Comprehensive Rural Development Programme: Trade & Industry Policy Strategy Organisation research

Meeting report

Comprehensive Rural Development Programme: Trade & Industry Policy Strategy Organisation research
The Chairperson noted that the Committee would be briefed on the research conducted by the Trade and Industry Policy Strategy (TIPS) Organisation on the Comprehensive Rural Development Programme (CRDP). A number of departments were also represented, including the Department of Agriculture, Forestry & Fisheries (DAFF), Department of Labour, and Department of Public Works (DPW). He noted that the work being done by TIPS aimed to open up South Africa’s rural space for industrial development projects. TIPS was extremely concerned with the lack of economic agencies in rural South Africa and was working towards ensuring job maximisation.

Ms Kate Philip, Development Strategist, TIPS, briefly introduced herself and indicated that she had, during her career, worked for the National Union of Mineworkers and had also run an employment creation non-government organisation (NGO), the Mineworkers Development Agency. Her presentation would set out a strategic process to address inequality and economic marginalization. This research had been commissioned by the Office of the Presidency, and had critically analysed the context, as well as looking into the Community Work programme.

Ms Philip began by providing the background for the ‘second economy debate’. She explained that the concept of two economies resonated and became widely used because it seemed to explain South Africa’s stark socio-economic disparities. She noted, however, that this process had masked the extent to which inequality of outcomes resulted from common sets of processes. She argued that the 1913 Land Act had not so much concentrated on keeping the Bantustans separate or disconnected, but had actually forced black people off the land and into urban labour markets, where they became linked to the core economy on disadvantageous terms. She noted that the second economy therefore was not poor and underdeveloped because it was disconnected, but the terms of the connection were problematic.

Ms Philip argued that structural inequality in South Africa had its roots in key legacies of apartheid. The highly concentrated, vertically integrated structure of the core economy and spatial inequality meant that huge economic costs were borne disproportionately by the poor. She explained that strategies to address inequality needed to focus on economic marginalisation. She would focus on how the structure of the economy impacted on opportunities at the margins, and the manner in which spatial inequality compounded the challenges.

Ms Philip explained that the South African economy was highly centralized, was capital intensive and was dominated by a number of monopoly industries. This led to a series of consequences for development strategies. Capital intensive industries often excluded small and medium enterprises (SMEs) from participation, making employment creation expensive.

Ms Philip noted that a number of questions could be asked – namely, why the informal and micro-enterprise sector in South Africa was so small, when unemployment was so high, why the informal sector was dominated by retail and why money circulated so little in marginalised local economies. Typically, the answers to these questions had focused on issues relating to skills, levels of entrepreneurship and limited access to credit and capital. These were important considerations, but Ms Philip stressed that better solutions could be reached by understanding the impacts of structural inequality on economic opportunity in the marginal areas.

Ms Philip explained that it was necessary to look at the structures of production, distribution and demand in marginal areas. She noted that markets in marginal areas were thinly spread, with poor people tending to buy a limited range of consumer goods. Many of these goods were mass-produced in the core economy, at a scale that made it hard to compete on price. Ms Philip also noted that branded goods and branded stores provided a level of quality assurance that made it difficult for small scale producers to compete.

Ms Philip provided an example of a typical small sewing co-operative, which might include twenty people, each of whom wanted to earn R500 a month. If wages accounted for only 25% of the costs, with material and other costs accounting for the remainder, that cooperative must sell R40 000 of dresses per month just to cover the wages and break even. It was impossible to achieve sales of this volume in most poor areas, and the cooperative was also competing with companies such as Jet and Pep.

In respect of agriculture, there were local markets for fresh produce, but these too were limited and the returns were low. The history of land dispossession and land degradation, coupled with rising migrancy rates, resulted in major de-agrarianisation of South Africa’s former Bantustan areas. Less than 50% of rural households engaged in agriculture, and only 1.1% did so as a main source of income. 87% of households were dependent on store-bought maize all year round. South Africa’s rural areas became labour-sending areas for mines and industry, but now that there were fewer jobs in those sectors, it was not easy for people to return to the land, nor was there easy access into agricultural markets. She explained that while land productivity in the former Bantustan areas declined, the returns from migrancy were increased, until there was a decline in job availability. At the same time, the ready availability of cheap agro-processed products meant that many people would prefer not to run the risks of growing their own crops. This had limited the scope for market entry and also dis-incentivised the production of surpluses.

Ms Philip explained that the traditional approach to rural development and improvement of farm incomes in poor countries was to assist farmers in moving up the value chain, by supporting their forms of agro-processing. This strategy assumed that surpluses would be produced, and this was not the case in South Africa. Ms Philip also highlighted that many development strategies focused on local production for local consumption, because of its obvious advantages. However, these strategies only succeeded in developing countries, where no such sectors existed in the national economy, and where the rural economy was able to supply the growing urban demand for fresh and processed foods. They would not succeed in South Africa, where urban areas were already perfectly well supplied from within the established agricultural sector. In addition, South Africa had not promoted policy to support this approach, because there were no tariffs to protect ‘infant industries’ in marginal areas, nor were there any anti-dumping clauses.

Ms Philip noted that, in response to these challenges, there were attempts to come up with enterprise development strategies that would address the limits for small-scale manufacturing and agro-processing by targeting external markers and participating in wider value chains. For instance, one focus area was on niche or artisan products, targeting higher value but relatively low-volume external markets, such as designer crafts, goats’ milk cheese, rooibos tea and similar items. In addition there were potential strategies for small-scale producers to sell to retail “giants”. On the downside, accessing wider markets would bring new challenges and was extremely competitive, bringing about an end to informal trading. As soon as a transaction was no longer face-to-face, it required an enforceable contract to mitigate the risks of exchange for both parties, and use of invoices, delivery notes, receipts and bank accounts. Without this, formal businesses would not recognise potential transactions, and participation in wider value chains required greater quality assurance, quality consistency and compliance with complex standards.

Ms Philip also emphasised the need to understand global trends in value chains. She explained that a high concentration at the centre cascaded through the value chain, which resulted in fewer purchase points and fewer entry points. Moreover, she noted that certification had been used to reduce the governance costs of quality assurance due to high compliance requirements. Profits were gravitating away from production and towards logistics, branding, marketing and design. The market was becoming increasingly hostile for small-scale producers.

Ms Philip explained that increased access into external markets created massive increases in volume and capital requirements. For example, Il Corte Inglese, a Spanish department store, had ordered 17 000 beaded bracelets in a single order from ‘Gone Rural’. It took 200 workers to complete the order, and the entrepreneur had to mortgage his house to purchase the beads.

In addition, entry into wider value chains and markets required intermediary forms of organisation and coordination. She argued that rather than cutting out the middle man, there had to be a process to transform this function to allow key interactions between enterprises on the margins and access to markets. Small businesses required certain forms of coordination to enable the volumes required for participation in value chains and economies of scale were required for affordable input supplies, and infrastructure such as storage facilities. In South Africa, the emphasis was often on collective production co-operatives in order to create jobs, with less emphasis on this form of user cooperative, yet the latter was required for sustainable self-employment for small-scale producers.

Ms Philip then produced evidence from urban areas in the form of a Business Sophistication Model (BSM). She explained that in this model (see attached presentation for full details), BSM1 indicated a highly marginalised SME, and BSM7 would be the most sophisticated or more formal SME. There was a huge disparity between them, and more jobs were created in formal SMEs. She noted that the most marginalised SMEs were retail-based, but said that there was no point in attempting to formalise the marginalised SMEs since retail giants were controlling and eroding this space. Ms Philip noted that average earnings in the BSM6 category were just over R1 100 a month while BSM7s had experienced a significant increase in returns.

Ms Philip posited that the key to success in BSM7s was participation in value chains. She argued that participation in business-to-business transactions created a different level of opportunity and this was what drove formalisation. She suggested that a development strategy therefore ought to be informed by the nature of market insertion. As already explained, there were no particular benefits to formalisation for informal traders or service providers involved in direct sales to consumers. However, there was limited scope for growth without such formalisation, if they wished to break into wider markets. It was not possible to depart from the requirements for meeting basic standards, business formalities and practices, and levels of compliance. She emphasised that the ability to comply unlocked opportunities and mitigated the risks of exchange, which were necessary pre-requisites for business-to-business transactions.

Ms Philip noted that, overall, strategies needed to focus on addressing structural inequality. Whilst the New Growth Path had begun to do this, there was more that had to be done to focus on the scope for change within the current market structure. Structural change would take time, so complementary strategies were needed in the meantime to tackle high unemployment and enable economic participation, especially when the market was unsuccessful.

Discussion
Dr L Bosman (DA) noted that the South African economy was competing internationally, and if it was to grow some way must be found to supply volume, capital and product surpluses. Producers now found themselves in a position where they had to grow in size and capacity if they wished to continue making a profit. However, the business model in South Africa was always changing. The number of farmers was ever-decreasing, dropping from about 120 000 at the end of the 1980s, to about 40 000 currently. There was, however, plenty of high potential land that could be used for agriculture, especially in Mpumalanga and the Eastern Cape, so the limiting factor was not the land, but the issue of small-scale producers trying to compete in the global economy.

Ms M Phaliso (ANC) noted that the problem was that small-scale producers did not have access to capital. Small holders’ products were in demand, so it was the government’s responsibility to strengthen local markets. Commercial farmers had in the past had successfully suppressed so many small enterprises.

Ms P Ngwenya-Mabila (ANC) asked whether subsistence programmes were having an impact on the 87% of households who were dependent on store-bought maize.

Ms Philip responded that she was not sure if DAFF subsistence programmes had any effect on the 87% of rural households who were dependent on store-bought maize. She explained that structural constraints greatly affected people’s agency and belief in themselves.

