ZHUWAO BRIEF: Dialogues for an empowered society, growing economy…Economic growth of an enclave dual economy

01 Mar, 2015 - 00:03 0 Views
ZHUWAO BRIEF: Dialogues for an empowered society, growing economy…Economic growth of an enclave dual economy

The Sunday Mail

2802-1-1-LEWIS TWO SECTOR MODELAs indicated in a prior instalment of the Zhuwao Brief on underemployment, underemployment is a situation that exists if a reduction in the labour force engaged in an activity does not result in a reduction in total output from that activity.

One of the most significant challenges that the Zimbabwean economy faces is the issue of unemployment. The Zhuwao Brief questions the school of thought that advances the notion that foreign direct investment can address the challenge of unemployment and its concomitantly more dangerous and insidious and deceitful ally, underemployment. Professor Guy Mhone submits that it is necessary to conduct a deeper analysis of the structural rigidities that constrain the labour absorptive capacity of our economies.

Consequently, the Zhuwao Brief will this week review the growth of a developing economy in terms of the transition of labour from subsistence non-formal activities towards wealth accumulation formal activities by considering the hypothetical case of a closed dual enclave economy. This article is the fourth instalment in the Zhuwao Brief’s series on “Dialogues for an Empowered Society and a Growing Economy”.

Previously, the Zhuwao Brief has provided a brief summary of Professor Guy Mhone’s thesis on “Enclavity and the Constrained Labour Absorptive Capacity of Southern African Economies”. This has been followed by unpacking the concept of underemployment within the context of the unemployment conundrum in Southern Africa. Last week, the Zhuwao Brief touched on the concept of enclavity and economic dualism within the economies of Southern Africa as expounded by Mhone.

This week the Zhuwao Brief reviews Professor Mhone’s conceptualisation of the growth of a developing closed dualised enclave economy. We will start off with an explanation of the process of dynamic transformation between the non-formal subsistence sector and the wealth accumulation formal sector. The implications of that dynamic transformation will then be interrogated prior to discussing the growth linkages of that dynamic transformation. The Zhuwao Brief will conclude by highlighting the stages of the dynamic transformation and integration.

The Process of Dynamic Transformation

Professor Mhone submits that the process of dynamic transformation is founded on the works of the Nobel Laureate, Sir Arthur Lewis, as enumerated in his 1954 article entitled “Economic Development with Unlimited Supplies of Labour”. In 1964, John Fei and Gustav Ranis expanded on the dual sector model (also known as the Lewis Model) to develop the Fei-Ranis Model of economic growth.

According to Mhone, both the Lewis Model and the Fei-Ranis Model recognise the existence of two sectors of the economy, namely the subsistence or non-formal sector, and the wealth accumulation, capitalist or formal sector. The Fei-Ranis model acknowledges that there is a mutual interest in the interaction of the two sectors for two reasons. Firstly, the non-formal sector represents a pool of under-utilised cheap labour as viewed by the formal sector. Secondly, the non-formal sector sees that there are higher returns to labour to be acquired in the formal sector.

Mhone contends that the co-existence of the deal economy forms the basis for the process of dynamic transformation of the closed dual enclave economy into a fully-fledged wealth accumulation economy that embraces all of the labour force. In this model economy, the formal sector employs labour for profit, relies on reproducible capital, is innovation-driven and has higher average productivity per worker.

Fei and Ranis elaborated a growth process in which cheap surplus labour from the non-formal sector triggers the process of dynamic accumulation. That cheap surplus labour is absorbed into the formal sector at a constant wage, albeit with a marginal premium. This constant wage is tied to the subsistence income in the non-formal subsistence sector.

In the formal sector, the cheap employed labour allows for unusually high rates of surplus or profit which are reinvested. This results in further increases in demand for surplus labour and thus propelling further expansion in the formal sector. Hence the demand for labour in the formal sector continues to increase resulting in even more increases in productivity in the formal sector.

Implications of Dynamic Transformation

Professor Mhone argues that the movement of labour from the non-formal subsistence sector to the formal wealth accumulation sector has implications according to two dimensions. The first dimension relates to a situation where there is some form of reorganisation in the non-formal subsistence sector.

