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DOUBLING DOWN ON THE CHILD GRANT GAMBLE

The Democratic Alliance at its recent congress raised and debated the policy proposal that child grants paid to poor parents should be increased in value and in due course doubled. The justification is a laudable one. The DA is concerned about high rates of malnourishment that is prevalent among poor children, and that manifests as stunted growth. That in turn has a number of deleterious consequences, including diseases and educational disadvantages suffered by young people.

It is important that we remind ourselves at the outset what it is that we want to achieve: We want to avoid the poverty trap that is making this endemic developing-world state of affairs possible.

Being a poverty trap, it is only fair that we should point out the obvious: If we can turn poverty around, we can deal with this problem. The first point to note therefore, is the simple one that the higher the per capita GDP of a country, the lower the malnourishment. Here is a list of African countries, selected at random save for the deliberate inclusion of SA and our neighbour Namibia, showing their GDP per capita and their rate of malnourishment according to the statistics of the World Bank:

Country Per capita GDP Malnourishment 2015
Mauritius 9822 5.2
Gabon 9569 7
South Africa 7488 4.6
Botswana 7483 26
Namibia 6045 28.8
Ave 1st quartile 8081 14.32
Angola 3582 14
Congo 2798 28.2
Nigeria 2455 8
Ghana 1707 7.6
Cameroon 1495 7.9
Ave 1st quartile 2407 12.14
Kenya 1143 19.1
Zimbabwe 917 44.7
Tanzania 867 32.3
Rwanda 738 41.1
Burkina Faso 663 20.2
Ave 1st quartile 865 31.48
Uganda 662 39
Mozambique 515 26.6
Ethiopia 511 28.8
Malawi 481 25.9
Liberia 352 42.8
Ave 1st quartile 504 32.62

 

It is fairly clear that in Africa at least, it is the relatively wealthy countries that have best dealt with the problem of malnourishment. That problem will best be tackled then, by growing our economy.

The second point is that even in poor countries, per capita growth improves countries’ response to malnourishment:

Country PC GDP % Δ Mal % Δ
Ethiopia 160 +44
Mozambique 101 +34
Nigeria 90 +11
Ghana 76 +52
Mauritius 76 +27
Ave 1st quartile 33.6
Tanzania 74 +14
Angola 70 +72
Namibia 61 -9
Uganda 60 -28
Burkina Faso 52 +20
Ave 2nd quartile 13.8
Botswana 51 +36
Kenya 37 +68
Rwanda 31 +34
Cameroon 28 +74
South Africa 28 +2
Ave 3d quartile 42.8
Malawi 23 +4
Congo 18 +13
Gabon -5.6 +25
Liberia -10 -10
Zimbabwe -27 -3
Ave 4th quartile 5.8

 

The next question is whether social spending (welfare payments) improves malnourishment. Here is a table setting out social spending of the same list of countries, together with their levels of malnourishment:

Country Social spend ($) Malnourishment 2015
Mauritius 626 5.2
South Africa 408 4.6
Namibia 334 28.8
Botswana 232 26
Angola 117 14
    15.72
Burkina Faso 31 20.2
Gabon 31 7
Ghana 26 7.6
Rwanda 25 41.1
Liberia 23 42.8
26.6
Ethiopia 16 28.8
Malawi 16 25.9
Mozambique 15 26.6
Uganda 14 39
Nigeria 13 8
25.66
Kenya 11 19.1
Tanzania 11 32.3
Zimbabwe 8 44.7
Congo 2 28.2
Cameroon 1 7.9
26.44

 

At first blush it seems as if the countries in the first quartile have low malnourishment because they have high social spending, which seemingly vindicates the proponents of the doubling-down hypothesis. But under scrutiny this hypothesis fails:

  • The countries in the first quartile are all wealthy countries, that have low malnourishment. This accords with the correlation between per capita wealth and low malnourishment that we see in the first table. It may well be the relative wealth of their citizens that improves malnourishment;
  • That this is so, is demonstrated by Ghana, Gabon, Congo and Nigeria, that disprove the idea that it is grants that achieve the beneficial results. These countries are all relatively wealthy countries (in the African context at least) and they have low malnourishment figures. Most importantly they have very low social spending. That supports the idea that what matters is wealth created by people themselves, not social grants.
  • The 2nd, 3rd and 4th quartiles do not continue with the trend of high levels of social spending correlating with low malnourishment. If there was anything to the theory, we would have expected lower social spending progressively to deliver more malnourishment. There is no such correlation. The bottom quartile is as successful as the second in fighting malnourishment.
  • Unfortunately we do not have figures to compare the change in social spending in the different countries. But what we do know, is that in South Africa social spending increased exponentially. Here is how a 2014 report of Statistics SA titled ‘Poverty trends in South Africa : An examination of absolute poverty between 2006 and 2011’, describes the growth of welfare in South Africa:

“South Africa’s social assistance system has expanded tremendously since 2000, growing from around 3 million grants to 15 million by 2011. Growth in grants has been primarily driven by the expansion of child support grants which increased from roughly 150 000 recipients in 2000 to over 10 million in 2011. The coverage of this grant has successively been extended to children in older years, reaching those between the ages of 15 and 16 in 2010 and thus increasing its ability and reach to improve the lives of those living below the poverty line. Between the IES [Income and Expenditure Survey] 2005/06 and IES 2010/11, the number of grant holders increased by over 46%, growing from 10.2 million in 2006 to 14.9 million in 2011”.[i]

Against the background of such growth, if these grants were necessary and effective in dealing with the problem of malnourishment, one would have expected that malnourishment would have been much worse in 2000, and would have been drastically reduced since then. Instead, as we see in the above figures, SA already had relatively low malnourishment by African standards, and it was not reduced by any significant degree between 2000 and 2015.

The authors Deveraux and Waider show[1] that while there has been some reduction in the prevalence of out-and-out hunger, the rate of stunting due to malnutrition was almost constant over the period 1993 to 2008, with a very modest decline in 2012.

The point is if grants were such a powerful instrument to fight malnutrition, should we not by now have seen a far more dramatic improvement?

We must remember that over the same period (2000-2015) unemployment in SA (on the narrow definition) increased from about 4 million to 5.5 million. That means that while it is true that many people were lifted out of absolute poverty by means of social grants, these grants went to an increasing crowd of jobless workers. (Theoretically of course they went in aid of children, but remember it is the parents who spend the money, so all the unemployed adults in an extended family are likely to benefit too). The result is not only that an increasingly unproductive process is taking place (as fewer people work for the food so distributed), but the number of mouths to feed (other than targeted children) is increasing all the time. This creates a classicwelfare trap. While fewer produce, more become dependent on consuming.

What is more, given the need to spread the meagre produce purchased with a grant in this way, is hardly likely to achieve the aim of good, balanced nutrition for children.

So inevitably the proposal is now to double the benefit. That must mean that there will be an increasing burden on the fiscus. According to the South African national budget for 2017/18, out of total income of R1 414.1 billion, R180 billion already goes to welfare[ii].

That amounts to about 11.5 per cent of the budget.[iii] It is not clear where the saving should come from to fund the doubling og the grant.

In this context it is worth revisiting evidence that amongst South Africa’s peers, countries with high state consumption spending invariably have higher unemployment:

In other words, the more the state spends (as is likely to happen if the suggestion of the DA comes to fruition), the more the takers are likely to be. The economic principle is known as “the tragedy of the commons”: As soon as a resource is free and available to the public, it tends to be exhausted as more and more people make use of it. There is no check on the consumption. Long before any economic benefits of improved child nutrition will be felt, those benefits will be swamped by the growing idleness that feeds on it.

What is more, there is a strong case to be made that welfare grants contribute to our reprehensibly low start-up rate of small businesses.

Here are the percentages of the population intending to start a business in South Africa compared to the other African countries cited in the Global Entrepreneurship Monitor 2016/17 Global Report (GEM Report):

 

Country Entrepreneurial intentions (%)
Burkina Faso 63.7
Cameroon 34.4
Egypt 63.8
Morocco 36.2
South Africa 10.1
Average, excluding South Africa 49.5

Source: Global Entrepreneurship Monitor 2016/17 Global Report[iv]

 

It is clear that the vast majority of our unemployed do not even consider starting a business.

The same story is told by the figures showing ownership of new businesses:

 

Country New business ownership rate (%)
Burkina Faso 13.5
Cameroon 10.9
Egypt 6.6
Morocco 4.3
South Africa 3.3
Average, excluding South Africa 8.8

Source: Global Entrepreneurship Monitor 2016/17 Global Report

 

Someone sitting at home (possibly in a free government house) who receives a grant providing enough to buy food for the family, may well have felt compelled to start a small business in the absence of that grant. It is clear that there is a perception that the government will provide. There is no urgency to start new businesses.

Is South Africa exceptional in this regard? Here is a list of various African countries (selected on the basis of availability of data) and the percentage of GDP paid towards social welfare by each:

 

Country Total public social expenditure as % of GDP Total public social expenditure per capita (US$)
Burkina Faso 1.200 20.35
Central African Republic 2.800 17.32
Djibouti 0.100 3.49
Ethiopia 1.100 17.91
Ghana 0.500 21.05
Kenya 2.500 77.22
Morocco 0.900 70.57
Namibia 3.400 353.97
Nigeria 0.300 18.01
Senegal 1.000 24.10
South Africa 3.000 396.27
Sudan 0.600 26.32
Tunisia 0.500 58.09
Uganda 0.600 11.10
Zimbabwe 0.400 7.15
Average, excluding South Africa 1.057 51.90

Source: World Bank[v]

 

Save for Namibia, South Africa is by far the highest spender of state funds on welfare in terms of percentage of GDP. South Africa spends three times as much on welfare expressed as a percentage of GDP, but more than six times as much in absolute dollar terms per capita, than its African counterparts.

Looked at another way: as there are about 17 million welfare recipients in South Africa (about 30 per cent of the population), we are talking of a massive injection of cash for no productive work in return. That $396.27 per capita per year translates to about R1 350 per beneficiary per month on average. In comparison to South Africa’s $396.27, of the entrepreneurial countries identified earlier, Burkina Faso spends $20.35 per person per year. Uganda, recently named the most entrepreneurial country in the world,[vi] spends a puny $11.10. These countries have such low welfare payments that clearly there is strong motivation to work or start a business.

No country can hope to supply jobs to all of its citizens who want to work, without a growing business sector. Every single private-sector employer once was a business start-up.

There is no way in the world that we will reverse the growing tide of unemployment by means of welfare grants targeted at children, while those are gradually and voraciously eaten up by the unemployed.

 

In its May 2016 report ‘South Africa: A new growth strategy’, the SAIRR highlighted the following change in the relationship between the number of people in employment and the number of people receiving social grants:

 

“… the number of people on social grants now exceeds the number of people in employment. In 2001, before the major roll out of child support grants occurred, there were 312 employed people for every 100 on social grants. Now there are only 86 people with jobs for every 100 people on social grants”.[vii]

 

Welfare grants are displacing employment. The only sources for state expenditure are taxpayers’ money, state borrowing or printing cash. All of these undermine the collective purse of the country, taking up money that could have been used by the private sector to create real jobs and wealth.

 

Africa Check recently reported:

 

“There is concern over whether South Africa’s spending on social welfare is sustainable in the long term. According to research that has compared the government’s expenditure on social grants and civil service remuneration since 2008 with government revenue over the same period, these will absorb all government income by 2026 if current growth trends are not adjusted” [my emphasis].[viii]

 

That may well not happen. But how are we to turn the growing trend of unemployment around if we were to double child care grants? There is not a socialist policy that fails (and believe me, this one is failing) that does not sooner or later elicit the retort from its proponents: What we need to do, is just to spend more money on it.

No we do not. What we need to do is to create more jobs. Millions more. Towards which which the Job Seekers Exemption Certificate, also proposed by the DA, is an excellent start.

[1] http://foodsecurity.ac.za/Media/Default/Publications/Final_Devereux%20%20Waidler%202017%20-%20Social%20grants%20and%20food%20security%20in%20SA%2025-Jan-17.pdf

[i] Statistics South Africa, ‘Poverty trends in South Africa: An examination of absolute poverty between 2006 and 2011’, 2014, available at http://www.statssa.gov.za/publications/Report-03-10-06/Report-03-10-06March2014.pdf (last accessed 22 March 2017).

[ii] Budget 2017: Budget Review, National Treasury of the Republic of South Africa, 22 February 2017.

[iii] Ibid.

[iv] Global Entrepreneurship Monitor 2016/17 Global Report (Global Entrepreneurship Research Association, 2017), available for download at http://www.gemconsortium.org/report (last accessed 20 March 2017).

[v] World Bank, Social Security Protection Indicators, available at http://datatopics.worldbank.org/aspire/indicator/social-expenditure (last accessed 22 April 2017).

[vi] Megan Kurose, ‘The most entrepreneurial country in the world (hint: it’s not the U.S.)’, StartupRounds, 19 January 2017, available at https://www.startuprounds.com/entrepreneurial-country-world-hint-not-u-s/ (last accessed 26 April 2017).

[vii] SAIRR, ‘South Africa: A new national growth strategy’, May 2016, available at http://irr.org.za/reports-and-publications/occasional-reports/files/sairr_national-growth-stategy_web_200516.pdf (last accessed 20 March 2017).

[viii] Louise Ferreira, ‘Factsheet: Social grants in South Africa – separating myth from reality’, Africa Check, available at https://africacheck.org/factsheets/separating-myth-from-reality-a-guide-to-social-grants-in-south-africa/ (last accessed 12 March 2017).

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EAST BLOC ECONOMIC REFORM: LESSONS FOR SOUTH AFRICA

I have always puzzled as to why some formerly communist countries came out of the bloc so much more quickly (pun intended) and effectively than others.

Estonia –the flavour of the month amongst commentators – is a wonderful prototype of successful reform. No one knows exactly how much the per capita income of Estonia was before the introduction of market-based reforms in the early nineties. But anecdotal accounts suggest that it, and life quality in general, was poor. But we do have decent statistics from 1995 onwards.

