The Sunday Mail
The previous six instalments of the Zhuwao Brief’s series on “Dialogues for an Empowered Society and a Growing Economy” dwelt on a theoretical and hypothetical model of a dual enclave economy.
This seventh instalment examines the effect that economic policy biases have had on the enclave dual economies of Southern Africa.
The Zhuwao Brief will start off by recounting Professor Mhone’s submission that policy-induced biases have reinforced enclavity and economic dualism.
However, it will be necessary to enunciate what these common policy biases have been prior to highlighting how some of these policies for “creating an enabling environment” have strengthened the formal enclave.
This instalment will conclude by explaining the implications of these policy biases.
Policy-induced biases
Prof Mhone submits that the advantage of Lewis’s analysis of labour surplus economies and the paradigm of enclavity is that it demonstrates at a purely conceptual level that market forces on their own are unlikely to resolve the problems of economic dualism.
They will rather lead most likely to a low-income, quasi-stable equilibrium trap which would structurally underpin open unemployment and underemployment in a latecomer developing country under both closed and open scenarios.
For Mhone, this conclusion implies that more innovative measures are required than merely ensuring that there is a good enabling environment for the operation of domestic and international market forces.
Mhone argues that it is necessary to advance the argument further by demonstrating how policy-induced developments have actually reinforced the proclivity towards economic dualism and enclave growth and development which was essentially sustained by colonial relations of domination and subjugation.
Mhone submits that during the era of colonialism, colonial interests were paramount and only coincidentally or peripherally aimed at the development of the colonised economies.
Despite having been independent for 50 years, African economies are still plagued by enclavity and pervasive open and hidden unemployment, particularly in non-formal sectors.
According to Mhone, the superficial perspective has been that this continued crisis in African economies has primarily been a result of statist, interventionist or inward-looking policies pursued by African policymakers.
The unsustainability of these policies was exposed in the mid-1970s when the international economy plunged into recession.
Mhone believes that by the early 1980s, a policy consensus began to emerge that outward orientation and liberalisation of domestic economies were the solutions to the problems confronting Africa.
As a result, we saw the now ubiquitous economic reform programmes embraced by almost every African country, propagated and supervised by the World Bank and IMF.
Zimbabwe had the Economic Structural Adjustment Programme from 1991.
Mhone submits that enclavity and economic dualism, and the concomitant low labour absorption rate, raises several issues.
One of these relates to the need to demonstrate, in a very general and conceptual way, how problems inherited from the colonial period have been perpetuated and accentuated.
Common policy biases
Mhone reminds us that the analysis of the closed and open models of enclavity was meant to show that such enclavity would arise and be sustained through unimpeded domestic and international market forces in the absence of structural interventions to redefine the structure of the economy. He argues that this process has historically been reinforced by a number of policy developments common to many developing countries.
Firstly, Mhone contends African policymakers have been convinced that the inherited formal sector is the engine of growth and development, regardless of ideological persuasions.
Secondly, Mhone says policymakers have been convinced of the importance of nurturing export growth as the basis for financing importation of capital, intermediate and final goods, which are seen to be absolutely essential in sustaining formal sector viability.
The export bias has generally been in favour of raw materials.
Thirdly, Mhone accuses policymakers of relying on FDI and aid as major capital sources.
He says African policymakers have uncritically embraced the enclavity of their economies in the belief that formal sector growth will, through trickle-down effects and lateral expansion, eat away at open unemployment and underemployment in the non-formal sectors.
In this respect, Mhone concludes that any policy initiatives to promote productive activities in the non-formal sectors have come in the context of the enclave models with the formal sector as the dynamic driving engine of growth.
Enabling whose economy?
Mhone submits that there has been a paradigmatic uncritical stance in which almost all policies have had a deliberate formal sector bias.
Unfortunately, this paradigm has had the inadvertent effect of reinforcing enclavity and low labour absorption capacity.
The main policy biases in this respect include regulatory policies that give the legal advantage to large-scale, formal sector firms with respect to accessing finance and Government benefits such as subsidies, export markets and services, including the regulation of prices and markets.
Mhone argues that most African government expenditure policies have subsidised large-scale, capital-intensive firms.
Further, there have been various explicit and implicit subsidies that cheapen the relative cost of capital for the enclave formal sector through skewed tariff and customs policies, credit provision, foreign exchange policies, education and training policies, research and development policies, provision of utilities, transport infrastructure, storage facilities, etc.
Mhone concludes that the overall effect of such policies is to impart a bias in the economy in favour of large-scale firms, capital-intensive activities, the urban sector, and more generally the formal sector.
Implications of policy biases
This policy environment tends to act against the evolution of small-scale and rural activities, labour-intensive activities and more generally the transformation of the non-formal sector. Such policy biases imparted a stag-flationary bias to the economies.
For Mhone, among the major outcomes that had important implications for labour absorption included the tendency toward low employment elasticity with respect to output and investment.
Thus, with the typical GDP growth rates of less than 5 percent and population growth rates of about 3 percent per annum, the nature of the labour absorption problem becomes quite obvious.
Mhone argues that there is a tendency toward excess capacity given the deficiency in aggregate demand.
This is reinforced by the fact that small-scale firms and micro-enterprises have to override enormous barriers to be successful, and often with very little support from the state; and the fact that given the limited labour absorption rates in the formal sector, the non-formal sectors tend to be the last resort for survival.
More important in this respect is the lateral expansion that results from the ease of entry in such non-formal activities, which tends to depress returns to labour.
In addition, non-formal enterprises attempting to engage in productive or formal type activities have to contend with a cost disadvantage since, unlike firms in the formal sector, they lack access to discount facilities with respect to finance, intermediate inputs, capital goods and large markets.
Mhone submits that the absence of formal sector employment opportunities, together with the general state of depression in the non-formal sector, has led to a high degree of “self-exploitation” among non-formal workers.
This is exacerbated by the high degree of saturation in activities undertaken by non-formal workers.
The self-exploitation is reflected in long working hours and low returns, use of child labour and abuse of women workers and the widespread depreciation of the human being as an economic asset.
Mhone believes that the inadequacy of employment opportunities has generally led to the state acting as a major agency for absorbing labour, even if much of this employment is non-productive in the classical sense.
The tendency for the state to be overly extended is a common feature of enclave economies.
In conclusion, Mhone submits that these biases are common to all African economies regardless of whether they have pursued inward-looking policies or not, or whether they have been market oriented or not.
Indeed it is this commonality in the problems confronted by these countries that begs for a paradigm shift in interpretation of the problematic of the low labour absorption rate.
The issue can be pursued further to another level of analysis, that which pertains to the structural legacies of particular types of economies.
Icho.
Honourable Patrick Zhuwao is chair of Zhuwao Institute, an economics, development and research think tank focused on integrating socio-political dimensions into business and economic decision making, particularly strategic planning. He can be reached at [email protected] and [email protected]
