South Africa: World Bank shrugs at inequality and corporate subsidies

By Patrick Bond

November 20, 2014 – Links International Journal of Socialist Renewal – “South Africa is achieving a sizable reduction in poverty and inequality through its fiscal tools" – that was the main claim by the World Bank’s Pretoria-based country director Asad Alam last week, in the foreword to the November 2014 report, Fiscal Policy and Redistribution in an Unequal Society.

The timing is vital: just two weeks earlier, in his first budget speech, South African finance minister Nhlanhla Nene warned of coming austerity, "tough times" and "a new age of pain". The World Bank’s statistical findings were immediately spun into life, as commentators and politicians drew what they thought were the obvious implications, including back slapping from within the ruling African National Congress (ANC).

Jonathan Katzenellenbogen at PoliticsWeb: “a World Bank report warned last week that government no longer has the cash to expand the grant system… the ‘fiscal space for more redistribution is limited due to the high fiscal deficit and debt.’ According to the Bank report, transfers have caused the poverty rate to fall from 46.2 percent to 39 percent… This reduction in inequality through tax and spending is larger than in any other country.”

Hilary Joffe of 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 SA comes out spectacularly well against its peers.”

From inside the bank, Mahmound Moheildin and Maria Beatriz Orlandon in Project Syndicate’s "Visionary Voices" series: “South Africa has made considerable progress from institutionalized segregation toward an ideal of a ‘rainbow nation’ in just two decades.”

Rothschilds banker (and former ANC 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 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 stated that in South Africa, large reductions have been made in poverty and inequality.”

The subtext soon comes into focus: neoliberals can justify social spending caps or even cuts, in one of the world’s most unequal countries, if the South African treasury is now seen to have been exceedingly generous. But to reach their conclusion, Alam, Purfield and their followers simply ignored data they cannot process: numbers inconsistent with World Bank dogma. (A "fiscal tool" is, in straight talk, what treasury uses when collecting taxes and making payments.)

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

In this context, the World Bank’s optimism about redistribution is not unusual, for it suffers a seriously bad statistical habit: poverty denialism. As Jason Hickel of the London School of Economics pointed out recently, in 2000 rising numbers of poor people represented “a PR nightmare for the World Bank”, so 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.” This has been largely based on picking an extremely low and arbitrary number for poverty (US$1.25/day) and employing many other numerical tricks and creative accounting techiques.

Manipulating Gini

In South Africa, economists generally approve of the treasury’s commitment to neoliberalism, and so the World Bank’s new strategy appears similar: creatively adjusting the Gini Coefficient. This number is the most-cited reference of economic injustice: 1 is total inequality, when one person "earns" everything and everyone else gets nothing, while 0 is when everyone shares income equally.

The new World Bank spin: once South Africa's Gini is twisted and turned to include taxes and state payments then inequality falls dramatically, from 0.771 to 0.596.

To its credit, the World Bank 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;

* “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” (emphasis added).

But as a result, four specific problems arise which render the bank’s optimistic conclusion utterly untenable.

Embarrassing corporate infrastructure welfare

First, why did World Bank staff not estimate enormous business subsidies colloquially known as "corporate welfare"? For example, state economic infrastructure overwhelmingly benefits corporates and rich people, especially because of ongoing subsidies covering operating costs: roads under the failed e-tolling system; the Gautrain luxury subway linking Johannesburg and Pretoria; South African Airways passengers; tax-loopholed industrial districts; the world’s cheapest electricity during most of the last century; discounted water and wastewater; R&D support; export subsidies; etc.

The treasury’s pro-corporate investments show up in corporate balance sheets as rising implicit share value, via the locational advantage of stockholder assets compared to similar sites lacking such infrastructure. The World Bank provides estimates for many such subjective service valuations, such as education and health-care investments, even though their quality is so low (especially in black residential areas) that the share of students failing to reach 12th grade broached 50 per cent in 2012, up from 22 in 2007.

Many of the treasury’s 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 Johannesburg Stock Exchange shares would be unveiled as disproportionate beneficiaries of state largesse.

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

Repaying the bank and other Medupi lenders has already forced poor people to cough up 150 per cent more for electricity than in 2007. Hence, many have switched to dirty energy to avoid running hot plates and single-bar heaters in favour of cheaper, dirtier, much more dangerous and health-costly paraffin [kerosene], coal and wood. Tellingly, this process gets no mention in the World Bank report.

Meanwhile, the largest power subsidies (some years taking 10 per cent of the national supply) go to BHP Billiton smelters via a "Special Pricing Agreement" dating to 1992. Eskom admitted the deal was worth more than $1 billion in subsidies in 2013 alone, in the form of US$0.01/kWh electricity, an eighth as dear as what most of us pay.

