The Sunday Mail
For Mhone, Lewis’ analysis of the ideal growth process demonstrates how the process of accumulation unfolds as enclavity is eliminated and the whole economy is subsumed by wealth accumulation mode of production.
Last week, the Zhuwao Brief initiated the conversation on the theoretical conceptualisation of how an enclave dual economy grows. This week, we conclude that theoretical discussion by examining the barriers to the elimination of enclavity and economic dualism.
Over the past few weeks, the Zhuwao Brief has been initiating conversations around several concepts that relate to the malaise that is afflicting Zimbabwe’s economy.
The series is based on Professor Guy Mhone’s seminal thesis of 2000 entitled “Enclavity and Constrained Labour Absorptive Capacity of Southern African Economies”.
The conversations started with a challenge to the nonsensical fallacy that FDI will lead to trickle-down effects that have material bearing on Zimbabweans.
That call for a paradigm shift in economic policy was premised on an exposition of the concept of underemployment as elucidated in the second instalment of this series.
The third instalment firmly situated the phenomenon of underemployment on the enclave and dualistic nature of the Zimbabwean economy.
Last week, the Zhuwao Brief initiated the conversation on the theoretical conceptualisation of how an enclave dual economy grows. This week, we conclude that theoretical discussion by examining the barriers to the elimination of enclavity and economic dualism.
To do that, I will start by explaining the ideal growth process for a dualistic enclave economy as well as the ideal virtuous circle of linkages that facilitates for that growth.
The potential barriers to that integrated growth and transformation of the dual enclave economy will be explored prior to concluding by suggesting some requirements necessary to transform and grow a dual enclave economy such as Zimbabwe’s economy.
Ideal growth model
Prof Mhone states that the ideal growth process in a dualistic economy, with huge supplies of underemployed labour, requires that there is lateral and vertical expansion of the wealth accumulation formal sector and the shrinking and vertical growth of the subsistence non-formal sector.
According to Mhone, this ideal growth process is initially triggered by the circulation of cheap labour. It is then sustained by consumption, savings, and input linkages between the two sectors. The process should lead to the integration of the two sectors of the economy and thus eliminate the enclavity and dualism.
Mhone submits that there are two requirements to the growth process. The first is that the lateral absorption of labour into the wealth accumulation formal sector should be greater than the net additions to the total labour force.
Second, the remaining labour force in the non-formal sector should be transformed into productive employment by being absorbed into wealth accumulation modes of production such as commercial agriculture and other rural formal activities.
Mhone agrees with Lewis’ observation that the wealth accumulation formal sector can proceed to grow with minimal intervention by the state.
However, the transformation of the subsistence non-formal economy requires facilitative interventions from the state for it to take advantage of the unfolding scenario.
These interventions include the provision of social services, extension support, and economic infrastructure amongst a host of facilitative services.
Most important in this are regulatory and institutional interventions aimed at development and formalisation of wealth accumulation modes of production.
Mhone believes that the absence of such interventions may lead to the collapse of the subsistence non-formal sector.
He argues that while such a collapse might appear to be a boon to the formal sector in that it might release further labour surpluses, the resulting growth process within the formal sector might not be fast enough to absorb such labour.
Consequently, there will be open unemployment.
According to Mhone, the phenomenon of surplus labour should disappear over time within the hypothetical scenario of a closed enclave dual economy.
The economy should then be able to move towards full employment in the context of a wealth accumulation mode of production.
Mhone believes that the chances of such a process occurring are greater in an economy that is not too reliant on foreign trade and investment, or in an economy that is large enough to have a large internal market.
For Mhone, Lewis’ analysis of the ideal growth process demonstrates how the process of accumulation unfolds as enclavity is eliminated and the whole economy is subsumed by wealth accumulation mode of production.
Mhone submits that the more important part of Lewis’ analysis of this process lies in the identification of the barriers to this process which might lead to a persistence of the enclavity and dualism.
He argues that this is what has transpired to be the outcome in much of Africa, particularly Southern Africa.
But before we interrogate these barriers, it is useful to look at the linkages for the growth of an enclave dual economy that is not open.
Virtuous circle of linkages
Prof Mhone argued that the surplus generated by the utilisation of the excess labour kick starts a process of wealth accumulation and growth that encompasses both the industrial and agricultural sectors in a manner that undermines the residual-ness of the subsistence non-formal sector.
This surplus is generated in both the wealth accumulation formal sector and the transforming subsistence non-formal sector. Consequently, Mhone sees a virtuous cycle of linkages arising on a number of fronts.
Firstly, the increased labour absorption creates the effective demand for industrial goods which in turn fuel further industrial expansion.
Secondly, if the surplus in the subsistence non-formal sector can be translated into demand for industrial consumer, intermediate and capital goods, this will further propel growth in both sectors. Thirdly, if the savings in the subsistence non-formal sector are properly mediated they can be used for investment purposes in both the wealth-creation formal and subsistence non-formal sectors.
This will result in the further expansion of the productive base of the economy and, by the same token, its labour absorptive capacity.
Finally, as a consequence of all these interactions it can be expected that the revenue base of the state will increase thereby allowing it to invest in economic and social infrastructure to further underpin growth.
Thus a virtuous cycle of interactions is precipitated that allows for the lateral and vertical growth of both the formal and non-formal sectors yielding a more inclusive growth path.
Mhone posits that the initial simultaneous transformation of the wealth accumulation of formal and subsistence non-formal sectors captures the majority of the labour force into productive employment. As a result, the residual underemployment and open unemployment only affects a minor proportion of the labour force.
