The undeserving rich – Politicsweb, 1 December 2015

Sara Gon writes on the inequality myth in South African politics.

By Sara Gon 

There are many myths perpetuated in South African politics. A myth is a “widely held but false idea or belief”. This is the second in a series of articles from the SAIRR which debunks some of those myths.

Myth No. 2 -Inequality

The economic concept du jour is that of inequality and the allegedly disastrous effects it will have on the economics and politics of nations. Inequality has replaced poverty as the social ill that must be overcome.

Organisations and commentators who want us to feel distaste for “obscene” inequality, just have to point to a breathtaking statistic or two.

At the World Economic Forum in Davos, Switzerland in 2014, Oxfam International released a report called “Working for the Few”. It contains some startling statistics on what it refers to as the “growing tide of inequality.”

The report states:

- Almost half of the world’s wealth is now owned by just one percent of the population;
- The wealth of the one percent richest people in the world amounts to $110 trillion. That’s 65 times the total wealth of the bottom half of the world’s population;
- The bottom half of the world’s population owns the same as the richest 85 people in the world;
- Seven out of ten people live in countries where economic inequality has increased in the last 30 years.
- The richest one percent increased their share of income in 24 out of 26 countries for which we have data between 1980 and 2012.
- In the US, the wealthiest one percent captured 95 percent of post financial crisis growth since 2009, while the bottom 90 percent became poorer.

The impression created is that the 85 richest people, necessarily, are in the position they are in at the expense of the poorest half of the world’s population.

These statistics engender the idea that the richest 85 owe it to the poorest half to bring them out of poverty. Many governments believe the rich need to be taxed more aggressively to make up for the sins of being rich, hardworking, inventive, creative and savvy.

The poor desperately need the intervention of the rich in the form of business and job creation. But they’re not entitled willy nilly to their wealth. Very little of this great wealth has been created at the expense of the very poor.

Of the 85 richest, 11 became rich through IT-related endeavours: internet, software, hardware and social media. Seven became rich on telecoms and media. Other areas of wealth include clothing, casinos, cars and real estate. Approximately six derived some or all of their wealth from the exploitation of traditional natural resources.

Other than Haiti, Afghanistan, Burma and Nepal, the 23 poorest countries in the world are in Africa. They are the DRC, Zimbabwe, Burundi, Liberia, Eritrea, the Central African Republic, Niger, Malawi, Madagascar, Mali, Togo, Equatorial Guinea, Mozambique, Guinea Bissau, Comoros, South Sudan, Burkino Faso and Uganda.

What bedevils most of these economies is not the wealth of the world’s 85 richest, but the despotism, war, corruption, disease and brutality of the tyrannical leadership of these countries. They are desperately poor both despite and because these countries are amongst the most resource rich in the world.

No sane, compassionate person would object to lifting the poor out of poverty and reducing inequality. It would be good for the poor and the rich.

But equality can never ever be achieved. Humanity is too varied in its skills, desires and personalities for that. The world would be a much poorer place if inequality was eradicated. Creativity would drop which would reduce the establishment of businesses and thus the consequent employment of people.

Inequality is inevitable: society must always reward ability, effort and risk-taking. It should only be of concern if wealth is achieved through the impoverishment of others.

A common myth is that inequality hampers progress. It doesn’t. The absence of good education and political freedom hampers progress.

Thomas Piketty, the darling of the inequality debate following the massive success of his book Capital in the 21st Century, says that there is a level of individual wealth where the benefit to the recipient is greater than the benefit to society. So what?

It may seem that the wealth of a Gates is “obscene” in its extreme largeness, but it is wealth achieved through ability, risk-taking, creativity and extremely hard work. And the benefits to mankind are immeasurable.

Obscene wealth is the wealth appropriated by people who create and earn nothing but merely take it from others. And the deficits are immeasurable.

Certain African political leaders, their families, and cronies, are widely   rumoured to have accumulated wealth which runs into the tens or even  hundreds of millions of dollars."

In the old days they acquired wealth through the diversion of state monies, or through the outright theft of property taken from racial minorities through 'indigenisation' or 'Africanisation' drives (in Zaire under Mobutu or Zimbabwe under Mugabe.) More recently, with foreign investment coming back into Africa, some of this ruling elite have become rich through insisting on taking a cut of the action.

This private wealth accumulation has had corollary benefit on the lives of many of their subjects who remain in dire poverty.

Isabel dos Santos, daughter of the president of Angola, is the youngest and only female billionaire in Africa. She is worth $3bn. According to Forbes Magazine, every major investment she holds stems either from taking a chunk of a company that wants to do business in Angola or from a stroke of her father’s pen that cuts her into the action.

“Her story is a rare window into the same, tragic kleptocratic narrative that grips resource-rich countries around the world.”

The reduction in inequality lies in sound education policies and systems, accessible and decent health care, private ownership of land to provide access to capital, and governmental policies that encourage enterprise growth.

According to Piketty, a global tax on wealth is needed.

Gavin Keeton, economist at Rhodes University (Business Day 17/9) says Piketty failed to take into account the effect of depreciation when calculating the return on capital. In addition his finding on rising wealth is also distorted by the effect of rapid rises in house prices in recent times.

As Keeton succinctly says, wealth is one thing and income is another. A person can be very wealthy but have a modest income. Owning a valuable painting produces no monetary income until it is sold.

Most householders’ wealth lies in their home and their pension fund. Owning a home provides economic security, but little by way of cash income.

Income inequality in SA comes mainly from unequal wage earnings and not from income gained from wealth. Human capital is the largest contributor to income inequality. This is apparent from the huge premium on skilled wages.

As Keeton says, inequality in education perpetuates these huge disparities. This is what creates such extraordinarily high income inequality.

The crisis in schooling above all is what has to be addressed by the government.

And what the R254m in public money that was used to provide upgrades to Zuma’s Nkandla homestead?

The Public Protector’s report into the Nkandla scandal, entitled ‘Secure in Comfort’ says:

“Funds were reallocated from the inner city regeneration project and the dolomite risk management programme of the department of public works.

Due to lack of proper demand management and planning, service delivery programs of the department of public works were negatively affected.”

The PP said that the conduct of the Department of Public Works was in violation of Section 237 of the Constitution and the Batho Pele (“People First”) White Paper.

So our president built a private home using the taxes (from income and wealth) of hardworking citizens of South Africa, at the expense of the people of South Africa.

That is obscene.

Sara Gon is a Policy Fellow at the IRR, a think tank that promotes economic and political liberty. Follow the IRR on Twitter @IRR_SouthAfrica.

Read the article on Politicsweb here