Let's Get Serious about Achieving Economic Equity

By Ebrahim-Khalil Hassen · 27 Aug 2010

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Picture credit: The Travelinged
Picture credit: The Travelinged

Sixteen Rand is not much. It’s what a single shot of espresso at an upmarket hotel in Cape Town might cost. However, poverty estimates reveal that over 20% of the population attempt to meet not only their food needs, but every other need with less than R16.00 a day. 

At an upmarket hotel, a Minister could live, what is called in popular parlance, a “caviar lifestyle.” Consider this: for the estimated half a million Rand one Minister actually did spend at a hotel, one person could receive the state’s old age pension for over 40 years. 

The Minister may well be negotiating with cellular phone companies that are colluding on prices, increasing the cost of cellular usage and putting a lag, not only on South Africans using mobile technology for banking, but on economic growth itself. The CEO of the large cellular phone company would have benefitted from the company’s empowerment deal, and works long hours to make the company successful. He begrudgingly accepts that some of his BEE partners can be nothing more than “politically connected.”

The Minister and the CEO would, no doubt, find common cause in the huge amounts of finance that leave South African shores each year. Perhaps, in their luxurious enclaves, they are a little insulated from the deep economic divisions of our society. But those enclaves offer a short respite, because evident everywhere, are deep divisions showing how different South Africans spend R16.00. 

Sixteen Rand is hardly enough money to feed a household and search for employment. But these households are, in technical jargon, below the “upper bound” poverty line. In simple language, they are not yet the “poorest of the poor,” which politicians speak so eloquently of. These humble beginnings are what we celebrate in the “rags to riches stories.”

Perhaps these are the very people who should provide the social capital to deepen democracy as advocated by the Dinokeng Scenarios. But, then again perhaps these households are the very ones that would – in the most romantic of revolutionary senses – constitute the start of an urban social movement that would in the flowery prose of academia “constitute a tactical and redistributive opening.”

With such hefty burdens on the poor, the daily slog to find something to eat sounds positively easy.

Why is it – and I include myself in this – that the better off place such a burden on the poor?

Conceivably, despite all that distinguishes the ‘social movements’ argument from the ‘rags to riches’ story, they are just variants of that other cliché – pulling yourself up by your bootstraps. What if these very people do not have boots or had their boots stolen from them or were denied the ability to own cattle whose hide could make boots? 

In such a context, it is not surprising that the call for nationalisation finds fertile ground, and raises the ire of others.  The argument has a solid foundation and shaky policy logic. Its solidity is that without strategies to either transfer wealth or build new wealth, South Africa will remain unequal, and with it, faces a fractured future. The policies, however, become shaky as their proposals neither socialise benefits nor provide assets for future generations. Evidently inequality breeds an economic populism, as it entrenches itself. 

Does the Rising Tide Lift All Boats?

Increasingly the upper classes in our society reflect the “rainbow nation.” They have become more non-racial, or so it appears. The statistics however tell us that economic wealth is still largely determined by race.

What remains remarkable is that despite the different starting points determined by race, the policy prescriptions are more or less the same. Hard work, risk taking and entrepreneurial endeavour will spur the economy on to a new path. A rising tide raises all boats, as the development studies’ textbooks suggest.

But entrepreneurial endeavour faces significant challenges in South Africa because our “free market” lacks competition. The market replicates the income divide, because South Africa’s economy is characterised by high levels of economic concentration and collusion. The challenges for big business are simply “high labour costs” and a “regulated labour market.” By freeing the labour market they argue that jobs will be created. The implicit argument is that hard work is rewarded without reference to wider social conditions. 

There is however a profound disconnect between effort and reward in our society. Most easily, it is seen in lucrative black economic empowerment (BEE) deals that transfer share ownership without creating jobs or new investments. During the Mbeki era, the Elephant Consortium’s purchase of shares in Telkom was a good example of political power reinforcing a business practice that deepened inequality. And, in the Zuma era, through a complicated set of processes, a group of politically connected individuals first received mining rights, and then, a large BEE deal during the dispute between Kumba Iron Ore and Accelor Mittal.

