Reducing economic inequality in Zim

By Kevin Tutani | 12h ago

Urban slums in Zimbabwe’s Epworth settlement 25km east of the country’s capital, Harare.

Last week's article explained worsening inequalities in Zimbabwe.

It highlighted how Zimbabwe is now ranked among the 30 countries with the most regrettable inequality.

It highlighted how the wealthiest 10% of Zimbabwe's population control 59% of the country’s income. Some 50% of the population earns only a cumulative 9,2%. Disadvantages of such inequalities were also discussed. These included; increased difficulty for the poor to catch up with the rich, the likelihood of the poor getting lower quality education and healthcare systems — compared to the rich.

How the government can address this through wealth taxes was also described. The article assessed the feasibility of adding more wealth taxes, to the ones which are already in place.

It was proposed that increased government revenues from wealth taxes would then be used to support the poor and cover inequality gaps.

The revenues would be used to fund a competent public education and healthcare system, provide the poor with small amounts of free cash regularly and provide more public services to help the poor.

It was also proven last week that additional wealth taxes may be unsuccessful if wrongly implemented. That is why today's article will venture into other methods, which the government can adopt, in order to reduce inequality.

Available measures

Keep Reading

There are several other avenues through which the redistribution of income and wealth can be achieved, besides direct wealth taxes. Many of them are already in implementation, although when mentioned in this passage, the emphasis is on how to enhance their effectiveness. These are discussed below.

It is particularly important to keep in mind that regular government taxes are potent income and wealth redistribution mechanisms.

The revenue which government earns from taxing workers and companies in both the public and private sectors provides great opportunities for it to address inequalities. The existing income consumption and wealth taxes have a major role to play.

Using usual tax revenues, the government may increase its expenditure towards education and healthcare. Education bequeaths learners with skills which increase their prospects to become active in the labour market.

By increasingly making the country's future labour force employable, some economic inequalities will be concurrently addressed.

This is especially important in the context of providing free and subsidised education to the poor. As a developing country, Zimbabwe's privately held wealth, to national income ratio is likely to be quite modest, particularly when compared to advanced economies.

South Africa's ratio was estimated at only 255% in 2014. It was much lower than that in advanced economies, whose ratio was between 400- 700%.

Since Zimbabwe is less developed than South Africa, it is likely that its wealth to income ratio is similarly lower.

This implies that the Zimbabwean labour market can be a useful tool to close a portion of the wealth inequality gap.

Typically, labour makes up between 60% and 75% of a country's national income. By inference, supporting the poor, so that they participate in a more valuable manner in the labour market can help to close income and wealth inequalities.

This would particularly produce exceptional results when the majority of economic activity becomes formal, instead of informal.

Healthcare spending improves the quality of life of citizens. Some respected researchers have found that an increase in a country's average life expectancy by one year can lead to 4% economic growth in the long term.

In this regard, the government should continue working towards optimising its expenditure in the education and healthcare sectors.

In South Africa, it was discovered that efficient government procurement could save as a much 20% of the costs of goods and services, equivalent to 3% of GDP or US$12,7 billion each year.

Unfortunately, Zimbabwe does not have data on the exact level of inefficiency pertaining to state procurement. This lack of data does not imply that state procurement is efficient.

It is just not available. Preferential procurement influences supply chains to choose suppliers on grounds which are alternative to price and quality. Therefore, there are much savings to be realised from removing inefficiency in education and healthcare expenditure, along with overall state procurement.

The savings can be used to further enhance the same social services, with the aim of achieving a more balanced distribution of income and wealth in the country.

The government can choose to issue title deeds to competent black farmers, and others who have the potential to excel in agriculture.

Land can be sold to them at 25% to 50% of market value, whilst they pay monthly instalments towards the purchase over a period of 25 years or so. This should include state land, as well as that which the government is currently leasing to black farmers.

