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Income Inequality in South Africa and the United States
âAn imbalance between rich and poor is the oldest and most fatal ailment of all republics,â this was said by ancient Greek biographer Plutarch. Income inequality in small doses can propel a capitalistic economy and drive people to achieve more, but in large amounts it can be a cancer that creates and enforces divides between groups of people. Inequality is a common disease throughout history; many modern historians attribute the fall of Rome to an overwhelming disparity between classes. This concept exists just as prevalently today as it has in the ancient world, taking root in developed and undeveloped countries alike. For example, in the time of 1988 to 2008 the top 1 percent of the world received a 60 percent increase in salary, while the bottom 5 percent remained stagnant (Stiglitz, 2013). Â In many cases, income inequalities continue a preexisting divide, be it ideological or racial. It enforces existing separations between marginalized groups of people, perpetuates the cycle of poverty, and causes general disruption to the development of a country and its economy. In both the United States, a highly developed country, and South Africa, a developing country, a racially charged history has left huge legacies of income inequality that have impeded upon further development and enforced lingering racial separations.
Definition of development and explanation of indicators
As of March 2013, according to the World Bank, there are 145 developing or less developed nations around the world. While a strict definition of what constitutes a developing country does not exist between institutions such as the UN or World Bank, the following several factors are used in classification: GDP/GNI, life expectancy, access to education, level of infrastructure, gender equality, income inequality, and more (World Bank). Development is a highly complex issue that has been studied and interpreted in many ways. For the purpose of this paper, we will look at development through the lens of equality. When considering a country or area developed, all of the people in said nation must have equal access to institutions such as education, government programs, and health services. Additionally, the entire population should have a fairly equal quality of life. In a capitalistic society, it is almost impossible and undesirable to achieve perfect equality; this paper does not argue for Communism. However, large disparities in wealth have social and economic ramifications.
Definition of Topic and Explanation of indicators
Income inequality is essentially a measure of how much wealth the upper class of a country controls versus the percent of wealth the lower class does. Countries with large income inequality often suffer from oligarchic business structures, distrust of government, and higher crime levels.Â When such a large gap forms between the wealthy and less fortunate, political unrest often occurs due to conflicts such as revolts and factions that form out of desperation. Inequality limits economic upward mobility, as those children in the lower income brackets must work rather than go to school (World Bank). It is impossible for further development to occur in such bifurcated societies.
In addition to lowering the standard of life, inequality is also economically inefficient. According to Nancy Birdsall (2007), the president of the Center for Global Development, income inequality prevents markets from functioning to their best capacity due to the unused resources of labor and a diminished demand. The depleted demand is resultant of only a small minority being able to afford goods and services and extreme inequality can lead to a polarized workforce, with a dearth of mid-skill workers. Income inequality breeds a society that goes against rational decision making as well as limits the regulatory effect of government, creating an unstable market. This directly decreases consumption, driving down the GDP and economic progress of a country. By hindering growth, this inequality is also stopping the opportunity to create a more developed country with the potential influx in capital. Although all of this is true, many countries today cannot seem to break the cycle of inequality.
Income inequality can be measured in a few ways, many indexes use indirect methods such as education disparities or consumption differences. On a global scale, income inequality is measure by surveys such as the Gini index compiled by the World Bank. The index assigns each country a number from 0 to 100 with 0 being perfect equality and 100 being perfect inequality (Bee, Adam 2012). This paper will primarily use the Gini index as a benchmark to identify income inequality.
Topic of development in South Africa
One of the most striking and interesting examples of income inequality is in South Africa. In terms of development and progression, South Africa has driven down a unique road. In the late 1980âs due to global resistance to Apartheid such as international trade sanctions and embargos, South Africa was forced to economically advance in to a more self-sustaining nation. Rather than solely relying on foreign trade, internal markets were developed and the oil shock forced the building of infrastructure, as it was difficult to travel large distances (Elliott 2008). In that time, the nation made great strides on the economic front but not necessarily from a humanitarian standpoint. 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. However, the UN still maintains South Africa as a developing region due to problems such as the low life expectancy and inequality (World Bank).
