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Why do 16 million people not constitute an economy?

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets.

The budget announced by Pravin Gordhan last week once again highlighted the number of people who receive social grants. One wonders, if a population the size of a small country needs them, why don’t they have their own economy?

A whopping R105-billion is budgeted for social grants in the 2012/13 financial year, growing by a whopping 14% to a whop… a prodigious R122-billion a year later. (Thanks,

This is a lot of money. It represents almost 10% of the total budget, and accounts for about 3.5% of GDP. According to finance minister Pravin Gordhan, almost 16-million people receive social grants.

When I heard that number I thought: “Wow, that’s almost the population of Holland.” Yet Holland has more than twice the nominal GDP of all of South Africa put together. Why can’t those 16-million people just create an economy all of their own?

After all, there’s no mystery to how an economy forms. Some people farm to produce food, and others make the tools to do this with. As the economy develops a greater division of labour, they begin to sell their produce, manufactures or services to others, and merchants begin to trade surplus produce with other communities.

This development does not require a government to organise production, or expropriate produce from rich people. In any community, its members will naturally and voluntarily seek to produce goods and services to supply their own community’s demand, and perhaps to have some left over to sell to other communities.

A part of the answer could be welfare dependency. Although Michael Noble and Phakama Ntshongwana published a report for the Human Sciences Research Council entitled No sign of a dependency culture, what that report actually says is not quite so clear-cut.

It found that two-thirds of grant recipients said a person ought to have a job to have dignity, or a job made them feel part of the community. Let’s leave aside that many respondents might simply have said what they believed to be right, but in reality act differently. That still leaves about a third (the number varies a little depending on the kind of question asked) who actually admit they don’t agree that working is better than leeching off the productive members of society, with the help of government’s power to expropriate income by force.

Maybe the HSRC believes a “dependency culture” does not exist if the dependency is not universal, or not universally acknowledged, but that a third of respondents disagree that a job is good, necessary, or better than a grant, is alarming.

However, the rest of the answer is far more simple: South Africa’s social support grants do not go primarily to people who should be part of the economy. Grants go to pensions, disability care, child support and foster care support.

So, we’re looking at the wrong number, unless you expect an economy consisting entirely of the young, the sick, and the old, to be productive.

Besides, for many recipients these grants are a lifeline. A welfare state may be a drag on an economy, and arguing against it may be a valid theoretical position to take, but in the absence of a prosperous economy in rude health, it is will not fly, politically.

So, why don’t we have a prosperous economy in rude health?

The more correct number to use when questioning the economic activity of an unproductive segment of the population is the number of unemployed working-age adults. They do not benefit directly from present social grants, but would receive a basic income grant if future plans for South Africa’s growing welfare state are implemented.

So, let’s count them. There are over 4.2-million unemployed adults in South Africa. Another 2.3-million are discouraged work-seekers. That represents 24% and 37% of the total labour force of 17.7-million, respectively. The labour force in turn represents 54% of the people between the ages of 15 and 64, and 35% of the total population.

These ratios suggest that a labour force of 6.6-million – the current unemployed – would all things being equal support a hypothetical population of 18.7-million.

Even if you make some provision for measurement errors, you’re still left with a population the size of Holland that earns nothing, and lives either off family or friends who do work, or worse, off social grants intended for children, the disabled, or pensioners.

It raises exactly the same question. Why does this massive population not constitute an economy of their own? Producing or trading for the necessities of life occurs even in countries with very few natural resources compared to South Africa. Holland’s geographical area would fit into South Africa 33 times, for example, and its wealth is almost entirely built on commerce. Japan supports a far bigger population than South Africa, on an almost total lack of natural re-sources.

This seems to point to a fundamental structural problem in South Africa. If people naturally and voluntarily seek to produce goods and services to supply their own demand, perhaps these people cannot or are not permitted to do so.

Suggesting that they cannot would be offensive. Even if research could be found that the unemployed are largely stupid, clumsy or lazy, it would not account for their failure to be at least sufficiently productive to meet their own basic needs.

However, the theory that they are not permitted to do so holds more water.

Two issues occur to me as key obstacles to full employment, or alternatively, as obstacles to the 16-million people that now are deadweight to form a productive economy of their own. Neither of them are cases of market failure.

The first is hinted at in the budget speech itself. When running through customs and excise successes, Gordhan noted: “During the current financial year, SARS has already confiscated 3.4-million articles of clothing and footwear valued at almost R580-million. In addition SARS has seized drugs worth R139-million and 683-million sticks of cigarettes valued at R180-million.”

Illegal clothing is almost twice as big a problem for the taxman as smuggled drugs and cigarettes? This is absurd. Remember, these clothes are imported and sold by informal traders to a population that largely cannot afford the excessive prices and inferior quality produced by our heavily protected domestic industry.

The so-called “informal economy” is often viewed with suspicion by the agents of the state, as an underground and even criminal community. In reality, it is what Robert Neuwirth, in his book Stealth of Nations: The Global Rise of the Informal Economy, describes as a do-it-yourself economy based on self-reliance and innovation.

It does include smuggled and pirated goods, certainly, but the informal sector also constitutes a large legitimate market for goods and services, and one that many big companies (such as Unilever, Procter & Gamble, MTN and Vodacom) are already extensively using for distribution.

It may seem tempting to say that such trade ought to be regulated, in order to protect suppliers, traders and customers among the general public, but the problems informal traders face aren’t of a benign regulatory nature.

Even in South Africa, which by comparison with the rest of Africa is fairly liberal in its legal approach to the informal sector, punitive suppression of informal trade is common. Informal traders are routinely evicted to make way for “urban renewal” projects or flagship tourism events, or to protect formal-sector competition.

Heavy import duties on the ordinary necessities of life, which exist only to protect inefficient formal industries, remain a frequently-used excuse for confiscating stock, which is ruinous to the traders involved. The R580-million in illegal clothing and footwear is a symptom of a repressive approach to the spontaneous emergence of production and trade. It runs directly contrary to the South African Constitution and the Freedom Charter, which both claim “equal rights to trade where they choose, to manufacture and to enter all trades, crafts and professions”.

The other major damper on economic activity, especially among the poor, is the continuing failure of government to establish secure property rights in poor communities.

The previously disadvantaged remain disadvantaged because they live on municipal, provincial or national land, to which they have no title. Those that are lucky enough to receive a house under the RDP programme do not get to own it free and clear. The restrictive conditions imposed on RDP house owners prevents them from moving to where work is available, from using it as collateral to secure capital, or from leasing or selling it to raise the wherewithal to invest in a business.

Most small-scale enterprises, whether they are farms, factories, shops or service businesses, begin with a small amount of private capital. This capital might take the form of a sum of cash from savings, winnings, or an inheritance, but more commonly the capital takes the form of a house, a car, or a plot of land.

The government has failed, to date, to “nationalise” the vast tracts of occupied land it controls by “transferring it to the ownership of the people” (again quoting the Freedom Charter). As a consequence, people live in “informal settlements”, with no access to capital nor even the motive to improve their property.

They live as quasi-feudal serfs on the land, entirely dependent on the propertied classes, charity, or the state. None can strike out on their own, because none owns the start-up capital they require to take that first step out of poverty and into the productive economy.

Sixteen million people can indeed form an economy, all on their own. But not if the government makes it impossible for them to securely own property and freely trade the proceeds of their labour. DM


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