CDE Taking Poverty & Inequality Seriously Op-ed's (Part 2)

TAKING POVERTY AND INEQUALITY SERIOUSLY (PART 2) High rates of poverty, unemployment and inequality hold back the lives of too many people in South Africa, and many other developing countries. What is the best way to tackle and overcome these challenges?

In the op-eds that follow, CDE’s Ann Bernstein argues that while ameliorating poverty is important, there are two strategies that developing countries can adopt to create millions of new opportunities for the poor. The first, is to transform the economy so that it grows rapidly and is much more labour intensive. What is vital is to create jobs for the workforce a country actually has, rather than the highly skilled one that most governments wish they had. Second, is to recognize the reality of urbanisation and to build on the dynamics of expanding cities. Successful predominantly urban societies create cities of hope for everyone including the poor. To achieve this national government need to reorient their priorities towards the cities and ensure that they have the powers, resources and accountabilities to drive inclusion and economic growth.

OP-EDS

TABLE OF CONTENTS Jobs are the vehicle for prosperity

The key to urban growth is creating cities of hope for the poor

1 3

Jobs are the vehicle for prosperity

By Ann Bernstein, 4 September 2017

In many countries, inflexible labour regulations make it difficult for the economy to generate a rapid expansion of formal sector jobs. Workers are edged out of the labour market into unemployment by excessive regulation or forced into the informal economy, where opportunities to get ahead are very scarce. And, limiting the creation of low-skill, low-wage jobs harms poor people most: permitting low, entry-level wages is an important way to generate new opportunities, which then lead to improvements and progress towards ending poverty.

In any society, finding employment is the most effective route out of poverty. Jobs can transform societies. This is a point well-made by the World Bank, which noted in its 2013 World Development Report that: “Jobs are the cornerstone of economic and social development. Indeed, development happens through jobs. People work their way out of poverty and hardship through better livelihoods. Economies grow as people get better at what they do, as they move from farms to firms, and as more productive jobs are created and less productive ones disappear. Societies flourish as jobs bring together people from different ethnic and social backgrounds, and nurture a sense of opportunity. Jobs are thus transformational – they can transform what we earn, what we do and even who we are.”

The importance of employment means that the principal goal of policy makers in developing countries like South Africa should be to ensure that everyone who wants to work has the opportunity to do so.

The crucial question is how to make this happen.

A critical part of the answer is that societies need to recognise reality: countries cannot afford to create jobs for the skilled workforce they wish they had; they have to create jobs for the workforce they actually have.

1

Centre for Development and Enterprise

In middle-income countries, with poor education for the majority of the population, and where the typical firm is relatively unsophisticated, that means most opportunities for employment will be relatively lowskilled and low-waged.

It would be grossly unjust if low-wage jobs were to become the endpoint of development strategy.

Fortunately, this need not be the case. Some factory workers can learn new skills and move up the ladder in the firm – for example, from making T-shirts to supervising others making them, or graduating to making more complex garments. Other workers will save money and move out of low-skill factory jobs to do other things, such as establishing small firms of their own servicing the needs of the next generation of factory workers. Most importantly, firms acquire new capabilities, access new markets and become more productive. As they do so, they move up the value chain, creating new opportunities for themselves and their workers. And, because factory workers will have resources and opportunities to educate their children (especially the girls) for longer, the next generation of workers will enter an economy that offers more opportunities than the one their parents faced, and with the ability to take advantage of them.

Getting this process right can reap rich rewards, as we have seen in many societies in Asia and elsewhere, so policy-makers should focus on ensuring that nothing prevents the movement of firms up the value chain.

This will require that the legal, logistical, and education and training institutions required to facilitate this movement are built. This does not happen overnight and patience is essential, as are the right relationships between firms and the state.

Creating high-skill, high-wage opportunities does not help those who do not have the necessary skills.

And, imposing a mandatory range of high minimum

standards on employment conditions can deprive poor countries of the opportunity to use their abundant labour as a comparative advantage. Such standards incentivise employers to mechanise and even to avoid investing in the sectors that could create low-skill, low-wage job opportunities.

