L Brown: University of Cape Town Summer School Function

17 January 2006

I am sure that all of you present here today have heard the buzz-words of
Shared Growth from recent media reports. But do we understand exactly what it
is and more importantly, what it offers to ordinary South Africans?

Before we get to the detail of definitions, many of you may be aware that
Government has recently adopted the notion of Shared Growth in its new economic
growth and development strategy. Known as the Accelerated Shared Growth
Initiative for South Africa (ASGI-SA), under the leadership of Deputy President
Phumzile Mlambo-Ngcuka, the framework aims to accelerate our economic growth to
between 6 and 8% by 2014.

Why do we need higher levels of growth? All indicators are pointing to a
robust and bubbling economy. In fact, it is well known that over the past ten
years, South Africa has achieved considerable success in macroeconomic
stabilisation, laying a solid foundation for sustainable development into the
future.

Well for many, these gains are surreal. For many people, each day brings
significant challenges to basic survival.

Stubbornly high levels of unemployment and poverty persist, stretching the
development gap and reducing the dream of a better life for all of our
citizens. Recent social protests against inadequate municipal service delivery
are a stark reminder of such realities to us all.

So, driven by these harsh realities, Government's new accelerated shared
growth strategy drives a tough, relentless development agenda. It focuses
attention, resources and capacity on key areas such as infrastructure
development, sector investment strategies and small business expansion, aiming
to unblock structural barriers that inhibit rapid economic growth, job creation
and shared development in South Africa.

But what is Shared Growth and Development?

And what is 'new' about the Shared Growth approach that differentiates it
from other development strategies? Said simply, Shared Growth is a development
strategy that views poverty reduction and economic growth as being
inter-dependent goals over the medium to long term. That is, that the fates of
the poor and the wealthy are intertwined; that the only option is to find
strength and unity in our diversity, and work together towards a shared
future.

We know that higher levels of economic growth are critical to reducing
unemployment and poverty over the medium- to long term. It is only at higher
levels of growth (the 6 to 8% band) that South Africa's economy will be able to
generate sufficient investment, particularly in economic infrastructure, and
stimulate the levels of economic activity that are conducive to the level of
job creation that we need.

So growth is not the ultimate aim. It is the means to the end - a better
life for all.

Moreover, it is generally accepted that on its own growth will not bring
benefits to the wider community. The wealthy are able to capture economic
benefits, while poorer communities tend to have few resources or capabilities
to respond to social and economic changes. Growth for its own sake almost
always results in higher levels of inequity and tends to exacerbate income
distribution trends.

Yet economic growth also has the ability to make a significant contribution
to reducing poverty and improving people's livelihoods and future
opportunities.

Shared growth recognises that growth alone is a necessary but not sufficient
condition. That is, more than just high levels of growth are needed to reduce
poverty. That equity matters in the growth and development game.

High levels of equity enhance the impact of accelerated growth on poverty
reduction. In turn, boosting the long-term growth potential of an economy
depends on a more equitable distribution of income, capabilities and geographic
location of communities and economic activity that enable the benefits of
growth to be 'shared'.

This 'sharing' of economic yields enhances social and economic
participation, which in turn feeds back to reinforce the economy's long-term
growth potential, generating a virtuous cycle of growth and human development.
This means that a shared growth strategy must be simultaneously pro-growth and
pro-poor.

What do we mean by 'pro-growth' and 'pro-poor'?

Pro-growth strategies were epitomised in the 1980s by structural adjustment
lending that emphasised economic reforms in developing countries that were
aimed at enhancing growth first and foremost. Higher growth was meant to impact
on poverty and inequality through a 'trickle-down' effect on the economy.

However, pro-growth strategies were over-optimistic in their assumption that
economic benefits gained by the wealthy in inequitable societies would feed
through to the poor.

They did not acknowledge the development needs and challenges of poor
people, and therefore created a development gap, contributing to a long-term
slide in development opportunities for the poor and wealthy alike. This led to
a focus on pro-poor growth in the 1990s. Pro-poor growth is growth that is good
for the poor.

Under the relative definition, growth is pro-poor if the incomes of poorer
people grow faster than those of the population as a whole, leading to lower
levels of income inequality.

Under the absolute definition, growth is considered pro-poor if, and only
if, poor people benefit in absolute terms, according to a pre-defined measure
of poverty, usually an income poverty line.

Pro-poor growth strategies have contributed to national (and sub-national)
public expenditure strategies that emphasise poverty reduction and social
expenditures in a sharpened focus on poverty and human development. The latter
is best defined in the Millennium Development Goals (MDGs), which provides an
international benchmark for comparing development performance.

It is interesting that not one of the MDGs mentions economic growth as an
objective or target. Yet we know that economic growth is a key ingredient of
any poverty reduction strategy.

Empirically, we have seen that, on average and over time, growth does result
in the reduction of poverty. However, it is the quality of growth that matters
for the extent of impact on poverty.