What we also know, is that the country’s economic system changed from a communist/socialist one in the years up to 1989, to a free-market system. Today its economy is the tenth freest in the world.

Here is a table setting out the change of Estonia to a free-market system, according to the Freedom of the World Index, together with its per capita GDP over the period (The freedom rating components of 1990 are sparse, and the average does not contain all the elements available):

1990 1995 2000 2005 2010 2014 2015 2016
Economic freedom 4.49 7.60 7.96 7.82 7.80 7.95
GDP per capita (Constant 2010 $) 7313 10108 14681 14282 17453 17733 18094
Unemployment 1.5 10 15 9 16 9 7 5

 

What we note is that:

  • Economic freedom gradually increased;
  • The country’s real per capita GDP grew by 150% between1995 and 2016;
  • After volatility in the years of the transition and the financial crisis, unemployment has declined steadily.

A point that should not be left unmade, is about basic education.  In 2015, Estonia was ranked in the top ten nations in both math and reading in the PISA international educational rankings, and in science it was ranked third in the world behind Singapore and Japan.

Estonia has one of the most decentralised education systems in the world. This extends not only to school management, but also to teachers. Promotion and appointment of teachers, curriculum, time allocation and testing procedures are mostly decied at school level.

Moreover, Estonia has school choice. In addition to a guaranteed place in a local public school, a learner may also apply to any private or selective school, each of which receives a state subsidy, but may charge extra. That has the benefit of introducing competition into the education arena, resulting in incentives for both private and public schools to improve.

The combination of a free market and good education has predictably unleashed the growth potential of the Estonian economy.

A comparison of Estonia with its peers – ie former Soviet satelite states that emerged from the former East Bloc – shows how important a free market is. The graph below compares average annual real per capita GDP in dollar terms. That way of measurement is more useful than percentage growth, because to a large degree it eliminates the phenomenon of convergence – namely that poorer countries, all things being equal, grow percentage-wise faster that wealthy ones.

Country Average economic freedom rank (90-15) (EFW) $ per capita GDP growth 1995-2016
Estonia 13.8 1207
Georgia 18.75 591
Lithuania 29.2 1503
Ave 1st quartile 20.58 1100
Latvia 30.4 1306
Slovak Rep 40.8 1116
Romania 51.5 502
Ave 2nd quartile 40.9 974
Czech Rep 51.6 652
Hungary 54.33 481
Poland 67 934
Ave 3rd quartile 57.64 689
Bulgaria 68.33 419
Slovenia 73.22 726
Croatia 79.4 484
Ave 4th quartile 73.65 543

 

There is no question: Those countries that maintained a high level of economic freedom in the post-communist era, and did so over a number of years consistently, on the whole reaped the benefits.

Having said that, Georgia is an outlier. Despite its considerable economic freedom, its performance (as measured here) was average at best. That is largely the result of the fact that it started off a lower base than any of the other countries. If measured in percentage terms, its per capita GDP grew at a phenomenal 12 percent per annum, higher than any country on the list. That is despite the fact that it has relatively poor education, as the next graph shows (It is ranked 105 out of 139 in the Global Competitiveness report). By contrast, Poland (with 4th best education among the countries shown) does quite well despite a lack of economic freedom:

Country Education rank $ growth
Estonia 5 1207
Slovenia 52 726
Czech Rep 59 652
Poland 72 934
Lithuania 73 1503
Bulgaria 87 419
Latvia 88 1306
Georgia 105 591
Hungary 111 481
Croatia 112 484
Romania 115 502
Slovak Rep 118 1116

 

None of this should come as a surprise. In South Africa we also, like these former East Bloc countries, emerge from an era of economic mismanagement. We too need to reform our economy in order to create jobs for all. As the above evidence shows, that will only produce optimal dividends if we – besides drastically improving education – reform all aspects of the economy, including taxes and high state spending, inflation (especially of asset prices), international trade and business regulation including labour, and the rule of law – an essential part of market freedom. Needless to say, the right to protection of private property is a cornerstone of the rule of law, and its threatened abolishment will destroy any ambitions of productive reform.

By way of comparison, this is where South Africa stands:

Average free-market rank 1990-2015: 75.33

Education rank: 114

Average annual per capita growth in dollars 1995-2016: $98.

In other words: Our average free-market rank would place us second last on the list, if we were to be compared to the former communist countries.

Our education ranking is just about doubly as bad as any on the list.

And our annual per capita growth in dollars is less than 10% of the freest countries, and less than 20% of the least free group. Even percentage-wise, our per capita GDP is worse than any country on the list.

Click on this link for a graph showing just how badly we compare:

https://data.worldbank.org/indicator/NY.GDP.PCAP.KD?end=2016&locations=GE-EE-LT-LV-CZ-MU-PL-RO-ZA&start=1995

It is fair to say our reform project is in trouble, and a drastic U-turn is called for.

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CHAPTER-BY-CHAPTER CRITIQUE OF 23 THINGS THEY DON’T TELL YOU ABOUT CAPITALISM: PART 3

I am still writing and publishing a critique of Ha-Joon Chang’s book with the above title. In the introduction he stakes his claim:

What the free-marketers have promised is at best half true.

Free markets make economies worse off than the correct alternative policies.

Capitalism remains the answer, but government intervention is necessary to make it work.

The book is based on the formula that free-marketers are guilty of peddling myths, and the author’s business is to debunk those myths (“things” the reader presumably does not know) – one per chapter. For that reason it is convenient to follow the same formula to criticise the points the author makes.

Thing 3: Most people in rich countries are paid more than they should be.

In this chapter the author makes the point that in rich countries people are paid dramatically better for doing the same job, only because the system of the economy in rich countries is more “advanced”, and because their governments exercise protectionism in the form of immigration control. The fallacy that the free marketers commit is that they wrongly claim that people are paid better for their relatively higher productivity, which is not the case.

The implication is that government practices intervention in the form of restricting labour mobility into the country, which is a necessary thing, and that discredits the idea of a free market. In other words, if the market had been truly free, it would have permitted everyone who wished to enter, to do so. And then all workers entering that society would have been paid low wages as in the poor countries of their origin.

Central to the argument is the assertion that a capitalist system needs this kind of intervention in order to be optimal. The author believes that: “Too rapid an inflow of immigrants will not only lead to a sudden increase in competition for jobs but also stretch the physical and social infrastructures, such as housing and healthcare, and create tensions with the resident population.”

If I understand the argument correctly, then it is that this is a good thing, because the sudden influx of low-wage competition would be bad for social cohesion in that country. It would make workers in the rich country unhappy because their wages would be suppressed.

What does not seem to bother the author, is what happens to the workers of the poor country. He seems to be quite sanguine about the fact that they are paid at the relative level of their productivity, even if that brings about huge inequality of income between workers of the two countries.

Surely if he is concerned about social justice, he should rather worry about the poor country’s workers?

Let’s start with the point about competition. The puzzling aspect is that Mr Chang sees an increase in competition as a problem. Why would that be, especially as he says the workers in the rich country are paid more than they are worth?

Competition is beneficial, because it improves the cost-efficiency of labour, and lowers consumer prices in the economy. It has been shown repeatedly that immigrants are a boon to any economy[1]. It is not clear then why Mr Chang wants to keep the wages high by way of government intervention. It is almost as if he sees the country as a kind of trade union that operates to benefit its members at the exclusion of non-members.

But let’s examine whether free immigration would cause the disaster the author fears: does it mean we are likely to see a race to the bottom as immigrants drive down wages?

That is very unlikely.

First of all we must remember that all workers in a rich society like Sweden get paid higher wages than workers in, say, India. Everyone in Sweden is better off, because the economy is more advanced and more productive. That means that employers have to offer higher wages than they would in India, because otherwise the wages offered would not be competitive in the Swedish economy. In Sweden no-one would sweep the streets, or drive a taxi, for the same price as in India. Because everyone gets paid more, the cost of living is higher in Sweden, as higher labour costs make things more expensive. So Swedish employers have a limited choice. They have to pay more, or forego the benefit of the service.

But having said that, workers in Sweden are not necessarily rich because of such an arrangement. If we apply the principle of purchasing power parity, then a taxi driver in Sweden cannot buy all that much more in Sweden than his counterpart in India can, when it comes to basic necessities. Yes of course the quality of goods, services and housing is better in Sweden than in India. But the worker has to pay high Swedish prices to get those things.

But is it entirely correct to say that the productivity of a taxi driver is the same in Sweden? Of course, taken literally, it is. A taxi driver in either society covers only so many miles per time unit. He cannot really achieve better output than the Indian driver can.

But surely that is not the end of the story, is it? The passenger still gets much more value for money in Sweden. And the reason for that is that he or she gets from point A to point B in Sweden, not in India. We know that the general quality of life is higher in Sweden. Being transported where you want to go (or getting any service) in Sweden is for that reason alone, more valuable in Sweden than in India. Productivity narrowly defined is not the only reason why consumers get more value for money out of a taxi ride. Which partly explains why workers get paid more in rich countries. Consumers are prepared to pay for the more expensive service, after all.

That also explains why workers want to emigrate to free, wealthy countries, rather than the other way around.

Even so, immigrants to a rich country would probably still charge less for the same job – in other words, undercut their local competition to some extent. The evidence is for example that immigrants to the USA are paid less when they start working, (even though they typically soon surpass the locals)[2].

But there are severe constraints on immigrants undercutting local workers. Immigrants still have to make a living in the new economy, which is vastly more expensive than where they come from. That being so, they will discount the price of their labour only enough to create a competitive advantage at the margin. They are hardly likely to ignite a “race to the bottom”.

In the meantime investors and consumers benefit from the cheaper services, as the former make more profit (leading to more investment) and the latter enjoy cheaper services. In a competitive market taxi rides will ultimately become cheaper.

More serious problems occur when the taxpayer has to pay for social welfare made available to immigrants. However, no free market would permit that. Creating a taxpayer-funded safety net for immigrants creates a moral hazard and an economic risk of freeloading. In a truly free market there would not be such a risk.

Will unfettered immigration lead to social unrest?  Bear in mind again that we are talking about a free market. In a truly free market there is prosperity and a high demand for workers. It is a well-known phenomenon that unskilled immigrant workers often do jobs that locals do not want to do. Locals who lose their jobs due to immigrant competition will mostly find other jobs in a free market. Truly free markets have jobs and rising incomes for everyone, including the poor.

It is further so that free markets attract by far the highest numbers of immigrants. While about 3% of the world population are migrants, close to 30% of the population of the top ten free-market countries are.  The world is replete with examples of free markets that absorb immigrants all the time, and where unemployment is still extremely low. That alone testifies to the success of a free-market economy, and shows that the supposed danger posed by incoming labour is vastly overrated.

But even so a situation can be imagined where unfettered immigration would, at least in the short term, put pressure on the social fabric of a free-market country. But the only reason why that would be so, would be because the countries from which these migrants come, are not free markets with similar levels of prosperity in the first place. Migrants only leave their home countries for free markets because they realise that the latter offer better jobs and business opportunities. As we see, to some extent that has already been happening for years. For many years free-market countries have served as the refuge of poor people: The US, the UK, New Zealand and Australia, for example, have been havens to Mexican, Polish, Irish, Indian, Chinese and Japanese immigrants.

The question is whether we can say that an economic system that does not allow all and any comers to join it, is not a free market. In our current setup what we refer to as an economic “system” is normally one that is run by a government with jurisdiction over a particular territory. Such a system is therefore assessed according to how well it provides a living to its citizens, not to all and sundry putting up their hands and saying “me too”. To expect such a system to be judged for both its economic freedom and its economic success based on the life quality it provides to millions who do not even form part of it, is grossly unfair.

Indeed, one of the driving forces behind economic reform is precisely the fact that we have jurisdictional competition. The very fact of jurisdictional competition has spurred governments of unfree countries to reform.

The fact that the free market of one country is not able to accommodate and provide a living to all manner of citizens of other countries that do not similarly have free markets, can barely be laid at the free market’s door.

On the other hand the answer to the problem is not to exclude all immigrants by force either. It may lie in helping to make the immigrant’s country of origin so attractive that he does not want to leave in the first place – in other words, to encourage that country also to have a free market.

Nothing stands in the way of a free-market country, for example, doing what free–market countries already do in respect of trade, namely to conclude agreements that eliminate protectionism – except that, instead of free trade, they permit a mutual flow of labour, on condition that any new member to the pact undertakes to reform to a free-market economy. (Or it can be done in stages: X number of immigrants for Y number of reforms, etc).

Of course in such an event there will be much less need for immigration. Then there will be so many more job opportunities in the new member countries, that workers might be happy to stay where they are. Such a pact will eliminate the income disparities between India and Sweden much more rapidly than any other solution.

It follows that if Mr Chang is interested in social justice (and it is by no means clear that he is) he should not engage in semantic games by trying to prove that markets where governments exercise sovereignty over who may cross its borders, are not free markets. Perhaps we can even concede that he is right. Maybe immigration restriction is an intervention in the market. But that would only be necessary because workers in unfree, poor countries are oppressed. That is where his attention should be focussed.

The main reason why workers in Sweden are paid more than workers in India, is because workers in India are paid much less than they would have been paid if India had been a successful free market like Sweden. We should not blame the successful system for that state of affairs. Much less can we say that that system is not free.

For the time being, we can conclude by saying that the statement that people in rich countries are paid more than they should be, holds no water. The very fact that they are paid more in a free market, is a force for the good. But for that, the poor citizens of unfree societies would have no incentive to ask for, and their governments to give them,  a better system.

[1] The effects of immigration on the United States’ economy’, Penn Wharton Budget Model, 27 June 2016, available at http://www.budgetmodel.wharton.upenn.edu/issues/2016/1/27/the-effects-of-immigration-on-the-united-states-economy (last accessed 19 April 2017).

