There are patterns in Economics, which 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
relay of natural resources or technology. Coupled with the fact 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. However painfully obvious this could be to everyone that we have fewer
rich people than we have impoverished ones. It was the discovery of a 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 Tetris that places a level of
comfort that as a society we are striding 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 breads 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
Nationslisation of mines as wealth redistribution mechanism, and subsequently
commentator such as Desmond Tutu have suggested concept such as rich people
tax. What are the alternatives 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? Let’s explore two cases, where Wealth
redistribution is taking 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 is achieved.
In November, 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 could be trusted to honour long
term commitments 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 prioritized
in government planning and funds allocation. Policies will be amended to
facilitate fast track implementation of such activities, including liberalizing
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
distribution as an investment opportunity and not a hostile transection. 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.