Title deeds will enhance the ability of farmers to secure commercial loans for the expansion of their agricultural activities. Selling land to black farmers would improve government revenue collections. On the other hand, it will empower farmers from previously disadvantaged backgrounds to become more economically productive and wealthier. This will go a long way in addressing income and wealth inequalities.

A number of firms in Zimbabwe operate in highly-concentrated markets where they face little, if any, competition. The result is such firms have enjoyed healthy profits for decades, with limited motivation to innovate or provide goods and services on competitive terms for the benefit of consumers.

Examples of such industries include mining, telecoms and manufacturing. The government could intervene with various regulatory measures to break up the influence of existing firms so there is more competition.

However, such firms would lose their economies of scale and might ultimately become inefficient to the point of divesting.

This is particularly noteworthy in an economic environment characterised by globalisation and international competitors.

If local enterprises lose their commercial potency, they may succumb to imports.

So, in order to implement a mutually beneficial solution, the government should look into taxing firms which operate in concentrated markets, at a higher rate than firms in competitive markets.

If the aforementioned firms attempt to pass on the taxes to consumers, through higher prices, the government can even threaten to tax them as much as 50% of their earnings, or more.

This is so that, whatever financial revenues they accrue, would be equally beneficial to government.

In this way, the firms can continue to make profits, albeit reasonable ones, whilst the government draws greater revenues from their activities. In France, the government used a somewhat similar “modus operandi”, to reduce the price of foodstuffs, after food prices were unyielding.

The additional government revenues to be reaped from concentrated markets can be used to fund social and economic development. Thus includes; subsidisation of economic infrastructure (electricity, rail, water and ports), enhancing education and health expenditure as well as social grants. Subsidisation of infrastructure should ideally translate into cheaper electricity, water, rail and port access tariffs.

That means consumers, particularly the indigent, will have more disposable incomes and enjoy a better quality of life than before.

Besides, it will make the overall economy more competitive because infrastructure is a critical component used in the production process of all firms.

If the economy begins to grow vibrantly and government earns abundant revenues, the focus of expenditure should not only be limited to social spending and infrastructure, as a means to rebalance wealth inequalities.

The additional tax revenues can also be used to replenish the country's sovereign wealth fund, which is an investment vehicle used by the government to increase the value of government assets and finances, on behalf of all Zimbabweans. The government can use the sovereign wealth fund to establish local and foreign investments in stocks, government bonds, time deposits and direct investments in dynamic companies. The profits of the sovereign wealth fund are what will then be used for expanding social transfers and other redistribution mechanisms.

Norway has a dedicated fund of that sort, which invests on behalf of its citizens, and was worth more than US$1,7 trillion in February. In 2024, the fund generated US$222 billion in profits. Norway withdraws part of the profits in order to bolster government financial resources, time and again.

The Zimbabwe Revenue Authority needs to be capacitated such that it can close more loopholes that the wealthy are using to evade tax which is due from them. Among these, illicit financial outflows are particularly problematic.

Specialist researchers and organisations in the field of illicit outflows have concluded that governments incur significant revenue losses due to such illegal mechanisms.

In South Africa, for example, it has been suggested that as much as US$6 billion is being lost each year due to such tax evasion.

This criminality is being carried out by unscrupulous firms and some wealthy individuals who are depriving the government of the revenue which is due to it.

Incentivising whistle-blowers who expose tax evasion, will also be essential. That means anyone who exposes illicit activities, will get 1% or more of proceeds to be recovered by the State, for example. This will improve both tax compliance and recovery of any pilfered funds.

The government can also use moral suasion to appeal to the wealthy, so that they too can participate in creating opportunities for and transferring some of their wealth to the less privileged.

These campaigns can be implemented through inviting high net worth individuals to government functions where speeches are made to encourage them to invest some of their wealth into communities.

By inference, that also means the country needs a database with all names and details of high net worth individuals who are citizens or resident in Zimbabwe. At such events, politicians can diplomatically discuss national setbacks associated with wealth inequalities, along with benefits to be reaped when some of them are rebalanced.