Income inequality in South Africa report

Analysis: Income inequality in South Africa

By

Joseph Teboho Mokoena

2013


of 21

T A B L E O F C O N T E N T S

1. INTRODUCTION .................................................................................................................................................... 3

2. GLOBAL OUTLOOK ............................................................................................................................................. 4

3. CAUSES OF INEQUALITIES ............................................................................................................................... 5

3.1 WEALTH CONCENTRATION ............................................................................................................................. 6

3.2 LABOUR MARKET INEQUALITIES ................................................................................................................. 6

3.3 TAXES ...................................................................................................................................................................... 7

3.4 EDUCATION ........................................................................................................................................................... 8

3.5 GLOBALISATION .................................................................................................................................................. 8

4. MEASURES OF INCOME INEQUALITY .......................................................................................................... 8

5. INCOME INEQUALITY IN SOUTH AFRICA ........................................................................................................ 9

5. 1 DRIVERS OF INEQUALITY IN SOUTH AFRICA ............................................................................................. 9

2. 5. 1.1 APARTHEID LEGACY ............................................................... ERROR! BOOKMARK NOT DEFINED.

3. 5.2 CONTEMPORARY TRENDS ....................................................................................................................... 10

4. EDUCATIONAL INEQUALITIES IN SOUTH AFRICA ................................................................................. 12

6. BRAZIL EXPERIENCE ....................................................................................................................................... 14

7. POLICIES FOR ADDRESSING INCOME INEQUALITY .............................................................................. 16

8. CONCLUSION ...................................................................................................................................................... 19

9. REFERENCES ....................................................................................................................................................... 20


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1. Introduction

Economic inequality can be referred to as the gap between rich and poor, income

inequality, wealth disparity, or wealth and income differences comprises disparities in the

distribution of economicassets (wealth) and income within or between populations or

individuals. The term typically refers to inequality among individuals and groups within a

society. The widening income gap between the rich and poor has highlighted the need to

understand the causes of relative inequality and to construct suitable policies to reduce

and narrow the income gap.

The last decade has witnessed positive GDP growth rates in South Africa but the impact

on income inequality gap has been inadequate. This has acted as a constraint into

ensuring that South Africa's economic growth results in significant declines in poverty

levels.South Africa has largely failed to provide equal opportunities to all citizens since the

advent of the democracy in 1994.There is a widespread concern that the "rich are getting

richer and the poor are getting poorer", it is important note that this can result in negative

social outcomes such as criminal and social exclusion. It has been observed in the country

lately that there has been a lot of social unrest among various members of the society.

This is indicated by continued service delivery protest, high unemployment rate marches

and many strikes perpetrated the income gap between senior management and workers.

The recent incident of Marikana Mine violent strike which lead to deaths of people of

wages and to Credit agencies downgrading South Africa’s credit rating, is one example of

results of the negative impact of income inequality. Income inequality should be of great

concern to the government of the country as it is has detrimental impact on the country's

social, economic and business environment.

The main aim of this study is to provide an overview of income inequalities in South Africa.

Also to evaluate policies directed at addressing the income inequality challenge. Section 2

provides a global outlook and trends on income inequality. Section 3 discusses income

inequality in South Africa while section 4 provides an overview of educational inequalities

in South Africa. Section 5 brief discusses the link between income inequality and

migration. The Brazil experience is documented in section 6 and finally an overview of

policies aimed at addressing income inequality.

http://en.wikipedia.org/wiki/Economic

http://en.wikipedia.org/wiki/Economic

http://en.wikipedia.org/wiki/Income


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2. Global Outlook

The disparities that occur in income distribution of the countries are not only a

phenomenon in South Africa, but also happen in both advanced and developing countries.

Whether in advanced or developing economies, reducing inequality and poverty, and

promoting equity, are important macro-economic objectives.

Income inequality has been a rising concern in economies over the recent decades. This

has been driven by rising unemployment levels, government spending cuts in advanced

economies and skills divide in developing countries. Sub-Saharan Africa is the region that

increased the most over past two decades, with most significant increase being between

2005 and 2010. Latin America has been increasing over the past years but in 2010 the

income inequality was lower and it was not the most unequal region. Although inequality

has been slightly increasing, advanced economies are the least unequal economies in the

world. Their sustained growth levels, low inflation rates, low unemployment rates and

progressive tax systems enable developed countries to be the least unequal economies in

the world. Advanced economies also tend to have effective income redistributive policies.

