Share

Free market fallacies

ACCORDING to a recent report in the Sunday Times, taken over in the Afrikaans press, writer Antjie Krog has suggested a revolutionary new way to deal with poverty and income inequality in South Africa.

Inter alia, she wants all those who have just concluded their studies or have just been pensioned to do free community service in the town or city of their birth, without salary. The town must provide food and lodging for the year.

Furthermore, she wants no salary or price increases for two years. “Every park (must be) filled with squatters, every street with vendors. Every home- and landowner, every suburb, every farm (should be) free to negotiate a living space with whoever moves in.”

Now I admire Krog in some respects. Sometimes she really has a way with words (when she doesn’t spice her poems with obscenities).

But an economist she is not. I doubt whether she has the faintest idea what utter chaos would result if anyone in power were to take her proposals seriously.

Of course, it is not as if she makes no point whatsoever. On the contrary, she is quite correct in wanting to reduce poverty and income inequality. As I have reasoned in numerous columns on Fin24, the growing inequality South Africa (and several other countries) is experiencing, will, in the long run, be devastating for our social cohesion and stability.

This has recently been confirmed by an institution regarded by many leftists as the Satan of capitalism, none less than the International Monetary Fund (IMF).

Explosive study about global inequality

The IMF recently released an explosive study about income inequality in the world, with the title “Causes and Consequences of Income Inequality: A Global Perspective”, in which many a certainty preached so confidently by rigid free market ideologists is turned upside down.

The orthodox view hitherto has been: Let the economy grow, and if the rich are advantaged more than the poor, at least the cake grows bigger, and the poor benefit as well, even though modestly. This is called trickle-down economics, where the benefits at the top trickle down to the poor.

However, this study disproves it.

To begin with, the study shows that the top 1% of earners have benefited by far the most since 1998. Is that bad?

Yes. The research shows – and this is really explosive stuff – that if you increase the income share of the poor and middle class by 1 percentage point, gross domestic product growth increases by 0.38% in a country over a period of five years. At the same time, if you lift the income share of the rich by 1 percentage point, GDP growth will drop by 0.08 percentage points.

This is buttressed by another IMF study, done in 2011, entitled “Inequality and Unsustainable Growth: Two Sides of the same Coin?”. A central conclusion of this study is found in the following sentence: “A 10-percentile decrease in inequality ... increases the expected length of a growth spell by 50 percent.”

Too much inequality makes growth less sustainable

In other words, (excessive) income inequality actually impedes economic growth and makes it less sustainable.

And therefore, these words by IMF managing director Christine Lagarde during a press conference in Brussels two weeks ago when presenting the latest study really forces one to think: “Our findings suggest that – contrary to conventional wisdom – the benefits of higher income are trickling up, not down.”

She added, equally provocatively: “You do not have to be an altruist to support policies that lift the incomes of the poor and the middle class. Everybody will benefit from these policies, because they are essential to generate higher, more inclusive, and more sustainable growth.

“In other words, if you want to see more durable growth, you need to generate more equitable growth.”

The sixty-four thousand dollar question is, of course, exactly how to achieve this equitable growth. I am no economist, and anything I suggest must, therefore, be suspect.

Education is the bedrock of equitable growth

But I do have – I hope – some common sense, so here goes: The bedrock on which to build the foundations of equitable growth is efficient education and training in the broadest sense of the word.

All economically and socially successful countries got there by investing hugely in empowering their people to participate more fully in the economy.

This was the route taken, for instance, by Europe to lift the millions of poor teeming in huge, unsanitary slums in the big cities in the 18th and 19th centuries to the middle class status enjoyed by most nowadays.

Of course, all is not well in paradise, as the world economy is going through a painful crisis, exacerbated by an equally painful digitalisation process which is gobbling up many job opportunities. But that is the subject for a future column in this space.

In the meantime, I really do understand what is moving Antjie Krog. The problem is that she, in her ignorance and naiveté, is doing a good cause a great disservice.

The French philosopher Roland Barthes once said that stupidity is as impenetrable as a stone. How true.

* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.00
-0.3%
Rand - Pound
24.09
+0.1%
Rand - Euro
20.61
-0.1%
Rand - Aus dollar
12.37
+0.4%
Rand - Yen
0.13
+0.5%
Platinum
904.45
+0.2%
Palladium
999.75
-0.6%
Gold
2,153.10
-0.3%
Silver
24.91
-0.5%
Brent Crude
86.89
+1.8%
Top 40
65,887
-0.6%
All Share
72,097
-0.5%
Resource 10
53,271
-0.1%
Industrial 25
99,407
-1.1%
Financial 15
16,625
+0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders