Professor Imraan Valodia: Changing Inequality in the Real World
Outline of Work-in-Progress Seminar, Institute for Advanced Studies in Humanities, University of Edinburgh
29 January 2019
Imraan Valodia
University of Witwatersrand
Imraan.Valodia@wits.ac.za
South Africa is among the countries with the highest Gini coefficient in the world. In a review of inequality trends in South Africa, Hundenborn et al. (2016) find that overall inequality in South Africa decreased only slightly between 1993 and 2014, from 0.681 to 0.655, despite a temporary increase accompanying the global financial crises, when inequality rose to 0.69 in 2008. Moreover, the patterns on inequality in wealth suggest a pattern of inequality that is much worse than the income data shows. A recent insightful paper by Orthofer (2016) is the first significant investigation into wealth inequality in South Africa. The author used previously unpublished personal income tax data from the South African Revenue Service (SARS) for the 2010-11 tax year. Her results are striking, and underscore the importance of including an analysis of the distribution of wealth in any study of inequality. She found that while the highest-earning one percent of the population earns between 16-17 percent of all income, the top 10 percent earn 56-58 percent. Looking at wealth, however, the top 10 percent of the population own approximately 95 percent of all wealth, while 80 percent own no wealth at all (Orthofer, 2016). Despite a period of sustained economic growth in the 1990s and government policies to address the inequalities generated by South Africa’s aparthied past, not only is the country making little progress in addressing income and wealth inequality but that the little bits of data we have suggest that wealth inequality is now worse than it was during the height of apartheid. In 1970, the richest 20 percent of the population owned 75 percent of all wealth (Wilson & Ramphele, 1994). Now, the richest 10% own 95% of all wealth.
There are two critical causes of this high level of inequality – earnings in the labour market, and economic concentration in the economy. Of course, both of these are best closely related to South Africa’s apartheid history. The South African labour market can be characterised as a bifurcated one, where the high-skilled segment is dominated by excess demand for workers, skills shortages and very high wages, while the low-skilled tier is characterised by excess supply of labour, unemployment and very low wages. This pattern in the labour market, according to some estimates, accounts for about 91% of income inequality in South Africa (see Finn, 2015). In 2015, the top 10% of full-time South African employees took home, on average, 82 times more than the bottom 10%, with the average earnings for white workers more than three times higher than for African workers (Isaacs, 2016). Typically, in countries with high income inequality, the mean wage will be disproportionally higher as high-income earners pull up the average. In South Africa, mean wages are higher than median wages, and growing at a faster rate. South Africa had the lowest median to mean ratio of wages compared with other countries studied, indicating that wage inequality is higher here.
Second, not only are the patterns of ownership extremely unequal, but concentration levels are extremely high, thereby driving further inquality in ownership of assets. There are a number of studies of the industrial sector which confirm the very high levels of economic concentration in South Africa. The Competition Commission in South Africa studied 2,150 merger reports that it undertook between the years 2009 and 2016, to study market dominance. The study adopted the statutory provision in the Competition Act which defines a dominant firm – a firm that has 45% of market share in the relevant market. The study found that there were 294 dominant firms in the 31 sectors of the economy, with 70% of the sectors having dominant firms in defined product markets.
During 2018, the South African government introduced two new policies to address both these causes of inequality. Under the leadership of President Ramaphosa a National Minimum Wage (NMW) has been introduced, and came into effect in early 2019. Since the early 1990s, South Africa has seen a large growth in low-paid work – 47% of the workforce earns less that ZAR3500 per month. Notwithstanding its sophisticated system of collective bargaining, some 20% of workers employed in South Africa remain uncovered by any protection.
While the economy has grown, ownership, as I have argued above, remains concentrated in a few hands, and the pattern of ownership is heavily skewed by race. In order to address this challenge government proposed amendments to the Competition Act – to promote new entry into the economy, and to change the racial pattern of ownership. These amendments have come into effect in July 2019.
I have played a role in the development of both these policies. President Ramaphosa (then Deputy President) asked me to Chair a Panel of Experts on the National Minimum Wage (NMW) to advise him on the level and architecture of the NMW. The proposals of the Panel were accepted and the level of the wage and its implementation is broadly in line with the recommendations of the Panel. The Minister of Economic Development invited me to be part of a Panel to advise him on amendments to the Competition Act. Our mandate was to suggest amendments to the Act to address the high levels of economic concentration in South Africa. The Panel made a number of suggestions some of which have made their way into the amendments.
These policy changes are important for South Africa but the policy lessons have application internationally. Somewhat uniquely, at least for an academic economist, my research on inequality, employment and competition policy was able to have a direct impact on policy change. My project at IASH, is to begin writing up this material for a book manuscript. In my work-in-progress seminar, I will cover the key policy and research questions and challenges with the National Minimum Wage. If time permits, I will broadly cover some of the debates and policy changes made in the Competition Act.