[2] Gwynn Guilford, ‘Immigrants are getting more out of America’s recovery than native-born households are’, Quartz, 20 September 2016, available at https://qz.com/781527/immigrants-are-getting-more-out-of-americas-recovery-than-native-born-households-are/ (last accessed 17 April 2017).

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CHAPTER-BY-CHAPTER CRITIQUE OF 23 THINGS THEY DON’T TELL YOU ABOUT CAPITALISM: Thing 2: Companies should not be run in the interest of their owners.

This is the second delivery in the series constituting a chapter by chapter refutation of Ha-Joon Chang’s book with the above title. In the introduction he stakes his claim:

What the free-marketers have promised is at best half true.

Free markets make economies worse off than the correct alternative policies.

Capitalism remains the answer, but government intervention is necessary to make it work.

The book is based on the formula that free-marketers are guilty of peddling myths, and the author’s business is to debunk those myths (“things” the reader presumably does not know) – one per chapter. For that reason it is convenient to follow the same formula to criticise the points the author makes.

Thing 2: Companies should not be run in the interest of their shareholders

The basic premise of this chapter at first seems seductive. The author points out that in the 18th and 19th centuries limited-liability companies were the exception rather than the rule. Governments granted a dispensation permitting limited liability by exception, and only late in the 19th and early in the 20th century was limited liability a common phenomenon. The suggestion is of course that it required the intervention of the state to bring about the undoubtedly beneficial phenomenon of limited-liability companies, which allowed shareholders to feel much freer to invest their capital, as they would not be open to claims instituted by creditors of the company. That set in motion the positive cycle of investments that aided the industrial revolution so much.

The basic fallacy underlying this argument is of course the assumption that it was government intervention that allowed limited-liability companies to come about. The truth is (and this is even apparent from the author’s own account) that for years the government prohibited limited-liability companies, except for certain state monopolies and so on. Far from being the facilitator of limited liability, the state for years prevented it.

Just think about it logically for a moment: In a truly free market surely nothing prevents a company from declaring itself a limited-liability company? Any party contracting with that company would then know that it is a condition of any deal with the company that shareholders may not be sued if there is a dispute. Contracting parties would then be free to choose whether to enter into a contract with the company on that basis or not.

A further fallacy in the author’s thinking is the idea that, because of the limited-liability status so graciously bestowed on companies (to benefit and protect their shareholders) the shareholders are protected and run no risk. It is of course true that they cannot be sued for damages and other claims from creditors, but surely it is they who risk their hard-earned capital by investing it in the company? If that bet fails, and the company is liquidated, they lose their investment. Why should they not be rewarded by the company managing itself to improve shareholder value? Take the owner of the corner shop, a sole proprietorship. He is presumably entitled, as the sole investor, to run the business in his own interest and that of his family? If that is so, then why may the company not be run in the interests of its owners?

From there the author then proceeds to demonstrate that in the US two historical developments occurred: the traditional family business of the late 19th and early 20th century disappeared, and in the eighties it became vogue to run a business in the interests of its shareholders, which in turn resulted in company buy-backs of their own shares, which reached a climax at the time of the 2008 crash.

He compares the periods of the seventies and eighties and the period of 1990 to 2009, to demonstrate that per capita income growth declined. The point of this is to demonstrate of course that the second was a period of shareholder maximisation, and see, it resulted in less growth. I tested this by comparing the per capita growth rates of the two periods:

1970-89: 54.5%

1990-2009: 31%

If we ignore for a moment that the second period is inclusive of the biggest post-depression financial crash in the history of the US, then the point seems to be made.

Growth rates slowed down in the era of shareholder maximisation, not so?

The author’s explanation for the slowdown seems to be that, contrary to free-market countries like the US and the UK, some countries in Europe and the East did not suffer in the same way due to the emphasis on shareholder value, and indeed because these countries had mechanisms preventing such buybacks and consequent large pay-outs to managers and shareholders, outsourcing and off-shoring of labour, dismissal of workers and suppression of wages. Such measures include “stabilizing” large shareholdings for the state (France), differential voting rights for founder families (Sweden), supervisory boards for workers (Germany), cross-shareholding among companies (Japan).

Well, then it is only fair that we subject these countries to the same growth comparison, not so? Here are the results (excluding Germany, as the unification of 1989 falls between the two periods, and bedevils any calculation):

France:

1970-89: 58.54%

1990-2009: 23.07%

Sweden:

1970-89: 41.77%

1990-2009: 30.72%

Japan:

1970-89: 95.4%

1990-2009: 12.7%

So it is clear that all the countries suffered downturns in their income in the second period. So whatever it was that caused the downturn, also did so in the non-Anglo-American countries. And equally importantly, the measures that were supposed to stop share buybacks, did not succeed in preventing the fallout in terms of growth.

One obvious candidate to explain the downturn in the wealthy countries, is the economic phenomenon of convergence. For example, here is Wikipedia[1]:

The idea of convergence in economics (also sometimes known as the catch-up effect) is the hypothesis that poorer economies‘ per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income. Developing countries have the potential to grow at a faster rate than developed countries because diminishing returns (in particular, to capital) are not as strong as in capital-rich countries. Furthermore, poorer countries can replicate the production methods, technologies, and institutions of developed countries.”

In other words, over time, wealthy countries tend to grow more slowly.

Here is another candidate, namely economic freedom:

Country Ave free-market rating 1980-90 Ave free-market rating 2000-2010 Change in rating Change PC GDP first/second period
US 8.275 8.216 -0.59 -43.11%
France 6.545 7.4 +0.855 -60.59%
Sweden 6.31 7.583 +1.273 -26.45%
Japan 7.655 7.783 +0.128 -86.68%

 

France and Japan, for all their protective measures, fared far worse than the US. These countries at all relevant times had far lower levels of economic freedom than the US. The country that bucked the trend of a decline in growth best is Sweden. Sweden is also the country that underwent the biggest deregulation (ie became freer) between the two periods.

That of course still does not mean that the share buyback trend is a force for the good, or that it doesn’t matter. It is, on the face of it, worrying that companies do not invest in machines, technology and training of workers, instead choosing to cannibalise their own shares. This is bound to be less than optimally productive. But knowing that, still begs the question: was it free enterprise that caused it?

Why did this tendency increase so much during the period 1980 to date, as correctly pointed out by the author?

The answer lies in easy money. Here is a graph showing the federal Fund interest rates in the US from 1971 to date:

The declining interest rate trend since the early 1980s is notable. Equally obvious is that the interest rates imposed by the Fed trended downward over precisely the period that the share buyback trend grew in severity. It is also the time during which a decline in productivity has been noted, as well as a trend for businesses to buy shares in businesses (including their own shares) instead of investing in research and development, training, new technology and new plant. The culture that took hold since the seventies has been one where consumption has been fuelled by debt, not productivity. This is all no coincidence. It is a fundamental principle of economics that production has to precede consumption. Low interest rates effectively open the door to money creation out of nothing. That encourages malinvestment in the form of share buying instead of building factories (to simplify) and fuels consumption[2]. The Mises Institute explains:

“On account of loose monetary policy and the subsequent increase in the money supply, the process of wealth transferring from wealth generators to the holders of the newly created money is set in motion. Since this new money was generated out of “thin air,” nothing was exchanged for it hence we have here an exchange of nothing for something.

This means the holders of newly printed money have taken from the pool of real wealth without giving anything back in return. Consequently, this puts pressure on the pool of real wealth. Similarly to government, these holders of newly created money are engaged in non-wealth generating activities. (These activities sprang up on the back of money pumping. In the free unhampered environment these activities, which ranked as low priority would not be undertaken.)”[3]

It is no wonder the US economy has suffered.

For our purposes the important point is that the increasing (and damaging) trend of growing share buybacks is more than explained by the Fed artificially pushing interest rates down, in effect pumping money into the economy. Needless to say, this process of priming the economy by means of low interest rates, is government intervention in the economy. It is not the free market at work. In a free market money would simply be a liquid medium of exchange, and interest rates would reflect supply and demand of real credit. In a fast-growing economy interest rates would tend upward, because demand for credit would increase. That would encourage ordinary people and businesses to enter the loans market. Conversely, if for some reason the growth rate of the economy declines, so would interest rates.

Now we can return to the notion that companies should not be run in the interest of their shareholders. That is like saying people should not obey their survival instinct. In a properly functioning economy, businesses would operate like the corner café or the local tailor: They would aim to serve their customers by giving the best value for money, because they would be driven by the selfish and normal urge to better their own economic well-being. To the extent that companies hire professional managers, the latter would be rewarded on a fiduciary basis, namely that contractually they are obliged to serve the interests of the company first and foremost. That is economically to all intents and purposes indistinguishable from the interests of the shareholders. Employees should receive rewards and favourable terms and conditions of employment to the extent that they serve the interests of the company in that sense, and not as an aim in itself.

Any suggestion that any other outcome is possible, likely or desirable, is clearly nonsense.

[1] https://en.wikipedia.org/wiki/Convergence_(economics)#Examples

[2] See https://seekingalpha.com/article/3956980-give-liberty-give-debt

[3] https://mises.org/wire/economic-growth-requires-more-low-interest-rates

 

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CHAPTER-BY-CHAPTER CRITIQUE OF 23 THINGS THEY DON’T TELL YOU ABOUT CAPITALISM

For the next few weeks I am writing and publishing a critique of Ha-Joon Chang’s book with the above title. In the introduction he stakes his claim:

What the free-marketers have promised is at best half true.

Free markets make economies worse off than the correct alternative policies.

Capitalism remains the answer, but government intervention is necessary to make it work.

The book is based on the formula that free-marketers are guilty of peddling myths, and the author’s business is to debunk those myths (“things” the reader presumably does not know) – one per chapter. For that reason it is convenient to follow the same formula to criticise the points the author makes.

Thing 1: There is no such thing as a free market

The point that is made here, is that no market is completely free from state intervention.

To this one’s instinctive response is to say: so what?

There is no such thing as a completely free market. Even hard-core libertarians allow for some state role in the economy. For example, today it is generally accepted amongst free-market advocates that a country practising free enterprise policy should have a court system; a law of contract; property laws; a sound monetary system, and so on.

In practice there are of course more interventions than those.  In Hong Kong, probably the freest economy on earth, the state pays for education and housing for example. But the state interferes less than in any other country.

The point is that economic freedom is a relative concept. And the evidence is overwhelming that as a rule the freest economies fare the best in terms of any criterion yet designed for measuring life quality, including income, poverty relief, happiness, environmental protection, health, education and human rights.

The author’s tacit subtext is of course that state intervention is a good idea, and works better.

For example, the bailout of Freddie Mac and Fannie Mae in the US is cited as examples that prove that the government in America intervenes in the economy. Whether this is a good thing, is seemingly taken for granted, without a shred of evidence. Who knows what the effect would have been if these institutions had been left to their own devices? We cannot assume what that would have been.

The argument is similar to the one about the so-called developmental state, of which the Asian Tigers are typical examples. It is assumed that Singapore proves the case. But between 1961 and 1997 the per capita GDP in constant dollar terms of Singapore and Hong Kong were almost identical. For all its developmental strategizing, Singapore was slightly behind in the race, while the freest country, with the least intervention of any in the world, was slightly ahead. That raises the question: Was Singapore effective because the state intervened, or in spite of it? Then Hong Kong was handed over to China, and investment rates dropped. But until then, the laissez faire economy of Hong Kong was at least as good as the slightly more interventionist one of Singapore.

It must be emphasised at the outset that, despite the activism of the Singaporean government, in the period that of 1960-2015, both Singapore and Hong Kong were two of the freest economies on earth – in fact, throughout most of this period they were numbers one and two on indices measuring economic freedom. To a large extent, this explains why they greatly outclass the other Asian tigers, and indeed all other states in the Far East.

As a further example, the author makes the point that all countries today have anti-child labour rules. The implication is that it is the anti-child labour rules that caused child labour no longer to be used. This inference is drawn because of the coincidence of both the rules and no child labour in the same country at the same time. There is of course a good chance that the opposite is true, namely that the country can afford the luxury of such laws because it is wealthy enough to send all its children to school. That is, wealthy, successful countries do not need these rules, and in failing, poor countries they do not work.

To confirm this, Wikipedia for example reports[1] that

“In Cambodia, the state had ratified both the Minimum Age Convention (C138)[3] in 1999 and Worst Forms of Child Labour Convention (C182) in 2006, which are adopted by the International Labour Organization (ILO). For the former convention, Cambodia had specified the minimum age to work to be at age 14.[4]

Yet, significant levels of child labour appear to be found in Cambodia. In 1998, ILO estimated that 24.1% of children in Cambodia aged between 10 and 14 were economically active.[5] Many of these children work long hours and Cambodia Human Development Report 2000 reported that approximately 65,000 children between the ages of 5 to 13 worked 25 hours a week and did not attend school.

Despite the laws implemented by government, economic necessity dictates that child labour be used. The converse is just as true. In a successful wealthy economy, there is barely any demand for child labour.

Here is a list of the worst offenders in terms of child labour out of 197 countries rated by Maplecroft[2], together with their free-market rating and GDP per capita:

Country Child labour rank Market freedom rating (out of 159) Per capita income (out of 198)
Eritrea 1 190
Somalia 1 198
DRC 3 147 195
Myanmar 3 151 133
Sudan 3 144
Afghanistan 6 180
Pakistan 6 127 141
Zimbabwe 8 144 170
Yemen 9 123 171
Burundi 10 125 196
Nigeria 10 114 134
Average   133 168.3

 

The offending countries are desperately poor without exception. The best of them is Myanmar at number 133 out of the total of 198. The poorest country in the world, Somalia, is also on the list. As for economic freedom, the offending countries whose economic freedom has been rated, all fall squarely in the bottom 25% of free countries.

