On 2014/11/20 06:22 AM, Eugene Coyle wrote:
One remark is going to cost this economist a lot of money.
He was billing very large sums to some states and the Federal govt. They are
wondering now about his work. Larry Summers defends him.
We have a vaguely parallel situation in which an indirect attack on
social spending in South Africa is underway, in part using the work of
World Bank economists who this month displayed a certain bias in the way
they view 'fiscal tools'... and we're looking to get some sort of public
retraction from them... advice welcomed.
http://links.org.au/node/4159
The World Bank blinks at South African inequality and corporate subsidies
By Patrick Bond
/“//South Africa is achieving a sizable reduction in poverty and
inequality through its fiscal tools.”/
This was the main claim
<http://www.worldbank.org/en/news/press-release/2014/11/04/south-africa-lifts-36-million-out-of-poverty-thanks-to-its-fiscal-policies>
by the World Bank’s Pretoria-based country director Asad Alam last week,
in the foreword to the November 2014 report, “Fiscal Policy and
Redistribution in an Unequal Society.”
The timing is vital: just two weeks earlier, in his first budget speech,
South African Finance Minister Nhlanhla Nene warned of coming austerity,
‘tough times
<http://www.theafricareport.com/Southern-Africa/tough-times-need-tough-solutions-nhlanhla-nene.html>’
and ‘a new age of pain
<http://mg.co.za/article/2014-10-22-nene-warns-of-a-new-age-of-pain-for-sa>.’
The Bank’s statistical findings were immediately spun into life, as
commentators and politicians drew what they thought were the obvious
implications, including back-slapping from within the ruling African
National Congress (ANC):
Jonathan Katzenellenbogen
<http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page71619?oid=797617&sn=Detail&pid=71616>
at /PoliticsWeb: /“a World Bank report warned last week that
government no longer has the cash to expand the grant system… the
‘fiscal space for more redistribution is limited due to the high
fiscal deficit and debt.’ According to the Bank report, transfers
have caused the poverty rate to fall from 46.2 percent to 39
percent… This reduction in inequality through tax and spending is
larger than in any other country.”
Hilary Joffe
<http://www.bdlive.co.za/opinion/columnists/2014/11/12/world-bank-tax-study-holds-important-lessons-for-sa>
of/Business Day: /“Add in the social spending side of the fiscal
equation, which the World Bank study finds is very well targeted to
the poor, and SA comes out spectacularly well against its peers.”
From inside the Bank, Mahmound Moheildin and Maria Beatriz Orlandon
<http://www.project-syndicate.org/commentary/post-2015-development-agenda-social-economic-inclusion-by-mahmoud-mohieldin-and-maria-beatriz-orlando-2014-11>in
Project Syndicate’s/‘Visionary Voices’ /series: “South Africa has
made considerable progress from institutionalized segregation toward
an ideal of a ‘rainbow nation’ in just two decades.”
Rothschilds banker (and former finance and planning minister) Trevor
Manuel
<http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page71656?oid=798431&sn=Detail&pid=71616>:
“The World Bank study released last week confirms that fiscal policy
is significantly redistributive, on both the tax and spending sides…”
ANC Treasurer Zweli Mkhize
<http://www.anc.org.za/show.php?id=11194>: “in the midst of the
gloom and pessimism that abounds, we must never lose sight of our
strength as a people and our achievements as a country. Last week
World Bank economist Catriona Purfield
<http://www.enca.com/africa/southern-africa/gap-between-rich-and-poor-narrowing-sub-saharan-africa>
told reporters in Pretoria stated that in South Africa, large
reductions have been made in poverty and inequality.”
The subtext soon comes into focus: neoliberals can justify social
spending caps or even cuts, in one of the world’s most unequal
countries, if the South African Treasury is now seen to have been
exceedingly generous. But to reach their conclusion, Alam, Purfield and
their followers simply /ignored data they cannot process/: numbers
inconsistent with Bank dogma. (A ‘fiscal tool’ is, in straight talk,
what Treasury uses when collecting taxes and making payments.)
In reality, South Africa has the fourth lowest public social spending
(as a share of national income) amongst the world’s largest 40
countries, just half Brazil’s. The ratio of social grant spending was
already projected to decline from a tokenistic 3.0 to just 2.3 percent
of GDP by 2040, even before Nene’s recent speech. Yet the SA corporate
profit rate is the world’s third highest, according to the International
Monetary Fund
<https://www.imf.org/external/pubs/cat/longres.aspx?sk=40971.0>.
