Are Equal Incomes a Good Idea?

The GINI coefficient is neither a necessary nor a sufficient indicator or condition required to improve the lives of the poor in South Africa.

One target of the Vision 2030 Economic Development Plan drafted by the Planning Commission led by Minister Trevor Manuel is to reduce South Africa’s GINI coefficient from 0.7 to 0.6 by 2030. Implied is that everyone will end up richer. But as an indication of improved economic circumstances for a people, it could well mean that everyone will end up poorer. When the GINI coefficient portrays perfect equality, all of the people in a country are earning the same amount of money – either a lot or a little.

Corrado Gini first published the GINI coefficient in 1912 and it is now used worldwide. The GINI coefficient measures the extent to which the incomes among individuals or households within an economy deviate from a perfectly equal distribution. A GINI index of 0 represents perfect equality and an index of 1 means perfect inequality. The GINI coefficient measures inequality through a ratio analysis that makes it easy to interpret.

What the GINI coefficient does not take into consideration are absolute national and personal incomes. By measuring inequality in income only, it ignores the differential efficiency of use of household resources. By ignoring wealth (except as it refers to income), it can create the appearance of inequality when the people being compared are at different stages in their life.

Within this context, it is limiting to focus on the GINI coefficient when examining South Africa’s economic challenges. Countries that have identical GINI coefficients can differ greatly in wealth. A rich country, where basic necessities are available to all, can have the same GINI coefficient as a poor country where the people have no access to any of the basic necessities.

The GINI does not address cause. It does not reveal when income inequality reflects differences in opportunity or capability. For example, some countries may have a social class structure that presents barriers to upward mobility; some people may have more skills than others.

The GINI coefficient of South Africa stands at 0.70 and is one of the highest in the world along with Namibia 0.69, Lesotho 0.63, Botswana 0.63, Sierra Leone 0.62, Central African Republic 0.61, and Brazil 0.58. Countries with the lowest GINI coefficients (less than 0.2) include Afghanistan, Angola, Chad, Bahrain, Cuba, Iraq and others. Countries that have GINI coefficients between 0.30 and 0.48 are Cameroon, United States, Iran, Nigeria, China, Switzerland and Sweden. From this, it is clear that countries with .similar GINI coefficients have many economic differences which include a vast range of GDP growth rates, per capita incomes and levels of unemployment. For example, Cameroon, which has been awarded the humiliating status of a Highly Indebted and Poor Country by the IMF in a bid to get part of its debts cancelled, has a GINI coefficient close to that of advanced countries like the United States.

In advocating for a low GINI coefficient, the Planning Commission needs to explain why many very high GINI coefficient countries have higher growth rates, less unemployment and higher per capita GDPs than South Africa, for example, Brazil and China. It also needs to take into account that among the countries with very low GINI coefficients are some of the poorest in the world like Chad, Bahrain and Cuba.

Various writers have exposed the mathematical limitations of the GINI coefficient. For a large, economically diverse country like SA, a much higher coefficient is calculated when looking at the country as a whole. The story in SA is even worse, in fact. When comparing the GINI coefficients of the various SA race groups we find that the African group has the highest, whites have the lowest. Would the advocates of a lower GINI coefficient, for instance, suggest that rich blacks, as one of the potential causes of SA’s high GINI coefficient be made poorer in order to solve the problem? I would hope not!

To date, the government has succeeded, directly or indirectly, to increase the number of people dependent on welfare from 3 million in 1994 to 15.7 million in 2011. Not good news for the economy. While government may always have good intentions of realising a better life for all, the unintended outcomes of its actions leave the poorest of the poor worse off. Empirical evidence shows that things get better for everyone in countries if their economies are well situated on international indicators like the Economic Freedom of the World Index, the competitiveness index, the corruption index, etc. In all these indices, South Africa has slipped down the ranks in recent years.

Having lowering of the GINI coefficient from 0.7 to 0.6 as one of the main targets for Vision 2030 is unlikely to achieve much for the poor people in this country for the simple reason that the GINI in itself does not explain much.

To simply aim at decreasing the GINI coefficient will not achieve anything if greater importance and purpose is not placed on growing the economy. A stronger economy will automatically advance technology, create jobs and lower our staggering unemployment rate. Rather than simply decreasing the GINI coefficient through ‘redistribution’, what the poor need is an enabling environment to improve their lot and maximise their potential. With this everyone in the country will benefit, no matter what the GINI coefficient might be.

AUTHOR Vivian Atud is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 28 February 2012

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