Furthermore, Mhone argues that the process also lessens the amount of growth in output and investment required to reduce this residual portion since it is now smaller.
With the passage of time, the marginal rates of growth in the larger part of the economy (the wealth accumulation formal sector in which the majority is now absorbed) will eliminate the subsistence non-formal employment or reduce it to a natural rate of unemployment and underemployment.
Mhone emphasised that this whole process in a closed economy is endogenously propelled. The accumulation imperative is internal to the economy.
It does not depend primarily on external stimulation through outward orientation. However, outward orientation would, in this ideal environment, give further impetus to an endogenously driven process.
This is one of the lessons to be learned from the experience of the newly industrialised countries some decades ago.
Potential barriers
Prof Mhone also identified potential barriers to the integrated growth and transformation of a dual enclave economy.
These barriers relate to possible constraints to the efficient realisation of the virtuous circle of labour absorption linkages outlined above.
We must remember that these linkages relate to how increased labour absorption results in increased effective demand for consumer, intermediate and capital good.
This, in turn, leads to surpluses which are saved and, with proper financial mediation, reinvested. There will also be increased fiscal revenues for the state to reinvest in the economic and social infrastructure that underpins growth.
All this leads to a virtuous circle of growth.
Mhone cautions that the absorption of underemployed labour by the wealth creation formal sector could be impeded.
This could be as a result of the possibility that the wage rate in the formal sector may rise at a rate that throttles profitability in this sector.
Such a situation could arise as a result of the premium of the formal sector wage above the subsistence wage increasing due to increased costs of transferring labour from the subsistence non-formal to the wealth accumulation formal sector.
Mhone identifies several possible reasons for this. It could be due to an increase in the opportunity cost of releasing labour from the subsistence non-formal sector in the absence of accommodating changes in work organisation in that sector.
This may be due to increasing average productivity in the subsistence non-formal sector.
It may also be due to an increase in unionisation in the wealth accumulation formal sector. It could even be due to an increase in remittances from the wealth accumulation formal sector to the subsistence non-formal sector.
All of the foregoing will result in an increase in the reservation wage for unskilled labour.
This would result in a slower rate of labour absorption by the wealth creation formal sector from the subsistence non-formal sector.
Mhone suggests that there is a built-in tendency in the dual enclave economy for receding growth or stagnation. These barriers identified above could easily lead to a situation in which the economy gets trapped in a low-income quasi-stable equilibrium trap at less than full employment.
Hirschman, in his 1958 book entitled “The Strategy of Economic Development”, suggested that such a trap would have high levels of open unemployment and underemployment.
According to Mhone, in this position, formal sector expansion is constrained by a lack of effective demand in the economy as a whole and by a seeming lack of profitable investment opportunities in the subsistence non-formal sector.
In its totality, this situation also results in low levels of internal accumulation or generation of savings and investment funds.
Thus we have an economy in a low-income quasi-stable equilibrium trap with low levels of internal effective demand, savings and investment funds, but with surplus labour in the form of open unemployment and underemployment in the non-formal sector.
This economy also suffers from constrained fiscal space.
Zimbabwe finds itself in this situation where is low effective demand. As a result, there is low production. Low production results in less income.
The low levels of national income are translated to less savings. The low absolute savings result in low levels of internal domestic investment.
This also explains the constrained fiscal space that is currently occurring in Zimbabwe.
Low levels of domestic investment give the impression that Zimbabwe is not an attractive investment destination even to its own people. It is therefore not a far stretch to see that it would be difficult to attract FDI.
Yet some of our policymakers continue to parrot the same message of foreign direct investment. It has been said that the hallmark of stupidity is to continue doing the same thing in the hope of a different result.
But as a nation, we are also being sold the idea that liquidity is the major problem in the economy. But we all know that the economy brightens up when it’s the tobacco selling season.
Why?
Because tobacco farmers have effective demanded that is backed by real money.
Where does that money come from? It comes from production on the back of asset entitlement occasioned by the land reform programme, as well as income entitlements that have been facilitated by the funding mechanism for tobacco which is based on the contact farming system.
And look mum — no title deeds!
Mhone observes that market forces, on their own, lead to the foregoing situation in the absence of any extra-market interventions by the state within the context of a closed economy.
Requirements for growth
Given the barriers outlined above, Prof Mhone suggests the ideal situation in a closed economy with surplus labour occurs when there is a good propensity for innovation coupled with an entrepreneurial class that is ready to capture the opportunities in the subsistence non-formal sector and transform these opportunities accordingly.
Mhone also asserts that there is a political need to commoditise the subsistence non-formal sector. Mhone states that this is what happened during the industrial revolutions of Europe and Japan. He further submits that the newly industrialised countries pursued a similar strategy led by the state prior to their outward orientation.
The Zhuwao Brief will next week move beyond the theoretical suppositions of how to grow a hypothetical closed dual enclave economy to addressing the real world conditions of an open dual enclave economy such as the Zimbabwean one.
This requires that we interrogate how opening up a dual enclave economy further entrenches enclavity and dualism in such a manner as to embed a low-income economy in a quasi-stable equilibrium trap with low levels of internal effective demand, savings and investment funds, but with surplus labour in the form of open unemployment and underemployment in the non-formal sector.
It is astounding that we still have some of our policymakers who continue to advocate for a free-market open economy that serves to ensconce a foreign formal sector that is divorced from the real needs of the people.
Such an approach is inimical to the Zim-Asset vision of “an empowered society and a growing economy”.
Icho!
Patrick Zhuwao is chair of the 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]
