Searching for Mbeki’s Second Economy by Adrian Hadland

Tuesday, 27 March, 2007 - 06:53

For almost four years now, President Thabo Mbeki’s notion of a “second economy” has been a key tool for understanding the intractable problem of poverty in South Africa.  Increasingly, howev

For almost four years now, President Thabo Mbeki’s notion of a “second economy” has been a key tool for understanding the intractable problem of poverty in South Africa.  

Increasingly, however, the idea that South Africa has two economies, one modern and first world and the other backward and third world, is being reconsidered and revised.

Both government insiders and an increasingly vocal group of local and international scholars, backed by their recent research findings, are now questioning the value of the second economy concept. They are suggesting though it played an important role in highlighting the deficiencies of GEAR trickle down, it has limited use in making sense of poverty and may afford a distorted view of life at the margins of the South African economy.

As the second economy currently has a central role in government policy, the retreat from the concept could have important consequences. It may challenge both scholars and policymakers to rethink completely how the country understands and therefore tackles poverty.

A number of researchers, academics and policy-makers from South Africa and around the world are pooling their thoughts and work at a conference in Stellenbosch this week. The event entitled “Living on the Margins”.ends today, 28 March 2007. Several expect that the outcome will be the development of more powerful tools for academics and policymakers to engage with the concept of the second economy. Indeed, there are already indications that government is sliding down the bench to create a bit of space between its senior officials and Mbeki’s flagship economic concept.

The event is hosted by the University of the Western Cape’s Programme for Land and Agrarian Studies (PLAAS), the Manchester, UK based Chronic Poverty Research Centre and Cape NGO Isandla Institute.

Mbeki, who was awarded a masters degree in economics from the University of Sussex during his years in exile, first mooted the idea of South Africa’s second economy in his official Letter from the President in August 2003, according to University of the Western Cape (UWC) researchers Andries du Toit and David Neves. Prior to the letter, Mbeki had tended to describe poverty as a legacy of apartheid and the policies of the past.

In work presented to the conference, the two researchers recounted how Mbeki changed his tune on poverty from one presidential term to the next. In his first term, from 1999 to 2003, Mbeki “showed a lively appreciation of the reality of deep inequality in South Africa”, though he usually described poverty as an inequality between two nations – language that framed the problem as essentially one of national reconciliation, not macro-economic strategy. By late 2003, Mbeki had started to depict the division in different terms: Inequality and poverty were the result of a “disjuncture” within the structure of the economy itself.

Several researchers suspect that Mbeki may have borrowed his second economy idea from well-known journalist and author Allister Sparks who argued originally that South Africa suffered from a “double-decker economy”. Academics have, however, been talking about economic “dualism” since the 1930s, says UK-based academic Deborah Potts, also attending the conference.

Mbeki refined the double-decker bus concept and went on to argue that side-by-side with South Africa’s modern first world economy, there existed a marginalised realm more typical of the third world. Such an arrangement meant that economic growth and prosperity would not result in trickle-down benefits for the poor. Instead, Mbeki argued in his letter, “the reality is that those who would be affected positively, as projected by these theories, would be those who … can be defined as already belonging to the ‘first world economy’. What was needed, said Mbeki, were interventions that could directly benefit those in the ‘third world economy’.

This was not a radical about-turn, but has been seen as a significant shift. It indicated a move away from a narrowly orthodox assumption that economic policy (in the form of the Growth, Employment and Redistribution policy, or GEAR) on its own could serve to eradicate poverty. Mbeki’s intervention was followed by various other important policy documents, such as the Presidential Ten Year Review and it wasn’t long, say Du Toit and Neves, before the second economy became “a key organising concept in government thinking about policy and implementation”.

As researchers such as Idasa’s Jonathan Faull has pointed out, the notion of the second economy - just like the RDP before it – swiftly became a commonplace feature of political jargon. Not only that, but it also began to inform a substantive framework of policy and a programme of action with tangible effects on the roll-out of services and societal interventions.

So what went wrong?

Although many commentators hailed the opening up of the debate on the nature of growth, they were less convinced by the notion that South Africa, a country with a history of 250 years of thorough modernization – could be described in such a dualist way.  By 2005, government officials were already trying to soften the conceptual edge of the second economy. It’s not literal, argued economist Alan Hirsch of the Presidency:  It’s more of a metaphor, a way of opening debate on structural determinants of poverty in South African society. How can government base policy on a metaphor? - one critic quickly retorted.

Scholars did what they do, meanwhile, and tested the concept against what they know of the real-world dynamics of persistent poverty in South Africa. Some rejected the notion outright, arguing that there was only one economy. Others valued the concept for highlighting the existence of structural disjuncture and deep segmentation. Everyone lauded the rejection of narrow trickle down. But most scholars increasingly felt that the notion of the second economy as a separate economic realm was not very useful.

The “living on the Margins” conference marks a key moment at which scholars and policymakers within and outside government are exploring these and other ways of understanding persistent poverty.   Du Toit and Neves’s paper recounts their ‘search’ for South Africa’s second economy in ground level research conducted in places such as the rural Eastern Cape and in Khayelitsha. It was a fruitless search, it seems: to go looking for South Africa’s second economy, they argue, ‘is to look for something that is not there… and to miss much of what is.’ The second economy, they suggest, is a conceptual chimera, created perhaps with good intention but, in the end, conceptually redundant and practically unhelpful. Worse than that, it may have set government policy on a path that is inherently flawed and that will fail to address the poverty problem in South Africa.

Du Toit and Neves’ research found that far from occupying a remote, ignored space, economic activities in marginal places such as Khayelitsha and the rural Eastern Cape were very much dependent on the powerful interventions of major corporations and city businesses. Corporates are present, and are able to extract profits, even in the deep rural areas. For instance, in the remote town of Mount Frere, a compact device “no larger than a modest television set” sits in the lobby of a major local supermarket. The device contains no money and, instead, dispenses printed slips which can be redeemed for cash or goods at the store cashiers. A similar arrangement exists in respect of the pension pay-out machine situated inside another local supermarket. Pensions can be drawn from the machine on condition that 10% of the payout is spent immediately in the shop. In this way, a “symbiosis” has been established between retail banking and food retail entities that strips cash out of local economies, according to Du Toit and Neves.

 Poverty, in other words, may not stem from ‘disconnection’  but from what a growing body of international researchers are calling ‘adverse incorporation’.
“Far from being unintegrated, the researchers argue, they are thoroughly integrated, but in ways that undermine their ability to constitute themselves powerfully as economic actors and social agents”.

Du Toit and Neves together with other researchers and academics attending the conference such as Potts and James Heintz, conclude that the two economy “dualism” of Mbeki’s economic policy is simply not based on reality.

“What is revealed is not a vision of an economy that is comprised out of two distinct and disconnected realms, nor the simple contrast between the powerful urban centres and their scrap heaps of discarded human lives. Rather, what emerges is the messy map of unequally constituted, differentially positioned and closely related spaces: enclaves of power and peripheralised zones; circuits, routes and ‘wormholes’ that connect distant realms in surprisingly direct ways; spatial traps and buffer zones; rural outposts and urban beach-heads,” according to Du Toit and Neves. 

But if the notion of ‘two economies’ is not a useful metaphor for understanding the problem of persistent poverty in South Africa, what is? That is a tough nut that the scholars and policymakers are trying to crack.  The international conference features a range of influential researchers and academics including Marty Chen, Ravi Kanbur, Hein Marais, and Henry Bernstein.

 - Adrian Hadland is a chief research specialist with the Democracy & Governance research programme of the Human Sciences Research Council (HSRC). He writes here in his personal capacity.


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