Inequality in Post-Apartheid South Africa
In the course of globalisation and increasing liberalisation, the question of how the costs and benefits of these processes are shared is of special concern. Recent studies suggest that they are shared unequally. Although inequality between countries is declining, global inequality is on the rise owing to the fact that inequality within countries is increasing. These developments raise the question of how growth affects inequality and vice versa. Further it has to be explored what role governments have to play to ensure that all members of society benefit from growth.
Kuznets suggested that countries would initially face rising inequality as they grow richer, however, as a certain threshold of per capita income is reached the degree of inequality would decrease. From this proposition it is easy to conclude that governments do not have to be concerned about rising inequality as it eventually will decrease once the economy has reached a certain level of economic development. It may also imply that there is a trade-off between growth and equality.
More recent studies challenge Kuznets proposition. These studies indicate that high levels of inequality hamper economic growth. Yet, economic growth is an important instrument in the fight against poverty. It is assumed that economic growth creates employment opportunities and increases the scope for distributive policies and thus tends to reduce poverty. Therefore, any country that is determined to address the problem of poverty ought to pay attention to the nexus between inequality and growth.
In the theoretical part of this paper, arguments that support and challenge Kuznets hypothesis are analysed. Thereafter an interesting proposition developed by Addison and Corniais presented that suggests that there may be an efficient level of inequality. From these different arguments conclusions are drawn and policy implications presented. The theoretical part does not attempt to analyse the causes of inequality. To identify the causes of inequality, it would be necessary to undertake a case-by-case analysis. The general assumption for the theoretical part is that inequality is caused by unequal access to resources as well as inadequate economic policies which can lead to persistent unemployment and poverty. Unequal access may be caused by market failures especially in the capital and labour markets, or by historical and political developments that create uneven power […]
Table of Contents
I. The Nexus Between Inequality and Growth – Different Theories
1. The Kuznets’ Hypothesis
2. In Response to Kuznets
2.1. Inequality as an Accelerator of Growth
2.2. Accumulation and Redistribution
2.3. Inequality and Capital Market Imperfections
2.4. Inequality and Social Conflict
2.5. Inequality and the Choice of Policies
2.6. A Concave Relationship between Inequality and Growth
3. Policy Implications
II. Case Study: South Africa
5. South Africa Under Apartheid – Setting the Stage for an Unequal Society
6. The Apartheid Heritage
6.1. Poverty and Inequality
6.1.1. Census Data
6.1.2. All Media and Products Survey
6.1.3. Household Income and Expenditure Survey
6.1.4. General findings
6.2. Functional Income Distribution
6.3. What Explains the Trends of Inequality and Poverty?
6.4. Why is the Unemployment Rate so High?
7. The Government’s Response
7.1. Economic Policies
7.2. Social Security Provision as a Tool for Redistribution
8. Current Debate
In the course of globalisation and increasing liberalisation, the question of how the costs and benefits of these processes are shared is of special concern. Recent studies suggest that they are shared unequally. Although inequality between countries is declining, global inequality is on the rise owing to the fact that inequality within countries is increasing (Chotikapanich et al., 1997; Chotikapanich and Rao, 1998; Melchior, Telle and Wiig, 2000; Milanovic and Yitzhaki, 2001; Milanovic, 2002; all in: Chotikapanich et al., 2007: 1). These developments raise the question of how growth affects inequality and vice versa. Further it has to be explored what role governments have to play to ensure that all members of society benefit from growth.
Kuznets (1955) suggested that countries would initially face rising inequality as they grow richer, however, as a certain threshold of per capita income is reached the degree of inequality would decrease (Kuznets, 1955). From this proposition it is easy to conclude that governments do not have to be concerned about rising inequality as it eventually will decrease once the economy has reached a certain level of economic development. It may also imply that there is a trade-off between growth and equality.
More recent studies challenge Kuznets’ proposition. These studies indicate that high levels of inequality hamper economic growth (e.g. Addison and Cornia, 2001; Alesina and Rodrik, 1994; Aghion, 1998; Aghion et al., 1999; Bénabou, 1996). Yet, economic growth is an important instrument in the fight against poverty. It is assumed that economic growth creates employment opportunities and increases the scope for distributive policies and thus tends to reduce poverty (Khan, 2001: 2; van der Berg et al., 2005: 3). Therefore, any country that is determined to address the problem of poverty ought to pay attention to the nexus between inequality and growth.
