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The link between inequality and power

- Imraan Valodia

How power is distributed in SA and how those with power think about wealth and income.

In the second part of our New Frame, New Economy forum on inequality, Imraan Valodia advocates for understanding how power is distributed in South Africa and how those with power think about wealth and income.

Inequality in South Africa is about more than what people earn. It is about more, even, than the distribution of resources. Ultimately, inequality is about power.

My objective here, then, is to complement Murray Liebbrandt’s perceptive article by adding some points on measurement, and providing some caution about the limitations of focusing too much on data and ignoring the broader power issues.

As highlighted by Leibbrandt, South Africa has the worst inequality in the world. But there are a few issues worth clarifying about the measurement of inequality.

It should be made clear, for instance, that South Africa’s levels of inequality are the highest of all countries that have data on inequality. There are a number of countries that probably have higher levels of inequality – think Angola or the Democratic Republic of Congo – but whose inequality data do not exist, or are too poor to be considered reliable.

Wealth is the real home of inequality

A more pressing clarification relates to the relationship between what people earn and what they own. Much of South Africa’s reported data rely on income. But while income does give us a good understanding of inequality, there are at least two good reasons why it tells only a part of the story.

Income shows how peoples’ total wealth changes from one year to the next. What it doesn’t show is a true picture of their stock of wealth. To better understand the extent of inequality, we should really be looking at how much wealth – total assets less their liabilities – individuals in our society own.

People with high levels of income use all sorts of ways to hide their income, and the wealthy seldom report the true extent of their income in surveys. It is a little more difficult, however, for the wealthy to hide large houses, expensive cars, investments and other forms of conspicuous consumption. Of course, revelations like the Panama Papers show that the wealthy are able to hide their wealth, too. But the point here is that it is more difficult to hide wealth than it is to hide income.

Understanding the distribution of wealth in South Africa would give us a more complete, accurate and nuanced understanding of inequality.

The Southern Centre for Inequality Studies has done excellent research that highlights South Africa’s wealth inequality. Some key findings are worth highlighting. The wealthiest 10% of the population owns 85% of all household wealth, for instance, while the wealthiest 0.1% own 25% of it. Even further up the scale, the wealthiest 3 500 people – 0.01% of the adult population – own 15% of all household wealth in South Africa. And while the average net wealth of the top 1% is nearly R18 million, the liabilities of the bottom 50% exceed their assets. So, the most impoverished half of the population has a net worth of negative R16 000.

The denial of human possibilities

The pattern of wealth inequality in South Africa is more extreme than most other societies, and it has not changed since the country’s democratic transition. This is no basis for a sustainable society.

But the nature and effect of inequality goes much further than resource inequality.

Inequality is, in essence, a maldistribution of power. It is about the conditions in a society that allow one group – whether based on race, gender, economic resources, age or sexual preferences – to dominate over another. It is, to use the words of Swedish sociologist Goran Therborn, “a violation of human dignity: it is a denial of the possibility for everyone’s capabilities to develop”.

To deal with inequality, then, we must also look beyond the data and understand how power is distributed in our society. And we must interrogate the thinking promoted by those with power.

Globally, powerful interest groups in economics and other disciplines promote the idea that free markets, deregulation and the dominance of the private sector over the public sector are in the best interests of all. This thinking has shaped how our economies operate and who gets to benefit from economic activity. Together with technological changes that have concentrated economic power and benefitted individuals with high levels of skill, these ideas and processes have skewed the benefits of economic growth and generated higher and higher levels of income and wealth for those, with enormous power, at the top.

These global trends have had particularly pernicious effects in South Africa where, as Leibbrandt highlights, our history of dispossession and apartheid created an already highly unequal society.

Despite significant fiscal transfers and policies such as minimum wages aimed at increasing the income of those at the bottom end of the distribution, the country’s patterns of inequality have remained persistent. Even policies such as black economic empowerment have disproportionately benefitted a small elite.

Three reasons to defeat inequality...

Changing South Africa’s inequality is important for many reasons. But I want to highlight three.

First, as Leibbrandt shows, inequality begets inequality. The current patterns of inequality in South Africa are only further perpetuating inequality. As he shows, for all the talk of individual abilities, a child born to parents in one of South Africa’s most impoverished homes has a 95% chance of being similarly impoverished as an adult.

In other words, the current structure of inequality is being perpetuated across generations. The future of a South African child is almost entirely dependent, notwithstanding abilities, on whether he or she is born to rich or impoverished parents.

Second, inequality is a structural constraint to a better society for all. As Leibbrandt points out, it is a trap that is hampering us as a society.

And third, none of this constitutes the basis for a sustainable society. We might paper over the cracks for some years through fiscal transfers, as we have done until this point. But sooner or later, this level and pattern of inequality will mean that South Africa will fracture beyond remedy. 

...and four ways it might be defeated

So, what needs to be done? Leibbrandt highlights the needs for better policy coordination across economic and social policy. I agree. But I would add the following.

First, in most other societies, education is a key driver of social mobility. Sadly, and despite the fact that South Africa spends a significant amount of its national resources on education, we achieve extremely poor outcomes. We simply have to improve the quality and efficacy of the education system.

Second, unemployment is a key driver of income inequality. Any future economic growth must generate more employment and better income for low-paid workers. And here the solutions have to be more global. Technological development can and should be harnessed to create employment and improve social services, rather than generate massive incomes for a select few at the expense of most of society.

Third, policy should not normally aim to improve the welfare of one group at the expense of another. However, unless we address the exceptionally high levels of income and wealth that are concentrated in a few hands, everyone, including the wealthy, stands to lose. South Africa’s already precarious tax system is more fragile than ever since the onset of the Covid-19 pandemic.

So, we should be cautious about interfering with a tax system. But unless we want to consider ill-advised policies like legislating for maximum pay, the tax system should be used to disincentivise excessively high incomes among the highest earners. Higher levels of taxation and policies such as a wealth tax have to be seriously considered.

Fourth, policies that democratise investment decisions in companies and result in a more egalitarian distribution of the benefits of growth must be considered. In this regard, it is pleasing to see that policy makers are taking seriously policies such as employee share ownership and worker representation on company boards.

As I have already highlighted, inequality is, at its heart, an issue of power. Many in our society lack access to power. Without it, the resources needed for a good life remain out of reach. Others wield too much power. They use it to defend their privilege and reproduce inequality. There are a number of policy levers available to policy makers to address this. Competition policies to address the concentration of economic power, for example.

But in the end, South Africa’s struggle against inequality will depend on whether various interests in our society can cohere to address this maldistribution of power. To quote American economist Darrick Hamilton, “dramatic inequality is at least as much a problem of politics as it is of economics. It is time to go beyond the false narrative that attributes inequality to individual deficits, while largely ignoring the advantages of wealth.”

Professor Imraan Valodia is the Dean of the Faculty of Commerce, Law and Management, and Head of the Southern Centre for Inequality Studies. This article was first published in New Frame.