/ 13 November 2014

South Africa’s inconvenient truths

Distorted: The World Bank's data misrepresents
Distorted: The World Bank's data misrepresents

“South Africa is achieving a sizable reduction in poverty and inequality through its fiscal tools.” This was the claim by the World Bank’s Pretoria-based country director, Asad Alam, last week, in the study Fiscal Policy and Redistribution in an Unequal Society (Three million lifted out of poverty).

To reach this conclusion, Alam and his staff simply ignored data they cannot process: numbers inconsistent with World Bank dogma. (A “fiscal tool” is, in straight talk, what the treasury uses when collecting taxes and making payments.)

The bank suffers from a seriously bad statistical habit: poverty denialism. As Jason Hickel, of the London School of Economics, pointed out recently, rising numbers of poor people represented “a PR nightmare for the World Bank” in 2000, and, after massaging the international poverty line, “their story changed dramatically and they announced the exact opposite news: the introduction of free-market policies had actually reduced the number of impoverished people by 400-million between 1981 and 2001”.

In South Africa, where financiers generally approve of treasury neoliberalism, the bank’s new strategy appears similar: creatively adjusting the Gini coefficient. This number is the most cited reference of economic injustice: a score of one is total inequality, when one person “earns” everything and everyone else gets nothing; zero is when everyone shares income equally.

The new World Bank spin is that, once our Gini is twisted and turned to include taxes and state payments, inequality falls dramatically – from 0.77 to 0.60. To its credit, the report does acknowledge four caveats:

  • “The analysis does not take into account the quality of services delivered by the government”;
  • “The analysis excludes some important taxes and spending such as corporate income, international trade, and property taxes, and spending such as infrastructure investments due to the lack of an established methodology for assigning these outlays across households”;
  • “It does not capture the growing debate on how asset accumulation and returns to capital affect income inequality”; and
  • “Turning to the data used in the analysis … there are questions about the ability of a survey of this type to collect adequate information on households at the top of the distribution”.

As a result, however, four specific problems arise that render the bank’s optimistic conclusion untenable.

Corporate welfare
Why did bank staff not estimate the enormous business subsidies colloquially known as “corporate welfare”? For example, state economic infrastructure overwhelmingly benefits corporates and rich people: e-tolled roads, rail (especially the Gautrain), SAA passengers; tax-loopholed industrial districts; the world’s cheapest electricity during most of the past century; discounted water and wastewater; research and development support; and export subsidies.

The treasury’s pro-corporate investments show up in corporate balance sheets as rising implicit share value, through the locational advantage of stockholder assets compared with similar sites lacking such infrastructure. The World Bank provides estimates for many such subjective service valuations, such as education and healthcare investments, even though their quality is so low that the share of students who failed to reach matric went beyond 50% in 2012, up from 22% in 2007.

Many such fiscal tools contribute to corporate wealth, not necessarily as explicit income but as higher “produced capital” (just as education and health spending are counted as human capital). If the World Bank bothered to count it, the rich who hold an oversized proportion of JSE shares would be unveiled as disproportionate beneficiaries of state largesse.

On top of that, who is really paying for Eskom’s long-delayed Medupi coal-fired power plant? The World Bank lent Eskom $3.75-billion in 2010, in spite of well-documented corruption in boiler tendering (involving the chairperson of Eskom and the ruling party), rampant damage to water and air, rising community and social strife, especially in coal-sourcing sites, and ongoing labour unrest?

Repaying the bank and other lenders has already forced poor people to cough up 150% more for electricity than in 2007. To avoid running hot plates and single-bar heaters, many have switched to dirty energy – cheaper, much more dangerous and health-costly paraffin, coal and wood. This process gets no mention in the bank’s report.

Meanwhile, the largest power subsidies (taking 10% of the national supply in some years) go to BHP Billiton smelters because of a 1992 “Special Pricing Agreement”. Eskom admitted the deal was worth R11.5-billion in subsidies in 2013 alone, in the form of R0.12kWh electricity – an eighth of the price paid by most consumers.

