In the 1998 Parliamentary debate on reconciliation and nation-building, then Deputy President Thabo Mbeki famously argued that South Africa comprised ‘two-nations’ divided by poverty and inequality. He declared that:

“[o]ne of these nations is white, relatively prosperous, regardless of gender or geographic dispersal. It has ready access to a developed economic, physical, educational, communication and other infrastructure. The second and larger nation of South Africa is black and poor, with the worst affected being women in the rural areas, the black rural population in general and the disabled. This nation lives under conditions of a grossly underdeveloped economic, physical, educational, communication and other infrastructure. It has virtually no possibility to exercise what in reality amounts to a theoretical right to equal opportunity.”⁽²⁾

This CAI paper delves into the phenomenon of inequality in South Africa - its causes, contemporary trends and policy responses. The South African economy is witnessing positive growth, declining poverty and increasing inequality. The paper argues that the labour market sits centre-stage as the driver of South African income inequality and that the policy initiatives by the South African Government to address inequality have been, at the most, only modestly successful. The paper also argues that fiscal policy interventions, especially social grants, are untenable in the long run and suggests a ‘human opportunity approach’ as an alternative to address inequality.

Apartheid’s legacy

South Africa’s highly unegalitarian economy is, in many aspects, a legacy of apartheid. The previous regime perpetuated income poverty and exacerbated income inequality in very obvious ways. Africans, Coloureds and Asians were dispossessed of most of their land, faced restricted opportunities for employment or self-employment, were limited to low-quality public education and health care, and were physically confined to impoverished parts of the countryside or cities. At the same time, the white minority benefited from discriminatory public policies. It was hardly surprising that South Africa competed with Brazil and a handful of other countries for the indignity of having the most unequal distribution of income. Poverty did not exist alongside affluence, because segregation kept the rich and poor apart, but they certainly coexisted in the same country.⁽³⁾

Contemporary trends

Post-apartheid democratisation was accompanied by high hopes that income poverty and inequality would decrease. Though absolute, relative and income poverty have decreased in the 2000s, income inequality has actually increased. Other development indicators like access to sanitation, electricity, gross enrolment rates and immunisation coverage have shown more optimistic trends. Ironically, the rise in inequality has co-occurred with the rise in economic growth in South Africa. South Africa’s average gross domestic product (GDP) growth rate over the period 1993-2011 has been 3.26%,⁽⁴⁾ whereas its Gini coefficient ⁽⁵⁾ (an internationally used measure of inequality) has increased from 0.66 in 1993 to 0.70 in 2008.⁽⁶⁾ Economic growth has been highly uneven in its distribution, perpetuating inequality and exclusion. With an income Gini coefficient of around 0.70 in 2008 and a consumption Gini coefficient of 0.63 in 2009,⁽⁷⁾ South Africa stands as one of the most unequal countries in the world. The top decile of the population accounts for 58% of the country’s income, while the bottom decile accounts for only 0.5% and the bottom half less than 8%.⁽⁸⁾

Racial analysis of inequality

Inequality in South Africa has strong racial underpinnings. Significant differences between the population and income shares exist. While Africans accounted for 79% of the population in 2008, they captured only 44% of income and 41% of total expenditure.⁽⁹⁾ Whites, who accounted for only 9.2% of the population, captured 40.3% of income and 40.9% of total expenditure.⁽¹⁰⁾

The income decile composition for each raceshows the position of the different groups in the income distribution. Africans are spread relatively evenly across the lower deciles, while the other racial groups are concentrated around the upper deciles. Almost 60% of Asians/Indians and 25% of Coloured people are in the top two deciles whereas the corresponding share for the white population stands at over 80%.⁽¹¹⁾

Another popular measure of inequality is the Theil index. A useful property of this measure is that it is decomposable into a share of the total measured inequality that is attributable to inequality within each of the racial groups (Gini coefficient is not decomposable over groups) and a share that is attributable to inequality between racial groups. Recent studies have found an increase in the contribution of within-group inequality to total inequality, driven to a large extent by the increase in inequality amongst Africans. The rising inequality amongst Africans has been driven by high African unemployment on the one hand and increasing incomes at the very top of the distribution on the other. In 2008, 59% of overall income inequality was driven by differences within races, while the remaining 41% resulted from income inequality between racial groups.⁽¹²⁾
Drivers of inequality in South Africa

