How inequality is wrecking SA's economy, and what we can do about it
Alarming statistics show the ranks of the poor swelling. We urgently need progressive policies focusing on wealth as much as income, writes Michael Nassen Smith
Some alarming statistics were presented at the recent Institute for African Alternatives (IFAA) Confronting Inequality conference.
Millions of South Africans cannot afford to buy food or access healthcare, decent sanitation and other essentials of a dignified life. The National Income Dynamics Study shows that 29% of the population are trapped in severe poverty. Over the past few years, 3-million people have joined the ranks of the impoverished.
Four-fifths of the rural population live below the poverty line — almost double the rate of poverty in the metros. However, in urban areas too, many face spatial segregation from productive economic activity.
The economy suffers from precarious mobility, with those escaping poverty having low probabilities of remaining out of it for long. There is a lack of intergenerational mobility, with 95% chance of children born to parents in the bottom of earnings distribution occupying the same place in the distribution.
The entrenched and racialised class stratification of SA remains intact, with only 24% of the population free from poverty, or the threat of it.
Meanwhile, the rich keep getting richer. In 2007-17, the cumulative holdings of the top 10 on the JSE increased from R64bn to R280bn. The average remuneration of the top 200 earners in SA increased from R16.6m in 2007 to R20.8m in 2015. There is a large disparity between the big earners and ordinary workers in the economy. CEOs of the largest listed firms earned between 120 and 1,332 times more than the average pay at their companies.
South African CEOs earn on average 541 times the country’s per capita GDP. This is significantly higher than in the US (483:1) and the UK (229:1).
The share of total income going to the top 10% income earners in SA is 60%-65%. In Europe it is 30%-35%, in the US 45%-50% and Brazil 50%-55%.
Most research on inequality in SA has focused on income differentials. But the situation is even worse when considering the limited data available on wealth.
A recent paper by Stellenbosch University researcher Anna Orthofer finds that wealth is much more unequally distributed than incomes.
According to Orthofer, 10% of the population own 90%-95% of all SA’s wealth. With a Gini coefficient of about 0.95 (compared to 0.7 for incomes, the highest in the world), "the South African wealth distribution is as unequal as that of the world as a whole", she finds. Wealth generates its own income — interest, dividends, rents and capital gains — and so further deepens long-term inequality.
There should not only be moral concerns about these figures, there are pragmatic reasons to be alarmed too. Research indicates that inequality causes violence in societies where prosperity is divided on racial, religious or regional grounds. The racial character of SA’s inequality is due to its history of colonialism and apartheid and poverty and wealth largely continues to wear black and white masks, respectively.
A democratic and progressive solution urgently needs to be found lest the country sink even further into social and political unrest.
It is in this context that IFAA convened the conference, funded by the Netherlands embassy.
It was attended by students, academics, nongovernmental organisations, government officials, labour, the embassies of the Sweden, Norway and France and civil society.
They grappled with how to realise greater equality, given the rather alarming statistics presented by panellists.
It is clear that poverty is driven by unemployment. Yet unemployment is also the creation of inequality, where the unequal distribution of access among the population frustrates the economy’s ability to absorb the marginalised into productive activity.
Contrary to the views of more conservative economists, there need not be a trade-off between fighting unemployment, growth and inequality. Achieving greater equality would lead to an increase in aggregate demand, a rise in productivity (as more working age people gain access to education), a broadening of the tax base and lower the risk of a credit-induced financial crisis.
Some progress has been made in dealing with wage inequality, with the country’s social partners — labour, business, civil society and the government — agreeing to a national minimum wage of R20 an hour by May 2018. It is, however, not enough.
There need not be a trade-off between growth, fighting unemployment and inequality
Other policies that should be explored include the public disclosure of pay ratios within business or sectors, caps on executive pay, a shift of corporate governance away from shareholder primacy and towards workers’ participation, government incentives and penalties applied to pay ratios and the strengthening of the collective bargaining process.
