Capital flight blamed for toxic labour relations
THE South African economy has been crippled by decades of transfer pricing and other forms of illegal capital flight by multinational companies, especially in the mining sector.
This partly explained the country’s poisonous labour relations environment and led directly to the Marikana killings three years ago.
These were the sentiments of leading economist Ben Fine, of London University’s School of Oriental and African Studies, and Wits University senior policy researcher Nicolas PonsVignon.
Transfer pricing, also referred to as base erosion and profit shifting, occurs when one division of an enterprise, usually a multinational, sells goods and services to another division typically based in a low-tax jurisdiction to shift tax liabilities and hide profits.
It is a major tool used in corporate tax avoidance.
Multinational mining companies operating in South Africa have been accused of using this practice to deny the state potential tax revenue and to keep wages low.
Fine challenged perceptions that labour was an impediment to growth. Instead he pointed out flaws in the structure of the economy – which included tax evasion through either transfer pricing or other capital outflows by businesses.
Fine and Pons-Vignon were debating the nature of the SA labour market and economic development at a seminar hosted by the Independent World of Work and the African Programme on Rethinking Development Economics at Wits on Monday night.
Research showed that in 2007 as much as 20 percent of total GDP was lost either through transfer pricing or other forms of illicit capital flight. In contrast, total investment in the economy stood at 17 percent of GDP, roughly half what is needed to grow an economy sustainably.
This high level of illegal flight, coupled with low investment, was having a negative effect on the country’s poor, regardless of the state’s policy direction, the two men agreed.
“Who cares about minimum wages if you are losing half your investment in the economy to illegal capital flight,” Fine said.
Pons-Vignon argued that workers should be better informed about such activities to bargain for better wages for themselves. He raised Mari- kana: employers could have afforded to pay the R12 500 wage demand if all their profits had been reinvested in the economy. “There was a 10-year period when it would have been appropriate to make much higher wage demands than the NUM was making,” he said.
The country’s failure to maximise the value of its minerals was also problematic as it had limited diversification into other sectors. Had this not been the case, more jobs could be created and wage levels raised across the economy, eliminating the social burden on single income households which mostly depended on SA’s working poor, who typically earn about R3 000 a month.
Fine criticised the country’s integration into the global economy in the post-apartheid period. South Africa was incorporated into production patterns that did not “aid its developmental industrialisation goals”, he said.