The dilemma between the pro-market and the pro-poor local economic development approaches in the democratic South Africa: Theoretical perspective

Abstract

Since the advent of the democratic government in 1994, there has been a serious contestation over the meaning and implications of local economic development in South Africa. Central to the debates has been on whether local economic development initiatives should take pro-market or pro-poor approach in the local government. To this end, the critical divide has been between those who believe that the local government should provide a direct solution by supporting projects for job creation and those who advocate for an indirect solution in terms of creating an enabling environment for local economic development. The article therefore argues that the pro-market local economic development approach often limit the local control of economic activities and resources, instead it is seen to perpetuate an exclusive economy. Against this background, the article applies the Economic Base and the Location Theories to explain, from a theoretical perspective, why the pro-market approach for local economic development planning in the democratic South Africa is preferable in the expense of the pro-poor approach. The article concludes that the pro-market local economic development approach is incapable of creating the inclusive local economies and lacks the determination for the realisation of real potential and competitive advantages for addressing local needs of the poor people.

Keywords

local economic development local government pro-market approach pro-poor approach South Africa

Introduction

Although local economic development (LED) has emerged globally as a vibrant ‘place-based’ planning approach to local and regional economic development (Barca et al., 2012; Bek et al., 2013; Koma, 2014; Rogerson, 2014), there has been ongoing battle of ideas over the meaning of LED in different regions, particularly in Southern Africa (Nel and Rogerson, 2005; Rogerson, 2010). Central to the debate in the South African context, for example, has been about whether LED should focus on pro-market approach or pro-poor approach. The former focuses more on supportive and competitive business environment, institutional support for competitive sectors, business retention and introduction of local investment incentives (Bond, 2002; Ingle, 2014; Rogerson, 2009). while the latter pays attention on Small, Medium and Micro Enterprises (SMMEs) and community development projects, with indirect impact on the national economy (Khambule, 2018; Malefane, 2009). While there is strong emphasis on policy integration of the pro-poor and pro-market approaches in terms of LED policy implication (Bond, 2002; Nel and Rogerson, 2007), there has been constant observation on the persistent overlapping and contradictions in terms of policy implications between the leading national LED institutions in South Africa (Bond, 2002; Koma, 2014; Malefane, 2009; Rogerson, 2010; Van der Heijden, 2008). The most contradicting point in this regard is that several national legislative frameworks, including the White Paper on Local Government, provide a mandate which support the developmental and pro-poor economic development particularly in the local sphere of government (Republic of South Africa (RSA), 1998). To explain this dilemma, the study applies the Economic Base and the Location Theories to give an explanation from a theoretical perspective and methodologically, the study draws strength from a critical review from the implications of the economic base and location theories in relation to the scholarly and policy material on LED issues locally and internationally. To this extent, the study holds the view that the pro-poor LED approach is what is necessary for poverty reduction in the South African context, taking into account the prevailing socio-economic disparities and inequalities as a result of the skewed historical socio-economic policies.

Conceptualisation and theoretical framework

Different definitions of the concept of LED have been provided by various international and local institutions and academics. The World Bank (2003) defines LED as a process by which public, business and non-governmental sector partners work collectively to create better conditions for economic growth and employment generation. While from the International Labour Organization (2006) perspective, LED is defined as a participatory development process that encourages partnership arrangements between the main private and public stakeholders of a defined territory, enabling the joint design and implementation of a common development strategy, by making use of the local resources and competitive advantage in a global context, with the final objective of creating decent jobs and stimulating economic activity. Again, Patterson (2004) maintains that LED is an ongoing process by which key stakeholders and institutions from all spheres of society, the public and private sector as well as civil society, work jointly to create a unique advantage for the locality and its firms, tackle market failures, remove bureaucratic obstacles for local businesses and strengthen the competitiveness of local firms.

