When Thomas Piketty went to South Africa

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Thomas Piketty, the French superstar economist and author of the immensely popular book Capital in the Twenty-First Century, visited South Africa recently to deliver the 13th Annual Nelson Mandela Lecture. His visit drew wide interest given that he starts off his 700 page book by referring to the unfortunate events at Marikana – a classic example of the sometimes violent struggle between labour and capital. Piketty almost didn’t make it because his travel documents weren’t in order. Then his first lecture at the University of Cape Town, via Skype (the organizers decided to go ahead with the lecture anyway), was commandeered by students from #RhodesMustFall, who were protesting outsourcing at UCT and the choice of Piketty’s interlocutor, South Africa’s former finance Trevor Manuel. The latter was a central figure in the government’s turn to market friendly economic policies. Piketty finally made it to the University of Johannesburg’s Soweto Campus where he lectured.

There’s been some reporting and analysis about Piketty’s Johannesburg audience. The journalist and commentator Angelo Fick described the lecture itself, named for Nelson Mandela, as “something out of V.S. Naipaul’s oeuvre, or the less palatable moments in the work of Evelyn Waugh.”  Fick noted the irony that the event was sponsored “… by several multinational corporations and organizations, some of which many in the audience must have known have less than exemplary records in relation to the people of the global South.”  The event was also “situated within sight of the very effects of the massive inequality of resource allocation and opportunity distribution in contemporary South Africa.”  He couldn’t help noticing that “the folks in attendance … were the 10% who hog 65% of the income, while the 89% beyond the gates make do with the rest, were the 1% of underpaid laborers who guarded us, and then picked up our litter and cleaned up after us.”

Bizarrely, for all the attention paid Piketty’s visit, we learned very little about what he actually said. So, what did Piketty tell his hosts?

The main thrust of Piketty’s lecture was to argue that equality in formal and basic civil rights, though absolutely necessary, was not sufficient on its own to bring about real equality in society. Sure, the ending of apartheid meant that all South Africans could live anywhere they wanted. But what good was this right if you couldn’t afford rent or housing to go where the jobs were? Sure, the ending of apartheid meant that all South Africans had the right to aspire to any occupation. But what good was this right if the skills needed to take-up most occupations remained the preserve of the few? For Piketty, real equality comes about when people have effective rights. That is, when formal rights can be actualized by all.

One measure of the absence of effective rights in a society is the level of income and/or wealth inequality — the level of income/wealth available to you determines, in no small way, the types of schools your children attend, the type of neighbourhood you reside in, the type of healthcare you receive and so on. Income inequality in South Africa has traditionally been reported in terms of the Gini coefficient. Running from 0 to 1, a Gini closer to 1 implies high inequality and South Africa’s Gini at around 0.70 tells us that income inequality is very high.

The Gini coefficient, on its own, does not tell who’s accruing what proportions. Further, the income data that has traditionally gone into the computation of South Africa’s Gini has largely been self-reported. That is, enumerators are sent round to ask a representative sample of households what their income is. And here we are immediately faced with two challenges. Firstly, most people, particularly high earners, tend to understate their incomes when surveyed. Secondly, and a particular challenge in South Africa, the response rate among whites is usually low. The combination of these factors suggests that we are missing out a big part of the inequality story in the country.

Piketty’s preferred approach is to use both household survey data and administrative tax data (obtained from the Revenue Authority) in computing inequality measures. Administrative tax data helps in correcting for the low response rates observed for certain groups. The income data so obtained is then presented, not in the form of a Gini coefficient, but in the form of a distribution table telling us what fractions of total income accrue to particular groups – much more informative than a single number. And the latest data available to Piketty presents a depressing picture for South Africa: the share of total income accruing to the top 10% of income earners is somewhere between 60% and 65% – really the highest share among countries for which Piketty and company have collected this type of data. In Brazil, the top 10% share is between 50% and 55%. In the US, this share is between 45% and 50%. In Europe, the top 10% share is between 30% and 35%.

For Piketty, the story often told that high unemployment explains South Africa’s unusual level of inequality is not entirely convincing. High unemployment is itself a symptom, and not a cause, of inequality as it points to the fact that skills are unequally distributed in society. Further, countries like Greece and Spain, with comparable unemployment rates, do not have South Africa’s alarming level of inequality. A more convincing story is the impact of history. The legacy of apartheid. And this can be seen in the racial composition of top income earners. According to Piketty, the top 1% to 5% of income earners are still predominantly white – the proportion of whites in this exclusive club is about 80%. This, in a country where whites make-up only 9% of the total population. History continues to cast a very long shadow on contemporary South Africa.

So what can be done to ensure that effective rights are realised for all South Africans?

Firstly, Piketty suggests that the country should introduce a national minimum wage as a way to protect low-skilled workers, particularly those who can’t migrate, from exploitation. And here, South Africa can learn from Brazil’s experience. More than half of the reduction in income inequality in Brazil over the last decade has been attributed to significant increases in the national minimum wage. This is according to research done by João Saboia, a professor at the Institute of Economics at the Universidade Federal do Rio de Janeiro.

Setting a national minimum wage will, however, not resolve the key problem of the inability to access high paying jobs for many South Africans. And here government needs to prioritise the provision of high quality education to the most disadvantaged groups in society. Current fee structures, where tuition fees are many orders of magnitude of annual income, determine who goes to university and in this way perpetuates historical inequality.

Piketty’s third recommendation is to be thought of as a direct attack on inequality, particularly wealth inequality. Little land reform has taken place in South Africa two decades after the official ending of apartheid. And Piketty does not find this fact particularly surprising given that there are no examples in history where land inequality has declined as a result of voluntary market transactions. This, according to him, also partly explains the very limited success of South Africa’s Black Economic Empowerment (BEE) strategies — these strategies were voluntary, after all. South Africa needs to have a more ambitious land reform programme. And tied to this, there is need to introduce an annual progressive tax on net wealth (after deducting debt). Such a tax, in addition to directly confronting a source of inequality, would help generate the information needed for a healthy and transparent debate about wealth inequality in the country. For example, we currently have sketchy data on the extent of land inequality 20 years into democracy.

Piketty’s last recommendation is a call for increased worker participation in the running of companies in South Africa. Sweden and Germany, both highly productive economies, are examples of countries where workers have significant representation on company boards (up to one-third in Sweden and up to one-half in Germany). Having worker representation on boards ensures that the long-term objective of improving the well-being of workers is not sacrificed at the altar of short-term profit maximization.

As we said on Twitter, very little of what Piketty said in his lecture would come as a surprise to most South Africans. Perhaps the elite will now listen.

* Sean Jacobs contributed to this post.

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