The statistics for the countries with the least child labour are not readily available, but education quality is a good indicator of child welfare. The 10 best countries in terms of education, according to the OECD Better Life Index (with their free-market rankings out of 159 in brackets) are Finland (17), Australia (9), Denmark (15), Germany (23), Slovenia (73), Japan (39), Sweden (27), Poland (51), Ireland (5) and Korea (32). Their per capita GDP rankings (out of 197) are Finland (28), Australia (20), Denmark (23), Germany (19), Slovenia (41), Japan (31), Sweden (18), Poland (47), Ireland (7) and Korea (33). All the countries are relatively free-market countries with high incomes.

No one can seriously contend that it was child labour laws that were responsible for the wealth and well-being of children in these countries. The inference is irresistible that they would have been well off in any event. Children in wealthy countries are sent to school, not put to work in factories. Children are enabled to become as productive as possible. The converse is true in unfree, poor economies, where parents (sadly) choose to use their children’s labour to survive. .

The same applies to rules like labour standards and minimum wages. Poor people (the poorest 10% of the population) in free-market countries[3] earn about ten times as much as their counterparts in unfree countries[4]. Minimum wages have absolutely nothing to do with this. Productivity that comes with economic development, education and training has everything to do with it. A good example is the clothing industry, where – despite the threat of forced closure – hundreds of clothes factories for years operated below the levels imposed by bargaining council minimum wages. In poor countries these standards on the whole do not help.

In the US a study was done by the US Chamber of Commerce comparing states with high, intermediate and low levels of labour regulation (called ‘Poor’, ‘Fair’ and ‘Good’ respectively). When it came to assigning overall rank, 15 states were ranked ‘Good’, 20 ‘Fair’ and 15 ‘Poor’. In the five-year period from 2009 to 2014, I calculated the average employment growth in each group, which was as follows:

Good  2.72 per cent

Fair     0.6 per cent

Poor    0.49 per cent

Quite clearly it pays to be ranked ‘Good’. Average employment growth in this group is about 4.5 times higher than in the ‘Fair’ group, and 5.5 times higher than in the ‘Poor’ group.

A more dramatic illustration of the value of low regulation is to compare the percentage of jobs created over the same five-year period for all the states in each group combined. The ‘Good’ group’s employment growth was 4.4 per cent, while that of the ‘Poor’ group was a measly 0.6 per cent. In other words, the ‘Good’ states proportionally created more than seven times as many jobs as the ‘Poor’ states did. In actual numbers, the ‘Good’ states created 2 124 734 jobs (starting from about 47 million), while the ‘Poor’ states created only 390 551 jobs (starting from a much larger 62 million).

And in case you were wondering, per capita income growth is also better in the ‘Good’ states:[i]

Good  1.82 per cent

Fair     1.64 per cent

Poor    1.68 per cent

Labour laws and minimum wages not only had no beneficial effect on incomes in the Poor states; it exacerbated them drastically.

It is enough to conclude that while it is true that most, in fact all economies contain mixtures of freedom and state intervention, that tells us nothing about the superiority of either.

[1] https://en.wikipedia.org/wiki/Child_labour_in_Cambodia

[2] https://edition.cnn.com/2013/10/15/world/child-labor-index-2014/index.html

[3] The first quartile on the Economic Freedom of the World Index

[4] The fourth quartile on the Economic Freedom of the World Index

[i] ‘United States real per capita personal income growth by state: Average annual percent change, 1959-2015’, United States Regional Economic Analysis Project, November 2016, available at https://united-states.reaproject.org/analysis/comparative-indicators/growth_by_decade/per_capita_personal_income/reports/#page_3 (last accessed 1 April 2017).

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Definitions, facts, solutions: A reply to Henry A Giroux: Democracy in Crisis

This is a reply to Henry A Giroux: Democracy in Crisis, the Specter of Authoritarianism, and the Future of Higher Education, an article that attacks “neo-liberalism” as a major threat to universities as a democratic public space, and ultimately as a cornerstone of democracy itself.   (http://ecommons.luc.edu/cgi/viewcontent.cgi?article=1001&context=jcshesa). This is crucial in view of the current debate about the role of universities in South Africa.

uni

Definitions, facts and practical proposals. Whenever I deal with a piece like this, I feel the need to get three things straight at the outset. What is “neo-liberalism”? What are the facts concerning its application at this stage? And finally, what does the author propose should come in its place?

First then, the definition. Normally what people mean when they talk of “neo-liberalism”, is free-market policy. The author does however qualify this by suggesting it is a more authoritarian, undemocratic version of free markets, driven by selfish values hostile to the weak of society. If the suggestion is that there is an acceptable version of free-market policy that is none of those things, one has to agree.

It is important to understand what a free market is and is not. It is not anarchy.  An absolutely typical exponent of free-market policy is the Fraser Institute’s Economic Freedom of the World Index, which measures freedom of markets across the world. It regards certain institutions, such as courts of law and sound money systems, for example, as essential to a free market.  In other words, even where there is a free market, the framework is based on the principle that certain forms of regulation are essential to ensuring freedom.  Most significantly, the law of contract is central to the system, as is the law of property.  This is because the two principles of freedom of contract and protection of private property are crucial to the free-market system.  It is based on voluntary exchange of goods and services, and unless the legal system is able to enforce contracts voluntarily reached between adults, and the protection of property, such a system would be next to meaningless.  A free-market system also has a sound monetary foundation in that a monetary unit adopted by the system is stable and not inflationary.  That in turn is essential for the other cornerstone of the free-enterprise system, namely accurate price signals.

But most importantly, a free-market system has as an inherent ingredient the rule of law – the idea that people are governed not by the arbitrary whims of people, but by laws. That is a crucial ingredient of the policy,that is equally essential to democracy.

All these instruments are designed to protect the individual, including the poor, against abuse by the state and other people.

The free market does not rest on “an irrational belief in the market to solve all problems and serve as a model for structuring all social relations”. It is based on a rational belief – namely the belief that, as is evidenced by developments, the most effective economic system to improve the life quality of the largest number of people, given the inevitable scarcity of resources, is a free market. Can it solve all problems? Of course not. But on balance, is it better than the alternatives? You bet. The big picture is that

  • The world has globally moved in a free-market direction over the past 35 years, as the Economic Freedom of the World reports[1]:

“There are 109 countries for which the EFW data have been continuously available since 1985. … economic freedom has increased throughout the world during the past three decades. The average EFW rating of the 20 high-income countries was 0.8 units higher in 2014 than 1985 and that of the 89 developing economies, 1.7 units higher.” (Note, this is out of a possible 10, therefore increases were 8% and 17% respectively)

  • In that period billions of people have been lifted out of poverty:

“The extreme poverty rate in the developing world fell from 56.9% in 1980 to 34.5% in 2000, and 15.6% in 2014. Thus, the extreme poverty rate in less-developed countries is now more than 40 percentage points lower than in 1980. In 1980, 73.9% of the population of low-income countries had incomes below the moderate poverty rate threshold in 1980. By 2000, the moderate poverty rate in the developing world had declined to 59.2%, and by 2014 the figure had fallen to 34.3%. Thus, the moderate poverty rate was reduced by more than 50% during the 34-year period.”

This is not an ideology that “considers profit-making the essence of democracy”. The essence of democracy is power given to the people – to have an effective say in decisions affecting them, to be protected against the power of government, to be free to live life with as many choices as possible. These principles are not only compatible with free-market policy, they are essential to it. Most people in a free market never take profit in the normal sense of the word. They are employed through contracts freely concluded. They benefit yes, just as much as employees, as consumers.

For example: Jason Furman, the Chair of the Council of Economic Advisers to President Clinton, explained in 2006:

“There is little dispute that Walmart’s price reductions have benefited the 120 million American workers employed outside of the retail sector. Plausible estimates of the magnitude of the savings from Walmart are enormous – a total of $263 billion in 2004, or $2,329 per household.”

Ordinary people enjoy the enormous benefits of profit-driven consumer goods like smartphones and internet access. Life quality has changed for them beyond all comparison. Ask the billion people lifted out of poverty in the last 30 years in South East Asia whether they would rather forego the benefits they enjoy as consumers. We know what they will say.

But no, consuming” is not “the only operable form of citizenship”.  What a gross distortion to say that free-market policy has ever suggested anything of the kind. But consuming matters a great deal. Our ability to consume – food, housing, entertainment, education – co-determines our quality of life. And that makes it an important part of citizenship.

Take that away, and what do you have? Take the example of environmental consciousness – the sort of concern that embodies good citizenship, beyond “mere” consumerism. Here are the ten countries with the best environmental performance in the world: Switzerland, Luxembourg, Australia, Singapore, Czech Republic, Germany, Spain, Austria, Sweden and Norway. They are all relatively free-market capitalist countries, with an average score of 7.728 on the Economic Freedom of the World Index, and an average ranking of 24.1 out of 157. By contrast, the ten countries with the worst environmental records that also appear on the Index – Bangladesh, DRC, Sierra Leone, Togo, Lesotho, Haiti, Burundi, Madagascar, Mauretania and Myanmar – have an average point of 6.154, and an average ranking of 126.1 out of 157. The best environmental records generally are held by the wealthiest countries. The average per capita income of the above ten best environmental performers is $54224, while that of the ten worst performers is $2095. The best cure for most environmental scourges is economic growth. The best way to ensure economic growth, is by maintaining free markets. Environmentalism costs money. The most productive societies (ie those that produce wealth most cost-effectively) are invariably the ones that best address growth of human wealth as a priority, and then as a happy side effect, care for the environment.

We are often guilty of not seeing the wood for the trees.   It is necessary to step back a little and gain some perspective and see where we are.

For example:  A common misconception is that the United States has a free-market economy.  Whereas it is true that for many years – in particular the years 1980 to 2000, the US was amongst the freest economies in the world – that, sadly, is no longer the case.

According to the latest edition of Economic Freedom of the World, the US has declined in economic freedom:

“Americans have long described their country as ‘the land of the free and the home of the brave’, a description immortalised in the American National Anthem, sung before every major sporting competition in the United States.  While that description was apt for much of modern history (at least compared to other major economies), over the last decade and a half that description has begun to ring less and less true.  The United States was ranked first in economic freedom among OECD countries as recently as 2000 – and third overall, typically behind only Hong Kong and Singapore, and some years, only Hong Kong – and had been since 1980.  Unfortunately, it has been declining since then.”

The authors show that the US declined from second or third position in the international rankings to hovering between sixteenth and eighteenth in the world.  Of particular concern is the fact that the components of freedom relating to the rule of law and the size of the government have been deteriorating.

So, the US is no longer a paragon of market freedom, and its performance in respect of income has reflected this.  From 1985 to 2000 its per capita income grew by about 100%.  By contrast, over the next decade and a half its freedom rating declined to 7.75, and per capita income only grew by about 50%.

A particularly disturbing trend is the decline of the rule of law in the rating of the US. This takes the form of, among other things, a surfeit of executive orders to attack foreign countries and implementing regulations by executive fiat, not to mention the arbitrary interference with the due-process rights of prisoners of war and criminal accused. Judicial independence (as measured by the Index) declined between 2000 and 2014 from 8.02 to 6.84, impartial courts from 9.02 to 6.84. Legal enforcement of contracts declined from 7.33 to 5.45.

Individual freedom has therefore suffered severe setbacks.

Also the economic power of the government has grown hand over fist. Government spending at the time of Obama taking over the reins was at a historical high. To the credit of the government under his leadership government spending was brought under control somewhat, but at the same time billions of Dollars’ worth of paper money was pumped into the balance sheet of the Fed, massively inflating the stock market and unjustifiably boosting inequality. In this way an unsavoury alliance has been formed between the corporate rich and the government, to the detriment of the poor. Arbitrary money creation by an agency that is not answerable to Congress, is a serious violation of the rule of law.

Here is a graph showing the decline in the rule of law in the US, compared to its general economic freedom, which is now lower than that of Canada.

rule

According to the Cato Institute: The measured deterioration in the rule of law is consistent with scholarship in that field and, according to the report, is a result of ‘increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs,’ and other property rights violations.”

As a matter of fact therefore, the US has become a more authoritarian and pro-rich place, which undermines many of the principles of democracy. In many instances government and corporate interests are in bed together. Examples include almost any commercial lobby one can imagine. The increase in the influence of special interests is in its turn the result of a watering-down of democracy by reason of the entrenchment of incumbent congress members due to election rules that undermine the principle of federalism and centralise state power. If all that is what “neo-liberalism” means, then one must agree with the author – the less one has to do with it the better.

The problem is that that shift in policy – away from the rule of law – is seized upon by the left to discredit free-market policy, whilst it demonstrates the opposite. The left now wants to throw out the baby of free markets with the bathwater of abusive state power. That is a serious mistake. In the relatively free-market era (1980-2000), for example, the poor in America in absolute terms advanced in leaps and bounds. During that period, the real income of the bottom 20% grew cumulatively between 20% and 40% per year – faster than that of the second and third quintiles. To the extent that the income of the top 20% still grew faster, that is mainly the result of arbitrary money creation referred to earlier.

As for higher education, it is not clear from where the idea comes of “the increasing exclusion of working-class youth from higher education”. The US, which is presumably the pinnacle of modern-day neo-liberalism, has one of the most accessible higher education systems in the world as measured by enrolment figures (http://data.worldbank.org/indicator/SE.TER.ENRR?locations=ES).  88.8% of school leavers enrol in some form of tertiary education, compared to 78.5% in the Netherlands, 62% in France, 61% in Germany, 76% in Norway and 63% in Sweden. If neo-liberalism is the cause of denying university access to the youth (of any demographic) then it is passing strange that the latter group of social democracies are more guilty on this score than that paragon of neo-liberalism, the US.

As for high tuition fees, the main cause of this is the universal availability of government-subsidised student loan schemes, which increase tuition by 50-70% (https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr733.pdf). How ironic that the focus of the author’s thesis provides such a good illustration of the unholy alliance between the government and corporate interests! The answer is to get the government out of tuition funding, and make prices more cost-effective, as in the case of Korea or Chile, neither of which has traditionally had such national loan schemes.