In the South African context, an institution of education defines LED as a process to secure greater local control over business enterprise, labour, capital and other resources, and that LED strategy is based on the concept that economic activity can be used to improve the quality of life for all members of the community (South African Qualification Authority, 2017). Academics such as Helmsing and Egziabher (2005) consider LED to be a process in which partnerships between local governments, NGOs, community-based groups and the private sector are established to manage existing resources, to create jobs and stimulate the economy of a well-defined territory; while according to Nel and Rogerson (2007) LED is a process of creating wealth through the organised mobilisation of human, physical, financial, capital and natural resources in a defined locality. In all the definitions provided above, the general consensus is that LED should be based on partnership formation, participatory processes, mobilisation of local resources, job creation and improving the economy of a particular territory.

Although the above-mentioned definitions put more emphasis on the establishment of partnerships between the different stakeholders involved in the process of LED in the local areas, such partnership arrangements, particularly with the local communities, are hardly formed in a pro-market-based LED approach. The pro-market LED practice, as it is the case in South Africa, is primarily influenced by the economic base theory together with the location theory. However, these theories do not encourage the participation of the local communities in the LED initiatives, regardless of the country’s legislative mandate which endorses the developmental and pro-poor economic development, particularly in the local government. Two key theories which are central to the practice of LED in South Africa are identified for the purpose of this article: the economic base theory and the location theory. In essence, these theories are applied to explain why the pro-market approach for LED planning in the democratic South Africa is preferable at the expense of the pro-poor approach.

Economic Base Theory

According Leigh and Blakely (2016), the Economic Base Theory holds the view that a community’s economic growth is directly related to and is stimulated by the demand for its goods, services and products from areas outside its local economic boundaries. The theory believes that industries that use local resources such as labour and material to produce goods and services should be exported elsewhere in order to generate local wealth and job opportunities. In practice, the Economic Base Theory would promote measures that reduce barriers to the establishment of export-based industries in a particular territory. These measures may include incentives such as tax relief and subsidy of establishment of free trade zones (Wolman and Spitzley, 1996). Interestingly, the theory assumes that non-exporting industries and or local service providers will develop automatically to supply the exporting firms and those who work in them.

In this regard, it is argued that the export-oriented industries have higher job multipliers than local service firms (Bingham and Mier, 1993). That is, every job created in an exporting firm will further generate, depending on the sector, more other job opportunities elsewhere in the country’s economy. However, critics of this theory argue that the Economic Base Theory is applicable in the short term because its export market and economic structures, which are the primary focus in the theory, are subject to change over time (Blair, 1995; Bond, 2002). Moreover, Leigh and Blakely (2016) indicate that the key weakness of the Economic Base Theory is that it relies on supplying and satisfying the external (international) rather than internal (domestic) market or demand. Nonetheless, the Economic Base Theory may be necessary in understanding the fluctuations in the country’s economic growth in response to the changes in the international demand for the goods produced in the local zone. The Economic Base Theory differs with the Location Theory which focuses on location of the firm rather than just export benefits.

Location theory

The Location Theory seeks to explain how firms and industries choose their locations for economic advancement. According to Leigh and Blakely (2016), industries maximise profits by selecting locations that minimise their cost of production and transportation of their goods to the market. On the same note, Bingham and Mier (1993) outline that the historical Location Theory focused on whether the product a firm created gained or lost weight in its production process, thereby either increasing or decreasing the transport cost of the final product relative (compared) to the inputs from which it was created. So, in order to reduce the transport cost, a firm with a final product that weighs less than its inputs (raw material) will locate at the source of the inputs and transport the final product to the market, such firms are commonly known as weight-losing or input-oriented industries (Bingham and Mier, 1993). Apart from the transportation cost which is the primary factor that influences the location of the firm, the theory also considers other crucial factors.

