Essay: South Africa’s income inequality

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To what extent has post-Apartheid South Africa’s income inequality increased despite its transition to democracy and its economic growth?
South Africa is a country renowned for its stark contrast in social, ethnic and economic (income) inequality. Introduced by the National party in 1948, the Apartheid system established the barrier between different appearances, known ancestries, socioeconomic status and cultural lifestyles which collectively contributed to four racial groups. Naturally this segregation led to high unemployment and a low skill base in the most segregated groups of the Apartheid such as ‘coloured’ and ‘Africans’, yet when the Apartheid was abolished in 1994, Nelson Mandela was voted in and a political change to democracy was established there was little change in decreasing the heavily prominent inequality in the South African society. However, whilst South Africa lacked a change in its income inequality; suggesting a broad low skill base and high poverty rates, its annual growth rate increased post Apartheid showing a contrast between the two sets of data. Today, as part of the Southern African Customs Union, South Africa is considered a developed country according to international trade statistics due to its $384.31 billion GDP, thriving resource based market, and $935 million food trade surplus (1). However, the UN still maintains South Africa as a developing region due to problems such as the low life expectancy and inequality. A nation with a level of income inequality is often subject to oligarchic business structures, distrust in the government and high rates of crime. The large gap between the richer population and the poorer low income population often creates political unrest due to revolts and factions formed out of desperation. Inequality limits an individuals access to economic mobility, meaning individuals born of lower income backgrounds are highly likely to remain in this social class throughout their lifetime.

Inequality is, by definition of [investopedia] ‘the unequal distribution of household or individual income across the various participants in an economy’, hence in order to understand the reasons behind South Africas income inequality the social classes and population groups that differ in income must be identified. (2)

Firstly, the post Apartheid rule of ANC (African national party) and its new found freedom led to an era of neoliberal leadership; favouring pro capitalism views and hence low government intervention. This slowed the goal of equality for Africans as there was a lack of regulation and a ‘laissez faire’ mindset, leading to difficulties for Africans to break the system that had been ingrained for fifty years and climb the social ladder. A key barrier to lack of social and income equality is social and economic mobility, hence a lack of economic opportunities provided by the government- such as: taxes and income redistribution; grants and benefits; national minimum wages; and government job creation (all of which are adopted by many developed countries)- mean an individual is unlikely to be more successful than their parent and thus a cycle of poverty continues and a system of rigid class is sustained.

The newly elected governments desegregation of unions and legalisation of interracial unions led to a sharp increase in the union participation rate. This interracial union participation had an impact as the employment of union affiliated men significantly increased, hence causing a reduction in unaffiliated mens employment. This new reduction in labour market segregation and discrimination due to the interracial unions resulted in a much larger workforce as Africans were now included. Due to basic supply and demand theory there was then a transition to cheaper low paid labour, most of which were Africans. While this transition may have reduced the racial divide, it did cause many whites to be put out of work due to the new workforce of Africans working for lower pay; thus creating an income gap between newly unemployed whites and Africans in work.

Trade unions took an unusual stance as a part of a relatively privileged section of society in that they were a union of employed workers- an aspect not nationally universal. The members stood to gain financially from the new social welfare system even if most recipients were not members of trade unions meaning an increase in taxes for trade union members, as they helped in the negotiations for the basic income grants. Their emphasis on the need for a basic social wage allowed the unions to defend high wages- thus keeping a high wage growth path- against the large criticisms of the high wage/job creation trade off (as high wages are known to be bad for poverty reduction and inequality). These moral concerns combined with self-interest led the unions towards welfare reforms that contain pro-poor aspects. As trade unions were keen to point out, the ‘working class’ frequently played a major role in reducing poverty in south Africa through its private welfare system of remittances. The employed workers are the people that essentially provide the social security net for the unemployed through their remittances and taxation. About 5% of all wage income is redistributed through inter- household transfers (or remittances), with substantial redistribution from the richer half of the population (including trade union members) to the poorer half. Trade unions favoured the socialisation of welfare as they supported the idea of the burden of supporting the poorer population to be undertaken by taxpayers rather than their members. The top 20% of households in South Africa pay the largest share of income and sales taxes due to its large share of income and expenditure, and since the majority of trade union members are in income groups that pay small shares of taxation, this burden would not impact them heavily.

