Minister of Economic Development on Income Inequality in South Africa

Economic Development

07 October 2009
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Meeting Summary

The Minister of Economic Development stated that the policy platform was being held to discuss the issue of inequality, specifically, the facts surrounding inequality in South Africa and the policy implications. Income inequality was not a uniquely South African challenge. Policy debates, globally, were characterised by a deep concern in the public sector about rising income inequality in every part of the world.

Prof Haroon Bhorat briefed those present on Poverty, Inequality and the Nature of Economic Growth in South Africa. He used the 1995 and 2005 Income and Expenditure Survey reports to give an overview of inequality and poverty over the past ten years. It was noted that inequality in South Africa increased in the period 1995-2005.
Absolute levels of inequality remained high and race as well as gender was still critically associated with poverty. Income inequality was rising and was very high by international standards and income inequality between African and white people were driving the overall inequality. Since 1995 a disproportionate share of economic growth has gone to the top of the income band and social transfer programmes were a key source of rising incomes at the bottom end of the income band. South Africa was entrenching its reputation as a very unequal society.

Dr Muazzam Mahmood from the International Labour Organisation commented on the presentation that although poverty had declined, inequality had increased. It was worrying that even though poverty had decreased, there were still so many people “trapped” in the low poverty line. It was equally upsetting that more women were trapped at the low poverty line. This was a major indicator of the depth of poverty for female headed households as well as for African-headed households.  He warned that there could not be a sustainable growth trajectory if certain parts or groups of the population were not participating in economic growth activities. It was important to see how much of the poverty reduction was based on social grant transfers and to what extent income inequality was based on the growth effect.

Those present at the meeting queried what the driving factors were that contributed to growth. They asked if the emergence of a strong, black middle class as well as the emergence of poorer white-headed households had any significance on the shift in race inequality in South Africa. They wanted to know how the government could focus more of its energy on the “very poor” to help them out of poverty. Would it help to bring in measures that would address basic needs such as food access? The presenters were asked what effect inequality had on the country’s growth trajectory, what it was that led to the significant change in the Gini Coefficient and what measures could be put in place to change the Gini to a more positive result. There were comments that there was a need to create a long-term solution by creating a stronger Small, Medium and Micro Enterprise sector. Was there no change in the pattern of growth because there were no skills development and the country kept reproducing the same inequality it had before. The presenters were asked how helpful poverty lines were and what they really told people. They discussed the increase in social grant beneficiaries and whether the resulting decline in poverty was sustainable. Another question that needed to be asked was what people were buying with the social grants. When looking at sustainability, political risks also had to be factored in such as what the costs would be to the country if social grants were not used.

Meeting report

Opening Statement by the Minister
Minister Patel stated that the policy platform was being held to discuss the issue of inequality, specifically, the facts surrounding inequality in South Africa and the policy implications. Income inequality was not a uniquely South African challenge. Policy debates, globally, were characterised by a deep concern in the public sector about rising income inequality in every part of the world. Work done by the International Labour Organisation (ILO) showed that the last two to three decades of economic growth were associated, in many countries, with rising income inequality. Last year the ILO produced its first global wage report. The report showed that across countries, rich and poor, rising income inequality was a key public policy concern. He hoped that those attending would leave at the end of the platform with a better understanding of income inequality in South Africa, a common recognition that it was a serious matter, and a few ideas on how the matter could be handled.

Briefing by Professor Haroon Bhorat
Prof Haroon Bhorat, Economist and Lecturer at the University of Cape Town, noted that South Africa had experienced consistent and positive economic growth post 1994. His presentation looked at the impact of this growth on social welfare, specifically income poverty and income inequality. The release of the Income and Expenditure Survey (IES), released every five years, was the only instrument available to accurately show the impacts of poverty and inequality on the country. The 2005 IES would show the impact of economic growth on society and the impact of household poverty. The poverty and inequality shifts between 1995 and 2005 would be discussed, as well as the interactions between growth, poverty and inequality. This was instrumental in understanding how the benefits of growth may or may not translate into reducing poverty.

