The Distribution of Income and the Distribution of Wealth Part II – Guidelines

Charles Simkins | Sep 09, 2014
The facts about income distribution in South Africa were set out in a previous brief. Here the focus will be on ways to think about it. Five guidelines are proposed.

1. Think more about the distribution of income than the distribution of wealth

There are two reasons for this.  First, the distribution of wealth changes as a result of changes in the distribution of income.  Every household in a position to save acquires wealth as a result.  Secondly, as the previous brief indicated, it is possible to have a high level of inequality in wealth coexisting with low inequality of income, as Denmark and Sweden attest.  There is a qualification in respect of great fortunes and they need special consideration.  But even there, there is mobility, as the South African experience shows.

2. Decide whether reduction of poverty (incomes below a constant real level) or reduction of inequality is the goal

South Africa has done quite well in recent years on reducing poverty.  Extension of social grants has helped, as has construction of infrastructure by both the public and the private sectors.  While much remains to be done, access to safe water, sanitation, electricity and cellular telephones has been greatly extended and payment for water and electricity has been graduated by consumption, making them affordable for the poor.  All of these developments have made life easier for many South Africans.

On the other hand, inequality of income has changed little in the last twenty years.  This may in part be a consequence of the opening of the economy, from which richer people have been in a better position to benefit initially.  Greater openness makes more rapid growth possible, which will reduce poverty down the line. 

South Africa has made an implicit choice already, and the National Development Plan makes this choice explicit in its poverty and inequality goals.  There is an intermediate position and that is to conceptualize poverty in relative rather than absolute terms, so that household poverty would be defined as receipt of less than, say, half of median household income.  The idea is that poverty in relative terms means that a household cannot adequately participate in society.   

3. Focus on inequality of opportunity among children

Measuring inequality of opportunity among adults is complex, because outcomes among adults depend on their choices.  Adults may have equality of opportunity, but some may make the most of it, while others mess up, leading to inequality of outcome.  There is no such gap in the case of children, who have little or no control over the circumstances they find themselves in.  All the infrastructural development and income support mentioned helps to reduce inequality among children.  Moreover, virtually all children in the compulsory school age range are in school.  Grade R seeks to overcome differences in household capacities to ready children for school.  However, there are large differentials in the quality of general education schooling (up to and including Grade 9) and there remains differential access to further and higher education though this, too, has narrowed.  Expansion of technical and vocational education would also help.

Our children are our future and they can be reached.  Sadly, it is not so easy to compensate for a deprived childhood once people have become adults.

4. Go with the flow, recognizing that the market and state both have roles to play

Not surprisingly, politicians are prone to place an exclusive emphasis on redistribution through state policy.  They have an interest in doing so.  The rest of us should take a more balanced view.  It is certainly true that state policy has an important role to play and that state successes as well as state failures affect outcomes.  Improvements in infrastructure have been financed by a rapid expansion of central government grants to local authorities.  However, local government is often inefficient and sometimes corrupt, leading to justified anger at the local level.  If Pravin Gordhan can do as good a job in his present role as Minister of Co-operative Governance and Traditional Affairs he did at the Treasury, he will be doing the country a great service.  The introduction of the child support grant has been well targeted as a poverty reduction measure.  On the other hand, failures in the production of electricity damage the interests of the rich and poor alike.

Market contributions need to be brought into focus.  It is not only the state which redistributes land.  The market does as well, and arguably more effectively.  It is not only the state which changes settlement patterns in cities.  The market does it every day.  South Africa has little capacity to produce commercially viable technical innovation, but it is good at obtaining licenses for it from abroad and introducing it here.  Cellular telephones are a case in point and they have had a positive impact on the welfare of the poor.

Moreover, the market has responded to the lifting of disabilities imposed by apartheid.  Indeed, the need for a more skilled work force was a major factor bringing apartheid down: capitalism breaking the fetters of a racial estate system.  Upward occupational mobility has been growing ever since the industrial expansion of the 1930s and took place even under apartheid.  It continues to-day.

5. Recognize that developments in income inequality and poverty work themselves out over decades

There are limits on how fast income inequality and poverty can change.  For instance, the effects of improved equality of opportunity for children will work themselves out over their entire life.  Small businesses develop into larger ones over a period of years.  These times cannot be shortened.  Caution is in order in order to avoid state policies, adopted with the ostensible, and perhaps real, intention of reducing inequality and poverty, but which will make things worse rather than better.  A lot of our labour legislation falls under this category, effectively shutting out large numbers of people from employment, making high levels of unemployment inevitable even if we get higher growth.  More haste, less speed.

Charles Simkins
Senior Researcher