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Opinion Pieces

Piketty: Profile of an Economic Imperialist

Nelson Mandela vowed to liberate all South Africans from the continuing bondage of poverty and deprivation. Twenty-two years later, South Africa remains one of the most unequal societies in the world. We look to French economist Thomas Piketty and his work on income and wealth inequality to understand whether his theories and solutions apply in a South African context.


In 2015, Piketty came to South Africa and spoke at the University of Johannesburg’s Soweto campus to over two thousand enamoured students, dignitaries, top-ranking ANC officials and some of the wealthiest elite in South Africa. Despite the fact that South Africa was not one of the twenty countries covered in his body of work, Piketty argued that land redistribution, a minimum wage, and tax on the wealth of individuals rather than just their income, would contribute toward a more equal society in South Africa. Piketty left South Africa with an honorary doctoral degree in Economics – Philosophiae Doctor (Honoris Causa) – from the University of Johannesburg and a growing fanbase. It remains to be seen, however, whether Piketty’s thesis actually holds true in a South African context.


piketty_2_smallCapital in the Twenty-First Century, Piketty’s overnight sensation, took the world by storm and sets the tone of the debate on the skyrocketing incomes of the 1% and the exorbitant gains of the 0.1% and 0.01%. Central to the book’s theme is the underlying concept that laissez-faire capitalism is no longer working, and that state interventionism is required. The book integrates economic growth, the distribution of income between capital and labour and the distribution of wealth and income among individuals.


Using more than two hundred years of data, particularly from America and Europe, Piketty and other economists detail historical changes in the concentration of income and wealth. He demonstrates the evolution of inequality, from the pre-industrial revolution all the way to the digital age today.


One only has to think of Marie Antoinette to get a feeling of the extreme inequality in the 18th century – where private wealth overshadowed national income and was concentrated in the hands of rich families atop a rigid class structure. This system continued until it was disrupted by the First and Second World Wars and the Great Depression. Piketty explains that the period from 1914 to the 1970s is an historical outlier in which both income inequality and wealth inequality fell dramatically. It would seem, according to Piketty, that the enormous disruptions and violence of the first half of the 20th century was actually the engine room for wealth re-distribution and the cause of the lowering of the Gini Coefficient in Western economies. He asserts that now that the shocks of the early 20th century have subsided, inequality is approaching levels last seen before the First World War. His theory is that the extreme fiscal stimulation of a broad-based nature caused by the need to rapidly create munitions and to enable the logistics of war, lead to an injection of wide-ranging economic stimulus never before seen and probably never to be seen again.


Piketty’s theory behind the more recent surge back to the levels of pre-20th century inequality has to do with capital accumulation. His central claim is that the free-market system has a natural tendency toward increasing the concentration of wealth. Other than during periods of extreme disruption – in the Western economies that he investigates – the rate of return on capital including investments, dividends, and royalties has consistently exceeded the rate of economic growth. He then goes on to point out that where r > g, r being the rate of return on capital and g being economic growth, it causes rising inequality through an excessively greater concentration of wealth in the hands of a few. In other words, inherited wealth grows faster than output and income. Piketty mentions that the combination of slow growth alongside better financial returns will result in inherited wealth that will, on average, “dominate wealth amassed from a lifetime’s labour by a wide margin”. The rising wealth of the 1% is not a random consequence, but the palpable result of capitalism itself. His argument is that this will ultimately continue until either public policies and institutions are put in place to regulate the relationship between capital and labour, or conflict will result. This prediction is based on an extrapolation of past trends and also assumes that as wealth rises, capital will not experience diminishing marginal returns.


One of the points that Piketty makes is that this rising inequality – associated with an ever increasing disparity between the rate of return on capital and economic growth – is that the ogre of patrimonial capitalism is a key driver. This is where the economic elite attains their fortunes through inheritance rather than innovation or entrepreneurship and is one of the reasons he gives for rising inequality. In interviews outside the realms of his book, as mentioned in a previous Monocle article, Death and Taxes – Piketty vs Bettencourt, he has raised examples such as Liliane Bettencourt who inherited her wealth and thereafter experienced the same rate of return on her capital that Bill Gates – an entrepreneur from the start – experienced on his capital. Data from a study completed by the Oxford Quarterly Journal of Economics shows that French annual inheritances have tripled from less than 5% of GDP in the 1950s to about 15% of GDP today moving closer to the 19th-century peak of 25%. Ultimately, Piketty argues, capitalist forces have resulted in a society of rentiers – people living on income from property or investments – people unlikely to innovate or advance society.


