Political Economy Watch

Anatomy of inequality in South Africa on centre stage

Thomas Piketty brought inequality centre stage
Thomas Piketty.jpg

Worldwide the debate on the impact of economic inequality on society has moved centre stage, with South Africa playing an important supporting role.

The global debate on economic modelling has dramatically changed about 18 months ago with the publication in English of French economist, academic and author Thomas Piketty’s 685-page Capital in the Twenty-First Century.

In South Africa it drew much attention, especially in recent weeks, with Piketty’s visit to the country to deliver the Nelson Mandela Foundation’s 13th Nelson Mandela Annual Lecture.

Another renowned economist and the 2008 Nobel Prizewinner for economics, Paul Krugman, in his New York Times review of the book, wrote: “The result (reaction to Piketty’s book) has been a revolution in our understanding of long-term trends in inequality.”   

Piketty, who for the first time used a historic collection and analysis of tax and other data, besides the modern-day tool of surveys, tracked income and wealth over the last century in Britain and the United States and over a longer period in France, in order to identify historical trends.

Nothing new

What emerged from the book and the sharp focus on inequality in the debate that followed, is that the phenomenon of inequality is far from new, is extremely complex due to shifting interactions between numerous factors and has a wide variety of impacts on different fronts in society at large.

One of the key insights from the book is the distinction Piketty makes between wealth and income, to argue that concentrations of wealth, particularly since the end of the Depression in the 1930s, have increasingly landed in the hands of the world’s top 1% income earners.

Since the publication of the book there has been a growing appreciation that inequality can profoundly affect the general wellbeing of all in society.

This is illustrated by the fact that in recent times:

  • Pope Francis in his Evangelii Gaudium, his first exhortation as pontiff, wrote that the time has come to say “thou shalt not” to an economy of exclusion and inequality – also a recurring theme during his recent visit to the US;
  • A study into the decline in overall sport participation in England, despite increased success of elite athletes, revealed that – as with society in general – inequality continues to be deeply entrenched across all levels of sport, with for example, a disproportionate number (37%) of Team GB medal winners at the London 2012 Olympics having previously attended private schools;
  • A study of the high dropout rate among first-year students in South Africa has found that almost 94% of the students surveyed relied on bursaries or scholarships to study. Many had taken part-time jobs to have some income and did not spend a lot of time on campus; and
  • There has been an increased focus in economic analysis and modelling regarding the executive remuneration structures, modern financial structures and the impact of the top 1% of the income and wealth pyramid.

South African case study

Against this background one should not be surprised that South Africa, which in many respects made a fresh start in the early 1990s, offers an almost natural ‘case study’ on the subject of inequality and the trajectory of trends.

It is probably not a coincidence that the opening chapter of Capital in the Twenty-First Century, titled Income and Output, starts with a description of the 2012 Marikana tragedy.

Piketty writes: “This episode reminds us that the question of what share of output should go to wages and what share to profit – in other words how should the income from production be divided between labour and capital? – has always been at the heart of distributional conflict.”

The way things have panned out in the Farlam report and the subsequent way in which Deputy President Cyril Ramaphosa, for one, has come under fire over Marikana, illustrates that the phenomenon of inequality in South Africa transcends a simplistic racial construct.

In this regard it is also interesting, with reference to the mentioned sport study in England, to note how many of the sportsmen from previously (black) disadvantaged communities who make it to the national teams of traditionally white-dominated sports like rugby and cricket, come from so-called elite schools.

Historical context

The historical context in which Piketty’s work has placed the inequality issue also illustrates that it has been around for a long time. Although the factors driving it change, it seems to follow some kind of a cycle.

“US inequality in 2010 is quantitatively as extreme as in old Europe in the first decade of the twentieth century, but the structure of that inequality is rather clearly different,” he writes

On the structure of present day inequality it is noted that what we have seen in America, and are starting to see elsewhere (also in South Africa), is something “radically new” – the rise of “super salaries”.

Piketty rightly notes that intervention in the market mechanism in 1914 and 1945 – including taxation policies in the 1920s and 1930s – arrested a trend towards greater and greater inequality. However, since the 1970s, slowing growth has seen it trending steadily back toward previous levels.

Krugman agrees with Piketty that “progressive taxation – in particular taxation of wealth and inheritance – can be a powerful force limiting inequality. Indeed, Piketty concludes his masterwork with a plea for just such a form of taxation. Unfortunately, the history covered in his own book does not encourage optimism.”

Although empirical data in the modern sense of the word is not available, recorded ancient history, dating back to at least the days of King Solomon of the Bible, tells us that inequality has for millenniums been a reality in human societies.

It is also true, as Piketty in reference to the 20th century’s two world wars points out, that geopolitical events can influence inequality rates, as it does with other economic realities. Even Cleopatra of Egypt had to devalue her currency to be able to pay off her father’s war debts.

Equally true is that if inequality becomes too big and unmanageable, it can lead to “distributional conflict” like it did at Marikana.

Krugman, in the face of the interaction between political elites, is also correct when he assesses that it is “easy to be cynical about the prospects for anything of the kind” about the call made by Piketty for “wealth taxes, global if possible, to restrain the growing power of inherited wealth” and, by extension, widening inequality gaps.

The challenge is to make peace first with the reality of inequality and then to find ways to contain it on manageable levels. Neither a simplistic approach of absolute state control (which is likely to change the profile of the advantaged elite only) nor an absolutely free market will do the job.

We live in an increasingly dynamic and integrated world where a complex network of factors, from technological innovation and shifting geopolitical interests to forces of nature, constantly impact on the power relations between capital/wealth, labour and politics. In such a world rigid ideological approaches of whatever persuasion are enemy number one and flexibility and mixed responses the almost only workable option.

by Piet Coetzer

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