In large part, inequality is an enduring legacy of the apartheid system, which denied the non-whites (especially Africans) the chance to accumulate capital in any form - land, finance, skills, education or social networks. At the heart of high inequality lies the inability to create employment opportunities on a large enough scale. In the first quarter of 2012, unemployment in South Africa stood at 25.2% (33.0% including ‘discouraged’ workers); among the world’s highest.⁽¹³⁾

Figure 1: Income components by decile, 2008 ⁽¹⁴⁾

The decomposition of income sources has key implications for assessing inequality. The above figure shows that earnings from the labour market make up the bulk of total income for higher deciles, while the contribution of Government grants is particularly important for poor households. From 1993 to 2008, the contribution of remittances to total income has steadily decreased for the lowest deciles, suggesting a crowding out of private transfers by public transfers. Capital incomes (like dividends and interest) remain small for all except the top deciles.

Contemporary research in the field of inequality further decomposes the ‘income’ into four sources: Remittances, wage income (including self-employment), social assistance (‘grants’) and capital income (such as dividends, interest, rental income and private pensions). Research shows that wage incomes account for around 70% of total income and make an even larger contribution to inequality (around 85%).⁽¹⁵⁾ The reason for this is the high correlation between wage income and total household income (a rank correlation of over 0.9), implying that a household's rank in the distribution of wage income is strongly correlated with that household’s rank in the distribution of total income.⁽¹⁶⁾ Thus, the labour market sits centre-stage as the driver of South African income inequality.

Human opportunity: Alternative perspective to inequality

The access to opportunities is an important predictor of future outcomes.⁽¹⁷⁾ Access to quality basic services such as education, health care, essential infrastructure (like water, sanitation and electricity) and early childhood development provides an individual, irrespective of background, the opportunity to advance and reach his or her human potential.

Interestingly, analysing such opportunities for children in South Africa can help better understand the nature and causes of inequality of outcomes observed among adults. Opportunities among children can also be reliable predictors of economic mobility across generations and over time. For instance, if access to economic opportunities, in the form of jobs (and earnings), credit, and ownership of land and financial assets, is correlated with an individual’s circumstances (such as race and location of residence), it reinforces the link between children’s circumstances and their opportunities in life.

The World Bank has devised the Human Opportunities Index (HOI) to assess society’s progress toward the equitable provision of opportunities for all children.⁽¹⁸⁾ The HOI could also be applied to labour markets. In a recent study, the World Bank applied the HOI to South African children. It aimed to answer, among other questions, what circumstances shape inequality of opportunity in South Africa. Location of the household (whether a child lives in a township and informal settlement or a rural area as opposed to other urban area) and education of the household head (a broad proxy for the socioeconomic status of the household) contribute most to inequality of opportunity.⁽¹⁹⁾ Race and gender are other secondary factors affecting the inequality of opportunity. Many of the apparent racial and gender gaps in opportunities for children in South Africa today could therefore be narrowed if opportunities could be equalised across groups differentiated by socioeconomic status and, above all, location.⁽²⁰⁾

A human opportunities perspective has critical implications for policy aimed at reducing inequality. Academic research has found interventions that equalise opportunities earlier in life to be much more cost-effective and successful in reducing inequality than those later in life.⁽²¹⁾

Inequality and Government intervention

The apartheid policy of institutional and racial segregation is at the root of current inequalities. Coupled with the neoliberal free market policy of post-apartheid South Africa, it accentuated the range of inequalities. Post-democratisation, a number of Government policies have been designed to address the often interrelated problems of inequality, poverty and unemployment. Government initiatives have included the Growth, Employment and Redistribution (GEAR) programme, the Reconstruction and Development Programme (RDP), the Broad-Based Black Economic Empowerment (BBBEE) policy and the land reform strategy. The fiscal policy leg of economic policy becomes increasingly important when the Government aims to address the problem of inequality by trying to redistribute gains from economic growth. On the fiscal front, one of the policies that the South African Government has implemented quite successfully is the provision of social grants. These grants are generally well targeted and mostly reach the poorest of the poor. Grants are targeted at the most vulnerable members of society, specifically the disabled, the aged and children. These grants include: Disability grant, old age pension and Child Support Grant (CSG). Grant income has been found to make a substantial contribution to total income, and is often used to support an entire household.

