/ 5 February 2020

Shake up institutions controlling the economy to dislodge inequality

According to new research
World Economic Forum report ranks South Africa among the countries with the worst record of upward social mobility — with poor education, health and unfair or low wages being the key factors. (Reuters/Siphiwe Sibeko)


The iterative reports on the high levels of inequality in South Africa are an indictment of our constitutional aspirations for socioeconomic justice. Successive waves of income inequality estimates, the most recent being the Oxfam inequality report, the World Economic Forum’s global social mobility report and Statistics South Africa’s living conditions survey, point to a severe and deepening gap between the poor and the rich. 

Oxfam highlights the severity of these disparities; the wealth of the richest two people in South Africa equates to that of the bottom half of the country’s population. Similarly, the World Economic Forum report ranks South Africa among the countries with the worst record of upward social mobility — with poor education, health and unfair or low wages being the key factors. 

Outrageous as these reports may sound, their estimates are far from surprising considering that more than half of the working population make less than the recommended minimum wage of R3 500 a month. 

Taking this further and accounting for South Africa’s historical and racial dynamics, the living conditions survey points out that black South Africans’ average earnings in 2015 were 80% below that of their white compatriots. With the emergence of a black middle class over the past two decades or so, the manifestation of income disparities has evolved from being distinctively interracial to embodying intraracial, class and gender nuances. We now have a caste of qualified black people earning far more than the unskilled majority — but with female-headed households earning three-fifths the average income of male-headed households. 

Income disparities are not confined to South Africa. About 70% of the world’s population live in countries where economic inequality has deteriorated over the past three decades. Women carry the highest burden of inequality, because they are mostly overrepresented in unpaid care work, estimated at more than R140-trillion a year. 

High levels of inequality are surely unsustainable. Left unchecked, inequality can self-perpetuate, hamper growth and potentially trigger political and social strife. Many parts of the world — from Lebanon to Hong Kong and Chile to France — are already experiencing mass civil unrest amid discontent about economic decline, transport cost increases, corruption and inequality. 

Countries that place a premium on equality will find the opposite morally reprehensible and seek to intervene through deliberate policy actions. The composition of these remedial policy actions is a constant subject of discussion and contestation in academia and government circles. It is difficult to get consensus on an optimal policy package required to reduce inequality precisely because the concept practically manifest through multiple dimensions. 

These dimensions involves intricate elements of poverty and unemployment, which act in tandem to widen the income gap between those at the lower and upper extreme of the socioeconomic scale. The agenda for reducing income inequality thus requires policymakers not only to comprehend its convoluted manifestation but also the channels through which it geminates and self-perpetuates.

Inequality in South Africa is largely understood to emanate from its apartheid past. The policy interventions for inequality reduction have thus been underpinned by the broader agenda for redress. The government introduced a number of reforms and social programmes to improve the socioeconomic conditions of black people. Education and health are universally accessible, more than 18-million people receive social grants and a sizable majority benefit from ongoing public housing and land restitution programmes while those who complete higher education are able to move up the social strata assisted by economic empowerment policies. Amid this impressive record, millions of able-bodied people are unemployed, school attrition rates are high and wage disparities are deepening. More disturbing is that inequality is greater in 2020 than it was in 1994. 

Several reasons may explain this peculiar pattern. Either the diagnosis underlying the current redress policy package is off the mark, interventions are insufficient to deal with the magnitude of the problem or policies are unresponsive to the multifaceted nature of South Africa’s inequality problem. 

Ironically, some Latin American countries, which at some point rivalled South Africa on world inequality rankings, have narrowed their income disparities applying similar approaches, but also through rising wages and employment. This begs the question of whether South Africa’s social and economic structure harbours peculiar characteristics that render remedial interventions for inequality ineffective. 

The ongoing economic malady in the country reinforces a misplaced perception that inequality is aggravated by the current state dysfunction, incompetence and inertia. Some people are of the view that the state has failed to use available spending and regulatory levers to drive the cause for socioeconomic change. 

This may be true, but critics must also appreciate the challenges of dealing with structural inequality. Inequality is embedded into the fabric of institutions governing the economy, markets and the social networks. These institutions produce prosperous bias towards a few members of the society while marginalising the vulnerable majority. Bias is produced in respect of access to social and financial services, property rights and opportunities (jobs, education, business and housing). Many South Africans are trapped in impoverished areas where opportunities are meagre because of exclusive urban land markets and historical patterns of development. Product markets are dominated by few oligopolies with capabilities to prevent entry of new players and bargain low wages through patronage networks. 

Dismantling such a reproductive system of entrenched privileges will take more than the provision of RDP houses and other social wage entitlements to the poor and low-income earners. Returns on investments earned through privilege grow much faster than taxes can remediate the resulting inequalities. Government and society at large needs to be more intentional about access to quality education and the emphasis on completion. 

Celebrating an 80% matric pass rate when majority of the candidates are not job ready or unskilled only serves to reinforce inequality. Beyond social entitlements, South Africa will have to make bold reforms to democratise both the product and urban land markets. Something should be done before the social compact is unravelled. 

Eddie Rakabe is an independent researcher and economist