A large factor in the failure to remove, and increase in interracial income inequality stems from poor political management.The newly elected African National Congress party’s original plan to rebuild the South African economy after years of international isolation and sanctions was through the ‘Reconstruction and Development programme’. This scheme aimed to establish democracy for all South African citizens through five major policies. These included ‘creating a strong, dynamic and balanced economy’; ‘Developing a human resource capacity of all South Africans’; ‘Ensuring that no one suffers racial or gender discrimination in employment, promotion or training situations’; ‘Developing a prosperous, balanced regional economy in South Africa’; and ‘Democratising the state and society’. In short this policy was aimed to address and redress the inherited gross inequalities of apartheid, socially, economically and spatially. The programme was successful in that it created a strong social security through its extensive welfare system, including health care for pregnant women and children; free school lunches; and care for the elderly, disabled and children in need. However, the large quantities in government spending for this programme led to a fiscal constraint due to the impact of its inherited poor economic legacy of the Apartheid also creating an organisational constraint due to its previous lack of a social welfare system. The governments neglect for a taxation system also led to an increasingly heavy fiscal deficit. Between 1994 and 1996 the fiscal deficit rose from 11500 million ZAR (South African rand) to 19000 million ZAR; equating to 4% of the countries Gross national product. (3)

When faced with these constraints Government introduced a macroeconomic policy framework called the Growth, Employment and Redistribution strategy in 1996 to stimulate faster economic growth which was required to provide resources to meet social investment needs, rather than the original policies use of existing resources (hence the lack of). The policy encompassed most of the social objectives of the RDP but was also aimed at reducing fiscal deficits, lowering inflation, maintaining exchange rate stability, decreasing barriers to trade and liberalising capital flows. With this new policy the targets for fiscal deficit, inflation and government consumption were nearly met, the fiscal deficit reducing o 2.2% from 5.8% between 1996 and 2000 inflation decreased to 5.4% from 6.8% at the end of 1996; whilst government consumption reduced to 18% over the same period. This established greater macroeconomic stability, better reporting and increased accountability. Furthermore, the management of public finances improved drastically under the new strategy and the success with regard to GDP was that the negative growth rate of the early nineties was reversed. Tightening of the monetary policy, restructuring all government levels also led to a reduction in government expenditure.

However these policies were largely criticised, mainly by Congress of South Africa’s Trade Unions for its neo-liberal approach. Despite the original achievements, private investment, job creation and GDP growth indicators were not reaching the levels the government were hoping for. Low levels of economic growth and private investment were insufficient in their contribution to the reduction in unemployment; and furthermore the policy achieved very little success with the distribution of wealth- stimulating the start of the downfall in income equality. While the new government strategy was able to achieve the macroeconomic objectives, it clearly lacked success with regard to the social challenges of the country, most notably poverty reduction and employment creation as was envisaged. (4)

In order to quantify this income gap and inequality between the different ‘racial classes’ from the Apartheid there are a number of methods used to present and compare a countries spread of income, thus presenting its income inequality. The Gini coefficient is a commonly used method of indicating a countries level of income inequality by condensing the entire countries income distribution into a number between 0 and 1, with a low number signalling a completely equal country. It is calculated by finding out the income of all the people in a country and then expressing this information as a cumulative percentage of people against the cumulative share of income earned; this creates the Lorenz curve (shown in diagram). The curve indicates the proportion of the income going to the poorest people, middle-income people and richest people. South Africa has a consistently high coefficient compared to other developed countries of 0.65 (2014) indicating large differences between the rich and the poor. However, the key to its post apartheid analysis is in its increase between 1995 to 2005. A political transition from national segregation and white supremacy to democracy and black freedom would suggest less discrimination and increased rights for the lower classes, however the coefficient rose from 0.64 to 0.69; which suggests there was an increase in the boundaries between these high and low classes. Whilst the advantages of the Gini coefficient are clear in that it gives an easily comparable ratio against other countries spread of income and wealth, it gives no indication of which end of the distribution contributed most to the observed inequality. (5)

As a result of this criticism, additionally to the Gini coefficient other measures such as the Atkinson and Theil indexes are often used, both of which are entropy measures which present the deviations from perfect income equality. The Theil index can present overall inequality can be decomposed by race, with a certain proportion of overall inequality being explained by inequality between the race groups, and the remainder being explained by within race groups. To do this, the Theil index measures an entropic “distance” the population is away from the egalitarian state of everyone having the same income. The numerical result is in terms of negative entropy so that a higher number indicates more order that is further away from the complete equality. Formulating the index to represent negative entropy instead of entropy allows it to be a measure of inequality rather than equality. The statistics for South Africa as estimated by [University of Cape town, development policy research unit] suggests that between 1995 and 2005 the share of inequality created by within racial group dynamics has declined. In turn, this poses the idea that primary driver of income inequality since Mandela’s election has been between group inequality; as statistics show that shares of inequality between race groups contribution to overall inequality increased from 46.9% to 49.7%. This information from the use of the Theil index is useful as whilst the Gini coefficient proves an increase in general income inequality, the Theil index has shown that the dynamics of segregation created due to Apartheid have remained persistent in the new era of democracy through the separation of racial groups through differences in average income. (6)