When large numbers of school-leavers are semiliterate and semi-numerate at best, and when there is a shortage of skilled teachers, lecturers and trainers, then the hope that a country can adopt a high-skill, high-wage employment strategy is a mirage. As Trevor Manuel pointed out in response to the insistence on “decent” jobs as a prerequisite for employment, “the more adjectives you put in front of the word jobs, the fewer jobs you will get”. The truth is that the alternative to low-paying jobs isn’t high-paying jobs, it’s no jobs at all. Ernesto Zedillo, former president of Mexico, put it clearly: As people move from agricultural and informal jobs to low-paying manufacturing jobs, they find that “these jobs are a step towards better opportunities. It is progress that matters the most when considering the standards of a given country”.

In many countries, inflexible labour regulations make it difficult for the economy to generate a rapid expansion of formal sector jobs. Workers are edged out of the labour market into unemployment by excessive regulation or forced into the informal economy, where opportunities to get ahead are very scarce. And, limiting the creation of low-skill, lowwage jobs harms poor people most: permitting low, entry-level wages is an important way to generate new opportunities, which then lead to improvements and progress towards ending poverty. As Nobel laureate, Paul Krugman, has written: “In a substantial number of industries, low wages allowed developing countries to break into world markets… (and) wherever the new export industries have grown, there has been measurable improvement in ordinary people’s lives.”

By ensuring that the available jobs are subject to basic health and safety standards, and that they are not dead-end informal or “make-work” public sector jobs, a more labour-intensive approach to economic growth will immediately contribute to rising productivity and skill levels. Employed people learn on-the-job skills and earn the steady wages that will allow them to invest more substantially in their children’s education.

2

Centre for Development and Enterprise

Young people are normally worst affected when economies fail to generate a significant number of entry level jobs in the formal sector. In South Africa, enormous numbers of young people are unable to find work and the numbers not in employment, education or training (NEETS) are a staggering – 7.5-million (nearly 40%) of the 20-million people aged 15-34.

There are large numbers of NEETs in other developing countries too, with the proportion of NEETs in Mexico and Indonesia being above 25%.

The failure to create opportunities for young people has devastating effects. When young people do not find employment, it affects the course of their entire lives, reducing their lifetime earnings, inhibiting their capacity to marry and start their own families. This failure weakens the “demographic dividend” that societies with large numbers of young workers can reap, and could turn a youthful population into a source of political instability.

Expanding women’s access to formal employment, especially those who are trying to break into the market for the first time, is another strong reason to reduce barriers to employment. The most pervasive form of human rights violation across the world continues to be discrimination against women.

Despite improvements, women in many countries face numerous barriers preventing them from entering the job market. In 2013, some 72% of adult men across the globe were employed, while the corresponding number for women was 47%.

In environments where growth and inclusion are vital to combat poverty and inequality, the last thing that governments should do is erect additional barriers that create disincentives for employers to hire inexperienced job-seekers.

Countries seeking to expand the opportunities of the poor need, first and foremost, to pursue the fastest possible rate of economic growth. That means building the institutions, and adopting the policies, that help firms to thrive and force them to innovate.

At the same time, countries like South Africa with one of the world’s highest unemployment rates, need to ensure that the economy is as labour-intensive as possible.

Critics who label internationally competitive low-skill employment as a ‘race-to-the-bottom’ are wrong.

They assume that low wages are forever. This ignores employment effects at individual and industry levels.

Individuals can take advantage of opportunities for mobility through employment experience and training. At industry level, the effects of employment growth and a tightening labour market raise wages.

In China, the average annual increase has been about 15% in recent years.

Rising wages in China opens opportunities elsewhere.

Firms in other countries become that much more competitive, with some estimates suggesting that 85 million jobs currently located in China will relocate to other countries. This has already had significant effects on the global distribution of employment: Ethiopia, for example, is quickly becoming Africa’s

largest clothing exporter, with companies like H&M and Primark sourcing apparel there. As a result, it is one of the fastest growing economies in the world (from a very low base), with average annual growth of close to 10% since 2005.

No-one thinks that “sweat shop” jobs ought to be the high point of developing countries’ ambitions. These jobs are low-skilled, low-waged and are sometimes offered in unsafe and unhygienic conditions. However, apart from finding oil, labour-intensive exportoriented activities – especially in manufacturing – are the one tried-and-true method for developing countries to escape poverty. They are the vehicle for prosperity, and the principal source of opportunities for hundreds of millions of people. The only real question is whether policy-makers will embrace this fact or ignore it.