As measured by the Gini index, South Africa stands at 63.1 (World Bank). Due to issues with accuracy of statistics, this number has not been updated since 2009; however, 63.1 is still the highest index in the world. Furthermore, the gap in is not just reflective of monetary inequality but racial inequality as well. Â For example, in 2000 according to Van der Berg and Louw, total per capita income was 14, 716 Rands with the blackâs and whiteâs per capita income standing at 7,283 and 62,360 Rands respectively (Nix 2007). This stark separation also manifests itself in indicators such as the unemployment rate. The official unemployment rate currently stands at 25.6 percent, however the Economist (2013) believes that the unemployment rate for young blacks could be upwards of 55%. In terms of development, unemployment is inherently unequal. It creates a divide of people who can and cannot provide for themselves. Despite the many political moves to bridge the gap, in many ways, it is actually growing larger due to worldwide economic issues as well as unforeseen reactions to policy (Nix 2007).
Inequality has historically been an issue in South Africa, beginning with Dutch colonization in the mid 1600s until the 1990s when Apartheid was officially disbanded. Apartheid, a legal and economic separation based on race lasted for 50 years and is a huge source of the problems that South Africans -particularly blacks- continue to face. During the period of The National Party rule, blacks and whites were confined to different areas of the country and forced to use different facilities. Blacks were removed from their homes and relegated to the Bantustans while the government sold whites the fertile land at discounted prices. Cleanliness, infrastructure, and overall quality of life differed greatly between the two parts of the country (May 1998).
Apartheid continues to have huge legacies on the social structure and contributes to existing inequality. Bloombergâs Mike Cohenâs (2013) findings discuss the continued lack of access to education that exists in predominantly black areas. This education gap perpetuates poverty in the black community, as people are unable to qualify for high paying jobs. The physical separation is still seen, as a third of all economic activity is concentrated in the historically white province of Gauteng. However, the Apartheid is not the only culprit in modern day South Africa. The initial post-Apartheid rule of ANC and mindset of freedom led to an economy governed mainly by Neoliberal ideas (Mckaiser 2012). This lack of regulation did not properly assist blacks and the other disenfranchised groups of people in reaching equality, but rather concentrated on limited government involvement and a laissez faire mindset. Without government help, it was very difficult for blacks to move up the social ladder and break through a system that had defined the economy for almost 50 years.
Today, although there is certainly a correlation, income inequality is not solely defined by race in South Africa. Some policies that were put in place to counteract racist institutions actually ended up causing interracial inequality. An unexpected example of this is the desegregation of unions. Once interracial unions were legally allowed, the union participation rate increased dramatically. In the mid 90âs there began to be a shift as the unemployment rates of unaffiliated men began to rise whilst the unemployment rates of union affiliated men began to shrink. The decrease in labor market segregation and discrimination caused an increase in the supply of workers and a move toward cheaper labor, which most often were blacks. The increased hiring of blacks decreased the racial divide but put many whites out of work, which caused an uptick in interracial inequality. Interracial unions helped decrease the problem of elevated black unemployment, but caused an equally negative reaction in the working class white community. According to Nix (2007), many unions and other desegregation policies actually inadvertently contributed to the income gap.
Despite continuing difficulties, South Africa has come a long way since the height of the Apartheid. The African National Congress has tried to be as helpful to the black and colored community as possible. They have created several institutions such as the Black Economic Empowerment program as well as many other affirmative action programs. While there are great debates to the broad based efficacy of many of these programs, there is no doubt that they have made some gains (May 1998). Attempts to bridge the income gap are seen by the increase in government expenditure going towards welfare. As of 2010, 15% of total government spending, the second largest component of the budget goes towards welfare spending. Despite the fact that more and more blacks enter the work force and join greater income brackets, the Gini index has remained fairly consistent from 1990 Apartheid South Africa to modern day. For example, according to the International Herald Tribune, South Africa is the only country that has a greater number of citizens receiving welfare than the number of employed (Mckaiser 2012). With this said, South Africa has a long way to go, as many increases in racial equality seem to produce a regression in income equality.
With one of the highest, if not the highest, incidences of income inequality, South Africa is having a difficult time making strides.Â Income inequality is an issue that must be addressed before the country can move into the developed world. With over 47% of South Africans falling below the poverty line and the largest GDP in all of Sub Saharan Africa, there is a clear disconnect. Many of South Africaâs problems, including its low literacy rates and high crime incidences can somehow be linked to the issues formed or perpetrated by income inequality. The legacy of Apartheid continues to shadow the economic growth of the country as a whole and inefficiencies due to inequality threaten the long-term success of the economy.
Topic and Development in the United States
In many eyes the United States of America and the rest of the so-called Western World is considered the most âdevelopedâ area throughout the globe. For America, this it has not always been true and there is still vast room for improvement. Today, income inequality in America is more advanced, resulting from factors such as shifts in the economy and changing labor force dynamics. Â As of 2013, the United States has the fourth highest Gini coefficient in the developed world, trumped only by Mexico, Chile, and Turkey. (OECD) Income inequality perpetuates to cycle of inequality in all senses of the word, restricting success and access to education as well as health care. This inequality not only impedes the US standings in the world but also has social repercussions that continue to hinder development.