In spite of developing Asia's great success in raising the living standards and reducing

poverty, swelling income inequality threatens to undermine the pace of the progress. Latin

America has a level of income inequality that is substantially higher than other regions in

the world, but it is expected to decrease .However the limited effect of redistribution from

the tax system in that region might threaten the progress to bridge the inequality gap.In the

US the income inequality gap is expected to widen as the country recovers from the

financial crisis. Income inequality is expected to increase in Europe as the region is

affected by the sovereign debt crisis. In Africa with particular reference to Southern Africa

income inequality is expected to remain as the country tries has also been negatively

affected by the global financial crises and the recent crises in the Eurozone.

Africa is one of the poorest regions in the world and it is also the world's most inequitable

region in the world after Latin America. In 2010 six out of ten most unequal countries

worldwide were in Sub-Saharan Africa and more specifically in Southern Africa(South

Africa, Angola, Botswana and Zimbabwe). Rising income inequality is a growing concern

in South Africa. Figure 1 below indicated the different trends in income inequality across

different regions.


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Figure 1: Trends in income inequality across region

Source: World Development Indicators, World Bank 2010

According World bank the Gini coefficient of South Africa currently stands at 0.70 and is

one of the highest in the world along with Namibia 0.69, Lesotho 0.63, Botswana 0.63,

Sierra Leone 0.62, Central African Republic 0.61, and Brazil 0.58. Countries with the

lowest Gini coefficients (less than 0.2) include Afghanistan, Angola, Chad, Bahrain, Cuba,

Iraq and others. Countries that have Gini coefficients between 0.30 and 0.48 are

Cameroon, United States, Iran, Nigeria, China, Switzerland and Sweden. From this, it is

clear that countries with similar Gini coefficients have many economic differences which

include a vast range of GDP growth rates, per capita incomes and levels of

unemployment. For example, Cameroon, which has been awarded the humiliating status

of a Highly Indebted and Poor Country by the IMF in a bid to get part of its debts

cancelled, has a Gini coefficient close to that of advanced countries like the United States.

3. Causes of inequalities

0

0.1

0.2

0.3

0.4

0.5

0.6

1980 1985 1990 1995 2000 2005 2010

Advanced Economies Asia

Emerging Europe Latin America

Middle East and North Africa Sub-Saharan Africa


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There are many reasons for economic inequalities within different societies. The single

most important driver has been greater inequality in incomes (wages and salaries). Apart

from income inequalities, there are other acknowledged factors that have an impact on

economic inequality and poses serious threats of disparities within different societies. This

has been mainly attributable to a range of factors including globalisation and technological

change. This has resulted in the widening of the gap between the rich and poor in the

world.Other inequalities apart from income inequality of wages and salaries (highly skilled

workers who earn more than others; includes among others, the wealth concentration;

labour markets, increasing education costs racial inequality, the gender pay gap, and

nepotism. For this analysis the following section will only focus on wealth concentration,

labour market inequalities, taxes, education and globalisation.

3.1 Wealth concentration

This is the case where one section of the population has more wealth as compared to the

other section. The distribution of wealth in South Africa is more unequal than what it was a

decade ago, according to the South African Institute of Race Relations (SAIRR) report

2009. This may have been as a result of an unintended consequence of the country's

Black Economic Empowerment (BEE) and employment equity policies.

3.2 Labour Market inequalities

One of the major causes of economic inequality within modern market economies is the

determination of wages by the market. Some small part of economic inequality is caused

by the differences in the supply and demand for different types of work. However, where

competition is imperfect; information unevenly distributed; opportunities to acquire

education and skills unequal; and since many such imperfect conditions exist in virtually

every market, there is in fact little presumption that markets are in general efficient. This

means that there is an enormous potential role for government to correct these market

failures.

