Essay: South Africa’s income inequality

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  • Published on: December 31, 2017
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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.

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