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SA’s income inequality battle can only be won through job creation in tradable sectors

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SA’s income inequality battle can only be won through job creation in tradable sectors

9th July 2010

By: Terence Creamer
Creamer Media Editor

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The current emphasis on wage increases to deal with South Africa’s income inequality crisis is inappropriate and the focus should urgently shift to economic inclusion for those six-million-plus citizens who are currently unemployed, a group of leading international economists argues.

Speaking at the Gordon Institute of Business Science recently, Harvard University’s Professor Ricardo Hausmann, who also led the 2006 International Growth Advisory Panel for South Africa, said that the country’s high rate of economic exclusion remained its most significant challenge and that dealing with it should now supplant the 2010 FIFA World Cup as the nation’s chief priority.

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“This is a very low rate of employment . . . and it implies an enormous productive potential that is not being fully utilised, because willingness to work has not been transformed into value,” he said.

Under a ‘normalised’ employment con- ditions, South Africa, which has some 47-million citizens, should employ between 18-million and 19-million of its citizens, as opposed to the current paltry level of around 12-million, with about eight-million of those in the formal sector.

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South Africa shed a further 79 000 jobs in the first quarter of 2010, having lost nearly one-million jobs during the 2009 recession, which was the country’s first in 17 years.

“There is a huge difference between the number of people working today and the number of people that could potentially be working. And, if those people were working, this would be a much more inclusive society, because those six-million to seven-million people who are not working are predominantly young, black and female,” Hausmann said.

This sentiment was vigorously echoed by the Massachusetts Institute of Technology’s Professor Roberto Rigobon, who argued that South African policymakers and social actors had to begin accepting that it would be far more effective to improve the lives of the poor by creating six-million jobs than by continuing to raise wages at rates of around 10% a year.

“It is still assumed that income distribution can only be solved through wage increases. But, in a country where only one-fourth of the population is actually working, inclusion is the best, and the most effective, policy remedy for income distribution and poverty,” Rigobon averred.

Hausmann’s Harvard colleague, Andres Velasco, who served as Chilean Finance Minister between 2006 and 2010, added that South Africa’s biggest problem was not merely the high unemployment rate, but the fact that it was coupled to a “very low participation rate”.

“The number of people working [in South Africa] is just extraordinarily low . . . I don’t know of another country, especially one of this level of development, where so few people work,” Velasco lamented.

All three economists, thus, argued that wage moderation would have to be accepted as part of any strategy to overcome South Africa’s relatively “lacklustre” growth outlook, particularly when compared with other emerging markets in Latin America and Asia.

Such an assertion is likely to be met with resistance, especially from South Africa’s powerful labour movement, where the Congress of South African Trade Unions remains a member of the governing alliance, led by the African National Congress.

Velasco also cautioned that the current “politics of the left” was not the “politics of jobs, but the politics of wages”. “Therefore, the biggest challenge now for central-left thinking on the planet, not only in South Africa, is to move the debate from a debate about wages to a debate about jobs.”

Fiscal Tightening?
Besides wage moderation, though, Hausmann, Velasco and Rigobon also urged South Africa to pursue a postcrisis macroeconomic path that embraced tighter fiscal frameworks and looser monetary policy.

Velasco, who presided over the creation of massive and often-unpopular fiscal surpluses in Chile, which were then used to counteract the recession of 2008/9, said that it was less important whether a country ran a fiscal surplus or deficit than having the mechanisms in place to ensure a smooth expenditure trajectory.

He said that, by running tight fiscal policy during a period of expansion, Chile’s real exchange rate had also remained remarkably stable between 2000 and 2010, despite the country’s continued dependence on a single commodity – copper. By contrast, other commodity-linked currencies, including the South African rand, had strengthened materially during the crisis.

A restrained fiscal framework and the accumulation of currency reserves during periods of plenty were “expensive”, but provided vital protection. It also enabled a country to adopt looser monetary policies, which lowered the real interest rate differential and the exchange-rate distortions asso-ciated with the “carry trade”.

But Rigobon argued that South Africa should also consider taxing short-term capital flows as a way of dissuading currency speculators. He argued that it would be unfair to regard such a tax as a “capital control” as it was really only a transaction tax that would reduce the noise that such “hot money” created for the exchange rate and monetary policy.

The approach, which decreased currency volatility and increased exchange rate com- petitiveness, could also galvanise interest among fixed investors in the tradable sectors, such as mining, agriculture and manufactur- ing.

In fact, all three economists viewed these tradable sectors as the key to boosting economic growth in South Africa, parti- cularly given the fact that the country’s chronic current account deficit made it difficult for South Africa to grow through raising domestic demand alone.

Therefore, Hausmann also urged South Africa’s policymakers to continue to support an open economy and allow the competitive currency, rather than tariffs, to provide protection for industry.

But he also said that it was vital for the country to increase the number of companies operating in the economy and to create systems that “increased the birth rate and decreased the infant mortality rate of firms”.

A review was, therefore, also necessary of the prevailing constraints to enterprise development, including an honest assess- ment of whether black economic empowerment had become a hindrance in this regard.

While affirmative action was still necessary, Hausmann questioned whether new enterprises should be saddled with the “original sin of apartheid”.

“It is hard enough to create a new venture. Don’t burden them with these additional restrictions,” Hausmann concluded.

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