If the government continues to view income inequality as undesirable, it should stop focusing on reducing the income of top earners and concentrate on removing the artificial barriers it imposes on the functioning of the market. The government needs to increase the wage earning power of all South Africans significantly by boosting employment and increasing productivity. And it needs to encourage people – it needs to show them they can reap the rewards of their effort and expertise.
Most people believe income inequality is bad. This crude assumption shifts the focus away from the millions who are mired in poverty and puts an inordinate amount of emphasis on money. Seldom acknowledged is the fact that to achieve a more equal distribution of income, people have to be treated unequally. The unequal distribution of income is not the problem. The problem is envy – an evil preoccupation that prevents people from caring about the well-being of others because they are so concerned about how much certain people earn.
For everyone in this country to have the chance to earn a living and possess a slice of the wealth requires a fundamental shift in policy. Policy is currently geared towards equality of income. Rather, the emphasis should be on equality of opportunity. Policies designed to reduce income inequality involve the redistribution of income through social welfare policies, a progressive tax rate regime and outright discrimination. These are policies that discourage savings and investment, retard economic growth and opportunity, and discourage the hiring of labour.
If the government were to adopt policies based on equality before the law and designed to enhance equal opportunity, it would quickly foster economic growth and increase the size of the available pie so everyone could take a bite. Although the income gap has widened in many developing and developed countries over the past 30 years, the disparity in world income inequality has lessened. This is mainly due to the rapid economic growth in developing countries with big populations such as Brazil, India and China.
As gross domestic product (GDP) in these countries increased, so did the per capita income of their people, which has greatly reduced the number of people living in extreme poverty. Due to the advances in medical technology, people in low- and middle-income countries are also living much longer than previously. Indeed, life expectancy in low- and middle-income countries has increased from an average of 47 years in 1960 to an average of 68 years in 2010.
According to Professor Julian Simon: “Data on the absolute gap between yearly incomes of rich and poor countries are beside the point; widening is inevitable if all get rich at the same proportional rate, and the absolute gap can increase even if the poor improve their incomes at a faster proportional rate than the rich. Here one should notice increased life expectancy among the poor relative to the rich reduces the gap in lifetime income, which is a more meaningful measure than yearly income.”
In South Africa, the income gap has widened. Our most common measure of inequality is the Gini coefficient, named after its inventor, Corrodo Gini, who introduced the calculation in 1912. Its range is from zero to one. Zero indicates a perfectly equal distribution of income (the poorest individuals in a population earn the same as the richest individuals), or one, the extreme opposite (one individual or household earns all the income in the economy).
In 1991, South Africa’s Gini coefficient was 0.68. By 1996, it was 0.69. Although, by 2001, the gap in incomes between South Africa’s rich and poor had widened even further with the Gini registering 0.77, no one can dispute a substantial rise in the overall well-being of South Africa’s citizens. South Africa’s GDP per capita (measured in real terms) in 1960 was R21 589. By 2011, it was R37 474 – an increase of 74 percent; a dramatic improvement. In 1960, the average South African could expect to live only until the age of 49 years. By 1993, the average life expectancy had increased to 61 years. Unfortunately, from 1994 onwards, average life expectancies have begun to regress; and in 2010, the average South African could only expect to live until the age of 52 – the same as a South African living in 1968.
Does it matter if person A is 10 times or even 100 times wealthier than person B? Surely, what matters most is person B’s standard of living. Consider, for example, what happened with the US basketball team, the Chicago Bulls. In 1986, the team’s median player salary was $300 000 (R2.4 million) a year. The team’s lowest paid player was paid $135 000 (R1.1m), and the highest paid player made $806 000 (R6.4m). The Gini coefficient for the team was 0.36. When Michael “Air” Jordan joined the team, its popularity reached an all-time high. By 1998, even with Jordan’s two-year break when he first “retired”, the median player’s income rocketed to $2.3m (R18.4m). The lowest paid player was paid $500 000 (R4m) and the highest paid player (Jordan) received $33m (R264m) a year. The gap in incomes between the highest paid player and the rest of the team had widened substantially and the Gini coefficient almost doubled to 0.67.
By the time Jordan retired from the Bulls (for the second time) in 1998, the median player was receiving more than seven times that paid in 1986. The lowest paid player, in 1998, had an income four times that of his 1986 counterpart. Was this “unfair”? Should some of Jordan’s income have been redistributed to his team mates? No doubt the lower earners would have benefited, but only in the short run. In the long run, Jordan and other valuable players would start to feel unrecognised and cheated and simply choose not to play any longer, to the detriment of the whole team. If such redistribution policies are entrenched here in South Africa, everyone would suffer from the loss of highly motivated, successful people like the US’s Michael Jordan.
Author: Jasson Urbach is an Economist and director of the Free Market Foundation.
(This article was originally published by the FMF on the 16th of October 2012 (Income inequality – should we mind the gap?). It was subsequently republished by The Star on 9 September 2014 on pg. 12)