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
Working overseas
Many low-income countries have large proportions of the population below the World Bank's absolute poverty level of per day (United States dollars, 2022). One way in which these countries try to reduce their poverty is by the migration of workers to richer countries. The migrants send a portion of their incomes, known as remittances, back home to support their families.
These overseas workers are a link between migration and development. The flow of remittance money is greater than the foreign direct investment and official development aid received by middle-income and low-income countries. Total remittances received by those countries in 2022 was billion, of which ( billion) was received by only five countries.
About 50\% of migrants from low-income countries went to high-income countries.
Migrants can find their incomes increase significantly. A nurse may make seven times more in Australia than in the Philippines, adjusted for purchasing power parity (PPP).
Unlike official aid, remittances flow directly to their receivers and are a stable source of income. They can buy extra food and they may provide savings for the receiver. They may reduce child labour in disadvantaged families and allow for higher spending on education through higher enrolments and more years of completed schooling.
Migration can reduce unemployment and raise wages in home countries. Migration may lead to larger benefits for the home country by increasing the rates of return on human capital caused by the creation of better, more productive, and higher paying jobs.
When the flow of migrants goes to a host country whose population is ageing, it may reduce the average age of the population. This can lead to an increase in the size of the labour force, reduce the age dependency ratio and make a positive tax contribution. The migrants increase the demand for host country output and may utilise housing in less popular areas. Those with a high level of education make an even more significant contribution to economic output.
Sources: The Guardian, 23 August 2023
asia.nikkei.com, 3 March 2023
imf.org, March 2020
Explain what is meant by absolute poverty.