The Sunday Mail
The low absorptive capacity of the economy results partly from the tendency toward capital intensive methods of production induced by the increasing reservation wage, and partly from the fact that the formal sector resorts to technology and capital imports that are primarily suited to economies with scarce labour.
The “Dialogues for an Empowered Society and a Growing Economy” series has focused on conversations that provide a conceptual and theoretical grounding as a foundation for deeper thought and analysis into the Zimbabwean economy.
This week, the Zhuwao Brief will cap the past four instalments on the theory espoused in the late Professor Guy Mhone’s 2000 seminal treatise entitled “Enclavity and the Constrained Labour Absorptive Capacity of Southern African Economies”.
The first instalment challenged the deceptively disingenuous and duplicitous notion that FDI would result in trickle-down leading to employment and called for a paradigm shift on economic policy.
I then unpacked the concept of underemployment and unemployment and supported Mhone’s view that this constituted the principal fundamental problem of Southern Africa.
To demonstrate Mhone’s thesis, the Zhuwao Brief highlighted how enclavity and economic dualism were the condition sine quo non for the high levels of underemployment in Zimbabwe.
This was highlighted in the fourth and fifth instalments, which examined the hypothetical case of the growth of a closed enclave dual economy.
This sixth instalment introduces openness to our hypothetical model enclave dual economy to examine the effects of external markets and foreign capital.
We start this week’s conversation with a recap of Prof Guy Mhone’s analysis of potential barriers to integrated growth and transformation of a closed enclave dual economy which is required to liberate itself from a low-income quasi-stable equilibrium trap.
Mhone submits that a closed enclave dual economy has a built-in tendency for receding growth or stagnation. This is primarily because such an economy finds itself in a situation where there is low effective demand.
Because this hypothetical closed enclave dual economy does not trade externally, the constrained effective local demand leads to low levels of production since there are few resourced consumers to take up the produced goods and services.
According to Mhone, the low levels of production in the hypothetical closed dual enclave economy’s results in a low national income.
This low national income translates into low absolute savings and concomitantly low levels of internal domestic investment. It also results in lower revenues to the national treasury, which means less investment in the public and social infrastructure and services necessary to underpin economic growth and development.
For Mhone, the lack of internal effective demand immediately translates into the need to exploit outside markets through export promotion.
Similarly, the tendency toward inadequate internal savings and investment funds reasserts itself as the need for foreign capital; whether in the form of private investment or foreign aid. In the meanwhile, the surplus labour continues to exist as a potentially exploitable resource for both export promotion and foreign investment.
Mhone submits that the need to export in the face of stunted growth and an underdeveloped secondary sector gives rise to the need to import capital and intermediate goods.
In addition investment for purposes of producing for the domestic market is constrained by the low level of effective demand in the economy.
This means investment has to be directed to producing for export as well. The economy still relies on importation of capital and intermediate goods and technology.
The inability of a labour surplus economy to accumulate and find effective internal markets compels the economy to resort to the international economy to escape these constraints.
Unfortunately, as both Lewis and Baran pointed out, the introduction of openness does not resolve the issues satisfactorily.
Openness, depending on the circumstances, might either ameliorate or exacerbate the problem of the low-income, quasi-stable equilibrium trap in the absence of other interventions.
For small, labour-surplus economies huge inflows of foreign capital or the emergence of sustainably lucrative export markets might be enough to absorb surplus labour such that the labour market becomes tight or approaches full employment.
This might be facilitated by the discovery of resources with high export demand, the unprecedented inflow of FDI wishing to take advantage of particular circumstances in the global positioning of the economy, and so on.
As Lewis notes, for large labour-surplus economies, external vents for the problems faced can only bring about marginal benefits since labour absorption needs are so large that huge increases in production for export and foreign investment would be needed to begin to absorb net increases to the labour force.
Unfortunately, the resort to the international economy then subjects the dual enclave economy to dependency as postulated by Hans Singer and Raul Prebisch in 1949.
Singer and Prebisch argued that the terms of trade between developing and developed nations continued to deteriorate over time
The dependency theory was popularised by Walter Rodney in “How Europe Underdeveloped Africa” (1972).
Mhone believes that it is at this stage of the analysis that the approach to underdevelopment that Baran and Lewis utilise converges with that of the dependency school analysts.
Whilst Baran and Lewis attribute the low-income quasi-stable equilibrium trap and its perpetuation to external factors, dependency theorists and analysts, including Samir Amin of the Marxist perspective, would argue that it is the interactions of internal structural factors and the external factors that perpetuate underdevelopment.
Both schools agree that for large labour surplus economies external economic relations are not likely to resolve the fundamental problem confronted by these countries.
Mhone submits that the introduction of openness in the model of enclavity and economic dualism poses some fundamental barriers to the elimination of enclavity and economic dualism.
What lurk as potential barriers to the model when closed become real barriers to the elimination of enclavity and economic dualism in an open economy.
There are structural constraints, which are accidents of history, in the internal relationship within an enclave dual economy and its relationship to the outside world.
Mhone also observes that in the real world there are not only many enclave dual developing economies, but also a large external market for the exportation and importation of commodities and capital.
The openness presents both opportunities and constraints for the growth and development of an enclave dual economy.
As a result, Prof Mhone submits that the problem needs to be posed afresh.
There is now a major difference between having an enabling environment for the growth of the enclave formal sector on the one hand, and having an enabling environment for the virtuous integration of the formal and non-formal sectors of the enclave economy on the other.
