ZHUWAO BRIEF: Dialogues for Empowered Society, Growing Economy

The Zhuwao Brief’s series on “Dialogues for an Empowered Society and a Growing Economy” has so far dealt with a brief summary of Professor Guy Mhone’s thesis on “Enclavity and the Constrained Labour Absorptive Capacity of Southern African Economies”.

The series has also unpacked the concept of underemployment within the context of the unemployment conundrum in Southern Africa.

Professor Mhone observed that Southern African economies have high levels of unemployment with characteristically significant levels of underemployment.

Mhone’s view that foreign direct investment (FDI) has not resulted in high levels of employment from the so-called trickle-down effect is supported by facts on the ground in these economies.

This means that any expectation of meaningful employment out of foreign direct investment is akin to flogging a dead horse.

Mhone offered two perspectives of underemployment.

Firstly, he viewed underemployment as any activity which does not result in the continuous expansion of wealth. An example of underemployment is the manner in which most of the cattle herds of Zimbabwe’s small holder farmers do not increase in number.

The labour and effort expended in tending those herds is thus termed as underemployed.

Secondly, Mhone viewed underemployment as an activity in which any additional effort does not yield in increased total production or total output. Conversely, underemployment occurs in a scenario in which the withdrawal of some labour or effort does not result in any reduction in total output or production.

An example of this form of underemployment is found in the vending that has become commonplace in most parts of Zimbabwe, with the Zhuwao Brief having highlighted Mupedzanhamo Market in Mbare and its extension of Kotama Boutique next to Rufaro Stadium.

Professor Mhone submits that the problem of unemployment and underemployment finds its genesis within the enclave and dualistic nature of Southern African economies.

As a result, the Zhuwao Brief will this week interrogate the concept of enclavity and economic dualism within the economies of Southern Africa as expounded by Mhone.

This week’s Zhuwao Brief will next review a few of the theories that explain the economic malaise suffered by former colonies prior to describing the development of enclavity and economic dualism. The Zhuwao Brief concludes by introducing the models of the enclave dual economy as a prelude to next week’s article.

Why do former colonies continue to struggle economically?

The economic malaise that grips former colonies has been attributed to the dependency theories within their various schools, be it Marxist, Prebisch or the new international division of labour variety.

Many of us have come across the dependency theory as popularised by Walter Rodney in his 1972 book entitled “How Europe Underdeveloped Africa”.

The dependency theory originates from two papers published in 1949 by Hans Singer and Raul Prebisch. They both argue that the terms of trade between developing nations and the developed world continue to deteriorate over time.

The Singer-Prebisch thesis submitted that developing countries were able to purchase fewer and fewer manufactured goods in exchange for a given quantity of their raw material exports.

The dependency theory stressed the unequal consequences of interactions between developing and developed countries with respect to trade, aid and foreign investment flows.

It focused on how global forces marginalised and peripheralised developing countries that had been colonised and were latecomers to the global arena.

Professor Mhone submits that the dependency theory paid little attention to elaborating the actual circumstances and internal structural constraints prevailing in the developing countries themselves.

He submits that the dependency theory, as a result, does not relate how the circumstances and the internal structural constraints of developing countries impact on the quest for equitable or more inclusive growth.

This is what then forms a departure from the main stream dependency theory that is picked on by the approaches of Paul Baran and Arthur Lewis.

Professor Mhone explains that Paul Baran was one of the earliest analysts to call attention to the fact that developing countries that had been colonised had inherited a special type of social formation in which the capitalist sector of the economy was grafted onto pre-capitalist forms of production in a manner that was distorted.

In particular, Baran (whose approach was decidedly Marxist) argued that this type of capitalism did not possess its own imperative for dynamic transformation and development since it was essentially dependent on and constrained by external factors.

It was a foreign-owned capitalist economy and a legacy of colonialism in a supposedly sovereign and independent state.

Mhone finds that, implicit in Baran’s argument, was the contention that the growth process within an unfettered domestic and international market process would marginalise the majority of the labour force, as well as to also marginalise the developing country itself in the international arena.