Piketty’s overall thesis suggests that capitalism as an economic system is not working and will result in low growth, high levels of inequality and low levels of social mobility. If you are not born into wealth then life, even for the best educated, will be something akin to how Jane Eyre felt without a Mr Rochester.


piketty_4_smallIn Capital, Piketty uses the Forbes 400 Rich List 2015 as an example of how concentrated wealth has become. He calculates that over the last 30 years the top 400 richest families in the world – irrespective of each year’s annual constituents – has experienced an annual growth rate substantially exceeding the world economic growth rate. He uses this case as an example of how, if extrapolated, the top 400 families in the world would own just about everything by the year 2050. Ironically, if one analyses the Forbes Magazine’s 2016 list, there are two problems with Piketty’s underlying thesis: namely that the constituents of the list change quite dramatically over time, suggesting that although overall wealth is concentrated, it is not concentrated in the same hands. Secondly, on closer inspection, one will find the following: Bill Gates was named the richest man in the world by Forbes Magazine’s 2016 annual list of the world’s billionaires. This was the 16th time that the founder of Microsoft claimed the top spot with $75 billion. Following behind him on the list with $67 billion is Amancio Ortega, the Spanish retail genius who started Zara, with less than $100. Both Gates and Ortega are self-made billionaires. In fact, the first 8 of the world’s richest people are entrepreneurs. They did not start with large chunks of inheritance but made their way up the ranks with hard work and focus. Tied at 9th place is Charles and David Koch who inherited the family business when it was worth $21 million in 1961, and made it into the $100 billion conglomerate it is today. This equates to a compound annual growth rate (CAGR) of more than 16.8% for a period of 54 years. Although they inherited the original business from their father, it was their hard work that got it to where it is today. These entrepreneurs lead the way to technological change and advances in productivity, which lower cost and increase real wages.


Interestingly though, Piketty’s argument around patrimonial capitalism holds more water when analysing the world’s richest women. The top 10 richest women are either widows or heiresses and include Liliane Bettencourt, the heiress to the L’Oréal empire, and Steve Jobs’ widow Laurene Powell Jobs. The top 10 wealthiest men on the list are primarily self-made and the top 10 women are primarily heiresses. It is somewhat unfortunate that Piketty would appear to be more correct in looking at the women in the top 10 list as opposed to the men.


When looking at the richest South Africans, one finds the majority coming from old money. Nicky Oppenheimer, the richest South African, comes in at 174 on the Forbes’ list followed by retail industrialist Christoffel Wiese, who surpassed the diamond magnate for a time, post-Brexit. Ironically, some of the corporate sponsors for Piketty’s South African visit are extensions of the corporate entities which Piketty is criticising. The sponsors included AngloGoldAshanti, Audi, Coca-Cola South Africa, Vodacom, Rupert & Rothschild Vignerons and Douw Steyn, in his personal capacity. The progressive wealth tax that Piketty is suggesting would have a large impact on the founders of these very same companies. Piketty’s suggestions would seem at odds with their personal narratives. He has been embraced by the South African public and by the South African elite, in a way that seems ironic if one looks at what he is proposing.


To put this in perspective: the most significant economist of the last 50 years, on a visit to South Africa sponsored by the wealthiest elite in South Africa, has proposed the following: progressive wealth tax, a national minimum wage, worker participation at board level in companies, and significant land reform. In particular, progressive wealth tax, which is Piketty’s proposed overall solution of 10% per year on capital would most likely experience strong resistance from the very same quarters that invited him to speak.


After the work of Simon Kuznets, many economists postulated that inequality was essential for economic development. In the early stages of a country’s economic growth, inequality needs to be high, but as economies develop, and skills’ bases expand, inequality should fall. In recent decades, this has not been observed to be true. In some developed countries such as the USA, inequality levels remain as high as they’ve been for the past century. On the other hand, developing countries such as Brazil and Latin America have had reduced levels of inequality. Inequality has become a major topic for research and most major economists are now addressing this particular issue due to its great importance. As an example the Financial Times’ Martin Wolf said that rising inequality is “incompatible with true equality as citizens” which is a central principle of democracy. Inequality is not good for anyone and results in a reduction of mobility and deepening poverty as well as peripheral symptoms like increased crime rates. Additionally, Columbia University economist Joseph E. Stiglitz, argues that extreme inequality “threatens our democratic institutions”. Even in the current political landscape moving toward the US elections in November, The New York Times notes that more than half of the early funding for both the Democratic and Republican parties came from just 158 families. This plays into the argument that Piketty makes: which is that the accumulation of wealth creates an environment, within laissez-faire capitalism, in which fewer and fewer have more and more power. It is precisely this accumulation of power which leads to higher rates of return on capital whilst a country experiences simultaneously lagging economic growth rates. Piketty points out that inherited capital produces a class of rentiers who dominate politics with many negative consequences.


