Remember when they said that a rising tide lifts all boats? Well, that wasn’t entirely true. Africa had some of the fastest growing economies in the world posting an average of 5.4 percent of gross domestic product (GDP) growth between 2000 and 2010, adding about Sh7.5 trillion annually to GDP.
McKinsey Global Institute even described the potential and progress of African economies as “Lions on the move”. But that growth failed to translate into lower rates of poverty. Poverty levels have barely improved. In fact, according to Gallup World, by 2013, the 10 countries with the highest proportion of residents living in extreme poverty were all in sub-Saharan Africa.
In 2016, 75 percent of the world’s poorest countries were located in the continent according to World Bank. Ten of the world’s 19 most unequal countries are in sub-Saharan Africa according to United Nations Development Programme (UNDP). Did Trickle-down economics fail or was it Trick-down economics? Not my interest today. Today’s article seeks to further an idea; Employee Stock Options Plans (ESOPs) that might help rebalance inequality.
But what are ESOPs? These are simply contributions typically shares of stock in the employee’s company. ESOPs are commonly used by employers to either reward employees or as an exit strategy from business ownership. Now back to our quest. I was fortunate to stumble on Jared Bernstein’s (chief economist under Vice President Joe Biden in the Obama administration) work on ESOPs.
In his research paper titled: Employee Ownership, ESOPs, Wealth and Wages 2016, he concludes that ESOPS do have the potential to equalise wealth and wage distributions. Equally important, he demonstrated that minimum wages, though a useful policy to reduce the gap between low and middle wages, for the high-end inequalities (among the one per cent of wealth), it’s found to be an inadequate means. The clear suggestion was that ESOPs (although he warns their effect may be limited by plan, design and access) hold the potential to bridge the wealth gap. He emphasises the adoption of ESOPs for these three reasons.
One, ESOPs have been shown to reduce wealth inequality. Since ESOPs transfer capital ownership to workers less likely to own capital, as the extent of employee ownership rises, wage inequality among worker-owner declines.
Two, firms in ESOPs appear uniquely resilient in recessions relative to non-ESOP firms — perhaps due to enhanced cooperation by employee-owners. For non-ESOP firms, to “climb the ladder” appears trapped in ways that may or may not improve the firm’s output and efficiency.
Three, since wealth inequality is considerably less equitably distributed than wage inequality, ESOPs present an opportunity to less overall inequality.
Given the findings above, will growing employee ownership really tilt the poverty balance? It’s safe to argue that that ESOPs and employee ownership in general appear to reduce inequality. And should ESOPs be therefore adopted as a policy tool?