Here again, huge income transfers were undertaken without jobs being created. The real challenge is the fact that there are many entrepreneurs without political connections who receive little or no support from the state. Thus, the “rents” are being distributed in ways that reproduce inequality. 

The conditions that dominant firms find themselves in create another barrier for hard working “start-ups.” Price collusion in the South African economy has traditionally been a common practice among larger players. Such collusion is however rendered easier with the “oligopolistic nature of business” in South Africa. That basically means that a few big companies have effective control over entire industries and are able to not only set prices but also capture markets. As a consequence, start-ups have a very difficult time getting new products onto the market, as well as creating value and jobs. Big companies, with very little effort, can maintain profit levels and stifle competition.

Yet, the very proponents of economic growth do not take the logical step by proposing an “economic de-concentration” programme. 

Without looking at value chains and state subsidies and support to big business, we can never have a full picture of what strategies are needed to create “market supporting institutions.”

Despite economic growth, capitalism reproduces inequality in South Africa, because the opportunities for participating are limited not just by race, but by the structure of the market.

Linking the Political with the Practical

A useful starting point for developing proposals is understanding just how unequal we are as a society.

In several international comparisons, South Africa is either the most unequal society, or within a group of seven countries that could be regarded as “super unequal.” Yet, as shocking as this fact is, it pales in comparison to the uncontested truth that we have, since democracy, not become a more equal society.

Official government statistics paint a steady picture of high inequality. These statistics worry government officials, as they wonder what to do to reduce inequality. This worrying can only be deepened with independent studies showing that we have become more unequal since democracy.

To add grist to the mill, the situation is far more complex than either the proponents of nationalisation or those arguing for the inevitability of inequality suggest. For instance, under a nationalised mining sector, would these companies sell their products at socialised prices, or at market-determined prices? In the other instance, would propelling economic growth without regard for income distribution be sustainable, under heightened social unrest? Clearly, the proposals are deliberately cast in strident ideological tones, rather than for practical implementation.

Curiously, these extreme positions make the strangest of bedfellows in various BEE deals. The contradictions are ubiquitous; the very captains of industry that make the loudest calls for economic growth and labour law relaxation are the ones leading the process of BEE that has put a brake on economic growth. 

The search for practical measures to improve income distribution in our society is at a similar crisis point. At the level of political strategy, two broad coalitions are proposed.

First, the conventional prescription is a social compact involving big business, organised labour and government. This approach seeks to reduce distributional conflicts over resources through agreements and concessions amongst parties. Government officials already speak of a combination of increased fiscal spending and supporting export currency interventions on the one hand. With, on the other hand, wage moderation and increased support to firms to make them viable. This ‘national deal’ is underpinned by recent policy signals from the Presidency and the Treasury that a programme to reach an economic growth target of 7% will mark this term of government. 

Second, and alternatively, there is the view that sees the organised working class making strong and sustainable linkages with emerging social movements, and a range of advocacy and activist based organisations. This entails shifting power relations in society through political mobilisation and activism.  A strong coalition of the weak and excluded working in the framework of democracy would yield wider distributional gains for the poor, is the promise of this political coalition. 

Importantly, the coalition would not seek to become a political party but rather shift power relations in society. The motivation is that this would result in a more ambitious set of redistributive arrangements. 

Missing from the equation are the actual policies that are likely to reduce inequality. It is not that they do not exist, but rather that they need to be robustly assessed. How much would a currency intervention cost? What are the human resource requirements on government to start up a quarter of a million jobs? How would a low entry-level position in the public service function? Can we both meet 7% economic growth as well as lower employment to 13%?

It is by connecting the practical with the political that an ambitious strategy to make our society more equal would emerge. It’s time to move the discussion on inequality.  It could start with making sense of how the “haves” and “have-nots” spend R 16.00.  

Hassen is the founder of Zapreneur and Proposal Desk, both websites aimed at answering the question, "Can the Internet help South African small business?"

