Piketty and Inequality in South Africa

Every month, hundreds of children are fleeing abject poverty in Zimbabwe and heading to South Africa. It’s a dangerous journey, but many take the risk in the hope of a better life. But once on the other side, there is help. With the support of UKaid from the Department for International Development, there is food, shelter and the chance to go to school. Find out more in our feature: www.dfid.gov.uk/musinaSouth 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.

More information on the relevance of Piketty’s book for resp. developing countries and South Africa in particular can be found here and here.  Both articles are well recommended.

The picture at the top of this post is courtesy of DFID and is released under an Attribution-NonCommercial-NoDerivs 2.0 Generic license.

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Antifragile

talebA freely operating restaurant market will benefit from competition and the variety of consumer tastes.  A restaurant that goes bankrupt doesn’t threaten to bring down the whole system, but rather provides a learner opportunity for the others.  Therefore, small errors by restaurants are actually quite likely to make the system stronger.  That’s why guesthouses in tourist hotspots like Bali or Siem Reap offer such good value compared to little-visited places like Padang or Kampong Cham.  Such a creative-destruction-driven system is antifragile, argues Nicholas Nassim Taleb, an essayist and former financial trader.  Antifragile systems are systems that benefit from disorder, unlike fragile systems (that are harmed by disorder) or robust systems (that are immune to disorder).

Natural evolution is a good example of an antifragile system.   Small mutations in genes and variations in the natural environment change survival and sexual reproduction success rates, driving evolution.  When a species goes extinct, its ecological niche is quickly filled by another.  Variation prevents the system from collapsing with minor changes.  Many human-created systems are rather fragile: centralized states, too-big-to-fail conglomerates and banks and education systems.  Imagine that bankrupt restaurants would be bailed out by the government, what effect would it have on the quality of food?

“Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.”

Taleb prefers Swiss-like city states to national governments, small and medium-sized enterprises to large corporations and entrepreneurs to bureaucrats with no “skin in the game.”  Personal interest or “skin in the game” is a key ingredient for successful systems.  A trader who works with others’ money will take more risks.  Taleb derides academics and journalists who can write and make predictions and experience no harm if they turn out to be false, but just continue to make other predictions. He suggests linking their salary to their predictions. Conversely, a teacher who lives in the local community where he/she teaches, has “skin in the game” through accountability.  Bringing skin in the game can be done by invoking the ancient Hammurabi’s Principle, for example by beheading architects if a bridge they built collapses.

Academics are not Taleb’s best friends, due to their tendency to theorize things that practitioners have already found out long ago.  Whereas teachers have developed the tacit knowledge to teach, academics usually either develop theory to fit practice or aim at proving what is already known to practitioners under the misnomer of ‘providing evidence’.  Taleb believes rather in trial-and-error and experience-driven heuristics and definitely condemn South Africa’s centralized attempts to improve education, such as nation-wide curricula, national annual assessments and its central point-based system for continuous professional development.  An antifragile education system enables students to deal with lots of information from a variety of sources, as happens in connectivism and the cMOOCs:

Connectivying a course empowers, exposes and trains students to be more effective and more literate network citizens. Enhancing such capability allows our students to be more resilient and become antifragile!  – Terry Anderson

An interesting part of the book is when Taleb’s links fragility to interventionism.  In the face of problems, people like to ‘do things’.  People tend to over-intervene on small things and under-intervene for large things.  According to Taleb, it’s better not to visit a doctor unless you’re very sick. And if you’re really sick, it’s best to directly visit five.  Interventionism makes systems more vulnerable for large shocks, and thus weaker.

Strong systems are characterised by optionality, redundancy and variability.  In contrast, humans often try and design systems that exclude all variability.  Assad’s Syria and Mubarak’s Egypt offer pseudo-stability, unable to adapt and blowing up in the face of change. An education system with these characteristics would probably be a decentralized one, with large responsibility (and accountability) for directors and teachers, openness of information and freedom of choice for parents.  Optionality refers to leaving as many options open as possible (hedging your bets) and redundancy refers to the tendency to plan based on past events, rather than improbable events.  This is especially true in areas with high uncertainty like climate change. Not the median value of expected temperature rise is so much important, rather than the ‘fat tail’ of improbable but potentially devastating temperature rises. Focusing on the outliers and considering action against climate change as an insurance against uncertainty, or keeping your options open, makes more sense than focusing on what constitutes a ‘safe’ threshold.

“Many people keep deploring the low level of formal education in the United states (as defined by, say, math grades). Yet these fail to realize that the new comes from here and gets imitated elsewhere. And it is not thanks to universities, which obviously claim a lot more credit than their accomplishments warrant. Like Britain in the Industrial Revolution, America’s asset is, simply, risk taking and the use of optionality, this remarkable ability to engage in rational forms of trial and error, with no comparative shame in failing again, starting again, and repeating failure.” – Nicholas Taleb

The book is a series of essays exploring various aspects of antifragility, drawing examples and anecdotes from a variety of fields.  Taleb’s erudite ranting can be annoying at times, but it’s interesting and fascinating enough to keep reading. The style and examples make the book more memorable as well and its insights are applicable to many fields, including education, which I tried to do above.  It’s a book that makes you thing, rather than presenting its ideas in ready-made format.  Well recommended a read. And another one.