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June 13, 2012

South Africa – The Most Unequal Income Distribution in the World

AfricaAnalyst Insight by An Hodgson, Income and Expenditure Manager at Euromonitor International

Despite the end of the apartheid in 1994, South Africa has the highest income inequality in the world measured by the Gini Index – a level that has remained relatively unchanged between 1990 and 2011. This is one of the biggest challenges facing the country and has a detrimental impact on the country's economic development and business environment.

Top 5 Countries Gini Index: 2000-2011

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Source: Euromonitor International from national statistics

Note: (1) The Gini index is the standard economic measure of income inequality varying between 0% (perfect equality) and 100% (perfect inequality). (2) Ranking out of 85 countries and ranked by 2011 data.

  • Real GDP growth in South Africa averaged 3.6% between 2000 and 2011 – this was on a par with the average global growth for the same period. Despite gains in economic growth, the country has the most unequal income distribution in the world with a Gini Index of 63.6% in 2011, relatively unchanged from 63.5% in 2000. The Gini index is the standard economic measure of income inequality varying between 0% (perfect equality) and 100% (perfect inequality);
  • The income gap between the poorest 10% of households (decile 1) and richest 10% of households (decile 10) has widened between 2000 and 2011. During this period, the average household disposable income (constant US$) of the poorest 10% of households and richest 10% of households recorded a real increase of 14.4% and 26.8% respectively to reach US$427 and US$80,880 respectively by 2011.

Implications

  • Rising income inequality is a key challenge for South Africa that adversely impacts economic development and socio-political stability, it also impedes the progress of health and education;
  • Huge variations in income can also increase the incidence of poverty and contribute towards high crime rates. In 2006 (latest data available), 25.3% of the population lived below US$2.00 (PPP) a day and 34.8% lived below US$2.50 (PPP) a day.  In 2011, South Africa had the eighth highest homicide rate in the world (out of 98 countries);
  • Although South Africa is classified as a middle-income country, according to the United Nations Development Programme's (UNDP) Millennium Development Goals (MDG) country report 2010, high poverty levels in a majority of the population qualifies the country as a low-income country;
  • Together these factors are having a detrimental effect on South Africa's business environment and investment potential. Foreign direct investment inflows into South Africa dropped to R11.4 billion (US$1.6 billion) in 2010 (latest data available) from R74.4 billion (US$9.0 billion) in 2008;
  • High income inequality can, however, create opportunities for businesses targeting high-income groups and marketers of luxury goods. In 2011, consumer expenditure of the richest 10% of households stood at US$57,024 per household compared to US$1,470 per household spent by the poorest 10% of households;
  • Wide income disparities can limit the growth potential of the middle class but the sheer size of this middle class can also provide opportunities for businesses in the non-essential consumer goods sector. Between 2006 and 2011, South Africa's social class C grew by 6.5% to reach 4.7 million;

South Africa’s Consumer Expenditure by Decile 1 and 10: 2006 – 2011

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Source: Euromonitor International from national statistics/Eurostat/UN/OECD

Prospects

  • The government of South Africa is actively involved in poverty reduction programmes and reducing income inequalities. In 2008, the government launched the War on Poverty campaign that led to the establishment of anti-poverty "war rooms" in all nine provinces with the aim of alleviating poverty in South Africa's most deprived communities by 2014;
  • South Africa's commitment to the eight Millennium Development Goals with the UNDP started in 2000 and includes a target of halving poverty levels between 1990 and 2015. According to the MDG 2010 country report, although poverty levels are improving, South Africa is unlikely to achieve its 2015 target of 21.1% of the population below US$2.5 (PPP) per day;
  • With rising unemployment rates, South Africa will continue to have the highest income inequality in the world in 2020 measured by the Gini Index. The unemployment rate in the country is forecast to reach 20.6% by 2020, from 24.9% in 2011 – amongst the highest in the world; Click to tweet!
  • Nonetheless, South Africa will continue to be highly integrated with the global economy and its business environment will remain attractive. Real GDP growth is forecast to slow to 2.0% in 2012 before rising to 3.0% in 2013 and 4.0% in 2014. According to the IMF, the country's economic policies will provide “a platform for higher growth, for more investment, and for less poverty”. 

 

 


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