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Inequality’s surprising and deeply troubling bedfellows

Economic realities shared by unequal societies should ring alarm bells loud and clear against increased government spending.
Government debt puts the economic growth potential of a nation in leg irons. Image: Waldo Swiegers, Bloomberg

Did you know that the countries with the highest inequality in the world have a lot of seemingly unrelated economic indicators in common?

These indicators aren’t something mainstream commentators and leaders talk about because it seems the penny hasn’t dropped yet. Worse, I don’t see many in academia making the connection either.

South Africa has kicked the spending and deficit can far down the road. The road has come to an end, and we can no longer just spend more in the hope that things will get better.

The Covid-19 crisis has brought that end closer.

Indicators that add to inequality and poverty in emerging markets

  • High unemployment

Firstly, all countries with high inequality have a very high unemployment rate in common. All five Southern African Customs Union (Sacu) countries – Botswana, Eswatini, Lesotho, Namibia and South Africa – are among the 10 countries in the world with the highest unemployment and the top 12 most unequal societies too. There is clear evidence across the world that high unemployment is a very good indicator of high inequality.

Select world inequality rankings

Country Inequality ranking
South Africa 1
Namibia 2
Botswana 3
Zambia 4
Lesotho 6
Mozambique 7
Eswatini 8
Brazil 9
Colombia 10
Rwanda 13
Honduras 14
Malawi 18

Source: The Economist’s Pocket World in Figures, 2020 edition. Countries selected on tax and employee compensation data availability.

Simply put, too few people working increases poverty levels and inequality.

  • High tax to GDP

Secondly, many might not see high tax-to-GDP ratios as an inequality indicator, but it is clear that many emerging markets that have high tax burdens also have high inequality. All five Sacu countries are among the top 30 highest taxed countries in the world.

Emerging markets tax burden: Taxes collected as a percentage of GDP in 2017

Source: UNU-Wider revenue dataset/economists.co.za

  • High government wage bill

Add a high government wage bill as percentage of GDP, along with the high tax burden and one finds the third fact: emerging countries with higher total government wage bill as a percentage of GDP is a very good indicator of high inequality.

Namibia and SA lead the world in shouldering the burden of government wages.

Government compensation in Brazil, Eswatini and Botswana are also among the world’s highest.

Notably, the world’s most developed market, Sweden, has a lower wage bill than the average for the Sacu countries.

Ten of the top 12 highest emerging market wage bill countries for which we have recent data are also among the top 20 most unequal societies in the world.

This, combined with the high tax burden, means that most of the tax money goes to consumption expenditure and to a small group of citizens.

In fact for emerging countries, high government wage burdens are a very good indicator of inequality, as more often than not civil servants who get the large chunk of GDP are in the top 10% or 5% of earners in those countries.

It also means governments do not have much left to pay for medicine, books or roads.

Government wage bill as a percentage of GDP for 2016 or later

Source: IMF, economists.co.za

Note: Data includes that from central government plus local and other tiers of government, apart from Angola, Malawi, Namibia, Nigeria and Mozambique (central governments only), India (excludes state government), while Zambia and Angola’s data exclude local government. Honduras seems to be missing local government data.

High government debt

In the fourth instance, government debt burdens and government interest payments relative to the size of the economy are also good indicators of stress in an economy. The burden of government interest payments as a percentage of GDP in SA is the fourth highest among major emerging markets; our government deficit is also one of the highest. Brazil also has a high government deficit, as do many SADC countries.

Government debt is not an obvious indicator of inequality but more of a leg iron for potential growth to close the poverty gaps and the ability of infrastructure to lift growth.

If there is little growth there will be no improvement in poverty and unemployment levels.

Many of the countries with very high inequality have high government-debt-to-GDP levels, with the very clear exception of Botswana. Interestingly, the reverse also seems generally true in that lower debt-to-GDP countries have less inequality as is the case in Eastern Europe, Turkey and Thailand – with India and in a sense Argentina the exceptions in the reverse angle.

Major emerging markets’ government debt to GDP

Source: IMF, economists.co.za

Note: All data is for general government, except Angola, Namibia, Zambia Mozambique, Rwanda, Eswatini, Lesotho, Botswana, Honduras and Malawi,  which are central government only.

The problem is that some governments and many academics seem to believe that spending more will solve inequality and poverty. This is pertinently untrue for emerging markets at least, and most economies. Even reserve currencies will implode at some stage with the debt burdens being imposed.

The real problem is not spending, but to fix inefficiencies and crime.

South Africa and southern Africa generally have failed to fix government efficiencies, badly-run state-owned entities (SOEs), and government functions such as public transport. Instead, corruption has engulfed every facet of life in government and the destruction just continues.

It is downhill from here because the kitty has run dry.

With deficits of over 14% this year and nearly 10% next year it is silly to think government debt will remain below the level of the country’s GDP.

Fifty-two percent of this year’s non-interest expenditure is financed by debt. That is not even close to sustainable. Over 40% is normally a clear sign of a debt or hyperinflation crisis.

With an extreme tax burden that is crushing growth potential, and spending that is mostly on consumption by government and a presidency that relies on a predominate government and SOE-based trade union federations, it seems unlikely that the country will be able to run a sustainable spending and tax regime.

The hard-left trade union-inspired government spending and taxation will not go away easily.

But as debt levels rise to closer to 100% of GDP, the room to do things will be crushed.

Government will not be able to tax more in a very weak economy without fully destroying the already-cracked golden egg.

In short it’s over if we do not make massive reforms.

If we do not, I can tell you that universities will close, the Passenger Rail Agency of SA (Prasa) and Gautrain will no longer be around, social grants will become worthless, and hospitals will be empty places that employ doctors who can prescribe but not provide a Panado.

Inequality and poverty will rise even more. Unemployment will rush higher too. Interestingly, all nine of the highest unequal countries in the world (with unemployment data) have unemployment rates higher than 13% generally, while the top seven have unemployment rates of about 20% and above.

Sick cycle

So if government spends more it will at a stage have to tax more and that will chase away even more potential – or future employers, which increases unemployment and creates even more pressure for government to employ more civil servants and raise taxes yet again while cutting books, medicine and infrastructure spending.

This is a bad cycle and the shouting for a universal basic income grant will threaten the currently employed with even more taxes and the richer folk with wealth taxes.

We are getting closer to this very bad scenario …

A scenario where the country will take crushing measures like changing pension regulations, begging from the International Monetary Fund (IMF) or hitting the rich with ever higher taxes.

I am not a pessimist by any means but we honestly need to pray that the finance minister can get it right this time, as the data mentioned above will kill growth and hope in this economy.

Yet the penny has not dropped for those who earn a cheque from the government.

As for academics, they will need to understand these facts quickly or they will find themselves unemployed too, as a government that needs so much money will end up closing universities and departments.

Many a union thinks another 20% increase will drop inequality and unemployment because people will spend more – er, yes: on cellphones, imported clothes, cars and champagne. The four imported Cs.

If SA just spends and spends then our children will leave and work elsewhere.

Mike Schüssler is an economist at economists.co.za

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Great article – pity our government officials who broke the education system won’t be able to read this as they are mostly financially illerate

Perhaps also include the average number of dependents in each of these country’s households, stratified from high income earners to the lowest earners. I’m pretty sure an inverse pattern will emerge.

The term inequality has been promoted by the politicians – it implies that the poor are poor because of the rich, taking away the initiative of the poor to do something about their plight.

The real issue is poverty. The politicians would rather claim benefits from the rich than put in the hard work of development, in ensuring small families, quality education and high economic growth.

Schussler’s first point is obvious – people are poor because they do not have jobs.

Spot on.

Reminds me of Thomas Sowell’s Knowledge & Decisions “It is always true, at least in the short run that those poorly fed would be better fed if the well fed shared shared some of their food. That is wholly different from saying people are starving in India because overfed Americans somehow took their food. “

Not a single government there with fair skinned rulers – funny that

Brazil, Argentina, Turkey, China, etc all fair skinned governments. Its all about being Communists or not.

