Inequality is growth’s enemy

Johannesburg – Inequality is rising globally and social discontent is rising with it. This has brought a new focus on the causes and consequences of high inequality and a growing consensus that it’s not just bad for societies, it’s also bad for economies.

High inequality has been identified as a factor that constrains growth – and limits the effect on the poor of whatever growth does take place.

In South Africa, growth is seen as a necessary condition for addressing poverty. Addressing inequality might just be a necessary condition for unlocking the kinds of growth required to do so. If inequality acts as a constraint on growth – and greater equity unlocks it – how does it do so? Can it be assumed that all forms of inequality, such as inequality in relation to race and gender, inequality of opportunities, income inequality and asset inequality are equal in this respect?

In South Africa, unemployment is the main contributor to growing income inequality, hence the priority given to employment-creating growth.

When it comes to understanding how inequality affects growth, however, a more multidimensional lens is needed.

Firstly, there’s no escaping history. No society with high inequality started with a level playing field.

Dispossession and the capture of resources has always informed patterns of ownership. To compound matters, as Thomas Piketty’s work has shown, the value of assets has consistently grown faster than the value of earned incomes, leading to the rich growing richer faster than anyone else can catch up. Until the neoliberal 1990s, this effect was partly offset in the developed world by their tax regimes, but not any more.

Concentrations of corporate capital also affect growth.

At one level, this is about the lack of competition and resultant inefficiencies at the level of the commanding heights of the economy. But such concentration can also limit the scope for small and even informal business development in poor communities.

This is because, for new entrepreneurs, the easiest entry point into business is to make and sell products their neighbours need.

In South Africa, however, the majority of basic consumer goods are already mass-produced in the core economy, at a scale that makes it very difficult to compete on price. This makes small business development that much harder and reproduces existing patterns of wealth creation.

Inequality in land ownership patterns is also strongly correlated with constraints on inclusive growth. Yet in South Africa, current proposals for addressing inequality in relation to commercial and communal land appear deeply flawed and unlikely to achieve their desired outcomes.

Inequality of opportunity, like that resulting from racism and sexism, also limits growth. When opportunities in society are biased towards existing elites, this limits the pool from which society can draw its leaders, innovators and entrepreneurs.

Those with better opportunities are also more likely to influence the rules of the game in society and to shape its institutions. These institutions in turn reproduce and enforce the rules of the game that favour the favoured. Institutions matter for equity. So despite the significant gains made at the level of formal rights in South Africa, institutional weaknesses – and the difficulties of institutional transformation – still affect the realisation of such rights and the equality of opportunity.

All forms of inequality negatively affect social stability. This affects growth because economic actors typically respond by reducing their activities, limiting their risk, moving their assets offshore and investing in financial instruments rather than in productive activity that will create inclusive forms of growth.

All this has policy implications for South Africa. At present, policies to promote inclusive growth are seen as the most effective way to reduce poverty and inequality.

If, however, high levels of inequality constrain the scope to achieve such growth, then tackling inequality might just be a prior and necessary condition for doing so.

Philip is a development strategist at NGO Trade and Industry Policy Strategies. For more on this topic, click here for UNDP Inequality SA for the paper by Philip, Mbofholowo Tsedu and Meshack Zwane.