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An economy for the 99%

New estimates released by Oxfam International reveal that the wealth of the world’s richest eight men is equal to that of the poorest half of the world, which equates to approximately 3.6 billion people. The January 2017 report, titled ‘An economy for the 99%’, highlights the growing inequality gap between the rich and the poor. The report estimates that between 1988 and 2011, the incomes of the poorest 10% of the global population increased by less than $3 a year, while the incomes of the richest 1% increased by 182 times as much.

The report indicates that in South Africa, three of the country’s richest men hold the same amount of wealth as the bottom 50% of the country’s population. This demonstrates the well-known fact that income inequality in South Africa is significant. Further highlighting this is the fact that the richest 1% holds 42% of the country’s wealth. The vast inequality gap in South Africa is also emphasized by new results published by global business news publication Quartz. Quartz linked British think tank High Pay Centre’s report to Bloomberg’s Global CEO Pay index to calculate how quickly the average CEO will earn the annual salary of the average person living in the same country. These results showed that South African CEO’s topped the list of this income gap study. In just over 7 hours, a CEO in South Africa will earn the average person’s annual wage (R180 251).

Sipho Mthathi, Oxfam South Africa Executive Director, explained that despite the fact that such inequality is a sign of a broken economy, the South African government has the opportunity to help all of its citizens. The organisation believes that authorities can build an economy where businesses pay their taxes and thereby contribute to the wider good and enabling a healthy and educated society. The Oxfam report calls this the Human Economy.

Some suggestions to level the playing field in South Africa includes increasing taxes for the super wealthy, the legislation of living wages (as opposed to minimum wages) as well as supporting companies that benefit workers and society rather than merely the shareholders in company.

In their report, Oxfam also illustrates six false assumptions that fuel the idea that wealth created at the top will trickle down to everyone else in society. We highlight these six assumptions below and comment on South Africa’s current situation regarding each in italics.

False assumption #1: The market is always right and the role of governments should be minimised.

In reality, the market has failed to prove itself the best way of organising and valuing much of our common life or designing our common future. We have seen how corruption and cronyism distort markets at the expense of ordinary people and how the excessive growth of the financial sector exacerbates inequality. Privatisation of public services such as health, education or water has been shown to exclude the poor, and especially women.

In South Africa, the government is the dominant player in most public services. Most of South Africa’s tertiary education institutions are state subsidised while the government is also working on a National Health Insurance (NHI) programme. The country’s social security system (including child and old age grants) is one of the most comprehensive in the world. However, the current situation of large scale unemployment and slow economic growth puts pressure on government’s ability to fund the social security system.

False assumption #2: Corporations need to maximise profits and returns to shareholders at all costs.

Maximizing profits disproportionately boosts the incomes of the already rich while putting unnecessary pressure on workers, farmers, consumers, suppliers, communities and the environment. Instead, there are many more constructive ways to organise businesses that contribute to greater prosperity for all, and plenty of existing examples of how to do this.

This is an assumption that is unfortunately still evident among most of South Africa’s private sector. However, on a positive note, a proposed new minimum wage will protect the lowest earning workers against exploitation. The National Minimum Wage Panel recommended an initial level of R20 per hour, which equates to R3 500 per month, as the appropriate level for minimising the danger of job losses while maximising the potential to pull people out of poverty.

False assumption #3: Extreme individual wealth is benign and a sign of success, and inequality is not relevant. Oxfam infographic 1

Instead, the emergence of a new gilded age, with vast amounts of wealth concentrated in too few hands – the majority male – is economically inefficient, politically corrosive, and undermines our collective progress. A more equal distribution of wealth is necessary.

The Davis Tax Commission is currently considering several options for introducing wealth taxes. Furthermore, SARS has done an amazing job to clamp down on tax evasion. The South African government is, in many of its public forums, looking at ways to reduce the very high inequality.

False assumption #4: GDP growth should be the primary goal of policy making.

Yet as Robert Kennedy said in 1968: “GDP measures everything except that which makes life worthwhile.” GDP fails to count the huge amount of unpaid work done by women across the world. It fails to take into account inequality, meaning that a country like Zambia can have high GDP growth at a time when the number of poor people actually increased.

Pravin Gordhan frequently refers to South Africa’s need for inclusive growth. In the Medium Term Budget Policy Statement (MTBPS) from October 2016 he states the following:

“By inclusive growth (…)

  • We mean opening up opportunities and broadening participation in an expanding economy.
  • We mean meeting the service delivery demands of marginalised communities.
  • We mean decent work prospects for all, over time, and extending the frontiers of education to those who wish to learn. All too often in history, the benefits of progress have been appropriated by narrow elites. War and conquest, colonisation, exclusive trading licenses, protection rackets, monopolisation of markets, secret cartels and discriminatory laws – there are so many ways in which wealth has been accumulated by the few while inequality and class divisions have been entrenched.”

Ayabonga Cawe, economic justice manager at Oxfam South Africa, also said that policy makers needed to shift their focus from achieving higher GDP growth and pursue growth that brought shared wealth.

False assumption #5: Our economic model is gender-neutral.

In fact, cuts in public services, job security and labour rights hurt women most. Women are disproportionately in the least secure and lowest-paid jobs and they also do most of the unpaid care work – which is not counted in GDP, but without which our economies would not function

Unfortunately this is also true in South Africa. The gender wage gap is evident, with women earning substantially less than their male counterparts. In South Africa, women dominate lower earnings categories. Thus, women are likely to make up a smaller proportion of the income tax base in South Africa as they tend to have lower levels of labour market participation and higher levels of unemployment than men. In 2013, women made up 43% of income taxpayers and similarly only earned 36.5% of taxable income.

False assumption #6: Our planet’s resources are limitless.

This is not only a false assumption, but one which could lead to catastrophic consequences for our planet. Our economic model is based on exploiting our environment and ignoring the limits of what our planet can bear. It is an economic system that is a major driver of runaway climate change.

South Africa’s Renewable Energy Independent Power Producer Procurement programme (REIPPP) is becoming a much acclaimed programme internationally, with many countries copying this methodology. However, South Africa’s decades-long over-dependence on coal for has exploited the environment. In addition, many households in South Africa still rely on biomass and wood fire heat for cooking and cleaning which also harms the environment.

Conclusion

Given the above, one still needs to acknowledge that the business ventures and companies run/owned by the wealthy 1% employ millions of people worldwide, contribute greatly to global trade and economic growth, and provide platforms for value chains to develop around these industries. Apart from paying huge tax bills, these large companies contribute substantial amounts to aid and social relief programmes, which are usually very well managed and effective. There are also various other points to make that highlight the need for/role of captains of industry meriting very high paycheques and shareholding value. These could include (the appetite for) innovation, economic value add, the principle of risk and reward, and the level of responsibility and accountability of executives. However, in order to create an economy that works for everyone, and not just the 1%, both public and private sectors will need to address these false assumptions accordingly. Shared prosperity and stability will only occur if we build the economy from the bottom up.

For more information:

Nina K

Nina Kirsten
KPMG South Africa
Tel: +27 (0)60 692 0341
Email: nina.kirsten@kpmg.co.za

 

 

 

 

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