Slave Wage R7,150 per month in today money
Government recommended unskilled wage R3,200

Employed Persons Dec19 – 10.1 Million of which 3 million are now jobless
Unemployed person Dec19 – 17million added the 3 million which lost the jobs
Tax payers 2.5 Million and dropping
Average investment to create a single job is R500,000
Total Investment required to create jobs for everyone R10,000,000,000,000 (R10Trillion)

South African Federal Debt 3,772,787,000
South African interest on current debt climbs at R6,306 per second

IMF Please come and save us

In any family or enterprise the path is clear:

1. Spend less and save for the future.
2. Add value to society and your customers.
3. Invest for growth and a future.

Why should a government be different?

In today’s global economy you have to be either innovative and come up with new inventions like i-Pads or you have to be more productive like the Chinese and produce more goods at lower prices. However, there is 3rd and much easier way and that is bribery/corruption. For this, you don’t need to be competitive nor innovative. You just need to have LEGISLATION and EVERYBODY must be in on the deal. It is easy and after all, who wants to memorise a whole bunch of textbooks at Varsity when you get money for jam in this way? Why make all the effort to go and pick the bananas off the tree when you can sit in the shade and wait for them to fall on the ground?? It is that simple and that is why the whole of Africa will never get out of the quagmire it is currently in.

I am fascinated by economic matters because economics is the study of human psychology and the behaviour patterns of individuals. We measure the mindset of people with metrics like the Wealth per Capita, Debt/GDP, unemployment rate, Budget Deficit, rate of inflation and cost of living.

These measurements are not merely cold economic statistics. They reflect the mindset, the cognitive ability, the attitude and belief system of the voter. The budget deficit and tax/GDP ratio tells us something about the attitude and mindset of the average voter.

Now we come to the point. Can we expect to have a sound economy when the average voter is morally and ethically bankrupt? Is it at all possible the have GDP growth and equality when the average voter has the collectivist mindset?

The figures prove that the collectivist mindset destroys the economy and creates rising inequality.

We have an abundance of mineral wealth, the best farming sector and banking sector, capable academic facilities and no natural disasters. The country has huge potential, but sadly, the economic statistics will only reflect the mentality of the voter.

In summary: Solution for a better life for all: the regime must

1. Be small with an efficient, honest and merit based government
2. Live within their means.
3. Quit borrowing to finance current expenditure.
4. Remove barriers to employment by the private sector
5. Remove barriers and disincentives to investment
6. Reduce taxation (CGT, income tax, company tax)

Folks, this is not rocket science. All successful countries follow this recipe. All failed states adopt populist policies like the ANC.

Would we have so many unemployed people in our country if adults took responsibility for how many children they have per family, and how those children are raised?

A lot of things need to change for us to work, but certainly some of those changes need to start at home.

Many commentators on Moneyweb share your point of view.

We should remind ourselves that our opinion reflects our perspective, and our perspective is shaped by our cultural norms. In short – people who reason like us, have their roots in free-market capitalist societies where individualism and accountability are held in high regard. Individuals from this background plan their families as they plan their lives and their finances. They can conceptualise the future. The mindset and social norms of this group evolved over generations, to protect property rights, to include individualism and law and order, because they have realised that these factors save them from famine. They even incorporated these elements into their religious belief system, making it holy. Property rights and individualism form the basis of the Ten Commandments.

The collectivist or communalist have an opposing view of life. They are good people who also want the best for their children, but they do not believe in the importance of property rights, individualism, law and order and accountability. For them, the future is a vague and irrelevant concept, for intellectual debate only. Because they fail to plan, nature has to plan on their behalf. Famine takes over the role of family planning. The collectivist system enables and incentivises a lack of family planning because the accountability lies with the collective. The entire community is expected to raise the child, which it is unable to do.

This brings us to the point. A capitalist society, due to the benefits of property rights, enables the size of the population to grow much bigger than would have been possible under collectivism. When a society moves away from capitalism, towards collectivism or socialism, the size of the population will have to shrink to bring equilibrium between the population size and the size of the economy. Socialism sets the Malthusian Trap.