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Rory Short
28 Aug

Economic Inequality

Prof Richard Wilkinson [He and his publications can be found through Google Scholar.] has researched the deleterious impacts on societies of high levels of economic inequality. We in South Africa desperately need to take actions to put our country to rights in this regard. The Unions in conjunction with business and government could utilise the Gini coefficient for this purpose.

1. Through the tax office government could

a] Calculate the Gini Coefficients for industrial and commercial groupings of employers, including government itself in this grouping process.

b] Calculate the Gini Coefficient attained each year by individual employing entities

All this information to be made publicly available.

2. Unions through the wage bargaining process could negotiate acceptable Gini Coefficients to be achieved by these different groupings of employers.

3. Government should set up different rates of company tax for employing entities, increasingly higher rates being applicable to employing entities that deviate towards greater inequality than the Gini Coefficient agreed upon for their grouping. This can easily be justified on the basis that greater income inequality is going to result in various forms of increased social spend by government.



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X Cepting
1 Sep

Re: Let's Get Serious about Achieving Economic Equality

Mr Hassen, I followed you to this site from M&G Thoughtleader because I am starting to understand that the, shall we call them well-off, really, as you say here, have no idea what the "poorest of the poor" face in surviving daily, much less becoming an enterpreneur. Both the remedies you offer here and the academic remedies offered by Prof Wilkinson re the Gini coefficient, somehow misses the point. All these remedies will not affect those who most need it since they are not "in the loop" so as to speak and have given up hope of help a long time back, are suspicious of any "organisation" that promises aid and try to keep as low a profile as possible with the motto "don't make waves".

Many of these cannot read so publications, especially on the net will not reach them. Many are hampered by a history of distrust of the rich, big business, well meaning educators, etc.

How do one reach these people is the biggest problem. The next one is how do one fund micro business when banks are not interested in nobodies with zero education and no assets to possess?

I have yet to meet one business development organisation that gives a damn for the micro business person.

The third biggest problem is that the "well-off" imagines poor people have no pride and does not find it as galling to receive charity or have their problems sorted out by "their betters". Micro loans that are tied to progress reports, obviously with ample business knowledge support (free primary/secondary education) and backed by a mandatory development fund that is donated from govt. funds (tax money) is really the only way to level the field and spread the wealth. Our great-grandfathers had far more accessible bank managers who new how to acess risks and who gave them a chance first and then judged them on poor performance later. The poor are prejudged, insulted and mistrusted, but still are expected to pull themselves up by, as you say, their missing boot straps. All most poor people need is a chance. Some of the hardest working micro enterpreneurs I know are the scrap collectors and street sellers. I do not see a hand extended to them to help them formalise their micro businesses and until I do, cannot take any articles of this nature seriously.

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Ebrahim-Khalil Hassen
2 Sep

Replies to Rory and X Cepting

@ rory - this sounds like an interesting proposal. will definitely add this to my reading list. thanks.

@ X cepting --- call me Ebrahim. (Mr. Hassen sounds too formal). Excellent points. I think all of us "experts" are so insulated from the daily realities that we do not understand. In sum, we are going to have to imagine "something" that works. It does sometimes seem a little overwhelming. However, a country like Brazil has managed to reduce inequality, and there must be lessons to learn from there and from other experiences. (I may post this on Thought Leader next week)

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NS
3 Sep

Breaking Bread

Hi guys of the intellectual fraternity, consider this:

I was producing bread shortly after bread had become de-regulated in the early nineties; I produced some 2500 to 2700 loaves a day. This I achieved with my own capital, some old ovens and it was a good start-up business. I dreamt of building this business to tap into the huge bread market. My bread was cheaper, it tasted better, it was more nutritious as I mixed my own ingredients and I could give my customers a better service than my top-heavy commercial competitors. The only area large bread companies could beat me was in shelve life.

Large bread companies achieve this by using excessive amounts of preservatives and R10 million (at that time) state of the art machinery.

What was interesting about my little business was that I employed 18 workers most of whom I trained on the job. Granted my staff didn

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Ebrahim-Khalil Hassen
5 Sep

Bread

NS --- This is a very interesting and true example. I agree that breaking the monopolies would spur employment. Thank you for sharing your experience.

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