Annual Forum Papers

The Economy-Wide Impacts of the Labour Intensification of Infrastructure Expenditure

  • Year: 2004
  • Author(s): Anna McCord; Dirk van Seventer
  • Countries and Regions: South Africa

This paper examines the performance of public works in addressing both micro and macroeconomic policy objectives relating to growth, employment and poverty reduction in South Africa. Survey data on the micro-economic impact of public worksprogramme participation is used alongside a social accounting matrix (SAM) for the South African economy which models the impact of a demand stimulus to the South African economy reflecting a hypothetical annual public works programme of R3billion, using data from a labour based road rehabilitation programme.

Drawing on recent survey data from two public works programmes in South Africa, the microeconomic impacts of public works programme participation in terms of income poverty, non income poverty and labour market performance are reviewed. Thesemicroeconomic findings are then linked to recent research examining the macro-economic impacts of public works programmes and the two are considered together in order to assess the micro-macro linkage of public works programmes and theircontribution to development and poverty reduction. This analysis is particularly relevant given the popularity of public works as an instrument for labour market and social protection intervention throughout the continent.

The microeconomic analysis suggests that while participation in a public worksprogramme may contribute to a reduction in the depth of poverty, with improvements in participation in education and nutrition, and have positive psychosocial benefits, the impact of a short term programme may not be significant in terms of a reduction in headcount poverty or improvements in asset ownership (material or financial). In this case the public works programme income may function essentially as a temporary wage shock, since the insurance function of the transfer is limited by the short duration of the employment period. If targeted to poorer groups, with lower levels of schoolparticipation and poorer nutrition, impact may be greater per unit of wage transferred, interms of contributing to human capital, but is still not likely to move participants out of poverty, but rather reduce the depth of their poverty.

The research also indicates that participation in a public works programme may not significantly improve labour market performance among workers in immediateaftermath of programme employment, largely due to lack of demand for labour in the formal sector. Also the likelihood of PWP employment to stimulate secondary informal income generation activity is found to be limited due to capital, skills and market constraints. The integration of initiatives such as income generation training, savings clubs could address these constraints and increase the likelihood of transfers having a longer term impact. However, the limited amount of transfer and duration ofemployment militates against investment in productive assets which could be used to generate employment in the informal economy.

From a macroeconomic perspective the economy-wide impact of a demand stimulus tothe South African economy reflecting a hypothetical annual extended public works program of R3 billion is examined, based on a social accounting matrix (SAM) for the South African economy, and data from a labour based road rehabilitation programme.Two options are considered; labour and machine based public infrastructure provision. Currently machine based infrastructure provision is the norm, and the purpose of this part of the paper is to evaluate the impact of shifting from machine to labour based provision with a given budget constraint. Using a SAM it is estimated that the impact of shifting R3 billion expenditure from machine to labour based infrastructure provision over a one year period would be to increase employment by 1%, the income of the poorest quintile by 2% (if employment were exclusively targeted to this group) and GDP by 0.1%. While these are positive outcomes, they are not significant in terms of South Africa's overall economic and employment performance.

The conclusion is drawn that from both a macro and microeconomic perspective, there is reason to be cautious about the potential of a national public works programme based on shifting the labour intensity of infrastructure provision, and offering short term employment opportunities, to have a significant impact on poverty, employment or growth.

Finally it is suggested that these limited impacts may be the consequence of the fact that in South Africa PWPs tend to offer only short term employment, having thecharacteristics of counter cyclical interventions, and hence an inherently limited risk insurance function, in the context of a mass chronic and essentially structuralunemployment problem, in which demand for labour is the key constraint. Hence inconsistencies between the nature of the PWP instrument selected in South Africa and the characteristics of the labour market crisis are identified as the fundamental cause of the limited macro and microeconomic impacts of the intervention.