In a purely capitalist mode of production (i.e. where professional and labour organizations

cannot limit the number of workers) the workers’ wages will not be controlled by these

organizations, or by the employer, but rather by the market. Wages work in the same way

as prices for any other good. Thus, wages can be considered as a function of market price

http://en.wikipedia.org/wiki/Wealth_concentration

http://en.wikipedia.org/wiki/Higher_education_bubble

http://en.wikipedia.org/wiki/Gender_pay_gap

http://en.wikipedia.org/wiki/Market_economy

http://en.wikipedia.org/wiki/Labor_market

http://en.wikipedia.org/wiki/Supply_and_demand

http://en.wikipedia.org/wiki/Capitalist_mode_of_production


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of skill. And therefore, inequality is driven by this price. Under the law of supply and

demand, the price of skill is determined by a race between the demand for the skilled

worker and the supply of the skilled worker. On the other hand, markets can also

concentrate wealth; pass environmental costs on to society, and abuse workers and

consumers. Markets, by themselves, even when they are stable, often lead to high levels

of inequality, outcomes that are widely viewed as unfair.

Employers who offer a below market wage will find that their business is chronically

understaffed. Their competitors will take advantage of the situation by offering a higher

wage to snatch up the best of their labour. For a businessman who has the profit motive as

the prime interest, it is a losing proposition to offer below or above market wages to

workers. These supply and demand interactions result in a gradation of wage levels within

society that significantly influence economic inequality. Polarization of wages does not

explain the accumulation of wealth and very high incomes among the 1%. It is plain that

markets must be tamed and tempered to make sure they work to the benefit of most

citizens.

3.3 Taxes

Another cause is the rate at which income is taxed coupled with the progressivity of the tax

system. A progressive tax is a tax by which the tax rate increases as the taxable base

amount increases. In a progressive tax system, the level of the top tax rate will have a

direct impact on the level of inequality within a society, either increasing it or decreasing it.

Additionally, a steeper progressivity results in a more equal distribution of income across

the board. The difference between the Gini index for an income distribution before taxation

and the Gini index after taxation is an indicator for the effects of such taxation.

There is debate between politicians and economists over the role of tax policy in mitigating

or exacerbating wealth inequality. Economists argue that tax policy in the post World War

II era has indeed increased income inequality by enabling the wealthiest workers far

greater access to capital than lower-income earners.

http://en.wikipedia.org/wiki/Profit_motive

http://en.wikipedia.org/wiki/Polarization_(economics)

http://en.wikipedia.org/wiki/Income_tax

http://en.wikipedia.org/wiki/Progressive_tax

http://en.wikipedia.org/wiki/Progressive_tax

http://en.wikipedia.org/wiki/Tax_rate

http://en.wikipedia.org/wiki/Gini_index


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3.4 Education

One important factor in the creation of inequality is variation in individuals' access to

education. Education, especially in areas where there is a high demand for workers,

creates high wages for those with this education. As a result, those who are unable to

afford an education, or choose not to pursue optional education, generally receive much

lower wages. Unequal levels of education also have direct impact on income inequalities.

3.5 Globalisation

Globalisation is often blamed for growing inequality. The increased productivity and

opportunities for trade and foreign direct investment (FDI) that globalisation brings in its

wake have contributed to raising the growth potential in both advanced and emerging

economies. But the benefits of greater trade and FDI integration and economic growth

have often not been distributed equally. High-skilled, highly-educated workers in

developing countries such as South Africa and some of the emerging economies have

gained the most.

Economic globalisation has many facets, however, such as greater openness of markets,

integration of financial markets, relocation of production, and international migration. Each

of these facets has a potential impact on inequality and needs to be taken into account

when assessing the overall effect. Trade liberalization may shift economic inequality from

a global to a domestic scale. When rich countries trade with poor countries, the low-skilled

workers in the rich countries may see reduced wages as a result of the competition, while

low-skilled workers in the poor countries may see increased wages.

4. Measures of income inequality

The main measure of income distribution is the Gini coefficient. It calculates the extent to

which the distribution of income among individuals within a country deviates from a

perfectly equal distribution. The coefficient varies between zero, which reflects complete

equality and one, which indicates complete inequality. Theil-index is another measure of

income inequality. While its less commonly used than the Gini coefficient, it has the

advantage of being additive across different subgroups or regions in the country.A useful

property of this measure is that it is decomposable into a share of the total measured

http://en.wikipedia.org/wiki/Free_trade


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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.

In terms of the Gini co-efficient measure, which has increased over the past decade from

0,64 and 0,66 in South Africa. The Gini scale measures the level of wealth distribution.

Zero represents perfect equality, while a score of one represents perfect inequality. Most

developed countries have scores of between 0,20 and 0,40. In South Africa, most racial

groups saw their Gini scores increase over the past ten years, meaning that the

distribution of wealth has become more unequal.

