GINI exposed

Inequality in South Africa is based on suspect statistics.

I’ve always had a problem with GINI.

While the word conjures up a song in my head about a lady with light brown hair, as a national statistic it is one of those mesmerising measurements that sends domestic economic and political debate into a frenzy. It quickly becomes absorbed into the refrain of the terrible troika of unemployment, poverty and inequality chanted so regularly and nauseatingly by politicians and ideologues at virtually every occasion when our national priorities are discussed.

As tribal warriors of old discovered, with the right breathing and rhythm a chant can become as hypnotic as lungs full of dagga, robbing the chanter of any rational thinking and preparing him to charge into the cannons for some ungodly cause. So it is with GINI, and if only the refrain were based on the whimsical melody of the lady with the light brown hair, it may have been more rationally analysed in informing our economic challenges, before being so expediently and incitingly used in political vapour.

The facts are simply that while we have for some years now been paraded as the “most unequal society in the world”, based on a GINI metric of about .65, we could, in fact be much closer to the global average of .47. This according to statistics iconoclast, Mike Schussler who, in this article on Moneyweb puzzlingly hid the crucial finding in an expose of our warped tax perspectives, in itself a highly important topic.

It’s not the first time Schussler has tilted his formidable lance at fellow economists, statisticians and academics. He has on previous occasions challenged the basis of the all-important Gross Domestic product calculation, and the racially prejudicial perversion of income distribution reflected in the Census, joining the chorus of many such as 19^th century British politician Benjamin Disraeli who spoke of “lies, damn lies and statistics”, and Albert Einstein’s aphorism that “not everything that can be counted counts, and not everything that counts can be counted”.

The inequality fraud Schussler points out is based on the exclusion of state wealth redistribution of the 27% of GDP revenue collected from a small tax base. The GINI measurement is based on gross income of measured households where 45% have at least one person receiving social grants which he believes is the highest rate in the world, and “our taxation system makes huge inroads into the inequality that the country has.” To this he adds other “equalising” factors such housing, water and electricity, pointing out that “home ownership is a staggering 67% and is also one of the highest in the world. Seventy-eight percent of all housing is formal brick and mortar.”

No doubt, Schussler’s arguments will be opposed with some vigour from his peers. But GINI has always had serious challenges. Eighteen months ago, in this Moneyweb article called “A crisis of perceptions” I challenged its veracity in reflecting the true nature of wealth disparities in South Africa. In this Daily Maverick article late last year, writer Paul Berkowitz also gave a detailed account of its shortcomings.

Apart from GINI, there are many other measurements of inequality and the list is growing as economists and statisticians challenge each one. They include the 20:20 ratio, the Palma Ratio, the Hoover Index and the Theil Index. I’m not sure why statisticians have not designed some or other “weighted average” of all of these metrics to present us with one globally accepted inequality ruler. The problem with all of these calculations is that they are mostly based on surveys and averages and as most of us intuitively know, no-one is average, let alone a weighted average.

Admittedly, I have also been guilty of GINI’s facile use in discussing the issue of global wealth disparities, but the problems we may have with the measurement should not detract from the polarising threat I outlined in this Moneyweb Article recently. What deserves repeating is that “inequality is a complex issue with many facets beyond comprehensive treatment in an article. It cannot be restricted to income or material assets, but has to embrace access to services and amenities such as food, water, shelter and, above all, education.”

It is, nevertheless, an issue that “could become an economic game changer of the same magnitude as the industrial revolution or the Great Depression.” And as French Economist, Thomas Pikkety, has found in his ground-breaking research it is being exacerbated by the fact that capital, and the money that it produces, accumulates faster than economic growth. Disturbingly, the UNICEF Global Inequality report concludes that the “champagne glass effect” is a serious threat to global economic growth.

South Africa is politically playing with inequality at its own peril. It’s an explosive issue that is already feeding labour unrest and populist extremism. What is astounding is that politicians have not latched on to the fact that far from presenting the country as an unequal basket case, it could have paraded its success at countering inequality through the social wage to bring us in line with the world average. That would have placed the government in a far better position to address the unintended debilitating consequences of social grants which Schussler outlined in his article.

Instead we simply fuel the flames with expedient often ethnically biased rhetoric on a false measurement. To what end one may well ask.

Platinum profits

Academics making mischief with metrics

It will take a very long time for the dust to settle even after a resolution of the platinum strike. Many of the scars are permanent with the country’s longest and most costly conflict marred by murder, violence, politics, power mongering, ideology, rancour and simmering resentment that has moved it far away from what should be achieved in any accord – ensuring the survival of the company or industry itself and a better understanding of mutual aspirations and expectations.

