In the second part of a two-part interview at Mada Masr’s office in Cairo, the author of bestseller “Capital in the 21st Century” talks about Egypt’s economic policies, French arms sales, tax havens, the IMF and permanent revolution. You can read part one here.
Mada Masr: A core argument of your book is that “r > g”— the net return on capital is larger than overall economic growth — leading to wealth inequality. You argue that “r > g” is not a law of nature and is the result of policies or, rather, politics. In your opinion, what are some of these policies and how can they be reversed now?
Thomas Piketty: The political response is that it’s really a mixture: a whole set of political institutions, fiscal institutions and educational institutions can regulate it. In some cases you want to have public property, public wealth or public infrastructure. In some cases you want to develop new forms of property that are not public but not completely private, like non-profit media organizations.
This can exist also in the manufacturing sector, like how it’s done in Sweden and Germany. In Germany, one half of board members are employee representatives. In Sweden, it is one third. For a long time in France the capitalists and employers were saying “we cannot do that, we don’t want to have employees on the board of the company because these trade union people are crazy people. They come to the board meetings and they make crazy decisions.” This is what they do in Sweden and Germany and apparently they are more productive than French capitalists, so what are you talking about? In the end, a law was passed in France two years ago that gives one seat out of 12 to employee representatives, which is less than 10 percent, so it is much less than in Sweden and Germany. I’m not saying the Swedish or German system is perfect. There are many ways you can improve, by giving voting rights to the workers, for example, not only on the board but also with the general assembly of shareholders, with the right kind of administration.
What I mean is that there are different ways to organize property. We should not stop thinking about other ways to organize property because Soviet-type state property was a disaster. You will always have private property in the traditional sense. Progressive taxation of wealth and income — and particularly progressive taxation of wealth — is, I think, another way that is complementary to co-determination.
If progressive taxation works, it can be quite a radical way to question property. It depends what is your tax rate. In my book, I say if top billionaires are rising at 5-10 percent per year, you want tax rates that are comparable to that size and which are sufficient to keep this under control. In effect this means that property rights become temporary rights. You are the private owner, but if you have too much concentration of property rights, then you have to return to society 5-10 percent each year. It’s like permanent land reform. Now the progressive wealth tax is doing the same. It’s like a permanent revolution, but more peaceful. All these different ways of tackling inequality of wealth and power, and redefining what a more democratic property regime could look like, are complementary.
MM: The strategy of development in Egypt since the 1990s has been to open its borders, and use the comparative advantage of cheap labor and cheap energy to try to attract investment. This strategy somehow backfired and led to a revolution and has worsened since. Would you still say that tackling inequalities in this context should still be a short-term priority? And if so, what strategies should the country resort to?
TP: Let me tell you. I am here to learn about Egypt, and not to give lessons about what Egypt should do. Certainly, I think there are better ways to use public revenues and the public budget than what we have today.
When you put one third or one fourth of budget to interest payments and debt, whether it is domestic debt or external debt, I am not sure. The priority in a country like Egypt should be to improve the public services and increase investment in education, roads, health services. To me the biggest scandal is that we have limited public resources and we don’t use them well. We see examples from history when countries have to negotiate public debt, whether it is domestic or external. I think Egypt is at this stage. We know the financial situation is very complicated, reserves are getting smaller and smaller.
At some point you have to take a new start and invest more in the youth and growth and employment. This process has to work together with the process of democratization and building trust in the government. This is where Egypt is in a very strange situation.
Like many people outside and inside Egypt, I was very sad to see how things have changed in recent years. The election of 2012 at least looked like a contested election with many different candidates. We got a lot of votes, and we didn’t know in advance who was going to win. It looked like a process of democratic institution building.
The fact that all this ended up a few years later with a new military regime, and with countries like France taking US$5-6 billion to sell guns to Egypt. What are we doing? The attitude of France and Western countries with respect to the new regime is highly questionable, and the fact that you have transferring from Egypt to France right now during this situation. I don’t know, maybe these guns are so useful that it is worth it. I’m not an expert, but I’m very skeptical.
MM: What do you think about the recent paper by IMF economists called “Neoliberlism: Oversold?” Basically, they make the argument that some of the core tenets of neoliberalism, particularly financial openness and fiscal austerity can actually increase inequality and undermine long-term growth. Of course, these are individual economists, this is not the IMF as an institution saying this. I wondered on one hand if you think your book and the kinds of conversations it’s opened up have contributed to this discourse about inequality and questioning neoliberalism filtering into institutions like the IMF. Also, do you think there’s maybe any chance this kind of thinking will in turn filter into policy makers in institutions like the IMF and governments like Egypt?
TP: I hope my book has contributed to the debate about inequality, rising awareness. But to be honest, to me, you don’t write a book for presidents of the IMF or leaders. You write a book for normal citizens. I think the success of the book comes from the fact that you have lots of normal citizens who are not economists, who are not IMF staff, who are not presidents, and who are tired of hearing that this is too complicated for them, that they cannot understand the economic and financial issues, and who want to form their own opinion. I think, in the end, this is what we can contribute to change. I think my book has contributed to trying to democratize economic knowledge. I think this can contribute to democratization of the economy itself. Of course this is just a book, this is not enough. You need political mobilization, you need new forms of political movements.
