Growth, not redistribution, key to reducing global inequality: Katzenellenbogen

Key topics:

• Economic growth is key to reducing inequality long-term

• Ramaphosa leads G20 push on global inequality reduction

• South Africa’s low growth and policies worsen inequality

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By Jonathan Katzenellenbogen*

Reducing inequality has become one of the foremost moral causes of our times.

But strong evidence suggests that it is economic growth that is key to reduced inequality over the longer term – and that the pursuit of inequality reduction alone could impede growth and cuts in poverty rates. 

The reduction of inequality is undoubtedly a positive. High levels of inequality make it more likely that rich elites will control politics and neglect the poor. It also fuels resentment due to a sense of unfairness and can undermine faith in democracy. For economic growth and consolidating democracy, people need to be given greater access to opportunities.

But aiming for reduced inequality cannot be a goal on its own, or be allowed to replace growth as the primary aim.

President Cyril Ramaphosa is hoping to lead a new international campaign on the reduction of global inequality.

As a start, he wants to make the reduction of inequality one of the key focus areas of the G20 Summit that begins in Johannesburg in ten days.

Last week an “Extraordinary Committee of Independent Experts on Global Inequality” appointed by Ramaphosa and headed by Nobel prize-winning economist, Joseph Stiglitz, released a report, which will be presented to the Summit. The report points to an “inequality emergency.”

Among other things, the report recommends a new permanent international body that will assess and monitor inequality globally. That will be treading on the toes of the World Bank, which has long done that sort of monitoring work. But most of the other G20 countries might just indulge Ramaphosa as he is, after all, the host.

The reduction in inequality is an issue that is close to Ramaphosa’s heart, and he clearly believes that SA can make a difference in this area. The signs are that the international campaign to reduce inequality will be used to try to elevate SA’s image, taking up what Pretoria sees as the big moral causes, like the ongoing case in the International Court of Justice charging Israel with genocide.

“Inequality did not start yesterday, it did not start in 1994, it started many years ago, with colonialism and apartheid,” Ramaphosa said at the report’s launch last week.

Western guilt

Ramaphosa said releasing the report was not intended to “shock and awe” other members of the G20. But inevitably, pushing the issue hard does underscore Western guilt due to colonialism and apartheid, and therefore a need for large increases in foreign aid to combat inequality among nations.

Very few world leaders would admit that reductions in inequality should not be a prime goal. Along with “sustainable development”, “inclusive growth” and “climate justice”, economic justice in reduced inequality is taken for granted as a prime public good.

Inequality has been high on the international agenda since the adoption of the Sustainable Development Goals in 2015. Goal number 10 is to “Reduce inequality within and among countries.” Concerns about the inequitable impact of the 2008 Global Financial Crisis and the release of Thomas Piketty’s “Capital in the Twenty-First Century” in 2013 greatly helped propel the issue to the fore.

Until the 1980s, growth in per capita GDP was the primary goal, but in the 1980s, poverty reduction and human development became associated goals. Today the focus, at least in many international forums, is firmly on inequality.

Yet strong evidence suggests the best way to cut poverty and reduce inequality over the longer term is fast growth. In the shorter-term, reducing inequality leads to the sorts of policies that can be unaffordable for countries and may reduce investment. Growth provides the government with the sort of revenue to reduce inequality.

The early stages of industrialisation were accompanied by massive rises in inequality, although most benefited. In much of Europe and the US, the owners of railways, steel mills and banks made the sort of fortunes that had never existed before. This boosted inequality but took these countries into the industrial age, and led to enormous benefits in health, longevity and overall standards of living. There were losers, but over the years society has benefited. 

In recent times, those who were in Silicon Valley at the right time and right place and made the right decisions made billions. But the world has also benefited.

Relatively rich

The most equal countries are all relatively rich. Slovakia, the Czech Republic, then Belgium and the Scandinavian countries have well-run economies and welfare states, based on wealth built over many years. 

It is sound economic policies and growth that pave the way to greater equality. Fast economic growth is what has allowed billions of Chinese to emerge from poverty and for the country to become more equal. It is growth that generates the increase in tax revenue to be spent on education, health and social programmes which, when accompanied by good governance, allow for poverty reduction and ultimately greater equality to come about.

Reducing inequality is best considered as an outcome of growth and sound governance rather than as a goal in itself.

Most government spending in SA and in much of the world is aimed at reducing inequality. In SA, more than 64 percent of the 2025/26 budget goes to a combination of healthcare, education, social grants, and housing. The rest is spent mainly on security and debt repayments.

Our fundamental problem in addressing inequality is that we are hardly growing, and due to corruption and mismanagement, government spending does not deliver as much as it should. The Treasury admits there is little scope to raise taxes.

Although it points to an “inequality emergency,” the report shows definite progress in reducing inequality, due to growth. Globally, income inequality between individuals has fallen since 2000, largely due to China’s extraordinary growth rate. Global income inequality remains high, but the world is becoming less unequal and poverty is on the decline, due to growth.

The report further points out that on average, a person in the richest one percent has seen their wealth increase more than 2,200 times that of the poorest since the turn of the century. Yet, while this measure of inequality has risen, the number of those living in extreme poverty, defined by the World Bank as less than $2.15 a day and lacking in key necessities, has fallen by nearly 60 percent.

New driver of inequality

South Africa is often cited as one of the most unequal societies in the world. Had it not been for our low growth and high unemployment we would have made good progress.

Our rigid labour laws, defended by the unions, mean companies are reluctant to take on more labour. And Black Economic Empowerment, which often enriches the already empowered, has become a new driver of inequality. 

The “Extraordinary Committee” would do us a great favour if they looked at the causes behind the high degree of inequality in SA.

*Jonathan Katzenellenbogen is a Johannesburg-based freelance journalist.

*This article was originally published by Daily Friend and has been republished with permission.