The most critical task will be the rebuilding of trust between the parties and a resolve to digest what was said and done during the dispute. Against this background one could question the timing and relevance of a research paper compiled by academics from Wits and Manchester Universities called “Demanding the Impossible? Platinum Mining Profits and Wage Demands in Context.” (See paper here). The question in the title is highly provocative, implying that conditions of the past are transferable to the present. It is a subterfuge that prosecutors often use: if you want to avoid accountability for a statement, pose it as a question.

Challenging this approach does not detract from valid questions around profit maximisation and short term shareholder value criteria. Of course, one could argue that the mines should have considered deploying the revenue streams of the fat years differently. But to remotely imply even as a question that this can be done retroactively is disingenuous and counter-productive.

As fascinating and enlightening as the profit analysis of the platinum producers is, in the end it is simply academic. It’s relevance could have been challenged by even the most junior financial journalist, let alone one who has worked underground, was exposed to mining for more than fifty years, spent decades in championing the empowerment (not only rights) of labour as a major contributor to wealth creation, consistently questioned obsession with profits, and since the early 1990’s has argued for flexible pay under the principles of common purpose and common fate in business.

While the researchers concede the validity of the industry’s figures which show that they are currently cash strapped and struggling, they accuse them of being selective in focusing only on a narrow time frame of the last few years. Ironically, they then similarly select a time frame of between 2000 and 2008, to illustrate “super” profits when much higher wages could have been afforded.

One simply cannot think of mining in that fashion. It is more than cyclical – it is erratic and unpredictable demanding very large amounts of speculative capital to be ploughed into what is essentially a wasting asset. One also cannot lump all the metrics together at a mining house level. This hides critical factors such as reserves, grades, operational risks, cross subsidisation of marginal operations and features unique to specific mines or even specific sub-operations.

Admittedly, the mining industry has much to answer for, including the calcified lungs of my own father. But on a social scale, there are debilitating legacies such as lack of people development, dysfunctional communities, the devastating effects of migrant labour and environment destruction. On the other hand the industry can claim to have achieved many positives, ultimately consigning all the pros and cons to the academic playground of historians who still today are arguing about whether the industrial revolution was good or bad for mankind.

The unanswerable question the mining legacy, indeed even the broader legacy debate raises is simply: how does one address the past without destroying the present and the future for most if not all? That same “what if” can be applied to the research paper: “where would the industry be today if it had given a large chunk of its ‘super’ profits in those eight years to fixed and exponentially increasing pay?”

One could hypothesise endlessly on things such as what effect higher wages would have had on government revenue, capital expenditure on mining development and exploration, and dividend income to pension and provident funds benefitting ordinary citizens. The distinctions between profits, “other profits”, capital expenditure, reserves and dividends are not always clear, leading at times to overstating direct shareholder benefit.

There is one flaw in the presentation of wealth distribution which is common to the conventional value-added statement. That is the inclusion in wealth creation of depreciation and interest as part of “providers” of capital. As reflected under a Contribution Account, they are better allocated to outside costs, which would have a material effect on the wealth creation figure and change the distribution percentages as well.

Like many of these research efforts, they are good at gathering data, diagnosis and interpretation, but rather short on solutions. Many seasoned mining journalists and those close to the industry could be forgiven for concluding that the compilers demonstrate a less than adequate understanding of the vagaries of mining. The brief conclusion moots rather vaguely an “orderly” restructuring of the sector to ensure higher wages.

They also suggest the imposition of Resource Rent Tax to heavily tax any profits above what they call a fair rate of return of 15% -- this at a time when the Edelman research has found that only 17% of informed South Africans trust the government to do the right thing, while 63% trust business to do the right thing. There is simply no guarantee that the extra revenue to the government will improve the lot of workers at the mines more than what the mines themselves are prepared to do. I personally would rather see employees get that money than the government.

There is one very significant contribution this research has made to South Africa’s labour debate. It was screaming at the researchers from their own conclusions and is the clearest evidence yet that the answer to destructive wage disputes in this country lies in variable pay in the form of real fortune sharing (see article here).

Why did they miss it? Perhaps it was beyond their expertise, or perhaps it may have required much more research and reflection. What is true is that both capital and labour have to make some tangible concessions in fortune sharing and both find far greater comfort in the current commoditisation of labour. Organised labour structures, especially leadership, benefit from the "war" with capital while workers simply become political cannon fodder.

But let us use the researchers’ own figures as shown in the graphics below. If workers were on fortune sharing, in which optimum distribution (meeting the legitimate expectations of all the stakeholders and encouraging continued contribution) was determined say at 40% of wealth creation, they would have received 37% more income in the 2000-2008 period. If this share remained the same for the 2009-2013 period (which it should have under a well-designed fortune sharing agreement) they would have received 31% less in pay than they did in the previous period, reflecting the changing fortunes of the industry as a whole.

