Development Watch

SA’s 'good story' on poverty reduction with a bite

Progress with poverty alleviation
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South Africa indeed has a ‘good story’ to tell about combating poverty, according to a new World Bank study that scores SA tops among emerging nations globally. But there is also a bite.

According to the study released last week South Africa has achieved more success than other emerging nations like Brazil, Mexico, Argentina and Indonesia in using fiscal policies to reduce levels of poverty.

It emerged from the study that three million South Africans were lifted above the poverty line of $2.50 per day by using its tax system

The study showed that well over three million South Africans climbed above the poverty line in 2010 and 2011 thanks to the use of tax money as redistributive instrument to render social assistance to the poor. In the process its income inequality level has also been reduced by nearly 25% and the percentage of the ‘extremely’ poor, living on less than $1.25 per day, went down from 34% of the population to 16.5%.

It puts South Africa at the top of states with similar economic circumstance combating poverty through fiscal measures. It includes countries like Bolivia, Brazil, Costa Rica, El Salvador, Ethiopia, Guatemala, Indonesia, Mexico, Peru and Uruguay.

Yet the South African society still records the highest rate of social inequality in this league of nations and remains one of the countries with the highest rates of inequality in the world.

“Even though South Africa has made very effective use of its fiscal tools, the original problems in income inequality are so high that South Africa is going to need other things to help it address the problem of inequality,” said World Bank economist Catriona Purfield.

What is needed besides fiscal policy is higher and more inclusive growth that generates jobs, especially at the bottom-end of the employment market, she said.

“This report provides evidence that activist fiscal policies have helped South Africa reduce poverty and inequality even though these remain pressing developmental challenges,” says Asad Alam, World Bank Country Director for South Africa.

He also added his voice to those urging for a national economic dialogue, saying: “We hope that this analysis will help inform and deepen the ongoing debate on the broader policies needed to attack poverty and inequality.”

The report also shows that the burden of taxes falls on the richest in South Africa. The income of the richest decile goes from more than 1 000 times bigger than that of the poorest decile, to 66 times bigger after the impact of taxes and transfers.

World Bank Senior Economist, Gabriela Inchasute, noted that with fiscal deficits and debt already high, and the fiscal system already achieving a lot of redistribution, there is little space left in the government's purse to do more to alleviate poverty and inequality via fiscal policy.

"We see from the analysis in the Update that fiscal policy goes a long way towards redistribution but reducing poverty and inequality further in a way that is consistent with fiscal sustainability will require a combination of better quality and more efficient public services but most importantly greater employment opportunities,” said Purfield.

Economic developments

This Economic Update also provides a review of recent economic developments and assesses South Africa's economic prospects, concluding that domestic factors and a fragile global recovery bring significant headwinds to South Africa's growth performance. It envisages a slow and gradual return to modest economic growth over the medium term.

Public investment helps to ease infrastructure constraints and private investment and household consumption gradually regain pace as external demand strengthens and confidence improves.

However, to boost economic growth, South Africa needs to quickly address infrastructure constraints and broaden structural reforms if it is to succeed in reducing the unacceptably high levels of joblessness and inequality prevailing in the economy.

To the ‘good story’ perspective can be added that the South African government has also just been ranked 35th out of the top 500 global infrastructure owners with assets in the order of $80.5 billion.

The bite

The bite lies firstly in the narrowness of the tax base the World Bank refers to and which would be difficult to expand without meaningful and sustainable economic growth – growth that increasingly, under prevailing domestic and global conditions, seems unlikely in the near future.

Secondly, the bite lies not only in the cost of expanding the ‘constrained’ infrastructure but also the cost of maintaining existing infrastructure on a sustainable basis.

In another article last week by Stellenbosch University historian and commentator, Hermann Giliomee, on the question of strained tax base made the following points:

• At present the sum expended on salaries and social welfare is equal to 56% of the state's revenue. If the trends of the past decades continue these two items on the budget will absorb all the state's revenue by 2026;

• Eventually government might have to go cap in hand to the World Bank and IMF for funds and it is unlikely a loan will be given without very strict conditions, including a severe reduction in the public sector salary bill and in social grants; and

• Such a development will put stability in South Africa before a severe test.

He concludes that it “would be better if South Africans of all persuasions start debating how the fiscal cliff can be avoided well before the country arrives at that point”.

Regarding infrastructure, there are growing signs, be it electricity blackouts, disruptions in water supplies or ill-maintained roads, that there is already a struggle on to maintain existing infrastructure.

by Piet Coetzer

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