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Tackling inequality in South Africa – the great escape

23rd February 2018

By: Saliem Fakir

     

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There have been clarion calls to clean up corruption in South Africa, but the greater challenge will be clawing back the effects of structural poverty. Influential voices from business have suddenly become activists in relation to corruption, but seemingly not activist enough on inequality. Growth without redistribution will be a source of future instability in South Africa.

It was economist and Nobel laureate Angus Deaton who coined the metaphor “the great escape” in reference to how industrial development and advances in modern science and technology must count as the most significant propellers of prosperity for the modern era. Technology contributed to the surge in economic growth and improvements in welfare.

Prosperity is reflected not only in income but also the extension of life expectancy brought about by better health, access to education and the abundance of basic necessities that make a dent on squalor and poverty.
The first frontier of this transformation happened in the Western world before spreading to the rest of the world.

The growth in wealth and abundance does not imply that access to these propellers of prosperity were spread equally around the world.
Thomas Piketty’s book, Capital, and the ongoing data set his research continues to produce show that, while modern science and technology continue to be the bedrock of prosperity, inequality is on the rise.

Piketty’s work demonstrates how the world is divided – today there exists a global economic apartheid. About 80% of the world’s wealth is owned by 1% to 10% of the world’s population. Piketty’s data show how consistent this pattern of wealth distribution and share is repeated all over the world.

In some countries, this form of wealth share is a result of an exclusive political economy, despite the prevalence of democracy.
Both Deaton and Piketty (as well as many others) challenge the more ideological line that poverty is a result of individual attributes rather than the product of an economic system. If you are poor, you must blame yourself, not others – this is according to some Libertarians.

The issue of poverty is increasingly shifting focus to economic systems and the characteristics of the political economy to better understand how poverty manifests persistently due to structural reasons.

Modernising advances tell us a lot of what we can do to improve things, but they tell us little about who will benefit the most from these advances.

Scientific and technological advances may give us many new livelihood opportunities and tools to advance innovations and make us live longer but, if the political economy is exclusive, advances can spread to millions of the populace. However, in some places, the side effect is that the wealth generated from advancement is skewed.

Inequality is also paradoxical. Inequality and poverty are not always the same thing, even though they are often talked about in the same breath. Inequality and poverty can be separate but also intertwined. A may earn ten times less than B, but both may not be poor.

A’s share of income is unequal relative to B. A may be resentful of B’s income level but A may suffer little poverty, given his or her material standing, relative to those who earn $2 a day.

Most symbolic of this is the wage gap concern between the CEO of a company and the lowest-ranked worker in a given company or the wage gaps between the male and female workforce.

The top management enjoy the moneyed life as their stakes over a firm’s income can be disproportionate if one adds stock options, bonuses and other benefits that are not accessible to those at the lowest ranks of the firm. This is one example of how exclusivity works at the level of the firm.

Notions of what is inequality can obscure certain realities: those who are unequal and not poor do not see the inequality unless they are poor and live with inequality simultaneously.
 

Deaton himself has singled out the power of financial capital as the primary influence of how wealth is distributed. Since the 1980s, the power of financial capital has grown and its extractive nature has been enhanced through the globalisation of capital markets. The consequence is that wealth and ownership of assets have been skewed in favour of financial capital rather than the real economy, as a recent study by the University of Zurich showed.
 

Piketty’s book is a critique of the power of financial capital because its focus is on the rate of growth of capital rather than the growth of the real economy, with the latter more likely to have a greater impact on the distribution of wealth, as it is more labour absorbing.

This swing towards greater concentration by financial capital has long been a concern for economists, if you consider the pioneering work of Hyman Minsky and others, because financial capital is inherently tilted towards the pursuit of unearned economy largely by increasing society’s debt burden.

Minsky’s economic forebears, who raised concerns around the power of financial capitalists, can be found in the works of Silvio Gesell and, interestingly, the works of John Maynard Keynes as well, from whom Minsky famously derived the phrase ‘euthanasia of the rent-seekers’ when Minsky proposed the taming of rapacious forms of financial capital.

Since exclusivity is the result of a political system built around a network of incestuous elites, reforms take a long time and, where reforms are implemented, as is being shown with the Dodd-Franks Act, well-intended provisions are slowly clawed back through the influence of powerful lobby groups.

South Africa’s challenge is not just growth but also getting redistribution right. Corruption has energised many segments of South African society, so it must be for poverty as well.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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