Even so, while it is true that tuition fees in the US are the highest in the world, between 1965 and 2014 university enrolment there increased as follows:

1965 2014
Public 3.97m 14.66m
Private 1.95m 5.55m
% private 21.3 27.46

 

The idea, in the light of these figures, that youths are progressively excluded from tertiary education (by anyone) is simply fiction. What is true, is that private interests, as is the case all over the world, bear an increasing load of the funding and management of universities. The one reason for that is that it is very difficult for even the richest countries nowadays to provide free education to all those who demand it. The supply of higher education is in the result increasingly carried by the private sector. Over the last few decades university access has dramatically grown.  Consequently the idea that university education is increasingly an “elite” activity, is simply nonsense. While in the sixties it truly was an activity reserved for the elite, today it is a common commodity. University education has never been as equal as it is now. Like all commodities it has been made more accessible by the market system, not less. The countries that have so-called “free” education (mainly the Nordic societies) suffer significantly by comparison in that they are on the whole worse off in terms of access, quality and cost-effectiveness of education.

Here is a table of developed countries ranked from highest private funding of higher education to the lowest, showing:

  • The quality rating of each country’s higher education system (SR)[2];
  • the enrolment percentage of school-leavers in higher education (E)[3];
  • the combined figure for the two (SR + E);
  • their respective economic freedom ranks;
  • their respective per capita GDPs.
Country Private funding % System rating (SR) Enrolment % (E) SR+E Free

rank

PC GDP
Korea 70.7 80.1 97 177.1 39 34549
Japan 65.7 78.5 62 140.5 26 37322
Chile 65.4 46.7 84 130.7 10 22316
US 62.2 100 88.8 188.8 16 55837
Australia 55.1 92.6 86.6 179.2 12 47514
New Zealand 47.6 70.2 80 150.2 3 36982
Israel 47.6 50.1 66 116.1 39 35431
First quartile average 59.18 74.02 80.62 154.64   38564
Portugal 45.7 40.3 66 106.3 35 29214
Canada 45.1 90.2 88.7 (1996) 178.9 9 44310
UK 43.1 98.5 57 155.5 10 41325
Russia 36.5 59.8 78 137.8 99 24451
Italy 34 73.4 63 136.4 68 35897
Netherlands 29.5 84.8 78.5 163.3 30 48459
Second quartile average 38.98 74.5 71.86 146.36   37276
Spain 26.9 75.3 87 162.3 49 34527
Poland 22.4 20 71 91 47 26135
Estonia 21.8 10.5 73 83.5 22 29095
Czech Rep 20.7 31.8 65 96.8 42 32167
France 20.2 89 62 151 70 39678
Turkey 19.6 26.1 79 105.1 82 19618
Third quartile average 21.93 42.11 72.83 114.94   30203
Ireland 18.2 60.9 73 133.9 8 54654
Germany 14.1 94 61 155 29 47268
Sweden 10.7 73.1 63 136.1 42 46420
Belgium 10.1 71.6 72 143.6 52 43992
Austria 4.7 49.1 80 129.1 31 47824
Norway 3.9 46.6 76 122.6 27 61472
Finland 3.8 66.9 91 157.9 19 41605
Fourth quartile average 9.35 66.02 73.71 139.73   49033

 

As regards the issue whether the university is no longer a public space where freedom of thought, speech and enquiry flourishes, firstly this: There is always a place for the university in the time-honoured tradition as a place of such learning and enquiry. In the sixties this role was fulfilled mainly by public universities.

As to the idea that universities are beholden to private funding to such an extent that funders effectively shut down public discourse and academic freedom, where is the evidence of that? It is true that the market dictates what courses have to be provided, which is a function of training needs of the corporate world.

But the idea that corporate needs include a subservient, indoctrinated student mass in the result, is laughable. As in, it induces laughter due to the conspiratorial nature of the theory. For instance:  “This role of higher education [namely as democratic public sphere]  is perceived by neoliberal acolytes as dangerous because it has the potential to educate young people to think critically and learn how to hold power accountable (Giroux, 2014b).” Can the man be serious? A growing number of CEOs demand a liberal arts degree for a significant percentage of their job candidates, as the complexity and ambiguity of modern commerce, especially hi-tech, requires integrative, creative and critical thinking. (See E Segran: Why Top Tech CEOs Want Employees with Liberal Arts Degrees, fastcompany.com 8/28/14).One only has to read the debates on social media about identity politics for example, or the American mass protests against Trump, to see how false the notion is that corporate culture has killed critical thought among students. Not all of it is of high quality, mind you, or remotely independent. Free-market intellectuals (such as the very Thomas Sowell denigrated by the author) ironically frequently complain about precisely the opposite, namely that the mindless narrative of modern identity politics and political correctness speaks of a lack of independent thinking at our universities.

That university education has “dumbed down”, is possibly true. Inevitably, if it is going to be a mainstream commodity (as it is, like cell phones, the internet, international travel) there is going to be some “dumbing down” in the aggregate. In the US part of this must be laid at the door of American basic education, run by the government on a highly centralised basis and with consequently moderate to poor results by world standards. But part of it is simply a function of demographics. Universities are no longer an elite pastime reserved only for the graduates of elite schools. It is today the expected due of all who pass school.

But the most laughable idea advanced by the author is the notion that universities are now bastions of free-market/neo-liberal thought, in a manner of speaking. Anyone who has tried to advance the ideas underlying a free market, will testify to the fact that academia is the very last place where such an agenda is likely to fly. Academic economists are, almost to a person, terrible free-marketeers. An example is the almost universal support for trade unions in those ranks, notwithstanding ubiquitous evidence that high trade union density slows down job growth.  Academics are the strongest bulwark against the free market, a demographic that supported Bernie Sanders as a solid block (see eg “Leading Academics Launch ‘Higher Ed for Bernie’”, berniesanders.com 27 October 2015). If the author is worried about free-market policy having converted entire faculties, he shouldn’t be.

That brings us to the most important question: so what?  What does the author suggest we do to cure this mass cultural conversion of universities into neo-liberal agencies? Not much on the practical front. This is the type of platitude with which we must content ourselves:

“Those who believe in higher education and democracy have to engage the issues of economic inequality and overcome social fragmentation, develop an international social formation for radical democracy and the defense of the public good, undertake ways to finance oppositional activities and avoid the corrupting influence of corporate power, take seriously the educative nature of politics and the need to change the way people think, and develop a comprehensive notion of politics and a vision to match.”

Really? No wonder the left is so ill-equipped to beat the forces of “neo-liberalism”. What the author doesn’t get, is that calling higher education a democratic public sphere, does not mean it does not have to answer to the laws of economics.

May I venture a proposal: Given the author’s transparent suspicion of the market, one expects he would say that the scourges he identifies should be dealt with by way of public funding. That way, surely, the sacred space of academia will not be beholden to corrupting corporate culture. So, how has that worked out in the world so far?

If you believe that the percentage of a country’s GDP that is expended on tertiary education is important (as undoubtedly it is), then it is significant to know what proportion of that percentage is private expenditure[4]: In other words, which countries (OECD countries in the sample below) tend to spend more on higher education: those where most of the spend is public, or where it is private? In the first column is the percentage of GDP spent by the private sector in each country. In the second column is the percentage that that private spending makes out of all spending on higher education; and finally we see the total percentage spent on higher education, expressed as a percentage.

Country Private spend as % GDP Private spend as % of whole spend Total spend as % GDP
Chile 1.5 60 2.5
Korea 1.5 65 2.3
US 1.4 50 2.8
Canada 1 40 2.5
Japan 1 66 1.5
Australia 0.7 43.7 1.6
Israel 0.7 43.7 1.6
NZ 0.7 36.8 1.9
Ave 1st quartile 1.06 50.65 2.05
UK 0.6 33 1.8
Hungary 0.4 33 1.2
Mexico 0.4 30,7 1.3
Portugal 0.4 30.7 1.3
Netherlands 0.3 17.6 1.7
Czech Rep 0.2 14.28 1.4
Estonia 0.2 12.5 1.6
France 0.2 14.28 1.4
Ireland 0.2 15.38 1.3
Spain 0.2 16.6 1.2
Turkey 0.2 14.28 1.4
Sweden 0.2 11.76 1.7
Ave 2nd quartile 0.29 18.1 1.44
Finland 0.1 5.55 1.8
Iceland 0.1 8.33 1.2
Italy 0.1 11,1 0.9
Poland 0.1 7.69 1.3
Slovak Rep 0.1 10 1.0
Ave 3rd quartile 0.5 8.53 1.24
Austria 0 0 1.7
Norway 0 0 1.6
Belgium 0 0 1.4
Germany 0 0 1.2
Slovenia 0 0 1.2
Luxembourg 0 0 0.4
Switzerland 0 0 1.2
Ave 4th quartile 0 0 1.24

Clearly then, the greater the percentage spent by the private sector, the more a nation spends on higher education – by far. When a country is really intent on increasing spending on tertiary education, the private sector should incur as large a percentage of the total expenditure as possible.

Of course, you may say the amount spent does not matter. Perhaps it is better to have a “democratic public sphere”, even if that means “the increasing exclusion of working-class youth from higher education”.

Education is a resource. It depends on the development of human resources, namely academics, and the provision of facilities in the shape of libraries, classrooms, computers and laboratories. In other words, how is this luxury of a “democratic public sphere” to be funded, while still maintaining high pedagogical and research standards and optimal access for all? Like all such questions, it is a matter of efficiency. Without addressing that, the author’s opponents will not take him seriously. In fact, one wonders how his supporters can.

[1] https://www.fraserinstitute.org/sites/default/files/economic-freedom-of-the-world-2016.pdf

[2] http://www.topuniversities.com/system-strength-rankings/2016#sorting=rank+custom=rank+order=desc+search=rankings/2016#sorting=rank+custom=rank+order=desc+search=

[3] http://data.worldbank.org/indicator/SE.TER.ENRR?locations=ES

[4] http://download.ei-ie.org/Docs/WebDepot/EaG2015_EN.pdf

0

Money, not equality, buys happiness

House-and-money-on-scales-Isolated-3D-image-Stock-Photo-balanceOne of those seemingly self-evident truths that seem to skip effortlessly off the tongues of the left-wing advocates of equality, is that equality of income is essential to societal stability and contentment. But is that really true?

The Better Life Index of the OECD aims to measure the relative life satisfaction (happiness) of citizens of mainly OECD countries. The point allocated to each country, calculated on the basis of a series of answers in a survey, reflects the subjective views of respondents. Dealing as the survey does with a purely subjective value, namely happiness, this is perfectly in order. The one thing that a person cannot second-guess, is another’s say-so about his or her own happiness.

Here is the raw data (from the most equal society to the least), including data on GDP per capita, a good proxy for average income levels:

Country Equality (Gini coefficient) after transfers & taxes Life satisfaction GDP per capita
Sweden 25 7.2 45143
Norway 25.8 7.4 64893
Czech Rep 26 6.5 30445
Austria 26 6.9 46164
Slovakia 26 6.1 27585
Finland 26.9 7.4 39755
Iceland* 28 7.5 43393
Denmark 28.1 7.5 44862
Australia 30.5 7.3 43901
Germany 30.6 7 45615
Luxembourg 30.8 6.9 91048
Netherlands 30.9 7.3 47130
Slovenia 31.2 5.7 29917
Hungary 31.2 4.9 23334
S Korea 31.3 5.8 34356
France 32.7 6.5 38851
Belgium 33 6.9 42725
Switzerland 33.7 7.5 56939
Canada 33.7 7.3 44088
Poland 34.1 5.7 23690
Greece 34.3 4.3 25667
Ireland 34.3 7 47804
Spain 34.7 6.5 33763
Italy 36 6 34758
Estonia 36 5.6 26355
NZ 36.2 7.3 35217
UK 38 6.8 39137
Japan 38.1 5.9 36426
Portugal 38.5 5.1 28326
Turkey 39 5.6 18783
Israel 39.2 7.4 33072
Russia 39.7 6 25248
US 41.1 7.2 54629
Mexico 48.1 6.7 16370
Chile 50.8 6.7 21942
Brazil 52.7 7 15835

 

First, a few observations:

  • The most unequal of the developed countries in the list, is the US. Yet it still has an LSI of 7.2, which compares well with that of the happiest society, Denmark, at 7.5.
  • The US fares even better compared to highly equal Sweden (7.2) and Norway (7.4)
  • It is a far happier society than a whole host of other more equal societies on the list, including Czech Republic (6.5), Slovakia (6.1), Austria (6.9) and Germany (7)
  • Switzerland, which tops the pile in terms of happiness together with Denmark at 7.5, is dead average in terms of equality, with a Gini coefficient of 33.7, placing it 18th out of the 36 on the list.

Assuming that equality matters for purposes of happiness, the rather obvious explanation for these seeming anomalies is that the per capita incomes of the happier societies – such as average-equality US and Switzerland – are far superior to that of any of the other more equal, but unhappier, societies.

If we plot the LSI (happiness) of each country on a graph against the income equality of each, it is immediately obvious that there is no correlation between the two. In other words, mere equality does not make people happier:

 

Gini
 
25 Sl Cz Sw Nor
27 Au Fi
29 Ice, Den
31 Hu Sl, Ko Ger, Lux Aus Ne
33 Fr Be, Ire Swi, Ca
35 Gr Po Sp
37 Est It, Ja UK NZ
39 Por Tur Ru Is
41 US
43
45
47 Mex
49
51 Chi
53 Br
 
Happiness 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5

 

On the other hand, if we were to plot the LSI of each country against its per capita GDP, it is immediately apparent that there is a compelling correlation between the two. It confirms the somewhat un-PC point that money, up to a point, does indeed seem to buy happiness:

 

GDP pc
90 Lux
85
80
75
70        X
65 Nor
60 Sw
55 US       X
50 Ire
45 Swe,Au. Ger, Be

 

X

Ice, XDen,

Aus, Ne,Ca

40 Fr UK, Ja Fi
35 Ko, It Sp X NZ, Is
30 Por Sl X Cz
25 Gr

 

Hu

X

Po,Es Sl, Ru
20 X Tur Ch
15 Mex Br
Happiness 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5

 

That of course does not mean that it may not be better to be both more equal and wealthier.

