Bridging the Divide

A recent announcement by South African short-term insurer Santan that it proposes to offer low cost shack insurance plans for informal settlement dwellers has raised hopes that other financial services may soon follow suit. Normalisation of the so-called unofficial economy by offering financial services is the latest instalment in a long line of ideas on how to alleviate some of the country's crushing poverty.



To land at Johannesburg airport is, to the casual observer, to arrive in the "first world". On your way from the airport you will pass along immaculate highways cruised by expensive European cars and see pristine golf courses and gleaming office blocks bearing the logos of the same high tech and financial service companies you would find in the US or Europe.



Without the high walls surrounding every building, bearing signs promising an armed response for those who attempt to climb over them, it would look much like southern California.



Yet drive west, along William Nicol Drive, past the new shopping malls and condominiums, which seem to have been transplanted from the Costa del Sol, and you will suddenly find yourself in a city built out of corrugated iron and tarpaulin called Diepsloot.



You are now in the heart of what President Thabo Mbeki has termed the "second economy". Squatter camps or "informal settlements" like Diepsloot can be found outside most of the country's major cities.



The second economy refers to the condition in which about one-third of South Africa's population of more than 44m live, admittedly not all of them in tin shacks, and with approximately 8m of these people having no formal employment.



South Africa is almost unique in that the debate surrounding development concerns not how the country can industrialise, but rather how one-third of the country can catch up with the other two-thirds.



South Africa is not a developing country, but rather two countries existing side by side. The IMF, for example, classifies South Africa as a "middle income industrialised economy". While the economy has recently shown some resilience, it is more akin to the kind to growth seen in the developed world, at around 4.4% for 2005. The structure of the economy also mirrors that of a developed nation, with a large services industry making up about 70% of the economy, a small agricultural sector and a shrinking industrial base. South Africa's biggest export is financial services. This does not look like China.



Perhaps unsurprisingly therefore, bridging the gap between these two worlds is a topic of constant and fierce political debate. The government hopes to build what the influential economist Alan Hirsh has termed, "the spiral staircase" between the two economies.



Many analysts and business leaders argue that the problem lies with the labour market, which is seen as too costly and rigid. This argument carries a lot of weight - South Africa excels in capital intensive and highly skilled industries, but labour-intensive industries like textile manufacturing have been unable to compete with India and China. Foreign direct investment (FDI) has also lagged significantly, at around 16% of GDP. Last year saw significant investments, but these have mainly been in financial services and telecoms.



All this has left the country with a shortage of skilled labour and a large surplus of unskilled and unemployed people.



There are few subjects more sensitive than the lowering of wages in South Africa. With the legacy of apartheid and the inequities of the past it is still politically unviable to pursue policies that would be seen as worsening working conditions in order to compete. The government is therefore pursuing policies aimed at boosting the growth of small- and medium-sized enterprises (SMEs) and improving skills.



Lumkile Mondi from the Industrial Development Corporation (IDC), which acts as the lending arm of the Department of Trade and Industry, told OBG in a recent interview that, "the government aims to produce new industries without compromising our labour standards".



Access to finance is seen as crucial by many in government and business, but there are conflicting ideas about how this could work. The government, for its part, has launched the Apex Fund, which provides micro funding along with business support facilities for SMEs.



The government would like banks to get more involved and follow the lead taken by Santan, but the lenders have little or no experience in creating products for this market. Not surprisingly, the banks would like the South African Reserve Bank (SARB) to back them as a lender of last resort.



Cas Coovadia, managing director of the Banking Association, told OBG they had made a proposal to the SARB for it to act as the lender of last resort for a period of 10 years. This he believes would enable the banks to create the kind of products needed for this market.



The proposal has caused an ongoing debate, and an extremely controversial one given the obvious link between a lender of last resort and moral hazard, with the IDC coming out against such a move.



"You cannot get the state to guarantee risk for 10 years, we will oppose it, there is no free lunch," Mondi said. "You want to create products that can sustain themselves."



The debate on the best way to unite this disjointed economy seems set to run and run.