THE DISTRIBUTION OF INCOME AND THE DISTRIBUTION OF WEALTH IN SOUTH AFRICA PART I - THE FACTS

Mother to daughter: ‘When Daddy talks about his worth, he means what he has. Daddy as such has very little market value.'

To the lay mind, wealth and income often mean more or less the same thing. For economists, the terms are distinct. Wealth is the sum of all your assets less your liabilities and is a stock concept. Income is a flow and refers to what you receive in a given period, say a year. They are related, because income less consumption is an addition to wealth and wealth creates an entitlement to income in the form of interest, dividends, property rentals and the like, which form a component of income, alongside earnings and transfers (such as social grants).

For many middle income people, the accumulation of wealth follows a pattern over the life cycle: low among young adults, rising in middle age to a peak just before retirement and then reducing in post-retirement years. Such people accumulate wealth to provide for emergencies, specific needs, retirement and bequests. Wealth is held in order to smooth consumption over time.

It follows that if an unexpected parcel of wealth is dropped on someone, that wealth will not be retained fully. Some of it will be converted into consumption, since the increase in wealth changes calculations about what can be consumed during the rest of the person's life. That has been one the frustrations of wealth transfers under black economic empowerment: what has been transferred as wealth does not, in large measure, remain as wealth in the hands of the person who receives it.  

The rich are different if they have assets at the outset and so are the poor who have few assets of any kind.

The distribution of income is easier to measure and more frequently measured than the distribution of wealth. One internationally used measure of income distribution is the Gini coefficient, which varies between zero (perfect equality) and one (perfect inequality, where one person receives all the income).

The Gini coefficient is usually measured for the distribution of income between households. Using the 2011 census returns of income, one can estimate the Gini coefficient for South Africa at 0.68, in line with other recent estimates. By international standards, this is very high, though it is mitigated by a strongly redistributive pattern of taxation and state expenditure.

For decades, there has been interest in South Africa in the distribution of personal income across population groups. In 1970, as in 1917, Whites had 70% of household income. However, the 2011 census yields the following estimates of shares:

The change has been possible without much change in the Gini coefficient because "within group" inequality has risen as "between group" inequality has dropped. The growth of the middle class has had much to do with the rise of within group inequality. More generally, inequality can be explained in terms of the shares of household income coming from returns to assets, earnings and transfers.

Expended social grants in recent years have had the effect of reducing the number of people below a constant real poverty level. Earnings inequality remains high in South Africa, with the ratio of earnings at the 50^th percentile in relation to those at the 10^th percentile, and the ratio of those at the 90^th percentile in relation to those at the 50^th percentile, both being well above international averages.

What will reduce income inequality?

Greater equality of opportunity among children. Rising access to amenities, better health care and housing and safer neighbourhoods for poorer households will all help.

A rise in the proportion of adults in employment.

The spread of education and greater value for money in the education sector.

A more dynamic small business sector.

The distribution of wealth is characteristically more unequal than the distribution of income. The most systematic international compilation of wealth statistics is published annually by Credit Suisse's Research Institute. It found aggregate wealth in South Africa to be US $ 609 billion or $ 13 416 per capita, with 70% of it in financial assets. It estimated the distribution across deciles to be:

The distribution in South Africa is remarkably similar to that in the United States. Several other countries have a share of above 70% belonging to the top decile[1], including Chile, India, Indonesia, Spain and Switzerland and, surprisingly, Denmark and Sweden.

There has been a lot of interest recently in high net worth individuals who have net financial assets of more than a million US dollars. Both asset managers and tax collectors have been interested in them. Credit Suisse estimated in 2013 that there were 42 786 high net worth individuals in South Africa.

It is impossible to provide a reliable population group breakdown of wealth holdings in South Africa, but it must be moving in favour of Black people, since Black participation in the wealth accumulating middle and upper income groups is increasing rapidly.

Credit Suisse provides estimates of mobility between wealth quintiles over thirty years by world region. Those for Africa are very similar for Latin America. The following table sets out movement between wealth quintiles:

Wealth mobility is greater here than in Europe or the United States. Life cycles and the wheel of fortune turn. You do not have to stay at the bottom if you started there. Nor is a place at the top guaranteed forever.

Footnote:

[1] A decile represents 10% of the population and a quintile represents 20%.

Charles Simkins, Senior Researcher, Helen Suzman Foundation

Click here to sign up to receive our free daily headline email newsletter