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Zuma’s middle-income problems

Trudi Makhaya, former Deputy Competition Commissioner, is an independent economist and strategist. A Rhodes scholar, she has also worked at Deloitte and Genesis Analytics.

Success breeds rising expectations, which lead to protest. Many commentators have dismissed this idea, as advanced in President Zuma’s state of the union address, as the highest order of spin. But let’s not be too quick to diss. The literature on middle-income countries such as ours suggests that the president is hinting at an important dynamic in economic development.

Many countries have been able to make the transition from low-income status to middle-income status. To bring an economy from a very low base requires fairly straight-forward investments in basic services and infrastructure by government. And in that initial phase, the private sector creates jobs in simple activities with low value added, including in extractive industries, and many households are lifted out of poverty. However, in many cases this is accompanied by rising wages and currency appreciation on the back of an economy that has yet to diversify.

South Africa’s experience as a middle-income country is unique. Unlike many other emerging economies, it did not reach this status through a sustained manufacturing boom. It has also been classified as a middle-income country at least since the 1960s though it is only in recent times that there has been a significant drop in poverty levels for the majority. And much of this poverty alleviation has been led by government, which since 1994, has made significant strides in providing basic human capital investments and a social safety net. That is a good story to tell. But it is also an incomplete story if one considers what happens on the journey from middle-income status to high-income status.

An alarming statistic from the World Bank: of the 101 countries that were classified as middle-income in 1960, only 13 made it into the high-income group in 2008. As for the rest of the countries, many would have succumbed to the middle-income trap – a conflation of obstacles that emerge partly because of the not-so positive consequences of the initial growth spurt.

Economic development is a messy process. This is more so when it comes to the social and political forces that come into play when public and private investments create winners and losers in society. In India, the IT services boom and government reform led to the emergence of a new middle class. This has created in-migration into economic hubs such as Mumbai that has overwhelmed services and infrastructure. Where institutions are weak, corruption and violence serve as channels for economic contestation. The rise of Maoist groups and intra-religious tensions across India can be linked to the economic grievances that arise from raised expectations that cannot be met by the initial stages of growth. Similar stories can be told from Brazil to Thailand.

In an unequal society such as ours, contestation over limited resources, alongside visible economic mobility by certain segments of the community or neighbouring communities, can turn ugly. The National Development Plan presents four features as manifestations of the middle-income trap in South Africa: low levels of competition in the economy, work-seekers who are excluded from the economy, low savings and low skills. Those who live this reality are exposed to the ‘good story’ that has eluded them for twenty years. Communities look at the tools that they have to access the good story, and they find that local leaders are ineffective or corrupt, and violent protest appears to be an attractive option. The underlying causes of a middle-income trap are always difficult to address, but when combined with social and political ruptures that lead to populism and extremism, further success becomes even more difficult to achieve.

Take Gauteng as an illustration of the risks of a middle-income trap. In the pre-crisis 2000s, it scored the highest economic growth rates in the country. It also experienced significant population growth, largely fuelled by migration from other parts of the country. But what do the ambitious and hopeful, who happen to be poor, find when they get to Gauteng? First of all, hundreds and thousands of other poor people. They also find very limited affordable housing, which means that they will live in poor informal settlements alongside other poor people. They will have to travel far to access jobs, using a fragmented and expensive public/private transport system. Their health might deteriorate in the face of their living arrangements and the poor air quality in a fossil-fuel dependent economy. They will struggle to access good schools for their children. This daily struggle will lead to many frustrations, as they jostle for resources with those born in the province and those coming from further afield in the rest of the continent.

This is a situation that plays itself out across the country. These problems are also inherently about local governance as they relate to access to basic services and daily living conditions – for example, as Premier Mokonyane paints a picture of the current state of the Gauteng province. Over the past few years, her government has crafted a response that includes small business development, public works programmes and infrastructure development. The success of these programmes will be judged on how they contribute to productivity and broad-based prosperity.

The president was on point in identifying rising expectations as one of the drivers of protest. The hope is that he realises that this is not just a passing phase that is addressed by managing expectations. History suggests that it takes some exceptional policymaking and execution, coupled with skillful consensus-building to advance towards first-world problems. DM


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