Practise distinguishing equity from equality, explaining poverty traps and evaluating taxes, transfers, benefits and supply-side measures for distribution and work incentives.
The decline of South Africa's economy
South Africa is the most industrialised country in the continent of Africa but it is also an economy with much economic inequality.
Recently governments in South Africa have aimed to reduce economic inequalities by redistributing incomes and increasing both job and investment opportunities for all sections of society. Unfortunately, the reforms have been undermined through poor organisation and management. State railways, port facilities, airways and electricity production have been affected.
Government statistics for the first quarter of 2020 show that South Africa's economy contracted by 3.2 %, the biggest quarterly decline of actual economic growth in a decade (see Fig. 1.1). Gross domestic product (GDP) per capita was US$6130 in December 2019, 5.8\% lower than in December 2018.
Fig. 1.1 South Africa annual growth rate, 2008 to 2019
This economic decline is reflected in the electricity supply industry, which is a state-owned monopoly. It is struggling to survive mainly due to mismanagement. For several months it rationed electricity consumption and introduced regular power cuts for households and industries. The rationing policy led to decreases in production and increases in unemployment. The company's debts added significantly to South Africa's current national debt to GDP ratio of 56\% and are seen as the biggest threat to the economy.
Further evidence of economic difficulties can be found in the mining industry, a significant part of South Africa's economy. A controversial reform was introduced to give more equality of ownership. Already facing rising costs and growing bureaucracy, many mining firms, including multinational companies, stopped investing altogether which reduced potential economic growth. The mining industry declined. Thousands of jobs were lost despite South Africa having significant deposits of platinum, gold and iron ore.
For South Africa's economy to grow it needs to address major infrastructure issues. Also, in disadvantaged communities the education system is weak contributing to a skills shortage and a rise in the unemployment rate to 27 % (see Fig. 1.2). Increased production is further hindered by restrictive trade union practices.
Fig. 1.2 South Africa's unemployment rate
Fig. 1.3 South Africa's foreign direct investment (FDI) net inflows
An analyst said: 'A critical reason for low economic growth has been a lack of private sector investment and FDI (see Fig. 1.3). The lack of investment wasn't just due to the political policies but also to uncertainty and mismanagement which led to continued inequalities.'
Sources: The Daily Telegraph, 6 July 2019 and ceicdata.com
Describe what is meant by economic equality and distinguish it from equity.
When is a policy of income redistribution from rich people to poor people most appropriate?
when control of demand-pull inflation is the priority
when equality is valued more highly than efficiency
when monetary reward is the best incentive to risk-taking
when the rich have higher marginal utility curves than the poor
Income inequality
According to a report by the World Bank, income inequality has declined in some low-income countries in recent years. For example, between 2008 and 2018, the Gini coefficient decreased by more than 5 percentage points in Chile, Colombia and Mexico. In some other countries, such as Ethiopia, India and Indonesia income inequality has remained relatively stable over the past decade while it has increased in China and South Africa.
In low-income countries inequalities of opportunity, in particular the differences in access to education between females and males, appear to pose obstacles to a more equal income distribution. Equality of opportunity becomes an issue of macroeconomic relevance.
Table 1.1 shows Gini coefficients, female/male literacy ratios and the percentages of population in absolute poverty for five countries.
| Country | Gini coefficient | Literacy ratio | \% of population below the poverty line |
|---|---|---|---|
| Brazil | 0.53 | 1.01 | 4.2 |
| Mauritius | 0.36 | 0.95 | 10.3 |
| India | 0.35 | 0.90 | 21.9 |
| Egypt | 0.31 | 0.80 | 32.5 |
| Pakistan | 0.30 | 0.67 | 24.3 |
Table 1.1
Literacy ratio = female literacy rate male literacy rate
It is important to note that income inequality is a complex issue that can be influenced by a wide range of factors, including economic growth, government policies and global economic trends. The government can use fiscal and supply-side policies to influence and change income distribution. These could lead to higher Gross Domestic Product (GDP) and increased economic growth.
While the Gini coefficient is the most widely used measure of income inequality, it is important to note that it has limitations. It does not take into account other factors that contribute to inequality such as wealth inequality, and it may not take into account the full extent of inequality in societies with large informal economies.
Distinguish between absolute poverty and relative poverty.