Piketty stresses that South Africa is one of the most unequal countries in the world, and stated that “South Africa is very unequal and did not become more equal after the end of Apartheid, at least not as much as some people would have hoped. In some way, it has even become more unequal if we take the concentration of incomes in the top groups of the people.” He further advocates that the lack of large-scale forced land redistribution in South Africa from the rich to the poor could be the reason behind one of the world’s widest income gaps. If one takes into consideration that Piketty’s work concentrated on western economies with long historical tax records and ones which did not have homogeneity with a South African context, it is at least a valid question to ask why he would advocate such a potentially socially dangerous solution to South Africa’s inequality problems. If one considers the extent of damage to the Zimbabwean economy following their land redistribution programme it is further a valid question why an economist who proposes these policies would be given a standing ovation by the wealthiest elite of South Africa. Rather than address the politics of Piketty’s policies it seems more apt to question the validity of Piketty’s economic argument and apply it to a South African context as a test of whether the concepts of Piketty are applicable in South Africa at all.


Piketty’s work covered twenty countries including France, USA and the UK. If one applied Piketty’s hypothesis to South African data, would it show that South Africa’s increasing inequality is due to r > g? In fact, would it even show that inequality has increased, and furthermore would it show that r > g since the failure of Apartheid?


In a study completed by two American Professors, Daron Acemoglu and James A. Robinson, it was argued that Piketty’s general laws of capitalism ignore the role that political and economic institutions play in understanding the inequality of the past. They used South African interest rates and economic growth rates to test r > g and proved that it did not explain historical patterns of inequality as Piketty suggested it would. Although the study was insightful, its use of interest rates as a proxy for return made it incomplete. Piketty’s definition of capital includes profits, dividends, royalties, capital gains and other capital components. A more comprehensive proxy than interest rates would need to be used. Monocle Solutions’ research team realised there was a missing component of research and set out to re-test Piketty’s original hypothesis in a South African context: that, when the return on capital exceeds South African economic growth, the result is rising inequality. Instead of using interest rates solely, a composite index – R – was created using a combination of South African returns on the four major asset classes – namely cash, bonds, property, and equity – as a proxy for return on capital.


Over two decades of data were collected (1994 – 2014) and the following proxies were used for each of the corresponding asset classes. For the less risky and liquid cash asset class, the three-month JIBAR rates were used. The return on the bonds was measured using liquid government bonds – namely: R194, R186, R153, and R157. The property class was represented by annual growth rates in the value of property obtained from the Lightstone property index. The property class was further segmented into the following categories: national luxury, high, mid and low value. Lastly, the South African All Share Index was used as a proxy for equity. The data source used as the measure for economic growth – G – was the nominal GDP values of South Africa, collected from the Federal Reserve Bank of St Louis (FRED) for the period 1994 to 2015.


The research team hypothesised that the composite index for capital return, R, would vary depending on investor risk appetite. Consequently, R was calculated for three different investor appetites: risk-seeking, risk-neutral, and risk-averse. Each investor risk appetite was given a different weighting for each of the four asset classes. To ensure all realistic investment scenarios were tested, each composite R was compared to G over the same period.


piketty_5_smallRecall that Piketty’s original studies never included South Africa but he does indicate in a Ted talk, quite emphatically, that in a country like South Africa, R would almost always exceed G. Clearly, Piketty is making the same assumption he made when he spoke at the University of Johannesburg’s Soweto campus last year. This must have also been the same assumption made when he proposed land reform within South Africa. Distressingly for Piketty, as well as for his South African admirers, the Monocle research team found that the underlying assumption he makes seems not to be true. Specifically, the Monocle research team found that in the past two decades across all investor types defined above, the return on capital, R, on average did not exceed South African growth, G. This phenomenon of R being less than G in South Africa, over the past two decades, does not necessarily disprove Piketty’s thesis that when r > g, inequality increases. But if r < g does it necessarily mean that inequality has decreased? The question of whether inequality has increased or decreased in South Africa since the fall of Apartheid and since the first free and fair elections were held in 1994, was the next topic that the Monocle research team then addressed.


Despite the general perception propagated by the media that South African inequality is largely on the rise, a more scientific measure was required. The first measure was taken from the World Bank, which undertakes research into the state of global inequality. In terms of South Africa, it was found that income share held by the highest 10% made up 52% in 2009 and 54% in 2011. Comparatively, the lowest 10% had a 1.17% share of total income in 2009 and a 1.05% share in 2011. Unfortunately, 2011 was the latest data available at the time the research was completed. Similar inconclusive results were found when using the Gini Coefficient, another measure of inequality which looks at the statistical dispersion of the income distribution of a country’s residents. The Gini Coefficient uses a scale of 0 – 100, with 0 indicating that the dispersion of income is completely equal (i.e. everyone gets the same amount) and 100 being the most unequal or having the most uneven distribution of income. South Africa’s Gini Coefficient increased from 59 in 1993 to 65 in 2011, again showing an increase in inequality.