In the theoretical part of this paper, arguments that support and challenge Kuznets’ hypothesis are analysed. Thereafter an interesting proposition developed by Addison and Cornia (2001) is presented that suggests that there may be an efficient level of inequality (Addison and Cornia, 2001). From these different arguments conclusions are drawn and policy implications presented. The theoretical part does not attempt to analyse the causes of inequality. To identify the causes of inequality, it would be necessary to undertake a case-by-case analysis. The general assumption for the theoretical part is that inequality is caused by unequal access to resources as well as inadequate economic policies which can lead to persistent unemployment and poverty. Unequal access may be caused by market failures especially in the capital and labour markets, or by historical and political developments that create uneven power constellations, exclusion, or discrimination.
The case study deals with the question of whether growth per se is responsible for inequality and persisting poverty in South Africa.
At the beginning of the section an overview of the apartheid era is presented in order to identify the roots of South Africa’s highly unequal income distribution and persistent poverty. South Africa is an interesting case as until 1994 apartheid policies discriminated against major parts of the society and created a skewed distribution of resources and income as well as unequal opportunities in the labour market among the different population groups. Furthermore, South Africa is a case in point illustrating how a government is able to influence the distributional outcome by means of its choice of economic policy. The case study also shows that the discriminatory policies of the apartheid era had a long lasting impact on the South African society, which still struggles to cope with the legacy of apartheid. Despite the strong commitment of the democratic government to fight poverty and inequality and despite the relatively good growth performance, the welfare situation in post-apartheid South Africa has hardly, if at all, improved. South Africa is still among the countries with the highest degree of inequality in the world and large parts of the society suffer from severe and persistent poverty.
Compared to other middle income countries that have similar levels of per capita GDP (e.g. Mexico, Brazil, and Malaysia), South Africa is faced with the highest poverty headcount ratiosamong these countries (see appendix A). However, it is difficult to draw a cross-country comparison, due to the lack of adequate data and the fact that countries apply national poverty lines in order to illustrate their welfare situation. Furthermore, it is not the scope of this paper to draw a cross-country comparison. Instead this paper attempts to analyse the evolution of growing or persistently high levels of inequality and poverty with concomitant high levels of unemployment in the post-apartheid era. Subsequent government strategies to address the problem are considered, in order to ascertain whether the government’s policies have been well targeted. The case study is primarily based on different studies that have analysed October Household Surveys (OHS), Labour Force Surveys (LFS) and Income and Expenditure Surveys (IES) as well as the data of national censusesand the All Media and Products Surveys (AMPS). Due to the limited availability of current data, the paper primarily focuses on the period from 1994 until 2005.
I. The Nexus between Inequality and Growth - Different Theories
This section attempts to answer the question of whether income inequality and economic growth are compatible or contradictory. Different theories are presented. The answer to this question is of special concern as it has important implications for economic policy decision-making. For South Africa, in particular, this question is pertinent, since the government places a lot of emphasis on growth as an instrument of poverty relief. This emphasis is, for instance, reflected in theGrowth, Employment, and Redistribution(GEAR)programme and in theAccelerated and Shared Growth Initiative for South Africa(ASGISA) (Department of Finance, 1996; The Presidency of the Republic of South Africa, 2006).
A large body of literature has been produced on the topic of inequality and growth (e.g. Addison and Cornia, 2001; Aghion, 1998; Alesina and Rodrik, 1994; Bénabou, 1996; Carter, 2004 in: Cornia, 2004; Galor and Tsiddon, 1995). Most of the literature is in direct or indirect response to Kuznets’ paperEconomic Growth and Income Inequality(Kuznets, 1955) - either supporting or rejecting his propositions.
1. The Kuznets’ Hypothesis
One of the most prominent hypotheses regarding growth and income inequality was developed by Kuznets in the 1950s. Within a limited set of data, Kuznets observed that, in the course of their development, Germany, the United Kingdom, and the United States exhibit a specific pattern of inequality. From his observation of these three nations, Kuznets concluded that economies, which are at an initial stage of development, experience widening income inequality while they grow (Kuznets, 1955: 4-5). Up until a critical value (point X in figure 1) the economy’s growth is accompanied by rising income inequality. Once this critical value of average per capita income is reached and the country matures, the income gap starts to narrow (Galor and Tsiddon, 1995: 104-105). Depicted in a graph, the relationship between economic growth and inequality reveals an inverted-U curve (see figure 1).
