To get higher levels of growth, South Africa needs investment. That will not happen if entrepreneurs are held up as villains who cause other people to be poor.
Last month the British charity, Oxfam, made headlines with a report suggesting that inequality is South Africa’s greatest economic problem and that wealth redistribution should be a greater policy priority for the government than economic growth. To bolster public and media support for their report, Oxfam pegged it on the sensationalist sound bite that the three richest South Africans have more collective wealth than half of all South Africans.
The report was fuel to the fire for journalists, politicians, and activists who insist that the relative prosperity of the few in South Africa is responsible for the poverty of the many. Until wealth is confiscated and equally redistributed, they allege, the poor will never be better off. Economic growth, it is alleged, benefits only the rich, with Oxfam itself saying that the South African economy benefits only 1% of the population at the expense of the 99%.
Oxfam is a very well-resourced organisation with income last year of around R1-billion. Unlike other development organisations, it actively seeks to promote a particular set of policies in the countries it operates in, and, with its substantial budget and brilliant media team, it is very influential. It is a leading case study of how to be an effective policy advocacy organisation.
But it is also wrong – inequality is not South Africa’s greatest economic problem and economic growth should indeed be the primary focus of government policy. The fallacy at the core of the Oxfam report is that the relative prosperity of the few is responsible for the poverty of the many and that by redistributing wealth everyone will be better off.
South Africa has serious levels of poverty. More than half of people aged between 20 and 30 are not in education or employment. South Africa also has a small middle class with about one in 10 people enjoying a comfortable Western middle-class standard of living. But it does not follow that the very rich, or even the middle classes, are responsible for that.
Less than half of children who enter Grade 1 will reach matric and fewer than 1 in 10 will pass mathematics with a grade of 50%. This is despite there being enough money to run good schools – our spending levels are internationally competitive. The problem is that the money is wasted through bad policies, including insisting that schools be run by the state.
Young people are not unemployed because better-off people deny them jobs. The unemployment rate is so high because the growth rate in the economy since 1994 has stumbled along at less than half of what is needed to trigger sufficient new business and new job creation. Much of the reason for this is that the policies of the government are hostile to entrepreneurship to begin with. Only in the years 2004 to 2007 – when a combination of falling interest rates and high commodity prices saw GDP growth rates exceed 5% – did the unemployment rate fall sharply. The correlation between economic growth, employment, household prosperity and confidence in the future is nearly perfect. It is wrong on the facts to say the growth benefits only the rich.
Quite the opposite is true. The broad-range improvements in living standards (that so many IRR reports have pointed to) have benefitted the great majority of South Africans and can each be credited more to the economic growth rate than to any other factor or policy.
Yet, to get higher levels of growth, South Africa needs investment. That will not happen if entrepreneurs are held up as villains who cause other people to be poor. Nor will that investment materialise if the state is allowed to confiscate wealth. This will merely impel entrepreneurs to go to other countries and help to make their people rich. South Africa has to create new wealth – that is the heart of the problem.
It is futile in any event to confiscate wealth as it will evaporate like mist before the sun and undermine, not bolster, living standards. For this reason it is also a mistake to think that the consequences of Oxfam advocacy in South Africa will be experienced only by the super-rich. That is a red herring obscuring that the middle classes and the poor will also fall victim to the policies Oxfam promotes – the experience of every economy that has tried similar advice.
Oxfam’s report will do damage to South Africa. It will further motivate the government to place the state at the centre of the economy and look to seize wealth and assets wherever possible as a means of extending its political life span. It will also see more journalists, activists, and politicians present the middle classes as the problem – but, like people who are sitting backwards on a donkey, the politicians and activists may think they are riding towards the solution, but they are actually riding further away. DM
Frans Cronje is CEO of the IRR, a think tank that promotes political and economic freedom. This article is based on a column that originally appeared in Rapport.
"Man is by nature a political animal" ~ Aristotle