Ms Ngwenya-Mabila enquired about the standpoint of TIPS with respect to China’s manufacturing boom, and whether this was significantly affecting South Africa’s informal market.

Ms Philip accepted that it would be foolish to ignore the competitive context of the global market and that South Africa was suffering from a crisis of unemployment that had to be tackled.

Mr L Gaehler (UDM) noted that part of moulding a suitable environment for small-scale producers must include offering low-interest rate loans and a substantial subsidy system. He also highlighted that the present seemingly-uncontrolled levels of dumping had to stop.

Ms Philip noted that there had been a tendency to provide microfinance for projects that regularly failed, so her concern was how to enable economic participation when markets failed.

Mr Gaehler highlighted that South Africa’s rural masses lacked basic infrastructure and had many other components that were not seen in relatively highly developed nations. He argued that the state of South Africa’s dual economy was catastrophic.

Community Works Programme
Ms Philip then moved to the part of her presentation on the Community Works programme. She again emphasised that structural inequality placed constraints on the scope for employment at the lower economic levels in South Africa. In a country with chronic structural unemployment, the unemployed essentially had no social protection, particularly young males. Although there were social grants to cover those who society did not expect to be economically active, there were few projects to help people become economically self-sufficient. Constraints on market access, coupled with the lack of social protection, left the unemployed in South Africa unusually dependent on goodwill transfers from remittances or social grants intended for other purposes. Workers and the poor provided a ‘private’ safety net, raising wage pressures at the lower end and pushing poor households deeper into poverty.

Ms Philip explained that in a context in which more than half of the unemployed under 35 years of age had never worked, those who lost their jobs lost the skills of working and become unemployable, whilst those who had never worked never learned those skills. Being economically productive was part of the transition to adulthood. In South Africa, long-term structural dependence had influenced people’s sense of economic agency, or their ability to change their material conditions through their own actions.

Ms Philip went on to outline and discuss the Community Works Programme (CWP). She explained that the programme was an innovative exercise in public employment. She explained that the CWP was initiated and piloted as part of the Second Economy Strategy Project in TIPS. She highlighted that the CWP was designed as an employment safety net, because it provided regular and predictable part-time work in marginal areas where jobs were unlikely to occur soon. This programme promised two days of work per week, or eight days a month, in remote areas. Access to a minimum level of regular work had a range of impacts, creating structure and inclusion, a positive effect on nutrition and education, whilst it did not displace any other existing livelihood activities.

The CWP was intent on creating new forms of partnership in development. The CWP was a government programme, but it was implemented by non-profit agencies, helping to build the capacity of civil society in marginal areas. She highlighted that the work in CWP was decided through participatory local processes, which ensured that it is multi-sectoral. Since April 2010 the CWP had been run as a programme in the Department of Cooperative Governance. By March 2011, 89 000 had participated, showing rapid growth of the programme. She noted that the programme’s target was to have a presence in every municipality by 2014. This model would continue to remain dedicated to building new forms of partnership between government, civil society and communities. She would like to see CWP becoming a platform for a major push in respect of food security, renewing the culture of food production at the local level. Moreover, the assets and services created would provide a social and economic return on investment, because it was investing in people as well as in productivity at the local level.

Discussion
Ms Phaliso asked whether the research had sought out other agencies or stakeholders who were willing to cooperate with the government in implementing the CWP. If so, she enquired who they were.

Ms Philip noted that there was an enormous amount of value added by partnerships with non-profit agencies. However, she emphasised that the CWP was, first and foremost, a government project and assured the Committee that the non-profit bodies were involved as facilitators, not organisers.

Ms A Steyn (DA) was concerned about the recruitment to and advertising of the CWP. She noted her concerns that women were allegedly falling pregnant merely to access the Child Support grants, and wondered if there was a strategy in place to motivate them rather to become involved in the CWP as a means of getting income.

Ms Philip emphasised that the CWP was merely a complementary project to quickly address the high levels of unemployment in South Africa. It was not intended to be a complete solution but rather a safety net, or strategy to improve the current situation.

Ms Steyn asked about the expenses breakdown for the CWP.

Ms Philip explained that for every R100 spent, 65% went to wages, 10% to programme management and 25% for equipment and resources.

Ms Steyn sought clarity on the management of the CWP: She asked whether there was a process in place to mobilise and supervise the workers, and also whether there was any focus on post-CWP unemployment strategies.

Ms Philip explained that CWP was part of the Expanded Public Works Programme (EPWP), which served as the coordinating mechanism. The goal of the CWP was to tackle those falling back into poverty from the EWPW. There was a sliding pay-scale for workers, where R60 per day was the minimum starting wage, but it would increase for team leaders and coordinators who were in charge of managerial activities.

The Chairperson enquired about the training of workers, and asked how power relations between workers might affect work morale and efficiency.

Ms Philip said that the demand for training outpaced the supply, but assured the Committee that this was being addressed.

Adoption of Minutes
The Committee adopted the minutes of the meeting on 2 November 2011.

The meeting was adjourned.