Coming back to the IMF, I’m not so convinced they have changed, really. I think there’s a lot of rhetoric, but in the end the IMF has always been a very conservative institution, and I think they are still a very conservative institution. I wouldn’t like to be Egypt in an IMF plan in the next few years.
I think what they have done, and what they are still doing in Greece is just a complete catastrophe. Now they are trying to play a game with Germans, saying, “Oh, you know, the worst are the Germans.” But they have been working together to deal with the Greek crisis, and they have done a terrible job. The level of GDP in Greece today 25 percent lower than what it was in 2007. How do you want to a country to repay its debt when its GDP is down by 25 percent? The very least you could do is have a debt moratorium until you return to a stage where you have the level of economic activity that you had before, and if possible at least some small growth trajectory. Then you can think of adding a fiscal surplus.
The IMF has been a very big part of this, and is still very conservative when it comes to tax reform. In Greece, all they wanted is an increase in consumption tax. When they come to Egypt, they say “increase indirect taxation.” So I’m not sure they have changed.
They pretend to be very concerned with inequality, but they are still very conservative. These international organizations, for such a long time, they have been in favor of no transparency, competition of countries to attract investment with no automatic transmission of information at all. And then suddenly they say, “Oh maybe we should…” But I don’t trust them too much. I think we need citizens who put in power governments and parties who will have different policies. I would not wait for the international organizations to make a difference.
MM: You state in your book that diffusion of knowledge and investment in youth is the main factor to reduce inequality. But as you know, Egypt has a public budget for education that is very low, so you end up with a system that is quite segregated with quite expensive private schools that most people cannot attend, and even for people who graduated from these schools, they don’t really have the jobs these people are qualified for, so they end up leaving the counry. So, actually, is there any short-term fix, beyond this long-term investment in education. What do you see happening?
TP: Look, when you have US$5 billion to spend, whether you spend them on buying guns from France or spend them on education or public services or creating jobs in Egypt, that will make a big difference. In the case of this contract with France, there was no investment in Egypt.
With the purchase of jets from France, you can see a possible strategy. With the purchase of helicopter carriers, many people are asking, what is it going to do? What is the plan? It looks as if you want to have good relations with France and with the West and want to make friends for the future of the regime, but it could make a big short-term difference if this money was used to invest in Egypt.
MM: One critique of your work in this region came from Hernando de Soto, who basically said that you need to look at people like Tunisia’s Mohamed Bouzazi as frustrated entrepreneurs rather than unemployed workers, and that “capital and labor are not natural enemies” in the Middle East, but part of a continuum. He also said the categories you are using are too Eurocentric and don’t apply to the developing world. Do you feel like this is a fair critique?
TP: I don’t think capital and labor are enemies. I like capital, I like property, this is why I would like more people to access property. So, private property is not the enemy, capital is not the enemy. But, unlike Hernando De Soto, I believe in market forces but I think they are not enough. You also need strong democratic institutions, strong fiscal institutions and transparency, so as to put these market forces into the common interest. I think it’s very naïve to believe that any level of inequality, any level of initial concentration of resources, the market will take care of it and everything will go fine.
I am into history. I try to collect data to see what I see. I don’t have any theoretical preconceptions. I’m just trying to see the facts. And the facts are that the experience, in particular of Western countries, is that it took major political change, major political shocks in some cases, to get reduction of inequality. And the idea that this will come just from market forces, I think is wrong. If you want markets to work well, you need good public services. For this, you need a tax system that is perceived as fair.
MM: The Panama Papers were a recent reminder of the volume of undisclosed income, shifted profits and intensity of the “tax race to the bottom”. Egypt is suffering from the use of tax havens, which has led the government to try to compensate by imposing more indirect taxation, which of course aggravates the wealth gap. With the current environment, where tax havens play a more important role by the day, do you see this trend reversing in the foreseeable future?
TP: I don’t think that we have seen the end of tax competition, and tax havens and tax opacity. I think it could get even worse. Europe is playing an important role in this evolution because there is competition among European countries to reduce the corporate tax rate, which could go even further. We went from a 50 percent corporate tax rate to 40, 30, and in some countries like Ireland or Poland, 10 percent. Britain now wants to reduce to 17, which for a large country is very small. If we don’t do anything, we will go toward zero. And then when we are at zero, we will have subsidies to investment, so it will be negative. The problem is, if you do that, someone else will have to pay for public services. So you will overtax the people who cannot move: Low-skilled, medium-skilled workers.
I think it’s putting our basic social contract at risk, because at some point these people will say, “look, why should I pay more than the richer people?” And so they will start complaining about the welfare state, about public spending, and start to turn against the poor or against migrants, which you see now in European countries. So I think this tax competition, tax opacity and lack of local tax receipts is an issue that is really threatening our basic social fabric.
We have not solved the problem. I think it can get even worse. We keep having these treaties to further liberalize trade, like the Transatlantic and Transpacific treaties, without putting into these treaties any serious attempt to have a permanent minimum corporate tax for large multinational corporations. This would be the place. With a treaty between the US and the European Union, you have almost half of the world’s GDP here on the table. This is the time to promote financial transparency. If you don’t do it then, when will you do it? You lose opportunities, basically because those who benefit from financial opacity have been so far better lobbyists to convince government in the US and Europe not to change anything. I hope the democratic process can be stronger.
This article has been edited for length and clarity.