Inequality concerns block growth and poverty alleviation
Income inequality and capital markets volatility share an odd kinship. Habitual vilification of both distracts from their helping to explain how consumers, businesses and investors interpret economic shifts. Recent global market volatility reflects technological and political sea changes resetting the tug-of-war balance between consumers and providers of energy.
Rising income inequality expresses even deeper rifts in the composition of the global economy. Viewing such developments through morally-focused political lenses obscures embedded insights which should be guiding decision makers.
The industrial era is giving way to the information age while the rise of Asia is largely about integrating the economies of the East and the West. The global population is expected to expand from today's seven to nine billion people by 2050. This is trivial given that the corresponding, inflation-adjusted, projected increase in the global economy is from 80 trillion to nearly 240 trillion dollars.
Earth cannot accommodate a future growth path resembling an extension of the industrial led growth which spawned today's many hundreds of millions of middle income jobs. The 100 trillion dollar question: What new products and services will people buy in sufficient quantities to keep the global economy expanding?
The creative folks who can satisfy wants-that-people-didn't-know-they-had, often become fabulously wealthy as per iPads, Facebook, and clever software. The political backlash from domestic income inequality may not discourage the visionaries who are reinventing the global economy but investor appetite to fund the risks is vulnerable. A still greater concern is the backlash directed toward the half billion or so information-focused workers who do not individually shape the future but have been responsive to its demands.
The approach should not be to punish those who are adapting to the changing requirements of the globally-integrated, information-driven economy but rather to support the laggards to catch up. Unfortunately, such thinking is more sensible economically than politically. Whereas the laws of economics are blind to ethnic affiliations, political progress requires that disparate groups vying for power be prudently accommodated.
The societies which gain ground will be those which are not hobbled by policy makers undermining long-term prospects for political point scoring. SA is easily among the world's most challenged countries in this regard. The objective should be to expand the middle class by investing in education and skill building while creating an environment which motivates investments. SA's fractious mix of political interests impede such efforts. While corruption is a significant drag on the economy, such political dynamics are more harmful still through preventing the creation of a workable growth strategy.
The long-standing covenant between the ANC and its support base is enshrined by expectations of fairness and rising equality. This is both perfectly understandable and frustratingly problematic. The political struggle was won long ago while the economic struggle is growing more severe. Post 1945 global trends have been clear: Poverty alleviation to achieve middle class outcomes requires enduring decades of pain en route to achieving global competitiveness through strategic specialisation.
The global economy has experienced a profound improvement in income equality among nations mostly reflecting Asia's hardscrabble competitiveness. Conversely, income inequality has been rising within nations resulting from the shift from an industrial global economy to one where information age economics dominate.
That the information age harshly discriminates in favour of those with highly developed skills is a reality so at odds with expectations of ANC supporters that it has been ignored - which only makes matters worse. The global economy is deeply hostile to fairness-focused covenants such as the one between the ANC and its supporters. The ANC is no less contemptuous in return. This is equally unhelpful; the world isn't going to change to accommodate any country's historic imbalances.
The politics of rising inequality within nations is on display across the globe. While nowhere are the challenges as extreme as they are in SA, second place might go to the world's largest economy, the European Union. The inequality fault lines in SA breakout along racial and neighbourhood criteria together with differences in skills and employment prospects. In the EU somewhat similar markers are evident but the differences in competitiveness there are starkly defined by national borders thus distinguishing between failed and successful policies. SA's policy shortcomings are somewhat camouflaged.
In 1960 Asians were generally poorer than Africans. The rise of Asia was not predicated on regional trade but rather on selling to wealthy western consumers. There are now hundreds of millions of prosperous Asians. If somehow Swaziland and Switzerland were to switch places, SA's economic prospects would be greatly improved. Wealth creation relies on innovation whereas diffusion of knowledge and selling to wealthy consumers are the cornerstones of profound poverty alleviation. Many inequalities reflect time delays.
While the politics of race and rising inequality are powerful distractions, SA's high and rising inequality should rather be seen as a reflection of many decades of failed economic policies. As in Europe, Asia, the Americas, and the rest of Africa, improving SA's equality is tied to improving its competitiveness. Politically coloured perceptions have always blinded Pretoria's policy makers to this increasingly crucial point.
Shawn Hagedorn is an independent strategy adviser.
This article first appeared on BizNews.com
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