Abbildung in dieser Leseprobe nicht enthalten
Figure 1: Kuznets’ curve
Source: own graphical representation
Kuznets acknowledged that although his hypothesis lacked a sound empirical foundation, he did make a theoretical attempt to explain the observations.
As possible explanations for the increase of income inequality during the initial phase of development, Kuznets (1955) attributed this to the concentration of savings among the upper-income group as well as the change in the industrial structure from agricultural production to non-agricultural production, both of which are discussed more fully below (Kuznets, 1955: 6-7).
Due to the inability of the lower- and middle-income group to save, savings are concentrated among the rich segment of the society. This savings concentration might be beneficial for economic growth, since it allows for capital accumulation and the necessary investments for economic growth. This accumulation leads in turn to an increased income share of the rich and a consequent widening of the income gap (Kuznets, 1955: 6-7).
Kuznets distinguishes between a rural agricultural sector and an urban non-agricultural sector. Compared to the urban sector, the rural sector is characterised by lower intra-sectoral inequality as well as by lower average per capita income (Kuznets, 1955: 7-8). Economies undergoing economic development usually experience a Lewis-style shift from agricultural to non-agricultural production (Lewis, 1954). The move from agricultural to non-agricultural production during the initial phase of development has two effects: firstly as the urban sector gains more weight, inequality increases, due to the sector’s more unequal nature. Secondly, given higher productivity in the urban sector, there is a general tendency towards further divergence of rural and urban income. In aggregate, the total income gap widens.
According to Kuznets (1955), the income gap eventually narrows due to the following factors: firstly, the government might intervene directly or indirectly. The introduction of taxes on, for instance, inheritance or on capital returns constitutes a possible way of direct intervention. These taxes allow for redistribution from the rich to the poor, which eventually would lower income inequality. By tolerating or even fuelling inflation, the government could indirectly reduce the value of wealth stored in securities which do not adjust to price changes. In addition, the government may introduce rent controls to restrict returns on property.
Secondly, different demographic patterns across income groups may also counter the concentration of savings. As lower income groups tend to grow faster, poorer individuals enter the fixed ordinal group at the top. This shift of the income brackets impacts the distributional pattern.
Thirdly, the dynamic nature of the economy leads to decreasing relative importance of the old-established industries. As new industries emerge, individual opportunities increase and upward mobility might be more easily achieved.
In addition, while the economy is growing, service income gains importance. Kuznets (1955) suggests that service income based on merit is likely to have diminishing growth rates the higher the initial income of an individual. Thus, the service income of individuals ascending from a lower income group grows faster compared to those ascending from initially high income groups. In particular, inter-industry shifts account for the rising per capita income. Moreover, due to higher productivity levels in the non-agricultural sector and hence higher income in this sector, a shift from agricultural production to non-agricultural production would increase overall per capita income.
In summary, the dynamic character of the growing industry which allows for upward mobility and redistribution is responsible for the convergence of per capita income in the long run (Kuznets, 1955: 6-20).
A range of papers that establish a causal relation from income distribution to growth have been published. However, scholars differ about if the relationship is positive or negative. The following section presents a selection of these theories.
2. In Response to Kuznets
2.1. Inequality as an Accelerator of Growth
In growth models that follow a Keynesian notion, economic growth depends on the ability of an economy to accumulate capital (Addison and Cornia, 2001: 7).
In post-Keynesian models, owners of different production factors have different propensities to spend or to save respectively. Capitalists tend to save more than wage earners (Kaldor, 1960 in: Addison and Cornia, 2001: 7). According to some post-Keynesian models, a profit biased economy exhibits a higher savings ratio compared to a more egalitarian society and hence is better able to accumulate capital. This, in turn, leads to faster growth. Applying the Harrod-Domar growth model, that regards savings as a precondition for investment, higher savings would eventually lead to higher growth (Todaro and Smith, 2003: 113-115). Kaldor’s assumption that capitalists have a higher propensity to save implies that an economy in which profits are higher and real wages are lower, would tend to grow faster than an economy with lower profits and higher real wages. This model is consistent with the Kuznets hypothesis in so far as income inequality will cause an efficient outcome at the initial stage of economic development (Addison and Cornia, 2001: 7).