Prof Bhorat discussed poverty shifts by race of the HouseHold (HH) head. He explained that the Headcount Index was calculated as the proportion of HHs that was deemed poor. The table had two sections; a R322 poverty line and a R174 poverty line. These were known as the high and low poverty lines. The key results for the period 1995 to 2005 showed that the proportion of HHs that was poor declined from 52% to 49%. Because this poverty line was sometimes seen as too high, the low poverty line was also used. The low poverty line for 1995-2005 showed that HH poverty declined from 31% to 24%. This showed that there was a larger reduction of poverty concerning the “ultra” poor. In the first decade of democracy, positive economic growth saw a decline in HH poverty levels. However, economic growth was necessary but not always sufficient for poverty reduction. Results showed that there was a reduction in African HH poverty. The poverty gap ratio asked how the poor fared in all this and it showed that there was a reduction in poverty there as well [see slide 4].

Poverty shifts in gender of HH head showed there was a decline in poverty in female headed HH; there was a decline from 66% in 1995 to 62% in 2005. There was decline in male headed HHs, from 46% to 39%. This showed that irrespective of gender, there was a decline in HH poverty. However, there was a discrepancy. 62% of female headed HHs were poor compared to only 39% of male headed HHs. He commented that this was astounding [see slide 5].

The Cumulative Distribution Functions (CDF) explained the distribution of income for 1995 and 2005. For reduction in poverty to happen, the 1995 curve had to be above the 2005 curve [see slide 6]. This allowed people to analyse poverty changes without relying on poverty lines, as there was still ongoing debate about what the official poverty line should be. The graph showed that poverty declined irrespective of any feasible poverty line. The graph [see slide 7] showed that poverty also declined in African headed HHs from 1995 to 2005.
Economic growth saw a reduction in poverty, but what often happened was that the distribution of poverty would begin to “stretch”. This meant that the gains from poverty reduction were stolen by increases in inequality. This was common in most developing countries. The Gini Coefficient (GC) was the standard measure of income and inequality that ranged between zero and one. The closer a country's value was to one, the more unequal the society was. South Africa, historically, has always been one of the most unequal societies. Therefore, its Gini Coefficient has always ranged between 0.6 and 0.64. The coefficient did not usually change that much, it took fairly big events for a Gini Coefficient to change by a significant amount. South Africa's GC increased from 0.64 in 1995 to 0.69 in 2005. This was a big leap and it was highly unusual for a GC to change this significantly. This showed that SA's growth process delivered rising levels of inequality. This made South Africa one of the most unequal developing societies in the world [see slide 9].

The important question to ask was what was driving this change in inequality. One had to think about urban and rural equality. For example, in China, inequality between urban and rural areas had grown. This contributed to overall inequality. There was also inequality within certain groups; like within urban areas or within rural areas. The question to ask now was whether inequality between certain groups or inequality within certain groups was more significant. The Theil Index was used to analyse racial groups. The index looked at whether inequality was made worse due to inequality within the African group, within the white group, or if inequality was driven by the differences between African and white people. Most of the results showed that the “within group” component (53%) was dominant and was growing. Within group inequality was driving overall inequality. This was because of the rising middle class, public sector jobs, Black Economic Empowerment (BEE). It showed that inequality within the African distribution was growing and this contributed to overall inequality. The “between groups” component, which was the inequality between Africans and whites, went from 47% in 1995 to 50% in 2005. This was worrying, as this meant that overall inequality was growing as a consequence of the inequality between Africans and whites. This was deeply unusual and spoke to issues of social stability [see slides 10 and 11].

