14 May 2014

South Africa: The Relevance of Thomas Piketty for South Africa - Why Inequality Should Still Be On the Political Agenda


The reaction to Thomas Piketty's book Capital in the Twenty-First Century was to be expected - both great praise and rejection at the same time.

Most studies on inequality, certainly, in the case of South Africa have tended to focus on the middle class, the employed worker and the unemployed through household surveys.

What Piketty's book has done is to argue that economists have been focusing so much on the bottom of the economic pile that we have lost sight of what is going on at the top where transparency has been the least. The top does matter because gains at the top have been unprecedented and concentration of wealth doesn't only affect how wealth is used but also the very nature of political life itself and economic health.

The consequence of Piketty's analysis is that it explodes the myth that society is built only on meritocracy. He shows how most of the gains of the top ten percent have been through the way money buys influence, economic access, privilege and worse, as Piketty notes, gets transferred to future generations. Inheritances tend to account for 20-25% of national income resulting in the same system of accumulation perpetuating itself.

Piketty's economic analysis essentially offers us a political argument for how inequality leads to a form of patrimonial capitalism, essentially managed by rich families, corporates and other forms of dynasties.

Piketty's message has not been a palatable one for the rich and those who idealize wealth and believe that all wealth creation is the result of hard work and talent.

What Piketty's scholarly work and longitudinal study of several decades of tax filings shows is that its not the inequality between those at the top and those at the bottom that matters, but how wide the divide is between the top ten percent and the rest: the middle class, ordinary workers and the unemployed - those who are already the losers in relation to national income growth.

In the US for instance, the top one percent own 35% of all capital and the top 10% close to 70%, while the bottom 50% own just 5% of capital.

This "U" shaped phenomena of growth, decline and rapid rise in capital accumulation that Piketty describes replicates itself not only in the top economies, like the US, but also in emerging economies like South Africa.

Piketty's book is not only about making visible, with hard numbers, the problem with concentration of wealth but also the underlying reasons for this.

It is important, first to recognise that this is a systemic issue. It's about the very structure of the economy and imbalances that have set in since the liberalisation trends of the Reagan and Thatcher period.

The very system itself is tainted by how a few influential individuals and organisations have shaped patterns of accumulation. This has gone unchallenged for decades.

There are several factors that have contributed to this situation. In recent decades, the rate of return for capital has grown at phenomenally higher rates than income growth for labour and the economy in general.

Here in South Africa, the World Bank and other studies show that the rate of return for corporate capital in our country has been sustained at double-digit levels given low inflation and the low cost of capital as well as depressed wages since 1994.

For instance, Piketty shows that wages for the top one percent have risen by 165% and for the top 0.1% by 362%. The issue of CEO and management remuneration is an issue here in South Africa too.

The debate has seen more fire recently in the release of a new book by Kaylan Massie and Debbie Collier titled, Executive Salaries.

The authors compared the salaries of the CEOs of the top 50 companies in South Africa and found that in some cases, salaries were 700 times higher than that of the lowest paid worker.

Justifications for these trends have little to with the special talent of CEOs, but rather are a result of perverse trends in corporate culture, which Piketty and others have argued needs closer scrutiny.

A separate study by Loukas Karabarbounis and Brent Neiman (National Bureau of Economic Research, 2013) reinforces the role of high pay and corporate profit takings in rising income inequality. Their study shows a significant decline in income share for labour, globally, since the early 1980s.

This is largely attributed to advances in technology (like information technology) and the globalisation of the world's labour pool, if you consider what happens when more than a billion people from China and India suddenly have to compete with smaller labour pools in other national economies, there is downward pressure on labour costs.

In South Africa we have seen the pressure this has put on minimum wages especially in the textile industry where job losses in the last two decades have been significant.

In addition, the ability of technology to substitute certain forms of routine labour also encourages increased investment in capital (machines) rather than labour.

In the future, while global labour costs may go up in Asia, technology's displacement effect is most likely to grow and perpetuate the disenfranchisement of labour's share of income.

Piketty dwells on this paradox of high rates of return for those who hold capital alongside low economic growth.

Also demonstrating that when there is concentration, less of private savings are spent in the economy as a result the potential redistributional impacts that can come from growth are either stalled or slowed down. Growth itself is stymied.

Greater capital accumulation in few hands also leads to increased financialisation of economic activity. Unearned income growth comes from obsessively focusing on deriving profits from dividends, interest, speculative stock-holding, and capital gains from the selling of assets. Often at all costs.

With the advent of cheap credit, companies and individuals that borrow money cheaply can drive up asset values so that they make better returns on inflated asset prices through the resale of housing, shares in stocks, patents, branding and other forms of ownership.

What Piketty's work clearly challenges is the old trope that growth lifts all boats and leads to redistribution through osmosis. Given the levels of wealth concentration, there is no truth to this very simplistic view of the relationship between growth, jobs and income share.

Piketty's book points to a need for rebalancing. His proposals range from higher taxes for the rich, taxing of inheritance, ways to cap CEO pay to more reasonable levels and looking more closely at speculative wealth earnings through some form of financial transaction tax or the other. Certainly labour's income share also has to improve (reinforcing once again the debate on the need for a minimum wages).

Piketty has opened a can of worms. He has revitalized the debate with very compelling evidence and is bringing back the focus to where it should rightfully be - the power of a narrow niche of super wealthy elites, how they earn their money and what they do with it. It's time we stopped fawning over them and instead started demanding some accountability from them.

Fakir is an independent writer based in Cape Town.

Read more articles by Saliem Fakir.

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