Given the significant advance and variety of transportation modes in the 21st century, such as trucking, shipping and airline cargo transport, the influence of transport costs on firm’s location decisions has declined significantly (Leigh and Blakely, 2016). However, nowadays firm’s decisions on location are influenced by a variety of logistic factors which encompass a range of activities for planning, storing and controlling the flow of goods, services and related information from point of origin to point of consumption (Leigh and Blakely, 2016). Accordingly, Bingham and Mier (1993) add that other factors which also affect the quality and suitability of a firm’s location are the cost of energy, labour cost, availability of suppliers, communication, education and training facilities, local government capability and responsiveness, and waste management. In practice, it is evident that for a firm to be competitive, a profound assessment on these combinations of various factors is important. As such, the local municipalities are expected to play a prime role in ensuring that the infrastructure and quality services are provided in order to attract different firms to invest in their LED. In South Africa, the facilitation of LED processes is guided by policies which are designed to respond to the socio-economic and infrastructure challenges and conditions particularly in rural areas where the scars of the legacy of apartheid government segregation policies still prevail.

Policy frameworks

In South Africa, the local sphere of government is accorded with a mandate to facilitate policy development for LED activities. The legislative and policy context for elevating LED to an obligatory mandate for all South African local authorities was initially recognised by the 1994 Reconstruction and Development Programme (RDP), and the 1996 Constitution, respectively. The notion of LED was then established in the 1998 White Paper on Local Government, which introduced the notion of developmental local government (Rogerson, 2010). However, until 2006 there was no policy framework which specifically addresses the processes of LED in South Africa. It was in 2006 that the then Department of Provincial and Local Government (DPLG) released the National Framework for Local Economic Development which provides a vision for creating robust and inclusive local economies (DPLG, 2006: 17).

Reconstruction and Development Programme (RDP), 1994

Section 4.3.5 of the RDP states that in order to foster the growth of local economies, broadly representative institutions must be established to address local economic development needs. The purpose of the institutions would be to formulate strategies to address job creation and community development (for example, leveraging private sector funds for community development, investment strategies, training, small business and agricultural development, etc.). If necessary, the democratic government must provide some subsidies as a catalyst for job creation programmes controlled by communities and/or workers, and target appropriate job creation and development programmes in the most neglected and impoverished areas of our country (Republic of South Africa, 1994).

The Constitution, 1996

In Chapter 7, Section 152 of The Constitution, the objectives of the local government are outlined as follows: (a) Provide democratic and accountable government for local communities; (b) ensure the provision of services to communities in a sustainable manner; (c) promote social and economic development; (d) promote a safe and healthy environment; and (e) encourage the involvement of communities and community organisations in the matters of local government (Republic of South Africa, 1996).

White Paper on Local Government, 1998

Section B (2.3) of the White Paper on Local Government states the developmental outcomes of local government. The policy framework asserts that the local government can play an important role in promoting job creation and boosting the local economy. In this context, the policy framework call for prioritization of investment in basic services and infrastructure in order to provide good quality and cost-effective services and to ensure that the local areas are pleasant places to live and work (Republic of South Africa, 1998).

National Framework for Local Economic Development, 2006

The National Framework for Local Economic Development provides a vision for creating “robust and inclusive local economies, exploiting local opportunities, real potential and competitive advantages, addressing local needs and contributing to national development objectives” (DPLG, 2006: 17). The policy framework also identifies the characteristics of robust and inclusive economies. That is, the people; their leaders; the workforce; the assets; high quality of life experience; natural and built environment; functional partnerships; and income.

This LED policy framework is intended to empower the most vulnerable, marginalised and poor sectors of local communities to raise sufficient income to meet their basic needs and aspirations (Koma, 2014). This in principles should form the bases for the facilitation of LED practices in South Africa.

National Development Plan Vision for 2030

The National Development Plan (NDP) promotes the pro-poor LED approach by expressing the immediate need to combat the marginalisation of the poor people in the rural areas. The policy emphasises that in order to realise an integrated and inclusive rural economy, access to resource, provision of infrastructure and other public services must be prioritised. The national policy further outlines the specific programmes of action that are pivotal in the execution of the rural development strategy. That is, the policy calls for enhanced agricultural development through equitable land reform; the provision of quality basic services, more especially in education, health care and public transport services; and the development of industries such as agro-processing, tourism, fisheries and small enterprises in areas with great economic potential (National Planning Commission, 2011).

