Opinionista Neil Coleman 6 October 2015

South Africa needs serious interventions to fix extreme inequality

This is a revised version of remarks I made to a Social Dialogue Forum with Thomas Piketty, hosted by the Nelson Mandela Foundation on 2 October 2015. The discussion was held under ‘Chatham house rules’ which prevent reporting on what other participants said.

“SA is one the most unequal countries in the world. This stems obviously from the apartheid legacy, but also from the ‘neoliberal’ pro-market and pro-rich policies that have dominated the world, including SA, since the 1980s-1990s.” Thomas Piketty (Financial Mail, 1 October 2015)

r > g = Global appropriation of the social surplus

Professor Thomas Piketty’s formula r > g (returns to capital are greater than growth in national income) expresses the tendency to rising inequality, particularly under neoliberal and financialised capitalism.

Another, perhaps simpler way of expressing this formula is that the owners of capital have found multiple ways to cream off the social surplus, and ensure the evergrowing concentration of wealth in their own hands.

This has happened on a global scale, with limited exceptions where progressive governments (particularly in Latin America over the last decade) have acted to combat this powerful offensive by capital.

Political resistance to surging inequality has also been expressed in the global movement to challenge this super-accumulation trajectory – the “movement of the 99%”. But Piketty, and other experts working on inequality, show that growing global anger has failed to stop this orgy of greed: despite the financial collapse of 2008 (which was in part a product of these dynamics), the growth trajectory which deepens structural inequality remains firmly in place. Now even conservative organisations such as the International Monetary Fund recognise that this runaway phenomenon poses a threat to the global economy.

Progressive humanity had some hope that lessons learned from the global financial crisis would arrest this disastrous path. But the work of Joseph Stiglitz and others shows that the power of capital enabled it to socialise the costs of the crisis (through public funds bailing out the banks); while corporations and individuals who precipitated the crisis were able to privately appropriate the profits, once the situation was stabilised through state intervention.

Piketty’s work shows that while there was a temporary blip in the trajectory of ever-greater wealth concentration during the peak of the crisis, this, however, resumed with ferocity within the space of one or two years, and has now reached new heights.

In the popular mind, this extreme concentration of wealth is expressed through sky-high management and executive pay, and this of course is an important part of the picture. If executive pay was the only challenge, it would be troubling enough. But the work of Piketty shows that concentration of wealth goes way beyond executive income, to an exponential growth in the assets held by the 1%.

To address the scourge of inequality in South Africa we need to take a hard and honest look at how the current accumulation path entrenches extreme inequality; and consider what serious interventions can be made – otherwise we will continue to fiddle around the edges.

Creaming off the social surplus in South Africa

This global trend towards appropriation of the social surplus by a tiny elite has been even more extreme in South Africa, where the economic oligarchy have consolidated their power to extract and appropriate an ever growing share of the national wealth. In part this has derived from an ‘elite pact’ which underpinned the transition, and ensured they benefited from the necessary concessions; and in part through a series of devious manoeuvres to extract themselves from the South African economy, while continuing to enjoy the benefits it offers.

The parasitic accumulation (ie extraction without reinvestment) of South Africa’s socially produced surplus in particular by big capital, has taken place both inside and outside the country on a colossal scale over the last two decades.

It is not as if this accumulation trajectory was geared towards financing industrialisation, or investment into the productive sectors of the South African economy. A barometer sometimes used to measure the shift to financial speculation is the fact that an estimated R1,2-trillion of uninvested capital lies in the balance sheets of corporations.

This contradicts the claim that our levels of savings are too low to finance investment.

The process of de-industrialisation is in part the impact of South Africa’s long-running investment strike, the massive accumulation of financial assets in South Africa and abroad, as well as relocation of productive capacity outside of South Africa.

The huge outflow of capital engineered through the restructuring and relocation of formerly South African corporations is extremely worrying.

The extent of capital outflows from South Africa is illustrated by a report from the Reserve Bank which shows that a large part of our current deficits are as a result of dividend payments to ‘foreign’ companies, which totalled R163-billion in 2014. This represented an all time high:


The alarming speed with which our economy has been hollowed out is both a result of decisions taken by white capital before the democratic transition, and pursued relentlessly since; as well as political choices made by government in an attempt to appease business.