Due to its highly industrialized status and different definitions of income, the World Bank does not actually rank the United States on the Gini Index, however according to the OECD, using the same algorithm, in 2010 the US had a Gini index of 38.0. While 38 is not comparable to the 63.1 of South Africa, it is still extremely elevated when looked at in comparison to almost all other developed countries. Portugal and Italy, for example, have both very recently been under great stress as nations due to their role in the European Sovereign Debt Crisis, yet they both have Gini indexes under the United States at 29.1 and 26.2 respectively (Babones, Salvatore 2013). This is largely due to weak federal social programs of America compared to Europeâs notoriously large security net.
The United States has had a cyclical relationship with income inequality. It has always existed throughout the country, however, immediately preceding times of financial strife, it becomes far more pronounced. The first severe instance of inequality began with the period leading up to Great Depression. This was due to the monopolistic structures that come with industrialization (Stone, Chad and Danilo Trisi, Arloc Sherman, William Chen 2013). However, expansion and government policies helped mend the bridge between classes and there was a significant decrease in the income gap from 1929 to the late 60s (Smiley, Gene 2010).Â With World War II came a great expansion of the US economy and a massive inflation in wages and incomes all across the board. In following years, inequality existed but was not overly prevalent until just prior to the post gold standard recession of the 1970âs. The gap then widened as the stagflation of the time took a large toll on lower and middle income families, while the large increase in prices had little to no effect on top earners. Wage inequality has grown fairly steadily since the late 70âs, with income of the top 1% increasing almost 200% while the pre-tax income of the bottom 80% fell. David Moss of Harvard Business School, a leader in inequality research, noted that âthe last time inequality rose to its current heights was in the late 1920s, just before a financial meltdownâ (Allen, Frederick 2012). Although the country has officially been out of the Great Recession for over three years now, inequality has yet to go down.
Income inequality is a large point of argument in modern day politics. Its continuing rise is a point for concern for many politicians, however many still deny the ramifications. Several members of the far right conservative party attempt to contribute income inequality to a simple byproduct of a competitive market. Often positives associated with inequality, such as the trickle down effect or incentive to work harder are diminished when income inequality is raised to such elevated levels (Sen Amartya 1997). Eventually income disparity is translated into severe economic inequality.
The Gini coefficient alone is not the issue; income inequality has been steadily on the rise since the 1970s. This is due to a variety of things such as a greater family income and the entrance of woman into the workforce, creating a large gap between units with single earners and those with two (Belsie, Laurent).Â According to the National Bureau of Economic Research, (2012) another aspect of the trend is the decline in labor unionization since there is no longer a standard lower bound in the income of many fields. Also, since the 1970âs there has been an important structural shift in the United States from a goods production based economy to a service based one (McLaughlin, Diane 2002). Additionally, there is continually a racial aspect of the income inequality in America dating back to legalized slavery, indentured servitude, and later just segregation. Today, research by the Congressional Budget Office shows that 45.8% of black Americans fall into the lower third of the incomes in America, while only 28.4% of whites fall into that category.
Furthermore, while the overall Gini index for the United States is interesting by itself, what is more striking is the index for different areas in the country. These statistics are more telling than the overall number in a highly developed country because it allows a better picture of the varied areas throughout the nation (Babones, Salvatore 2012). Statistics compiled by the U.S Census Bureau (2012) show that income disparity is not wide spread throughout the nation but confined to several areas. When analyzed on a county level, the index ranges from 20.7 to 64.5. Most of the income inequality is concentrated in the South and is due to reminiscences of indentured servitude and slavery in general (Bee, Adam 2012)
The strongest correlation between income levels and social factors is the mean years of schooling (Strauss, Steven 2011). Education level has become increasingly important in todayâs service based economy. In times of economic turmoil such as this past recession, the easiest jobs to shed are those that are not skill based. For example, in 2011 the unemployment rate for Americans with out a high school diploma stood at a grossly elevated 14.3% however the unemployment rate for those with an associateâs degree or above fell at 4.3%. Historically, education used to put people of all economic status on level ground, however today that is clearly not the case (Tavernise, Sabrina 2012) Children of families with higher median incomes do significantly better in school and later college. This creates and perpetuates the cycle of inequality, as those in lower income brackets are not able to succeed in school and are forced to take low paying jobs or suffer unemployed (Strauss, Steven 2011). Research done by sociologists at Stanford show a 40% increase in the gap of standardized test scores between low and high income students. This is more than double the gap that exists between Caucasian and African American students (Reardon, Sean). Income inequality prevents America from having a far more educated population and makes upward social mobility more difficult.
