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The Grant Thornton survey released last week, reflecting global disquiet on executives’ packages at large public corporations, brings out in bold relief the debate around inequality across most countries, SA included.
But does inequality as such matter? If, for instance, a society is experiencing a rising tide of economic growth which lifts all household boats – even if it’s not at the same pace – should the issue of inequality arise at all? We can put forward all kinds of arguments that inequality is morally bad. But is this enough?
At a factual level, instructive research done by Richard Wilkinson and Kate Pickett in their book, The Spirit Level, establishes interesting correlations between levels of inequality and societal wellbeing.
In a recent round-table discussion organised by the Mapungubwe Institute, Wilkinson elaborated on their findings that, for instance, in more unequal societies the rates of violent crime and teenage pregnancies are higher and that inversely educational performance and a country’s health profile are weaker.
Such differences apply horizontally across all social groups among the rich and the poor alike.
The authors tested all possible causalities and found no other that was common to these trends.
This issue is coming to the fore against the backdrop of growing inequality across the globe. Economist Paul Krugman describes it in the New York Times magazine (October 2002) as follows:
“When I was a teenager growing up on Long Island, one of my favourite excursions was a trip to see the great Gilded Age mansions of the North Shore. Those mansions weren’t just pieces of architectural history. They were monuments to a bygone social era, one in which the rich could afford the armies of servants needed to maintain a house the size of a European palace…
“But then why weren’t executives paid lavishly 30 years ago? Again, it’s a matter of corporate culture. For a generation after World War II, fear of outrage kept executive salaries in check.
“Now the outrage is gone. That is, the explosion of executive pay represents a social change rather than the purely economic forces of supply and demand.”
Last year, a study by the Organisation for Economic Co-operation and Development (OECD) revealed that, between the mid-1980s and late 2000s, the household income of the top 10 percent of the population in developed countries increased much faster than those of the poorest 10 percent – for instance, 3 percent per year for the poorest in Australia and 4.5 percent for the richest, 0.9 percent and 2.1 percent respectively in the UK, and 0.5 percent and 1.9 percent in the US.
Almost everywhere, the “trickle-up” effect is much in evidence.
The technical explanations put forward to try to explain this phenomenon, such as skills mobility, incentives theory and pro-aspiration rewards, only partly explain this trend. Indeed, when someone owns a number of mansions, an executive jet, yachts and even an island as real estate, what more incentives do they still need?
Some argue that this is a reflection of the “mine-is-bigger-than-yours” syndrome, a status thing as executives compare their rewards and assets across the globe.
Others believe the collapse of “socialism” in Eastern Europe combined with the weakness of the Left has deprived the world of a counter-balance to rapacious ostentation.
Whatever the reason, the implications of growing inequality are dire for social cohesion within and across nations.
This is worsened by the scandals in global financial institutions. As John Plender of the Financial Times (this month) puts it: “It is hard for people to tolerate historically high levels of inequality in difficult times when they can no longer perceive any moral link between effort and reward at the top. If those at the top are also perceived to be devoid of moral principle in their pursuit of profit, the challenge is dangerously multiplied.”
What are the trends in SA and how does this relate to the ideal to create a developmental state?
SA reflects extreme manifestations of inequality. At 0.68, our Gini coefficient as a measure of income inequality is said to be the second-highest in the world.
Attached to this is the racial dimension and the rapid rise of new black middle and upper strata, either through or related to the state. Legitimate as the broad trend may be, this in turn poisons the body politic.
In terms of SA’s income dynamics in the past 18 years:
l Between 1994 and 2004, inequality between the races declined as black people broke the apartheid glass ceiling.
l Within the racial groups, especially among black people, inequality increased, as fewer people were climbing the social ladder.
l Once the base effects of the first decade of freedom had worn off, inequality between the races widened (between 2004 and 2008) as the rich were better able to take advantage of the benefits of high economic growth in that period.
Will the building of a developmental state help us to deal with this challenge?
The answer, from experience, is that this is not necessarily the case. High rates of economic growth even with high levels of employment do reduce absolute poverty, but they may not bring about greater equality.
In most of East Asia, for instance, the logic of the developmental state model has in the main been one of trickle-down economics. In the earlier years this included sweatshops to absorb as many people as possible into the economy.
In China about 200 million people have been taken out of poverty over the past 30 years. But from a very low level, the Gini coefficient has increased to 0.47 which is not much different from that of countries of the North.
According to China Daily (May 2010), in 2007 the income of the top 10 percent of the richest Chinese was 23 times that of the bottom 10 percent, compared with 7.3 times about 10 years earlier in 1998.
In other words, poverty was being reduced at the same time as inequality was increasing. This, the Chinese leaders themselves have noted, is inflammable material for social instability.
And so, what should SA do to avoid the same consequences?
There is no doubt, as the National Planning Commission and virtually everyone else has argued, that faster economic growth should be at the top of the agenda.
Clearly, if those who currently have no income at all are absorbed into meaningful economic activity, this would at least reduce absolute poverty. However, to bring down relative poverty (inequality) requires an activist state as an instrument of redistribution.
But, redistribution of what, and in what form? This raises a fundamental point that tends to be missed in the discourse on inequality: The Gini coefficient applies to income dynamics.
Governments do provide a social wage which takes many forms beyond cash grants. It includes subsidised housing, free basic electricity and water, no-fee schools, and subsidised transport.
SA does very well on these non-cash elements of the social wage. Some extrapolations – for instance by Servaas van der Berg of Stellenbosch University – intimate that this social wage or fiscal incidence can have the effect of reducing inequality by about 40 percent.
Virtually none of the developmental states has had this magnitude of state intervention to assist the poor. In most of them, the cushion has been family plots of land.
With regard to Brazil, for instance, the argument that it was able to reduce inequality over the past decade merely through the Bolsa Familia social grants system is essentially inaccurate.
SA has a more extensive social wage system. What is ignored is the fact that one measure Brazil introduced, which should have had a bigger impact on inequality, is a minimum wage policy. The point however needs to be made that income and basic services cannot be counterposed as exclusive measures.
Montek Ahluwalia, the deputy chairperson of the Indian Planning Commission, argues quite correctly that, even if income were to increase and services such as health and potable water remained poor, the income would essentially be discounted.
On the other hand, as we have learnt in SA, when services such as electricity or subsidised housing are provided and yet people are unemployed, they can only use the electricity for lighting because they cannot afford electrical appliances. Others even rent out or sell the subsidised housing and return to informal settlements.
The challenge of inequality should therefore be addressed holistically. Among the interventions that would help in this regard, the following combined actions are critical:
l The absorption of the unemployed, especially young people and women, into economic activity.
l Provision of quality education as ‘the great liberator’ which, along with skills development, has the greatest potential to break the cycle of generational reproduction of poverty.
l Provision of quality public services with free or subsidised basic services for the poor.
l Progressive taxation, appreciating that, for this to be legitimate as in Scandinavian countries, the higher the rates of taxation, the better should be the efficiency and ethical conduct of the state.
l Mini- and macro-compacts on such issues as executive packages, wages (including a minimum wage), productivity and inflation.
l Measures to address the spatial settlement patterns inherited from apartheid in relation to proximity to locations of economic activity.
The National Planning Commission targets the reduction of SA’s income inequality measured by the Gini coefficient from the current 0.68 to about 0.60 which would still be at the top end globally.
From the scenario and projection work done, this is technically logical. But perhaps this is one issue around which society, both the rich and the poor, should protest: That the target is not ambitious enough because the nation is prepared to do more!
Written by Joel Netshitenzhe, executive director of the Mapungubwe Institute.
Article first published in The Sunday Independent