Income inequality is the rhetorical party-line du economical jour. It’s usually accompanied by graphs, much head-shaking, and well-dressed CNBC presenters name-dropping obscure statistical indices in portentous tone.

In South Africa, this then gets picked up by trade unionists, who turn it into astonishing wage promises to their members. At this point, I’d usually say “and more power to them” – but that seems like a foolish thing to wish for.

The Graphs

So let’s start with a shocking graph (I’ve used World Bank data for the years 1995 and 2009 – my methodology is as reliable as that of any trade unionist):

And immediately, we can make some observations:

1. Everyone is doing better in 2009 than they were in 1995 (if you politely just ignore inflation).
2. But the top 20% have more than doubled the amount of income they receive.
3. Therefore: the inequality gap is growing.

But don’t be too shocked by the distribution itself

For those that are surprised by the scale of the difference between the classes: the distribution of wealth has never been, and is never going to be, equally spread across the population.

Poverty means, by definition, having no money*; and being wealthy, by definition, means that you have it. It therefore makes complete sense that the wealthy should have most of the wealth, and that the poor should have very little.
*Well – the absolute kind, anyway.

That said, most historical situations where the wealth gaps have become extreme have ended with revolution and the bourgeoisie acquainting themselves with a guillotine. In general, of course, the majority of us would prefer to live in more equal societies: tall poppy syndrome and all that (with the only opposition coming from the tall poppies). But the true moment for concern is when the big boys get so overpoweringly tall that the rest of the patch takes up secateurs.

So the growing income gap… That. That we should be concerned about.

Here are two further graphs:

What you’ll notice: the only slice of the 2009 pie that has grown in relative terms belongs to the upper class.

So here’s the important question: why?

South Africa in 1995 was cresting high atop her wave of hope, just about to begin her economic transition out of apartheid’s segregationist policies. Now, nearly 15 years later, a decade and a half of fully democratic governance has delivered a negative change in income distribution.

The South African economy has gone backward.

At this point, the argument usually descends into racial rhetoric: the corporate sector accusing the majority government of being too focused on top-end empowerment; someone in government accusing white business of not doing enough empowerment. It is divisive and ugly: not a good sign for those that aren’t fans of revolutions and guillotining.

But in my mind, I’m just not sure that we can blame a lack of racial integration. And I think there are much more likely, if less politically-convenient, culprits.

Here’s an awkward list:

1. A lack of sanctions and strict capital controls
2. The emancipation of women
3. The legislative protection of the labour market.

Awkward Reason Number 1: The Unexpected Benefit of Economic Sanctions and Strict Capital Controls

General opinion, and the United States, tends to side with the malignant impact of sanctions: the flight of foreign capital, disinvestment and the restriction of trade.

But even the most negative of economic policies can have silver linings. And I would point out that restrictions of foreign trade can also be done intentionally. That is: Protectionism.

Countries that engage in it do so in order to protect domestic industries (and their employees) from the competitive impact of cheaper economic fundamentals in their trade partners. This may be at the expense of faster economic growth, but it can allow for higher employment in its place.

In South Africa’s case in the 1980s, various forms of “protectionism” were being imposed externally through sanctions, and internally through capital controls

The market for imported products was without supply, and the demand had to be met with local products or go unsatisfied, thereby creating and stimulating local industries that would not otherwise have been economically feasible. At the same time, while South Africa’s mines were making some of their most impressive profits, capital controls forced almost all that profit to be invested domestically. Mining companies bought up companies in almost every industry. And that wealth of investment created conditions for greater employment.

By 1993, the unemployment rate (under the narrow definition) sat at around 13.6%, give or take a basis point (depending on which authority you quote). To put that into perspective, the unemployment rate today is around 24%. And it’s closer to 40% when you start to include people that have become disillusioned with their job search.

So what happened? 

South Africa’s Liberalization.

Once sanctions were lifted, South Africa began to re-engage in international trade, and it began to implement the free(er) trade policies of the West.

Suddenly, the low-income workers in South Africa’s manufacturing industries went from being the only source of labour under sanctions, to competing with the (much) lower cost labour of Asia. And the manufacturing companies themselves lost the sanction shelter, and were left to face the subsidized foreign competition.

Over time, those industries began to collapse. Certainly, there were industries that flourished after sanctions fell away, like the mining industry and the services sector as a whole. But higher unemployment in services would have benefited the well-educated white children of apartheid over the unskilled low-income black worker. And it’s not so easy for unemployed garment manufacturers to become gold-miners. So unemployment in the lower income groupings began to swell.

And here’s the first part of the story: nothing creates inequality like unemployment. If someone is not earning, then they have zero income, and zero accumulation of wealth.

Awkward Reason Number 2: The Emancipation of Women

Over the last few decades, much like the developed world, South Africa has experienced a shift in social attitudes toward women in the work place. We tend to underestimate the economic impact of social pressures: but I’d point out that women account for every second person in the working age population. That’s a potential doubling in the work force.

If you look at labour force participation rates:

• In 1990, only 35% of women between the ages of 15 and 64 were part of the labour force (in absolutes, that’s about 3.6 million women)
• By 2009, 51% of women between the ages of 15 and 64 were part of the labour force (or 8.3 million women)

The labour force has also increased all on its own as a result of population growth. And, possibly, better healthcare – although the HIV/AIDS debate makes that reason a bit unobservable. Either way, the total labour force is almost 80% larger today than it was in 1990.

And what’s the problem with this? Well if you expand the labour force, even assuming labour demand keeps pace, what you end up with is stagnating real wages.

At best.

The more likely scenario: you end up with falling real wages. And falling wages is not exactly going to drive more wealth into the hands of the lower classes.

If a government really wanted to make the situation worse though, all they’d need to do is interfere in the wage adjustment process to make sure that wages don’t fall…

Awkward Reason Number 3: Trade Unions and Labour Law

In almost direct contradiction to its more liberal trade policies, South Africa continues to practice strict labour protectionism. That is: it stops the natural adjustment of the wage rate to account for changes in the labour market.

When you force the wage rate to remain the same, or to increase, in the face of falling demand, the adjustment will take place in employment. In words: the overall employment must drop even further to make up for the difference.

Hence the unemployment being so much higher than what it was under Apartheid. 

Is this a Racism Issue?

Well not in the sense that it is portrayed. It’s certainly true that the racism of black education under apartheid meant that the white minority was fortuitously placed to benefit from South Africa’s liberalization. But it’s also true that the majority of the population is ethnically African: so the poor should expect to follow that racial distribution.

And it clearly implies that the real disempowerment is an issue of education and skill.

But South Africa’s income inequality is also more traditionally structural: the mass labour market is significantly larger than what it was, faces more competition than it ever has, and is demanding that their price remain unchanged in the face of those structural changes.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.