As indicated in a prior instalment of the Zhuwao Brief on underemployment, underemployment is a situation that exists if a reduction in the labour force engaged in an activity does not result in a reduction in total output from that activity. Because of the underemployment in the non-formal subsistence sector, the re-organisation in the non-formal subsistence sector will result in increases in the productivity of those remaining in that sector.

This increase in productivity implies an increase in the reservation wage of labour to persuade it to engage in formal sector employment. By this very same token, the possible amount of surplus labour to be absorbed is now reduced. This situation can also lead to surpluses being generated in the non-formal sector which are then sold to the formal sector.

As demand increases in the formal sector for goods supplied by the subsistence sector (e.g. food-stuffs bought by wage workers), the terms of trade might improve in favour of the non-formal sector and against the formal sector. If this occurs, it will further hasten the moment at which it becomes unprofitable to harness labour from the non-formal sector.

In this case, both the increase in average productivity and surplus production in the non-formal sector act as barriers to the further expansion of the formal sector. This curtails the further absorption of labour by the formal wealth accumulation sector.

As a result, one type of enclavity will arise in which the formal sector is unable to completely absorb the surplus labour, let alone revamp or transform the non-formal sector, unless there is a technological revolution in both the formal and non-formal sectors.

Mhone believes that a similar situation actually transpired during the early years of colonial penetration in Southern Africa which led the colonialists to resort to extra-market measures to compel African rural dwellers to offer themselves onto the formal labour market at lower wages than would have otherwise been the case in the absence of such measures. These measures had the effect of depressing the reservation wage and increasing the supply of labour as in the second situation above.

The most fundamental and contentious of these measures were in the form of the appropriation of land from the Africans and their concentration into unsustainable homelands or villages.

According to Mhone, the second dimension arises when there is no significant reorganisation in the non-formal subsistence sector. Consequently, the non-formal subsistence sector collapses as labour leaves for the formal sector. As a result, the supply of labour to the formal sector will increase and also extend the range along which surplus labour may be absorbed at a constant wage rate for purposes of surplus generation in the formal sector.

This shift may be accentuated by increased labour force participation as the deterioration in living standards forces new entrants into the labour force (for instance children and women). This situation should lead to increased surplus generation in the formal sector and greater dynamic growth with a longer period or range before the exhaustion of surplus labour.

Nevertheless, the collapse of the non-formal sector might easily lead to a situation in which the supply of labour to the formal sector is far in excess of the labour that can be absorbed by this sector, thereby resulting in the lateral expansion of the urban informal sector.

In particular, if the employment created is less than the additions to the labour force, as has generally been the case in Africa, non-formal sector underemployment will continue to increase, and hence the enclavity will continue as well.

Growth Linkages for Dynamic Integration

It is Professor Mhone’s contention that if the process of dynamic integration does not result in a collapse of the non-formal sector, a number of growth linkages emerge in the economy that further reinforce the integration of the two sectors.

The first growth linkage relates to the absorption of labour from the non-formal sector. This absorption results in an increase in incomes of previously redundant and under-utilised labour. The additional incomes can be disaggregated into increases in consumption and savings.

The increase in consumption will stimulate demand for wage goods produced in the formal sector thereby propelling further expansion in the formal sector. The increase in savings, if properly mediated by financial institutions, can be channelled into investment funds, which can also lead to further expansion.

Secondly, if there is no re-organisation of production in the non-formal sector to take advantage of the exiting labour force that is redundant, the income gap between the formal and non-formal sector will increase further.

As a consequence, more surplus labour will be released to the formal sector thereby providing for further expansion on the basis of cheap labour along the lines described above. There will be dynamic growth based on surplus labour initially from the non-formal rural sector and later from the surplus labour in the urban economy which has been displaced from the rural economy.

If there is re-organisation of production in the non-formal sector as redundant labour exits, especially re-organisation along capitalist lines of production, there will be increased output. This increased output will be channelled into increased consumption within the non-formal sector, and increased demand for consumer goods and inputs from the formal sector both of which will be stimulated into further growth as a result.

In the latter case, however, if the formal sector purchases goods from the transforming non-formal subsistence sector, the terms of trade might shift against the formal sector as incomes and prices increase in the non-formal sector relative to those of goods produced in the formal sector.

When this approaches, as surplus labour is exhausted, the two sectors may be seen as integrated since expansion in one will have to take place at the expense of the other. Further growth in the economy will have to be innovation driven and/or rely on export markets.

