By: MICHAEL SCHMIDT
After her husband died, Chimwemwe (not her real name) was kicked out of their marriage home in Malawi. On returning destitute to her parents’ village with her two mentally disabled daughters, she found her former home in ruins.
This could have become another forgotten personal tragedy in a remote rural corner of Malawi, except that Chimwemwe was given a social grant of $7 (then equivalent to R53) a month. What she achieved with so little was remarkable.
She built a sturdy new three-roomed mud, wood and iron home in the shade of the trees, started a vegetable garden, employing a neighbour to tend the crops, to feed her little family and sell the surplus. And she had enough left over to pay for minibus taxis to take her daughters to school and the doctor when needed.
Through scrupulous management of her tiny income she uplifted her household from penury to profit, providing perhaps one of the most compelling stories I came across while working in 2009-2010 in Malawi, Tanzania, Zambia, Botswana and SA for the UK’s international development department, examining examples of how a social safety net comprising small cash grants can mitigate extreme poverty.
At a Good Governance Africa conference this month on challenges facing girls in Africa, Malawi Human Rights Commission executive secretary Habiba Osman said her work involving social cash transfers in Malawi showed promise, even though such programmes tended to stall after pilot stage due to government underfunding.
Osman’s words got me thinking about that plucky widow — and of finance minister Enoch Godongwana’s medium-term budget policy statement on October 26. In his presentation, against a backdrop of a 33.9% official unemployment rate, he is expected to address the controversial basic income grant (BIG).
Osman says that in her experience social grants need to come with conditions to ensure the grants are spent on households, not in taverns, though many studies show that poor people are generally more careful with their savings and spending than those who are better off.
For instance, the most recent Stats SA household income and expenditure survey showed that the poorest households spent up to 40% of income on food and nonalcoholic beverages. That survey is more than six years old, and the agency is preparing to update it by monitoring more than 31,000 selected households over four weeks in coming months.
Data collected from the survey will provide evidence-based information for monitoring the main National Development Plan target of reducing SA’s Gini coefficient to below 60 and cutting the percentage of the population living below the lower-bound poverty line (LBPL) to zero by 2030. The Gini coefficient, the global wealth-gap measure, rates SA as by far the world’s most unequal society with a value of 63. The inflation-adjusted LBPL now is equivalent to a monthly income per person of R945.
The new survey will inform the consumer price index (CPI) of price changes in a basket of purchases, which affects spending patterns. SA’s CPI has been rising steadily over the past year due to inflationary pressures. Stats SA also says the survey will,
“help SA better understand the impact of social grants in reducing poverty”.
Social development deputy minister Hendrietta Bogopane-Zulu, who grew up in rural poverty herself, said at the Good Governance Africa conference that the SA Social Security Agency has a R180bn budget for cash transfers, excluding the R350 a month temporary social relief of distress grant for Covid-19, which now amounts to R80bn.
A study of options to cost a BIG, released in September by Stellenbosch University’s Dr Hylton Hollander and research associates Daan Steenkamp and Roy Havemann, examined various scenarios. The first includes the possibility of converting the R350 a month grant, now paid to 10.5-million people, into a permanent BIG.
This, they argue, “is estimated to require an increase in public debt of about three percentage points of GDP after five years. It would require a marginal increase in effective indirect taxes (mainly the VAT rate), an increase in the effective personal income tax rate of about two percentage points, and an increase in the effective corporate income tax rate of about 0.25 percentage points.”
The model shows consumption rising in poor households, but predicts some job losses owing to the contractionary impact of higher debt and taxes on investment and growth.
Alternatively, issuing a BIG at the extreme poverty line (R663 a month) for the same 10.5-million people getting Covid-19 relief would cost R79bn and see debt rise by 7.7 percentage points of GDP, VAT by about half a percentage point and personal income tax by about 5.3 percentage points. “The model predicts job losses amounting to about 200,000. These come about because of the fiscal impact of a permanent increase in spending (higher taxes and higher interest rates).”
Another scenario of a BIG pegged to the extreme poverty line but financed by a 4% rise in VAT and personal income tax rising almost 3.5% “would lead to significant contraction in the economy, even though there would be some short-term employment gains from the large direct income effects from higher transfers”.
An additional scenario also envisaged an extreme poverty line BIG, but funded by a 5% VAT rise bolstered by R60bn in government investment plus structural reform “such as removing constraints on electricity availability”, which should lead to job gains and growth and productivity enhancements.
As I was looking at social grants in Southern Africa, Namibia (just behind SA on the Gini coefficient) was concluding a BIG pilot at a 1,000-strong impoverished settlement north of Windhoek, where unconditional R100 a person a month grants were paid over 12 months to nonpensioners.
SA, Australia and the US academics verified the results, which included: a reduction in the number of people living under the extreme poverty line from 76% to 16%; the percentage of those engaged in income generation rising from 44% to 55%; the percentage of underweight children falling from 42% to 10%; school dropouts falling 42% while school fee payments doubled; clinic attendance and antiretroviral access soaring; and the crime rate dropping 42%. Yet Namibia has yet to implement a BIG.
The economic costs of a possible BIG will naturally weigh on Godongwana’s mind as he prepares his medium-term budget presentation. But as President Cyril Ramaphosa said in April, the July 2021 unrest cost the economy more than R50bn and 2-million jobs. That is not sustainable in a country where 33-million people, just more than half the population, live in poverty.
If the chickens of SA’s disastrously skewed development come home to roost, the cost of not dealing with extreme inequality will far exceed that of any remedial measures we may take now.