The issue of extreme income inequality in South Africa remains unresolved. Persistent high rates of income inequality impact negatively on political inclusion, social cohesion, and crime. Using the US CIA’s most recent GINI index estimates of income inequality, South Africa is ranked second worst behind Lesotho.
Countries with a GINI index closer to zero, like Sweden (0.25) and Germany (0.27), have a more equal distribution of family income than countries like South Africa (0.63) and Haiti (0.61). The GINI index paints only a partial picture because a low score does not always indicate a healthy economic situation. The GINI index for Pakistan, for example, is 0.3 but most Pakistanis have much lower incomes and less economic mobility than South Africans.
Is it possible to achieve wealth, high economic mobility, and income equality within a society? In a functioning market, financial profits or losses signal to firms and people, whether their goods and services are in demand. Consequently, for this signalling to work in an unhampered market, income cannot be distributed evenly. But, if people and firms are equipped with the skills and knowledge to consistently adapt to new markets, better levels of equality can still be achieved.
In the modern world, income and wealth generation are based more and more on knowledge and information. The need for workers to acquire a range of skills and to continuously adapt these skills underlies the learning economy. Productivity is driven by tapping into new ideas, innovations and technologies on a global scale. A process that relies heavily on ICT.
South Africa ranks 88 out of 175 countries on the International Telecommunication Union’s ICT Development Index, despite having high rates of mobile phone penetration and high secondary school enrolment. Ranked first on the Index is South Korea, a remarkable achievement for a country that was one of the poorest in the world 50 years ago.
Few countries have embraced the knowledge economy as much as resource poor South Korea. The country’s 15-year-olds are consistently ranked highly in reading literacy, maths and science scores in PISA tests. The working population is highly educated and unemployment is low. The country scores 0.3 on the CIA’s GINI index despite having the second lowest public social spending (10.4% of GDP) amongst the OECD countries.
A strong emphasis on the importance of education, secure property rights, an independent and efficient judicial system, a competitive private banking system, and an excellent ICT sector have helped South Koreans to prosper. The country has moved from rags to riches at an astonishing pace. Intergenerational income mobility is high, and South Koreans are wealthier than South Africans when comparing every income group, from the poorest to the billionaires.
Distribution of income
Policy makers can attempt to distribute more income from the abundantly rich to the poor to lower inequality, but this cannot be done on a global scale, and it is a strategy that views the size of the ‘wealth pie’ as being limited. Economics is not a zero-sum game. In a resource-based economy, your potential wealth is restricted by finite resources. In a knowledge-based economy, your potential wealth is unrestricted.
Raising taxes on high income earners or creating capital movement controls will often have the opposite of desired effects. In today’s connected world, skills and businesses are mobile and wish to operate in an unrestricted business environment. Many South African entrepreneurs are choosing to move to other countries because it is difficult to take businesses beyond the incubation phase into a global market.
Mark Shuttleworth, another local tech entrepreneur who now lives in the Isle of Man, believes that exchange controls prevent small South African businesses from building global operations. South African tech entrepreneur Vinny Lingham, who now lives in California, believes that a lack of competition and Telkom are stifling the ICT industry.
Remove the glass ceiling
South Africa needs to raise and, ultimately, remove the glass ceiling that bureaucracy has placed on entrepreneurship and our information society. Capital movement controls should be lifted and a more competitive ICT industry established. The ability to move capital freely will also attract foreign investment. South Africa should fully privatise the telecommunications sector and relax regulations and the ‘spectrum bottleneck’ preventing expansion and new entrants.
Less bureaucracy, and a strong focus on ICT and education will help South Africa to embrace the information age and create new wealth opportunities for everyone. Better equality can be achieved without discouraging businesses and entrepreneurs. Taxes that redistribute income are difficult to implement fairly, administratively intensive, expensive, and open to corruption. We should focus more on implementing policies that uplift the poor, rather than trying to tackle inequality with taxes. If there is not enough pie for everyone, make more pie.
Luke Muller is an independent economist.