Outside of education, there are more repercussions that America faces due to this economic disparity. Some studies suggest that income inequality can negatively influence public health. This is because those who live in lower income areas do not have access to the best health services; this leads to higher sickness and mortality rates. Public health researchers have likened the mortality rates of some low-income areas in the US to those in Bangladesh, a country far less developed than the United States (Burtless, Gary 1999). This is also heightened due to the lack of a comprehensive social safety net or a universal health care system. Another theory pertinent to the inequity situation in America is that of income disparity begetting social tensions and disrupting a functioning social structure. In other less developed nations these tensions often lead to political factions and riots, however they take a much different shape in the US (Burtless, Gary 1999). In extreme cases, protests and movements are created out of this disconnect between the classes of people with situations like Occupy Wall Street. Additionally, according to Arthur MacEwan (2009), inequality breeds stressful surroundings âpolluting the social environment.â This then leads to tension and fear, which can contribute to other health issues.
American income inequality is a serious topic that will continual to negatively impact the country domestically and on the international stage. Unlike developing nations, the US has the resources and government influence to strongly address the issue now. Until inequality is reduced to a sustainable amount, America will continue to lag in education, underutilize its labor source, negatively affect public health, and more.
Comparison of the two countries
As discussed in the introduction, income inequality often occurs because of the lack of economic opportunity for a marginalized group of people. In both South Africa and the US, a racially charged history has left huge legacies of income inequality on both of these countries and negatively impacted development to this day. In examining the nature of income inequality in the US and South Africa, one can see that despite the different level of development, they suffer similarly from such inequality. The income gap between blacks and whites is very clear to see in both countries. In America in 2011, the median household income for whites stood at $67,175, while for blacks it was $39,760 (Woodruff 2013). In South Africa, this same comparison is made with whites making $35,985, and only $ 6,146 being earned by black households.
In both the United States of America and South Africa, the marginalized group of focus is the black population. In the early 1600s, slavery was brought to America and the practice flourished throughout the century. Budding resistance throughout the 1700âs eventually led to the Civil War and the abolition of slavery in 1865. This was followed by a long period of intense legal segregation, which was eventually diluted into the modern day racism that blacks and other minorities now face in the US (PBS). A similar situation occurred in South Africa, however to different extremes. The mid 1600âs brought Dutch colonization and slavery to the region. Slavery was then abolished during British rule, and in independence, the institution of Apartheid was instated. Apartheid, the legal separation based on race, dominated South African politics from 1948 until 1994 (BBC). In both cases, still today remnants of divides between the white and black classes exist.
While legal discrimination is no longer allowed in either of these two places, the legacy of separation is evident. In the South of the United States, there are strong relationships between the 1860 slave concentration map and a map depicting black and white poverty. There are clear overlaps in places where there was high slave concentration and where there is severe modern black poverty (OâConnell 2012). This is a strong legacy of slavery, as newly freed slaves often went into indentured servitude, staying in the same area. The Southâs lack of infrastructure and the former slaves lack of skill paired with a racially hostile situation, began the cycle of inequality and an income gap. The same can be said for South Africa, but just far more recently. During Apartheid, blacks were forced to live in certain areas in order to separate by race, and while this no longer legally exists, these areas are still predominantly black (Raghavan 2013). Whether it is self-segregation or simply part of a social structure, the separation of blacks in places that correlate with areas that they used to be confined to adds to and continues their inequality.
In both countries, these predominantly black and poor neighborhoods only beget more poverty and deepen the inequality. As previously discussed, perhaps the strongest correlation between income levels and social factors is level of education (Strauss, Steven 2011). These poor areas quite often suffer from a poor education system and high drop out rates due to children leaving to work. This then compounds the effect of lower income students tending to perform worse in school. Â In South Africa, a mere 10 percent of students qualify for university compares to 50 percent of white students. Additionally, this statistic does not account for the difference in students who can actually attend college; this is only students that qualify (Economist 2010). Although not as drastic, these figures are certainly comparable to the United States, where 66.3 percent of all college graduates are white and 13.7 percent are black (Institute of Education Sciences 2012). Growing up in a poorer area decreases the chance that children in predominantly black areas in both countries will succeed in school; additionally these areas tend to have a lower standard of education (Fiske and Ladd 2011). These two conditions together produce an uneducated future generation that cannot escape the area and end up repeating and perpetuating the inequality that marked the lives of their parents.