In contrast to a consistently prominent downfall in South Africas equality measures, there are a number of statistics that display success in economic growth across South Africa. The countries budget deficit fell from 8% in 1997 to 1.5% in 2004; which coincides with a 15% increase in exports, showing the countries dependance on its neighbours for goods and services had decreased and it became more self reliant, a good indicator of development as stated by the [Organisation for Economic Co-operation and Development]. The actual poverty rate statistically decreased as the population living on under $2 per day fell by 7% between 1996 and 2010 further exhibiting an increase in the countries income and wealth. Annabel Bishop an investec economist stated that the ‘South African economy doubled in real terms’ as its growth doubled from 1.8% in 1994 to 3.2% in 2008. A study taken by [Goldman Sachs international] also revealed that the countries real GDP per capita increased by almost $2000 between 1995 and 2012. Each individual statistic shows a clear suggestion of an improved economy, and so there can be no doubt about its economic growth as shown by the varied amount of data; which leaves the question of why there was then an increase in the countries income inequality.

The statistics used here from the [2017 Trading Economics database] con be concluded to have no bias in their usefulness as they consist of numerical values. The database also contains information on an international scale, since it is not a South African owned resource, so it is highly unlikely to be leaving out any figures that South Africa may consider poor. (7)

Further research into South Africa’s poverty levels between 1995 and 2005 can be used to link income inequality and economic growth. A table created by the [University of Cape town, development policy research unit] links the ‘poverty shifts by race of household head’ over the given time period. Using the headcount index: referring to the share of the total population with expenditure below a pre-defined poverty line; and the poverty gap ratio: a measure of the average poor agent’s expenditure relative to the poverty line. The statistics show that the headcount rate for Africans decreased over the ten year time period, proving a decline in poverty rate. Even more so, the two poverty lines (a higher line signalling the amount of income needed for the basic costs of living and a lower poverty line signalling an income of under $2 a day) both declined in percentage points. While the higher line lowered by 3.5% points, the lower line lowered by 7% points; not only showing that aggregate poverty decreased, but those at the lower levels of poverty experienced a larger relative improvement in their welfare over the decade following the Apartheid. These statistics are all for the black African population of South Africa, and so in comparison to the other Apartheid racial classes it appears that Africans were the only racial class to undertake an improvement in poverty, as the headcount rates of the Coloured, Asian and White groups showed little to no change (both absolute and relative). This in turn meant that the Africans decline in their headcount rates was relatively larger than that on a national level. (8)

While Africans did experience declines in their headcount rates at both poverty lines over the ten year period, their levels of poverty were still lower than the national level and that of other race groups as measures by the headcount indices. and those of other race groups. For example, in 2005 at the higher poverty line, the national headcount rate was 49 percent, while the African headcount rate was almost nine percentage points higher at 58 percent. In contrast, the Coloured headcount rate was 35 percent, while eight percent of Asians were poor at this line. Throughout the ten years, less than 1% of the poor population indicated at both lines were Whites.

It is not surprising that Africans held a disproportionate percentage of poor individuals in South Africa, given the results ubove; as they counted for 77% of the population in 1995, with this increasing by 2% by 2005. Hence why 93% of the population living under the higher poverty line were Africans. Whilst Whites were accounting for 10% of the overall population but less than 1% of the poor population as told by the poverty lines.

A second global issue in inequality, alongside racial inequalities is gender inequality. The research done by the [University of Cape town, development policy research unit] includes this in its data for South Africas poverty levels. A table the University created displays the change in poverty levels according to the gender of the ‘household head’. The data shows a decline in poverty levels experienced by both male and female headed households at both poverty line levels. The households that were considered male-headed undertook a relatively higher decrease of upwards of 6% in their headcount rate at the higher poverty line, whereas female-headed households undertook a larger decrease in their headcount at the lower poverty line. These results suggest the reductions in poverty at the poorer level of households were mainly found in female-headed households. However overall there was no bias to be shown to female-headed households in the reductions in poverty over the ten year period. This may be due to the fact that those living in households run by females were still more vulnerable than those with male run households; and there were still higher percentages of poorer households being female-headed- in both absolute and relative terms than male-headed households. An average poor person in a female headed household lived upwards of 27% below the poverty line, compared with an average poor person in a male-headed household living 17% under the poverty line. Even more so, the majority of these poor female-headed households were Africans. (8)