This means that the way in which wealth is created (the quality of growth)
is just as important as the level of growth, hence the move towards Shared
Growth and Development. Shared Growth and Development therefore talks to
pro-poor and pro-growth as interdependent goals; we need a growing economy that
grows in a pro-poor way.

That is, distributional facets are taken into account in the growth story.
We must therefore balance social and economic concerns in the Shared Growth
agenda.

In more detail, we know that higher levels of economic growth have a larger
impact on poverty in countries where there is a more equal asset and wealth
distribution.

Conversely, widening inequality not only diminishes the impact that higher
levels of growth have on reducing poverty; it also slows down the pace of
economic growth, conflating the trend.

Said simply, higher levels of growth have a greater impact on reducing
poverty when the poor are themselves empowered to participate in economic
activity, acting as agents of growth through their own activities. When poor
people have access to tangible assets, such as land, housing, water, energy,
sanitation, transport, credit, or intangible assets, such as education and
health, they hold the means to participate in economic activity themselves and
therefore are better placed to benefit from economic growth.

In economists' language, most developing economies have market failures or
missing markets. As a result, resources may not flow where returns are the
highest. For instance, given public subsidies, highly capable poor children may
complete secondary school, but be unable to gain access to tertiary education
due to credit rationing (access to finance).

Therefore, economists refer to market failure or missing markets that lead
to misallocation of investment opportunities. That is, those that hold greater
wealth and power are able to attract or 'crowd' in investment, while those that
hold limited sway are bypassed.

In turn, misallocation of investment in turn constrains economic growth, as
resources are not being invested in areas that offer the best rates of return.
In these instances, asset (tangible and intangible) or wealth (said broadly)
redistribution has the potential to enhance economic efficiency, raising
investment and improving economic growth potential.

Remember that we are talking about tangible and intangible assets, so
redistribution does not always have to be a fraught process, caught in a
zero-sum game, as in many tangible asset redistributions, such as that of land.
For example redistribution of education and health services may have equal or
even more important benefits than land redistribution for enhancing long-term
economic growth potential.

Moreover, the frank economist rationale that I have presented above does not
even touch on the social and moral benefits that asset or wealth redistribution
may bring to communities and society at large, particularly in a society such
as South Africa, given our legacy of political, social and economic
disenfranchisement.

The key policy lessons to be learnt here are firstly, that economic growth
that is accompanied by improved asset distribution will have a greater impact
on reducing poverty than growth that leaves distribution unchanged. Secondly,
worsening asset distribution (increased inequality) can offset the benefits of
growth to the poor, reducing the poverty impact of future growth.

It is precisely these conclusions that have shifted the debate towards
Shared Growth and Development. That is, understanding that the key to enhancing
sustainable human development is found in the interaction between asset and
wealth distributions and growth, and how these impact on poverty over time.

Meeting the Challenge!

Now we know what Shared Growth and Development is, the question is 'how' do
we go about achieving it, given the challenge over the next 10 years to
accelerate economic growth, enhance employment creation, and broaden economic
participation to the levels that are conducive to reducing poverty and
achieving shared gains.

Recent comparative international shared growth experiences show that the
rate and quality of growth is determined by a country's ability to integrate
into the global economy, its capacity to maintain sustainable government
finances and sound money, and its ability to put into place an institutional
environment in which contracts can be enforced and property rights
established.

The key message here is that the quality of government institutional
capacity matters for accelerated shared growth and development. In most
developing countries, financial, human and administrative government
institutional capacity is a limited, scarce resource.

As such, it needs to be prioritised, focused on removing those economic
distortions that are binding obstacles or constraints on growth; that will have
the biggest direct impact if removed. Considerable work is being done at the
national level by the AGSI-SA technical task team to identify the key binding
obstacles constraints and therefore attendant policy interventions to
accelerating and broad-basing economic growth and job creation at the national
level.

The changing intergovernmental landscape tests provinces to do the same.
Proactive shaping of the regional economic development agenda demands that
provinces identify key binding obstacles or constraints to shared growth within
an intergovernmental context; that is, understanding what the binding
constraints and attendant policy interventions are, and matching such to
national, provincial and local policy levers.

Where policy levers are within the provincial domain, they will be subject
to provincial political and resource prioritisation; whereas national and local
policy levers demand a different approach, testing intergovernmental
co-ordination, coherence and integration to the full.

Ultimately, accelerating shared growth within the dynamics of
intergovernmental interaction presents a challenge to all in the system, and
will require co-ordinated action from all spheres of government. Delivery
depends on the whole rather than the sum of the parts. The challenge has been
made clear. Stakes are high and our choices stark. Realism informs our options.
Vision and passion guide our future.

We will bring about a better life for all in South Africa. Thank you.

Issued by: Office of the MEC for Finance and Tourism, Western Cape
Provincial Government
17 January 2006

Source: Western Cape Provincial Government (http://www.capegateway.gov.za/)