LED practice in South Africa

Generally, there are two broad approaches of LED planning and practice in South Africa, that is the pro-market and the pro-poor approaches. The pro-market LED approach focuses on more supportive and competitive business environment, institutional support for competitive sectors, business retention and introduction of local investment incentives (Byrne, 2018; Rogerson, 2009; Van der Merwe and Rogerson, 2018), while the pro-poor pays attention on small community development projects, with limited economic impact (Malefane, 2009). The pro-market is seen to be the preferable LED approach in the South African context because the leading national LED institutions such as the Department of Trade and Industry are seen to be channelling more effort towards the establishment of pro-market facilities in a form of Special Economic Zones (SEZs).

National government-led LED

Through the Department of Trade and Industry, the South African national government is noticed to be promoting a pro-market LED approach by designating various categories of SEZs in different parts of the country. In this regard, the government’s pro-market LED approach focuses primarily on attracting Foreign Direct Investment through incentives such as tax breaks, cheap land, reduced rates and even direct financial rewards in return for locating in areas (Bond, 2002; Byrne, 2018) which are designated for economic development. In accordance with the location theory, which assumes that industries could maximise their profits by choosing appropriate locations, Leigh and Blakely (2016) maintain that the location of a firm is the primary factor in determining the success of any LED initiative. It is for this reason that the South African government is channelling its investment effort to specific SEZs, which are mainly dealing with the exporting of value-added commodities. The focus on export market as a panacea to LED is influenced by the economic base theory.

Proponents of the economic base theory argue that industries that use local resources such as labour and material to produce goods and services should be exported elsewhere in order to create local economic and job opportunities (Leigh and Blakely, 2016). With this theory, the assumption is that the exporting companies will work in partnership with the local small businesses, and as a result further job and economic opportunities will be created. However, several scholars have proved that with the current LED approach in the South African context, the local small businesses are hardly linked with the big corporate businesses in a form of partnership (Koma, 2014; Malefane, 2009; Van der Heijden, 2008). In this regard, an observation has also been made that the current system of LED implementation in the local government has no effect on skills transfer to SMMEs in the local areas (Malefane, 2009; Marais, 2016). The lack thereof in terms of trickle-down benefits in the pro-market LED approach is in contrast with the point of view embedded in the economic base theory which assumes that the non-exporting industries and or the local businesses will be stimulated automatically to supply the exporting firms and those working in those firms (Bingham and Mier, 1993). Despite such limitations in the pro-market LED approach, the South African government continues to support the establishment of the SEZs as the preferable LED strategy. Bond (2002) defines these economic facilities as being top-down in nature, and that the lack of inter-relationships with local industries, let alone the local communities. Moreover, the author also asserts that the pro-market LED approach has very little employment potential and adverse prospects for women workers in particular. It is for this reason that the call for the redirection of the LED approach to pro-poor is emphasised in the democratic RSA.

Local government-led LED

Despite the national legislative mandate which endorses the developmental and pro-poor economic development in the democratic South Africa, there has been little effort in support of the pro-poor LED approach, particularly in the local government. The importance of the pro-poor LED approach is that it does not only focus on economic growth, but also pays attention on the immediate basic needs such as increased service delivery, extension of the social grant system, public works and SMME initiatives (Van der Heijden, 2008). Often, the pro-poor approach is referred to as a social welfare-oriented approach because of its firm focus on poverty reduction projects than on economic development initiatives (Rogerson, 2010). Nonetheless, the pro-poor LED approach remains the relevant model in the creation of the inclusive economic opportunities for the people at the local level. In this regard, Koma (2014) identifies several reasons that make the pro-poor LED approach to be of importance at the local government level. Accordingly, Koma (2014) claims that LED activities enable the municipalities to create job and economic opportunities, which in turn increases the income level and broadens the tax base of the local municipalities.

