The Universal Quest for Inclusive Growth

By Jac Laubscher: Sanlam Economic Advisor

With inclusive growth being propagated as the leitmotif of economic policy in South Africa, first by ex-Minister Pravin Gordhan and now by new Minister of Finance, Malusi Gigaba, it is appropriate to note that South Africa is by no means alone in this endeavour. Although the nature and causes of exclusion and the required policies to address them differ from country to country, the common underlying motive is to be found in a perception that the current system is unfair with regard to the sharing of the benefits of economic progress.

The idea that it is merely a matter of differences in individual merit, and that increases in welfare in general originate from independent individual effort has become untenable in the eyes of some, with the recognition that individual success is built on the collective heritage of past achievements, whether private or public. All internet-based innovations, for example, would have been impossible without the development of the internet in the first place, with the latter being the result of innovation in the public sector.

The slow post-crisis recovery in economic activity and its varying effects on different groups in society have raised people’s awareness of this perceived unfairness to the point that it has moved to the centre of political economic debate.

A popular view has been that globalisation is mainly to blame for this development and that militant nationalism (finding expression in resistance to immigration and in trade protectionism) is therefore the solution to the problem.

In the words of the Managing Director of the IMF, Christine Lagarde, “while returns to capital and highly-skilled labour increased, wages of low- and middle-skilled workers stagnated. The ensuing increase in inequality and anxieties about integration’s effects on other aspects of life led to questions about its benefits.”(source: Lagarde, C: The Managing Director’s Global Policy Agenda. A More Inclusive and Resilient Global Economy. April 2017. International Monetary Fund).

However, empirical research has repeatedly shown that globalisation has played a secondary role in the decline in inclusiveness, in spite of it being blamed by populist politicians in especially developed countries. The suggestion that the winners from globalisation should in some way compensate the losers, although valid, has in any case come too late to address the general unhappiness.

The increasing focus on inclusive growth is therefore to be understood as a response to the growing inequality of the past three decades because most of the benefits of the growth in productivity accrued to the owners of capital (including individual and institutional investors) as reflected in the declining share of labour in national income, while the distribution of the labour share favoured the technologically savvy.

The consensus is that technological progress has been the major source of productivity growth in the past three decades, in particular in the manufacturing sector (automation, robotics, etc.) However, as Douglas Irwin has pointed out, the decline in employment opportunities in manufacturing in fact already started in the 1960s (source: Douglas A. Irwin: The False Promise of Protectionism. Foreign Affairs. May/June 2017).

To quote Lagarde again: “Job-rich growth remains a precondition for growth that is both sustainable and that delivers broad economic welfare gains. But, in an era of rapid technological change and economic integration, ensuring that everyone has an opportunity to benefit from growth and job opportunities requires an adaptable work force. Education and skills development, including through lifelong learning, must become a priority.”

These are not new or revolutionary insights.  In fact, the idea that the provision of universal public education has a key role to play in enabling upward mobility goes back to Adam Smith (1776), who is generally regarded as the founder of economics as a modern subject. This idea was furthermore reinforced by another supposedly unreserved proponent of laissez-faire economics, Friedrich von Hayek (1960). Both Smith and Hayek “defend education as a public duty, and they understand the role of regulation in terms of fostering competition to increase ‘vertical mobility’” (source: Leonidas Montes: Is Friedrich Hayek rowing Adam Smith’s boat? In Andrew Farrant (ed.): Hayek, Mill and the Liberal Tradition. Routledge. 2011).

The above brief outline of the challenges of achieving greater inclusion serves as a warning that in considering South Africa’s quest for inclusive growth, one should be careful to avoid oversimplifying the problem. It is not a matter of merely using public procurement to effect entry into the mainstream economy for a select few. It is also not a matter of developing black industrialists.  Neither is it only a matter of transforming the financial sector to effect easier access to capital for previously excluded people.

At the heart of inclusive growth will be South Africa’s ability to come to grips with global technological development. As emphasised above, education and skills development that does not equip the work force, current and future, to successfully engage with the technologies of the future will further add to the numbers of the army of the unemployable. And being unemployable puts one at the extreme of exclusion.

The challenge facing South African policymakers is to define inclusive growth in operational terms and identify parameters that will enable the measurement of progress in this regard before the appropriate policies can be formulated.