Other solutions to inequality canvassed at the conference included free education, ambitious land reform and the creation of a coherent spatial policy — regional, rural, urban.
Prof Ivan Turok pointed out that the working poor, as a consequence of apartheid geography, spend a disproportionate amount of their monthly income on transport. SA has one of the longest commuting distances in the world.
He illustrated the relationship between spatial inequality and social inequality and the effect this has on human, social and economic development. The spatial divisions that characterise SA’s built environment reflect inclusion and cohesion on the one side and crime and instability on the other. Segregated and fragmented settlements also undermine productivity and growth, and government policies play a big role in sustaining spatial inequalities.
Not receiving enough attention is what statistician-general Pali Lehohla of Statistics SA calls the demographic dividend — the change in age distribution of the population over time.
A decline in the proportion of older people relative to the youthful population presents an economic "windfall" if the productive forces of the country are geared to meet this change.
Lehohla explained that in Nordic countries, economic policy was aligned with this demographic phenomenon over a period of 60 years, while in China, it had been undertaken over a period of 30 years.
However, South African policy is failing to reap the dividend and the country is not doing well in productivity, labour absorption or terms of trade; unemployment has become a huge driver of poverty and, consequently, of inequality, according to Turok.
For all the palliative solutions offered, inequality in SA will only be comprehensively tackled if structural constraints are confronted. As Trade & Industrial Policy Strategies researcher Neva Makgetla argues, the economy remains reliant on commodity exports and capital-intensive industries.
Financialisation is bloating the financial sector to a size wholly inappropriate for a developing country with high rates of joblessness and poverty. Added to this is a dynamic in the political economy through which historically entrenched interests and newly formed interests attached to narrow black economic empowerment campaigns, have too great an influence over the levers of macroeconomic policy.
Deliberate and progressive state intervention is needed to achieve the changes necessary for fundamental transformation. Yet, for this to occur, it is first necessary to give up on mainstream myths.
Despite overwhelming evidence to the contrary, and concessions by the IMF and World Bank, SA’s macroeconomic thinking continues to be mired in neoliberal orthodoxy.
Yet, as several speakers at the conference highlighted, the era of "trickle-down economics", faith in the Kuznets curve and the belief that inequality is good — or at least neutral — for growth, is over.
The era of 'trickle-down economics', faith in the Kuznets curve and the belief that inequality is good — or at least neutral — for growth, is over
Although certain government departments champion industrial policy and the ideal of a developmental state, it is time for all sectors of society — including business — to embrace a transformative agenda.
A strong sentiment emerging from the conference was that these ambitions would only be realised if progressive forces were to unite to pressure key stakeholders into taking action. Participants and presenters highlighted the urgency of empowering communities, labour and civil society to enable participatory democracy in economic management.
Crucial to this might be to have direct worker participation on company boards, as in Sweden and Germany.
These initiatives are supported by economists Thomas Piketty and Ha-Joon Chang who have called into question the "expert culture" surrounding economics and economic policy formulation. Participants also discussed how social democracy might look in SA.
A necessary aspect of community and social empowerment is to challenge the corruption and state capture that plague democratic institutions and state-owned enterprises.
In his opening address at the conference, former president Kgalema Motlanthe said that an intervention seeking to tackle inequality could not ignore the reality of "nepotistic relations and tainted business relations" that undermine the ability of the government to meet its social responsibilities.
The IFAA’s Confronting Inequality conference tried to outline a research and social agenda for dealing with inequality. Much ground still needs to be covered. The conference did not talk about the international causes of SA’s inequality — global financialisation and commodity price fluctuations.
It was also strongly suggested that social scientists place the question of wealth, sorely neglected in the literature, at the forefront of their research programmes.
The conference highlighted the importance of participatory democracy and the urgent need for progressive social forces to unite, given the current political and economic crisis. Confronting inequality is one such avenue to do just that.
• Nassen Smith is deputy director of the Institute for African Alternatives.