In this context, the Bank’s optimism about redistributiom is not
unusual, for it suffers a seriously bad statistical habit: poverty
denialism. As Jason Hickel of the London School of Economics pointed out
<http://www.aljazeera.com/indepth/opinion/2014/08/exposing-great-poverty-reductio-201481211590729809.html>
recently, in 2000 rising numbers of poor people represented “a PR
nightmare for the World Bank”, so after massaging the International
Poverty Line, “their story changed dramatically and they announced the
exact opposite news: the introduction of free-market policies had
actually reduced the number of impoverished people by 400 million
between 1981 and 2001.” This has been largely based on picking an
extremely low and arbitrary number for poverty ($1.25/day) and employing
many other numerical tricks and creative accounting techiques.
*Manipulating **Ginny*
In South Africa, economists generally approve of the Treasury’s
commitment to neoliberalism, and so the Bank’s new strategy appears
similar: creatively adjusting the ‘Gini Coefficient.’ This number is the
most-cited reference of economic injustice: 1 is total inequality, when
one person ‘earns’ everything and everyone else gets nothing, while 0 is
when everyone shares income equally.
The new Bank spin: once our Gini is twisted and turned to include taxes
and state payments then inequality falls dramatically, from 0.771 to 0.596.
To its credit, the Bank report does acknowledge four caveats:
* “the analysis does not take into account the /quality/ of services
delivered by the government;
* “the analysis excludes some important taxes and spending such as
/corporate income, international trade, and property taxes/, and
spending such as /infrastructure investments/ due to the lack of an
established methodology for assigning these outlays across households;
* “it does not capture the growing debate on how /asset accumulation
and returns to capital/ affect income inequality;
* “turning to the data used in the analysis… there are questions
about the ability of a survey of this type to collect /adequate
information on households at the top of the distribution”/ (emphasis
added).
But as a result, four specific problems arise which render the Bank’s
optimistic conclusion utterly untenable.
*Embarrassing corporate infrastructure welfare*
First, why did Bank staff not estimate enormous business subsidies
colloquially known as ‘corporate welfare’? For example, state economic
infrastructure overwhelmingly benefits corporates and rich people,
especially because of ongoing subsidies covering operating costs: roads
under the failed e-tolling system; the Gautrain luxury subway linking
Johannesburg and Pretoria; South African Airways passengers;
tax-loopholed industrial districts; the world’s cheapest electricity
during most of the last century; discounted water and wastewater; R&D
support; export subsidies; etc.
The Treasury’s pro-corporate investments show up in corporate balance
sheets as rising implicit share value, via the locational advantage of
stockholder assets compared to similar sites lacking such
infrastructure. The Bank provides estimates for many such subjective
service valuations, such as education and healthcare investments, even
though their quality is so low (especially in black residential areas)
that the share of students failing to reach 12^th grade broached 50
percent in 2012, up from 22 in 2007.
Many of the Treasury’s fiscal tools contribute to corporate wealth, not
necessarily as explicit income but as higher ‘produced capital’ (just as
education and health spending are counted as ‘human capital’). If the
Bank bothered to count it, the rich who hold an oversized proportion of
Johannesburg Stock Exchange shares would be unveiled as disproportionate
beneficiaries of state largesse.
On top of that, who is really paying for Eskom’s long-delayed Medupi
<http://www.iss.nl/fileadmin/ASSETS/iss/Documents/Conference_presentations/NatureInc_Patrick_Bond.pdf>coal-fired
power plant? The Bank lent $3.75 billion for Medupi in 2010 in spite of
well-documented corruption in boiler tendering (involving the chair of
Eskom and ruling party), rampant damage to water and air, rising
community and social strife especially in coal-sourcing sites, and
relentless labour unrest.
Repaying the Bank and other Medupi lenders has already forced poor
people to cough up 150 percent more for electricity than in 2007. Hence,
many have switched
<http://www.cluteinstitute.com/ojs/index.php/IBER/article/viewFile/8586/8585>to
dirty energy to avoid running hot plates and single-bar heaters in
favour of cheaper, dirtier, much more dangerous and health-costly
paraffin, coal and wood. Tellingly, this process gets no mention in the
Bank report.
