Wealth and Income Redistribution via Share Ownership

This article is not meant to advocate for a welfare society nor does it argue for a free market competitive society where winners-takes-all. The article doesn’t either provide a panacea to address socio-economic inequalities or take a position in the right-left wing political economy policy proposals. What is it then? Read on:

There are different types of economic systems that feature varying degrees of interventionism aimed at redistribution of income and wealth, depending on how unequal the society is and how does it feel about such inequality. Free market capitalist economies for example tend to feature high degrees of income redistribution while centrally planned economies feature very little income redistribution mainly because private capital, land income, wage rates and enterprise profits – the major drivers of income inequality in capitalist systems – are virtually nonexistence in such economies.

Undesirable as it may sound for the right-leaning conservative, today, wealth or income redistribution occurs in some form in most democratic countries through economic policies, some distributive policies attempt to take wealth, income and other resources from the wealthy and share them with the poor, or taking resources from the relatively unorganised sections of the society to the more organised – these redistributive policies and actions are normally pursued either in the form of political influence or for the purpose of poverty eradication and/or economic empowerment among many.

Fiscal policies are the most common used tools of wealth and income redistribution – for instance under the progressive income tax system, different persons pay different rates of taxes for different income – in the process the rich are required to pay taxes at higher rates, then within such system some of the tax revenue goes to finance social programs such as social welfare, decent housing, health services, education, water and sanitation, etc or other social programs that benefits the poor.

The other most common form of wealth and income redistribution is via subsidies – this tool enables redistribution of national income and wealth through subsidizing consumptions on things that improve the future earnings power of citizens, such as education, good health, etc. However, such subsidies are somehow funded by way of fiscal policy actions i.e. through general taxation, fundamentally these subsidies are meant to benefits the poor.

The other admittedly uncommon but a sustainable wealth redistributive mechanism (and which is the focus of this piece) is by way of assets ownership, especially financial assets such as shares or stocks or bonds as well as non-financial assets such as property. Ownership of financial assets as a tool of wealth redistribution in the society, can be achieved by way of pursuing policies that encourages wider share ownership of entities operating within the economy so that the GDP growth or the increase in value of financial assets and their profits would go back to the citizens, or specific special interest groups within the society such as employees or consumers of goods and services of specific companies. This can take a direct form of investment by individuals or via savings in mutual funds, or collective investment schemes or statutory pensions schemes where investments can be made in commercial and industrial assets.

Therefore, in our case, privatisation policies that encourages flotation of shares of state owned entities to a wider population, or legislative actions such as Electronic and Postal Communication Act (EPOCA) and Mining Act that have specific provisions for flotation of shares to the public and list those shares into the stock exchange are targeted measures towards, among other core objectives, wealth redistribution and income enhancement for the solidarity of the society that is pursuing a feeling that the society is made by one people sharing a common destiny – i.e. prosperity for many.

Floatation of shares by way of privatization or other such policy and legislative actions enable redistribution of part of the surpluses that the government and corporates operating in specific targeted strategic sectors have accumulated over the years of their growth to the people so as to enable the people hold shares in key sectors or companies operating in the country and therefore have tangible stake in the country’s economic growth and other successes. Opposite of this, distribution of financial assets within the economy remains highly skewed towards the few, and in such situations, even if there are increases in financial assets as part of the overall economic growth, such increase as normally reflected in the stock market – doesn’t benefit many, in the process jeopardising the intended social and economic justice.

In whatever form or design (either by way of progressive tax systems, or subsidies on welfare and spending, or an opportunity for assets ownership), the fundamental objective of wealth and income redistribution are to increase economic stability, social justice and opportunity for the less wealthy members of society and thus usually include the funding of public services.  After all, it is only fair that a society should pursue policies that enables the creation of a larger middle class. A fair society is the one organised in a manner that also benefits the least advantaged, and where any inequality would be permissible only to the extent that it benefits the least advantaged — a good society have the moral obligation to help the poor among them.

Using statistics from 23 developed countries and the 50 states of the US, British researchers Richard G. Wilkinson and Kate Pickett show a correlation between income inequality and higher rates of social problems and social goods (i.e. mental illness, teenage births, low life expectancy, educational performance, women’s status, social mobility, etc). The authors argue that inequality leads to social ills through psychological stress, and the status anxiety that it creates. Furthermore, a 2011 report by the International Monetary Fund (IMF) found a strong association between lower levels of inequality and sustained periods of economic growth. These kinds of arguments can be accepted or rejected – depends on the political and social economic policy option that one stands for (right vs. left wing). I would choose to stand for what-makes-sense platform.

In this kind of arguments there are some for justifies the opposite by saying, but poor people would not hold into the financial assets that are afforded an opportunity to own, i.e. ownership in companies that float shares as part of implementing privatization policies or some specific legislative actions — the response to that is: with clear and beneficial intents, there can be many ways and means to discourage the immediate sale of financial assets (shares) for speculative cash gains. But I will also add, after all, economic empowerment doesn’t end with assets ownership, the intent should accommodate situations where selling of some assets (shares) for spending on socio-economic needs is a necessary hindrance.

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Transparency, Economic Empowerment and Government Revenue – via Stock Exchange

I chose a career in financial services, and in recent days particularly the stock exchange, because I am excited by the notion of making long-term sustainable capital accessible to business enterprises, entrepreneurial companies, and of letting capital serve as an engine for economic growth and social change, in extension creating economic prosperity, social stability, good governance and eventually, a good society. While the stock exchange workings are yet to be known by many who create policies, pass legislations, or could make use of the potentials that the stock exchange offers, I believe our industry has a chance to make positive and measurable impact in our country. I also believe in the framework that the capital markets provide — which links investors and companies to opportunity — many companies we know and use their products and services might have never seen their businesses or ideas come to fruition if it was not for the existence of stock markets.

