South Africa is a very unequal country. It has one of the highest Gini coefficients in the world, in particularly since various Latin American countries managed to bring their coefficients down in recent years. It should be noted that the Gini coefficient is an indicator of inequality in income, not in wealth. However, given South Africa’s history of Apartheid and colonialism, including wealth into the equation is not likely to reduce inequality. Conceded, the Gini coefficient also ignores progress that has been made in the provision of basic services to the poor in housing, electricity provision, healthcare delivery and education infrastructure.
Why does inequality matter? A certain degree of inequality may well be positive for society. It stimulates people to find their talents and get the best out of them. However, too much inequality poses various problems. It’s morally indefensible that some people earn orders of magnitude more than others, whatever their skills. There’s also research that points to negative political effects of high inequality. In unequal societies democracy tends to be hollowed out as decision processes are captured by a tiny elite, the masses are powerless and become disentangled and the social state is dismantled. No longer “having skin in the game”, they vote for extremists. Economically, high inequality reduces consumption, compared to a more even distribution of means. High inequality also reduces social mobility, wasting talent.
Economists disagree on the evolution of inequality. Kuznets argued that in the initial stages of development, a country becomes more unequal. Some people move from poor to rich and compared to (almost) everyone being poor, this constitutes more inequality. As more people grow rich, inequality would drop. This view was challenged by Piketty in his book Capital. Piketty’s central thesis is that inequality naturally rises within a capitalist system, because the rate of return on wealth exceeds that of income (or economic growth). Rather than focusing only on equality of opportunity, Piketty shows that we should also worry about the inequality of outcomes. Piketty’s thesis has drawn both praise and criticism. Most critics acknowledge that inequality is rising, but dispute whether it’s an inherent characteristics of capitalism or whether they are other factors at play, such as globalisation and its tendency for delocalisation and winner-takes-all markets and automation, threatening many low-skilled and medium-skilled jobs. Piketty favours the ‘utopian’ solution of a global, progressive wealth tax. Awaiting utopia, progressively taxing income and property may help. Piketty argues that insufficiently progressive tax rates are at the basis of skyrocketing top wages.
How relevant is Piketty’s analysis of inequality for developing countries? South Africa, with 1% of the population earning 15% of total labour income and with two thirds of the population living in poverty, seems like a good illustration of Piketty’s thesis. Economic growth has been anaemic for years, whereas income from property and assets have been rising. High youth unemployment and lack of unemployment benefits are one driver of inequality. A second is the high wage gap within the workplace. The low quality education system churns out too many unqualified people and too few qualified ones. For maths, only 3% of Grade 9 learners achieve a score higher than 50% at the latest Annual National Assessments (ANAs) and 90% remain stuck in the lowest category, which indicates a total lack of basic numeracy. As a result, skilled people can command a premium and the former remain stuck in menial, poorly-paid jobs. High inequality gradually erodes democratic institutions and public services are steadily privatized.
In other developing countries the situation is opposite. High inequality in countries such as Cambodia is rather the result than the cause of weak public institutions. An effective administration to collect taxes, regulators to deal with monopolies and anti-corruption watchdogs, an impartial justice system are absent favouring a corrupt elite. In this case, taxing the rich more will not help. Only building more effective institutions can address this. This extends beyond nation states.
Solutions need to be found on a global scale. Unfortunately, global governance institutions such as the WTO, WHO and the IMF provide global public goods, but suffer from a lack of democratic legitimacy, especially in developing countries. Strengthening legitimate and global governance may help to address global inequalities.
Piketty’s book focuses on advanced countries, but the wealth of discussion it has triggered includes plenty of analysis of its relevance for developing countries. Rising inequality within and between states is one of the defining themes of our times, partly causing and caused by Piketty’s work.
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