In essence, the pro-poor LED approach emphasises the importance of working directly with the low-income communities and their organisations. Proponents of the pro-poor LED approach, including Rogerson (2006) and Koma (2014), argue that unless the low-income communities are actively participating in local development initiatives, and are equipped with the necessary capacity to plan and monitor, they are unlikely to accumulate any benefits from the LED initiatives in their territory. In essence, the pro-poor LED approach focuses directly on poverty alleviating and improving the quality of life of a particular community. This approach emphasis the support for local institutions such as community development trusts and community-controlled enterprises such as local credit unions or development corporations (Bond, 2002). In addition, the pro-poor LED approach overtly aims to link profitable growth and redistributive development. In its nature, this approach is developmental and people centred. The South African government has categorised six developmental LED strategies which have commitment to support. That is, Community-based development, Linkage, Human capital development, Infrastructure and municipal services, Leak plugging in the local economy, and Retaining and expanding local economic activity (Republic of South Africa, 2001). Unlike in developed economies, LED in developing countries ought to focus more on issues relating to community-based development, small enterprise development and locality development (Rogerson, 2006). In contrast, the democratic South African has to pay little attention, if any, on the pro-poor LED strategies, regardless of the obligatory mandate for local government to promote developmental LED.

Implications of adopting pro-market or pro-poor LED strategies in South Africa

The circumstances of poverty in South Africa call for an urgent change in government’s perception of poor people as helpless and hapless victims of their deprivation, but it should view them as actors who are capable of contributing towards transformation of their unfortunate situation (Ansoms, 2010; Borras and Franco, 2010; Goodwin, 2008; Kydd et al., 2002; Stephan, 2003). In other words, achieving poverty alleviation through LED should be about local people working together to achieve sustainable economic growth that brings economic benefits and quality of life improvements for all in the community (Bredenoord and van Lindert, 2010; Pokorny et al., 2013; Rogerson, 2014; Stephan, 2003). Consequently, LED initiative should benefit the poor disproportionately more from growth than the non-poor, meaning, the income growth rate of the poor should be larger than the income growth rate of the non-poor if the gap of income inequalities is to be bridged. Bredenoord and Van Lindert (2010) wrote that, in most of the developing countries around the globe, the prime actors in the shelter and other basic household infrastructure delivery processes, for example, are the households themselves. Initiatives such as these, were the poor people can take control of their own development, signify the importance of facilitating activity of LED and its planning, not only to bring growth but also to empower local people to be self-sufficient. Even though growth is a fundamental aspect of LED, it needs to be accompanied by tangible aspects of change in poor people’s lives. Ansoms (2010) highlighted that growth is necessary, and without growth, concerns about poverty and inequality will only become greater challenges. Consequently, the author explained that without growth, role of LED in addressing challenges of unemployment and poverty alleviation in South Africa cannot be realised (Ansoms, 2010; Borras and Franco, 2010). In other words, the growth–poverty relationship can be quantified by the growth elasticity of poverty, that is the link between economic growth and poverty reduction (Ansoms, 2010; Borras and Franco, 2010). This, however, brings about a question of the kind of growth which is necessary for poverty to reduction.

The paper argues that pro-poor growth is what is necessary for poverty reduction in South Africa, taking into cognisance the unique historical and political events which brought about disparities and inequalities in terms of access to basic and essential services. The pro-poor growth in South Africa should redress and create access to make use of the factors of production. These, however, require capacitation of the primarily labour (predominantly unskilled currently) and in some contexts transferring adequate land back to the poor (Ansoms, 2010; Goodwin, 2008; Stephan, 2003). In other words, to answer the question of land in South Africa, a pro-poor land policy should categorically aim at protecting and advancing the land access and property interest of working poor people in order that they can escape poverty.