The point to make however, is that of the two factors (per capita income and equality), per capita income is by far the most influential. This we can tell by breaking the countries into peer groups according to income:

PCGDP over R50000:

Country Gini LSI
Norway 25.8 7.4
Luxembourg 30.8 6.9
Switzerland 33.7 7.5
US 41.1 7.2

 

40 000 – 50 000:

Country Gini LSI
Sweden 25 7.2
Austria 26 6.9
Iceland 28 7.5
Denmark 28.1 7.5
Australia 30.5 7.3
Germany 30.6 7
Netherlands 30.9 7.3
Belgium 33 6.9
Canada 33.7 7.3
Ireland 34.3 7

 

30 000 – 40 000:

Country Gini LSI
Czech Rep 26 6.5
Finland 26.9 7.4
S Korea 31.3 5.8
France 32.7 6.5
Spain 34.7 6.5
Italy 36 6
NZ 36.2 7.2
UK 38 6.8
Japan 38.1 5.9
Israel 39.2 7.4

 

20 000 – 30 000:

Country Gini LSI
Slovakia 26 6.1
Slovenia 31.2 5.7
Hungary 31.2 4.9
Poland 34.1 5.7
Greece 34.3 4.3
Estonia 36 5.6
Portugal 38.5 5.1
Russia 39.7 6
Chile 50.8 6.7

 

Less than 20000:

Country Gini LSI
Turkey 39 5.6
Mexico 48.1 6.7
Brazil 52.7 7

 

In none of the income categories is there any correlation between equality and happiness.

The real question is, however, whether there is a trade-off between the two factors of per capita income and equality of income. In other words, does a country have to give up income in order to achieve equality, and vice versa?

There are two types of policy measures that improve equality. The first is applied before government takes tax money and spends it on grants and welfare in order to equalise incomes. That category includes measures such as policies to bring about greater equality in the labour market.

First, let us examine labour law (the quantified value of which appears in the first column in brackets) as potential equaliser of income. A comparison of the Gini coefficient of different countries before taxes and transfers shows that labour laws have no significant impact on inequality of income. So for example the US, with significantly less labour regulation than most European countries, compares well with several highly regulated countries that are normally held up as paragons of equality (such as Austria and Germany, for example). The list comprises a wide variety of labour law systems with hugely differing degrees of labour regulation among both equal and unequal societies, with little discernible variation or trend.

 

Country Bargaining coverage

(labour market freedom)

Unemployment Immigrant  % of population Ed Gini before T&T Gini after T&T
South Korea 12 (4.51) 2.7 2.9 .865 .344 31.3
Iceland 100 (7.67) 4.5 10.7 .847 .382 28
Switzerland 37 (7.79) 3.5 28.9 .844 .409 33.7
Norway 74 (4.40) 3.7 13.8 .910 .410 25.8
Denmark 92 (7.34) 6.2 9.9 .873 .416 28.1
Sweden 90 (6.85) 7.8 15.9 .830 .426 25
New Zealand 15 (8.66) 5.6 25.1 .917 .455 36.2
Australia 39 (7.02) 6.4 27.7 .927 .468 30.8
Austria 95 (6.09) 4.8 15.7 .794 .472 26
Singapore 15 (7.60) 1.9 42.9 .768 .478 46.3
US 11 (9.03) 5.5 18.9 .890 .486 41.1
Germany 59 (6.49) 4.7 11.9 .884 .504 30.6
Portugal 45 (6.46) 13.3 8.9 .728 .521 38.5
Italy 80 (6.55) 12.6 9.4 .790 .534 36
Hong Kong 5 (9.30) 3.3 38.9 .767 .537 47.5

 

A related factor is the percentage of a country’s workforce that is covered by collective bargaining agreements. The bargaining coverage of countries is often cited as a factor that significantly brings about greater equality, but the table clearly disproves this notion. If labour law contributes to equality in these listed societies, clearly it must have to do with some other aspect of the law, or other factors.

The only other labour law factor that realistically be significant, would be state-imposed minimum wages. However, none of the 6 most equal societies above has such minimum wages – except for South Korea, which is the exception proving the rule.

As for non-law factors, the countries above that have low inequality have low unemployment too, provided they also have low levels of immigration (Korea, Iceland, Switzerland). Singapore, Hong Kong and the US (with much higher inequality), by contrast, have low unemployment but high immigration.

Low unemployment is self-evidently conducive to equality (poor people earning wages always have higher incomes than poor people who are unemployed).

Immigration has an impact as it often – at least temporarily – lowers the educational and skills level and language- and cultural cohesion of the population. (Germany in a way of course has the greatest “immigration” burden of all in that West Germany had to absorb an entire country barely two decades ago. It is fair to infer that that partly explains its relative inequality of income.)

The most equal society in the world (as measured by its pre-T&T Gini coefficient), namely Korea, confirms this thesis as it has both very low unemployment and very low immigration levels.

High levels of education improves productivity and thus salaries. This is well illustrated by New Zealand, the US and Australia, where indifferent unemployment rates and quite high immigration levels are somewhat corrected by very high education levels.

These and similar non-law factors, one intuitively feels, account almost entirely for the difference in pre-T&T Gini levels, leaving very little room for labour law as a differentiating factor.

Minimum wages and similar measures designed to improve conditions of employment, thus have virtually no impact on equality of income, whilst education and job growth most certainly do.

It is of course so that taxes and transfers may be used to improve equality of income.

To deal with this, I compare the proportion of the economy of a group of wealthy countries (excluding purely oil-based economies) that consists of state expenditure, that being a good proxy of taxes and transfers.

 

Government expenditure as a proportion of GDP: Wealthy countries, excluding oil-based economies

Country State expenditure% (economic freedom rank) Per capita GDP Gini after T&T
Sweden 58.1 (42) 45 143 25
Denmark 58.1 (22) 44 862 28.1
Iceland 58.1 (85) 43 393 28
Belgium 56 (52) 42 725 33
Netherlands 54.7 (30) 47 130 30.9
Austria 54.3 (31) 46 164 26
Germany 48.8 (29) 45 615 30.6
Canada 48.2 (9) 44 088 33.7
Australia 43.6 (12) 43 901 30.5
Switzerland 37.8 (4) 56 939 33.7
Luxembourg 37.5 (27) 91 048 30.7
US 19.9 (16) 54 629 41.1
Hong Kong 17 (1) 55 084 53.7
Singapore 16.3 (2) 82 763 46.4

 

The trade-off between taxes and transfers on one hand and equality on the other is clear. The higher taxes and transfers are, the lower the inequality of income tends to be.

Another trade-off is equally clear however. And that is between government taxes and transfers, and per capita income.

Countries with a government expenditure percentage over 40 percent of GDP (down to Australia in the list), all cluster around a per capita GDP of just over $40 000. The rest, whose government spending is under 40% of GDP, are significantly better performers with an average per capita GDP of $68 092. The incomes of these countries increase exponentially in line with declining state spending.

The fair inference from all this is that taxes and transfers tend to undermine per capita income, which as we have seen, tends to correlate with happiness. Amongst already developed countries this may be less important. Amongst developing countries like South Africa it matters hugely.

South Africa is thus far better off aggressively pursuing employment and growth than equality, in the pursuit of the happiness of our people.

This has important implications. Policies that amount to tax and spend such as welfare grants, do not support income growth and happiness in the long run. The same applies to policies that indirectly have the same effect, such as employment equity laws, BEE and minimum wages.

 

0

The moral case for scrapping labour law

One of the most intractable problems encountered by South Africa Can Work in advancing its cause, is political correctness.

Let us make it clear beyond doubt: Our concern is about the poorest of the poor. The weakest of the weak.

It is not complicated. Labour laws are ostensibly designed to protect the weaker of two sides, namely employees as against employers, by reason of their relatively weak bargaining power. Which is all very fine, but for the fact that there are 8 million people in South Africa who are in an even weaker bargaining position than employees, and those are the unemployed.

In our Constitutional dispensation the Court has always insisted on respecting the interests of the weakest members of society. As it was put in the matter of in Hoffman v South African Airways 2001 (1) SA 1 (CC):

“Our Constitution protects the weak, the marginalised, the socially outcast, and the victims of prejudice and stereotyping.  It is only when these groups are protected that we can be secure that our own rights are protected.”

The simple question is: What is the effect of our labour laws on this grouping? For unless it is not only designed to make, but also effective in making, their lives better, how can it be justified?

Firstly, labour laws are designed to protect the employed, not the unemployed. With rare exceptions, the unemployed do not enjoy the benefits of legislatively mandated fair labour practices. Almost by definition labour laws protect the employed against exploitation by reason of their perceived weak bargaining power. This it does by:

  • mandating minimum terms and conditions of employment, including wages;
  • prohibiting unfair labour practices, in particular unfair dismissals; and
  • protecting trade unions and strike action.

Besides that, by reason of their relative place in the market pecking order, the employed are not defenceless. They have an advantage over the unemployed in that:

  • on balance they are better educated;
  • they have the benefit of work experience; and
  • they have more and better work-related skills.

These advantages mean that they have greater bargaining power than the unemployed. Self-evidently the group with the weakest bargaining power is the unemployed. They typically include:

  • previously disadvantaged people, in particular blacks;
  • women;
  • uneducated people;
  • inexperienced youths; and
  • the aged.

These are precisely the kinds of people who our Constitution says must be protected: “the weak, the marginalised, the socially outcast, and the victims of prejudice and stereotyping…”

Labour laws have the effect of keeping precisely these categories of workers out of jobs. As examples see almost all the other articles on this website (http://southafricacanwork.co.za/convincing-american-evidence-that-regulation-kills-jobs, http://southafricacanwork.co.za/the-more-union-members-the-less-job-growth, http://southafricacanwork.co.za/the-effect-of-regulation-on-employment/).

It is not hard to believe. Make anything more expensive – and labour is no exception – and the market will buy less of it.

If that is true, then labour laws fail the moral test by giving an unfair advantage to the employed – the stronger group – over the unemployed – the weaker group. There is simply no moral justification for advancing the interests of the employed at the expense of the unemployed, as labour laws do.

The moral stereotyping of calls for labour deregulation has more to do, one surmises, with the fact that labour deregulation also happens to be good for employers.

Labour law protagonists have two moral problems with deregulation:

  • They find it hard to believe that both employers and employees can benefit from deregulation. They believe that employers can benefit only at the expense of employees.
  • For them the moral puzzle is simple: employers must give up something, to make things right.

It is undoubtedly so that employers will benefit from deregulation of labour. And it would be hypocritical to contend that employers calling for reforms of the labour market, do so out of altruistic motives. When white people called for democracy in 1994, or defended the Constitution in years thereafter, they undoubtedly did so out of selfish motives. But that did not make it wrong. They acted out of what is accurately described as enlightened self-interest. They pursued what is described, in another clichéd term, as a win-win solution. By the same token, when parties negotiate a settlement in a dispute because it has more benefits for both than a costly and damaging court case, no one would suggest that they are acting immorally.

Which of course raises the question: How can employees benefit from deregulation?  Where is their “win-win” situation?

Again, a rudimentary understanding of the way markets work supplies the answer. By making employment cheaper through deregulation, the state causes employment to rise. As soon as that happens, the demand for workers grows, as more and more workers become employed. The moment that happens, employers are forced to offer better working conditions in order to attract sufficient workers and not to lose out to other employers competing for their services. That includes the employed who initially took a dip in employment benefits.

Examples of this phenomenon are not hard to find:

  • Between 1960 and 1990 manufacturing wages in Taiwan, a country with almost no labour regulation and almost full employment, in real terms grew by 5-9% per year;
  • In 1991 New Zealand introduced the Employment Contracts Act, that brought about significant if incomplete deregulation of the New Zealand labour market. Amongst other things, it significantly reduced artificial statutory support for trade unions, and abolished centralised bargaining structures that prevented employers and employees from concluding their own, individual contracts of employment. In the result, between 1991 and 2007 unemployment fell from about 11% to under 4%; during the same period the labour force participation rate increased from 63% to 69%; most significantly, GDP per capita in real terms increased from about $20000 to $30000.
  • In 1985 a worker in Hong Kong (one of the least regulated labour markets in the world) in the poorest 10% of the workforce (precisely the group that labour laws would normally target) would have earned about $1560 in current prices. Today that same worker would earn $7693, a fivefold increase in real terms.

So, employees’ working conditions improve, not despite the absence of labour regulation, but because of it. Even so, one cannot escape the sneaking suspicion that trade unions and other protagonists of labour laws secretly cannot stomach the fact that a freer labour market may have the effect of improving the welfare of employers in the process. Such thinking forms part of the notion that labour law is a type of redress of the wrongs of the past, including apartheid. The laws will not fulfil the purpose these thinkers have in mind unless employers “pay”, or are “punished”, or at the very least inequality is reduced legislatively by forcing employers to spend more to meet legal standards.

First of all, employers are not a uniform group of previously advantaged white capitalists who benefited from apartheid. More than half of employers are black or black-owned, and many white employers are post-apartheid issue. Moral redress by means of labour law simply creates more moral problems than it solves.

Secondly, and more importantly, if we know that the only way to turn around the labour market is to deregulate it, does it really matter that employers’ positions are improved in the process? What would the moral choice be between uplifting both employers and unemployed workers on one hand, and uplifting neither? The choice is clear – the choice that will serve the common good is the correct one.

But what about inequality? In another article (http://southafricacanwork.co.za/the-effect-of-regulation-on-employment) I have shown that, in South Africa at least, inequality of income declines as unemployment does. It is in our interest then to cut unemployment as much as possible, if we are interested in reducing inequality. Inequality will be reduced by reducing unemployment – once again in service of the common good.

The protagonists of labour law display little interest in the common good.

