Piketty says "Tax the Rich"
"I think Europe and North America should stop having a double language with Africa, which is on the one hand they always give lessons about governance and transparency etcetera, and on the other hand, their own multinational companies and their own wealthy citizens are the very ones who are benefiting from financial opacity and they are doing nothing at all about it."
- Thomas Piketty, in Nelson Mandela Annual Lecture
Transcript of Nelson Mandela Annual Lecture 2015
Nelson Mandela Foundation
October 3, 2015
[This is an edited transcript of economist Professor Thomas Piketty's address to the 13th Nelson Mandela Annual Lecture, which took place at the University of Johannesburg's Soweto campus on October 3, 2015.
For full text visit here. Video with audience reaction is below]
Of course, now that we are 25 years after the fall of apartheid, we are all puzzled by the fact that inequality is not only still very high in South Africa, but has been rising and, in some way, income inequality is even higher today than 20 years ago, which is extremely puzzling for all of us. This is something we want to better understand.
We also know from historical experience, that extreme inequality of the kind of levels we observe in South Africa is not good for development and growth, and it can also lead to violent reactions and violent events. And we all have in mind the very violent episodes at Marikana three years ago, and we know from historical experience that if inequality is not addressed through peaceful means and peaceful democratic institutions it's always potentially a source of violence. And, of course, this can happen again.
So, what I'd really like to do in this lecture is to try to see what we can learn from the historical experience of other countries with inequality in order to better analyse future opportunities for a country like South Africa, but more generally for the world issue of inequality.
Let me say right away, and I will speak more about this, the fact that inequality today in some dimensions is higher in South Africa than what it was 20 years ago in terms of concentration of income is partly due to international factors which are not completely under the control of the South African government. I will come back to this later. I think the international community broadly speaking has a big responsibility for the situation of inequality in South Africa, in Africa ... and the world in general, and some of the solutions will have to come from the international community.
But it is not enough to just blame international factors. I think that there are also deeper reasons for the fact that, in terms of the reduction of inequality, the South African revolution so to speak, did not deliver as much as one might have expected. Generally speaking, I would say the general reason is that equality in formal rights and in basic civil rights - even though it is of course very important the right to move in your country, the right to take all possible occupations, at least in theory, the right to vote - all these formal civil rights are extremely important, but equality in formal rights are not sufficient to reach real equality.
So if you want effective rights to move, it's not enough to be formally allowed to go to other parts of the country. If you cannot pay rent or housing to go where the jobs are, in effect the right to move remains a very limited right.
More generally I would argue that we now need to think harder about how to secure effective rights, including the right to work for a decent wage, the right to good quality education, the right to have access to property, and finally, and maybe most importantly, the right to real economic and political democracy including sharing of economic power in companies and participatory governance in the public and private sector.
In this presentation, I'm going to make three different points. In the first part I will try to put the issue of inequality into historical perspective, and see what we can learn from historical experiences with the reduction of inequality in different countries. Then, the second point will be about a solution for reducing inequality in South Africa, that we can draw from historical experiences, and the third part of the lecture will be about the global response to inequality and the need for international action.
Let me first start with history and the historical perspective. I think it's important, because there's a lot of historical amnesia in the world sometimes about inequality, and I think it's important to take this broad historical and comparative perspective.
As a scholar and academic, my work has been primarily the work of a historian, trying to collect historical data on inequality and wealth. I should stress that this was only possible through a very collective research project. ...
... I think it is important to realise that issues of inequality, income, wealth, capital, public debt are not technical issues - these are issues in which everybody must have an opinion because ultimately they are what determine political change.
So if you look at this historical database that we have collected, probably the most important finding is that we cannot simply rely on market forces and "trickle-down" mechanisms in order to deliver the right level of inequality.
In particular, one very important finding is that if you look at the reduction of inequality that happened during the first half of the 20th century in North America, in Europe or in Asia, you can see that this has nothing to do with natural, process-based market forces.
It is due, to a large extent, to the very violent shocks of World War I, the Great Depression, World War II and most importantly, to the new policies, the new social policies, welfare state policies, new fiscal policies, progressive taxation that were finally accepted by the elites after these violent shocks and also after the Bolshevik Revolution, which put strong pressures on the elite in Western countries to accept reforms, which until 1914 and World War I were refused.
So, there were privileges in the country [France] and at that time, the hope during the French Revolution was that, if we have equal rights to take all occupation, to move, equal rights to property then this should be enough to bring a country of equals. And the fact that it doesn't work this way and that, in fact, over the course of the 19th century and in the earlier 20th century, we get to a concentration of wealth that is in some ways even higher than under the Ancien Régime, is very interesting because it shows probably one of the deep reasons that I try to explain in my research. It is that the fact of being a republic rather than a monarchy doesn't really change the deep economic mechanisms through which concentration of wealth is working; and in particular the fact that all over the 19th century you have a rate of return to capital that is markedly higher than the growth rate of the economy - 4%, 5%, 6% per year for the new capital investment in the manufacturing sector, as compared to a gross rate of 1% or 2% per year, well this gap between the two can explain to a large extent why we continue with the very large concentration of wealth until World War I.
