Worth infinitely more than you've paid for it.
21 April 2015 16:24 (South Africa)
Opinionista Ivo Vegter


  • Ivo Vegter
I'd like to coin a term – ginidiocy – for the most wrong-headed idea in political economy. Ginidiocy provides cover for statists to control the economy and socialists to redistribute wealth. Ebrahim Patel cites ginidiocy as a reason to impose wage caps. Ginidiocy says nothing about political stability, social cohesion, fairness, prosperity, or development. Down with ginidiocy!

What is the most unequal country in the world, in terms of income distribution? This may come as a surprise, but it is neither the richest, nor the poorest, nor the biggest, nor the smallest, nor the most rapidly developing, nor the most stagnant, nor the most autocratic, nor the most free, nor the most violent, nor the most peaceful.

Hint: it's a neighbouring country.

Nope, sorry. It's not Zimbabwe. Botswana would have been a much better guess. The correct answer, by a long way, is Namibia.

South Africa's gini coefficient, the canonical measure of income inequality, is 57.8%, according to the United Nations Development Programme. The Global Peace Index, whatever that is, has a cute interactive map, if tables and spreadsheets aren't your thing.

Gini stands for "generalised inequality index". Here is how it's calculated. The theory is that a gini coefficient of one (or 100%) represents a situation in which one household earns all available income, while a gini coefficient of 0% means every household earns exactly the same.

The socialists and hippies of the world have had to turn to this curiously unintuitive measure of a country's welfare, because otherwise they'd have to concede a very inconvenient truth indeed: the poor aren't getting poorer; things aren't getting worse.

If you haven't seen the statistics that Hans Rosling combines with clever data visualisation tools to debunk some commonly held myths about the world, both rich and poor, do yourself a favour and download a few of his talks.

That the world isn't going to hell in a handbasket is, of course, a crisis for the left.

Authors and speakers who point this out, like Rosling or Bjørn Lomborg, routinely get vilified for doing so. Good news just doesn't fit a worldview in which the rich exploit the poor, capitalism is cold-hearted and brutal, free markets are infested with swindlers and thieves, globalisation threatens the serenity of both the noble savage his unspoilt wilderness, and money is the root of all evil.

It is hard to advocate more coercive, redistributionist "solutions to poverty", when poverty is making itself history all by itself. It's hard to claim that poverty is bad from a platform that says money is the root of all evil. It is hard to argue with countries who liberate their markets, when they find their socio-economic outlook improves.

Policies that promote trade, encourage private business, remove red tape and reduce corruption have lifted millions out of poverty already. China alone accounts for half a billion people who no longer live below a dollar a day.

Drastic measures are called for in the face of all this good news.

So, first, the do-gooders shifted the goalposts. The symbolic line of poverty used to be $1 a day, until there weren't enough people left below it. It has surreptitiously been doubled to $2 a day. This sleight of hand allows those whose heads are as soft as their hearts to continue to indulge their luxurious guilt complexes.

This still doesn't fix the larger marketing problem, which is that the prosperity trend is for the most part upwards. To counter this communications crisis, the handwringers latched onto the gini coefficient of income inequality to replace embarrassing measures of actual poverty.

A high gini coeffient, which signifies less equal income, is supposed to be bad. The lower it is, the more "fair" a society is. Actual poverty does not count as much as how big the gap is between the poor and the wealthy, so the argument goes.

But why? If you plot the gini coefficient of the countries ranked in the UN's Human Development Index (HDI), there appears to be only a weak correlation between HDI rank and income inequality.

What does it tell us that the United States (40.8%) is ranked 77th out of 142 countries? Why would New Zealand (36.2%), Uzbekistan (36.7%), the United Kingdom (36.0%) and India (36.8%) be almost inseparable in terms of income inequality, yet they are separated by 114 places in the HDI ranking of 182 countries?

Can Ethiopia (29.8%), Bangladesh (31%) or Laos (32.6%) celebrate that they are among the most equal countries in the world? Lesotho (52.5%) and Swaziland (50.7%) are both far more equal societies than South Africa (57.8%). Along with countries as different as Liberia (52.6%) and Chile (52.0%), they are right in the middle of the 5% bracket flanked at the winning end by Zimbabwe (50.1%) and the losing end by Brazil (55%). Confused yet?