It was important to look at the relationship between growth, poverty and inequality, as growth was a necessary but not sufficient condition for poverty reduction. The higher the inequality, the less impact there was on poverty reduction. The Growth Incidence Curve (GIC) looked at the poorest to the richest HHs between 1995 and 2005. The GIC showed the percentage change in the HH incomes for the poorest HH to the richest HH. The results [see slides 13 and 14] showed that, over the 1995-2005, the rich gained enormously out of the growth process and this spoke to rising income inequality. The graph also showed that the poor gained as well. It showed that over the growth process, revenue increased rapidly and there was a redistribution of the revenue base to the bottom end of the distribution in the form of social grants. Therefore, social grants maintained the growth trajectory. However, the “missing middle” consisting of blue collar workers and public sector workers such as nurses and teachers, did not gain from the growth process.

Prof Bhorat discussed how “between groups” inequality could be driving overall inequality. Income for white HHs has grown on average between 13% and 14% from 1995-2005. Income for African HHs grew between 6.5% and 9.5%. This showed that African HHs income had gained but had grown far less than white headed HHs [see slide 16].

His study looked at the importance of social grants in dissipating the possible distribution impact of growth. Social grants were critical in ensuring the GC did not increase even more. Social grant access had increased, due mainly to access to the Child Support Grant (CSG). In 1995, 43% of all HHs in the bottom end of the distribution had access to social grants. In 2005, 65% of all HHs had access to grants. Social grants as a proportion of income had also grown.

Prof Bhorat concluded that there was a significant decline in absolute and relative poverty for African and female headed HHs. There was a significant increase in income inequality. This was unusual and very worrying. The Theil Index showed that inequality between race group components was important in explaining inequality shifts. There were increases in income for white-headed HHs; however, the “missing middle” did not gain from this. The incomes of those at the bottom of the distribution were supported through social grant transfers. The question was whether this was a desirable and/or sustainable growth and development trajectory. 

Statement by Mr Moazzam Mahmood
Dr Muazzam Mahmood, Senior Technical Specialist at the ILO, noted that although poverty had declined, inequality had increased. It would take a major change in production and income earned, for inequality to have increased the way it did over the past ten years. South Africa's GC was significantly higher than most parts of the world.

He stated that it was worrying that even though poverty decreased, there were still so many people “trapped” in the low poverty line. There should be more people trapped in the high poverty line. It was disturbing that the low poverty line trapped a significantly high proportion of African people. This meant that there was more extreme poverty amongst Africans. This was not the same for any of the other races. It was equally upsetting that more women were trapped at the low poverty line. This was a major indicator of the depth of poverty for female headed HHs as well as for Africans.

He looked at the relationship between poverty and inequality. Poverty was declining while inequality was rising. There were two factors at work here. One was growth and the other was the redistribution of income. A part of the overall income that was earned was given to the less privileged that was trapped beneath the low poverty line. The redistribution effect was responsible for poverty declining. The growth effect was responsible for the worsening income inequality. The lower end of the distribution was not sharing in the economic growth. The policy implication for this was worrying, as there could not be a sustainable growth trajectory if certain parts or groups of the population were not participating in economic growth activities. It was important to see how much of the poverty reduction was based on social grant transfers and to what extent income inequality was based on the growth effect. It was therefore important to analyse the relationship between income and employment. He noted that unemployment in South Africa was very high and this was made worse by the recession. A quarter of the labour force was not participating in the growth process. Surely, all of society should have the opportunity to participate in the growth process. 

Another indicator of inequality was the share of distribution of the total Gross Domestic Product (GDP). The ILO had recently published its Global Wage Report 2008/09 that showed that the wage share, which was defined as the share earned by wage workers, declined in a significant number of countries. This meant that the profit-share earned increased. This was not a satisfying result because half the income of the self-employed was given to wage workers and the wage share. The ILO had also done a study on the relationship between wages and productivity.

Summary by Minister Patel
The Minister noted that:
▪ Inequality in South Africa had increased in the period 1995-2005.
▪ Absolute levels of inequality remained high and race as well as gender was still critically associated with poverty.
▪ Income inequality was rising and was very high by international standards.
▪ Income inequality between African and white people was driving the overall inequality.
▪ Since 1995 a disproportionate share of economic growth had gone to the top of the income band.
▪ Social grant transfer programmes were a key source of rising incomes at the bottom end of the income band
▪ South Africa was entrenching its reputation as a very unequal society.
▪ The international trend showed a declining share of national income across a number of countries.
▪ The question was whether the country was seeing market outcomes based on economic activities over the last couple of years, regarding rising inequality, with state interventions that partially mitigated the effect on inequality.