So it's only very violent shocks which occurred in the 20th century, which finally convinced the elite to accept a number of fiscal and social reforms that were not adopted before.
I think this is of interest to South Africa, because, of course, I don't want to compare the French revolution and the South African revolution; it's completely a different context, and in a way the inequality regime that existed under apartheid was much more oppressive and violent than the Ancien Régime in France.
... the repression of basic rights which was happening under apartheid was much more violent with restrictions to mobility and we had a reference to this and expulsion [referring to previous speech] and the very strong territorial discrimination, which did not really exist in France in the 18th century, and which in some ways looked more like the serfdom systems that we had a couple of centuries before.
So, the challenges, the system from which South Africa comes from is, in a way, a much more oppressive inequality system than France and the Ancien Régime, and that's another reason why formal equal rights is not sufficient to bring equality. ...
So now, let me now turn to the issue of inequality in South Africa today and what kind of response to reduce inequality we can think of.
First, what do we know about the level of inequality in South Africa, how it has changed since the fall of apartheid and how does this compare to other countries?
We know too little, in particular regarding wealth concentration, but everything we know suggests an unusually high level of inequality, higher than what we observed pretty much everywhere else in the world. So just to take one number which I find particularly striking - if we use South African income tax data, together with a national accounts household survey, and we do the same for other countries, we find that the share of total income going to the top 10% income earners in South Africa currently, right now, is between 60% and 65% of total income for the top 10%.
Of course, this group historically has been predominantly, almost exclusively, white. Even today if you look at the data, especially within the top 1%-5%, it will be up to 80% white, so things have changed a little bit, but we are still are very much with this same structure of racial inequality that we used to have. So now how can we make progress? Let me make it clear that I'm not here to give lessons to South Africa, I am trying to see what we can learn from historical experience.
Certainly, the international context has played a role in rising inequality in South Africa since the 1990s. Let me mention a number of reasons.
Certainly, financial deregulation, which has happened over the world in the past 25 years, has contributed to rising inequality. More generally, the fall of communism around 1990 has opened the way for a new era, an unlimited phase in self-regulated markets, and in some cases it has clearly gone too far. Financial deregulation is one example and this has contributed to the rise of financial fragility, and which eventually contributed to the financial crisis of 2008.
But, it will not be enough just to blame these international factors.
I think there are domestic solutions to the inequality in South Africa, so as I already said, there are four areas of rights where we need to turn to a policy of effective rights - rights to labour, work for a decent wage, right to high-quality education, right of access to property, and right to economic and political democracy.
So let me say just a bit more about these four rights.
Regarding right to work for a decent wage, I think the discussions that South Africa is having right now about the introduction of a national minimum wage is extremely important and I think from this historical and comparative experience, I have, in my view, if we are able to find the right level of the national minimum wage, then definitely South Africa could and should introduce the national minimum wage.
Now, this in itself is not going to solve the key problem, which is the inability to access higher-paying jobs, and so here is a second important effective right that needs to be strengthened, is the right to high-quality education together with the right to adequate public infrastructure, including transportation infrastructure.
Regarding public education, I think it is fair to say that the quality of public, primary education and junior and secondary education that is available to the most disadvantaged groups in this country is not satisfactory, and that this should be a national priority and a lot of progress could be made in this direction.
I understand that many people, in particular many business leaders that I have met in recent days, are very sceptical about the capacity of the government to deliver this, but on the other hand I think there is no other option than to try to improve the functioning and to contribute, to pay the tax that we need in order to finance this public sector of education. ... privatising the education ... will not work; I think what has worked in history, in order to have sustainable and equitable growth is to have a wellfunctioning public education and health system, and South Africa should go in this direction.
The third, effective right which I want to stress is the right to access to property. ...I think it's fair to say that black economic empowerment (BEE) strategies, which were mostly based on voluntary market transactions, [and or not] market values were not that successful in spreading the wealth and limiting the extreme concentration of wealth from which we start in South Africa. So I think we need to think again about more ambitious land reform.
I also think that like many other countries, but maybe even more than other countries, South Africa will benefit from increased transparency about wealth and about who owns what in South Africa.
... in fact there is very little data in fact on wealth [in South Africa]. That's partly because access to the estate tax data is extremely difficult, to say the least, in South Africa. I think it would be important and absolutely possible for South Africa to introduce an annual tax on net wealth - a progressive annual tax on net individual wealth, even if it comes with a very low tax rate to begin with. For example, zero percent for R1-million in wealth, 0.1% between R1-million and R10-million and 0.5% above R10-million - I'm just putting numbers so that people have an idea.
I think even with relatively low tax rates such as these ones, the big advantage of an annual tax on wealth is that it would produce democratic transparency about wealth and we would know more about who owns what in South Africa and how this is changing over time.
I understand that many people in the business community might be against that, but then in the end, in the long run, I think it is in the interest of the business community to promote transparency about wealth. If you refuse transparency, it must be there is something to hide. That's not good. In order to build trust in a country I think it's very important to have that kind of transparency about income and wealth dynamics.
