Accepting inequality to pursue broad prosperity

Shawn Hagedorn says emphasising redistribution ahead of growth has been a mistake

Prioritising the reduction of inequality was an understandable consequence of SA’s 1990s transition yet, from the start, it was ill-fated politically and economically. The goal needed to be broad prosperity - achieved through growth overwhelming poverty. Focusing on inequality was always going to provoke corruption and preclude adequate growth.

Prioritising unworkable inequality remedies has become undeniably unaffordable. Resistance to a pro-growth pivot now relies on the perceived immorality of inequality. SA’s national dialogue must move beyond racially charged good-versus-evil perceptions to recognise how inequality mixes pluses and minuses.

As prosperity is becoming the norm internationally, pro-poor political voices have become increasingly anti-inequality while showing little interest in understanding how inequality often helps alleviate poverty. SA can ill-afford such indifference. Excluding this region, global poverty is about 5% whereas it is over 40% across sub-Saharan Africa and probably over 60% in SA.

Poor communities selling exclusively to other poor communities will stay poor for a very long time. That SSA is the poorest region and the region least integrated into the global economy is not a coincidence.

The West got rich by being first to industrialise. Having peasants leave farms to work at factories sharply increased their productivity. More recently, many eastern countries sustained very rapid growth by following a similar rural-urban industrialisation path while also selling into what had become a very deep western consumer market.

Without being able to sell to wealthy western consumers, Asia’s rate of development would have been sharply slower. It is not possible for countries with high poverty rates to grow both consumption and savings rapidly. Hence exporting is central to maintaining high growth and rapid poverty alleviation. Such exporting relies on high inequality.

Our policy makers emphasise redistribution ahead of growth as they believe quotas can redress historical inequities. Big business and others have toed the line as supporting such transformation initiatives is seen as part of the 1990s implied social contract. The resulting policies have undermined SA’s global integration thus precluding adequate access to deep markets while simultaneously encouraging much of its most valuable domestic customer base to emigrate.

Among the problems with seeking to reduce inequality is that no one anywhere in the world knows how to do it for reasons which relate to how the global economy is undergoing massive shifts which are sure to be followed by more massive shifts, such as a surge in robotics. In every society these shifts are benefiting some while disadvantaging others - while aggregate productivity and well-being trend ever higher. Thus inequality will likely remain high within many countries while declining globally.

Policy makers in most countries have long known that poverty can be sharply reduced through definitively integrating into the global economy. That SA’s policy makers are among the world’s worst at overcoming poverty traces directly to their over prioritising inequality. This not only encourages broad corruption but it also provokes a distinct inward bias. Box-ticking compliance exercises cripple exporting through hobbling competitiveness.

There are also deep-seated social reasons for not prioritising inequality reduction ahead of poverty reduction. Stable middle class families capture almost all the gains to be had from rising affluence. Such families become only slightly happier by becoming truly rich. Conversely, those advancing from poverty to a stable middle class existence tend to be significantly better off physically and they are usually much happier.

Societies can enhance well-being massively if they overcome a persistently high prevalence of poverty to achieve broad prosperity. Until two hundred years ago, 95% of the world’s population was poor. Today the ratio has been largely inverted as, excluding sub-Saharan Africa, less than 5% of the world’s population is poor and the trend is still downward. 

Once countries reduce poverty to under 10%, and all but a few countries outside of this region have accomplished this or are trending firmly in that direction, reducing inequality can then be justified as a top social objective. But whereas experts are quite clear regarding how to reduce poverty, thus achieving truly formidable gains in well-being, solutions for reducing inequality are elusive and the benefits less obvious. 

Affluent countries balance expensive safety nets with labour market flexibility to mitigate poverty hardships while pursuing full employment. SA’s declining fiscal position will reverse the expansion of social grants while existing policy choices are entrenching socially destabilising levels of unemployment.

About 70% of SA’s blacks are very poor with daily incomes of less than R50. Apartheid’s legacy is a factor but it doesn’t explain why SA’s poverty is substantially higher than a decade ago and why this country has been far less effective than the global economy over the last 25 years at reducing poverty through productivity and employment gains. Rather, SA’s poverty reduction has placed unsustainable reliance on transfer payments.

It is not possible to unequivocally isolate the effects of a single factor but SA’s emphasis on transformation policies is almost certainly the primary reason SA’s long-term growth trajectory is nearly flat. Policies centred around quota focused box-ticking precludes deep global integration which in turn precludes the healthy growth and poverty reduction which precede broad prosperity.

SA’s potential to absorb more low-skilled workers is infinitesimal relative to the global economy’s. The rise of Asia involved truly massive numbers of high and low-skilled workers being employed through global integration. SA’s poor don’t need to compete head on with their Asian counterparts as new opportunity paths are evolving and Asian wages keep ratcheting higher whereas the rand is set to continue to cheapen.

Inequality ethics

Firstly, policies that prioritise remedying inequality ahead of poverty in a society where most households are hectically poor defies common sense. Secondly, societies today are changing very rapidly.  Consider recent shifts in attitudes toward same-sex marriage, diets, diesel cars and spanking children. It is entirely possible that in less than 20 years national majorities will be non-materialistic. Such people feel sorrow for those whose lives are consumed by accumulation.

Combine that thought with the knowledge that there is no option for the world to maintain its current economic footprint and there are no going-back options. Solutions are possible but it requires that a lot of the most impactful people remain active which implies they be well “compensated”. If such compensation is meaningful but non-materialistic, the inequality issues don’t go away - as highly materialistic people might presume.

Managing money

Most people are bad at money management. This entrenches poverty and inequality. People with a lot of money think and act more like money managers than consumers. Pummeling poverty requires competent household money management. Achieving broad prosperity requires developing exceptional business builders and an environment supportive of bold initiatives - such as hiring large numbers of lower-skilled workers to innovatively integrate into the global economy. Those devoted to reducing inequality ignore key linkages such as how the arrival of broad prosperity will often be preceded by rising inequality accompanying aggressive risk-taking, high growth and declining poverty.

Taxes and regulations redistribute high volumes of SA’s income and wealth each year. Yet focusing on inequality has undermined growth to the point that now there isn’t enough money to fund investments in roads, schools, infrastructure, etc.

If all savings were uniformly distributed, the capacity to take risks and absorb sharp declines in asset values, would be greatly diminished. Such societies would not compete effectively with others that had pockets of great wealth and much expertise in investing aggressively-yet-shrewdly.

Commercial principles undermined by inequality concerns

Seeking broad prosperity aligns well with commercial principles whereas seeking to reduce inequality does not. Policy makers in high growth countries accepted this whereas SA’s politicians do not and they have co-opted other groups to accept their misconceptions. For instance, with the support of business leaders President Ramaphosa has sought to increase investment flows arguing that this will create many jobs.

New investments targeting domestic consumers in a stagnating economy will have to take market share from less competitive incumbents. Thus if the investors are targeting local consumers, for every 1,000 jobs created, as many, if not more, will often be lost. In SA’s traditional export sector, mining, this is not the case as investors would only invest if they identified adequate global demand. 

Inequality dominates the intersection of SA’s politics and economics and it undermines both. Nor was legislating equality ever doable. SA can achieve broad prosperity but this will require fully integrating into the global economy. 

The ironic twists are a bit much but it’s time to accept that focusing on inequality restricts integration and prosperity.

Shawn Hagedorn is an independent strategy adviser shawn-hagedorn.com