Rajiv Servansingh

A Fairer Sharing of Income Generated: A Real Issue Raised by the NESC Report

— Rajiv Servansingh

Modern economic growth and the diffusion of knowledge have made it possible to avoid the Marxist apocalypse but have not modified the deep structures of capital and inequality – or in any case not as much as one might have imagined in the optimistic decades following World War II. When the rate of return on capital exceeds the rate of growth of output and income… as seems quite likely in the twenty-first century, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

— ‘Capital in the Twenty-First Century’ by Thomas Piketty

The timely publication of the report by the National Economic and Social Council (NESC), coming as it does a few weeks before the presentation of the next budget, places the extremely vexing question of growing inequality in Mauritian society at the very heart of the debate about the quality of socio-economic progress which Mauritius has witnessed during the past decade or so.

The events which have been unfolding in the country over the past weeks, which can be described as nothing less than “traumatic” for the population, have added another layer to this debate by cruelly illustrating the kind of extremes which greed, excesses and hubris can lead to, especially in the absence of strong institutions.

The NESC report very rightly attributes the main source of this widening inequality, as measured by a deteriorating Gini Coefficient over the past decade or so, to the income distribution policies practised by the government over that period. It must be pointed out that this pattern of growing inequality of income was consonant with the adoption of a more and more liberal economic philosophy favouring liberalization and deregulation and its accompanying mantra of reduced policy intervention. The adoption of such measures had to some extent become inevitable, given the changing global economic environment and indeed they have contributed in breaking down some of the shackles which hampered the growth of productive forces in the country.

What is more controversial however is whether one had to indiscriminately adopt the whole bundle of measures – warp and all? The issue of growing inequality, which is of particular concern to us here, is one of the inevitable and even predictable consequences of the adoption of such a regime as evidenced by the experience of numerous countries.

In a speech in London in February 2014, the Managing Director of the IMF (whom one can hardly dismiss as a whining socialist) stated that “in the past economists have underestimated the importance of inequality. They have focussed on economic growth, on the size of the pie rather than on the distribution. Today, we are keenly aware of the damage done by inequality.”

The World Economic Forum’s Global Risks 2014 Report highlights severe income inequality as one of the top 10 global risks. In the United States of America, which has most extensively applied the deregulation and liberalization regime for decades now, the top 1% of the population is said to have captured 95% of the wealth created in the nation over those years.

The issue of widening inequality is socially unsustainable and morally unacceptable. If, as illustrated above, this is becoming a serious issue in large developed countries, then it should surely be of even greater concern for a small island transition economy like Mauritius.

Starting from the premise that a predominantly market driven economy tends to result in the kinds of situations mentioned above – that is a highly skewed income distribution favouring the accumulation of wealth by the existing elite – then state intervention becomes a desired option.

Appropriately designed fiscal policies — especially taxes — can serve as the primary instrument to address such issues within a general policy framework which addresses both the short-term actions as well as more long-term ones such as access to education (including higher education) and health care.

Regarding the issue of inequality of income, one of the most popular remedies proposed mostly by trade unions is the statutory promulgation of a “minimum wage.” One very interesting alternative route which has been suggested revolves around the concept of “maximum salaries.”

What its proponents are advocating is basically that there should be a nationally determined maximum multiple of say 30 between the lowest paid wages and the highest paid salaries within any enterprise.

Such solutions have been prompted by the recent scandals in the US and UK around the issue of executive pay. Even Conservative Prime Minister David Cameron reckoned that there was a serious issue and has tried to give more power to shareholders in the determination of executive remuneration.

The issue of income inequality, raised by the NESC Report, is not likely to go away any time soon. It is looking more and more likely that the new Minister of Finance will reverse the “flat tax” policy and give himself even more latitude in using fiscal policy (taxation) as an active instrument of economic and social policy and he would certainly be tempted to address the matter. It seems to us that in the particular context of Mauritius, given our small size and the fairly sophisticated level of data collection, consideration could also be given to the adoption of a “maximum salaries” policy as an accompanying measure.

Let us hurry to add that there is no suggestion that government should dabble into attempts to design Incomes policies or to set “fair wages”. The objective would be for government to proclaim that it wishes to set a norm according to which the maximum salaries in any enterprise should not be the equivalent of more than say 30 times that of the lowest paid wages in the same enterprise.

There will be no attempt by government to in any way “regulate” the maximum salaries paid by a company to its higher executives. These would presumably be determined by market forces of supply and demand except that any enterprise in which such “out of norm” salaries prevail would be taxed at a marginally higher rate than its compliant peers.

The adoption of such a “stand” by government would avoid bureaucratic intervention in the working of enterprises while promoting a less unequal distribution of income generated. This would be an added benefit and we believe a not negligible one at a time where nations are competing to differentiate themselves from their competitors on a number of platforms.

 

Rajiv Servansingh

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