Baran’s contention argues for an internally motivated conscious process of transformation.

These internally motivated conscious processes of transformation are exactly what the ZANU PF Government initiated when it set upon the Land Reform Programme and launched its indigenisation and economic empowerment policies.

The ZANU PF Government sought to jettison that foreign ownership of the economy which was not only a legacy of colonialism but was transforming to become a tool of neo-colonialism.

The Zhuwao Brief appears to be getting ahead of itself; these issues will be more fully ventilated in future instalments of this series.

Mhone submits that Baran’s thesis has spawned a substantial amount of Marxist literature on the phenomenon of underdevelopment and dependency.

According to Mhone writing in 2000, some of the literature by analysts like Banerjee and Clarkson was still relevant despite the predominance of neo-liberal and neo-conservative thinking that appeared to have been rendered obsolete by events such as the collapse of the Berlin Wall, the predominance of Francis Fukuyama’s “End of History” thesis and the resultant Washington Consensus and its attendant views.

Mhone also recognises, in another vein, and at about the same time as Baran (around 1957), an approach by Paul Lewis. Lewis advanced his approach to what he referred to as enclave development and growth based on the exploitation of underemployed labour.

Lewis borrowed freely from classical political economists such as Marx, Ricardo and Malthus to elaborate an approach he regarded as more relevant to the unique situation of developing countries which had inherited a capitalist sector that had been grafted onto their societies from external sources rather than internal ones.

Mhone believes that Lewis was making the same argument as Baran, although from within conventional economics, as opposed to the avowedly Marxist perspective of Baran.

Mhone focuses more on Lewis’s approach, which he believes to be instructive in this respect.

Professor Mhone submits that the approaches of Baran and Lewis are superior to the dependency theories for two reasons.

Firstly, the approaches of Baran and Lewis elaborate the nature of internal constraints to market-led growth given the presence of high levels of underemployment in a social formation dominated but not completely captured by capitalism.

Secondly, they demonstrate the interactive nature of external and internal factors in perpetuating the predicament of developing countries in the absence of specific interventions.

The Development of Enclavity and Economic Dualism

The concepts of enclavity and economic dualism are premised on the forms of production that exist in Southern African economies. Professor Mhone submits that there are two forms of production that are distinguished by their raison d’être.

One form of production places its focus primarily on subsistence, whilst the other one focuses solely on the accumulation of wealth and places capital at the centre. Mhone defines this later one as capitalism.

Mhone contends that the defining feature of capitalism is the capital-labour relationship in which labour is commoditised to propel the continuous expansion of capital. All of this occurs within the context of market exchange which encompasses factors of production as well as goods and services.

It must be recognised though, that market exchanges could be found in non-capitalist or pre-capitalist social formations as well. However, non-capitalist or pre-capitalist social formations focused primarily on subsistence and consumption without having the motivational imperative of wealth accumulation.

Professor Mhone submits that in Africa, capitalism as a mode of production was grafted onto these primarily subsistence forms of production organised along communal lines.

The capitalist sector in Southern African economies emerged as a grafted implant emanating from colonialism. Capitalism did not arise through the transformation of subsistence agriculture and the simultaneous emergence of a capitalist form of production in industry and the “commodification” of almost all of the active population.

This emergence of capitalism occurred without the need to transform agriculture and industry and without the need to “commodify” the active population. As a result, the majority of the population remains outside the sphere of the influence of capitalist relations of production.

Mhone refers to this incomplete subordination of non-capitalist forms of production by capitalism as economic dualism.

He concedes, though, that this economic dualism is not so much in the sense that Boeke defined it in 1953. Economic dualism is in the technical sense of a co-existence of two inter-related segments of the labour force.

Professor Mhone sees a minority engaged in dynamic activities propelled by the capitalist imperative for wealth accumulation, and a majority trapped in subsistence, low-productivity and non-capitalist forms of production that are static from the standpoint of wealth accumulation.

