by MORNE MALAN
JOHANNESBURG, (CAJ News) – ECONOMISTS are often accused of making relatively simple issues seem inordinately complex.
Politicians, on the other hand, tend towards the opposite. Neither of these approaches to policy-related matters is inherently good or bad, provided they help to clarify rather than obscure the facts of the matter.
If, therefore, we are attempting to address an issue such as inequality, which has been broadly accepted to have reached crisis levels in South Africa, then developing an accurate understanding of the data and how they seem to relate to policy is crucial. This is true, of course, regardless of one’s perspective on whether the pursuit of these goals will result in a net negative or positive outcome for society.
Let’s begin with the simple case.
The new Minister of Trade, Industry, and Competition (DTI), Parks Tau, is but one of many officials who recently reaffirmed his dedication to pursuing and intensifying Black Economic Empowerment (BEE) and affirmative action (AA) as the means by which to advance a more equal society. Such a commitment should raise at least two questions to the discerning reader: How unequal are we as a country? And how have these policies influenced inequality in the past? For both, the best available data must guide our investigations.
The most recent effort from a large institution to comprehensively analyse the dynamics of inequality in South Africa, is found in a woefully underpublicised 2019 Statistics South Africa (Statssa) report, Inequality Trends in South Africa: A multidimensional diagnostic of inequality.
Firstly, regarding the claim that inequality continues to be exceptionally high in SA, the report confirms this unequivocally. Whereas the Gini coefficient, based on per capita expenditure for the total population, stood at 0.67 in 2006, it crept down only slightly in 2009 to 0.65 and largely remained there for the rest of the period under investigation.
From a global perspective, this meant that we had moved from being the most unequal society in the world, to being only marginally less so. Now, to be clear, I don’t think there are enough inspirational quotes on all of Pinterest to convince the majority of South Africans that this is quite fine because, after all, you should “never measure your own progress using someone else’s ruler.”
Does this, however, confirm the necessity of intensifying policies which are ostensibly aimed at addressing inequality? Well, at least one reasonable objection would surely be that clearly these policies have not been particularly effective in doing so historically. But even this seems an unsatisfactory conclusion.
Could the substantial efforts pursued by government over the past three decades have really had such little effect? Here we shall have to begin with the more complex answer.
One particularly useful contribution by economists and statisticians hoping to elucidate the way in which parts interact with the whole and vice versa has been the identification of two related logical fallacies. These are generally referred to as the fallacies of composition and decomposition.
The fallacy of composition refers to the erroneous assumption that what is true for an individual is necessarily true for a group or likewise for a subset of the population in relation to the larger group. The inverse of this concept is the fallacy of decomposition: the mistaken assumption that what is true of a group is necessarily true of an individual or of a subset of the group.
Therefore, whilst we may conclude that a policy has undoubtedly been beneficial to certain members of a population group, it does not follow that they have been so for the entire subgroup nor for the population as a whole. Similarly, while the impact of a policy may appear to have been limited on a national level, this does not imply that no shifts have taken place on a more granular scale.
Of course, no measure of changes at the level and complexity of an entire economy is ever perfect, but some do serve certain purposes better than others. To assess the changes in inequality taking place not only between groups but also within them, another measure, known as the Theil Index, is generally applied. Here the report is less sanguine.
Whereas both within-group and between-groups inequality based on population group contributed equally to overall inequality at the lower end of the distribution in 2006, the former overtook the latter for every period since. The same holds true at the higher end of the distribution where within-group inequality accounted for 58% in 2006 and proceeded to rise to just under 70% in the latest measure, leaving the contribution of between-group inequality at roughly 30%. Moreover, when analysing the data for income (as opposed to expenditure), the report found that the contribution of inequality between groups was as low as 14% in the latest measure.
In other words, when decomposing the headline data of inequality based on expenditure, it becomes clear that whilst South Africa is still extremely unequal, said inequality is today driven primarily (although not exclusively) by forces within population groups and not between them. More specifically, it is a result of a precipitous increase in inequality within one population group in particular.
Whilst the report suggests that the “three other population groups” remained more or less the same over the entire period, the contribution of the “Black African” group increased significantly. In fact, according to the latest figures, inequality within this group could account for somewhere between 39% to 59% of overall inequality. Perhaps lending credence to the notion that ostensibly “redistributive” policies are benefitting a relatively small elite as opposed to the broad populace.
Whereas this would not have been true thirty years ago, the relative impact of unequal expenditure and income by the non-“Black African” population groups have increasingly become moderating factors in overall inequality. Put plainly, the inequality we have today is similar in magnitude to that of the past but has nonetheless largely changed its complexion.
Three decades into democracy, South Africa remains an extremely unequal society and efforts by the state have been largely ineffective in combatting it. However, this does not imply that they have not had a substantial effect on the underlying nature thereof.
BEE and AA, amongst the myriad other policies focussed on promoting race-based interventions into the economy, may have made little difference in the degree of inequality, but they have certainly transformed the kind of inequality in the country.
Such facts should have a significant impact on the way in which we evaluate the preferred policy tools utilised by government – whether in this case or any other. However, as far as equality is concerned, one important question to ask is whether we haven’t spent far too much time discussing how to lower the ceiling of wealth and far too little on which reforms would best raise the floor thereof? As the depth and breadth of poverty in South Africa continues to be heartbreakingly high. Perhaps the most important question, however, is whether government should be wielding these tools at all or whether we’d be far better served by allowing markets to operate without artificial manipulation? This is another vitally important question and one which, I hope, we could begin addressing with the level of complexity it warrants.
NB: Dr Morné Malan is Communications Manager for the Free Market Foundation.
– CAJ News