SANE ViewsVol. 6, No. 14, 12 April 2006   South Africa's Misunderstood 'Dual Economy' Norman Reynolds and Johan van Zyl  Part 1

During his 2003 State of the Nation address, President Mbeki acknowledged, for the first time, that South Africa is a dual economy. Since then that fundamental policy insight has, regrettably, degenerated into a piece of trivia, yet another politically correct phrase: the Second Economy'. For many, it is simply a new name for the  'informal economy'.

Government still has to reflect on what a dual economy is, how it came about and is structured, and what such economic duality requires in policy and programme terms. How can such an understanding promote economic activity for all South Africans? The promise of a new insight has ended up as further justification for more-of-the-same state delivery rather than asking, Why delivery contributes so little to the transformation of the historically poor areas of the country? Most citizens still live as virtual economic prisoners of the still non-working, marginalised local economies of township and rural areas.     

President Mbeki has presented a picture of the First and the Second Economies as a double storey house. On the top floor are the rich, living well. Stuck in the bottom floor, with no ladders to access the top floor, are the majority of South Africans who are poor. This depiction calls for investment, for more delivery’, in education and skills, in economic infrastructure etc. that creates the ladders the poor to join the rich on the top floor. There are two problems with this analogy and its solution. Today, the global economy that provides for the rich on the top floor can no longer provide employment for all. Under globalisation, in order to compete, there has to be highly capital intense production that displaces labour and rewards internationally privileged capital, distorted exchange rates, subsided exports, or exploited labour. There is simply no employment highway to the top floor for all South Africans. As the respected British commentator James Robertson, has recently stated, "Full employment, as we knew it in the past, will not return".

Government’s R240 odd billion annually spent in the marginalised areas generates very little local economic activity. The developed first economy of South Africa has indeed been growing. It mainly rewards capital and international corporate investment and is wedded to cheap energy. This growth’ is seen in rising profits and tax revenues. Meanwhile, our overall unemployment and poverty problems continue to worsen.  An appropriate depiction of the dual economy starts from the fact that the bottom floor of the double storey house contains the historically marginalised (and recently re-marginalised by globalisation) majority of the population whose dependence on the global first economy for jobs, goods and services remains almost total.

Money does not stay to work, to stimulate new economic activity in these poor areas. Incomes are almost immediately 'spent back' into the global economy of South Africa. These areas are characterised by not just high levels of unemployment (the national average is some 40% which here translates into 50% to 70%) but very high levels of overall economic inactivity. 

In two recent surveys in Sekhukhune and Soweto, some 80% of families reported no significant economic activity by unemployed adults.[1] At present, these communities are so economically dysfunctional that they are incapable of self-generated growth and development. Hence, the recent urgency to provide a comprehensive social welfare net – even if that 'solution' only treats the symptoms of poverty and digs a big expenditure hole. It also, at great cost some 70 billion a year – increases basic economic dependency and inactivity.

The main difference between the two economies can be simply illustrated via the concept of the local 'income multiplier':  R100 that enters Sandton or any other part of South Africa’s global economy 'stays to work': it circulates some 7 to 10 times (higher amongst Jews and Muslims) before it 'leaks outside' to pay for imports or is sent by government to pay a teacher’s salary in a village. That R100 of new income generates some R800 or more of additional economic activity in the global economy.

R100 that arrives by way of income, remittance or pension in Soweto or the Transkei leaves almost immediately on a taxi to buy global goods and services in the nearest town or shopping mall. The local income multiplier in these poor areas is around just 1.3. That means that it generates only R30 of new local economic activity. Small wonder that there is little or no local production in the townships and rural areas!

They are cash deserts for 20 or more days of each month. There is simply no regular, effective local demand to stimulate, reward and sustain new local economic activity. The dual economy is what it says: two separate economies that operate differently. Consequently, they require two different sets of policies and programmes to stimulate their internal development and growth. This basic policy insight has remained unrecognised by the government and its advisers.  

The emerging truth is that the global first economy cannot, on its own, achieve high levels of growth and stable development for all. The marginalised second economy must also become a major driver of the national economy. What should be a vast mass market for locally produced goods and services serving some 30 million poor citizens currently limps along at, probably, just 25% of its potential. Crime, poor health and schooling hurt the global economy and might yet undermine it.

Today it is realised that the dual economy model requires a set of 'localisation' policies and programmes that focus on the non-functioning nature of South Africa's many marginalized local economies. It is only once these marginalized areas become economically active, and over half the population can enjoy rewarding local economic activity, that the national economic potential can rise to the point where our major poverty and unemployment problem would finally be eliminated – not just alleviated.     

A more appropriate economic model for the marginalized areas would start from the amended proposition, not as per Say’s Law that Supply Creates its Own Demand, suited to the closed economies of 19th Century Europe, but that here we must learn to aim for 'Demand Creation that Calls Forth Local Supply (Production). This will take special measures to ensure that such production remains substantially local. These local demand and production creating measures include a variety of specific new instruments. The second article explains these. They are part of a new framework for Local Economic Development that government is currently examining.    


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