In South Africa, the Gini co-efficient among whites, decreased from 0,50 in 1998 to 0,46 in

2008, according to Statistics South Africa Survey 2009. The Gini increased among

Africans by 7%, and among Indians and coloureds by nearly 4%. The Gini was above 0,6

in all provinces in South Africa, with the gap between the richest and poorest being the

widest in KwaZulu-Natal and Mpumalanga and the lowest in the Western Cape in 2009. (

does not correspond to global insight)

5. Income inequality in South Africa

South Africa’s inequality has become a fundamental part that defines it. The country has a

very high Gini coefficient, which has always served as the complete indicator of the

country inequality. The racial legacy is a major variable in explaining inequality in the

country. The slow economic growth, unequal income and wealth distribution are also

epidemic in the country.

5. 1 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,


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finance, skills, education or social networks. At the heart of high inequality lies the inability

to create employment opportunities on a large enough scale. South Africa’s highly unequal

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.

5.2 Contemporary trends

Post-apartheid democratisation was accompanied by high hopes that income poverty and

inequality would decrease especially among the black population. Though absolute,

relative and income poverty have decreased in the 2000s, income inequality has actually

increased. Other development indicators like type of dwelling, 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%, whereas its Gini coefficient has increased from 0.66 in

1993 to 0.70 in 2008. Economic growth has been highly uneven in its distribution,

perpetuating inequality and exclusion. With an income Gini coefficient of around 0.66 in

2007 and Gini coefficient of 0.631 in 2010, South Africa stands as one of the most unequal

countries in the world.

5.3 Racial and gender analysis of inequality

1Data from Global Insight 2012


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Inequality in South Africa has strong racial underpinnings. Significant differences between

the population and income shares exist. While Africans accounted for 79.2% of the

population in 2008, they captured only 42.7% of income. Whites, who accounted for only

8.9% of the population, captured 43.4% of income.

The income decile composition for each race shows 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%.

The result of the 2011 census indicates high income inequality levels by race and gender.

White headed households have the highest average income at R365 134 per annum

compared to the black-African headed households who have an average income of R60

613 per annum .The disparity is also visible in comparison by gender as average female

headed households earn at R67 330 which is just above half of the annual income in 2011

of their male counterparts who earned an average of at least R128 329.The biggest

challenge is that income inequality positively correlates with racial divide thereby dividing

the nation further.

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 concentration on the few 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.

Income inequalities among race

In South Africa, blacks earn significantly less than their coloured, Indian, and white

counterparts. The average household income in South Africa has more than doubled the

past decade. In 2001, South African households earned on average R48,000, which had

increased to R103,204 by October 2011 according to census report 2011. The report


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further revealed that black African-headed households were found to have an average

annual income of R60,613 in 2011. White households earned on average about six times

more than blacks. White-headed households had the highest average household income

at R365,134 per annum. The average coloured household made about R112,000 a year,

and Indian households just over R250,000.

Households in Gauteng earned more than those in the rest of the country, raking in about

R156,243 a year on average, followed by the Western Cape with R143,460. Census 2011

found that Limpopo remained the province with the lowest average annual household

income at R56,844, followed by the Eastern Cape, where the average was R64,539 (

Census Report 2011).

2. Educational inequalities in South Africa

Investing is children's education is associated with future high-income levels, (Birdshall, 2000). It

has been shown that among individuals with equal abilities, those with higher income and wealth

may be able to become more educated while the poor cannot, thus condemning the children of the

poor to limited education and low future income and a self perpetuating poverty trap. Birdshall &

Londono, 1997, showed that inequality of education limits the poor's future income and leads to

continuous poverty vicious circle, thus the poor were previously too poor to invest in education

which might lift them out of the poverty levels.

In the case of South Africa, more than 90% of children of all race groups remain at school till

obtaining matric according to the Statistics SA census 2011 report, educational access is no longer

a major problem in the country. Also the racial gaps in educational attainment have been

substantially reduced over the past decades.

