While the government has identified six barriers to growth, I would like to add a seventh: income inequality and its impact on our well-being.
The government has moved quickly to remove inequalities between racial groups. In 1975 government spending on the black population was 28% of total social expenditure, while spending on the white population was 55%. By 1997 this had changed to match the size of the racial group in the overall population, namely 9% for whites and 80% for blacks.
While it is laudable that the government has addressed asset inequalities through land distribution and the black economic empowerment (BEE) process, income inequality has been neglected. Yet policies designed to lower income inequality can boost economic growth significantly.
With the government’s stated objective of achieving 6% gross domestic product (GDP) growth by 2014, a consideration of South Africa’s high level of income inequality, one of the highest in the world, is imperative. While income inequalities between racial groups have been declining, income inequalities within groups, or intra-group inequalities, have increased. (See “Investigating inequality”)
Therefore, while a focus on racial disparities by the government was, rightly, of paramount importance, a neglect of issues regarding overall income equality has left the overall income distributions worse than it was in 1994. The BEE process, which has been criticised for only transferring wealth from the white elite to a black elite at the expense of broad-based empowerment, perhaps explains these increases in intra-group inequalities. Some claim that social grants have reduced inequality, but studies have shown that many of the poorest do not have access to grants because they do not have the means or the necessary documentation to access them.
The failure of the government to reduce overall inequality is due to its focus on asset inequality at the expense of income inequality. Repeated tax cuts, even at the lower income levels, further exacerbate this.
A 10-point decrease in the Gini (inequality) coefficient will lead to a 1,2% increase in growth. Thus, if South Africa is serious about removing structural barriers to growth and reducing inequality, it does not need more tax cuts but more resources directed towards the poorest of the poor, who are unemployed and do not benefit from tax cuts. It is no longer an acceptable excuse that government departments cannot spend their ever-increasing revenues. If municipalities are unable to deliver, the government should by-pass them and engage the private sector directly. Put simply, if the Department of Public Works has the money but not the capacity to build a road to a village, a company like Murray & Roberts should be paid to build it.
Policies focused specifically on reducing inequalities between rural and urban areas such as subsistence farming rather than commercial farming (to which more energy has been directed), have been shown to have a positive and significant impact on economic growth.
Given the reality that South Africa’s poorest live in rural areas, there is a strong case for an increased focus on agricultural development, specifically the development of small-scale subsistence farmers.
In several country case studies conducted by the Food and Agricultural Organisation of the United Nations, rural development was found to reduce poverty in both rural and urban areas whereas urban development was found to have little spill-over effects for rural areas.
For example, in Indonesia, agricultural growth decreased rural poverty by 50% and urban poverty by 36%. Rural development benefits urban sectors through lower food prices, which lead to higher real wages for urban residents and through increased spending by better-off rural residents on non-farm goods.
The focused agricultural policy in East Asia was a catalyst for its industrial success. Government spending on rural development reduced the need for the creation of “make-work” public-works programmes (as is currently being done in South Africa), which are heavily subsidised and therefore divert resources from other, more efficient undertakings.
The government’s rural development programme is grossly inadequate and thus its impact on overall income inequality has been minimal.
Rejane Woodroffe is an economist at Metropolitan Asset Managers
Investigating inequality
In their 2004 paper, Measuring Recent Changes in South African Inequality and Poverty Using 1996 and 2001 Census Data, Murray Leibbrandt and others, using their own estimates and citing comparable calculations by Whiteford and Van Seventer (2000), show that the contribution of intra-group inequality to overall income inequality has increased from 38% in 1975 to 60% in 2001 and the contribution of inequality between racial groups to overall income distribution decreased from 62% in 1975 to 40% in 2001.
The authors show that the intra-group inequality is further highlighted by the steep increase in the Income Gini (inequality) coefficients for each population grouping. The Gini coefficient for the black group has increased from 47 in 1975 to 66 (one of the most unequal in the world) in 2001, within the coloured group it has increased from 51 to 60, for the Indian population it has increased from 45 to 56 and within the white population it has increased from 36 to 51. The national income Gini coefficient is shown to have increased from 68 points in 1975 to 73 in 2001.
Further evidence is presented by Sampie Terreblanche in his book A History of Inequality in South Africa, 1652-2002 where he shows that the top 17% of the population receive 72% of income and the bottom 50% only about 3%.