Part of the 1% and part of the inequality problem

INEQUALITY, it turns out, matters. The World Bank’s recent “equality of opportunity” report, which provides an evidence-based analysis of how inequality creates structural impediments to SA’s economic development and employment challenge, was interesting for its timing.

It came shortly after approval of a 5.5% salary adjustment for political office bearers. By virtue of their political incomes, western political leaders are not part of the 1% of their countries. South African political leaders are. Can they tackle the problem if they replicate the challenge?

The cursory (by which I mean midnight desktop research) statistical anecdotes that follow will be construed as controversial.

They are not intended to be. They are meant to provoke sober reflection.

Of all the leaders of the world’s largest economies, only the president of the US earns more than the president of SA. At just less than $320,000, President Jacob Zuma earns about 70% more than British prime minister, a fraction more than the Canadian and French leaders and is on a par with the German chancellor. It is a pretty safe bet that it is also significantly higher than the Chinese leaders, though my midnight surfing could find no reliable sources.

As a measure of inequality, the gap between the UK prime minister and a UK citizen is about five times; between the US president and the average US citizen about 10 times. The gap between the average household income in SA and the president of the republic is more than 100 times.

If inequality genuinely mattered, surely there would have been a more comprehensive conversation about the recent wage adjustment of political leaders? Does it matter? I am certain people will point out that paying our politicians less would not change inequality. CEOs make the same arguments. They also run companies that create opportunities for income distribution and generate approximately a third of government revenue.

A key theme of the current global economic conversation is inequality and growth. Until recently, neoclassical arguments dismissed the structural relevance of inequality in sustained economic growth. But that is changing. Given the recent debates in this paper, it is worth noting that the past 90 years have overwhelmingly demonstrated that Marx’s contention that capitalism is prone to bubbles and crisis has more evidentiary support than classical equilibrium theory.

Central to the boom and bust argument is the notion of the structural implications of a disproportionate capture of productivity gains — or inequality.

You do not have to be an economist, or a heterodox economist, to grasp the fundamental tenet of this theory. For instance, Germany cannot continue to grow wealthy if it captures all the gains of its model. Germany’s surplus growth can continue only if there is sufficient sustainable demand for its output. If consumption capacity does not keep pace, asset bubbles will develop.

The relationship between production and consumption is complex and, as many economists who are much smarter than I am have pointed out, there are no cardboard villains, although everyone except my extreme-left friends would agree that debt for consumption should on the whole be eliminated. In short, in the real world, income distribution has a fundamental relationship with sustainable output and demand.

However, this article is not about the problem of income distribution, aggregate demand and capitalist crisis, which is a common thread beginning with Marx, tackled by Keynes and located by Hyman Minsky in the financial market-dominated economy. It is about the mundane, real economy implications of inequality.

In oligopolies such as SA, the poor are price-takers. Even for basic items, as the bread price-fixing scandal underlined. As the World Bank points out, the majority of people are locked out of formal work networks just by virtue of their birth and location.

Given the levels of inequality, clearly we will not close the inequality gap by making people take pay cuts. In any case, we want more South Africans to be better off not fewer to be poorer. Nevertheless, if the pay levels of our political leaders keep pace with inflation, then SA’s economy would probably have to double every seven years for at least the next seven decades just to create the capacity for differentials between political incomes and average national incomes to be in line with the differential in the US.

We can look at long-term structural supply and demand measures, such as skills and infrastructure investment, as we must. We can prioritise short-term tactics such as wage subsidies in an attempt to tackle structural unemployment. We can work hard to improve the effectiveness of basic public goods such as transport, health and education. In the end, we will have to confront the organisational implications of inequality.

This leaves the question: Do we believe in closing the relative inequality gap? Who sets the tone? Should it be political leaders or can we reasonably expect those who generate the wealth to show the way? If our political leaders remain part of the 1%, what real chance is there to tackle inequality?

Mahabane is head of Brunswick SA.