Stages of Dynamic Transformation and Integration

Professor Mhone suggests that it is necessary at this stage to comment on the stages through which such a closed economy might develop as it integrates. The initial stage may be driven by the primary activities of the formal sector such as agriculture and mining within which the initial surplus labour may be absorbed.

At this stage, the greater proportion of GDP, productive employment and the labour force is accounted for by primary activities in the formal sector. This is an important stage since it sets the stage for the absorption of the majority of the labour force into productive employment, thus making future growth and development more inclusive.

The second stage arises as productivity in the formal sector and the hitherto non-formal sector increases, and industrialisation occurs reinforced by rising incomes. This stage entails the expansion of the secondary sector based on the production of consumer, intermediate and capital goods.

The secondary sector becomes the engine of growth at this stage in the development of the economy. Unlike the first stage, which is driven by the process of primary accumulation through the conversion of an agricultural surplus (in the form of rural surplus labour, surplus agricultural production and surplus savings), the second stage is innovation and investment driven. This second stage sees secondary industry absorbing the greater proportion of formal employment.

In the third stage, tertiary production begins to predominate. It accounts for a greater proportion of the GDP and formal sector employment. This stage tends to be both innovation and wealth driven.

These stages are not only important for heuristic purposes, but they also demonstrate a natural progression in growth and development that has been undertaken by countries that have had inclusive processes as opposed to exclusive ones based on enclavity.

Unfortunately this ideal situation either occurs through industrial and social revolutions as happened in Europe and Japan, or through the conscious intervention of the state as happened in the newly industrialising countries.

Professor Mhone submits that in Africa, this situation was approximated by the settler economies somewhat when they embarked on inward looking policies. Their approach was, however, compromised by their need to marginalise the majority in the process, hence the continued enclavity.

Mhone argues economic dualism and enclavity have been perpetuated in Africa and in Southern Africa. Enclavity and economic dualism become self-constraining within the perspective of the closed economy. It is further reinforced by the introduction of openness into the model.

Economic dualism and enclavity is perpetuated when the dual enclave economy is relatively open. The open dual enclave economy’s ability to integrate is compromised in the absence of countervailing interventions. Furthermore, the growth process of the open dual enclave economy becomes distorted in that it tends to skip the second stage of development in terms of the composition of output. The majority of the labour force will remain underemployed.

According to Mhone, it is this bastardised form of development that has sometimes been referred to as the hypertrophy (or ‘obesity’) of the tertiary sector. In other words, there is a premature and disproportionate expansion of the tertiary sector before the first two labour absorbing stages of development have been exploited and exhausted.

For Mhone, the nature of the problem becomes clear once the barriers to this ideal transformation are considered within the context of an open economy. That is when we consider the implications of the open enclave economy which are closer to the real world in Southern Africa.

This instalment of the Zhuwao Brief’s series on “Dialogues for an Empowered Society and a Growing Economy” has reviewed the economic growth of a closed dual enclave economy by examining the dynamic process of transformation. We have also looked at the implications of that dynamic transformation as well as the growth linkages for dynamic integration. The article has concluded by analysing the stages of dynamic transformation and integration in a closed dual enclave economy.

The next instalment of the Zhuwao Brief will consider the ideal growth process in the closed dual enclave economy as well the potential barriers to integrated growth. This will serve as a prelude to fully ventilating the scenario of an open dual enclave economy; a scenario which more closely resembles the real situation of the Zimbabwean economy.

Such an analysis will enable us to better understand the structural rigidities that have led to the levels of underemployment that we are currently facing. It is such an understanding which will inform our policy interventions so that we go beyond parroting ignorant and ineffectual calls for foreign direct investment as a panacea for the Zimbabwean economy. Icho.

 

About the writer

Honourable Patrick Zhuwao is the Chairman of Zhuwao Institute which is an economics, development and research think tank that focus on integrating socio-political dimensions into business and economic decision making, particularly strategic planning. Zhuwao is the holder of a BSc honours degree in Computer Systems Engineering and an MBA degree in Information Technology Management (City University, London). He also holds BSc honours and MSc degrees in Economics (University of Zimbabwe), as well as a Master of Management (with distinction) degree in Public and Development Management (University of the Witwatersrand, Johannesburg). [email protected]. [email protected]

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