A more equal country in five steps
Reducing income inequality and giving everyone a chance to succeed will entrench democracy
In e q u a l i t y i s l i mi t i n g S o u t h Africa’s economic progress in more ways than we think. For most of the past 20 years, it was simply assumed that economic growth on its own would reduce inequality. This is not necessarily the case.
Faster economic growth is a necessary but not sufficient condition to reduce inequality. More directed action is needed to tackle it.
Debate on inequality has blossomed following the success of French economist Thomas Piketty’s book, Capital in the 21st Century.
Although he has picked apart how capitalism has perpetuated an unequal society, I argue that some degree of inequality is inevitable as society seeks to reward ability and effort.
But high levels of inequality, as we have in South Africa and in many other parts of the world, damages growth in several ways. Education systems often reproduce inequality, hence making it more difficult to achieve high rates of social mobility. This affects productivity growth too. Unequal countries have higher levels of social tension.
Trust among social partners, an essential ingredient for development, is much harder to build. As a result, economic actors often seek quick fixes and quick returns, eschewing the long-term tasks of building sound institutions, invest- ing in people and infrastructure, and building the productive capacity of the economy. High levels of inequality also skew consumption patterns, resulting in less competitive markets, high cost structures and weak demand growth.
Why is it so hard to tackle inequality? Although there is overwhelming evidence that steps to reduce inequality can be made without harming growth, there are still difficult trade-offs in economic and social policy. Emerging economies face a dilemma of trying to attract investment and also of trying to increase redistribution, which, in a static sense, reduces the direct returns to private investment.
In a globalised world, capital and skills are often footloose, able to move between jurisdictions, seeking the highest short-term returns. There is also the issue of the “leaky bucket”. That is where tax revenue meant for the poor gets captured by corrupt, rent-seeking public servants and a small elite, undermining legitimate redistributive measures.
South Africa’s strategy to reduce poverty has been more successful than its efforts to reduce inequality. This has been focused on increasing cash transfers — now to about a third of the population. There has also been a transferral of assets — houses, water, sanitation and electricity — to the poor.
In terms of labour, there has been a broadening of collective bargaining and the institution of sectoral minimum wages. There has also been a broadening of access to basic education and healthcare.
These strategies have been effective in cutting the poverty rate by about half since 1994 and, although they have contributed to lowering inequality, their effect has been minimal and insufficient to counter the other pressures driving inequality up.
I can see five further steps that can be taken to reduce inequality and broaden opportunities for the poor.
First, highly unequal countries should have steeply progressive income tax systems. South Africa is an example of an unequal country that has such a system — and a capital gains tax — which raises large amounts of revenue at relatively low cost and with relatively little tax evasion. But there is also scope to raise the level of taxation on the richest 10%. Company taxes already provide a significant share of tax revenue, though taxes from mineral rents could be increased.
Second, unequal countries must spend much more on education than the norm and this must be pro-poor by a large margin. Investment in high-quality early childhood learning for the poor has many benefits, including freeing up women to enter the workforce.
For middle-income countries such as South Africa, progressive spend- ing on education should go all the way up to tertiary level. Society has to accept that it costs a lot to overcome the inherited legacies of apartheid education and the cycle of poverty and hence should be prepared to spend resources to reverse this.
Third, developing countries should tackle anti-competitive practices in product markets, such as monopoly pricing and collusion, with more vigour. Regulatory obstacles to entry drive prices up and keep profits high while depressing investment and employment.
Often, the best way of enhancing competition is to reduce tariffs and allow entry to foreign companies. Incumbents will argue this will cost jobs. But, in general, this opening up will lower prices for the poor and for downstream industries.
There may be a case for protecting some infant industries, but these should be sensibly evaluated and should not be the norm.
Fourth, labour market policy should strive to achieve full employment or as close to full employment as is socially desirable. Unemployment and underemployment are major drivers of inequality. Where there is high unemployment, even low-wage employment will have positive welfare effects and reduce the level of inequality.
Well-designed unemployment insurance schemes promote economic efficiency because they enable workers to leave work and search for more suitable employment.
Finally, redress measures. Countries should have explicit legal obligations to compel private schools, universities and even firms to set aside a proportion of places for people from historically disadvantaged backgrounds. Although race can be used as a proxy for relative deprivation, there are other useful measures, such as parents’ income, parents’ education, geographic region and gender.
Similarly, sensible land reform programmes and affirmative procurement programmes in the public sector can help broaden ownership in the economy.
Strategies such as these to reduce i n e q u a l i t y w i l l p r o mo t e e c o - nomic growth, but the prevailing trend globally is to do too little to address it explicitly. Much more needs to be done to create societies in which all citizens have the opportunity to succeed.
Only in this way can democracy flourish. — theconversation.com