In contrast to these post-Keynesian models, neo-Kaleckian models see a dual function of wages: wages are costs and reduce profits; on the other hand a worker’s wage is in itself purchasing power that is important for aggregate demand. Depending on the characteristics of the economy, one can distinguish between profit-led and wage-led regimes. In a profit-led regime, the cost aspect of wages dominates and hence an increase in the wage share would have a negative impact on growth through its dampening effect on profits. On the other hand, in a wage-led regime the demand aspect prevails; any increase in the wage share would stimulate demand and that would more than compensate for the negative effect of growing costs on profits (Bhaduri and Marglin, 1989). The distinction between profit-led and wage-led regimes has an important implication for redistributive policies: being in a wage-led regime would allow for redistribution towards wage earners at the expense of capitalists without jeopardising growth. However, within a profit-led regime the redistribution in favour of wage earners would dampen growth.
Aghion (1998) suggests a further case where inequality might be more efficient than an egalitarian distribution of income. It is assumed that at the initial stage of development large investments are required to boost growth. These investment endeavours are often characterised by being indivisible. Operating in an economy that does not have a sophisticated financial sector and in which the use of shares as a way of financing large investments is difficult, a concentration of income among a small privileged group may be a pre-requisite to carry out these initial lump sum investments (Aghion, 1998: 11-13). However it is questionable whether the privileged group is willing to undertake investments within the underdeveloped home market. It is quite possible that the privileged group favours investment opportunities abroad and therefore channels funds to more developed markets.
In contrast to the above presented models on capital accumulation, Galor and Tsiddon (1995) take the development of differences in wages for skilled (high level of education) and unskilled (low level of education) workers into account. According to their overlapping-generations model, economic growth induced endogenously leads to a Kuznets’ style inverted-U. Galor and Tsiddon (1995) assume that technical progress is driven by human capital development. Further, the aggregate human capital of a generation has a positive influence on the level of human capital and thus the efficiency of future generations. Additionally, the better educated the parents, the higher the return on education investments of the offspring. As the level of technology increases, the yield for educated individuals of future generations rises. The higher return on human capital offers an incentive for further investments in education. Galor and Tsiddon (1995) suggest in their model that initial inequality is necessary to create sufficient incentives for human capital investments. A too egalitarian society might face the problem of being trapped at a stage where human capital investments are insufficient to create technical progress and, hence, economic growth. Once a certain level of human capital is reached, a transfer of know-how from high to low human capital sections occurs. This transfer is fuelled by the increasing technical standards used in the production process. As skills become more precious in the market, the incentives to invest in human capital increase for all, regardless of the initial human capital level. At this stage, it is crucial to note that the model assumes diminishing returns to skills, and therefore individuals that were initially located in lower income (lower skill) brackets of society tend to invest a higher proportion of their income on human capital accumulation (Galor and Tsiddon, 1995: 104-116).
In counterpoint to the above-discussed theories, Addison and Cornia (2001: 7) argue that the Kuznets hypothesis and the abovementioned models supporting it lack empirical verification. Data relating to OECD countries only support an inverted-U shape up until the 1970s. Thereafter, most of the OECD countries experience rising inequality again (Aghion, 1998: 9). Bénabou (1996) presents evidence that highly unequal countries such as the Philippines and most of the Latin American countries grew far more slowly than most of the emerging Asian countries such as Korea, which exhibited a more egalitarian distribution pattern at their initial stage of development compared to most Latin American countries (Bénabou, 1996: 2-3).
In the following section theories that establish a negative relationship between inequality and growth are presented.
2.2. Accumulation and Redistribution
The extent of inequality may influence the level of the tax rate, since the tax rate can be seen as a proxy for redistribution. High inequality may increase the pressure for more redistribution and hence for higher tax rates. Alesina and Rodrik (1994) have developed a model of redistribution and endogenous growth based on the so-calledmedian voter theorem. Members of a society are heterogeneous in terms of their ownership of factors. In general there are two factors: labour and capital. Labour is regarded asnonaccumulative, whereas, capital is deemedaccumulative. Growth depends on the society’s ability to increase its capital stock. This ability is influenced by the saving decisions of the members of the society. Furthermore, Alesina and Rodrik (1994) incorporate public services into the model that are productive and beneficial for all members of society. Taxation on capital is used to fund these services. By taxing capital, the government influences the savings decision of individuals. A high capital tax rate inhibits accumulation and thus growth; whereas, a low tax rate has the opposite effect. Due to the differences in factor endowment, each person has his or her optimal tax rate. Capitalists would find a low capital tax preferable as in turn it would maximise the economy’s growth rate; whereas, wage earners would prefer a higher tax rate which, however, would lead to lower growth. Considering the median voter theorem, the existing tax rate reflects the median voter’s preference. Therefore, an economy where the median voter is relatively poor in terms of capital compared to the average would choose a higher tax rate, and thus retard growth (Alesina and Rodrik, 1994). The model implies that a functioning democracy exists and that government policies are aimed at redistribution. Further it is presumed that the returns to private investments are higher compared to those of public investments (Addison and Cornia, 2001: 8). Contradicting these assumptions, Easterly and Rebelo (1993) as well as Perotti (1996) provide empirical evidence that public spending, for instance on education, yields high returns and, therefore, it is instead growth enhancing (Easterly and Rebelo, 1993; Perotti, 1996 all in: Addison and Cornia, 2001: 8).