Table 2: Percentage distribution of persons aged 20 years and older by level of education and

population group

Variable

Black

African

Black

African Coloured Coloured India/Asia India/Asia White White

2001 2011 2001 2011 2001 2011 2001 2011

No Schooling 22.3 10.5 8.3 4.2 5.3 2.9 1.4 0.6

Some Primary 18.5 13.9 18.4 13.8 7.7 6.6 1.2 1.3


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Sou

rce:

Stati

stic

s

Sout

h

Africa Census 2012

Table 2 above clearly illustrates the improvement of education level across all population groups in

the country. Black African with no schooling declined by 11.8%, while the Coloured, India/Asia

declined by 4.1% and 2.4% respectively. The white race has the lowest number of people with no

education. Table 2 also indicates a significant decline in the number of black Africans without post

matric. However, there are severe problems with the quality of education in our country's school

system, as reflected by matriculants results in the previous years. The deficient performance

particularly from black schools is a source of concern as education enhances the earnings

potential, ability to compete for jobs and as it’s also a source of growth. Education is a major factor

in reducing income inequality.

Acquiring post matric education isa predictor of potential highincome, as individuals with low or

incomplete secondary will most likely earn less. The table 2 above, also illustrate that 37.8% of the

white population have post matric qualification, while blacks Africans, coloured and India/Asia only

have 8.6%, 7.7%, 22% respectively for the year 2011. Black Africans account for 79% of the

population in the country while the whites only account for 8.9% the lowest is the India/Asia

population with 2.5%. The education level of the previously disadvantage groups is improving but

not at a significant rate to reduce the inequality level.

The importance of acquiring higher education to increase one’s chances getting employed and

earning high income has been highlighted in the paragraphs above. High unemployment is

associated with low education level (Visa-visa), The diagram below clearly illustrate the

relationship between education and unemployment. Figure 2, shows that a large percentage of

unemployed South Africans have lower than matric education level and this number has been

decreasing from 63.8% in 2008 to 60% in the year 2012.The decrease in the share of unemployed

people with lower than matric qualifications is correlated to the improvement of people with matric

as it moved from 30.6% in 2008 to 33.3 in the year 2012. Tertiary education has shown significant

improvements for 4.8% of 2008 to 6.1% of 2012. The rise in the unemployment rate has been

increased by the mismatch been what people study at tertiary level and what the labour markets

requires.

Figure 2 :Share of the unemployed by education level

Completed

Primary 6.9 4.9 9.8 7.4 4.2 2.8 0.8 0.7

Some Secondary 30.4 35.3 40.1 41.8 33 25.7 25.9 20

Grade

12/Std10/matric 16.8 26.9 18.5 25.2 34.9 40 40.9 39.5

Higher 5.2 8.6 4.9 7.7 14.9 22 29.8 37.8


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Source: Quarterly labour Force survey 2012

At the heart of high inequalities lies the inability to create employment opportunities on a larger

scale. The country is currently at 25.5% unemployment rate. Unemployment is linked to issues

such as crime and has a potential to hurt investment and growth. Unemployment is also a

determining factor in inequality outcome of the country, the issue of wage disparity is crucial in this

context. The recent labour challenges by the mining, agricultural and transport logistics sector have

articulated the need for effective policy implementations to ensure income equality is achieved and

several structural socio-economic issues are addressed.

6. Brazil experience

Much research years has sought to explain why inequality in Brazil has decreased sharply in a

decade while South Africa's level of inequality has remained stubbornly high. Brazil and South

Africa have similarities as they are the largest economies in Latin America and Africa

respectively.They both have high inequality and have historically competed for the highest index

for most unequal in the world. South Africa has surpassed Brazil which had previously uphold the

title of the country with the greatest inequality. Much of the narrowing in Brazil has been

attributable to the buying power of the minimum wage, which has been steadily increasing since

1994.

2008 2009 2010 2011 2012

Lower than matric 63.8 61.6 60.1 59.7 60.0

Matric 30.6 32.2 33.3 33.7 33.3

Tertiary 4.8 5.4 5.8 5.8 6.1

Other 0.7 0.7 0.8 0.7 0.6

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

%


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Figure 3. Comparison between Brazil and South Africa's Gini coefficients

Source: World Bank database 2010

The figure above provides a comparison between South Africa and Brazil’s gini coefficient (the

measure of inequality) over the past decade. The graph illustrates that South Africa's inequality

has been on the rise while Brazil has been able to narrow the income inequality divide;

Factors that lead to the declined in income inequality in Brazil

Expansion in the provision of education, mainly elementary and secondary changed the

schooling profile of the labour force, closing the earning gap between different education

levels.

Strong economic growth and social policies that reach out to the poor communities,

lessening the proportion of the poor population.

High social spending as a percentage of GDP.