The capitalist sector, which Mhone labels as the formal sector, exists as an enclave in a sea of underemployment, or the non-formal sector.

He argues that this economic dualism is not so much characterised by separateness as by inter-relationship and mutual determination.

Professor Mhone contends that this is problematic in that this inter-related co-existence of the two sectors presages a vicious circle of proneness to economic stagnation and the marginalisation of the majority.

It does not result in a vicious circle of dynamic transformation as occurred in the now developed countries and economies.

Mhone believes that the transformation process referred to for industrialised countries is relevant to countries that are populated by fairly large indigenous populations.

It does not neatly fit the growth process of countries that are relatively small, such as Hong Kong and Singapore, or vast but originally sparsely populated by indigenous groups, such as the United States of America or Australia where capitalism was brought in by immigrant groups.

The notion of economic dualism as explained above implies a number of assumptions regarding the nature of the prevailing situation.

Firstly, the labour supply to the formal sector of the economy is rather elastic and can be had at fairly low wages set by the level of subsistence income plus a premium to reflect other factors and considerations.

Secondly, capital is the relatively scarce factor of production.

And lastly, that while external markets may be unlimited for an individual country, domestic markets are limited by the fact that the majority of the labour force is non-productive and hence cannot afford to purchase and thus become precluded from forming part of the effective demand of the nation.

Mhone describes the initial stage of development of a dual economy, with an emerging capitalist sector as the formal sector and the subsistence sector as its non-formal part.

It is assumed that the formal sector is the dynamic part of the economy, hiring labour to make profit, and that the non-formal sector is the static part with a given income equivalent to the production in kind which is all consumed.

In the capitalist part of the economy, labour is hired on the basis of its marginal productivity.

The higher income in this sector is in part a result of this higher productivity.

The higher wage rate also reflects a premium required to accommodate the transition costs and the high cost of living in the formal sector.

The supply of labour from the subsistence sector to the formal sector can be assumed to be initially quite elastic such that much of the surplus labour can be absorbed at a wage rate that is much lower than the marginal productivity of this labour in the formal sector.

It may be noted here that the marginal productivity of labour in the subsistence sector need not be zero, but low relative to the marginal productivity of this same labour when employed in the formal sector where it is deployed in combination with capital.

The differential between the subsistence income and the wage in the formal sector, and by the same token between the productivity in the formal and non-formal sectors become the basis for further accumulation in the formal sector.

Models of the Enclave Economy

To sum up, the above is a situation that may be assumed to have existed at the initial inception of capitalism in formerly colonised countries.

The manner in which the wealth accumulation proceeds, and the manner in which the enclavity might be perpetuated as the two sectors interact, are best appreciated when a distinction is made between the closed and open versions of this type of an economy.

In accordance with Lewis, and modifying his classification somewhat to capture the situation in Southern Africa, Mhone distinguishes between four possible ways in which the formal and non-formal sectors may be interrelated in an enclave economy. These possible ways are in two dimensions.

One dimension relates to whether the formal sector trades with the non-formal sector or not, and the other dimension relates to whether the economy is open to external trade or not.

The first type or model is a closed enclave economy in which the formal sector does not trade with the non-formal sector even if it hires labour from it, whilst the second is also a closed enclave economy but one in which the formal sector does trade with the non-formal sector while also hiring labour from it.

The third type is an open variation of the first one above implying that the formal sector does not trade with the non-formal sector internally but trades with the outside world externally.

Finally, the last type is an open version of the second type in which the formal sector trades with the non-formal sector internally and with the outside world externally.

The next article of the Zhuwao Brief’s series on “Dialogues for an Empowered Society and a Growing Economy” will describe these models of the enclave economy and interrogate whether enclavity and economic dualism has been further entrenched by the opening up and liberalisation of the Zimbabwean economy. Icho.

 

Honourable Patrick Zhuwao is the Chairman of Zhuwao Institute which is an economics, development and research think tank that focuses 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]

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