2.3. Inequality and Capital Market Imperfections
Endogenous growth models such as the one developed by Romer (1989) suggest that human capital formation is an important factor for growth. If financial markets are imperfect, for instance due to moral hazard or adverse selection problems, poor households face difficulties in borrowing for educational purposes. Further, if low income households are unable to borrow in order to buy land or other production factors, the economy would operate below its full potential. Resources are concentrated within the high income brackets which have access to financial markets. Hence, the high income households are responsible for the economy’s investment activities. However, assuming diminishing returns to investments, an exclusion of potential capacities locks the economy in a lower growth path compared to a growth path in which all individuals have adequate access to borrowing (Addison and Cornia, 2001: 8). Therefore, high inequality and imperfect capital markets lead to suboptimal growth.
2.4. Inequality and Social Conflict
High and persistent inequality may lead to social conflict. In countries with high crime rates, such as South Africa and Brazil, individuals spend a disproportional high share of their resources on home security and other security measures, which do not increase the productive capacity of the economy (Demombynes and Özler, 2005: 288). It may be difficult to link high crime rates directly to high inequality and poverty; certainly, not every poor person is a criminal. However, drawing on abovementioned findings that inequality and imperfect financial markets exclude large parts of the society from investment activities and impede their human capital formation, it may be concluded that inequality and poverty have an impact on crime. Further, Ehrlich (1973), Chiu and Madden (1998), and Bourguignon (2001) have established a positive relationship between high inequality within districts and the motivation to commit crime (in: Demombynes and Özler, 2005: 289). Noteworthy in the South African context is the finding that interracial income differentials have a strong influence on crime (Blau and Blau, 1982 in: Demombynes and Özler, 2005: 290). Moreover, Venieris and Gupta (1986) have identified a negative impact of violent actions on investors’ confidence and security of property rights.
Despite the difficulties in establishing a direct link between inequality and crime, it can be noted, nevertheless, that crime and social conflict in general create an environment that is not encouraging for economic activities (Demombynes and Özler, 2005: 288). These unfavourable conditions increase transaction costs (Venieris and Gupta, 1986 in: Addison and Cornia, 2001: 8). This in turn results in a discount for uncertainty and reduces the expected returns for investors and may lead to less investment activity and thus less growth.
2.5. Inequality and the Choice of Policies
Addison and Cornia (2001: 9) suggest that high levels of income inequality distort the policy decisions of governments.
The pressure to redistribute may lead to increased public spending. Addison and Cornia (2001) argue that expansionary fiscal policy may result in suppression of private investments and increased inflationary pressure. Both would have a negative impact on growth (Addison and Cornia 2001: 9). It is, however, debatable whether increased public spending on education, health services, or basic infrastructure crowds out private investments. Further, the inflationary pressure depends on the degree of expansion. Thus the benefits of an appropriate expansion of public spending may outweigh the negative impact of inflation. A too-tight fiscal policy may also be hostile to economic growth as it takes the aggregate demand stimulus away from the government.
Birdsall (2000) regards the functioning of the government as being threatened by rising inequality. Since income inequality leads to segregation and a struggle over distribution, the government may become more susceptible to the influence of different interest groups (Birdsall 2000, in: Addison and Cornia, 2001:9-10). Depending on the relative power balance of the groups, these distributive struggles may lead to suboptimal taxation or a cutback of public spending on essential public services such as health or education. Both may curtail growth. Birdsall (2000) argues further that the drifting apart of the social groups harms development as it undermines the rule of law. The privileged class may explore ways to avoid tax payments or defy criminal prosecution. In more general terms, the concentration of resources and therefore political power in the hands of the privileged may weaken or undermine the institutions of the society (Birdsall, 2000 in: Addison and Cornia, 2001: 9-10). Well-functioning institutions, however, play a critical role for economic development. North (1990) emphasises that it is crucial for economic success for institutions to be able to adapt to a changing environment such as the invention and utilisation of new technologies and production processes.