Likewise, bulk water supplies to favoured customers – 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 report.

Free basic services negated by fast-rising prices

Second, the World Bank report also ignores discriminatory bias in state services pricing, and makes exceedingly generous assumptions about "Free Basic Services" allegedly delivered to poor people. Yet data from the largest cities analysed by University of the Witwatersrand lawyers confirm that in 2001, water and electricity were repriced with a small token amount free (6 kilolitres of water and 50 kWh of electricity per household per month), but subsequent prices soared.

The free services were negated by such high prices for subsequent consumption blocks that 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 6-10kl consumption block soared. As a result, from 1998 to 2004, the poorest households cut water purchases by nearly a third, from 22 to 15 kilolitres per month, even though this period witnessed a cholera outbreak, rampant diarrhoea epidemics and the AIDS pandemic.

And if, as the World Bank report claims, a "sizeable" reduction of poverty was achieved through fiscal policy, why are there more delivery protests per person here than in probably anywhere else, earning the nickname "protest capital of the world"? Why are these increasing? The World Bank didn’t notice.

Corporate capital flight = lax fiscal policy

Third, treasury’s deregulatory attitude to corporate profit outflows since 1995, when exchange controls were first relaxed, has facilitated massive capital flight to the firms’ overseas financial headquarters, much more than is officially recorded in the national accounts. Vast amounts of implicit income are thus redistributed from what could have been our national fiscus, to corporate shareholders, 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 staff at the United Nations to have lost $130 billion from 2001-10. This is fully a third of all Africa’s illicit financial outflows, yet goes unmentioned in the World Bank report.

The treasury also shies away from investigating corporate gimmicks known as transfer pricing and trade mis-invoicing. For several years until 2014, South Africa’s deputy president Cyril Ramaphosa owned 9 per cent of Lonmin (of Marikana massacre fame), whose Bermuda "marketing" operations were revealed as a major source of capital flight during that time. Research by the University of Manchester Leverhulme Centre for the Study of Value strongly suggests that De Beers, with its near monopoly, secrecy and movement across borders, uses transfer pricing and misinvoicing worth $2.83 billion from 2004-12 in order to minimise its tax liability. In this area, corporate lawyers run rings around government regulators and the treasury’s South African Revenue Service.

How substantive are such tax avoidance and capital flight strategies? According to Wits economist Seeraj Mohamed, illicit outflows amounted to a massive 23 per cent of GDP 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 unaccounted for

Fourth, an additional tool would have revealed whether state fiscal policy favours longer-term interests of the country’s citizens: "natural capital accounting". The term refers to the value of minerals, forest resources, land and other environmental endowments that are either cropped or that remain underground. Critically, once corporations remove a non-renewable mineral resource, it’s gone forever.

Ironically, other World Bank staff have compiled what is probably the most sophisticated such 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 national income was negative 9 per cent. The overall net resulting shrinkage of wealth was $245 per person that year.

This extreme redistribution from future (poor) beneficiaries to (current) wealthy mining houses and shareholders can also be attributed to fiscal policy: not to substantively tax minerals extraction. 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 Bank report.

Reversing World Bank bullying?

The World Bank’s reaction to my critique? After more than a week’s delay (and only after this critique’s publication in South Africa on November 14), a reply came from Purfield. In addition to repeating the report’s methodology, she made these generous concessions:

Thank you for your mail and your questions. 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, my next question is this:

The austerity drum beat in South Africa has been building to a crescendo all year long. In one extreme case, Daily Maverick e-zine editor Brooks Spector praised the South African state for “terribly admirable” programs, but then recounted a revealing “day-dream”. Against the ANC’s “litany (sic) of ever-advancing, ever-improving benefits”, the former US State Department official asked whether any other party running in the election one month later was “brave enough” to say, “Damn right we’re in favour of cutting your social grants! That’s because we’re going to put South Africa back to work again, and turn it into a place where you will earn more money and gain real self-esteem because of your work.” (Social grants go to just three groups: the poor who are elderly or kids, and severely disabled people unable to work.)

Today, the renewed threat of social spending cutbacks is acute, as credit rating agency Moody’s downgraded the South Africa government the day after the World Bank report was released. The global financiers’ echo-box is just one reason why it is so objectionable for the World Bank to torture this country’s inequality data until they confess (the supposedly lower Gini Coefficient) – and in the process simply ignore society’s screams of protest and misery.

Because of the potential to tax the rich and corporations or even print money, 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 University of KwaZulu-Natal Centre for Civil Society.]