Inclusive Growth: Erratic policies mean SA rates either brilliant or pathetic

As the Arab Spring showed the world with such devastating consequences, inclusive growth has become the Holy Grail of economic policy. As old models get challenged by technological and other disruption, countries are forced to find inclusive growth models to address the trickiest of policy problems. Given its segregated past, the challenges for South Africa are tougher than most, as reflected by the results of the World Economic Forum’s year-long study into the issue. In London today, I caught up with the author of the WEF’s Inclusive Growth report, Richard Samans, for what turned out to be a fascinating interview. Jacob Zuma isn’t far off the mark when using Malaysian experiences to shape initiatives like Operation Phakisa, based on models from that country. But like so many parts of the country, there’s an obvious lack of consistency for the approach towards inclusive growth. – Alec Hogg     

Rick Samans (right) is a director at the World Economic Forum. Alec Hogg spoke to him about the WEF’s report on inclusive growth around the world. He asked Rick how long the report had taken….

We’ve been working on it for over a year.

What do you want to achieve? 

Well, we had listened carefully to the debate and the debate is all over the world, about inequality and about the need for a more inclusive economic growth model. Yet, what we heard when we listened to the debate was mainly diagnosis and aspiration. Very little in the way of concrete framework for how you go about trying to drive a more socially inclusive growth model. We decided to think about that and take a practical approach, and see whether we could help move the debate onto a bit more concrete and actionable ground.


South Africa overall results

The way South Africa performed in this survey, it seems like there’s a big mountain to climb….

Well, it’s true. South Africa, like many countries, has many challenges right now, but the thing that South Africa has in common with many other countries at various levels of economic development, is that there is a range of opportunities for making progress on both growth and equity by taking a wider spectrum approach to improving institutions and policy incentives in the economy beyond the ones that most of the media is focused on. I can elaborate if you wish.

Let’s just start from the basis of growth and equity. Are there any models around the world where this has worked?

Well yes, and that’s where we started. First, we looked at the historical experience and then what the experts and scholars have been learning over the last 10/20/30 years. What we found is that if you look at the advanced industrialised countries; after the last big financial crisis in the 1920s, during the next few decades the lesson they learned is that they needed to broaden the base of growth. They couldn’t rely mainly on business investment and asset prices, basically, to help keep the economies afloat. It was too vulnerable to shifts in the business cycle. What happened in the U.S. and much of Europe was the creation of a range of improved labour protections, social insurance systems, anti-corruption measures and frameworks, broadened financial inclusion, protection of small savers, breaking up some of the oligopolistic concentration of rents (economic rents) in the economy, and opening it up to competition, and supporting small business and entrepreneurship.

All of these things and more, including infrastructure improvements, were really important in increasing the amount of social inclusion in employment (the process of economic growth) as well as the benefits of it; namely, their median income. That in turn, helped to create this massive consumption engine that stabilised the growth cycle in the economies. That is a very important lesson. The interesting thing is that when economists look back at the success story in East Asia from the 60’s to the 90’s, they found the same thing, largely. It wasn’t magic. It was a deliberate strategy across a whole range of institutional aspects of the enabling environment for the economy that they did, which helped them achieve both high growth and strong social equity.

Corruption - South Africa ranks poorly in the WEF seurvey
Corruption – Interesting paradoxes for South Africa, but overall it ranks poorly at 21st of the 26 Upper Middle Income countries surveyed by the WEF.

It seems idealistic that you can get them all to combine, to coerce, to move in the same direction. I take the issue of corruption in Africa, where it will derail pretty much any other good-intentioned work that you might have.

Yes, but endemic corruption is not a given. It can be changed. Countries have shown that. Hong Kong had a terrible corruption record back in the 50’s and 60’s, and Hong Kong built some institutions. They created an independent anti-corruption authority that reported directly to the Prime Minister – didn’t have to go through the rest of the bureaucracy. They empowered the judicial system to be able to handle the matters that came up and they did a number of things that over a series of years, through these kinds of incentives and institutional capabilities and enforcement actions, changed the business culture and the political culture in Hong Kong. Other countries have done the same thing and so, these things are not magic. You can change them if you work at it.

Do you have a whole bunch of boxes then that need to be ticked? Do they all have to be ticked in order for the inclusive growth model to work?

Well, our main finding here is that interestingly, no single country in the world at any level of economic development scores above average on all 15 of the different parameters we look at, and so every country has room to improve. To be sure, some countries are scoring better in general than others, but the first step in the journey toward a more inclusive growth model is in fact, to look at the full spectrum of opportunities for progress. The second step (and this is where we’re trying to help) is just to take a good, clear look at what the countries’ relative strengths and weaknesses are. Where there institutions and incentives are relatively strong, compared to their peers. Where are they weak? Where they’re weak, look at what some of their peers are doing better…what they’re actually doing to help achieve better results and this is what we provide. In this report, we’re providing what you might think of as a diagnostic scan or an MRI of the skeleton of a country’s enabling institutions and policies – four things that really matter/particularly matter for social inclusion in the economy.

