Foreign investment is like slow poison

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The author of Capital in the Twenty-First Century has spurred an energetic debate about capitalism and inequality. Here, he talks to The Africa Report about democracy, markets and industrialisation.

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Thomas Piketty – economist / Professor of inequality

7 May 1971
Born in Clichy, Hauts-de-Seine, France

1993
Earned a doctorate in economics from the Ecole des Hautes Etudes en Sciences Sociales

1993-1995
Worked as an assistant professor at MIT, the Massachusetts Institute of Technology

2006 
Helped to establish the Ecole d’Economie de Paris

2014
Published Capital in the Twenty-First Century in English

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The Africa Report: What lessons on inequality are there for Africa from Europe’s 20th century?

Thomas Piketty: It’s important to think ahead about the kind of institutions, in particular progressive taxation and welfare states, that we gradually want to develop in order to ensure that this growth that will come [in Africa] can be distributed in a balanced manner and we don’t get to the kind of extreme and excessive concentration of wealth and economic power that we had in Europe up until the First World War.

In France in 1914, people didn’t want progressive taxation, even with a top rate of 2%. Then suddenly in 1920, the same political groups that refused the income tax with the 2% tax rate voted for an income tax with a top tax rate of 60%. This is largely due to the war-related shocks but also after the Bolshevik revolution in 1917.

Many rich people in France and in the West thought, after all, maybe it’s better to have progressive taxation than to have expropriation.

Do you need shocks? Won’t democracy do the trick?

I believe in democracy and in democratic forces, so I’m certainly not saying that you need wars, violent shocks or revolutions to make things happen. You can achieve a number of things through democracy, and I certainly believe in new forms of mass mobilisation using new information technologies to spread information.

But sometimes the elites invent a kind of persuasion apparatus that can be quite powerful in order to avoid the consequences of universal suffrage and electoral democracy. Democracy can be captured, in particular the laws governing democracy itself and the financing of political parties.

The financing of the media is important. In the US today there is certainly a big concern that rising inequality leads to rising inequality in political power and the capacity to influence the political process.

What about in emerging economies, where a hot topic is democracy versus authoritarian states?

I think the rise of democracy, the rise of a legitimate state and government, and trust in the government’s ability to control a significant part of the countries’ resources, raise tax revenue and spend it well – all these processes go together.

It’s very difficult to talk about the rise of democracy or the rise in trust in an elected multiparty system without talking about the substance of what the government is delivering: if the school system is working and if the roads are being repaired.

And so each country has its own very complicated political, cultural and social history of how people come to agree or come to disagree about what the government can do, and should the government exist with these kinds of boundaries or this kind of political community of people that you put together.

I think what has been very harmful in Africa and across the world is the belief after the fall of the Berlin Wall that all we need is market competition and we don’t want strong government, in fact we need weak governments.

I think this was a terrible mistake because if you want to have a well-functioning market institution, you also need strong governments that are able to pay their teachers, their judges, their policemen, their nurses well so that they do their jobs.

There’s no way that with 10% of GDP in tax revenue or sometimes less in some African countries, you can talk about democracy or talk about exchange because the bottom line is that you don’t have money to pay your teachers or road builders [...] I think, in a way, we’ve been playing with Africa as a field experiment, with a very radical discourse against government, which of course we did not apply at home or at least not as radically.

What about industrialisation? How difficult would that be given that, as you point out, 20% of African capital is held by foreigners. Does it complicate matters?

Foreign investment is complicated – it’s like a drug or slow poison. It can be useful as long as it doesn’t take proportions that are too large. When you have a significant part of your capital owned by foreign entities, it often leads to cycles of political tensions and big political cycles with groups either supporting the foreign owners, sometimes in a very unfair and inequitable manner, and sometimes expropriating the foreign ownership in a way that is not so efficient. I think it’s important to realise that basically no country in history has become rich through foreign investment.

What about African countries that struggle with inequality?

In the case of South Africa, we have some of the data and there’s evidence that in the dreams of the post-apartheid period, if anything the top income groups have taken a bigger share of income growth. To be honest, at least we have the data for South Africa. There are countries where maybe there’s been the same situation or one that is even worse, but we don’t see it.

What about the view from another side of the debate? One of Margaret Thatcher’s ministers said that the only problem with unearned income is that there’s not enough of it. That’s why they’re going to broaden the base of home ownership and privatise state companies.

To some extent I believe in broad ownership of capital, and I believe in private property, not only as the condition of economic efficiency but also as a condition for personal freedom. It’s just that I want to make sure that we’re indeed going to increase the spread of wealth, which is often heard in order to defend privatisation or other policies, but in fact that’s going to benefit only a small group of the population.

Also, whatever the level of equitable property distribution that you achieve, I think it’s important to balance the rights of capital owners with the rights of the workers and the rights of other parties involved [...] In France, the success of German exporters and German corporations is making some people change their view on this debate. Workers have voting rights on the boards of German corporations even when they don’t have any stake in the capital. Apparently that is not preventing them from producing good cars.

After the fall of the Berlin Wall some people thought that having a shareholder company with all power given to the shareholders is the only way to organise human activity, but this is crazy. This old debate, about what we used to call the mixed economy, has taken new forms today. In a way, it’s only beginning.

Sourced here  http://www.theafricareport.com/North-Africa/foreign-investment-is-like-slow-poison.html