The paper, however, also argues that even though the pro-market growth is necessary at a nation scale, in rural areas it provides limited benefits for the poor and faces a lot of challenges in alleviating poverty. Also given the dynamics of poverty traps in such areas, reliance on the market growth or private sector is unlikely to succeed (Kydd et al., 2002; Stephan, 2003). Kydd et al. (2002) argue that pro-market growth policy reforms appear to have benefited the elites and increase their access to public services and markets, but it has left behind those in remote areas, those growing subsistence crops and those without work. Even with increased investment on local economies by national government, bad governance by unaccountable and predatory elites remains the main cause of continued poor health, education and infrastructure; high dependency ratios; the spread of HIV/AIDS; weak management of and access to public services and poor agricultural performance particularly in rural areas (Kydd et al., 2002; Pokorny et al., 2013; Rogerson, 2014; Stephan, 2003). The economic and social costs of rural stagnation have also not allowed the pro-market growth LED strategies to provide safety nets in situations of enduring poverty in rural areas. Furthermore, Pokorny et al. (2013) alluded to the fact that the most critical factor is that a major share of the environmental and developmental projects follows market-oriented approaches that widely ignore local management practices, local ways of organising work, and other local capacities and limitations that have failed dismally. Consequently, in order to facilitate development particularly in rural areas where the poor reside, one needs to do a situational (including livelihoods) analysis in order to identify activities which are already practiced and then work together with communities to improve such or identify new opportunities (Kydd et al., 2002; Pokorny et al., 2013; Stephan, 2003). The above form part of the core values of pro-poor growth.

Pro-poor growth has been identified as one of the central concerns to achieve sustainable poverty reduction in developing countries (Marais, 2016; Rogerson, 2014; Strydom, 2016). In other words, pro-poor growth refers to growth that leads to significant reductions of poverty. It benefits the poor and gives them more access to economic opportunities. Furthermore, pro-poor strategies are aimed at stimulating does not only economic activity of the poor but also providing skills and capacity to the poor in order that such activities can be sustainable (Borras and Franco, 2010; Bredenoord and Van Lindert, 2010; Pokorny et al., 2013). This also includes the realisation that sustained poverty reduction requires some combination of improved access for the poor communities to a balanced set of assets, increased productivity of the assets that they hold and reduced vulnerability to shocks. In other words, making sure that the poor gets access to productive assets is fundamental to the pro-poor LED strategy (Goodwin, 2008; Kydd et al., 2002; Stephan, 2003). Access to assets may also be improved through increased income from productivity of existing assets, as a result of changes in technology, in access to complementary assets, in costs of inputs, or in demand for goods and services supplied by poor people (Ansoms, 2010; Goodwin, 2008; Stephan, 2003). Furthermore, this does not only expanded income opportunities and reduced income vulnerability for large numbers of people, but it also directly or indirectly ensures that complementary to this is poor people’s improved access to adequate health care and education services, also the expansion of human capital, increasing the social capital and reduction of vulnerability to seasonal shocks is realised.

Conclusion

Some of the major challenges of rural areas and rural communities include poor and lack of access to socio-economic infrastructure and services, public amenities and services. For instance, local communities lack proper transport systems, energy, communication networks, irrigation schemes, water harvesting schemes, fencing for agriculture and storage facilities. Furthermore, social infrastructures such as sanitation, health clinics, sports and recreation, rural libraries, rehabilitation of schools and centres for skills development are still lacking. In order to remedy these challenges, special focus of pro-poor LED should be upon infrastructure provision in respect of both economic and social facilities in rural areas. This should place strong emphasis on developing new and rehabilitating existing infrastructure in these areas. In other words, different technical and institutional solutions are necessary to respond to these conditions and that these initiatives will require differentiated policies recognising different types of context, conditions and development pathway for each area. Notwithstanding the fact that market growth-oriented approach is also necessary to advance the local economy, however, the core value outcomes of the pro-poor growth should be embraced, in order to make sure that vibrant, sustainable, equitable rural communities can be built while food security for all, rural job creation and the creation of economic livelihoods is accelerated. Government should also strategically propose policy initiatives which can bring about transformative land tenures, training and small enterprise support in order to create a favourable environment for the local entrepreneurs. The fundamental approach to this end is for government to invest in infrastructure projects which include paved roads, bus services, Internet cafes and improved communications in order that other activities in terms of small business development and sustainable agricultural advancement can be achieved taking into account the complexities of the modern world of technology.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

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