Wealth Redistribution: An investment opportunity or a hostile takeover?

2014-09-19 22:13

As Governer Gil Marcus gets ready to step down as the custodian of Monetary Policy in SA, Inequality continues to be a great challenge in South Africa. Inequality has given birth to a view that we need a wealth redistribution programme. Economics patterns have a significant influence in the make-up of society. An Italian engineer-turned-economist named Vilfredo Pareto, discovered one such a pattern, when he developed the distribution of wealth array in 1897.

Different nations have varied resources to yield different kinds of products. Some rely on agriculture, while others may rely of natural resources or technology. Coupled with the fact that each nation’s population has different backgrounds, skills, and levels of education, Pareto’s discovery made the distribution of wealth appear as universal as the law of gravity.

The concept goes something like this:

If we took a list of all South African’s who are worth say, R10,000 and built on a list by adding additional groups of other members of society with many other levels of wealth, both large and small, and we plot the results on a graph. The result will be a sliding graph, where many individuals are at the lowest end of the scale and fewer and fewer are higher up as we progress along the graph toward higher levels of wealth.

It is painfully obvious and true that we have fewer rich people than we have impoverished ones. It was the publishing of the Pareto’s principle, which essentially says 20% of the people own 80% of the wealth of a given country, that recent calls for Wealth redistribution have found relevance.

The concept of Redistribution of Wealth is seldom argued through an economic treatise that places a level of comfort that as a society we are striving towards an economic turnaround. Redistribution of wealth is defined as the transfer of income, wealth or property from some individuals to others caused by a social mechanism such as taxation, monetary policies, welfare, nationalization, and so forth. It is often a progressive redistribution, from the rich to the poor.

Countries would chose to use the mentioned tools to redistribute wealth for ethical, sociological, or economic reasons. Firstly, at an ethical level, any society needs to be altruistic with how it cares for its poor. Secondly, taxing the wealthy at higher rates will not affect their life chances, compared to taxing the less wealthy, particularly the lower and working classes, at equal rates. Thirdly, to prevent revolt on the part of poor, who may feel excluded or exploited. Fourthly, to ensure workers can buy goods and services that are produced, as house hold consumption has a bearing on the success of businesses and wealth creation. Fifthly, to even the playing field, because wealth breeds wealth and rags to riches cases are a rarity. Lastly, to avoid corporate subsidies that are extreme and taxing the wealthy at higher rates is one way to offset these subsidies.

In 2010, the ANC Youth League brought up the subject Nationalization of mines as wealth redistribution mechanism, and subsequently commentator such as Desmond Tutu have suggested concept such as rich people tax. This idea has since became a flagship concept in the creation of the Economic Freedom Front (EFF).

Are there alternative Wealth Redistribution instruments that have yielded economic turnarounds for other world economies? And can we suggest these for the necessary economic transformation in our economy? Are the current commentators talking out of turn or is there some merit to their comments? Surely inequality exists today as it was real twenty years ago.

Let’s explore two cases, where Wealth redistribution took a mutually beneficial framework.

Ireland 90’s Success Story

Beginning in the early 1990’s, unprecedented economic growth saw the level of Irish real GDP double in size over the course of a little more than a decade. There have been many reasons advanced for Ireland’s success over this period, including a concept called “co-ordinated social partnership agreements”. The first of these agreements, involved the labour market accepting moderate increases in wages in exchange for the long term development of various industries. In return both government and business remained committed to labour unions to honour them once the targeted growth was achieved.

For such a compact to be established the labour environment in South Africa needs to be less volatile than it is today. Infact such a compact could be the right catalyst to build a relationship of trust between Government, labour and Business.

In November 2011, Kumba Iron Ore announced the final results of its spectacularly successful Envision employee share ownership plan: a R2.6 trillion distribution to 6 029 workers. After tax, the distribution was as much as R345 000 a worker. This and many other Employee Share ownership (ESOP) schemes are examples of how the private sector in South Africa has shown evidence that they could be party to a commitment to the labour sector, as labour allows business to survive economic recessions.

Malaysia Economic Transformation Blueprint

Malaysia has been an economic darling of the Asian-Pacific region for many years with a sustained 8% GDP growth from the 80’s to the 90’s. Perhaps their most exemplary programme for South Africa is their transformation blueprint. The plan recognizes the role played by the private sector in the development of the Economy. A platform for investment was created with 92% expected from the private sector. The sector was involved in the planning of this transformation blueprint in partnership with government. Collectively the partnership identified 12 National Key Economic Activities (NKEA). From NKEA the partnership has identified 131 entry point projects, which will be prioritised in government planning and funds allocation. Policies will be amended to facilitate the fast track implementation of such activities, including liberalising the market and removal of bottlenecks.

Economic transformation is needed in South Africa to accelerate growth and help overcome challenges of income inequality, where South Africa is ranked in the top 10 countries in the world. The gap between the rich and poor has grown by 4% from 0.66 to 0.70, between 1993 and 2008. As income continues to be concentrated on a few, we need to approach wealth redistribution as an investment opportunity and not a hostile transaction. The global economy is converging ever closer with each passing day, the ominous challenge being a South Africa that reacts to economic changes, instead of a forward thinking country.

Be InspiredSA, Lets all do our part!

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