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SA's ticking timebomb

Nov 12 2012 10:25 Malcom Sharara, Fin24’s correspondent in Zimbabwe

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IF THERE is one startling revelation that came out of South Africa's Census 2011, it has to be the fact that the inequality gap in the country is widening.

What is more scary though is that this problem is also being felt across the globe, with US presidential candidates Mitt Romney and Barack Obama having taken time to debate this issue during their campaigns.

This goes to show the South African government and all key stakeholders ignore the Census 2011 findings on inequality at their peril.
 
In simple terms, inequality refers to the yawning gap between the haves and the have-nots. It is more than just a moral or social issue. The less equal a society, the more prone it is to instability.

Income inequality might not be recognised as a major problem at the moment but if it is left to rocket, it can easily become a major source of instability in the world, South Africa included.
 
In the US, the income inequality gap has reportedly soared to the highest levels since the Great Depression, with the top 1% of earners taking 93% of income earnings. 

Newly re-elected President Obama emphasised this theme in multiple campaign speeches. In one of these, he blasted Romney’s economic policies, saying: “It’s the same philosophy that’s been squeezing the middle class for more than a decade.”

In his victory speech Obama continued with the same mantra. “We want our children to live in an America that isn’t weakened up by inequality,” he said, adding that he will continue to fight for “new security for the middle class”.
 
His sentiments were echoed by many others who believe that for many years now, the middle class has been squeezed.

Elizabeth Warren, accepting the Massachusetts Senate seat, said: "For every family that has been chipped and squeezed and hammered, we're going to fight for a level playing field.

"To all the small business owners who are tired of a system rigged against them, we're going to hold the big guys accountable."
 
Even ordinary people talked about this issue after the elections. Symone Villalona, a call centre worker in Nevada and first-time voter who backed Obama, said: "I like someone who's for the people, the middle class. Romney didn't seem like he cared that much."

Romney through his 14% tax rate argued that it is appropriate for the wealthy to pay a smaller percentage of their income in taxes than the middle class or poor. The Republican candidate’s decision to embrace a 20% across-the-board tax cut helped the Obama team paint him as protecting the rich at the expense of the middle class.

In the end, he lost the election.
 
In South Africa the gap is also very evident. The Census 2011 figures recently released by Statistics SA showed that whites still take home six times more money than their black counterparts. Planning Minister Trevor Manuel described these figures as startling.

“It confirms our worst feas and I think it presents us with an enormous challenge,” said Manuel after the release of the census figures. What was also evident in the data was a growing disparity within the black African group, an indication that inequality is not a race issue per se.

The inequality problem even escalates to inequalities in education, urbanisation and employment. Another form of the inequality gap is the fact that the number of grant beneficiaries in SA will increase to 17.3 million by 2015 from 16.1 million today.

This is particularly alarming as these people constitute about 29% of the country’s populace.
 
While many would love to dismiss these figures as a storm in a teacup, events happening around the globe do not allow such folly. If we are to analyse what triggered the Arab Spring, we will realise that the underlying issue that forced the street vendor to set himself on fire was inequality.

Even if we are to analyse the Greek debacle, we will realise that what forces a nation or its people to live beyond their means is the gap between what they have and what other, richer people have.

If we come closer to home, we will realise that what forced the Zimbabwean government to take away farms and recently mines and other companies is the gap between what commercial farmers and communal farmers were earning.
 
In South Africa the whole hullabaloo at the mines can be traced back to the packages management and mine owners get against what the workers earn. The problem of inequality however does not only degenerate into chaotic scenes like the Marikana killings or the Occupy Wall Street demonstrations.

Sometimes the economy suffers in silence. According to a growing body of economic research, inequality might mean lower levels of economic growth and slower job creation in the years ahead.

Jonathan Ostry of the Internnational Monetary Fund (IMF) pointed out that “Growth becomes more fragile” in countries with high levels of inequality. In his research, he suggested that the widening disparity in any economy might shorten a nation’s economic expansion by as much as a third.
 
According to other IMF researchers, one reason why recent economic recoveries have been so weak is “precisely because widening inequality has hollowed out the middle class. Without the middle class, there is simply isn’t the broad-based demand necessary to fuel fast economic growth.”

The current issue of the IMF quarterly magazine Finance and Development highlights the research of two IMF economists, who argue that “countries with high inequality are far more likely to fall into financial crisis and far less likely to sustain economic growth”. 

The two economists said longer growth spells are robustly associated with more equality in income distribution.
 
It is against this background that governments should prioritise solving inequality problems. I know many rich people will resist the news and insist instead on believing the opposite. The truth is however that when “a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss”.

This is so evident in South Africa, where the wage disparity between top executives and entry level employees is particularly high in comparison to other developing countries.
 
According to Professor Barney Jordan of Stellenbosch Business School, SA companies are facing extreme pressure to address growing employee dissatisfaction due to wage disparities. He urges employers to review existing structures, as well as investigate the appropriate method of remuneration for their companies.

This can’t be overemphasised. As long as a certain section of the workforce is disgruntled, production will suffer as well as economic growth rates.
 
In my view, the starting point to solve the inequality problem in South Africa is the education system. The recent census showed that less than a third of South Africans have completed matric, while 8.6% have not had any education at all.

Without a good education, there is no way of getting a better paying job. The majority of the populace are not educated but still want to live like those who are. South Africans are borrowing to buy even food as they try to keep up with the Joneses. 

Such situations can only result in distress and crisis. If not curbed now, the inequality gap can cause untold damage  not only to the SA economy but to the world economy at large.

 - Fin24
malcom sharara  |  sa economy
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