South Africa’s poverty and unemployment battle

It has been over ten years since the first democratically elected government came into power and the new dispensation has a lot to be proud of. Indeed, the government should be congratulated on a number of beneficial reforms that has seen the overall level of economic growth increase over the past 13 years. However, the government cannot claim to have sufficiently addressed what are arguably some of South Africa’s most pressing issues: poverty and unemployment.

According to the latest labour force survey (LFS), approximately 4.3 million working aged adults were officially unemployed in March 2007. This equates to an official unemployment rate of 25.5 per cent. However, a further 3.5 million did not actively search for work in the month prior to the survey, but indicated they would work if jobs were available. If we include these discouraged work seekers the total number of unemployed increases to 7.8 million and the unemployment rate shoots to the more realistic rate of 38.3 per cent.

There is varying consensus on how to measure poverty but for comparative purposes we present the very crude, but internationally accepted measure, of the number of people who live on less than one US dollar per day. According to this measure the South African Institute of Race Relations reports that the number of poverty stricken South Africans increased from 1.9 million in 1996 to 4.2 million in 2005. Given the high levels of poverty and unemployment, it should come as no surprise that South Africa continues to have one of the most unequal distributions of income in the world.

The most common method used to measure income inequality is the "Gini" coefficient named after the Italian demographer Corrodo Gini who formulated the coefficient in 1912. The coefficient indicates the extent to which the distribution of income among households in an economy deviates from a perfectly equal distribution. The coefficient is measured on a scale of zero to one. If a country's Gini coefficient is zero, it means that income distribution is perfect, with each household earning exactly the same income. At the other extreme if the total income goes to one individual or household the Gini is one.

South Africa’s income distribution, as measured by the Gini coefficient, is approximately 0.593 – positioning South Africa as the sixth most unequal society in the world. The richest 20 per cent of the South African population earn approximately 65 per cent of the total income, whereas the poorest 20 per cent earn approximately 3 per cent. Simply put, the richest members of society earn approximately 22 times more than the poorest members.

Income inequality has remained high but relatively static in post-apartheid South Africa but the figures hide a significant factor: the Gini is higher among African households than among non-African households. Whiteford and Van Seventer found that, in 1997, the income of the top ten per cent of African income earners grew 7 per cent, whilst the income of the poorest 40 per cent declined by 27 per cent. Thus, in the last thirteen years there has been a significant shift in the composition of the wealthiest group in SA as it now includes several extremely wealthy African individuals.

Although the poorest layer of the population is still predominantly African, an increasing number of white households are rapidly sinking into poverty. As inter-racial inequality has declined (inequality between race groups), intra-racial inequality has steadily risen (inequality within race groups). Some African households have improved their financial positions considerably – a process that started at the beginning of the 1990s and accelerated after SA became a democracy in 1994. As apartheid unravelled, many more Africans were able to move up the occupational ladder and as the number in higher-paying occupations rose, so the gap between high- and low-paid Africans has steadily increased.

However, the most effective way to increase the standard of living of the entire population is through increased levels of economic freedom. Indeed, according to the Economic Freedom of the World countries with more economic freedom have substantially higher per-capita incomes. The most free nations in the world enjoy average per capita incomes of $26,013 compared to the least free nations who have an average of $3,305 per capita. Moreover, the amount per capita of income going to the poorest 10 per cent of the population is much greater in nations with the most economic freedom than it is with those with the least. In the freest economies individuals in the poorest 10 per cent earn $7,334 on average whereas in the least free economies the poorest 10 per cent earn $905 on average.

Despite some good progress in the overall level of economic freedom in the past 13 years, in recent years the SA government’s efforts have stalled, leading to a slide down the EFW rank from 44th in 2000 to 60th position in 2005. High economic freedom and growth will occur if the government concentrates on its core functions, substantially reduces barriers to doing business and restrictions on trade, and liberalises the labour laws. Increased economic freedom and growth will have positive spin-offs for all South Africans. Most economists recognise that to reduce poverty, unemployment must be reduced, and the best way to do so is to remove artificial constraints that prevent the labour market from functioning efficiently.

Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article/ 18 December 2007