It is time that these exploiters and rent-seekers are exposed for what they are. They are people who use the system of labour laws to oppress the outsiders of the economic world, namely the unemployed. What makes it worse, they do so by calling on a misplaced sense of guilt of the public: The public feel guilty because ostensibly workers are the “underdogs” in society. Well, here’s a newsflash: They are not the underdogs. The unemployed are. And the leaders of the trade unions shamelessly exploit the false perception that employed workers are the true oppressed of society.

But morality is not only about that kind of choice. It also has to do with providing others with choices. And here we think of the unemployed person who would have got a job, but for the current labour laws. By maintaining these laws we deny the unemployed an adult choice, namely whether to accept employment and earn an income for his family, and the humiliation and incapacitation of penury. What is more, we do so on the basis of the assumption that we know better what is good for such a worker, than he knows himself. We deny him the dignity of deciding for himself.

It is a universally accepted legal and moral right that all adults of full capacity have or should have freedom of contract. Likewise, it is now axiomatic that everyone is entitled to equal enjoyment of the benefits of the law. Freedom of contract entails the choice of a worker to accept or reject terms of employment that an employer is prepared to offer. That includes the choice of accepting a compromise in order to compensate for his relatively weak bargaining power by reason of lack of training, education, skills or experience. But by imposing legal minimum requirements for such contracts (such as minimum wages for example), we deny certain workers that choice. In particular we deny that choice to the weaker members of society, those who are unemployed because their bargaining power is too weak to command contracts that comply with labour law. That amounts to outright discrimination against these workers, discrimination on the ground of their socio-economic status, namely their weak bargaining power. To make it worse, it is done in order to improve the position of the stronger set, the employed.

Once we know that labour laws suppress job creation (and how can we not know?) and we do or say nothing, they share in the moral guilt of the rent-seekers.

Morality is about making the right choice when you know what the effects of your decision are. When you dare not say: but I did not know.

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Convincing American evidence that regulation kills jobs

In the United States the Federal Government regulates many aspects of labour relations. So for example it provides for a national minimum wage and anti-discrimination procedures. But over and above those Federal laws, each state also has the right to enact local laws that regulate employment. Any state could, for example, enact a minimum wage for the state that exceeds the national minimum wage. Although state labour law makes up only a fraction of American labour regulation, it is useful as a measure determining the differing degrees of state intervention between states.

All this makes America an ideal testing ground for the effect of labour laws on employment creation, because:

  • Many of the economic conditions in states are determined by Federal legislation and circumstances that are shared by all states;
  • Citizens of states are free to move from state to state to find   work.

The American Chamber of Commerce thus maintains an index of labour regulation  (The Impact of State Employment Policies on Job Growth 2011 )  that measures the levels of such state-wide employment regulation in each of the 50 states of the US. The Index examines six categories of regulation, namely

  • Employment relationships and the costs of separation;
  • Minimum wage and living wage laws;
  • Unemployment insurance and workers’ compensation;
  • Wage and hour policies;
  • Collective bargaining issues;
  • Litigation/enforcement climate.

A composite point (denoted by the abbreviation “ERI” for Employment Regulation Index”) is allocated to each state on the basis of individual questions relating to sub-topics (an ERI of 100 denoting the conceivably most heavily regulated state employment market).

The states are annually divided into three groups titled “Good”, “Fair” and “Poor”, each corresponding with the relative degree to which the labour regulation of each member of each group is conducive to job creation.

The authors then measure the economic impact of the regulation on the performance of each state as follows:

“Applying standard statistical techniques, we found that, when the ERI is inserted as an explanatory variable, our models demonstrate that higher levels of regulation (i.e., higher ERI scores) result in both higher unemployment and lower rates of new business formation, and that the effect is statistically significant at standard confidence levels. Moreover, the magnitude of the estimated effects is substantial. We estimate that, if each state were to achieve a “perfect” score on the ERI, the effect would be equivalent to a one-time boost of approximately 746,000 net new jobs”.

The outcome is indicated in the following table (The “but-for UR” is the notional unemployment rate that a state would achieve if it had a perfect score, ie maximum deregulation of those aspects governed by state employment law):

2009 EMPLOYMENT EFFECTS OF “PERFECT” ERI

Scores in all States

STATE ACTUAL UR BUT-FOR UR JOBS CREATED
South Dakota 4.8% 4.5% 1,028
Wyoming 6.4% 6.0% 1,213
North Dakota 4.3% 4.0% 1,380
Vermont 6.9% 6.3% 1,743
Mississippi 9.6% 9.4% 1,758
Alaska 8.0% 7.4% 1,819
Delaware 8.1% 7.7% 1,823
Idaho 8.0% 7.7% 2,099
Rhode Island 11.2% 10.8% 2,358
Montana 6.2% 5.6% 2,773
New Mexico 7.2% 6.8% 3,619
West Virginia 7.9% 7.5% 3,647
New Hampshire 6.3% 5.8% 3,662
Nebraska 4.6% 4.2% 3,706
Hawaii 6.8% 6.2% 3,707
Maine 8.0% 7.5% 3,747
Utah 6.6% 6.2% 4,305
Alabama 10.1% 9.8% 4,811
Kansas 6.7% 6.4% 5,169
Arkansas 7.3% 6.8% 5,574
Oklahoma 6.4% 6.0% 5,776
Iowa 6.0% 5.5% 7,340
South Carolina 11.7% 11.4% 7,349
Louisiana 6.8% 6.4% 8,025
Nevada 11.8% 11.2% 8,285
Tennessee 10.5% 10.1% 10,015
Kentucky 10.5% 9.9% 10,680
Arizona 9.1% 8.6% 10,959
Oregon 11.1% 10.4% 11,578
Virginia 6.7% 6.4% 11,592
Indiana 10.1% 9.7% 11,688
Connecticut 8.2% 7.5% 12,265
Colorado 7.7% 7.2% 12,669
Georgia 9.6% 9.3% 12,695
Missouri 9.3% 8.9% 12,884
North Carolina 10.6% 10.3% 13,634
Maryland 7.0% 6.5% 14,365
Minnesota 8.0% 7.4% 15,904
Wisconsin 8.5% 7.9% 17,294
Washington 8.9% 8.3% 17,847
Michigan 13.6% 13.0% 25,881
Massachusetts 8.5% 7.7% 26,772
Ohio 10.2% 9.7% 28,031
Florida 10.5% 10.2% 28,095
New Jersey 9.2% 8.5% 32,212
Pennsylvania 8.1% 7.5% 36,210
Texas 7.6% 7.3% 36,612
Illinois 10.1% 9.4% 43,488
New York 8.4% 7.7% 58,373
California 11.4% 10.6% 138,001
National average / total 9.3% 8.7% 746,462

 

Here are the states grouped according to the relative value of their respective ERI’s:

Good:

Alabama, Florida, Georgia, Idaho, Kansas, Mississippi, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia.

Fair:

Alaska, Arizona, Arkansas, Colorado, Delaware, Indiana, Iowa, Kentucky, Louisiana, Maryland,  Minnesota, Missouri, Nebraska, New Hampshire, New Mexico, Ohio, Rhode Island, Vermont, West Virginia, Wyoming.

Poor:

California, Connecticut, Hawaii, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada,  New Jersey, New York, Oregon, Pennsylvania, Washington, Wisconsin.

But how do the actual job creation figures of the three groups compare? Here is the average employment growth of each group in the 5-year period from 2009 to 2014:

Good:                                   2.72%

Fair:                                      0.6%

Poor:                                     0.49%

Quite clearly it would pay a state to be in the “Good” group. The average employment creation in that group is on average 4.5 times bigger than what it is in the “Fair” group, and 5.5 times that in the “Poor” group.

A more dramatic illustration of the value of low regulation is to compare the actual percentage of jobs created over the same five-year period by the “Good” group as opposed to the “Poor” group of states. The “Good” group’s employment growth was 4.4% over the period, compared to that of “Poor”, which was a measly 0.6%. In other words, the “Good” states proportionally created more than seven times as many jobs as the “Poor” states did. In actual numbers the “Good” states created 2 124 734 jobs (starting from about 47 million), while the “Poor” states created only 390 551 jobs (starting from a much larger 62 million).

What is amazing about these figures is how big an impact a relatively small difference in regulation makes. Imagine the difference that could be achieved if the edifice of Federal labour legislation were to be dismantled as well!

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The more union members, the less job growth

You cannot please everyone all the time, but I have to say it: Trade unions are not part of the solution to unemployment. They are a major part of the problem causing it.

What I demonstrate in this article is that the higher the trade union density is in an industry or an economy, the slower the job growth in that industry or economy.

Trade union density is the number of trade union members expressed as a percentage of a particular industry, a particular country or even a particular business.

It provides a very important indicator of the influence of trade unions in any unit measured.

South African union density is very much a function of legislation.  It was only after the introduction of the Labour Relations Act 1979, which extended legal protection for trade unions to black workers, that union membership in South Africa truly started escalating.  Before that there were unprotected black trade unions for a minority of black workers, as well as some white trade unions.  Pursuant to the new legislation in 1979, trade union membership escalated from a very low base of a few percentage points to a very high percentage.  In Table 1, South African Union density is expressed as a percentage of the economically active population, to demonstrate the initial spurt of growth of this phenomenon which eventually came to dominate the economic scene in South Africa.

From Table 1 it is clear that union density grew very steeply until 1993, whereafter it levelled off until it reached another peak in 1998 of 26%.  Thereafter a gradual decline followed. Table 1

For purposes of what follows I assess the success of our labour market simply by the growth in jobs, rather than a static notion of unemployment, because.  in South Africa we need massive job growth over the next decade and more.

Is there any correlation between union density and the rate of growth or decline of employment over a period of time?

In Graph 1 the block to the left of the vertical axis expresses union density as defined.  On the right-hand side of the vertical axis is the graphic exposition of formal employment growth or decline from 1980-2004.  (Union density is a mirror image of the employment growth value, in that the left-hand axis counts from zero to 35 in a left-hand direction, whereas the right-hand axis counts from -4 to +6 in a right-hand direction).

Graph 1:

Union density and employment growth

Graph 1

It is uncanny how closely these two curves run in parallel – in other words, as union density sharply increases from 1980 to 1993, there is a precipitous drop in the rate of employment growth.  This growth starts off at a very positive and healthy clip of 5% to 6% in the early part of the eighties, but as union membership grows, it eventually declines to a rate of decline of between 2% and 3% in the early nineties.  Thereafter union membership expressed as percentage of EAP reaches its zenith in 1998, namely 26%.  It is at this point that the most dramatic shrinkage in the formal labour market actually also occurs.  It is in that year that the growth rate of the formal employment market reaches the dismal figure of -4.  Thereafter, as union membership expressed as percentage of EAP goes into gradual decline until 2004, there is a miraculous reversal of fortunes for growth in the employment market, which then for the first time reaches the same heights as were achieved in the very early days of the previous decade.

Of course all this graph illustrates is that there is a correlation between union density and the growth rate of formal employment in this country.  It does not necessarily mean that union density is what causes the growth rate to decline.

It is at this point that it becomes important to remind ourselves that what we are measuring here as union density, is union membership expressed as a percentage of the economically active population, not as a percentage of the working population.

One argument that seeks to explain the correlation between union density and employment growth is that it is employment growth that causes a decline in union density, and employment decline that causes growth in union density.  In other words, if there is a sudden spurt in employment growth, it takes a while for union membership to catch up, and as a result union membership expressed as a percentage of the employed will be lower.  This argument is clearly wrong, as the figure that is used here is union membership expressed as a percentage of the economically active population.  Because that figure includes all unemployed persons who want to work, growth in employment does not affect union density so expressed.

The same applies to the converse argument, namely that because union employees have legal protection as a result of their union membership, they are less likely to be dismissed if retrenchments occur.  That being so (so the argument goes), this will result in increased union density if retrenchments take place.  Again this is wrong, for the simple reason that, even if it were true that union members survive retrenchments in greater numbers, their membership in the measurement is still expressed as a percentage of the economically active population, which does not change as a result of the retrenchments.

An examination of the curve of the economically active population shows a gradual incline over the years which does not fluctuate dramatically as do the union density and employment growth curves.

It therefore seems more and more likely that the explanation for the correlation between union density and employment growth is that it is the growth in union density that causes a decline in the rate of job growth.

The relationship between high union density and sluggish job growth is not unique to South Africa.  In order to test the same proposition that the employment growth is negatively influenced by growing union density, a number of American economists measured the correlation between union density and employment growth in a number of states in the USA, which they referred to as the “peer states of Pennsylvania”.  These are states that lie in the north-east of the USA and are either bordering on or very close to Pennsylvania.  Furthermore, they are used in economic comparisons as peer states of Pennsylvania for reasons of their similarity in type of economy, size, climate and so forth.  Whereas they are not identical, they are economically similar in many ways.

Where they differ quite sharply however, is in the relative degree of their union density and also in the relative degree of employment growth.  In this exercise union density is expressed not as a percentage of the economically active population, but as a percentage of the total number of employed in each state.

In Table 2 this comparison is expressed numerically:Table 2

 

 

We can now express the same set of figures graphically as follows:

 

Graph 2

 The various states cluster around a very clear curve.  In states where the union density is high, such as New York with a density of some 32%, job growth over the relevant period is very low, namely 14%.  On the other hand, in low density states such as Virginia with a union density of some 12%, job growth over the same period was almost 60%.  The same pattern follows consistently for all the states.

Next we can investigate developing countries such as South Africa.  In such an exercise the economist Siebert made a comparison between the change in union density in the 10-year period of 1985 to 1995 and unemployment change between 1990 and 1998.  He used a number of developing countries, including South Africa (as well as China and the United Kingdom, to add some interest to the experiment).  Graph 3 shows the result:

Graph 3

In his discussion of this graph, Siebert makes the following interesting point about South Africa:

 

“Countries such as Brazil and South Africa, with the largest union density increases, have also had the largest unemployment increases.  As figure 6 shows, it was also these countries which had the largest real wage increases.  It is hard not to conclude that for these countries we are observing a move akin to that from A to C in figure 4.”

