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ECONOMICS 101: INEQUALITY VERSUS POVERTY – A DEBATE VITAL TO SOUTH AFRICA’S FUTURE

Article © CA(SA)DotNews by DotNews

 
Inequality and poverty are two different things
There is confusion as to what these concepts mean. Recently, when protests broke out over inequality a government spokesman said poverty had dropped substantially since 1994. The comment is true in that poverty has dropped since 1994 – from roughly 60% of the population living in poverty to about 40% today. Grants (over 16 million people now receive them), housing, electricity and the provision in running water have contributed to poverty reduction. In addition, 4 million black people have reportedly joined the middle class.
Yet the Gini Coefficient (which measures inequality within a country) has not declined but in fact has risen over the past twenty years. In other words, the gap between the rich and the poor has widened. At 63.1%, South Africa’s Gini Coefficient is amongst the highest in the world.There are many solutions put forward as to how to address the inequality: from Julius Malema’s call to nationalise the mines and banks to the theory that economic growth will grow the overall economic “pie” and this will spread or “trickle down” to the poor communities.

One thing all commentators agree on is that inequality is a long term threat to stability in South Africa and thus priority needs to be given to this intractable problem.

What does research show?

There has been substantial global research done in recent years. One of the disturbing aspects of the research is that it discredits what has long been held – that the growth of a middle class brings with it a redistribution of income within an economy. The research shows that after the First World War there was a redistribution of income towards the middle class. However the last forty years has seen inequality rising again with the middle class being squeezed and the top 1% showing increasing incomes.

The research indicates that countries where the Gini Coefficient is low tend to have more sustainable growth. Countries with a high coefficient have more uneven growth as they go through more boom and bust cycles.

In South Africa, since 1994, incomes have become more equal in the white and coloured communities but inequality has risen amongst the black community.

Are there any solutions in South Africa?

Some researchers have called for a global tax on the super wealthy. They recognise that this will only work if all nations impose the tax – if they don’t, the wealthy will move their assets to countries that do not impose the tax.

Brazil has reduced its Gini Coefficient by social grants and by increasing the minimum wage. In South Africa, as noted, social grants have increased but more modest adjustments have been made to the minimum wage. Of course we are two different countries and Brazil enjoyed higher growth in the 2003 – 2008 global boom which made increasing the minimum wage more affordable. Brazil has also experienced social unrest similar to our ‘service delivery protests’ and has gone into economic decline in the past few years.

Clearly the problem is extremely difficult – experts believe the starting point is to remedy education and tackle the infrastructural backlogs. This will take several years before benefits start flowing through. In the short term there needs to be a consensus between the government, business and labour.  Some analysts believe that this will involve business raising wages and increasing employment in exchange for greater productivity and relaxations in labour law. 

 

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