It is both as simple and as difficult (not complex) as that. What a healthy fortune sharing scheme needs is awareness, understanding, transparency and realistic expectations. None of these are insurmountable.

Realistic expectations are a critical factor. This means that it is extremely difficult to introduce fortune sharing when times are euphoric and expectations inflated. It is better done in difficult times when expectations are modest and when it becomes easier to consider in exchange for greater job security.

The platinum industry has a window of opportunity right now, to introduce what could be a ground breaking approach to labour relations in South Africa.

Mediocre Matrics

Concern is about much more than maths and science.

The educational authorities’ response to the World Economic Forum survey on the parlous state of South Africa’s maths and science education (see full report here) is missing a crucial point.

Those surveyed represented business interests and, according to the Education Department, their views were not based on proper scientific research. What is being missed is that the group surveyed reflect market needs that ultimately create opportunities for those seeking gainful employment. Even graduates today are not guaranteed of suitable employment simply on the basis of a certificate.

But there are deeper issues at stake in the conventional understanding of the so-called labour “market” which is a predominant force in not only commoditising people and their skills, but in creating flawed attitudes and behaviours that ultimately do very little to unleash the best of the human spirit. In South Africa in particular, this must be seen in a rather bizarre context that has been developing in the last few decades.

A prime example was contained in a statement earlier this year, by Minister of Higher Education and Training, Blade Nzimande. Defending the 30% pass requirement for three out of six subjects needed to pass matric, he expressed concern that young people would miss out on post-school education opportunities if it was raised and that South Africa “was becoming a dangerously elitist country if it was considering throwing away half of our young people who did not achieve a 50% matric pass”.

Despite these emotional outpourings, there are many detractors from the shifting of the matric pass goal posts, including leading academics such as University of the Free State Vice-Chancellor Jonathan Jansen. They prefer a pass mark of 50%, which City Press recently estimated would have led to only 24% passing the grade, and not the 78% so widely celebrated at the beginning of the year.

There is of course, a stark irony built into the lower pass mark requirement and that is the automatic division between “worthy” achievers and those “less worthy” – in effect an “elite matric” and a “common matric”. And that has nothing to do with “elitism” but simply a natural assessment of the value of the certificate itself.

It should come as no surprise that already the employability of matriculants has been affected by the lower pass mark. SA Chamber of Commerce and Industry spokesman Pietman Roos says: “the matric certificate should be a fundamental signal to the labour market that a school leaver can perform in at least a low-skilled position. The business community has reported a growing number of ill-equipped school leavers.” This is the real significance of the WEF survey.

There is a well-known sketch libertarians love to trot out in anti-socialist rhetoric that has a Professor in a class deducting points from high achievers and giving them to the lower achievers in some form of academic egalitarianism. In the next tests, the high achievers put in less effort because they know they are going to have points deducted and the low achievers also do less because they know they are going to get free points from their better performing peers. So the whole standard drops and in time the entire class is submerged in dismal mediocrity.

The logic seems unassailable except for one thing: the true nature of the human spirit.

We are much more than certificate chasers. There is also our natural curiosity and hunger in the pursuit of knowledge. There is also the desire to equip ourselves with the means and ability to do something meaningful with our lives and make a difference to those around us.

Certificates, pass marks, and grades speak only in a small measure to having the means and ability. They say absolutely nothing about the most important element of all, and that is willingness. Willingness is the ultimate and essential ingredient of true empowerment.

This crucial factor is constantly missed in all the debate, including those who defend the lower pass mark and those who want a higher proof of achievement; as well as in the incessant blabber about skills development and our state of education. The system appears to be more certificates focussed than empowerment focussed. Most employee assessors in companies are ill-equipped to gauge this attribute in applicants. Indeed most applicants themselves see this attribute as secondary if not insignificant in relation to certificates. It immediately instils a sense of entitlement. As a matriculant remarked in one of those infernal TV “vox-pops”: “Now that I have a matric, they must not expect me to clean toilets.”

I am sure we all know of many potentially high achievers who were overlooked for a certain position that was filled by someone with “the right papers”, where the latter eventually proved to be of little or no use. Then there is the number of brilliant achievers in their field who failed quite dismally at their academic pursuits.

There is no easy answer in unleashing the true human potential that lies beneath all of the “paper requirements”. In a small measure, Nzimande has a point that those who do not pass matric should not be overlooked and be consigned to a human wasteland. But the answer cannot be in reducing the requirement for a piece of paper. That alone reflects an “elitist” pre-occupation with that piece of paper.

Perhaps the answer lies more in identifying impediments to willingness and exploring those hindrances to opportunities that exist in our elitist labour laws, the demise of the self-help principle, unrealistic expectations and the pervasive sense of entitlement.

Willingness can only be inspired by a deep desire to make a difference, of adding value to others lives, and of giving rather than getting. That’s not something a certificate can ever show.