The reasons behind why female-headed households shared the highest proportion of the poorer population can be explained through logic universal to all countries. The implication of a household run by a female suggests that there was a divorce or separation from the father of the household by which, traditionally, the house would be run. This then leaves the mother to single-handedly raise however many children were conceived whilst also providing an income and basic needs for the family. Numerous articles on the causes of greater poverty for female led households agree that usually they are disadvantaged in terms of access to land, livestock, other assets, credit, education, health care and extension services; a list of which a lack of would indicate higher possibility of poverty.

As the majority of this data was taken from the [University of South Africas Development and policy research Unit] its usefulness can be questioned as it may have a bias. As the University is based in South Africa it is likely to take a bias view in favour of the country as it has incentive to present the country in a positive light to remain favoured by the South African government. Yet since the data taken for analysis here are numerical values the bias can only be taken into account to a certain extent since these values can be proven and are not subject to objectified opinion.

Relating back to the measures of inequality through the Gini coefficent, the individual races statistics show interesting results. As already established by the headcount rate and poverty gap ratio, only Africans took a decline in their poverty levels, yet they were also the only population group that did not experience a large increase in inequality over the ten year period- although their Gini coefficient did remain consistently high. The coloured population experienced that largest incline in their Gini coeffocent, with a rise from 0.49 to 0.58 between 1995 and 2005; due to this, coloured individuals achieved the highest level of inequality relative to the other race groups in South Africa. Asian inequality also took an increase from 0.45 to 0.53 over the period, while the White population experienced a 0.06 increase from 0.39 to 0.45; continuing to be the population with the lowest relative levels of inequality.

This differentiation between racial groups is perhaps one of the most crucial pieces of evidence in determining the cause of South Africas increased inequality. The clear differences in income between the race groups rather than within the race groups signal the differential income gains and losses between the racial groups. This idea suggests the contrasting income gains has been the key determinant of rising aggregate income inequality in the South African economy.

Universally, there is little argument to the idea that a high level of economic growth is needed for a reduction in poverty. Increases in growth rates -measured by rising incomes per capita- should result in a fall in poverty in society. Yet indicated by countries across the world, there are a number of limitations to this idea that economic growth benefits the poor. One reason for this is that the impact of economic growth on poverty differs significantly across countries. Hence, research taken by the [Ravallion from the World bank] as has indicated that a 2% increase in growth rates can on average resulting a 1-7% reduction in rates of poverty. Furthermore, as incomes increase it is likely to have an impact on the countries distribution of income; suggesting that it will likely bring a change to levels of income inequality. If this does take place, and the result is an increase in income inequality, income gains from growth benefitting the poor are likely to be reduced. This incline in inequality levels due to the negative impact on the distribution of income then reduces the impact of economic growth on a countries poverty. Hence overall, the argument for the necessity of economic growth may not be a sufficient answer to solving the large problem of poverty in South Africa.

Since South Africas economic growth has been proven, the question of where the positive externalities and benefits from its growth were received is important in determining why the gap between the rich and the poor did increase, irrespective of race. An inclusiveness index can be used to measure the inclusiveness of growth. ‘Inclusive growth’ can be defined as combining the increased participation of poor and marginalising people in growing economic processes (via employment) with increased sharing in the benefits of growth (via rising incomes as well as increased benefits from social expenditure, including human capacity building). Both these elements need to be present for growth to be inclusive. Hence the inclusiveness index is measured through using poverty headcount ratios [taken from the World banks Development Research groups global update using a poverty line of 2 Us dollars per day purchasing power parity], alongside Gini coefficients [taken from the Standardised World Income database] and employment-to-population ratios [provided by the International Labour Organisation]. The index is calculated relative to other developing countries (in similar economic states to South Africa). A value between 0 and 1 is constructed, a higher value signalling poor performance in inclusiveness. From an index created for the ten year period post apartheid (1995 to 2005) South Africa obtained a value of 0.75, a value that is very high respective to its comparative counterparts. Thus, South African growth has not been inclusive in this period.