Discussion
A representative from the Department of Transport (DoT) stated that public expenditure programmes significantly contributed to positive economic growth over the past decade. He wanted to know what the other driving factors were that contributed to growth. South Africa had experienced the emergence of a strong, black middle class. However, there was also the emergence of poorer white-headed households. He asked what significance this had had on the shift in race inequality in SA. He suggested that the government should look at the effectiveness of the social welfare system in addressing poverty alleviation and income inequality, and whether it had actually addressed concerns.

Prof Bhorat stated that factors such as South Africa becoming a democratic country contributed to growth as it allowed export markets to open up, there was an increase in Foreign Direct Investment (FDI), new investment markets opened up and SA became an emerging economy.

Prof Bhorat reminded everyone that the evidence that the analyses of poor white- and black-headed HHs was based on, was on 30 000 HHs. It was a much-aggregated data set; therefore, picking up the incidence of poor white-headed HHs would be unreliable based on how small the data set was. Even if there was more data showing an increase in poor white-headed HHs, it would not have had that much of an effect on poverty and inequality. Social transfers and grants were shown to be the most effective poverty alleviation mechanisms. This did not necessarily mean that it was a growth and development strategy. This was what many debates were centered on.

Deputy Minister of Science and Technology, Mr Derek Hanekom, noted that the presentation was very helpful and that more policy platforms were needed in order to have a better understanding of the results. It was unsurprising that many poor people were dependent on social grants. This meant that many of them were less poor than before. However, the “very poor” were those that were unemployed, did not have access to grants, and therefore had no income. These people were excluded from growth and did not contribute to it either. This was self-evident. He wanted to know how the government could focus more of its energy on the “very poor” to help them out of poverty. If measures were brought in to address basic needs such as food access, it would help. A national effort was needed. More food security initiatives were needed such as soup kitchens and food gardens. There were many people who did not have access to food. He wondered how this was measured in terms of inequality and whether or not it was actually measurable.

Prof Bhorat did not understand the first question but stated that food security systems would be measurable. A lot of the data in the report on inequality asked what people consumed. One of the biggest debates going on globally at the moment centered on what big wins could be made by assisting the poor. Food security had become one of the benefits. When a parent lost his/her job, the first effect was on the child who would go hungry. In the long run, allowing for food security in HHs would be very effective.

Prof Bhorat said that he could not answer the question based on proportions on how many grantees there were compared to how many people were unemployed. He did not have the data for this. Grants were not necessarily a guarantee that one would not be poor. 

Mr L Greyling (ID) commented that the presentation was enlightening. He asked what effect inequality had on SA’s growth trajectory.

Prof Bhorat stated that the nature of demand forced a certain structure of supply. In a way it meant that changing the structure of the economy would mean changing the composition of demand such that it was more representative of the population. However, the more important thing about inequality and growth was about how much of the growth process resulted in the sharing of the organic results of growth with a small number of the population. This would become bad for growth itself. If the growth path was too high, it was a hindrance to growth. 

Dr Mahmood added that social welfare was critical for protecting the poor. He wondered what economies would do if they did not have the fiscal space for social transfers. Transfers were needed to protect the poor and vulnerable. These people should be given jobs and their labour should be used at the minimum wage to deliver infrastructure. The ILO was pushing for this short-term solution to be used in times of crisis.

A representative from COSATU commented that he was beginning to understand the differential gap between rural and urban inequality. He noted that it took a significant event to change the GC to the extent that it did. He asked what it was that had led to the significant change in the GC and what measures could be put in place to change the GC to a more positive result. The country was not improving its inequality after ten years, there was no turnaround.     