Siebert continues as follows:

“We see that South Africa has had the largest increase in union density over the period 1985 to 1995, 23 percentage points.  The only country with a similar increase is Brazil, with its new 1988 pro-union Constitution.  Both Brazil and South Africa, in fact, have had contemporaneous increases in union power, in real wages and in unemployment.”

Another example which is worth noting in the Siebert study, is that of Ireland, where union density in the relevant period declined by approximately 12%, which correlates with a drop in unemployment of 5%.

Another way of doing the same exercise is to divide South Africa into industries that are potentially sensitive to union density, and to compare their results.  In Table 3 we compare COSATU membership expressed as a percentage of formal employment in 2000 with growth or decline of employment expressed as a percentage in 2001 to 2006.  This is done in respect of the industries of mining, manufacturing, transport, trade, finance and construction.

Table 3

Next we can express the same information as a graph, namely as follows:

 

Graph 4

  The same test can be done over a different period – this time 2000-2012 – and with all unions (not just Cosatu) with similar results:

  Table 4

graph 5

Again one accepts that this correlation does not necessarily mean that it is union density that causes low employment growth.  However, as we have seen in the discussion about the time-line comparison over the period 1980 to 2004, the explanation cannot be that union density is higher when employment shrinks, and vice versa.  Another explanation must be found.

In this regard, those who wish to get the trade unions off the hook may grasp at that old trustworthy, globalisation.  The argument will go thus: because of globalisation, export industries such as mining and manufacturing are more sensitive to international competition (minerals, and manufactured products from China, etcetera) and as a result of upward pressure on the Rand (as the Rand increases in value, exports tend to decline).  The next step in this argument is then to say that industries under pressure from globalisation tend to downsize (retrench) more, creating fertile recruitment grounds for trade unions.  The first question is whether globalisation depresses growth, or whether it depresses employment growth as such.  If it were so that globalisation was the explanation, then we would expect job creation or shrinkage to stand in a constant relationship to gross sectoral product (GSP) growth across all these industries.  In other words, all industries will demonstrate employment growth that is equivalent to their GSP growth rates.  We would thus expect the GSP growth / employment growth ratio to be the same or similar across all industries.

What does this ratio in fact look like on an industry-by-industry basis?

 

Table 5

In order to make sense of these figures, we can divide the six industries into two groups on the basis of union membership, namely those with COSATU membership lower than 10% (trade, finance and construction) and those with COSATU membership greater than 20% (transport, manufacturing and mining).  On this basis the average performance of the two groups is as follows:

Table 6

There is no comparison between these two groups.  What is clear is that employment growth is not simply a function of economic growth.  All of these industries demonstrated positive growth rates over the relevant period, but in the low-union industries employment grew faster than their respective GSP’s, whilst in the high-union industries there was effectively “jobless growth”..  This suggests that there is something other than merely low growth that impedes job creation.  The above figures suggest that that something is union density.

It is true that growth in manufacturing and mining is generally lower than in the other industries, but this is partly also the result of the fact that there is a disincentive on investment in employment in those industries.

There is also a correlation between union density and low investment.  Graph 5 (from a study by Radulescu and Robson) shows there is a correlation between trade union density and foreign direct investment flows:

Graph 6

FDI is only one instance of investment, but one expects the same effect to apply to domestic investment, and thus job creation.

A further difficulty with the globalisation argument is that transport is not sensitive to globalisation.  If anything, transport will benefit from globalisation as it tends to lead to an increase in tourism and trade.  Yet it is clear from the data that transport employment suffered, even though the GSP grew at a good rate.  What it did have, was quite high union density of 24%.

This points to the conclusion that it is not globalisation that causes retrenchments, which in turn causes high levels of unionisation.  The contrary appears to be the correct explanation, namely that high union density deters investments, and particularly and disproportionately deters investment in labour.

Finally on this point, it is significant that in the study of the Pennsylvania peer states and the 2000-2012 study above the trade union density was high at the outset of the period over which resultant employment growth was measured.  That makes it much more difficult to argue that it was low employment growth that caused high union density.

The same point can be made by reference to the position in Britain.  In the decades up to 1980, union density in Britain relentlessly followed an upward curve.  Then, as Margaret Thatcher’s Conservative government started a progressive series of stealthy reforms at that time which endured throughout most of the next decade, union density declined sharply.

In the pre-Thatcher 20-year period the aggregate employment growth was 3.4%, and after the watershed of 1980 growth in the next two decades was 13.8%.  If union density played any role, clearly this was caused by the drop in union density, rather than the other way around.  In the first 4 years after 1980, British employment growth lagged, and only from about the middle of the decade did it start increasing.  That suggests that it was union decline that caused job growth, rather than the other way around.

Finally, for good measure research relating to the position in Australia confirms the relationship beween high union density and low employment growth.  This study makes use of a whole range of industries, namely agriculture, trade, personal services, finance, construction, manufacturing, community services, public administration, transport, mining and communication.  Once again union density, defined as the percentage that union members make up of the entire employed workforce, with employment growth in each industry.  The tabulated results are as follows:

Table 7

 Graphically the same information can be expressed as follows:

Graph 7

In an independent study Woodon & Hawk re-examined the role of union density in employment growth in Australia.  Unlike     earlier studies done in Australia, the data used were from a panel of firms surveyed in both 1989 to 1990 and 1995, rather than a single cross-section of firms at a point in time.  As a result, the study was able to control not just for the fixed characteristics of firms at workplaces, but also for changes in the economic environment and managerial strategy.

At the end of the study, the authors conclude as follows:

“The results presented in this article confirms conclusions reached in North American and UK research – unions slow job growth.  This adverse effect of trade unions on employment growth in Australia, however, appears to be confined to the private sector.  No evidence of any impact of unions on employment growth in the public sector could be found.  Within the private sector, the union employment effect is quite large, with workplaces with average levels of union density in 1989 to 1990 estimated to have experienced rates of employment growth that are close to 2,5 percentage points per annum less than lowly unionised workplaces.”

As already pointed out above, the focus of this article falls on the private sector.  For obvious reasons the government sector is not as sensitive to market pressures as the private sector.  For example, the demand for teachers is determined by the number of schools and the number of learners that have to be educated, and there is very little competition where the government is the main employer.  In the result pressure on wages, productivity, foreign direct investment and profitability are not problems that will trouble the state sector.  It will simply go ahead and appoint as many teachers as are needed, no matter what the cost.

In South Africa the numbers confirm this interpretation. Between 2000 and 2012 a quiet, insidious revolution took place in South Africa, in that government employment rose by approximately 46%, while private sector employment barely increased. The ratio of private to government workers changed from 5.5/1 to 3.9/1 over this period. Whilst private sector employment stagnated, government employment increased by 850 000 jobs.

In other words, government employment is slowly but steadily crowding out private employment. Although over the same period union density of private sector employees declined from 26% to 20% (which would normally result in a surge in private employment) the only surge that occurred was in government employment. Not only did this occur in the teeth of a surge in union membership to about 70%, it occurred despite some 20% higher earnings growth in the government sector. Not surprisingly in the result the higher wages of the state sector are luring employable workers away from the private sector. State workers are notoriously unproductive, as their careers do not depend on profit as those of private sector workers do. The net effect is that scarce resources are re-allocated from a more productive to a less productive sector. This has also destroyed the beneficial effects of lower unionization in the private sector. What is equally concerning, is that all of this occurs at the taxpayer’s expense, which means that funds that could have been used to create wealth-creating private-sector jobs, now go to the ever-growing state burocracy.

Why does high trade union density lead to a depression of the employment growth rate?  The most conventional explanation is that the wage rate of unionised industries is artificially pushed up through the legal bargaining power of trade unions. This results in a new equilibrium point where the same demand curve yields lower employment as a result of the increased wages bargained by the trade unions.

Another explanation for the same phenomenon is a variant of the first.  According to this explanation, the wage curve of an industry is not simply the actual salaries paid to employees, but the total package of costs incurred by employers as a result of labour laws.  These costs incurred include things such as time spent in disciplinary hearings and labour court cases, the appointment of human resource managers to manage labour law, legal costs paid to labour lawyers to advise companies, retrenchment costs, and similar impacts of labour law.  Because trade unions are a focal point of labour laws, in that their very raison d’etre is to enforce rights granted to workers under labour law, they serve as a type of “magnifying glass” through which the impact of labour laws is magnified many times over.  This serves as a disincentive to employers to create jobs in industries with high union density.

A further and related explanation is that related to profitability.  Because employment costs artificially increase as a result of the bargaining activities of trade unions, costs must either be passed on to the consumer or be absorbed by the business.  Because businesses operate in a competitive environment, and also have to compete with foreign operations in a globalised market, many companies are driven to reduce their profitability.  This in turn results in a reduction in investment in those businesses.  Ultimately a reduction in investment leads to a reduction in employment.

Trade union density also directly impacts on the number of work days lost due to strikes. In South Africa the agricultural strike in the Western Cape in 2012 was remarkable as it was the only major strike in years not called by a trade union.

A good example of the impact of trade union density on strike rates, is the change in union density and strike rates brought about by the New Zealand Employment Contracts Act of 1991:

Table 8

By halving union density, New Zealand managed to achieve an 8-fold reduction in strike days (from 520 to 65 days per 1000 workers per year). Here it is in graph form:

Graph 8 (4)

High strike rates obviously exact a cost, and thereby suppress job creation.

It is important to appreciate that trade unions get their power from labour laws, in particular the Labour Relations Act, and that that Act enables the unions to a large degree to exercise monopoly power over the way in which employees in the workplace are represented. That in turn, has a cost implication.  Power in this context is relative. The most extreme power wielded by a union is perhaps that of the closed shop. In terms of the Act a union can agree with an employer that the employees of that workplace must all belong to the union. Although the agreement may not require employees to belong to the union before becoming employed by the employer, the employee may be required to join the union as soon as he accepts the job. In fact, the Act further provides that it is not unfair to dismiss an employee for refusing to join the union, or for being expelled by the union.

A variation on this theme is an agency shop, in terms of which the union may recover fees from non-members in exchange for the non-members sharing in the spoils of the collective bargaining performed by the union.

A further variation of this theme is that non-members of unions may be bound by extensions of bargaining council agreements concluded between employers’ organisations and unions. The non-members have no choice in the matter, even if it means that the extension will have the result that they lose a job, or do not get a job in the first place,  because they cannot command terms of employment that comply with the extended agreement’s terms.

The golden thread that runs through these provisions is that of an infringement of the workers’ freedom of association. By law they are all compelled to join the trade union regime in some form or manner:

  • In the case of the closed shop, by becoming union members;
  • In the case of the agency shop, by being forced to pay union fees and not being able to negotiate their own terms of employment;
  • In the case of the bargaining council extension, by being compelled to accept terms and conditions of employment not necessarily demanded by them, at the risk of becoming or remaining unemployed as a result. 

In a way, all the laws that support trade unions in South Africa are variants on the theme of infringement of freedom of association. Because the law gives power to unions to populate workplaces and ultimately become majority representatives of the workers in the workplace, they are thus enabled to impose their will on non-members. By seeing union power for what it is, namely a form of closed shop (the difference case by case simply being a mere matter of degree) it is useful to study the effect of laws in other countries that infringe on non-member workers’ freedom of association, and determine how it impacts on employment growth.

In the United States this type of infringement drew the attention of the legislature, with the result that it passed the Taft-Hartley Act, also known as the Right to Work Act, in 1947. In terms of this Act each State has the right to determine whether its employees may decide whether to belong to a trade union or not, and no closed shop may be imposed on them should the State choose the latter option, ie choosing what is described as right-to-work status.

A recent study[1] in Michigan (which has recently become the latest right-to-work state) examined the economic effects of adopting right-to-work status. Here are some of its most striking results:

  • According to the Bureau of Economic Analysis, right-to-work states showed a 42.6 percent gain in total employment from 1990 to 2011, while non-right-to-work states showed gains of only 18.8 percent.
  • According to the U.S. Census Bureau, population increased in right-to-work states by 39.8 percent and only 16.7 percent in non-right-to-work states from 1990 to 2011.
  • According to the U.S. Census Bureau, 4.9 million people moved from non-right-to-work states to right-to-work states from 2000 to 2009.
  • According to the Bureau of Economic Analysis, nominal personal income grew by 209.3 percent in right-to-work states and by 148.5 percent in non-right-to-work states from 1990 to 2011. 

For our purposes the most significant impact is on employment growth. The authors conclude that right-to-work states in the period 1970 to 2011 grew employment at a rate exceeding that of non-right-to-work states by 0.9% per year.

It is also significant that, despite growing jobs roughly three times faster, right-to-work states do not sacrifice in terms of personal income. On the contrary, they gain in those terms too.

Of course, we must bear in mind that the right-to-work states have far lower union density than the non-right–to-work states (8.83% as opposed to 15.59%). In terms of the evidence in this article, that alone may explain the superior job performance of the right-to-work states.

The evidence from the US is convincing proof that legislation that favours high union density, such as that contained in our Labour Relations Act, is bound to enhance union growth and to deter employment growth in turn.

Finally, there is also evidence that over the medium to longer term high union density significantly retards productivity growth[2].  That obviously affects competitiveness and job creation.

It does not really matter what the exact mechanism is by which higher trade union membership leads to slower or even negative job growth.  For present purposes, it is enough to know that it is so.  Each of these explanations probably represents an aspect of the truth, and in their own way they all contribute to the ultimate result.  At a later stage, we look at ways and means that this problem can be tackled.  For the time being, it is good enough to know that it is there; that trade union density is a major impediment to desperately needed employment growth in our country.

 

 

 



[1] Hicks and LaFaive: Economic Growth and Right-to-Work Laws (Mackinac Center 2013)

[2] Barry T Hirsch: Labor Unions and the Economic Performance

of Firms. Kalamazoo, MI: W.E. Upjohn Institute

for Employment Research.

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