Not only has the share of social grant expenditure in GDP increased significantly, but the number of social grant recipients has also increased meaningfully.⁽²²⁾ By April 2009, 13.4 million people were benefiting from social grants. Of these, 2.3 million were receiving old age pensions, 1.4 million were receiving disability grants and 9.1 million children were benefiting from child support grants.⁽²³⁾ For the population at the lowest deciles of the income spectrum, social grants serve as the main source of income.⁽²⁴⁾ A key aspect of post-apartheid fiscal expenditure patterns has therefore been a widening and deepening of South Africa’s social security system.

Altough social grants have proven to be an effective policy measure; they do not constitute a sustainable solution in the long run. The large scale expansion of the social security net implies a considerable increase in fiscal expenditure, which can threaten the country’s macroeconomic stability. Thus, the Basic Income Grant Coalition (BIGC)’s proposal of a ‘fixed minimum income for everyone’ (synonym of a universal income support grant for all South African citizens) has been met with stiff resistance. Opponents have argued that it would create a ‘habit of dependency’ amongst the citizens and that the cost of such a programme is not tenable.

This emphasises the need to consider other policy options. One alternative is policy interventions aimed at creating employment on a large scale. The South African Government has initiated the Expanded Public Works Programme (EPWP) in 2004 and the EPWP Phase 2 in 2009 aimed at “providing poverty and income relief through temporary work for the unemployed to carry out socially useful activities.”⁽²⁵⁾ Given that most of the unemployed are unskilled, the focus is on relatively unskilled work opportunities. All work opportunities generated by the EPWP are therefore combined with training, education or skills development, with the aim of increasing people’s ability to earn an income once they leave the programme. The goal of the second phase of EPWP is to create 2 million full-time-equivalent jobs for poor and unemployed people in South Africa so as to contribute to halving unemployment by 2014, through the delivery of public and community services.⁽²⁶⁾

Another possible policy intervention is ‘Conditional Cash Transfers’ (CCT). CCTs aim to reduce poverty and inequality by making welfare programmes conditioned upon the receiver’s actions.⁽²⁷⁾ Thus CCT is a form of social grant which requires reciprocity of responsibility from the beneficiary. Under CCTs, the Government only transfers the money to persons who meet certain criteria. These criteria may include enrolling children into public schools, getting regular check-ups at the doctor's office, receiving vaccinations, or the like. CCTs are unique in seeking to help the current generation in poverty, as well as breaking the cycle of poverty for the next through the development of human capital.

Considerable literature has studied the impact and effectiveness of CCTs. Results have been generally positive and the effectiveness of CCTs was found to be strongly linked to the conditionality of cash transfer.⁽²⁸⁾ The experience of other developing countries which have comparable economic structure to South Africa can be instructive. For example, Brazil has successfully implemented the ‘Bolsa Familia’ ⁽²⁹⁾ (formerly Bolsa Escola) which provides monthly cash payments to poor households if their children (between the ages of 6 and 15) are enrolled in school. One of the important features of CCTs is that they could be designed to address more than one policy issue simultaneously like poverty and education or poverty and health. South Africa should seek to experiment the CCTs as a part of its fiscal policy interventions to address inequality.

Conclusion

Inequality in South Africa is a pressing concern. It has a complex relationship with economic growth, poverty and race. Though the South African economy is witnessing positive growth and poverty is showing a declining trend, gains from economic growth have not been equitably redistributed. The South African economy is increasingly becoming more unegalitarian. It is one of the most unequal societies in the world with a Gini coefficient of 0.7. More worrisome is the fact that inequality has shown an increasing trend.

Inequality in South Africa has historical and structural causes; it is also deeply intertwined with issues of unemployment and poverty. Inequality entrenched in the economic structure of a society is often difficult to reverse. Addressing the issue of inequality in South Africa needs an integrated and multi-pronged approach. The Government has been implementing various policies, especially fiscal policies, to address the problem of inequalities. However, these policies have mostly taken the form of social grants, which is not a sustainable solution in the long run. In addition, policies aimed to create jobs, like the EPWP, have only seen moderate success.