Prof Bhorat replied that there was not enough evidence from the survey to answer the question. There was evidence that suggested that urban inequality had grown. This was possibly because poor people from poor rural provinces were migrating into cities and were jobless. This meant that income inequality within urban areas had grown. South Africa had a very unusual growth process post 1994 because it became a democracy and opened up its markets. This big shock left the country unable to manage its organic growth process. Even though the state intervened with social grants, the net result was clear in terms of inequality. He added that areas such a water, housing and electricity needed massive improvements.

A member of the public noted that there was a lot more emphasis on policy and intervention since the economic crisis. The challenge was to look at the current economic structure in terms of restructuring the economy and putting emphasis on Small, Medium and Micro Enterprises (SMME). He asked if there was a need for a long term solution that would look at how to create a stronger SMME sector.

Prof Bhorat stated that a key way in which to change the growth trajectory was to look at the informal sector or the small business sector. South Africa stood out as having one of the smallest informal sectors in the developing world.

A representative from the Western Cape Business Opportunity Forum stated that the data looked at African and white-headed HHs. He did not know where coloured people fell. He noted that inequality was rife in the “bus operators” sector as well as in the clothing industry.

A representative from COSATU noted that, globally, the capital sector had taken another share of the economic growth. He asked what the International Monetary Fund (IMF) and the World Bank were saying about this change in growth. Currently, SA was spending approximately R800 billion on infrastructure as part of the programme for the Accelerated and Shared Growth Initiative for South Africa (ASGISA). The target was to achieve a growth rate of about 6%. He wondered if there was no change in the pattern of growth because there were no skills and because the country kept reproducing the same inequality they had before.

Prof Bhorat replied that he did not have an answer to the question concerning capital, as it was a very technical question. It was not about the amount of growth that was attained, the growth trajectory or the nature of the growth was more important.

A representative from the Department of Social Development (DSD) said that DSD officials were aware of the social policy problem. The DSD needed to ensure it had effective policies to follow. He wondered how helpful poverty lines were and what they really told people. He discussed the increase in social grant beneficiaries. Prof Bhorat had asked previously if this increase was sustainable. He did not want to answer the question. However, as long as there were policy failures in other areas, there would be a rampant demand for social grants. The question that needed to be asked was what people were buying with the social grants. When looking at issues of sustainability, political risks also had to be factored in such as what the costs would be to the country if social grants were not used.

Prof Bhorat answered that poverty lines were standard methodology used all over the world. It did not matter which poverty line countries used, it was the result that mattered. The poverty lines were used as an organizing framework so that government ministers and senior officials within countries had a sense of what was happening within their country using different poverty analysis. It was not the scientists’ or the economists’ decision as to where to set the poverty line; it was society’s choice.

Prof Bhorat said that the DSD representative was right about the sustainability matter. It was more important to have a sustainable growth path. Social grants had to be part of the sustainability of growth.

Dr Mahmood added that social transfers definitely contributed to relieving poverty. Another factor that affected poverty was the type of transfer one could not see called subsidies. It was a critical component of poverty.

A COSATU representative wondered if the ownership of means to production correlated to the growing inequality between races. Wage inequality also contributed to this. He stated that some people argued that the economic system itself did not breed inequality but this proved that the system actually did breed inequality.

Prof Bhorat stated that the biggest contributor to the GC was wage income. There were greater wage returns to those at the top end of the distribution. Wage inequality was a major contributor to rising overall inequality.

Closing Statement by Minister Patel
Minister Patel thanked the speakers for their insights. He stated that the Ministry and the Department of Economic Development wanted to hold a series of discussions to open up the debate on inequality, poverty and growth. This would also ensure that the government based its policies on information received in the public domain.

He noted that the value of an official poverty line had to be discussed. The government looked for ways to measure impacts and trends in development over time. The poverty line would help government to see effects on poverty. There was an important relationship between social and economic policy. Social grants played an important role in reducing poverty.

The meeting came to a close.

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