INEQUALITY IN SOUTHERN AFRICA: AN ASSESSMENT OF THE SOUTHERN AFRICAN CUSTOMS UNION COUNTRY BRIEF: SOUTH AFRICA1 South Africa is the most unequal country in the world, with inequality in per capita consumption about 50 percent higher than the average for upper-middle-income countries. The country has made little progress in reducing inequality in recent years. The main sources of inequality are inequality of opportunity and disparities in factor markets, with the legacy of apartheid playing a major role and access to jobs and land being severely constrained and uneven. High spending on transfers and social services partially mitigates unequal outcomes. Moving forward, South Africa needs to: (a) improve access to quality services to promote equality of opportunities across races and disadvantaged groups; (b) enhance conditions for private job creation, including by reducing barriers to entrepreneurship and self-employment, and by enhancing access to productive assets (skills and land); and (c) continue investing in the capacity of social protection systems to respond to shocks, especially in view of the growing climate-related risks. A. Inequality is high and stagnant South Africa is the most unequal country in the world, Progress in reducing inequality has been limited. ranking first among 164 countries in the World Bank’s global Between 2008 and 2018, South Africa’s Gini coefficient database of Gini coefficients, which measure inequality of changed very little, declining only from 68 to 67 or by just per capita consumption (or income, depending on the 0.21 points per year. This is the slowest decline among country). The most recent data put South Africa’s Gini index SACU countries, even though South Africa has the highest at 67 in 2018. level of inequality in the region. Figure 1. Inequality has fallen but remains relatively high a. Regional comparison of Gini coefficients b. International inequality comparison 70 68.40 68.77 80 South Africa, 2018 65 66.96 66.52 60 Namibia, 2015 61.60 Botswana, 2015 60.50 Eswatini, 2016 60 Lesotho, 2017 Gini coefficient 59.30 40 Gini coefficient 55 53.20 51.80 54.90 50 20 50.90 45 45.10 0 Countries ordered from lowest to highest Gini 40 Lesotho Eswatini Botswana Namibia South SACU Africa Region* Around 2001 Latest estimate Source: World Bank 2022. Note: Panel a presents the Gini coefficient of consumption for the whole SACU region, based on the earliest and latest rounds of household surveys from member countries. 1 This brief is largely drawn from a SACU regional report on inequality prepared by the World Bank and co-authored by Victor Sulla, Precious Zikhali, and Facundo Cuevas. The report uses the framework highlighted in Box 1: World Bank. 2022. Inequality in Southern Africa: An Assessment of the Southern African Customs Union. Washington, DC: World Bank. 1 B. A lack of education and jobs and the legacy of apartheid drive inequality Race is the largest contributor to inequality, and most important driver of inequality, especially post- its contribution is growing. The legacy of apartheid secondary or tertiary attainment. Disparities in access to continues to exacerbate economic disparities. Race education, which is key to human capital accumulation, explained almost 41 percent of overall inequality in 2018, contribute about 30 percent to overall inequality. Average up from 37.5 percent in 2008 (Figure 2), and overshadowed levels of human capital remain low—the World Bank’s the role of factors such as location, education, employment Human Capital Index (HCI) estimates that a child born in outcomes, and demographics. South Africa in 2020 would on average reach only 43 of its potential productivity as an adult. Differences in educational attainment are the second Figure 2. Decomposition of inequality 40.8 40 37.5 35.4 Contribution to Inequality 30 29.9 20 16.2 14.7 10 9.3 6.0 6.2 2.3 0 Demographics Education Labor market Location Race 2008 2018 Source: World Bank 2022. Disparities in employment outcomes are the third in occupation type (such as senior managers, professionals, most important contributor to inequality. Differences and clerks), which reflect skills differences, contribute in labor market attributes (labor force status, industry of most to inequality. This is followed by labor force status employment, and occupation type) account for nearly 16 (whether people are employed or not), which is growing in percent of overall inequality. Their role has increased since importance. The third attribute, “industry in which people 2008 against the backdrop of poor economic and labor work”, does not seem to be significant. market performance. Among these attributes, differences C. Inequality and the cycle of income generation It is useful to analyze the process of household is affected by access to factor endowments (or assets), income generation to identify the sources of high and such as education, skills, land, and capital, as well as their persistent inequality. The first step focuses on the pre- use and returns from interaction with markets. The third income distribution, which is the inequality of opportunity explores the secondary income distribution, assessing how that arises from differences in circumstances at birth and inequality is influenced by taxes and government transfers. during childhood, such as gender, race, location, parental Finally, the fourth component relates to the tertiary income education, and family wealth; these differences create distribution—the disparities that remain after accounting expected inequalities in income distribution even before for the role of social services (such as education, health, and people interact with factor markets. The second component infrastructure). looks at the primary income distribution—how inequality 2 Box 1. Framework to assess sources of income and consumption inequality The SACU regional inequality report uses an innovative framework built around the process that underlies household income generation to identify sources of high and persistent inequality. The framework is organized into four sequential components, presented in Figure 3. Figure 3. Framework to assess sources of income and consumption inequality Pre-income distribution: Inequality of opportunity Arising from circumstances at birth or family backgroung (including gender, race and parental education). Primary income distribution: Inequality of pre-tax income Influenced by differential access to, use of, and returns to assets (such as education, labor, land and capital). Secondary income distribution: inequality after taxes and transfers Affected by the structure, implementation capacity and incidence of fiscal policy. Tertiary income distribution: Inequality after social services Resulting from the provision of and access to public services (such as health, education and infrastructure). Source: World Bank (2022). High inequality of opportunity Children in South Africa face stark differences in households had access to improved water sources in 2015, life prospects depending on their circumstances at 43 percentage points lower than the access of the richest birth and during their early years. Their opportunities 10 percent. Similarly, about 98 percent of the richest decile are unequal because of circumstances they inherit and had access to electricity, as against only 78 percent among cannot control, such as race, gender, growing up in an the poorest. urban or rural area, and parental characteristics. Inherited High inequality is underpinned by very limited socio- circumstances account for 48 percent of inequality in economic mobility in both the short and the long consumption per capita. Race is the most important run. From a shorter-term perspective, comparing 2008 inherited circumstance—its contribution to inequality is with 2015 shows that half the population was trapped in about 4 times larger than that of parental characteristics, 3 chronic poverty, meaning that they were poor and highly times larger than location, and 10 times larger than gender. unlikely to improve their situation in either year, measured Children from low-income households tend to grow at the upper-bound national poverty line. From a long-term up without access to key services, which reduces their perspective, intergenerational mobility is also low—about opportunities later in life and so perpetuate inequality. three-fifths of the earnings advantage of South African Only about 54 percent of the poorest 10 percent of fathers is passed on to their sons. 3 Inequities in access and returns to productive outcomes in rural contexts. Various land restitution and assets (labor and land) redistribution programs have been implemented in the last three decades, but land reform remains a critical concern. A lack of job creation and skills mismatches hamper the ability of disadvantaged households in urban areas to generate income, and so limits the reduction Taxes and social spending play an important in inequality. Unemployment remains high, reaching role in reducing inequality 34.9 percent of the labor force in the third quarter of Taxes and transfers contribute significantly to lower 2021. Disparities in labor market outcomes stem from inequality. Driven by a progressive personal income tax bottlenecks that limit the capacity of firms to create jobs structure, targeted and comprehensive social assistance, and from barriers that constrain the ability of workers to and high spending on education and health services, South access such jobs. Although many factors are at play, one Africa’s fiscal interventions help reduce inequality. Without stands out: having post-secondary and tertiary education social transfers and social spending, inequality would be is vital both for getting a job and for getting better wages about 20 Gini points higher. This redistributive fiscal impact once employed. is among the highest in the world, at least among countries Wage inequality is increasing. Given the limited number in which comparable studies have been done. of skilled workers, returns to post-secondary education are The social protection system provided a strong high, which in turn increase wage disparities. The gender response to the COVID-19 crisis. The pandemic has wage gap is also substantial: among people with similar wrought unprecedented socio-economic challenges education, backgrounds, and occupations, men earn on across the world. In South Africa, low-wage workers suffered average 38 percent more than women. This is the largest almost four times more job losses than high-wage ones. gender gap among countries in southern Africa. Social assistance was mobilized to provide a vital safety net Land ownership has historically been unequal. The for affected households, topping up existing social transfers highly skewed land distribution, rooted in historical and introducing a new social grant for households affected discrimination against black Africans, underpins unequal by the pandemic (who did not already receive transfers). D. Policy considerations to accelerate the reduction in inequality Improve access to quality services to promote equality alleviate the lack of job opportunities. Relaxing regulatory of opportunities across races and disadvantaged constraints and simplifying legislation could help boost groups. Spending on social services is high by entrepreneurship, self-employment, and small businesses, international standards, but results are often below those all sectors with untapped potential. This could help get of other countries with similar development levels. The people working, as it does in other developing countries, policy agenda could focus on elevating the quality of instead of staying unemployed, becoming discouraged, public education and health services, improving basic and depreciating their human capital. To enhance the services such as electricity, and addressing coverage gaps inequality-reducing impact of this option, low-skilled for certain groups (such as black Africans) and locations entrepreneurs could be supported with business skills, (such as townships and rural areas). In education, the focus socio-emotional competencies, and grant financing should remain on enhancing early childhood development to address constraints that go beyond the regulatory programs and improving basic education at all levels, in framework. terms of both enrollment and learning outcomes. Early Continue strengthening the responsiveness of the childhood development initiatives offer a particularly cost- social protection system to shocks, with attention effective area of action. Investing in young children in their to climate risks. The system demonstrated its adaptive first 1,000 days has lifelong implications and could help capacity to weather the COVID-19 crisis. Going forward, as break the intergenerational cycle of unequal chances. part of the strategy for adapting to growing climate risks, Revitalize employment creation and remove barriers ongoing investment is needed in the responsiveness and to jobs for disadvantaged populations. Although the efficiency of the system for horizontal and vertical expansion. structural reform agenda aims to resume a path of growth This would allow it to reach new affected populations and employment generation in the economy, removing (horizontal expansion) and/or increase support to existing barriers to self-employment and entrepreneurship and beneficiaries (vertical expansion). Digital technologies and strengthening programs to boost employability will help mobile payments could support such initiatives. References World Bank. 2022.  Inequality in Southern Africa: An Assessment of the Southern African Customs Union. Washington, DC: World Bank. 4