Social safety net, providing employment and increasing the people’s skills so as to increase their employability are some of the dimensions which have to be integrated in the policy response. Fiscal policy interventions could be useful to address inequality in the short and medium term, whereas a human opportunities approach could be used to target inequality and poverty in the long run. There are no easy answers to South Africa’s inequality. South Africa’s pro-growth economic model has produced highly skewed returns. It is time South Africa shifted its economic model from pro-growth to pro-poor growth.

Written by Sudhanshu Sharma ⁽¹⁾

NOTES:

(1) Contact Sudhanshu Sharma through Consultancy Africa Intelligence’s Finance and Economy Unit ( finance.economy@consultancyafrica.com).
(2) Everatt, D., ‘The politics of poverty’, Southern African Regional Poverty Network (SARPN), November 2003, http://www.sarpn.org.
(3) Seekings, J. and Nattrass, N., ‘The post-apartheid distributional regime’, Centre for Social Science Research Working Paper no.76, 2004, http://www.cssr.uct.ac.za.
(4) ‘South Africa GDP growth rate’, Trading Economics, http://www.tradingeconomics.com.
(5) The Gini Coefficient is a measure of statistical dispersion which measures inequality among the values of a frequency distribution. It is commonly used as a measure of inequality of income or wealth. A Gini coefficient of 0 expresses perfect equality whereas that of 1 expresses maximal inequality among values.
(6) Woolard, I., Leibbrandt, M. and McEwen, H., 2009. “Poverty and inequality”, in Hofmyr, J. (ed.). Recession and recovery. African Minds/IJR: Cape Town.
(7) ‘Focus on inequality of opportunities’, South Africa Economic Update, The World Bank, 24 July 2012.
(8) Bastagali, F., Coady, C. and Gupta, S., ‘Income inequality and fiscal policy’, IMF Staff Discussion Notes, 28 June 2012, http://www.imf.org.
(9) Woolard, I., Leibbrandt, M. and McEwen, H., 2009. “Poverty and inequality”, in Hofmyr, J. (ed.). Recession and recovery. African Minds/IJR: Cape Town.
(10) Ibid.
(11) Ibid.
(12) Ibid.
(13) ‘Focus on inequality of opportunities’, South Africa Economic Update, The World Bank, 24 July 2012.
(14) Woolard, I., Leibbrandt, M. and McEwen, H., 2009. “Poverty and inequality”, in Hofmyr, J. (ed.). Recession and recovery. African Minds/IJ: Cape Town.
(15) Ibid.
(16) Ibid.
(17) Chetty, R., et al., ‘How does your kindergarten classroom affect your earnings? Evidence from Project STAR’, National Bureau of Economic Research (NBER) Working Paper 16381, 2010.
(18) Barros, R., et al., ‘Measuring inequality of opportunities in Latin America and the Caribbean’, The World Bank, 2009, http://siteresources.worldbank.org.
(19) ‘Focus on inequality of opportunities’, South Africa Economic Update, The World Bank, 24 July 2012.
(20) Ibid.
(21) Ibid.
(22) Bhorat, H. and van der Westhuizen, C., ‘Pro-poor growth and social protection in South Africa: Exploring the interactions’, Input paper prepared for the National Planning Commission, 2011.
(23) Woolard, I., Leibbrandt, M. and McEwen, H., 2009. “Poverty and inequality”, in Hofmyr, J. (ed.). Recession and recovery. African Minds/IJR: Cape Town.
(24) Ibid.
(25) Republic of South Africa’s Department of Public Works website, http://www.epwp.gov.za.
(26) Ibid.
(27) ‘Conditional Cash Transfers, Safety Nets and Transfers’, The World Bank, 10 February 2009, http://web.worldbank.org.
(28) Rawlings, L. and Rubio, G., ‘Evaluating the impact of conditional cash transfer programs’, The World Bank Research Observer, vol. 20, no. 1, spring 2005, http://www.crin.org.
(29) ‘Bolsa Familia programme’, Global Extension of Social Security (GESS), http://www.social-protection.org.