2.6. A Concave Relationship Between Inequality and Growth
In contrast to the previously presented links between inequality and growth, Addison and Cornia (2001) have established an incentive-based theory that exhibits a nonlinear relationsip between inequality and growth. This concept can be seen as a modification of Kuznets’ inverted-U hypothesis and it incorporates elements of the models explained above. Addison and Cornia (2001: 11) suggest that “‘too low’ or ‘too high’ inequality can be detrimental to growth”. Further, they propose that there is, depending on country specific characteristics, an efficient and growth-maximising degree of inequality. Inequality levels that are either below or above the optimum degree of inequality create a lower growth path. It is further assumed that in an economy the human capital endowments of individuals reveal the distribution of personal income; the higher the human capital endowment the higher the income and vice versa (Addison and Cornia, 2001: 10-15).
An economy in which inequality is below the growth-maximising level is characterised by a very equal income distribution with low wage differentials. It is possible that individuals may feel that their earnings do not satisfactorily correspond to their qualifications and their previous investments into education when compared to the income of lower skilled individuals. Hence, highly skilled individuals might have a tendency to perform below full capacity. Further, Addison and Cornia suggest that this undifferentiated income pattern may have a negative impact on risk taking and industriousness. These ideas are based on observations of socialist countries. Moreover, when the low wage differential is due to large redistribution via an excessive marginal taxation, individuals that contribute a large proportion of their income to the redistributive measures face disincentives to employ their full potential, as the marginal return to every additional unit of income is heavily taxed. On the other hand, unskilled workers may recognise these incentives as an opportunity to take a free ride at the expense of the whole society, especially in the presence of a generous social security system. All these factors contribute to a suboptimal growth rate (Addison and Cornia, 2001: 10-15).
Conversely, an economy that exhibits levels of income inequality above the maximisation level does not reveal its complete growth potential either. Addison and Cornia (2001) attribute inequality largely to the failure of markets and to the exclusion of parts of society from opportunities as happened for instance in South Africa during the apartheid era.
As mentioned above, the outcome of the exclusion of certain members of society is negative for economic growth. An interesting insight into the adverse effect of high inequality on growth can be drawn from observing the agricultural sector. In contrast to the theory of economies of scale, Cornia (1985) suggests that when there is a highly unequal ownership of land, the marginal productivity of land decreases. As the farm size increases, so do the costs of supervising farm workers, although the marginal productivity per unit of land decreases. Therefore, family farms are better suited to increase agricultural productivity (Cornia, 1985 in: Addison and Cornia, 2001: 11). Another negative effect of unequal ownership of land and other assets may arise as a result of survival strategies applied by deprived individuals. Livelihoods that are, for instance, based on the overexploitation of marginal land tend to aggravate environmental problems that, in turn, hamper the long term growth prospective of the entire society (Addison and Cornia, 2001: 12).
3. Policy Implications
Growth is necessary to create productive employment thereby lifting people out of poverty. However, growth itself is not a sufficient condition to overcome poverty (Khan, 2001: 2). Therefore, it is important to make sure that growth benefits as many people as possible and in particular the poor. Hence, it is self-explanatory that without more equality, the growth process will not reach its full potential of reducing poverty. To achieve the optimum outcome of growth and subsequent employment creation, it is necessary to supplement it with income redistribution as there is no guarantee that all segments of society will benefit alike. Redistribution can help to alleviate poverty among those who do not benefit directly by growth (van der Berg et al., 2005: 3; Dagdeviren et al., 2001: 3-6).
However, it is crucial to decide on a redistributive regime that is not harmful to growth. If the redistribution is perceived as an unacceptably high burden it may lead to a slump in investments which in turn would curtail growth. This would be detrimental to any attempt to reduce poverty as it inhibits employment creation and lowers the scope to distribution via the budget.
From the above discussed theories it is possible to make a convincing argument for the case that especially high initial and rising inequality is harmful to poverty reduction. Therefore, countries that strive to reduce poverty have to deal with the problem of inequality.