Another factor contributing to income inequality in both the United States of America and the South Africa is direct discrimination as well as blacks on average receiving
lower wages than their white counterparts.Â Although difficult to quantify, there is clearly still a negative connotation and racist attitude towards blacks in some parts of America (OâConnell 2012). This continued racial prejudice also exists within South Africa and is even more prominent. This prejudice exerts itself not only through workplace discrimination but also in a strong racial identification (McKaiser 2013). Discrimination is compounded by a significant wage gap. In America, African Americans only earn 72 cents for every respective dollar that whites do. The figure is harder to decipher for South Africa due to the unstable nature of the value of the Rand; whites on average earn approximately 6 times more than blacks. In both countries these factors are significant enough to add to the income inequality.
An interesting application of income inequality on development that can be seen in both cases is life expectancy. According to work done by Gus Lubin (2013), there is actually a direct correlation between income inequality and life expectancy. This goes back to the concept of the majority of blacks living in separate and more impoverished areas. These areas typically have lower access to good emergency care and cannot afford substantial healthcare. This inaccessibility often breeds illness and eventually a lower life span. Over 50 percent of black American children receive minimum healthcare coverage through Medicaid and other federal subsidized programs, while 73.1 percent of white American children received their healthcare through private companies (Gamboa 2013). There is currently a 6.5-year life expectancy gap between African American men and white men in the United States. There is a similar phenomenon present in South Africa (Castillo 2012), where the life expectancy gap is nearer to 18 years for white and black men. The severity of the South African gap should not only be attributed to the income inequality but also to acute instances of HIV and AIDS that occur in these predominantly black areas (Kinsella 1997).
The United States and South Africa possess many similar characteristics related to income inequality despite their different levels of development. That being said, the differences should also be quite apparent as well. Income inequality and the effects that it has are far more severe in South Africa than they are in the United States. Additionally, many of the problems that exist within the US are not solely isolated to blacks but are felt by a large number of minorities, including Hispanics and Native Americans. In South Africa, the blacks are the single group that is most largely targeted. Perhaps the largest dissimilarity between the two countries is the timeline that they have faced in recovering from their separationist ways. America has distanced itself from slavery and segregation for over 100 years now, while South Africa is barely celebrating twenty years.
Income inequality based in previous segregationist policies has had pronounced effects in both South Africa and the United States. In countries that have suffered from a racially divided past, such as the United States and South Africa, income inequality is often an initial product of discrimination and separation. Dangers approach when it becomes a cycle and limits access to proper education, quality health care, and causes even greater rifts between the groups of people. Income inequality is more pronounced in South Africa than the United States, but both examples of growing social tensions and economic slack show the negative effects that inequality has on the entire society. Income inequalityâs clear negative effect on development is something that these countries should aim to address. With relatively large GDPâs and economies, South Africa and the United States have the capability to devote funds and efforts in lowering the income inequality that exists and plagues both of their countries. Any steps to reduce the disparity would not only better the marginalized group but the economy as a whole.
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South Africa is one of the most unequal countries in the world. It is often said to be the most unequal, but that is incorrect. A number of countries, for example Namibia and Seychelles, have higher gini coefficients (the measure most often used to measure income distribution) than does South Africa1. There are a number of other countries that are clearly very unequal - some major oil producers for example - but, for obvious reasons, choose not to measure the extent of their inequality.
It should be noted that published gini coefficients measure distribution of income not distribution of wealth. This is because household wealth is notoriously difficult to measure. Other than the value of property, and possibly share ownership on the stock market, it is hard to know how wealthy individuals are. Even property and shares may be held in trusts that are not easily linked to individuals. Prices of assets, including shares, may fluctuate considerably and the values of, say, paintings or jewellery cannot be determined until they are sold.
Wealth is also not the same as income. There are many examples of wealthy individuals living in homes that have over time appreciated hugely in value, but whose incomes are dramatically lower than their wealth suggests. Many individuals with high incomes consume all they earn and may even borrow heavily to support lavish lifestyles. Their wealth may actually be very low. Despite these problems, many commentators switch between talking about income and wealth inequality as if the two terms are synonymous. The importance of distinguishing between the two will become obvious later.
Why does inequality matter? For decades following the work of Kuznets2 many economists argued that inequality was an inevitable part of economic development. Kuznets argued that in developing countries economic growth initially leads to increasing levels of inequality. Rich people save more than poor, so inequality aids the process of capital accumulation in poor countries. But as economies develop, larger portions of their populations move from agriculture into other sectors of the economy and their skills bases expand. Therefore a point is reached where inequality falls. Rich countries, according to Kuznets, should be more equal than poor countries.
