South Africa’s Poverty Problem Won’t Be Cured By Redistribution – Economic Growth Might Do It

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South Africa has just released the latest poverty figures for the country and they are somewhere between very bad and appalling dependent upon what level of rhetoric you wish to use. The basic underlying problem is that the economy is in two parts, a small and near First World industrial economy and a much larger–by the number of people, not economic size–essentially peasant economy surrounding it. Given South African history we don’t need to guess all that much as to the distribution of skin colour or race across those two. At which point we obviously want to mull over how to correct this situation–we do indeed want all people to be richer if we can figure out a way to do it. At which point something counter intuitive–the correct solution could well be to cut the minimum wage and largely deregulate the economy.

Yes, I know, but bear with me. GDP per capita at market exchange rates is some $5,000 or so and a more equal distribution of that would indeed make many better off. If, of course, it were possible to have a more equitable distribution without lowering that level of economic production, something by no means certain. The solution should therefore be more economic growth so that there is more to go around. And the truth is that large portions of the South African economy simply haven’t taken part in the industrial revolution as yet, that same industrial revolution that is the only way that any economy has lifted the people up out of that sort of poverty.

It’s worth noting that when they’re talking about poverty in South Africa they are not just talking about some having more than others. This is not the relative poverty that people in the US or UK whine about, this is the real absolute poverty which is pretty much the basic minimum necessary to maintain life:

More than 30.4 million South Africans—55.5% of the population—live on less than 992 rand (about $75) per person per month.

That’s pretty close to the World Bank $1.90 a day which we call absolute poverty. But we’ve a problem here, in that the $75 is at market exchange rates, the $1.90 at PPP, adjusting for price differences across geography. When we adjust that $75 a month is more like $200 a month at PPP or so. However, within that there’s this:

South Africa’s youth are trapped in poverty from an early age, with 43.5% of the citizens under the age of 17 living in households that earned below the median income of 797 rand ($60) per month. It’s the start of a vicious cycle that continues into adulthood, with more than half of South Africans below the age of 35 unemployed.

Household income at $60 a month at market rates, yes, we’re now at about that World Bank absolute poverty level. And yes again, that 50% unemployment rate has a lot to do with it.

The full report is here:

The South African economy in the last five years, notably between 2011 and 2015, has been driven by a combination of international and domestic factors such as low and weak economic growth, continuing high unemployment levels, lower commodity prices, higher consumer prices (especially for energy and food), lower investment levels, greater household dependency on credit, and policy uncertainty. This period has seen the financial health of South African households decline under the weight of these economic pressures and, in turn, has pulled more households and individuals down into poverty.

Of course, at this point we want to know what to do about it. This at HuffPo seems a bit weak:

Paying fair or even living wages and salaries to your domestic worker, nanny, gardener.

Especially when the writer talks at length about the alarming poverty of her domestic worker. COSATU also doesn’t have what I think is the right idea:

In 1994 the ANC inherited a country which was highly indebted to foreign and local capitalists and whose growth was based on racial discrimination and subjugation of black majority, cheap labour and granting of benefits to only the white minority. The poverty levels we have today can be traced back to the days of British colonialism and apartheid, which were both based on segregation and separate development. The colonial and apartheid government were captured by private businesses such as the chamber of mines, who for advocated a migrant labour system and dispossession of land from the black majority in the form of the 1913 Land Act.

Agreed, much of policy, for much of a century, was vile.

Poverty will only be solved in a socialist state where the means of production are used to benefit all and not make profits for individuals and families.

But no, that’s not going to work. Hasn’t worked anywhere, ever, and it has indeed been tried a number of times. The only form of economic organisation which has ever dragged a country up out of this sort of poverty is a roughly capitalist, roughly free market one, the very conditions that allow for an industrial revolution. It really isn’t chance that in 1978 China’s socialism had left it one fifth as rich as South Africa is now, today after near 40 years of very rough and tumble free marketry a couple of times richer.

But in more detail, what really is the problem in South Africa’s economy? The answer, after we get past the idea that there’s just not enough of it, is as I’ve intimated before:

Which brings us to South Africa today. And the usual analysis of South Africa is that wage levels are already too high. The country is covered by a patchwork, a leaky one, of sectoral and union agreements which determine wages in the formal economy. The unemployment rate is 25%–and that just among those formally looking for work. The population to employment ratio is in the mid 40s percent or so level–compared to the well above 60% in the US that we currently worry about. And that 41% population ratio is including the informal economy as well as the formal.

Wages in that formal economy are high compared to productivity. It is this which excludes some half of the people from that formal economy. They thus end up working in that informal one, or not at all. The solution, counter intuitive though it is, may well be therefore to lower those current wages so as to price into the formal economy all of the available labour. At which point wages will start to rise again, as they have everywhere else that follows that, very roughly capitalist and very roughly free market, development path.


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Loknath Das

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