Other nations have built more equal societies, but SA is found wanting

Mechanisms to achieve radical transformation are vague — research firm has lessons on reducing poverty

Deputy President Cyril Ramaphosa commented in a speech on April 19 that “[t]here is nothing abstract about radical economic transformation. It is fundamentally about inclusive growth. It is about building a more equal society.” Yet most local economists would argue that the concept of radical economic transformation is still an opaque idea.

More than four months after President Jacob Zuma reintroduced the concept in his party’s January 8 statement, little detail about this radical change has been elaborated.

Admittedly, Ramaphosa used his speech to talk about what radical economic transformation is aiming for (job creation, skills development, changing the ownership patterns of the economy) and what it requires (leveraging infrastructure investment more strategically, creating a new generation of black industrialists).

He did not provide information on the mechanics of the endeavour and certainly did not identify anything radical on the horizon. Encouragingly, the deputy president indicated that as the governing party prepared for its fifth national policy conference in June, leaders “have an opportunity to give greater substance and detail” to the concept at the conference.

At the very least, the motivation behind radical economic transformation — building a more equal society — is clear. SA is one of the most consistently unequal countries in the world. Economists use the Gini coefficient to calculate the distribution of wealth or income in a country. However, pure Gini estimates are based on household survey data associated with infrequent censuses. The World Bank has only six Gini coefficient numbers for SA since 1993, with the latest being for 2011.

As an alternative, Business Monitor International (BMI) offers annual Gini coefficient estimates for 113 countries. The company’s proprietary model takes into account publicly available historical as well as in-house data calculations to calculate Gini coefficients on a consistent basis for each calendar year. It estimates that SA’s coefficient has over the past decade been at a very unequal level of more than 0.6. A reading of zero indicates perfect equality, while a reading of one indicates perfect inequality. The research firm also identifies countries that have been successful in significantly reducing inequality in their societies over the past decade. The standout examples include Cambodia, Ecuador, Bhutan, Uruguay and Kazakhstan.

Can SA learn from these countries’ experiences as its own leaders search for solutions to the country’s inequality challenges? Are the solutions found in these diverse economies informative for local policy makers struggling to make SA a more equal society?

There has been a significant reduction in inequality in Cambodia, with BMI’s estimate of its Gini coefficient falling from 0.4 in 2007 to 0.26 in 2016. High levels of real annual economic growth — averaging 6.6% over this period — resulted in an overall reduction in poverty and lifted the economy to “lower middle-income” status in 2016.

According to the Bertelsmann Stiftung, a Berlin-based nonprofit organisation, a significant contributor to the decline in poverty has been growth in the textile and garment industry, which employs more than half a million workers. More than 90% of these are young women, who remit a significant portion of their earnings to family members in rural areas who are otherwise dependent on low-productivity subsistence farming.

SA’s clothing manufacturing industry, on the other hand, has had declining levels of production over the past 15 years. This was due to trade liberalisation, which led to increased imports from Asia, the relocation of factories to neighbouring countries with more favourable labour environments and significantly increasing input costs. Manufacturing employment is below that seen a decade ago, with factory jobs accounting for 11.3% of total employment in SA in 2016 from 14.3% in 2006.

Ecuador’s Gini coefficient has declined from 0.52 in 2007 to 0.42 in 2016. Local statistics indicate that about 25% of people in Ecuador live in poverty compared with nearly 37% a decade ago, with the percentage of people living in extreme poverty having halved.

The state drives an active intervention policy: public enterprises enjoy monopolies in many areas considered of strategic importance (consumer products and building materials, for instance), while sectors dominated by private entities are heavily regulated. The state’s ability to implement its interventionist policies and improve the performance of public companies — through the careful monitoring of officials — improved substantially over the past decade.

In SA, the Treasury’s Budget Review 2017 referred to local state-owned enterprises (SOEs) as “financially distressed” and several “may require intervention to stabilise their operations”. The quality of management and financial status of many SOEs is placing significant strain on the fiscus, which, in turn, reduces resources available for the delivery of other services.

BMI estimates that Bhutan’s Gini coefficient declined from 0.45 in 2004 to 0.34 in 2016. The significant gains made in welfare improvement resulted in the country now being classified as “middle human development” by the UN. The UN Multidimensional Poverty Index — a measurement of health, education and standards of living — indicated that only 12.7% of the population was in multidimensional poverty during 2016, compared with 27.2% in 2010. The country’s formal private sector is small and the informal sector creates jobs for 80% of Bhutan’s workforce, with the unemployment rate averaging a mere 3% over the past decade.

The state provides free education and healthcare to all citizens, which reduces multidimensional poverty. The provision of social services is funded by taxes collected largely from public enterprises; SOEs contribute 50% of tax revenues.

Substantial progress has been made in SA towards providing free primary education. However, universal access to healthcare is still a long way off. The proposed National Health Insurance scheme is a long-term programme that will only see the establishment of a dedicated funding mechanism and publication of an associated white paper some time in the coming year.

BMI calculated a Gini coefficient of 0.46 for Uruguay in 2007, declining to 0.38 in 2016. It had the lowest poverty rate in the region — less than 10% in 2015 from 30% in 2007. The country’s poverty reduction success is attributed to high levels of economic growth (averaging 4.2% during 2007 to 2016), proactive policies aimed at increasing real wages and the development of multidimensional transfer programmes. In addition to cash transfers, the state provides electronic debit cards for the purchase of food and hygiene products to households with children or pregnant women. By using these cards at participating stores, households in effect receive a boost to their disposable incomes. Prior to the adoption of this card-based system, households with children attending designated schools in poor areas were supplied with food baskets.

SA already has a transfer system in place that provides cash payments to 17-million people every month. However, the system does not include a direct food/hygiene product benefit, with cash payouts vulnerable to misuse. The South African Social Security Agency recently came perilously close to being unable to make payments due to bureaucratic bungles.

Kazakhstan was able to bring down its Gini coefficient from a comparatively low 0.30 in 2007 to 0.22 in 2016, according to BMI. While more than 30% of the population lived below the poverty line in 2007, this dropped sharply to only 3% in 2015. According to the Bertelsmann Stiftung, about 40% of the country’s population could be labelled as “middle class” in 2014 and average household income is higher than in most other post-Soviet states. Real economic growth averaged 4.5% during 2007 to 2016. The large Samruk-Kazyna conglomerate is a sovereign wealth fund that controls more than 50% of the country’s economy through almost 600 state companies. The fund has an investment-grade credit rating and, in effect, manages national development institutions and enhances their competitiveness in regional and global markets.

Such sovereign funds have been successfully used internationally to facilitate economic transformation — prime examples include Norway and Saudi Arabia. Locally, Economic Development Minister Ebrahim Patel announced in 2013 that plans for such a fund had been postponed indefinitely. He indicated that creating such a structure required stable or rising commodity prices, since windfall income from commodity exports was most often used to fund such funds.

What can SA learn from this? Ultimately, this overview of successes in radical economic transformation underlines the challenges the country faces. The methods used in these countries to achieve success, which admittedly worked within a specific economic setting, are absent or found wanting in SA’s case. We are therefore no closer to envisioning a local strategy for this proposed big change aimed at building a more equal society.

Analysts and investors would be less concerned if the big policy changes to come were obvious and transparent. But with little information on the local front and little prospect of replicating the successes achieved elsewhere, the “radical” policy outlook remains opaque. Hopefully, the ANC will make use of the opportunity in June to provide more insight into the mechanics of radical economic transformation. It is encouraging that there have been successes internationally on this front that can be emulated to achieve the goal of reducing inequality. Viljoen is economist at KPMG SA.