The irony is that a reliable cause of a low gini coefficient is, quite simply, poverty. It is further true that a leading cause of the world's poverty has been communism. The now-collapsed communist bloc once explicitly aimed for a perfectly equal distribution of income. There's no more irony in the fact that much of the world's present economic malaise had its roots in the redistributionist policies of Western welfare states. See where America's attempts to promote "affordable housing" by encouraging (and even underwriting) cheap credit got them.

Winston Churchill was remarkably perceptive when he said capitalism is the unequal sharing of blessings, and communism is the equal sharing of misery. Looked at it this way, striving for income equality is at the very least dangerous.

To reduce a gini coefficient, it is not enough to make the poor richer. You also have to stop the rich from doing the same. This is unlikely to happen naturally, of course. If both were to become, say, 10% richer – in terms of actual purchasing power – you'd think that would be cause for celebration. No, sir. That would push the gini coefficient up, and the left would pretend something really bad just happened.

Many countries that differ greatly in all other respects share a similar gini coefficient. This suggests that inequality is a poor determinant of, well, anything.

What should matter is the degree of poverty of the poor, in real terms. Can people, in their own countries, afford at least the basic needs of a decent life, such as food, water, basic healthcare, a roof over their heads, sanitation, and perhaps some schooling?

Some dangerous communists among my correspondents, not convinced that it matters how poor the poor are, have argued that jealousy among the poor threatens social instability, which is why income equality is desirable. Frankly, this doesn't sound so much like an economic theory as a trite pop-psychology explanation for a counter-intuitive point of view.

No matter their gini coefficient, the poor will envy the rich. How can I, for example, reach the self-actualisation at the pinnacle of Maslow's Hierarchy of Needs if I don't yet have one of these?

That the gap between rich and poor is growing is an oft-repeated "fact". But is it true? That depends entirely upon whom you ask.

The statistic on which the claim is based could be very wrong. It compares GDP per capita on an exchange-rate basis that does not take into account purchasing power. If you do take into account purchasing power parity, global inequality appears to have declined steadily since 1970.

A thorough review of the literature (PDF) conducted by Sudhir Anand and Paul Segal of Oxford University finds it strewn with opaque methodologies that reach contradicting conclusions. If you can't even figure out whether income inequality is rising or declining, how can you hold forth about its injurious social impact?

A more plausible explanation for social discontent, where it exists, is the loss of hope.

If the poor do not believe a prosperous future is within their reach, they are more likely to consider violent means to change their fortunes.

Such a feeling of powerlessness depends on many factors. As Rosling points out in his talks, there are many dimensions to development. Some are objectives – such as human rights, a healthy environment, good health and fulfilling culture – and others are means to reach them – such as the rule of law, good governance, conditions for economic growth, and decent education. Only when the means of development are absent, do people lose hope in their ability to reach those goals. None of these means to development can be provided by punishing success, encouraging skilled people to leave, or redistributing insufficient resources.

Therefore, the New Growth Path proposed by the minister for economic development, Ebrahim Patel, is founded on a fundamental flaw: thinking that income inequality is a problem the government ought to address. Never mind how he proposes doing so. Salary caps and wage controls might be stupid in and of themselves, but even the reason for proposing them is wrong.

Income inequality is not a problem, even if it is growing. It's grown in most of the countries that have hauled so many millions of people out of poverty in the last few decades.

What's important is the real living standard of the poor. South Africa has made significant progress in addressing poverty, and the ANC can justifiably claim at least some credit for this. However, it should ask itself how these successes were achieved. That so many still do not have access to the basic necessities of a decent life cannot be obscured by a populist about-turn in economic policy. Only harm can come from blaming, badgering or bleeding the rich.

Patel and the ANC should not fall for the deceptive appeal of ginidiocy. DM

PS. Thanks to a regular reader I know only as @Hetairos_ on Twitter for the link to the eponymous mahogany yacht. Excuse me while I take a moment to quietly weep, and plot revolution!

  • Ivo Vegter

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

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