Basic Income Grant Coalition indicates, expanding social security to this group would provide a foundation on which programmes such as improved education, public works and entry into education and jobs are much more likely to succeed.

Expanding the social security system will require more public money and a radical reprioritisation of existing spending. The outcome of expanding social security would however result in greater participation in the economy through employment and potentially youth enterprises. A credible case for expanding the redistributive role of fiscal policy is thus made.

Without an effective and sustainable redistributive strategy – either through an expansion of social security or a reimagined public works programme – the likelihood of youth participating and benefiting from economic reforms is unlikely. It is the link between government usage of its resources to improve the prospect of people participating in the economy, and the restructuring of the economy that must be sustained.

It harks back to the principle contained in the Reconstruction and Development Programme (RDP) to link development to growth.

Rapid structural change in the economy is obviously needed. Industrial policy and infrastructure development programmes are intended to do just that.

However, even here the links between these programmes and more egalitarian wealth distribution are tenuous. Start-up and smaller businesses would be hard pressed to find direct support through the current suite of industrial policy schemes, and larger businesses will benefit more from the infrastructure plan. Here again, redistribution matters.

The redistribution of market-based opportunities for firms is a subject not discussed in our economic policies. However, across the globe procurement policies, taxation, competition policy, supplier development programmes and other instruments are more aggressively utilised by government to support the entry of smaller firms and their continuation. Here again, it requires a reprioritisation of spending and more importantly, a reorientation in policy.

The challenge

The biggest challenge remains that much of what is being proposed rests on SA rapidly improving its economic growth rate to at least 4,5% per annum, or more ambitiously to 7% over a sustained period. The likelihood of this occurring is extremely slim precisely due to low levels of economic participation.

It requires us to develop policies that improve prospects for economic inclusion even under conditions of low economic growth.

The danger of the SACP and WB asking us to focus on economic transformation alone is not only that the possibility of a stronger redistributive stance recedes. Without linking redistributive instruments to economic strategies, SA will fail to provide the ways and means for excluded people and firms to craft strategies to participate in economic growth.

The challenge is not simply more money, but rather better programmes and a radical reprioritisation of existing spending. Surely, the more people are enabled to participate in the economy the more prospects for sustained economic transformation increase?

(This is a shortened version of Hassen’s original article, edited by Piet Coetzer)

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