The following part deals with the evolution of inequality in post-apartheid South Africa and the relationship between the country’s growth performance and the welfare situation.
II. Case study South Africa
The transition to democracy in South Africa was initiated by the first general elections in 1994. After the poor performance of the economy since the 1980s, the macroeconomic situation in post-apartheid South Africa stabilised. Further, strong efforts were made to achieve reconciliation and equal opportunities among all South Africans (Hausmann, 2008). In addition inflation was brought down from an annual average of above 13% in the decade prior to 1994 to an average level of just above 6% between 1994 and 2007 (StatsSA, 2008c). Additionally, in 2000 the South African Reserve Bank adopted inflation targeting in order to sustain low and constant inflation rates (van der Merwe, 2004: 1). In 2005, South African’s GDP amounted to more than $544 billion (PPP). This was almost 25% of the total output of Africa for that year. With a real per capita GDP of $11,470 (PPP) South Africa is relatively rich compared to most African countries. Further, between 1997 and 2005 South Africa had a relatively strong average real GDP growth rate of 3.2% per year. On the African continent South Africa is the most diversified economy; 44 products accounted for more than 75% of exports in 2003(AfDB and OECD, 2006: 546-559).
However, fourteen years into democracy, the legacy of apartheid is still omnipresent in South Africa. Since the choice of the economic policies and the segregation policies of apartheid favoured white citizens over non-white South Africans, a highly unequal income and wealth distribution has been created. This unequal distribution is still present in South Africa.
As the democratic government came into power, Nelson Mandela declared in his inaugural speech that the government promises “to liberateall[...] people from the continuing bondage of poverty, deprivation, suffering, gender and other discrimination” (ANC, 1994, emphasis added). Also the preamble of the new South African constitution states that the “divisions of the past” have to be healed as well as that “the quality of life ofallcitizens” has to be improved and “the potential ofeachperson” has to be freed (Republic of South Africa, 1996, emphasis added).
5. South Africa Under Apartheid – Setting the Stage for an Unequal Society
In order to understand the patterns of poverty and income distribution of present-day South Africa it is necessary to look at the economic situation and policy choices made during the apartheid era. The reflection on apartheid South Africa may help to identify the roots of inequality and the persistent poverty. This in turn may be useful to define measures to address the problem at present.
The victory of the National Party (NP) in the 1948 elections set the stage for strict segregation along racial lines and further discrimination against the non-white majority of South Africans. These policies are commonly known as ‘apartheid’. In particular, theGroup Areas Actof 1950 (Act No. 41 of 1950) passed by the newly elected government, had a long lasting impact on economic development in South Africa. This Act created dedicated areas for white South Africans and forced non-white South Africans to move to certain areas. Similar consequences flowed from theNativesLaws Amendment Actof 1952,with its notoriousSection 10, which restricted the influx of non-whites to urban areas and forced them to live in so-called ‘Bantustans’or ‘native reserves’ (ANC, 1987; South African History Online, 2008). In addition to this physical segregation, theBantu Education Actof 1953 laid the foundation for an education system segregated along racial lines with enduring negative effects on education for non-white South Africans and the entire economy of South Africa. Under the Prime Ministers Strijdom (1954-1958) and Verwoerd (1958-1966) the racial segregation was further deepened (Furlong, 2001: 384-385).
Using the international poverty line of $2 per day
OHS, LSF, IES and national censuses are conducted by Statistics South Africa
AMPS is conducted by the South African Advertising Research Foundation (SAARF)
It is assumed that governments have a moral obligation to fight poverty
In 2005, the average real GDP per capita in Africa was $2,724; only Equatorial Guinea ($50,522), Mauritius ($13,542), and the Seychelles ($12,603) had higher per capita real GDP in 2005 (AfDB and OECD, 2006: 456-457).
Only 8 African countries had 10 or more products accounting for more than 75% of their products (AfDB and OECD, 2006: 558-559)
In the following the major population groups are classified by the common terminology used in South Africa:BlackorAfrican,Coloured(mixed race),Indian(people of Asian descent in general), andWhite(Caucasian). For brevity, the term “non-white” is used to group African, Indian, and Coloured South Africans. All these terms are used in a neutral way and do not imply any judgements.
For an overview on apartheid see e.g. Chazan et al., 1999: 470-488, Furlong, 2001: 371-407, and Arnold, 2005: 329-354)
The termBanturefers to black South Africans