In the 1960s and 1970s this observation was supported by the empirical evidence. But more recently inequality has clearly been increasing in developed countries. A number of developing countries, such as Brazil and indeed most of Latin America, have substantially reduced their levels of inequality. Processes other than those identified by Kuznets have clearly been at work.
There are also clear moral and political reasons why inequality is bad. The Financial Times’ Martin Wolf notes that rising inequality is “Incompatible with true equality as citizens”3 which is a central tenet of democracy. A 2012 World Bank report on South Africa4 traced the differences in life opportunities for South African children and unsurprisingly found large differences based on race, gender, location and household income. It notes:
“An equitable society would not allow circumstances over which the individual has no control to influence her or his basic opportunities after birth. Whether a person is born a boy or a girl, black or white, in a township or leafy suburb, to an educated and well-off parent or otherwise should not be relevant to reaching his or her full potential: ideally, only the person’s effort, innate talent, choices in life, and, to an extent, sheer luck, would be the influencing forces. This is at the core of the equality of opportunity principle, which provides a powerful platform for the formulation of social and economic policy - one of the rare policy goals on which a political consensus is easier to achieve.”5.
Such differences of opportunity are morally reprehensible. Also, by preventing an economy’s best talent from expressing their true potential, economic and social development are retarded.
A further reason why inequality is bad, especially when the inequality is easily identifiable along racial lines as in South Africa, is that it enables politicians to dodge difficult economic questions and promote seemingly simple solutions to what are very complex problems. Poverty, lack of job creation, lack of public service delivery can all be blamed on inequality rather than policy or political failure. If inequality is the cause of all problems, then the solution to all problems must be to take from the rich and give to the poor. It can then be argued that it is the selfish unwillingness of the rich to share what they have gained at the expense of the poor that holds back economic salvation.
Chang et al 6have shown that nationalisation of mines occurs most often in economies that are unequal. In South Africa the former President of the African National Congress Youth League (ANCYL), for example, was able to promise university students that all education in South Africa would be free if the mines were nationalised7, even though the arithmetic shows that this clearly would not be possible. So high levels of inequality mean that necessary, but difficult, policy decisions are avoided. Economic performance and welfare suffer as a consequence.
The focus on inequality received new impetus with the onset of the global financial crisis in 2007/08. Exposure of the enormous bonuses and salaries earned by the financiers whose excessive risk taking had plunged the developed world into crisis provoked public outrage. This was compounded when the costs of rescuing the financial system from implosion were absorbed by taxpayers, but the risk takers who had caused the problem almost immediately started earning large bonuses again. Organisations such as the ‘Occupy Movement’ enjoyed widespread sympathy in this environment.
Capital in the twenty first century
Against this backdrop, the publication of the book ‘Capital in the Twenty-First Century’ by French economist, Thomas Piketty8 earlier this year enjoyed instant acclaim. Piketty has been described by some commentators as enjoying ‘rock star status’ in the capitals of the West, including Washington. Former United States Treasury Secretary, Larry Summers, has described his work as having “Transformed the discourse and is a Nobel Prize-worthy contribution”9. In a complete reversal of the arguments of Kuznets, Piketty argues that inequality is the inevitable outcome of capitalism. He argues that periods of falling inequality - as in Western Europe in the 1950s and 1960s - are aberrations caused by particularly aggressive policy (steeply progressive income tax and the welfare state). Falling inequality over this period, he argues, was also caused by the massive destruction of the inherited property of the wealthy during World Wars 1 and 2. Central to Piketty’s thesis is that the returns on capital always exceed economic growth. Thus the earnings of the owners of capital (the rich) always grow faster than the earnings of labour (the poor). The rich save enough of their earnings to ensure that their stock of capital always grows at least as fast as the economy and so inequality widens.
To combat widening inequality Piketty calls for much higher marginal income tax rates for the wealthy and for a global wealth tax. The wealth tax is needed because in Piketty’s view wealth is the source of income inequality. Without taxing wealth, inequality cannot be reduced because of the ability of the wealthy to hide their true income. The tax must be global because wealth is highly mobile and the wealthy will move it to more favourable tax regimes should individual countries seek to tackle the sources of inequality on their own.
Herein lies a critical weakness in Piketty’s remedy. Because wealth is highly mobile it is clearly in an individual county’s interest to break ranks and not impose a wealth tax. This country will benefit from inflows of wealth and of the wealthy who are typically high mobile, but at the expense of those countries seeking to reduce their inequalities of wealth.
