Income and consumption inequality makes SA most unequal in the world

Income and consumption inequality makes South Africa the most unequal country in the world, according to the World Bank, ranking first out of 164 countries. The main drivers of this inequality are pre-income, primary income, secondary income and tertiary income distribution.

According to the World Bank report on Inequality in Southern Africa: An Assessment of the Southern African Customs Union, which was released earlier this week, inequality in South Africa increased since the end of apartheid in 1994 and the country is characterised by high wealth inequality and economic polarisation, especially across labour markets.

In addition, inequality of opportunity determined by race, parental education and the occupations of fathers are also high, while wage inequality expanded between 1995 and 2015, when the Gini coefficient for wages rose from 58 to 69.

The Gini coefficient is a measure of the statistical distribution of welfare indicators commonly used to measure inequality, such as in income or consumption and ranges between 0 and 1 or 100, where 0 indicates perfect equality and 1 or 100 percent perfect inequality.

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Wealth inequality

The report shows that wealth inequality is higher than income inequality, with recent estimations indicating that that the top 10% of the population owns 71% of the wealth, while the bottom 60% owns only 7%. This is a big contrast compared to the member countries of the Organisation for Economic Co-operation and Development (OECD) where 50% owns 13% of the wealth.

In South Africa, the wealth gap is demonstrated by the unequal ownership of assets, such as financial assets making up 75% of the total assets of wealthy households, while only 36% of the assets of poor households consist of financial assets.

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Consequences

Canadian political scientist, Matthew Polacko, writes that income inequality causes more than the obvious poverty and material deprivation and has also been shown to reduce growth, innovation and investment.

Wilkinson and Pickett wrote in The Spirit Level that more unequal societies on average have worse social outcomes that include health and social problems, such as lower life expectancy, higher infant mortality, more obesity, less trust, more imprisonment, more homicide, more drug abuse, more mental health issues, less social mobility, less childhood education and more teenage pregnancy.

Greater inequality reduces demand and is a major contributor to secular stagnation or persistent insufficient demand relative to aggregate private savings. Inequality also increases the level of debt, as lower-income individuals borrow more to maintain their standard of living, especially in a climate of low interest rates, Polacko says.

Income inequality also leads to reduced welfare spending and public investment and as the wealthy earns a greater share of the income distribution, government has less income available to fund education, public amenities and other services that the poor rely on.

Polacko says this creates social separation, where the wealthy opt out of publicly funding services because their private equivalents, such as hospitals, are of better quality which causes a cycle of increasing income inequality that is likely to eventually lead to a situation of private affluence and public squalor.

He also points out that economic instability is a by-product of increasing inequality, which harms innovation. “Although income inequality is predominantly an economic subject, its effects are so pervasive that it has also been linked to a host of negative health and societal outcomes.”

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How we can fix inequality

The report suggests promoting policy measures that foster equality of opportunity and tackles the highly skewed distribution of productive assets which are critical to reducing the persistently high inequality.

In addition, the report suggests enhancing the capacity to respond to increasing climate and economic shocks that generally affect the poor more severely.

“Enhancing the efficiency and effectiveness of social spending and improving the targeting of key social protection programmes to redirect resources towards the most vulnerable for more sustainable and efficient fiscal redistribution, is key for accelerating reduction in inequality.”

Prof. Michael Sachs, a professor in economics at the Southern Centre for Inequality Studies at the University of the Witwatersrand, said at a webinar last year that it is time to stop thinking about inequality as a problem of the poor and to start thinking about it as a problem for the wealthy.

He also pointed out that segregation also remains a fundamental problem in South Africa.

“Segregation in the education system, which exposes the large disparities between private and public schools, must be addressed. If we do not, it will be difficult to overcome the problem of inequality. Inequality is reproduced by the segregation that exists in social systems.”

Without actively working to change the structures of society; without transforming institutions, progress will be stunted, he said.