Why we shouldn't focus on fighting inequality

Shawn Hagedorn says the redistribution option has already been exhausted


Tracing the disconnects of SA’s dysfunctional dialogue

Escalating acrimony at a recent gathering provoked Finance Minister Gordhan to accuse the Black Business Council of trying to capture the National Treasury. This was verified to Business Day by the council’s general secretary, George Sebulela, who tellingly demurred: “... our main disagreement was on the meaning of radical economic transformation.”

There is no longer room to doubt that SA’s national dialogue linking politics and economics is broken.

Exhibit A: The vast majority of South Africans voters feel strongly that a top government goal should be reducing inequality.

Exhibit B: No one inside or outside of government has a compelling inclusive-growth plan.

A functioning national dialogue would explore whether a causal relationship exists. Does focusing on lowering inequality reduce growth?

It's politically awkward to acknowledge but the unequivocal answer is yes. Among the many reasons, managing profound challenges requires accountability through communicating clear goals and being able to monitor progress. Focusing on inequality is absurdly vague and the time frame is similarly bizarre.

The odds that prolonged healthy growth will lead to SA’s inequality above the global average being reduced by, say, fifty percent in fifty years is about fifty:fifty. Consider recent trends.

In the aftermath of the 1994 transition, large waves of under skilled workers were hired in the civil service and through regulatory requirements. It would seem that a majority of voters saw this as a sustainable base which could steadily grow. Rather, many of the jobs were not only unsustainable, they were created in ways which rob from SA’s long-term potential, thus entrenching high unemployment.

The accounting and economics of focusing on inequality don’t add up. Those at National Treasury who interrogate budget items and forecasts can see that redistribution has been recklessly exhausted. Steadily increasing tax rates eventually precludes economic growth. This era has arrived with negative repercussions slowly percolating.

The misalignment of SA’s economic and political forces has foreclosed prospective upliftment paths while inspiring patronage alongside socialist fantasies. Sweeping policy shifts are required to induce minimally acceptable growth rates. Instead, political energies swirl around redistribution, spoils, and leadership contests.

Top media houses have struggled to dissect SA’s core disconnects and misunderstandings. Senior among the reasons, firstly, SA’s challenges cut across highly complex interdisciplinary intersections; and secondly, one of those disciplines is social justice.

The more disciplines experts span, such as, economics, politics, and global trends, the more vulnerable their analyses are to multi-angle attacks. While political parties must be seen advocating for reducing inequality, economic and broader policy analyses and strategies must prioritise and track poverty alleviation.

That is, the political-economic conversations need to be tactically developed, instead, logic surrenders to delusions. This provokes an environment hostile to problem solving.

When facing complex issues, even substantially educated voters rarely achieve anything resembling fluency around technical elements. Positions on critical issues echo people’s values which are largely framed by their associations - such as, family, faith, ideologies, and political and social affiliations.

Thus SA’s inequality obsessed politics-meets-economics discourse benefited the communists and cronies by blunting accountability. Now everyone is vulnerable.

The medical profession has developed protocols whereby the roles of specialists, primary physicians, lab tests, and the like are coordinated. Humankind has not yet worked out how to similarly manage the intersection of various social science disciplines central to policy making.

Some Nobel Prize winning economists are more special than others. Ken Arrow, who died several days ago, was extraordinarily influential regarding how to manage complex multidisciplinary challenges with political, economic, and social justice components. He advocated for, and developed, tools and methodologies which were grounded by mathematics and logic.  

Embracing Arrow’s reliance on mathematics and logic, along with a pragmatic recognition of management basics, makes clear that SA should reset the national dialogue to focus on poverty alleviation instead of inequality.

Mathematically, there are two paths to reduce inequality. As the long-term trajectory of global demand for commodities is under assault by waves of scientific and entrepreneurial disruptions, SA’s economy risks taking on the features of a ghost town. Assets wither as the risk-takers depart and the middle class contracts leading, perversely, to greater “equality”.

The alternative scenario to achieve steadily improving equality is through expanding prosperity. Modelling such “inclusive growth” scenarios in a spreadsheet will unequivocally demonstrate: meaningfully reducing inequality requires decades of high volume poverty alleviation.

Shifting from focusing on inequality to poverty alleviation is essential to achieve a working national dialogue but it is just a start. Over indulgence of emotions and values must routinely give way to quantitative analyses and economic realities.

SA is easily among the most mineral endowed countries in the world. Venezuela, by many expert accounts, has the most oil. Venezuela’s economy is collapsing due to policies inspired by cronies, communists, and populists. SA may not be far behind.

Focusing on inequality leads people to erroneously presume that access to capital is the binding constraint acting on SA’s economy. That SA’s wealth and income are stagnating, while its liabilities are projected to compound indefinitely, does not trace to capital issues. Capital providers seek countries and companies with winning strategies.

As with companies, the binding constraint acting on SA’s economy is the ability to competitively offer goods and services to markets with the ability to pay. The world has probably never been more awash with cross-border capital in search of reasonable returns. Nor however has the global economy ever been so integrated, hyper competitive, and in flux.

SA is an outlier which mixes long-standing isolationist tendencies alongside inequality obsessions. Conversely, many countries which have focused on poverty alleviation have prospered greatly in recent years.

SA has continued to grossly under invest in skill development. The policies of the last twenty years have sought to drive outcomes through quotas and restricting labour mobility. This was always going to exact a harsh toll. In addition, regulators were complicit as households became overly indebted.

Thus SA’s domestic economy lacks momentum prospects to escape stagnation. The market signals reverberate deafeningly. Yet, being inebriated on “inequality kool-aid”, policy makers ignore them. There is little awareness that in a prolonged low-growth economy, job creation programmes along with many other state planning initiatives, become self-defeating.

SA’s innate wealth has, in effect, been pledged in perpetuity to fund social liabilities which continue to compound; the economy lacks momentum avenues; and a massive portion of the workforce is a liability.

Thus redistribution to fund job programmes results in new jobs being created which mostly aren’t sustainable. Viable current and prospective jobs are sacrificed when taxes fund such programmes.

High consumer indebtedness and a lack of growth momentum are mutually reinforcing. Increasing value-added exports is thus necessary but made more difficult by a low-skilled workforce, government policies, and the stringent demands of the global economy.

Defining SA’s core challenges in terms of poverty alleviation is necessary to develop a national dialogue capable of confronting the commercial realities of today’s highly integrated global economy. The country can’t afford to focus on inequality.

Hagedorn is an independent strategy advisor