This difference is fundamental and it becomes more apparent once the barriers to the growth of the enclave economy are considered.
Mhone reiterates that in the face of a collapsing subsistence non-formal sector or of an increase in labour’s reservation wage, the absorption of labour from the subsistence non-formal sector eventually runs into a barrier.
This will sustain enclavity and dualism.
In the case of a collapsing subsistence non-formal sector, the sustenance of enclavity and economic dualism is reflected in the rise of open unemployment and underemployment in the urban sector of the economy closer to the formal sector.
As the subsistence non-formal sector becomes non-viable, the underemployment is translated into urban unemployment and underemployment.
This unemployment cannot be resolved by the slow rate of labour absorption in the formal sector.
In the second case of an increase in labour’s reservation wage, this eventuality throttles off accumulation eventually unless extra-market measures are used to deflate the wage.
However, given these possible eventualities, Mhone proposes that the enclave part of the economy may be saved from atrophy through the introduction of openness into model.
Mhone argues that with the introduction of openness, the economy is able to escape the internal barriers to growth by resorting to the external market for investment funds, investment opportunities, effective demand and innovation.
This happens without requiring the growth process to be inclusive and integrative of the subsistence non-formal sector.
According to Mhone, the higher reservation wage compels the enclave part of the economy to resort to capital-intensive forms of production based on imported technology and capital.
In the case of the depressed non-formal sector, which in turn depresses effective demand, the export market may be exploited to fill in the gap.
The absence of investment opportunities internally compels the export of capital. Furthermore, the inadequacy of internal savings is resolved by resorting to foreign capital inflows.
Consequently, the external sector acts as a vent for surplus production and savings from the enclave formal sector and serves as a source of foreign investment.
Mhone submits that essentially, the formal sector is able to sustain growth of sorts without the need to transform the subsistence non-formal sector, and in the presence of open unemployment and underemployment in the economy.
The low absorptive capacity of the economy results partly from the tendency toward capital intensive methods of production induced by the increasing reservation wage, and partly from the fact that the formal sector resorts to technology and capital imports that are primarily suited to economies with scarce labour.
As a consequence, employment does not respond positively to output and investment so much that the creation of additional employment is generally too low to absorb net increases to the labour force, let alone cure the structural underemployment that already exists.
For Mhone, the enclave formal sector thus begins to evolve a growth momentum of its own that is relatively unrelated to the existing underemployment, which is seen as irrelevant.
The momentum of the formal sector is intimately connected to the external sector, which is seen as critically essential for its own growth.
Meanwhile the subsistence non-formal sectors will tend toward lateral expansion and involution in a degenerative sense.
Mhone does not find it surprising therefore that such an economy easily shifts to the tertiary stage of the Fei-Ranis model of economic growth, not having exhausted the first and second stages of development indicated.
It is within this context that the foreign exchange and debt traps can be understood, and the misplaced preoccupation with foreign investment and export promotion as the presumed panaceas for the growth and labour absorption problems can be appreciated.
Mhone concludes that, openness essentially accentuates enclavity and economic dualism, and by the same token, the marginalisation of the subsistence non-formal sector.
In the context of openness, the formal sector begins to have a momentum of its own quite independent of the subsistence non-formal sector, which now becomes economically irrelevant.
Mhone argues that the economic flows of the formal sector and the external world become mutually sustaining and reinforcing of enclavity and economic dualism.
First, it becomes necessary to specialise in those goods that fit into the international division of labour, which in the case of many developing countries has initially meant specialisation in those primary products that are often produced by the formal sector and only in exceptional circumstances by the non-formal sector of the economy.
Now such goods are prone to the usual terms of trade problems and the consequent unequal exchange between developed and developing countries.
Second, according to Mhone, the absence of economies of scale in the production of capital, intermediate and durable consumer goods results in a dependency on imports, for which exports are needed.
Thus the internal imperative for efficient import substitution as a basis for the growth of a secondary sector is obviated.
Similarly, so is the ability to compete in the export of industrial goods given the external barriers to imports in industrial countries that UNCTAD has called attention to on numerous occasions.
Thirdly, for Mhone, there is only so much foreign capital to go around so that there is generally competition among developing countries for such funds and they can never be enough to resolve the internal structural problems of developing countries as a whole.
Thus, while foreign investors can choose, developing countries wishing such capital have to compete by providing adequate incentives to prospective investors.
Mhone believes that if a developing country does not take pro-active steps to modify its internal economy and its position in the international division of labour automatic, market forces will tend to reinforce its internal dualism and external dependency.
Trade, aid and foreign investment will tend to be facilitators of such a situation.
Mhone’s point is that the existence of external markets and foreign capital do not act as panacea for the structural problems posed by enclavity and economic dualism for an economy with a large labour surplus.
This is solely by virtue of the very nature and magnitude of these problems. This point is deliberately made to underscore the commonality of the problems of many developing countries, particularly those in Africa.
Mhone believes that it is only in this manner that the nature of continued underdevelopment in the context of openness during the colonial eras of developing countries can be understood and explained.
It is of course true that the developed countries did not go out of their way to make the international environment more conducive to the growth of developing countries in a manner that would enable them to compete with the industrial countries.
The main point Prof Mhone makes is that market forces are inadequate to resolve the problems of enclavity and economic dualism and the resultant low-income quasi-stable equilibrium trap that these structural attributes entail.
Consequently, it is futile to expect market forces to provide for full employment. Icho.
Honourable 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]. [email protected]