Larry Summers points to a more fundamental concern with Piketty’s analysis. Noting that after Piketty’s work on rising inequality “There can never again be a question about the phenomenon or its pervasiveness”10, he argues that Piketty’s central belief that the return on capital always exceeds over time the rate of growth in the economy is supported neither by economic theory nor by the large bulk of empirical research. Once capital depreciation is taken into account, Summers warns that he knows of no study that supports Piketty’s claim that the return on capital exceeds growth of the economy. But he knows of “quite a few suggesting the contrary”.11
Summers also questions Piketty’s claim that the rich always save and reinvest a substantial proportion of the income they receive from their wealth. He notes, for example, that the Forbes list of the 400 wealthiest Americans in 1982 and 2012 found that less than one tenth of those on the list in 1982 were still there in 2012. Instead of growing their wealth, as Piketty claims, Summers notes that “They did not, given pressures to spend, donate, or misinvest their wealth.” 12
If Piketty is wrong about the causes of the growing inequality which he has so clearly identified, what then is the true cause? Summers confesses that “No one really knows.”13 Summers warns, however, against the assumption that the obscene bonuses generated, for example, in the financial services industry must be unrelated to productivity. Technology and globalisation have made it possible for innovators to operate on a global stage, generating previously unthinkable returns as a result. This has benefited the top ‘one percent’. Globalisation has moved low-skilled jobs to developing countries such as China where wages are much lower. He warns that technology and automation are likely to work increasingly against those performing relatively low-skilled repetitive tasks such as in manufacturing. In this regard he warns that, “The trends are all in the wrong direction, particularly for the less skilled as the capacity of capital embodying artificial intelligence to replace white-collar and as blue-collar work will increase rapidly in the years ahead.”14
What are the implications of this analysis for South Africa?
The first point to note is that just as Piketty turned Kuznets’ analysis on its head by showing that inequality is growing in developed countries, so it has also been challenged by the narrowing of inequality in many developing countries where previously it was greatest. Twenty years ago most Latin American countries rivalled South Africa’s high inequality. While inequality remains very high it has narrowed virtually across Latin America over the past decade. Social transfers and higher minimum wages have helped increase the income of the poorest. Probably the most important cause of reduced inequality in Latin America was rising employment.
In South Africa, by contrast, income inequality has hardly changed despite the introduction of social transfers that now reach 16 million poor South Africans. Inequality remains high partly because the number of jobs created over the past 20 years barely kept pace with growth in the labour force. As a result, unemployment remains between 25 percent and 35 percent depending on whether one counts as being unemployed discouraged workers who have given up looking for a job. Our transfers system provides only for children from poor households, the elderly and the disabled. No provision is made for the unemployed. As a result, inequality in South Africa is so high both because of high wage inequalities within the workplace as well as the wide gap between those who are employed and those who are unemployed.
What if social transfers were raised to improve income distribution and taxes on the rich were raised for this purpose? An analysis of who pays tax reveals that even much more punitive marginal tax rates on the rich make little difference to government’s ability to spend on transfers. Tax collection statistics15 show that in 2010 only 2.3 percent of South African taxpayers earned more than R750 000 per annum. These 100 312 taxpayers earned 17.8 percent of taxable income and paid 30.3 percent of personal tax. Their average rate of tax paid was 35.2 percent. To estimate the impact of raising this rate of tax, two sets of calculations were made in which this average rate is raised by raising tax rates across the highest income brackets. If the average rate of tax for those earning more than R750 000 in 2010 rises to 41 percent this brings in only an additional R8.1 billion in income tax - or 1.4 percent of total tax revenue. A more dramatic rise in tax rates so the average tax rate for those earning above R750 000 rises to 46 percent raises an additional R16.0 billion - just 2.7 percent of total taxes. R84.8 billion was spent on existing social grants in 2010. The impact of the possible higher taxes on the rich on government’s ability to expand the existing grants system is therefore negligible.
If social grants cannot be extended to the unemployed by taxing the rich, the answer to inequality in South Africa then appears to be to generate millions of jobs, no matter how low paying they might be, so that the eight million people currently unemployed can start earning at least some income. Such a strategy would reduce poverty, but work by van der Berg16 shows that its impact on income inequality would actually be quite modest. This is because of the high degree of income inequality within the workplace. The largest cause of income inequality in South Africa lies within the workplace. Therefore, even if all those currently unemployed earn the current incomes of low-skilled workers, overall income inequality in South Africa will fall only modestly and will still be very high by global standards. The unemployed need to move also into higher wage jobs for the impact on reducing inequality to be substantial.