Choices made since 1990 have deepened the structural underpinnings of economic inequality, including:

  • Financialisation and the systemic diversion of resources from the real economy;

  • Liberalising capital controls and literally shipping South African assets and capital out of the country through through legal and illegal means, including tax evasion, transfer pricing, foreign listings and shifting the operations of South African built firms; and

  • Consolidating apartheid super-exploitation of cheap black labour, particularly through strategies to entrench atypical forms of work, combined with the creation of a new elite.

Conservative responses to the inequality challenge

In response to critiques of this inequitable economic trajectory, a conservative mantra has emerged, reflected inter alia in National Development Plan (NDP) proposals on the economy, in the Treasury and the Reserve Bank’s stance, as well as the posture of big business, which either deny the extent of the inequality crisis; or pose responses designed to leave power relations and wealth undisturbed.

The conservative mantra you will hear from these quarters on inequality includes these points:

  • There is no more room to redistribute – we already have a progressive tax system, we already have a capital gains tax, child support grants etc;

  • Taxing the rich wouldn’t work because the government is inefficient or corrupt;

  • The ‘real challenge’ is not income and wage disparities but education and training (as if a choice can be made be between these two);

  • It is an exaggeration to say there are massive levels of poverty, let alone working poverty (It is claimed that we have halved ‘multi-dimensional poverty’ since 1994. But the latest research by the Southern Africa Labour and Development Research Unit exposes the shocking fact that 63% of our people live in poverty);

  • The ‘real issue’ underpinning inequality is unemployment not low wages. The imperative it is argued is to promote low-wage work (even lower than current poverty wage levels), not raise incomes;

  • And in the end, the problem is not high inequality, but low growth. Faster growth is the best recipe, we must not get distracted by the quality of that growth, or the imperative of redistribution.

The above arguments represent a sophisticated web of spin and denial of the real challenges confronting us. They effectively relegate inequality to a side issue, rather than acknowledging that it constitutes a burning crisis, and an expression of the profound structural imbalances in our economy.

As a consequence of this denialist approach, even the NDP doesn’t try to hide the reality that the growth trajectory it proposes won’t significantly dent inequality. The NDP targets a shockingly high level of inequality by 2030 – namely a Gini of 0.6 –which would still make our inequality amongst the highest in the world.

Hobbling the democratic state

In the 1990s and beyond, a series of decisions were taken, by both economic and political actors, which effectively hobbled the capacity of the democratic state to meaningfully tackle apartheid’s economic legacy.

These decisions denied the state access to resources to address the massive challenges our society faces, and included:

  • Privatisation of key state enterprises such as Iscor and Sasol, and the commercialisation of others;

  • The abolition of prescribed assets, which allowed the state to direct investments;

  • The shift to a fully funded public sector pension fund, which vastly inflated the state’s debt liabilities;

  • A tax:gross domestic product (GDP) cap of 25% specified in Growth, Employment and Redistribution (Gear), together with an arbitrary ceiling on the budget deficit, which together hobbled the states ability to grow spending on the required scale;

  • A low effective corporate tax take and a reduction of the corporate tax rate, combined with widespread tax evasion and avoidance, through tax havens etc;

  • Semi-legal and illegal mechanisms such as profit shifting, and transfer pricing; and

  • Capital flight and foreign listings: academics estimate that between 2001 and 2007 legal and illegal capital flight rose from 12% of GDP and peaked at 23% in 2007.

The big question in the face of this co-ordinated strategy to leech economic assets from South Africa, is how the state can now act to reverse the flow, and force accountability and reparations for this large-scale corporate fleecing of our new democracy.

Income inequality and the working poor

Simply put, inequality under apartheid derived from a system of super-exploitation of cheap black labour, combined with a system of privilege for a white elite. While the racial contours of this system have become blurred over the last 20 years, some of its essential features remain intact.

