No quick solution to the problem of inequality

South Africa is one of the most unequal countries in the world. We are not, as is often claimed, the most unequal.

There are a few countries with higher measures of income inequality and several others that don’t measure their income inequality out of embarrassment for what this would reveal. Nonetheless, our level of inequality is unusually great.

A recent book, Capital in the Twenty-First Century, by French author Thomas Piketty has sparked widespread commentary about the causes and consequences of rising inequality in developed countries.

Former US Treasury secretary Larry Summers welcomes the focus on inequality Piketty’s book has generated. He notes that after Piketty’s analysis "there can never again be a question about the phenomenon (of rising wealth and income inequality) or its pervasiveness". But, he argues, Piketty’s diagnosis of the causes of the problem is faulty. According to Piketty, wealth automatically rises faster than economic growth, inevitably causing widening inequality.

The real causes of growing inequality, Summers counters, are poorly understood. Globalisation has moved low-skilled jobs to low-wage developing countries, contributing to inequality in the developed world.

Summers warns, too, that Piketty’s policy recommendations for reducing inequality — high taxes for high earners and a global wealth tax — have little chance of being implemented. This is because some countries would "break ranks" and tax the wealthy at a lower rate than their neighbours, knowing that the megarich have a strong incentive to move to countries with lower tax rates. Measuring wealth is also very complicated and so it is difficult to tax.

Piketty’s work has focused attention on inequality in developed countries. Twenty or 30 years ago, the focus was on developing countries where the problem of inequality was most severe. Ironically, just when inequality increased in the developed world it has declined in many developing countries.

Most Latin American countries previously rivalled South Africa for high levels of inequality. Inequality in Latin America remains high, but the income gap has declined substantially over the past decade. There are several reasons for this. Social transfers and higher minimum wages helped to raise the incomes of the poorest, while probably the most important cause of declining inequality has been growing job numbers.

In contrast, inequality in SA has hardly changed, despite the introduction of a welfare system now benefiting nearly 16-million of the poorest South Africans. The extension of social grants had little effect on inequality because employment barely grew. High inequality remains entrenched in South Africa as the result of both high wage inequalities and the widening gap between those with work and those who are unemployed.

Does inequality matter? Financial Times commentator Martin Wolf suggests that Piketty does not answer this question. Some commentators argue that economic growth matters more than income inequality because "a rising tide raises all ships". The income of even the poorest in developed countries, they suggest, rose in real terms in recent decades even as inequality increased. This meant that everyone, including the very poor in developed countries today, has access to goods and services previously beyond their reach. The resultant welfare gains, they suggest, matter more than equality.

Many reasons can be cited for why inequality matters. Wolf argues that rising inequality is "incompatible with true equality as citizens", which is a central tenet of democracy. Where inequality is large, inherited privilege rather than ability becomes the determinant of individual economic success. The failure to make the best use of a country’s talent retards its growth. Moreover, when inequality is accompanied by abject poverty, as it is in South Africa, it is morally indefensible.

High inequality also complicates our search for measures that will grow South Africa’s economy and create the jobs essential for combating both poverty and inequality. Extreme inequality can blind policy makers to what are actually very difficult problems to address. In a highly unequal society, it may appear that the unemployed are jobless because the rich are rich. Or that all economic problems can be solved simply by redistributing income or wealth to the poor.

Reality is more complicated than this. Detailed research by Servaas van der Berg of Stellenbosch University, shows that inequality in South Africa cannot be reduced until we dramatically improve the quality of education available to children of the poor in South Africa.

Without better learning outcomes and skills, greater employment and equality in the labour market are unattainable.

Sadly, there are no quick solutions without substantive human capital gains by the poor. Until we find solutions for this, inequality in South Africa will remain unacceptably wide.

By Gavin Keeton

Keeton is with the economics department at Rhodes University

Article Source: Business Day