Income inequality over average income

In South Africa we have a major income inequality problem. It’s historical (accumulated wealth, accumulated skills) and current (disastrous public education) and isn’t going away any time soon.

The free market argument here is to forget about income inequality per se and focus on economy friendly, business friendly policies that will grow the entire economy and have the benefits trickle down to all South Africans. If we can only raise GDP enough, all our problems will be solved.

Which is patently absurd of course.

Market liberalisation and economic growth sometimes go hand in hand, but so does increased gearing and increased risk and increased income inequality. Just look at the US, where although GDP per capita has increase over the last two decades, the real incomes of middle class Americans have hardly budged. This is not the solution that SA needs.

But more than the argument that increase average incomes alone isn’t sufficient to increase lower income householder incomes, there is another view entirely.

Increasing country incomes doesn’t make us happier. As all boats rise with the tide, everyone’s expectations and comparatives change as well. Look at the old Eastern Block and now China – people don’t report being any happier even with a four-fold increase in average incomes.

It’s income inequality that matters first, and average incomes a distant second.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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