Townships of Cape Town

South Africa: How extreme inequality persists

Aroop Chatterjee, Léo Czajka and Amory Gethin

Aroop Chatterjee, Léo Czajka and Amory Gethin

Aroop is the research manager on wealth inequality at the Southern Centre for Inequality Studies, University of Witwatersrand, South Africa. His research focuses on wealth inequality, elites, and policy.

Léo is a PhD Candidate in economics at the Université catholique de Louvain (IRES-LIDAM) and a research fellow of the World Inequality Lab. His work focuses on tax, administration, and inequality in sub-Saharan African countries.

Amory is a PhD candidate at the Paris School of Economics and a research fellow at the World Inequality Lab. His research focuses on the interplay of economic inequality and political conflict in comparative and historical perspective.

South Africa, almost three decades after the end of the apartheid regime of racial segregation, remains one of the most unequal countries in the world. Post-apartheid economic growth has benefitted a new, more racially diverse elite. Yet, despite significant government efforts at tackling pre-existing income disparities, it has failed to deliver better opportunities for the majority of the country’s population. Doing so will require going beyond traditional policy tools to address the distribution of inheritance and wealth, which continue to be concentrated in the hands of a few.
 
In 1994, after more than a century of racial segregation and White domination, South Africa held its first national election by universal suffrage. The end of the apartheid regime heralded the advent of a new democratic order and the end of legal discrimination at the same time as it raised hopes for a more equal distribution of social and economic power. Twenty-seven years later, the living standards of the poorest South African citizens have not significantly improved. In some dimensions, they may even have worsened, with the unemployment rate reaching an extraordinary 34% in the second quarter of 2021. What explains this apparent paradox? To what extent did the South African government fail to tackle the country’s extreme inequalities? Our recent research sheds new light on these questions by providing for the first time a consistent picture of the evolution of income and wealth disparities since 1993 (1-2). We find that wealth concentration has remained remarkably stable in the past decades, while pretax income disparities have substantially increased. The rise of government redistribution, while successful at compensating part of the income losses of the poor, has been insufficient to move South Africa towards a more inclusive growth trajectory.
 

Townships of Cape Town
A view of the township of Khayelitsha just outside of Cape Town, South Africa. Such slums are common in South Africa, usually within a short drive from city center. Usually segregated, with origins in apartheid era. Photo @Wikimedia Commons

An Extreme Inequality Legacy

South Africa has always been one of the most unequal countries in the world. This extreme inequality, until the end of the apartheid regime, had a unique and particularly pronounced racial dimension. From 1917 to the end of the 1980s, the ruling White minority earned on average more than 10 times the average income of the Black majority (3). The incomes of Asian and Coloured minorities fell in between, amounting to about a fifth of that of Whites.

The transition to democracy did provide new economic opportunities for the underprivileged non-White majority. Greater access to public sector jobs and to corporate ownership, thanks to the policies implemented by the new African National Congress government, enabled a number of citizens to access better-paying jobs. However, our findings suggest that these opportunities have been restricted to a narrow group (Figure 1): between 1993 and 2019, the top 10% of Black, Asian, and Coloured earners thus saw their pretax incomes grow substantially, while that of the poorest 90% of all groups stagnated or even declined. In other words, the economic growth of the recent decades has benefitted to a new multiracial elite, while leaving behind the majority of the poor.
 

The Rise of Inequality and the Emergence of a New Multiracial Elite in South Africa, 1993-2019
Figure 1: The figure represents the total growth rate of selected income groups within each population group from 1993 to 2019. The top 10% of Black earners saw their average income grow by 200% during this period. (2)

The Rise of Redistribution

Growing pretax income inequality, however, is only part of the story. The South African government did invest massively on social spending and government expenditure benefitting the poor. New social grants, such as the Child Support Grant benefitting millions of children since its inception in the late 1990s, have provided crucial social relief in times of distress. Investment in health and education, financed in part by higher income and corporate taxes paid by top income earners, has improved the lives and prospects of poorer regions and rural areas.

