From my The Economics Minute podcast today:

Johan Fourie wrote an interesting blog post yesterday, in which he outlined the opposing ideas about the economy and the role of government. On the one hand, there is the view that the country has been denuded, deindustrialised, and “financialised,” while the government pursues austerity policy and market-friendly reforms. On the other hand, there is the view that South Africa’s decline is not the result of free markets, but rather of government failure, rent-seeking, and policy uncertainty. The question that comes to my mind is whether inclusive growth is the middle ground?

Inclusive economic growth is a broadly used term, so it’s important to be more specific about what is meant. It is not simply “pro-poor” growth that only focuses on poverty reduction. It’s about a more equal distribution of economic growth across income groups, across regions, and across generations. It’s about broad participation in terms of employment, increasing the income of the poorest 40% of the population, improving education and health, and ensuring access to credit.

The idea is that a country can achieve inclusive growth outcomes if growth is supported by investment in education, health, and infrastructure in ways that boost productivity. Labour-intensive sectors need to absorb more workers. Small and medium-sized enterprises must be supported, and strong institutions must build trust.

Countries often cited as success stories include: South Korea, which made major investments in education, land reform, and rural development; Rwanda, which focused on health and the inclusion of women; Vietnam, which invested in health, education, and infrastructure; and Brazil, with large social programmes that raised incomes.

The opposite scenario is where average GDP per capita grows rapidly, but the benefits are not widely shared. This was the case with oil in Angola and Nigeria. In India, liberalisation benefited urban workers and the educated. In China, coastal provinces benefited, but migrant workers were left behind.

The question I still can’t quite answer is whether inclusive growth is just economic growth with redistribution—meaning the economy grows, and through progressive tax rates and social spending, the outcomes become more inclusive. Or must the drivers of growth themselves be inclusive? Should there be requirements for broad participation across different groups, regions, or generations when it comes to physical capital, human capital, and technology—the things that drive growth? Do such requirements strengthen the functioning of the drivers of growth, or do they hinder them?

That is the heart of the current debate in South Africa. Our tax system is progressive, spending on social services and grants is massive, and the latest income and expenditure survey shows that wealth is being shared. But our education outcomes are disastrous, infrastructure investment is mostly talk, and service delivery is crumbling.

Can the drivers of growth be made inclusive through BEE targets, local content requirements, tariff protection, and sector masterplans? So far, it doesn’t seem so. We are inclusive, but there is barely any economic growth or job creation.