The key to urban growth is creating cities of hope for the poor

By Ann Bernstein, 11 September 2017

Developing countries must create cities of hope for the poor. However, many middle-income countries have seen wasteful congestion, the creation of slums, worsening air quality, floods, inadequate sanitation and joblessness. Overcoming these problems requires effective city management, and the integration of the urban agenda into national plans to promote job-rich growth, to provide safety and security, public goods and quality education.

Paul Romer, World Bank chief economist, argues that successful development is driven by marrying two critical phenomena: the market and the city.

The city brings scale to economic activity, allows for an extensive division of labour, and enables goods, ideas and innovations to travel rapidly through networks of people. Competitive markets ensure that goods and inputs are used as efficiently as possible.

3

Centre for Development and Enterprise

The link between prosperity and high levels of urbanisation is one of the strongest correlations in the social sciences, with the relationship rooted in the all but magical effect that dense agglomerations of firms, workers and consumers has on productivity.

Historically, countries with higher levels of urbanisation have enjoyed greater prosperity. Most countries moving up the income ladder have done so in concert with the development of strong cities that generate incomes and jobs and, if well connected, these growth dynamics spread out to intermediate-sized cities and urban peripheries.

The vastly increased opportunities created by urban life enables a degree of personal freedom and empowerment that exceeds anything that went before.

People are able to live more self-directed, autonomous lives. And, compared with the back-breaking work that

dominates the countryside in developing countries, urban jobs generally require less physical strength and stamina, creating new possibilities for women’s liberation and empowerment.

There is, however, nothing inevitable about urbanisation and the achievement of greater prosperity. The existence and growth of poor megacities – urbanisation without industrialisation – has cast doubts on this relationship, especially for many cities in Africa. In part, this is because prevailing approaches to poverty whether in India, South Africa or many international organisations, often pay too little attention to urban development issues. There are far too many “reluctant urbanisers” – people who think that cities shouldn’t grow and that the poor should not urbanise – in developing country governments.

Increased urbanisation is inevitable across the developing world. National investment decisions need to take this process into account and national policy priorities need to catch up with the reality of increasingly urban-led societies and take advantage of the many benefits it brings. The political implications are also profound: here the debate concerns how much political power and accountability must be decentralised. Cities must be able to reap the benefits of growth as that will incentivise them to pursue it in the first place.

There is no alternative to urban-led economic growth. Rural areas are generally much deeper, more unbreakable poverty traps. Partly this is caused by the proliferation of low productivity, small-scale, usually family-based farming often coupled with landlessness in remote areas where few non-agricultural jobs are available. As many as 100-million rural households in India are landless, for example, and the average plot size of those who do have land is 1.2 hectares, which is half the size of plots in the 1970s. Across India, poverty rates are higher in rural rather than urban areas.

Danny Leipziger, of the Growth Dialogue, argues that: “Capturing the benefits of urban growth requires early action, effective coordination and political direction from the top. Many politicians ignore increasing urbanization since it requires long-term planning and multi-year expenditures, coordination between different levels of government, engagement with the private sector and significant improvements in

4

Centre for Development and Enterprise

governance.” In his view, countries that have managed urbanisation well such as Korea and Malaysia, have thought long term and have used strong political leadership to connect the growth of cities with national development plans. Seeing the rural poor become the urban poor is a bad development outcome; yet without an increased focus on the urban agenda and a change in policy direction this is quite likely.

Developing countries must create cities of hope for the poor. The potential benefits of cities are evident around the world. However, many middleincome countries have seen wasteful congestion, the creation of slums, worsening air quality, floods, inadequate sanitation and joblessness. Overcoming these problems and massively reducing urban poverty requires effective city management, and the integration of the urban agenda into national plans to promote job-rich growth, to provide safety and security, public goods and quality education.

There is a lot that middle-income countries could do to manage the process of city growth more effectively, and make opportunities more accessible for everyone, especially the poor.