Meanwhile, the largest power subsidies (some years taking 10 percent of
the national supply) go to BHP Billiton
<http://www.citypress.co.za/Columnists/BHP-disempowers-us-all-20121027>
smelters via a ‘Special Pricing Agreement’ dating to 1992. Eskom
admitted
<http://www.tips.org.za/files/bhp_billiton_cost_bd_01-08-2014.pdf> the
deal was worth more than $1 billion in subsidies in 2013 alone, in the
form of US$0.01/kWh electricity, an eighth as dear as what most of us pay.
Likewise, bulk water supplies to favoured customers – large-scale
farmers still receiving irrigation subsidies, corporations which
negotiate with municipalities for lower rates, timber plantations and
other mega-users – are not noticed in the Bank report.
*Free Basic Services negated by fast-rising prices*
Second, the Bank report also ignores discriminatory bias in state
services pricing, and makes exceedingly generous assumptions about ‘Free
Basic Services’ allegedly delivered to poor people. Yet data from the
largest cities analysed by University of the Witwatersrand
<http://www.ircwash.org/sites/default/files/Berkowitz-2009-Water.pdf>
lawyers confirm
<http://www.polity.org.za/article/faults-in-sas-water-sanitation-policy-2008-11-27>
that in 2001, water and electricity were repriced with a small token
amount free (6 kiloliters of water and 50 kWh of electricity per
household per month), but subsequent prices soared.
The free services were negated by such high prices for subsequent
consumption blocks that the result was a /regressive /overall price impact.
Durban residents, for example, got free water in the country’s main
pilot project, but /the poorest third of water customers were hit by a
doubling in the real price of water/ when the price for the 6-10kl
consumption block soared. As a result, from 1998 to 2004, the poorest
households cut water purchases by nearly a third, from 22 to 15
kiloliters per month, even though this period witnessed a cholera
outbreak, rampant diarrhoea epidemics and the AIDS pandemic.
And if, as the Bank report claims, a ‘sizeable’ reduction of poverty was
achieved through fiscal policy, why are there more delivery protests per
person here than in probably anywhere else, earning the nickname
<http://mg.co.za/article/2012-04-13-a-massive-rebellion-of-the-poor>
‘protest capital of the world’? Why are these increasing
<http://www.iol.co.za/dailynews/news/police-minister-to-change-views-of-militaristic-public-order-units-1.1723396#.VGdPFcmvMhI>?
The Bank didn’t notice.
*Corporate capital flight = lax fiscal policy*
Third, Treasury’s deregulatory attitude
<http://www.counterpunch.org/2012/04/24/south-africas-dangerously-unsafe-financial-intercourse/>
to corporate profit outflows since 1995, when exchange controls were
first relaxed, has facilitated massive capital flight to the firms’
overseas financial headquarters, /much more than is officially recorded/
in the national accounts. Vast amounts of implicit income are thus
redistributed from what could have been our national fiscus, to
corporate shareholders, here and abroad.
In addition to profit and dividend outflows, illicit financial flows are
so substantial that the Southern African Customs Union was
(conservatively) estimated by staff at the United Nations
<http://www.afdb.org/uploads/tx_llafdbpapers/Quantifying_IFF_from_Africa.ppt>
to have lost $130 billion from 2001-10. This is fully a third of all
Africa’s illicit financial outflows, yet goes unmentioned in the Bank
report.
The Treasury also shies away from investigating corporate gimmicks known
as transfer pricing and trade mis-invoicing. For several years until
2014, South Africa’s Deputy President Cyril Ramaphosa owned 9 percent of
Lonmin
<http://www.dailymaverick.co.za/article/2014-10-12-marikana-dont-touch-lonmin-on-its-bermuda/#.VFse_RanUhI>,
whose Bermuda ‘marketing’ operations were revealed as a major source of
capital flight during that time. Research by the University of
Manchester Leverhulme Centre for the Study of Value strongly suggests
that De Beers
<http://thestudyofvalue.org/2014/05/15/new-lcsv-working-paper-explores/>, with
its near-monopoly, secrecy and movement across borders, uses transfer
pricing and misinvoicing worth $2.83 billion from 2004-12 in order to
minimise its tax liability. In this area, corporate lawyers run rings
around government regulators and the Treasury’s SA Revenue Service.