Whilst there is a large scale agreement on certain policies that foster growth and poverty reduction, little is known or agreed on about what may encourage inclusive growth. In most countries their performance in the inclusiveness index cannot be explained by a growth in their GDP. This lack of a link between economic growth and inclusiveness is further evidence that growth alone is not the answer to reducing poverty, inequality and increase employment. The absence of the multiplier effect in reducing poverty due to economic growth suggests that South Africas current economic growth has not been accompanied by a creation of adequate employment. The employment coefficient in South Africa is 0.5, indicating that employment expands at only half the rate of GDP growth. Due to this, the creation of labour will continuously decrease relative to output, leading to the implication of overall employment intensity to continue in its decline. The difficulty of increasing employment in the formal economy of South Africa will continue to hinder the attempts to reduce the poverty gap. (9)

One reason for the richer population benefiting from economic growth were the high wage differentials in the middle class. This created a dividing line between the few skilled workers and the majority that remained unskilled due to the segregation of Apartheid. The new rising wages for skilled workers alongside the stagnation for unskilled workers formed the barrier for exponential growth of the middle class. The particularly high skills premium in South Africa created even more opportunity for the skilled workers to take advantage of their scarcity. A paper written for the [Southern Africa Labour and Development Research Unit by economists Miquel Pellicer and Vimal Ranchhod] states that ‘high inequality leads to low levels of skill accumulation, which in turn consolidates the high levels of inequality’, which is particularly relevant to the transition to tertiary education where the high returns on skills gained do not necessarily lead to access to higher education. South Africas individuals inability to access credit markets and the opportunity cost created by sending a child to university display a large barrier for the lower-income families to reach the necessary level of education to break the increasing social mobility barriers. (10)

The harsh views of a financial institution perceive the lower income families to be of higher risk in terms of the ratio of loan to total wealth being much greater for those of low income backgrounds, thus essentially a premium is placed on family background. This leads to the imperfect market of favouring the richer in terms of university loans rather than the moral idea of equality in helping every individual. The lack of availability of loans exhibits an opportunity cost for pursuing higher education, as the individual could be engaging in economic activity creating an income for their family- a further barrier to tertiary education for the lower income families, despite the high return for pursuing further education.

Political economist Thomas Pikkety’s ‘Capital in the 21st Century’ suggests that the answer to solving income inequality in the long run is through the implementation of education. Expanding on the problem of the opportunity cost for many families in sending children to higher education, a potential solution to this would be to make education compulsory up to a certain point. Currently in South Africa years 10-12 are non-compulsory; perhaps a government strategy should be to change these years to being a legal necessity for all South African children. (11)

Some policies implemented by the South African government were successful in reducing the rate of expansion of income inequality. The provision of social grants by the government that targeted the poorest of the poor can be considered successful in relieving a certain amount of the rising inequality. The grants were targeted at the most vulnerable members of society, specifically the disabled, the aged and children; with grant income contributing a substantial proportion to the countries total income. The number of beneficiaries experienced a significant increase between 2001 and 2005; with the number of Child support Grants increasing by more than five times its original number of 975000 in 2001 to 5.6 million in 2005. This large incline can be explained by increased public awareness of the grants, and an extension of Child grants to children of up to age 14. The fact that the implementation of the grants led to grant income significantly contributing to income total per capita confirms that the grants became an important source of income for the poor.

For those at the bottom of the South African income distribution, their average annual growth rate becomes negative when social grants are not taken into account. Even more so, the growth rates are negative from the bottom level of income all the way up tot he upper income percentile of the distribution. This suggests without the governments provision of grants the growth would not have been pro-poor even in an absolute sense. When grant income is included, the mean growth rate is 3.1% higher than without, proving the crucial role in the provision of the grants.

The extent to which South Africas income inequality has increased is undeniably high. The data used to present and measure the countries differences income, whether that be by gender, social class or race all indicate the drastic differences between each group of people. Whilst advancements in economic growth were originally thought to help the governments pledge for a reduction in poverty, the benefits of an increasing national income and GDP per capita failed wto achieve an ‘inclusive growth’ structure leading to increased income and wealth for the richer population.

Intervention and negotiation by the newly formed interracial trade unions helped lead to

whilst policies implemented by the government originally lacked thought for income redistribution, and focused on achieving a high economic growth rate to boost the severely damaged geconomy from years of sanctions and Apartheid; an underrated success was achieved through its creation of the strong social welfare system. Without its welfare system poverty rates would have been considerably higher, which would have led to an even greater income gap and divide throughout the country. South Africas transition to democracy and equal rights was undoubtably a great historic success, yet due to its new found freedom powering the governments neo-liberal stance, lack of crucial intervention and formation of much needed policies to remove the rigid cycle of segregation and create opportunities for the poorer populations in its society.

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