Once poor people are in cities they both create and take advantage of the economic benefits that cities generate. City governments should do more to support residents’ economic initiatives and make it easier and less costly for the urban poor to access opportunities. The goal of effective planning should be to lower transport costs, shorten travel distances, reduce the cost of housing, and encourage as much market-based interaction as possible. In particular, limited spatial mobility fragments a city’s labour market, reducing the number of job opportunities that can be reached from where poorer people live.

A key principle for developing country cities is to plan for expansion. They need to accept urbanisation and plan ahead for an inevitable growth in population, most of whom will be young and poor. Cities need to ensure that land for settlement with access to basic infrastructure and services is available and affordable.

In many middle-income cities poor people are priced out of formal sector housing markets because the supply of land is constrained by unnecessary rules and unsympathetic residents and administrations.

As a result, they often establish themselves on land

outside the city, far from economic opportunities and out of reach of public services: sewage, schools, clinics, decent roads. If these areas are unplanned, property rights are not established, tenure is insecure and the development of land and housing markets inhibited.

Dealing with this challenge does not necessarily require exhaustive prescriptions about land use and top-down urban planning schemes. By setting aside public space in advance, and formulating plans to supply services as demands for these arise, the grid that the government creates should merely establish a sensible platform on which private initiative can drive future city growth. As a result, new, more affordable settlements would reflect and adapt to the needs of individual users and, from this, produce the spatial and structural diversity that makes cities so dynamic and opportunity-rich.

In many places, it is too late for this and communities must grapple with the challenges of dealing with unplanned settlements. A supportive, incremental approach is best when seeking to manage the informal settlements that almost inevitably spring up in cities. Rather than rehousing informal settlers in formal government-provided housing that is usually located on cheap land on the outskirts of cities far from economic opportunities, tenure should be recognised in loco. Legitimisation paves the way for the city to gradually work with these communities to upgrade infrastructure, services, and housing stock.

A different challenge arises when housing standards are set too high relative to local levels of income.

When this happens, formal sector housing will be out of reach for the urban poor. With limited alternatives, low-income people wishing to stay in the city end up living in precisely the sorts of informal or overcrowded settlements that housing standards are intended to prevent.

Cities should relax or remove standards that put market-rate housing out of reach to low-income people. Oxford university’s Paul Collier sees this dynamic playing out in Sub-Saharan Africa where governments either adopted or inherited housing standards from higher-income countries. As a result, he argues that in general “Africa has bifurcated urban housing. Elite homes are constructed by foreign construction companies using capital-intensive

5

Centre for Development and Enterprise

techniques and imported materials. The structures are individually designed, and adhere to OECD building standards, usually inherited from the British 1947 Town and Country Planning Act which was imposed indiscriminately in the colonies. They are financed by savings or by banks. Ordinary people live in informal housing. Their homes have usually been self-built without adherence to building standards which are unenforceable because they would impose excessive costs�.

Providing appropriate infrastructure, especially roads, water and sanitation are all necessary to enhance opportunity generation in the city. This is well known.

Less readily appreciated, perhaps, is the role that effective, flexible urban planning plays in lowering the distances people have to travel and increasing the ease of interaction. In a well-planned city it is much easier and cheaper to build roads in the right places and to provide public transport where it is most needed, so that it complements private transport solutions such as mini-bus taxis.

Policy makers need to facilitate urbanisation.

Compared to high-income countries, both low and middle-income countries today face much faster rates of urban population growth. The historical correlation between urbanization and economic prosperity suggests strong reasons for optimism. In coming decades, middle-income countries can leverage urbanization as an opportunity for economic growth and for the poor to improve their standards of living.

Governments should not limit the rate of urbanisation.

Instead, the movement of poor people out of rural and into urban areas should be regarded as a positive dynamic and governments concerned to expand opportunities for the poor should remove barriers and artificial incentives that keep people in rural areas.

CDE BOARD L Dippenaar (chairman), A Bernstein (executive director), A Ball, C Coovadia, B Figaji, R Khoza, M Le Roux, S Maseko, I Mkhabela, S Nkosi, W Nkuhlu, S Ridley, A Sangqu, M Teke, S Zibi Published in April 2018 by The Centre for Development and Enterprise 5 Eton Road, Parktown, Johannesburg 2193, South Africa | PO Box 72445, Parkview, 2122, South Africa Tel +27 11 482 5140 | info@cde.org.za | www.cde.org.za