This need is borne out also by the current realities of the South African labour market. A recent study by Statistics South Africa17 shows that 76 percent of the 6.2 million jobs created in South Africa between 1994 and 2004 were skilled or semiskilled. 2 million skilled jobs were created over this period compared with just 1.4 million low-skilled jobs. South Africa needs to grow faster and generate many more jobs, but without significant structural changes in the economy a high proportion of these will be skilled and semi-skilled jobs. To fill these positions the unemployed and new entrants into the labour force require the necessary skills. Such skills are sadly lacking as a result of South Africa’s poorly functioning education system.
Fixing South Africa’s education system, van der Berg18 argues, is therefore necessary to reduce unemployment and inequality in South Africa. The unemployed will gain access to semi-skilled and skilled jobs only if they are better educated. At the same time, an increased pool of educated workers will reduce the premia paid to the educated who are currently in short supply. Both poverty and inequality will fall as a result. Van der Berg concludes:
“Job creation, though crucial for poverty reduction, will also do little to reduce overall inequality. The weak endowments of those currently unemployed would not assure them of high labour market earning. Thus even if they were employed, it would probably be at low wages, thus leaving wage and hence aggregate inequality high and little affected. Thus the labour market is at the heart of inequality, and central to labour market inequality is the quality of education. To reduce income inequality substantially requires a different wage pattern based on better human capital for the bulk of the population.”19
The report by Statistics South Africa20 shows that qualitative changes are required to education attainments as much as quantitative changes. Forty two percent of South African workers with less than a matric qualification are unemployed, but unemployment remains as high as 34 percent for those with a matric. For those with a matric and some tertiary qualification unemployment is 14 percent. Unemployment of university graduates is just 5.2 percent. More matric and tertiary qualifications are needed, but the quality of these passes must improve substantially to provide access to better paid jobs.
There are no quick and easy solutions to South Africa’s inequality problem. Without substantive improvements in the human capital of the poor, income inequality will remain unacceptably wide. Fixing the education system lies beyond the scope of this article or the competencies of this author. Much is made of the fact that South Africa already allocates a high share of resources to education relative to other developing countries. Given the backlogs and wide disparities in our society inherited from apartheid possibly even greater resources are needed. But even increased resources will help only if they are well used. This will happen only with far greater political will and focus than is currently apparent.
- W orld Bank, 2014. World Development Indicators. http://databank.worldbank.org/data/views/reports/tableview.aspx?isshared=true The higher the gini coefficient, the more unequal a society.
- K uznets, S. 1955. Economic Growth and Income Inequality. American Economic Review 45.1. 1–28.
- W olf, M. 2014. Review of ‘Capital in the Twenty-First Century’, by Thomas Piketty. Financial Times. 15 April. http://www.ft.com/cms/s/2/0c6e9302-c3e2-11e3-a8e0-00144feabdc0.html#axzz3EcBAjxuN
- W orld Bank, 2012. South Africa Economic Update: Focus on Inequality of Opportunity. World Bank, Washington DC.
- I bid. p. xii.
- C hang, R., Hevia, C. & Loayza, N. (2009). Privatization and Nationalization Cycles. World Bank Policy Research Working Paper, 5029. World Bank, Washington, D.C.
- SAPA , 2010. Nationalised mines could fund universities – Malema. http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page71651?oid=202880&sn=Detail&pid=71651
- P iketty, T. 2014. Capital in the Twenty-First Century. Harvard University Press.
- S ummers, L.H. 2014. The Inequality Puzzle. Democracy Journal. 33 (Summer).
- I bid. p.95-96.
- I bid. p.94.
- I bid. p.96.
- I bid. p. 96
- I bid. p.97
- S outh Africa (2011). 2011 Tax Statistics. http://www.treasury.gov.za/publications/tax%20statistics/2012/2011%20Tax%20Statistics.pdf
- van der Berg, S. 2010. Current poverty and income distribution in the context of South African history. Stellenbosch Economic Working Papers.22/10.
- S tats SA, 2014. Youth unemployment, unemployment, skills and economic growth. http://beta2.statssa.gov.za/presentation/Youth%20employement,%20skills%20and%20economic%20growth%201994-2014.pdf
- op. cit.
- I bid. p.19.
- op. cit.
- Gavin Keeton is an Associate Professor at Rhodes University Economics Department. This article first appeared in the Journal of the Helen Suzman Foundation Issue 74, November 2014.