/ 29 May 2006

Economic growth is not enough

The government’s Accelerated and Shared Growth Initiative for South Africa (Asgisa) differs from its two predecessors, the growth, employment and redistribution strategy (Gear) and the Reconstruction and Development Programme (RDP), in its strong emphasis on defined and specific growth-enhancing projects. These include the delivery of physical infrastructure and a detailed programme for the provision of skills.

However, in many senses, Asgisa is a continuation of Gear. Having achieved macroeconomic stability — arguably the core of Gear — the emphasis has now shifted to a more detailed programme designed to deliver the holy grail of 6% annual growth.

Economists agree that a high level of economic growth is essential for poverty reduction.

There are, however, two important caveats to the generalised view that ”growth is good for the poor”.

Firstly, the impact of economic growth on poverty differs significantly. World Bank research indicates that a 2% increase in growth rates will result in a reduction in poverty ranging from 1% to 7%, depending on the country.

Secondly, as incomes grow, there is a high likelihood that this will also affect the distribution of that income. Put differently, economic growth often changes the levels of income inequality-. When this occurs, the gains from growth for the poor may be reduced. Higher inequality- levels from growth ”stretch” the distribution of income and in so doing dilute the impact of economic growth on poverty.

It follows that, while economic growth may be necessary, it is certainly not a sufficient condition for poverty reduction.

In this context it is important to ask whether the positive economic growth recorded in South Africa since democracy has yielded a sufficient reduction in income poverty levels.

Analysis of data from 1995 to 2000 (an admittedly very short and inadequate period) suggests that nominal household expenditure grew by 6,14%. However, the growth in expenditure of those households living below the poverty line was only 2,29%. Hence, the growth in incomes of poor households has been significantly less than the growth for non-poor households.

This result can be more simply translated into the following: while South Africa did experience a growth in incomes for all households, rich households gained more than poor households, resulting in a growth path that was not pro-poor in nature.

Closer inspection of this empirical result indicates that over the 1995-2000 period, while the increase in household incomes did reduce poverty levels, it also increased income inequality.

The undesired effect of this rising income inequality has been to erode any growth benefits to the poor and ultimately has yielded no change in national poverty levels.

While the government still faces the challenge of how to deliver shared growth, a large part of the programme is already in place. In particular, two key elements of welfare enhancement have been established: the spectacular delivery of assets and services to the poor since 1994, and the provision of an adequate social safety net. For a middle-income country, South Africa has a very deep social security system that ensures a high level of protection to those individuals and households excluded from the growth process.

Ultimately, the government is limited in how it alone can affect the nature of South Africa’s growth. However, a carefully crafted compact in a variety of arenas with business and labour may get us closer to the vision of a 6% shared growth path.

Haroon Bhorat is director of the development policy research unit at the University of Cape Town and a member of the Joint Initiative on Priority Skills Acquisition. This is a summary of his presentation to a recent public forum convened by the Isandla Institute and the Open Society Foundation for South Africa