How substantive are such tax avoidance and capital flight strategies?
According to Wits economist Seeraj Mohamed
<http://www.wits.ac.za/staff/seeraj.mohamed.htm>, illicit outflows
amounted to a massive 23 percent of GDP in just one year, 2007. The
Treasury’s tax laxity – facilitating creative accounting by
ethics-challenged corporations – is one of the most important
redistributive aspects of fiscal policy. But it is ignored in the Bank
report.
*Natural capital unaccounted for*
Fourth, an additional tool would have revealed whether state fiscal
policy favours longer-term interests of the country’s citizens: ‘natural
capital accounting <http://triplecrisis.com/?p=10058>.’ The term refers
to the value of minerals, forest resources, land and other environmental
endowments that are either cropped or that remain underground.
Critically, /once corporations remove a non-renewable mineral resource,
it’s gone forever./
Ironically, other Bank staff have compiled what is probably the most
sophisticated such analysis, in the 2011 book /The Changing Wealth of
Nations/. In one sample year, 2005, the impact of natural capital
depletion on South Africa’s national income was negative 9 percent. The
overall net resulting shrinkage of wealth was $245 per person that year.
This extreme redistribution from future (poor) beneficiaries to
(current) wealthy mining houses and shareholders can also be attributed
to fiscal policy: /not to substantively tax minerals extraction. /In
contrast, sovereign wealth funds are working marvellously from lefty
Norway to conservative Alaska – and are in formation even in
resource-cursed Angola and Zimbabwe – but there’s no mention of higher
taxation or resource nationalism in this pro-corporate Bank report.
*Reversing Bank bullying?*
The Bank’s reaction to my critique? After more than a week’s delay (and
only after this critique’s publication in South Africa on November 14),
a reply came from Purfield. In addition to repeating the report’s
methodology, she made these generous concessions:
Thank you for your mail and your questions. As you highlight, an
analysis of this kind has limitations and you raise important issues
and reservations… As you note this mapping cannot take into account
the quality of the actual spending, especially in the areas of
education and health… On the important questions you raise about
corporate taxation and infrastructure and subsidy spending, the
incidence method in the paper simply cannot trace who is paying
these taxes or benefitting from these outlays.
Right then, my next question is this: /If your institution’s staff
really cannot distinguish between service quality in rich and poor areas
of South Africa, nor trace corporate taxes and benefits, then – given
the potential damage to poor people done by the over-optimistic
misimpressions created – *won’t the World Bank offer a retraction of
those dramatic redistribution claims, until proper research is done*?
Otherwise the neoliberal commentators and politicians will continue
using Bank research to advocate state spending cuts./
The austerity drum-beat in South Africa has been building to a crescendo
all year long. In one extreme case, Daily Maverick
<http://www.dailymaverick.co.za> ezine editor Brooks Spector
<http://www.dailymaverick.co.za/article/2014-04-07-the-ancs-call-for-action-more-social-grants-abstain-be-faithful-and-condomise/>
praised the SA state for “terribly admirable” programmes, but then
recounted a revealing “day-dream”. Against the ANC’s “litany (/sic/) of
ever-advancing, ever-improving benefits,” the former US State Department
official asked whether any other party running in the election one month
later was “brave enough” to say, “Damn right we’re in favour of cutting
your social grants! That’s because we’re going to put South Africa back
to work again, and turn it into a place where you will earn more money
and gain real self-esteem because of your work.” (Social grants go to
just three groups: the poor who are elderly or kids, and severely
disabled people unable to work.)
Today, the renewed threat of social spending cutbacks is acute, as
credit rating agency Moody’s downgraded
<http://www.fin24.com/Economy/Moodys-downgrades-South-Africa-debt-20141106>
the South Africa government the day after the Bank report was released.
The global financiers’ echo-box is just one reason why it is so
objectionable for the World Bank to torture this country’s inequality
data until they confess (the supposedly lower Gini Coefficient) – and in
the process simply ignore society’s screams of protest and misery.
Because of the potential to tax the rich and corporations or even print
money, pro-poor fiscal space could be said to exist in principle. But
that space is immediately /evacuated /by SA Treasury officials, who are
vigorously applauded in yet another fib-saturated World Bank report.
/*Patrick Bond* directs the University of KwaZulu-Natal Centre for Civil
Society <http://ccs.ukzn.ac.za/>./
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