An area where South Africa ranks well - its fiscal transfer policies
Take a bow SARS and Pravin Gordhan. SA ranks best of all 26 upper middle income countries surveyed in its tax code and social protection. 

There’s a lot of detail on South Africa but it doesn’t make a very happy picture; particularly in that you’re not rating the country against the whole world, but only in a particular sub-segment.

Yes, but it’s not a uniformly negative picture. South Africa, relative to its other upper middle-income country peers, does have some strengths. Your fiscal transfer sets the policies. That is how you structure your tax code, and the level of social protections that you funnel through government programs relative to other countries at their level of development, compare reasonably well. It’s the same thing in terms of asset building – enabling small business ownership etcetera, but there are some glaringly weaknesses and I’m happy to elaborate on them if you wish.

Which are they?

Well, in particular, as everyone who lives in South Africa will know, you have a very challenging job market/situation. South Africa is 26th out of 26 upper middle-income countries when it comes to the unemployment rate and 23rd out of the 23 countries for which, we have data on youth unemployment so that is a negative factor.

Once again poor labour legislation has delivered a wooden spoon for South Africa in a global survey on employment.
Once again poor labour legislation has delivered a wooden spoon for South Africa in a global survey on employment.

It can’t get any worse than that. You said right in the initial stages when we were unpacking this, that one of the areas is to bring in labour protections, but I guess you can go too far.

Well, here are other areas where there are some real challenges in the environment there. South Africa scores last in its category in cooperation in labour/employer relations, so there’s an adversarial dynamic, which is not particularly helpful. Similarly, the wage rates: the share of the working population that’s at a poverty level or below – you’re 18th out of 19. The relationship between pay and labour productivity growth: economists tell us that these two should track reasonably well in an economy that’s functioning well for the people. Here, there are some challenges as well. South Africa is near the bottom of its group. Maybe the other thing to quickly flag is the education system, because that’s even more fundamental than the labour market is.

Education and skills

South Africa is right up there – top five – on investment in education but it doesn’t seem to be properly invested..

You have some issues here in terms of both primary enrolment (surprisingly) and college/university/tertiary school enrolment where South Africa scores again, near the bottom. The secondary enrolment is very much, near the top, which is an interesting finding. The perceptions of employers with respect to the quality of the students’ skills coming out of school, is dead last in this income category, so there’s certainly work to be done in the education system. Partly what we’re looking at here is not just how well the best students do, but we’re looking at ‘what’s the overall performance level throughout society, across the different socioeconomic groups’, and South Africa is not alone in having challenges in this regard. Indeed, I’m an American and my country has real problems with equity of educational opportunity.

Rick, the World Economic Forum does a lot of good work. How well is it perceived in countries like South Africa, which don’t score terribly well in surveys like this?

This is piece of work is not about ‘naming and shaming’. This is exactly the opposite; unlike all of our other benchmarking work where we have one score per country and we put them in a league table (almost as if you’re watching a sporting event). In this case, we’re deliberately not doing that. Instead, what we’re providing is a very business-like approach. It’s a benchmarking approach and it’s a tool, essentially, to help move the debate from worrying about it and hand-wringing, to a more specific understanding of ‘where are the gaps, who’s done better, and where should I look to learn’, and that’s what we’ve done for South Africa and every other country. This is basically, to enable a much more concrete discussion about a national strategy. As I say, South Africa has strong points as well. I’ve just highlighted (in the last minute or two) some of its weaker points.

Summary of SA's results
Summary of SA’s results in WEF survey on policies for Inclusive Growth around the world – depending on section, either scores brilliantly or very badly. 

If you were setting an agenda for President Jacob Zuma’s cabinet, given the information that has come out here, what would be the key issues?

I think the key issues are reasonably well-known already, within the country. We know that there are some infrastructural problems, which are quite large. If you look at our ratings here, South Africa rates 12th out of 13 for which we have data, on access to electricity. This is already a very well-known issue in South Africa. Interestingly, the domestic transport network is near the bottom tier and also, the broadband and mobile cellular affordability and availability is relatively weak and yet, this is not a luxury anymore. This is a very power enabler of entrepreneurship.

So, those would be three areas that you would put high on the agenda.

I would say those areas are quite important, along with some of the weaknesses in the educational system and in the labour/employer relations. Finally, of course, a major issue that we touched on earlier is in fact, in the area of corruption and concentration of rents in the economy.

Are there any countries that have run the kind of path that you would be able to suggest that South Africa follows?

If you look at the other upper middle-income countries that are doing better across these 15 different areas that we’re scanning and benchmarking; Malaysia, Lithuania, Latvia, Chile, and Hungary are the ones which, while they do have weaknesses as well, they do better across the full panoply of areas so that’s worth looking at. The other thing I would point out is the World Bank did a very interesting study about 20 years ago, about what the key ingredients were in the success of the East Asian high growth economies. There’s a very good recipe for learning. It wasn’t so much natural endowments or natural resources, etcetera. It was really, about the institutions in the economy and how well the cooperation between the public/private sectors were and I think there are some useful lessons in that experience.

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