Thomas Piketty opens his book, ‘Capital and Ideology’, with a very instructive advice on inequality: “Every human society must justify its inequality, unless reasons for them are found, the whole political and social edifice stand in danger of collapse”.
Piketty goes on to say that there are often contradictory but competing ideologies seeking to legitimize “inequality that already exists or that people believe should exist”. From the contestation emerges a certain dominant economic, social, and political narrative that pacifies people.
Any unjustified inequality, be it education, income, or wealth inequality, can disturb country’s equilibrium. Indeed, historians posited that it is inequality and particular demographics that triggered revolutions around the world. This is significant for South Africa as will be explained down below.
To be fair, inequality is common in societies with histories of slavery, colonialism and apartheid as social stratifications were their inherent characteristics. But today’s inequality exists due to different factors under a democratic capitalism. South Africa is considered one of the highly unequal countries in the world. According to Piketty as cited above, 10% of South Africans claimed 65% total income in 2018 while the bottom 50% claimed less than 10%. Three decades into democracy, other factors have either come into play or legacy factors continued to exert increasing influences.
So, how can trade surplus enter the fray in today’s inequality, particularly with regards to South Africa? The channel through which trade surplus contributes to inequality is firstly through income inequality, which ultimately leads to wealth inequality.
To explain, it should be noted that there are four factors of production: land, labour, capital and technology. In a globally integrated economy into which South Africa belongs, only land is immobile while capital and technology are globally mobile and able to gravitate to regions that offer better returns with little frictional costs. Labour incurs relatively high frictional costs for global mobility, making it the only factor of production that gets squeezed in pursuit of competitiveness, profitability and sustainability.
South Africa is, of late, running trade surplus, as exports exceed imports (see figure 1) and yet economic growth remains mediocre. Matthew Klein and Michael Pettis argued in their prize-winning book, ‘Trade Wars are Class Wars’, that a country’s trade surplus represents the excess of its domestic savings over its domestic investment. Stated somewhat differently, trade surplus imply that a country has reached a saturation level of domestic investment relative to domestic demand, necessitating the need to externalize its domestic savings through the capital or financial account of the Balance of Payment (BOP).
Source: SARS and Quantec
Low domestic consumption relative to domestic production creates surpluses that must be exported, lest inventories builds up, ultimately leading to write offs and losses. Low domestic consumption is largely rooted in low labour pay relative to the value of goods labour helped to produce. According to the latest Quarterly Bulletin (June 2024) published by the South African Reserve Bank, labour share of the GDP amounted to 51% in 2023, down from 56% in 2015. Over the same period, labour productivity improved by 26%. It is no wonder that the trade sectors became globally competitive, leading to increasing exports relative to imports. Labour is effectively subsidizing exports. This contributes to rising income and wealth inequalities as capital (landlords and financiers) appropriates a rising share of the GDP.
Low labour share of the GDP has a powerful vicious feedback loop: Low labour pay leads to low aggregate demand, in turn leading to low capital investment, resulting in low job creation and consequently high unemployment. Indeed, corporate SA Inc has been blamed for engaging in what some saw as an ‘investment strike’ due to stagnant private sector investment. Available data from the Reserve Bank indicates that corporate savings increased from R155bn in 2014 to R780 bn in 2023. The above feedback loop also plays itself out in the global economy among trade surplus countries, leading to lower global demand than would otherwise be the case, in turn leading to lower global investment and low overall employment. Therefore, trade surplus countries suck out global demand while trade deficit countries add to global demand. As we celebrate trade surpluses, we should be mindful of this negative impact on overall global demand and employment.
At a sectoral level, agriculture is among major contributors to the overall trade surplus, notching record trade surplus after another (see figure 2). The sector is one of the eleven under Sectoral Determination whose working conditions are determined by the government, including minimum wages. Determination of minimum wages considers cost of living and ruling inflation with no due consideration to labour productivity improvements, which in part is also influenced technology (capital) in use. Fortunately, however, between 2015 and 2023, both the minimum wage for farm labourers and farm labour productivity increased by 88%. Over the same period, the agricultural trade surplus increased six times minimum wage increases.
Source: SARS and Quantec
At this point, there is a need to dispel the myth that trade surplus contributes to economic growth, which is not necessarily true. China runs a significant trade surplus and has registered high economic growth rates for decades, but Japan also ran a significant trade surplus for most of several decades, yet its economy registered anemic growth over that time. German, too, generally runs a strong trade surplus but registered mediocre economic growth, earning itself a name ‘the sick man of Europe’. The United States runs a significant trade deficit with good economic growth rates. South Africa’s high growth periods came at a time when the country was recording trade deficits. Based on these examples, it is inconclusive to state categorically that trade surpluses contribute to or detract from economic growth.
In conclusion, inequality is the product of political and economic designs supported by existing legal institutional arrangements. For instance, land reform is targeting a 30% redistribution of agricultural land instead of pursuing equity. The design and justification narrative of the acceptable levels of income and wealth inequality should take note of the inherent threat to social and political equilibrium of a country. Unfortunately, it is labour that is the main target of income distributive policies. Therefore, policies and programs of government should be intentional about egalitarianism. The ideal situation would be a social compact where public investment is met with explicit commitment by the private sector that the labour share of the total income would not be allowed to deteriorate any further. This is not an argument to curb exports but rather that the political and economic system should ensure that labour claims a fair and just share of the GDP.
Disclaimer: The views expressed in this article is solely that of Independent Agricultural Economist Robert Matsila, and does not necessarily reflect the views of Mzansi Agriculture Talk, his employers, or other associated parties.
