World Bank’s flawed report kicks SA’s poor in the teeth

When a bad idea is politically convenient, it can travel especially fast. On November 5, the World Bank released its technical report, Fiscal Policy and Redistribution in an Unequal Society, to great back-slapping acclaim, even on South Africa’s main TV news channel eNCA (albeit, recently tainted as a sunshine broadcaster).

Two weeks earlier, Finance Minister Nhlanhla Nene had warned of coming “tough times” and “a new age of pain”. The new bank “research” – which is bunk because it completely ignores Pretoria’s generous corporate subsidies (among other major errors) – is being spun to serve the austerity cause, as the following examples show:

  • BrandSouthAfrica manager Simon Barber in the respected journal Foreign Policy: “The World Bank recently compared 12 middle-income economies and found South Africa had performed the best in reducing poverty and inequality. That said … the fiscal space to spend more to achieve even greater redistribution is extremely limited … Government debt levels, close to those at apartheid’s end, are on an unsustainable trajectory. If this continues, treasury models suggest, choices will have to be made between expanding the politically important safety net, which now protects 16-million plus South Africans, and making the investments needed to clear blockages to the one thing that’s required above all, growth.”
  • Investec chief economist Brian Kantor: “The World Bank shows, in a recent study, that South Africa does more to redistribute income in cash and kind to the poor than its developing economy peers … The imposition of higher tax rates on the high-income earners would achieve little by way of extra collections; more important, it would undermine the incentives of high-income earners to deliver more taxable income.”
  • Jonathan Katzenellenbogen at PoliticsWeb: “A … report warned last week that government no longer has the cash to expand the grant system … ‘due to the high fiscal deficit and debt.’ According to the bank report, transfers have caused the poverty rate to fall from 46.2% to 39% … This reduction in inequality through tax and spending is larger than in any other country.”
  • Hilary Joffe in Business Day: “Add in the social spending side of the fiscal equation, which the World Bank study finds is very well targeted to the poor, and South Africa comes out spectacularly well against its peers.”
  • Nomura Investment Bank economist Peter Attard Montalto: “The World Bank’s report on South Africa’s fiscal policy being highly effective at redistribution is in some ways not a surprise … The problem is that this is only papering over inequality caused by unemployment. It is not addressing the real problem of boosting private-sector job creation through decent, noninvasive, microeconomic policies.”
  • From the World Bank itself, Mahmoud Moheildin and Maria Beatriz Orlando’s Project Syndicate’s ‘Visionary Voices’ series, states: “South Africa has made considerable progress from institutionalised segregation toward an ideal of a ‘rainbow nation’ in just two decades.”
  • Rothschilds banker (and former finance and planning minister) Trevor Manuel: “The World Bank study released last week confirms that fiscal policy is significantly redistributive, on both the tax and spending sides … ”
  • ANC treasurer general Zweli Mkhize: “In the midst of the gloom and pessimism that abounds, we must never lose sight of our strength as a people and our achievements as a country. Last week World Bank economist Catriona Purfield told reporters in Pretoria that in South Africa, large reductions have been made in poverty and inequality.”

Drumbeat for austerity
In this context, the drumbeat for austerity grows ever louder. Ratings agency Moody’s downgraded South Africa the day after the report was released. The spin’s subtext then quickly came into focus: justification of social spending caps or even cutbacks in one of the world’s most unequal countries, now that the treasury is seen to have been exceedingly generous with past grants.

A presentation made by treasury deputy director general Michael Sachs immediately after Purfield’s report launch stated: “Current levels of spending are sustainable, provided that real growth remains above three [percent a year]. In a secular stagnation scenario, social spending will be increasingly difficult to sustain.”

Yet among the world’s 40 largest countries, South Africa has the fourth-lowest public social spending (as a share of national income) – just half of Brazil’s. The ratio of social grant spending was already projected by Sachs to decline from a tokenistic 3% to just 2.3% of gross domestic product by 2040, even before Nene’s recent speech. Yet the South African corporate profit rate is the world’s third highest, according to the International Monetary Fund.

Purfield’s reply to my critique of the bank report came just after its publication on November 14 in the Mail & Guardian (South Africa’s inconvenient truths) – more than a week after I first enquired about the serious methodological flaws: “As you highlight, an analysis of this kind has limitations and you raise important issues and reservations … As you note this mapping cannot take into account the quality of the actual spending, especially in the areas of education and health … On the important questions you raise about corporate taxation and infrastructure and subsidy spending, the incidence method in the paper simply cannot trace who is paying these taxes or benefitting from these outlays.”

Right, then, I replied to Purfield on November 18, if the flaws are that substantial, “won’t the World Bank offer a retraction of those dramatic redistribution claims, until proper research is done? Otherwise the neoliberal commentators and politicians will continue using bank research to advocate state spending cuts”. On November 25, instead of answering, she directed me to the head of the bank’s communications for Africa, Peter Hay. Hay then backed Purfield’s work, not giving any credence to the glaring contradictions.

So now the notion that South Africa’s world-leading inequality is being reduced so dramatically that budgetary restraint is acceptable – a view spreading like wildfire, but valid only if generosity to the corporate elite is ignored – requires a dose of cold water.

But that sort of reality check in turn needs a modicum of integrity, far beyond Purfield’s confessional email. And now we discover an added complication in seeking quality control against this sort of bunk research: the World Bank vice-president for integrity (sic) is none other than Leonard McCarthy.

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

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Patrick Bond
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