And finally, the last and fourth effective right which I would like to stress has to do with economic and political democracy. I think it's important in South Africa, like in other countries in the world, to have new discussions about worker participation in companies and participatory governance. There are many countries in the world, including countries that are doing very well in terms of economic efficiency and exports and competitiveness, like Sweden and Germany, where workers have strong power in the board of companies. In Sweden, you have one-third of your seats in boards of companies that go to workers; in Germany it's up to half, and apparently this does not prevent them from producing good products and exporting all over the world.
Now, let me turn to the third, and final part of this lecture, which has to do with is the global response to inequality. I think it's clear that South Africa cannot solve all inequality problems in the world alone and there are many issues which rich countries, particularly countries in the north, have a huge responsibility, particularly in order to promote global financial transparency and fight against tax havens. More generally, it's clear that countries in the north have a huge historical responsibility for inequality in the world today and poverty in many southern countries. Europe has a direct responsibility for the existence of apartheid in the first place and, more generally, the apartheid system was a simply one extreme version of a form of a colonial inequality structure that you see in French colonies, in British colonies, all across colonial history.
The French Revolution, again, was very strong in terms of abstract principles. Article 1 of the Declaration of the Rights of Man of 1789 was saying that all men should have equal rights, that social distinction should be based only on common utility. But, in practice, the French Republic went on to develop one of the worst colonial empires in history. The French revolutionaries said in 1792 that they wanted to abolish slavery, but then, the government of France under Napoleon reinstated slavery, which was finally and abolished finally in 1848.
And when Haiti took the French Revolution seriously and decided that they would be independent in 1804, not only was France very unhappy, but France said in the end, in 1825: "You're going to be independent, but you're going to pay a price for it and there is going to be a large compensation to the slave owners, to us, for you being free." A very large public debt was imposed on Haiti and Haiti had to reimburse until the middle of the 20th century and all along the 19th century, Haiti is paying interest to France as compensation for the fact that the slave owners are not getting any income from their slaves.
There is so much historical amnesia. We forget about these things. When Haiti started to ask for compensation again a few years ago and in 2004, when they were commemorating their 200th anniversary, the French government said: "Okay, we won't go to Haiti for the anniversary, because we don't want to hear about this compensation."
This is just an example to say that historical amnesia, and the responsibility of northern countries in today's inequality situation in the world is enormous. If we look at the future, because, just talking about the past is not enough, although I think in this case there is still time for compensation and reimbursing that debt that was paid from Haiti to France. But if we look at the future, and from a more global perspective, I think it's clear that Europe and North America have a strong responsibility if we want to encourage financial transparency in the world. I think Europe and North America should stop having a double language with Africa, which is on the one hand they always give lessons about governance and transparency etcetera, and on the other hand, their own multinational companies and their own wealthy citizens are the very ones who are benefiting from financial opacity and they are doing nothing at all about it. So it's really a double language, which I think is absolutely terrible.
What Africa needs is not foreign aid. Africa is not asking for help. What Africa needs is an international legal system that allows African countries to make multinational companies and wealthy citizens pay their fair tax. This is what Europe and North America should now offer. So I think there are at least two concrete proposals that northern countries should make, on which they should make substantial progress.
The first one is that there should be a lot more transparency about how much multinational companies from Europe and North America are paying in tax when they are doing business in Africa ...
Now the second proposal, which I think is even more important, is that Europe and North America should accept the creation of a world financial register on financial assets, which would be a central repository for financial assets so that we will know who owns what financial assets all across the world.
Some of you might react by saying, "Oh, but this is completely Utopian, how could we do that?" Well, let me tell you that in fact we already have this kind central repository for assets, because it's useful for private companies to know who owns them. ... So these are private corporations who are offering these services to financial companies, so that they keep track of who owns them. But these private institutions do not collaborate with the public institution, in particular do not send their information to the tax administration. So I think it is time that governments in Europe and North America, in particular, but all across the world, take control of these private repository institutions and create a public wealth registry of financial assets.
That will be very important for everybody in the world, but particularly for Africa, because if we take the existing estimates of what fraction of the world financial assets are held in tax havens, the fraction is much bigger in African countries, or for the Middle East, than it is for Europe or France. The best estimates we have for Africa are between 30% and 50% of financial wealth is held offshore. So clearly, this is in effect a way to take away from Africa some of the resources that are necessary for development.
what we need really for the future is not so much to talk about aid, but simply to change the international legal system so that African governments can conduct a tax policy without being always threatened, sometimes by their own business community, to go away and not contribute to the common good.
I understand some people today are saying, "Okay, but we could just organise the system through voluntary donations and charitable giving" and I understand that people who have a lot of money would like just to decide how much to contribute to such-and-such a project, but it's very difficult to organise a society like this. It's very difficult to organise a society where thousands of people just want to decide for themselves how much they want to contribute to the public good.
So we need a legal system, in particular, an international legal system, that allows African countries to develop a fair tax system that's asking as much from the people at the top, at least as much as the people in the middle and at the bottom, which is not the case as of today.
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