We have reached the stage in South Africa where Nature once again sends the nurse called Famine to do some family planning.

Of all these factors, culture has the largest impact and is observable. I often see extremely poor people going to the shop to buy a 2 litre Coke as soon as they have a bit of money. I don’t understand this mindset.

Inequality’s un-surprising best bedfellow is corruption.

What is equality?

So often it seems like an envy thing, you have what I don’t have.

I want!!

Or is it:
Money, surplus or lack there of,
Job, have or have not or better or worse job,
House, mine is smaller than yours,
Car, bigger, faster more flashy
Food, I eat caviar he/she eats pap,
He /she wears Prado I wear PnP
I have ambitions, he/she does not
I am lazy, he /she is not

Who is going to determine who has and who has not? That is inequality because no one should be above the other in an equal society.

So I ask again what is inequality?

If you want inequality to worsen just put organizations like the ridiculous ANC in charge of fighting it.

’The government was set to protect man from criminals, and the Constitution was written to protect man from the government’’ Ayn Rand
…but neither is happening in sunny SA!

The Socialists ANC in my view prevented our market to function without administrative constraints-particularly those on wages, prices, and interest rates- they have disabled them. This is especially important in a world of massive movements of funds, huge trading volumes and markets rendered inevitably opaque by their increasing complexity. Economic and financial shocks will occur but the ability to absorb them is a paramount requirement for the stability of output and employment.
Our economy has now materially been ‘’ downsized’’ and the scary thought is that a dramatic shift is needed to rectify it save to say that they just don’t have the money to reflect the embodiment of their ideas.
Bigger social grants, NIH pipe dreams, etc. – is not going to happen – and the time has now come for the ANC to conclude/realize that this State just cannot maintain a ‘’pay-as-you-go’’ welfare state that requires a growing working class and WMC to finance it.
Yes, we do have vast natural resources, but it’s being plagued by socialist policies and a total disregard for the rule of law, corruption, and the hand of the trade unions.

careful about choosing statistics to validate a predetermined objective. Parts were not expected so I checked.

The article premise is that unequal countries also share other stats, but then the stats are only for developing nations – that is intellectually dishonest!

The tax argument is nonsense : the EU 19 average tax : gdp is 43% not sure why this table is only emerging countries if the premise of article is about all countries and inequalities??

Same for government debt levels – most of the developed word have vastly higher debt:gdp than the emerging countries that are admittedly the more unequal.

Wage bills are very hard to compare due to the different systems of government – eg US federal, state, county.

I am NOT saying we don’t have a massive problem but I do not draw conclusions on causality.

Another interesting, yet USELESS article from Schussler!

I have long criticised Schussler for his steady stream of lengthy articles filled with lots of interesting and suppositions – all of which end WITHOUT presenting what his SOLUTION to the dire outcomes he articulates, would be!

Any economist that thinks that SA’s “… real problem is not spending, but to fix inefficiencies and crime” has NOT looked hard enough, or deep enough, for the ROOT CAUSES driving inequality!

Moneyweb needs to challenge its contributors, that if they wish to opine on a subject, they MUST necessarily ALSO present their SOLUTION for the problem they rant about.

Anything less just contributes to the “street noise” !

What if there is no solution to the problem?

Is there an economist on the planet who knows how to create a job? I don’t think I’ve encountered one.

Does anyone know how to generate inclusive economic growth? Or how to employ an unskilled and inexperienced workforce with an entitlement mentality?

I can guarantee that our government doesn’t have a clue on any of these dimensions, but then, really, nobody does.

A good start for government would be to stop posing as this developmental state that will educate your child, find them a job, build them a house, and care for them when they’re sick.

Because this is all just an illusion.

…and the HIGH BIRTH RATE! That’s the real reason.

Over-population = same wealth to share amongst higher number of citizens.

Probably too late to comment.

As far as I know RSA birth rate per woman has seriously dropped in the past decade and around 2 now.

Not so if you look at the latest stats from STATSSA for the demographics in the Eastern Cape.

The birth rate amongst the poor is the biggest factor, by far, impeding their relief from poverty.

End of comments.

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