Bulk water supplies to favoured customers such as large-scale farmers still receiving irrigation subsidies, corporations that negotiate with municipalities for lower rates, timber plantations and other mega-users are not noticed in the bank’s report.

‘Free’ basic services
The report also ignores discriminatory bias in the pricing of state services. It makes generous assumptions about the “free basic services” allegedly delivered to poor people. Data from the largest cities confirm that, in 2001, water and electricity were repriced with a small free amount (six kilolitres of water and 50kWh of electricity a household a month), but subsequent prices soared. This negated the free services, so the result was a regressive overall price impact.

Durban residents, for example, got free water in the country’s main pilot project, but the poorest third of water customers were hit by a doubling in the real price of water when the price for the consumption block of six to 10 kilolitres soared. As a result, from 1998 to 2004, the poorest households cut water purchases by nearly a third, from 22 to 15 kilolitres a month, even though this period witnessed a cholera outbreak, diarrhoea epidemics and the Aids pandemic.

And if, as the report claims, a “sizeable” reduction in poverty was achieved through fiscal policy, why are there more delivery protests a person here than in probably any other country? Why are these increasing? The bank didn’t notice.

Lax fiscal policy
The treasury’s deregulatory attitude to corporate profit expatriation since 1995, when exchange controls were first relaxed, has facilitated outflows to firms’ overseas financial headquarters that is much greater than officially recorded in the national accounts. Vast amounts are redistributed to corporate shareholders both here and abroad.

In addition to profit and dividend outflows, illicit financial flows are so substantial that the Southern African Customs Union was (conservatively) estimated by the United Nations to have lost $130-billion in the years 2001 to 2010. This is fully a third of all Africa’s illicit financial outflows, yet goes unmentioned in the report.

The treasury also shies away from investigating corporate gimmicks known as transfer pricing and trade mispricing. Lonmin’s Bermuda “marketing” operations were revealed in this newspaper, and research by the Leverhulme Centre for the Study of Value and others strongly suggests that De Beers, with its near-monopoly, secrecy and movement across borders, uses transfer pricing to minimise its tax liability. In this area, corporate lawyers run rings around government regulators.

How substantial are such tax avoidance and capital flight strategies? According to Wits economist Seeraj Mohamed, illicit outflows amounted to 23% of gross domestic product in just one year, 2007.

The treasury’s tax laxity – facilitating creative accounting by ethics-challenged corporations – is one of the most important redistributive aspects of fiscal policy.

But it is ignored in the World Bank report.

Natural capital
An additional tool would have revealed whether state fiscal policy favours the longer-term interests of the country’s citizens – “natural capital accounting”. This accounts for the value of minerals, forest resources, land and other environmental endowments that are either used or remain as yet unextracted.

Ironically, other World Bank staff have compiled what is probably the most sophisticated “natural capital” analysis, in the 2011 book The Changing Wealth of Nations. In one sample year, 2005, the impact of natural capital depletion on South Africa’s income was a negative 9%. The overall net shrinkage of wealth was by $245 a person that year.

This extreme redistribution from future (poor) beneficiaries to wealthy mining houses and shareholders can also be attributed to fiscal policy, which is not to tax minerals extraction heavily. In contrast, sovereign wealth funds are working marvellously, from lefty Norway to conservative Alaska – and are in formation even in resource-cursed Angola and Zimbabwe – but there’s no mention of higher taxation or resource nationalism in this pro-corporate report.

In sum, the World Bank has tortured the treasury data until they confessed – providing the lower Gini coefficient – but to do so required ignoring society’s screams of protest and misery. These concerns reflect just some of the ways pro-poor fiscal space could be said to exist in principle. But that space is immediately evacuated by South African treasury officials, who are vigorously applauded in yet another fib-saturated World Bank report.

Patrick Bond directs the Centre for Civil Society at the University of KwaZulu-Natal