Based on both the World Bank and Gini Coefficients it would seem that South African inequality is rising, despite the fact that return on capital does not exceed economic growth. It must be noted that due to the imperfections of the Gini Coefficient index and the lack of recent data, a strong conclusion cannot be made with confidence. However, at the very least we can state that it is inconclusive whether the corollary of Piketty’s thesis pertains to South Africa: that when r < g, inequality decreases. In fact, at first appearance it would seem to be untrue, when r < g, it is possible for inequality to increase. However, the Monocle research team felt that the distortions of the Gini Coefficient index and the basis for the World Bank studies were not sufficiently accurate and the Monocle research team created an inequality index based on the simple thesis that inequality could be measured by analysing the value of property for different income levels within South Africa. Whilst the research team recognises that this stands only as a proxy for inequality, it would at least provide an original insight into the question of inequality in South Africa.


The Monocle research team created a concept of a high-income individual versus a low-income individual, in which we defined a high-income individual to possess excess wealth which would be invested in equity to the extent of 50% of his or her net asset value (NAV). Furthermore, we assumed that the same investor would be invested in luxury property to an extent of 40% of NAV, as well as 5% in bonds and 5% in cash for diversification purposes. In comparison, we created a concept of a low-income individual who would have no excess capital and therefore no holdings in equities or bonds. 70% of the low-income investor’s NAV would be tied up in low-income property and 30% in cash. Using the data collected from the various sources mentioned above we were able to show that from January 1995 through to September 2014 the compound annual growth rate for the low-income investor was in excess of 23.5% whereas for the high-income investor it was approximately 11.4%. The tremendous distortion between the growth rates of the individual investors can primarily be ascribed to the enormous differential in growth rates of high-income property versus low-income property. The lower income investor is 70% invested in low-income property and this particular property segment has experienced tremendous growth since the failure of Apartheid and the advent of true democracy within South Africa. Of course, this can easily be ascribed to the recognition – for the first time for these properties – of land rights and the registration of these land parcels with the protection of democratic property rights. This in and of itself is an indication that using the political institutions enshrined within the liberal constitution of South Africa there has been a far greater growth in low-income capital then there has been in high-income capital on a relative basis, distorting the underlying assumptions Piketty made when visiting South Africa. In fact, using property growth rates across different income segments as a proxy for a measure of inequality within South Africa, the Monocle research team is able to conclude that inequality has decreased since the advent of formal democracy within South Africa in 1994.


Another study by the IMF also found no empirical evidence that supported Piketty’s thesis. In fact, for at least 75% of the countries examined, the study found that inequality responds negatively to r minus g shocks, which is in line with previous single-equation estimates published by Acemoglu and Robinson (2015).


Although superficially attractive, the idea that equality can be enforced by the state has little empirical and even less ethical support. We would need to look outside Piketty’s “magnum opus” in order to understand inequality in South Africa.


By the end of Apartheid, South Africans who previously had no property rights were given property rights and this led to an increase in their capital values. It is particularly difficult to say that South Africa doesn’t have rising inequality, particularly considering that the World Bank and the IMF have shown that it may be true. But when one observes certain data categories, as mentioned above, the Monocle research team will argue that there might have been, to some extent, a reduction in inequality. Also, Piketty’s thesis, that r is greater than g in South Africa, is not true and this has been confirmed in several different scenarios taking into account investor risk appetite. Most dangerously, Piketty is proposing land reforms and policies that are not based on analysis and data that are contained within his main thesis as he did not study South Africa. It is also worth noting that even for Western countries, such as his own, he does not propose land reform, he proposes progressive capital gains tax. As responsible analysts, one needs to question why the South African elite would give centre stage to an economist who proposes such radical and dangerous reforms with a more or less complete lack of empirical evidence to support these notions within the country of South Africa. We would argue that it is particularly ironic that the wealthy elite have invited out a star-studded economist to come and preach reforms that could potentially further endanger and enhance inequality in South Africa. Ironically in contrast with an aggressive state-run land appropriation reform programme as proposed by Piketty, a large number of South Africans who previously did not have property rights, today do have property rights and this is thanks to the work of the South African democratic system rather than to a foreign economist. At some point, we will need as a country to be proud of our own heroes rather than heroes from other lands.

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