Rural development

Increase in the minimum wage policies between 1997 and 2009 the real value of the

minimum wage increased by 70%.This resulted in a reduction of earnings gap between the

low -skilled and the highly skilled workers.

In advanced economies and in the case of Brazil fiscal policy has played a significant role in

reducing income inequality, especially on the expenditure side but also through progressive

taxation. South Africa has a progressive income taxation system which is based on the premise

that the wealthy should contribute a greater proportion towards supporting the state than the poor.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1996 2000 2002 2005 2007 2009

South Africa

Brazil


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7. Policies for addressing income inequality

Social, labour-market and fiscal policies play a major role in redistributing income. On

average, cash transfers and income taxes reduce inequality by one third and reduce

poverty by about 60% in OECD countries. Policies to address the causes of growing

inequality could be made more efficient, for example, by making more use of in-work

benefits which encourage people to take up work and give additional income support to

low-income households. Another important policy challenge is to improve equal access

and quality of education and training which will enable workers to take up better-paid jobs

and thus reduce inequality.

Inequality is not only about income but includes other dimensions which policies have to

address. Publicly-provided services, such as health, education, housing or care services

also reduce inequality. Public services such as high-quality education furthermore

constitute a longer-term investment to foster upward social mobility and create higher

equality of opportunities in the long run. Redistributive policies are more difficult to

implement in emerging economies due to their large informal sectors.

Therefore, targeted benefit programmes, such as conditional cash transfers, may be more

effective in reducing inequality while at the same time serving other objectives, such as

increasing the use of health and education services. Universal basic pensions and

unconditional child grants with higher rates for poorer households can also be powerful

tools in reducing poverty, as the example of South Africa shows. In the medium term,

however, the most effective route to reducing poverty and inequality is to promote the

creation of better jobs in the formal sector and increase the coverage of social protection

systems. Policies to improve the business environment may be expensive for the South

African government but can support the creation and expansion of firms, and thus jobs, in

the formal sector.

Inequality and Government intervention


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The South African government has developed a number of policies to reduce the level of

inequalities in the country. One of the policies to effectively deal with inequality is the

National Development Plan (NDP). South Africa's National Development Plan (NDP)

seeks to eliminate poverty and reduce inequality by 2030 by drawing on the energies of

the country's people, growing an inclusive economy, enhancing the capacity of the state,

and promoting leadership and partnerships throughout society.

The plan focuses on the elimination of poverty - reducing the proportion of households with

a monthly income below R419 per person from 39 percent to zero - and reduction of

inequality in South Africa. Other goals include increasing employment from 13-million in

2010 to 24-million by 2030; broadening the country's ownership of assets to historically

disadvantaged groups; ensuring that all children have at least two years of pre-school

education and that all children can read and write by grade 3; providing affordable access

to healthcare; and ensuring effective public transport.

Apart from the NDP, a number of Government policies have been designed to address the

often interrelated problems of inequality, poverty and unemployment. Other 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. By April 2011, about 15


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million people were receiving social grants in South Africa, which is more than a quarter of

the population and over six times the number of grant beneficiaries in 1998. Social

assistance contributed R97.6 billion to household income in 2011/12, representing a

substantial and enduring programme of poverty alleviation. Of this 15 million, more than 10

million people received child support grant, nearly 440 000 caregivers received care

dependency or foster care grants and about 2.6 million received older people received a

non-contributory pension. For the population at the lowest deciles of the income spectrum,

social grants serve as the main source of income. A key aspect of post-apartheid fiscal

expenditure patterns has therefore been a widening and deepening of South Africa’s social

security system.

Although 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. It should be noted that its implementation has reduced

income inequality in the country but not significantly to have an impact on the overall gini-

coefficient. 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. 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


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so as to contribute to halving unemployment by 2014, through the delivery of public and

community services.

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. 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. 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’ (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.

Another factor for addressing income inequality by government has been the

implementation of minimum wage salary in different sectors, such as retail, private

household and agricultural among others. The challenge with this has been that not all

participants in the set sectors adhered to the set minimum wage. To ensure that this is

implemented so that it can address income inequality gap government should ensure that

the is compliance and enforce it in the sectors that do not comply.

8. 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


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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. These

grants have increased significantly since 1998, with about 15 million people or a quarter of

the population receiving these grants by 2011. However, these grants seem to be not

providing a sustainable solution in the long run and not having significant impact on closing

the inequality gap. 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.

9. References

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