inequality micropolicyview political economy public policy

Wealth Divide

Unedited version of my column in this week’s Business Report:

On my flight to India to attend the third BRICS competition conference held last week, I was struck by how our respective countries – Brazil, India, China, Russia and South Africa – have to grapple with the challenge of inequality.

The growth stories of Brazil, India and China in particular have captured investor imagination. However, the impressive rise of these economies has been accompanied by a rise in inequality. In Russia, the post-communism privatisation wave created oligarchs, who now face backlash and negative public sentiment. Though progressive policies have lifted many households out of poverty, large segments of Brazil’s population remains trapped in the favelas. The lower castes and the rural poor in India have not shared in the outsourced services boom that has powered that economy. China also suffers from a similar dynamic where large segments of the population have been excluded from export-led growth. South Africa remains one of the most unequal societies in the world, with racial and increasingly class tensions dominating economic policy discussions.

Inequality threatens the sustainability of economic growth because it generates tensions that may upset an already fragile political economy. Countries experiencing rapid but uneven growth face the risk of being stuck in a ‘middle income trap’; where popular protest rises, production is threatened and private investment slows down. Policymakers struggle to justify the market-oriented policies that led to the initial growth spurt to the poor and marginalised. Demands for more state-led and redistributive policies follow. Profits and executive salaries become easy targets for politicians striving to maintain their legitimacy. Investors became wary of the fraught political climate and seek market-friendly reassurances that policymakers find increasingly difficult to make in the face of popular discontent.

The immigration hall in Mumbai’s international airport provides a strange, inverted metaphor for inequality. The immigration hall divides into two wings, with long winding queues on both sides. But in the middle, there are two straight queues reserved for business and first class passengers.

Yet all is not as it seems. What one may imagine to be priority lines are serviced by two booths, whereas the winding masses have about ten booths on each wing. A small, slow-moving cluster of mostly westerners inches slowly towards the front of the room. I could be mistaken but I sense a mild air of amusement in the massive hall as the other passengers whizz past the befuddled group trapped between queue dividers. The authorities may have intended to provide a dedicated express service for the elite, but they simply have not backed up their intention with resources. My colleagues and I split into different queues. Suffice to say, the colleague who stuck to the business class ghetto missed her connecting flight to Delhi.

In the real world, skewed access to opportunity cripples individuals’ ability to function effectively. All our economic policies, including competition law enforcement and advocacy, have to contend with this challenge if they are to be relevant. Fortunately competition policy lends itself towards expanding opportunity because breaking up cartels, preventing anti-competitive mergers and challenging exclusionary behaviour are interventions that create the conditions for greater participation in the economy.

As Prime Minister Manmohan Singh of India emphasised in his speech at the BRICS competition conference, developing countries need to develop credible institutions for sustained and equitable growth. Competition authorities do so by maximising the beneficial effects of the market and ensuring that they deliver efficient outcomes.

In South Africa, competition legislation addresses inequality directly. The competition act aims to ensure that our markets are fair and efficient. Not only that, but the law goes on to state as its objectives the promotion of small businesses and also those owned by historically disadvantaged individuals. The preservation of employment is also a strong theme throughout the legislation. This is important as it has been shown that lack of access to job opportunities is one of the drivers of inequality in South Africa.

Various speakers at the BRICS conference commended the South African authorities for being sensitive to the challenge of inequality. Indeed, this can be seen in the way that the Commission selects cases, with priority given to sectors that poor households spend a high proportion of their income on, such as food. The focus on construction and input markets also means that sectors that affect industrial competitiveness, and thus manufacturing employment, can be rid of practises that increase barriers to entry and costs.

A prominent feature of Prime Minister’s Singh’s address touched on a certain type of inequality in the economy; that perpetuated by governments in the way they treat state-owned enterprises that compete against private companies. The preferential treatment of such entities is often seen as a way to facilitate development. However, the prime minister threw his intellectual support behind the concept of ‘competitive neutrality’ in the way that the state treats its assets in relation to other competitors.

Bemoaning a time when state-owned enterprises were sheltered from competition, the PM argued that the state should refrain from using its legislative and fiscal power to privilege such enterprises. Such preferences may lead to the exclusion and eventual exit of companies that are run on purely commercial lines, leading to loss of employment and dynamism in the market. The state-owned enterprises become like the business class line in Mumbai’s airport, slow-moving and stagnant despite their alleged privilege (or because of it).

As BRICS countries continue to face the challenges of economic growth and inequality, including those inequalities that emerge from state action itself, competition law and policy will play an important role in levelling the playing field.

Trudi Makhaya is an economist in the public service.

Image credit: Etienne Creux

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