As a national exchange, we at the Dar es Salaam Stock Exchange (DSE) see firsthand the benefits we can bring to our economy when our market become more vibrant and liquid, operate efficiently, transparently, and in a well-regulated environment. At DSE, our role centres on the creation of an ecosystem whereby industrialists, entrepreneurs and up-and-coming companies (especially after we introduced the Enterprise Growth Market) can access capital efficiently from investors worldwide (following the uplift of foreign investors restrictions in 2014). This is imbedded in our foresight in the capability of providing continuous access to capital and to deepen the liquidity of the listed securities.

Currently, the promise of raising money through the capital markets plays a minor role in our economy, the market is still nascent and underdeveloped, however, the upside potential where the stock exchange can help transform many existing and nascent ideas into some of the most iconic brands of our time, in our economy, is within reach. As we see and admire global brand companies in the likes of: Apple, Alphabet, Amazon, Microsoft, Tesla, etc – we should be reminded that these were financed via the Nasdaq Stock Exchange, a stock exchange that was established on an idea of financing start-ups and medium sized companies that would under normal circumstances fail to list into the New York Stock Exchange.

Yet, we see today that the depth and liquidity of our market is not encouraging at all. The depth of our market as measured by total market capitalisation to Gross Domestic Product is less than 20 percent (at the current market capitalisation of Tsh. 20 trillion, or there about), and if we exclude cross-listed companies, our domestic market capitalisation is only about 7 percent of the GDP. Furthermore, the market turnover ratio to domestic market capitalisation (which is a measure of stock market liquidity) again is currently at 7 per cent. Now, we know that such data to make a meaningful sense, they have to measured in relative terms. So, in relatively terms — the total market capitalisation for all listed equity securities in Africa is about US$ 1.5 trillion, this is equivalent to 60 percent of the total Africa’s GDP (Africa’s GDP is estimated to be at US$ 2.5 trillion). I will have to admit from the onset that Africa’s equity market capitalisation is largely assisted by South Africa, which contribute about 65 percent of the total Africa’s equity market capitalisation. Despite this, in almost all relative measures our stock market contribution to the size and growth of our economy is relatively on the lower end.

There are a number of factors at play here, including those that are structurally related (i.e. competitive investment returns on risk free assets); there are also cultural-related challenges (i.e. the lack of ingenuity, industrious and entrepreneurial drive, behaviour of evading taxes by way of being non-transparent, etc); our culture of short-termism and a minimal care for sustainability and good governance; as well as the regulatory hurdles that companies face when they enter the public markets – albeit this applies in almost all markets where enterprises and projects access public money. That being said, we know from experience that constructive interactions with the capital markets ultimately create jobs and lead to economic prosperity. This is why, we at the DSE, are so passionate about the relative role we play at the intersection of the capital markets and the economy. We continue to engage in public policy debate and work closely with government, regulators, and industry officials to ensure that the principles of domestic capital formation, market structure, and those issues most prevalent for growth companies are being heard.

As stewards of this dynamic ecosystem, DSE embraces government policies and legislative actions which aim at, among others, promoting the development of the capital markets; encouraging transparency, disclosure and good governance in the Tanzania corporate; enhancing economic empowerment and financial inclusion via equitization; and eventually enhancing more revenue to the government by way of taxes.

Further to the general economic empowerment policies, the Electronic and Postal Communications Act (EPOCA), 2010 as amended under the 2016 Finance Act as well as the Mining Act, 2010 whose implementation will start soon following the Mining (Minimum Shareholding and Public Offering) (Amendment) Regulations published in February 2017, are two pieces of legislation whose implementation is central to us. These legislations require that companies operating in the two sectors issue a portion of their shares to local citizens and list their shares into the Dar es salaam Stock Exchange.

Under these laws, unlike the missed opportunity during privatisation, we envisage to see the exchange significantly playing the role it was created to play i.e. facilitate raising finance for enterprises growth and project finance; promote and encouraging good governance and transparency in the way enterprises conduct their businesses within the economy; facilitate implementation of public policies; enabling the government to access debt finance through issuance of competitively and efficiently priced government securities; facilitate implementation of economic empowerment and financial inclusion initiatives; provide investment avenues for institutional investors such pension funds, insurance companies, and other institutional investors; etc.

Now, it is commonly expected that some members in the society will interpret such initiatives in a different perspective, probably with the notion that we might be on the extreme. As I mentioned in my various previous pieces, countries such India, China, Russia, Sri Lanka, Iraq, Hungary, Chile, Jordan and other East Europe, Latin America and some other Asian economies are pursuing similar initiatives for similar objectives, namely: increasing transparency, creating opportunities for smaller companies to grow, economic empowerment for many, good governance, promote local capital markets growth and more government revenue. The implementation mechanisms are either voluntarism and/or mandatorily.

As I conclude – let me on purpose choose three countries that I will mention. Sri Lanka, after about 30 years of civil war, in early 2000s, Sri-Lanka passed a legislative action that require banks and insurance companies to list into the local Exchange — as a result of such legislative actions, the Sri-Lankan, Colombo Stock Exchange has about 300 listed companies, while we have only 18 domestic listed companies – we need to run, probably as others walk. A similar approach is in implementation in India focusing on financial institutions, expecting to list about a 1,000 institutions in a timeframe of four years. Iraq is currently executing a similar policy in the licensing of existing and new companies operating in their telecommunication sector.