The poverty of working-class black communities continues to be rooted in the poverty wages which the majority of black workers earn, the concentration of unemployment in those communities, and therefore the dependence on those wages as the main source of income, and the lack of social security support for the unemployed.

The largest contributor to income inequality in South Africa is inequality in the labour market ie between high-paid and low-paid earners – read Arden Finn’s ‘A national minimum wage in the context of the labour market’ at the University of the Witwatersrand’s National Minimum Wage Research Initiative (NMWRI).

The gap between top and bottom incomes is not only extreme, but growing at an alarming rate. According to the 2015 Q1 Quarterly Labour Force Survey, the gap between the top 5% and bottom 5% of earners was 30 times in 2010. This had risen to around 50 times by 2014!

Figures for median wages in recent years (which show the midpoint of the earnings distribution) demonstrate that wages for low-paid workers in the bottom half of the wage structure have either stagnated or fallen in real terms. This has underpinned the growing concentration of income in the hands of high paid earners.

This stagnation of wages for low-paid workers has exacerbated the phenomenon of a huge population of working poor – according to Statistics South Africa more than half of South African workers earn less than R4,000 per month; but an important recent study by the the NMWRI argues that to escape from poverty poor workers need to earn at least R4,125 per month.

Political and policy interventions needed to reverse the tide

As Piketty so correctly says, entrenching inequality, or for that matter reversing it, is not an immutable law of economics, but is about political choices a country makes. The time has come for us to confront some hard choices, which may rattle the owners of capital, but nevertheless remain necessary.

We need to consider far-reaching measures to restore national sovereignty and ownership of the economy.

We need a serious debate about the role of state ownership in strategic sectors, which goes beyond the simplistic polarity between those advocating and opposing wholesale nationalisation. We also need a discussion on how to compel ‘renationalisation’ of our internationalised corporations, including reversing foreign listings.

There are a number of interventions which could advance such a national development agenda, some of which have been proposed by Thomas Piketty.

The required interventions include but are not limited to the following six key areas:

  • Transforming the apartheid wage structure to address the huge wage gaps, and combat working poverty. At the heart of this is the introduction of a national minimum wage which lifts the income of low-paid workers. This needs to be combined with comprehensive social protection measures, particularly to support the adult unemployed.

  • A new national wage policy can use a number of levers to transform the labour market: in addition to the national minimum wage we need a comprehensive collective bargaining system, with sectoral bargaining across the economy; we need to use the levers of state procurement, and certification of compliance with labour standards; we need to implement Section 27 of the Employment Equity Act requiring the introduction of plans to reduce disproportionate income inequalities; extend this as proposed by the African National Congress’s (ANC’s) elections manifesto to plans in our collective bargaining forums; and, importantly, we need to put caps on executive pay and benefits; and legislate a ratio between earners at the top and bottom of the wage structure.

  • Measures are needed to harness and direct investment into the productive sector to promote industrialisation, including penalisation of speculative activity; prescribed asset requirements compelling investment in productive activity; the extension of subsidised credit; and introduction of appropriate monetary policies to promote investment.

  • Measures to regulate the financial sector, and combat capital flight and destabilising capital flows, including a financial transaction tax, and capital controls.

  • Macroeconomic and fiscal interventions to promote equitable economic development, and ramp up investment in the productive sector. This includes an end to austerity and other neoliberal policies, which have failed so dismally; and large-scale investment in an industrialisation strategy for South Africa and the region.

  • Decisive tax interventions to address excessive wealth concentration. We support Piketty’s call for a wealth tax.

In the face of the challenges we have outlined, the extent of denial about the need to get serious about addressing inequality, is worrying. Looking at papers for the upcoming ANC national general council, one continues to get a sense that our leaders are content to fiddle while Rome burns. The apparent lack of interest by government ministers and leaders in engaging with Piketty was quite disturbing.

The choice is clear: We either take these challenges seriously, and implement radical measures to redress current and historical injustices; or we will rapidly slide into social fragmentation and implosion, violence, and extremism of different varieties. This is the lesson of Marikana. The second option is in no-one’s interests, least of the all those of the working class. DM