Big inequality red herring in South Africa
Inequality is a widely used term by politicians and activists as an economic evil which has to be fought and conquered.
The ANC government, for example, lists inequality alongside unemployment and poverty as a triple threat to South Africa.
To address the inequality problem, the ANC even proposed a wealth tax aimed at the richest people in the country to fund an income grant.
The World Economic Forum (WEF) also said global income inequality is a major problem and that “the global economy is not working well enough for enough people.”
Although inequality intuitively feels like an issue which needs to be addressed, delving into the numbers reveals something very different.
Daily Investor looked at two countries that have moved from extreme poverty to prosperity in recent decades – China and South Korea.
To measure a country’s inequality, economists typically look at its Gini coefficient.
The Gini coefficient is a mathematical measure of wealth distribution across a country’s population. The higher the value, the more unequal the wealth distribution between the poorest and richest.
China’s economy saw incredible growth after it went through economic reforms in 1979, creating huge increases in productivity.
From the start of the nineties, China experienced significant GDP growth as it became more industrialised, and its property market boomed due to massive urbanisation.
The GDP per capita (GDP per person) increased rapidly during this period, and people became much richer.
Comparing GDP and GDP per capita growth with income inequality revealed an interesting trend.
While China experienced strong growth and people became richer, the country’s inequality also increased.
China’s Gini coefficient had a significant increase from 1990 to 2010, rising from 32 to 44.
Since 2010 however, China’s Gini coefficient has decreased from 44 to 38.2, but is still significantly higher than in 1990.
South Korea was subject to intense authoritarian rule, and even after it adopted democratic principles in the 1940s, democracy was only fully implemented in 1987.
The period from 1940 to 1987 was marked by war, extreme poverty, corruption, and civil unrest.
South Korea implemented democratic principles in 1987, including that the sovereignty of the republic would lie with its citizens.
The new system supported freedom of speech, a free market economy, protection of private property, and voting rights for all.
After implementing these principles, South Korea experienced a rapid increase in economic activity, and the population’s wealth boomed.
The same was seen in China. As the economy grew and people got richer, South Korea’s Gini coefficient – income inequality – increased.
In China and South Korea, the average citizen was far wealthier after their economic expansion than prior to the expansion.
In 1990, 75% of the Chinese population still lived in rural areas in extreme poverty. In Korea, prior to 1987, the population lived under authoritarian rule and had very little income.
During these periods, when citizens lived in poverty and enjoyed few freedoms, there was very low income inequality. In simple terms, everyone was equally poor.
Although there is higher income inequality in these nations today, people are much wealthier, healthier, and happier.
Their economies benefitted from wealthy business owners that created jobs. Even the poorest individuals are a lot richer today than the average citizen was prior to their economic expansions.
South Africa is going the wrong route
When there are low levels of unemployment in a country, wealth can easily be transferred to the poorest part of the population.
To address unemployment, South Korea implemented policies that promoted business growth to benefit society.
Like South Korea before 1987, South Africa has a major unemployment problem, especially among young people.
South African Reserve Bank Governor Lesetja Kganyago said the biggest source of South Africa’s inequality is “not because there are people who are earning too much or too little.”
“The biggest reason for inequality is because there are people earning, and there are people getting zero income – called the unemployed.”
He explained that unemployment in South Africa is structural. “Even when the economy was booming, the lowest unemployment we could get was 23%,” he said.
However, instead of creating a business-friendly environment, the government has policies that prevent SMEs from growing and employing people.
In response to the unemployment crisis, the government is focusing on providing grants to ensure people do not live in absolute poverty.
However, the situation is not sustainable with a shrinking tax base and a growing number of grant recipients.
It also makes it impossible to transfer wealth to the poor in a sustainable way.
To close the inequality gap, the government taxes the wealthy and established businesses and uses part of the money for grants.
This strategy can amplify the problem as wealthy individuals are immigrating and moving their businesses offshore, leading to less job creation.
The data from China and South Korea shows that the government should focus on economic growth rather than income inequality.
In fact, focusing on income inequality can be a big hindrance to economic growth as it is merely an inevitable byproduct of creating a wealthier nation.
Inequality should, therefore, be removed from the “triple threat” to South Africa. The only focus should be economic growth, which will address unemployment and poverty.