Combining numerous data sources and allocating all taxes and transfers to individuals (including indirect taxes and in-kind transfers in education and health), we estimate that the rise of redistribution in South Africa has almost fully compensated the decline of pretax incomes at the bottom of the distribution (Figure 2). Yet, it has not succeeded in putting a halt to the surge of top-income earners, who even after tax have benefitted from significant real income growth.
 

The Rise of Redistribution in South Africa: Pretax versus Posttax Income Growth by Percentile, 1993-2019
Figure 2: The figure represents the cumulated income growth rate by percentile between 1993 and 2019 in terms of factor national income and posttax national income.(2)

Inheritance, Wealth Accumulation, and the Shadow of the Past

Why has redistribution failed to curb rising pretax income inequality? At least two factors may contribute to answering this question. The first one has to do with income taxation. Although the South African tax system is progressive overall, it has not been sufficiently progressive so as to halt the boom of top incomes, as shown in Figure 2. The top marginal income tax rate stands at 45% today, far below the historical levels that were once critical to moving Western societies to a more equal distribution of economic resources in the postwar era. In the United States for instance, throughout the 1940s to the 1960s, the top marginal income tax rate always exceeded 80% (4). Crucially, dividends are exempted from income taxation in South Africa and taxed at a flat rate of 20%, leaving wealthy shareholders ample space for extracting a high share of value added in the form of capital income.

The second factor has to do with the concentration of wealth and inheritance. Understanding the persistence of extreme inequalities in South Africa requires looking beyond income and redistribution. Wealth, defined as the total value of assets held by individual minus the debts they owe, is a critical yet often overlooked driver of this persistence. In that dimension, too, South Africa is one of the most unequal countries in the world. In 2017, more than 85% of total household wealth was owned by the richest 10% in South Africa, compared to about 70% in Russia and less than 55% in the United Kingdom and France. Meanwhile, the average wealth of the poorest 50% of South Africans was negative: the value of the debts they owed exceeded that of the assets they owned. In this context, starting with such different endowments at birth, it is not surprising that South African children face vastly different opportunities later in life. With the exception of inheritance, which is taxed at a top marginal rate of 25% under a poorly enforced estate duty, wealth is completely exempted from taxation in South Africa. This has enabled the richest families to continue accumulating substantial capital in the past decades, including from wealth directly inherited from the apartheid regime. Trusts, which are not subject to any meaningful taxation, have been the privileged vehicle for the wealthy to engage in such process.
 

Wealth Inequality in South Africa in Comparative Perspective: Evolution of the Top 10% Wealth Share in Selected Countries, 1980-2017
Figure 3: The figure compares the evolution of the top 10% wealth share across a number of countries between 1980 and 2017. (1)

Tackling South African inequality will thus require going beyond standard redistributive tools. To be sure, it will involve providing better-paid jobs and true economic opportunities to the millions of citizens who continue to suffer from chronic unemployment and persistent deprivation. Yet, it will also necessitate enforcing a more equitable circulation of inheritance and wealth if South Africa is to move towards a more equitable growth path.

A progressive wealth tax targeted at the richest 1% of South African owners, among other measures, could contribute to positively moving South African society in this direction. Such tax would have two positive effects on inequality. At the top of the distribution, it would contribute to limiting the accumulation of assets and capital gains in the hands of a few. The collected government revenue, which could fall in the range of 1.5% to 3.5% of GDP, could in turn be used to finance additional social programs or long-run investment in health, education, infrastructure, or high-quality jobs.

 

Aroop Chatterjee, Léo Czajka and Amory Gethin

 

References:

  1. Chatterjee, A., et al., “Wealth Inequality in South Africa,” World Bank Economic Review, forthcoming.
  2. Chatterjee, A., et al., “Can Redistribution Keep Up with Inequality? Evidence from South Africa, 1993-2019,” World Inequality Lab Working Paper, 2021.
  3. Leibbrandt, M., et al., “Trends in South African Income Distribution and Poverty since the Fall of Apartheid,” OECD Working Paper, 2010.
  4. Piketty, T., “Capital and Ideology”, Harvard University Press, 2020
Received: 24.09.21, Ready: 26.10.21,. Editors: Adam Wakeling, Jessica Brown

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