Monday, June 30, 2014

GINI exposed

Inequality in South Africa is based on suspect statistics.

I’ve always had a problem with GINI.

While the word conjures up a song in my head about a lady with light brown hair, as a national statistic it is one of those mesmerising measurements that sends domestic economic and political debate into a frenzy. It quickly becomes absorbed into the refrain of the terrible troika of unemployment, poverty and inequality chanted so regularly and nauseatingly by politicians and ideologues at virtually every occasion when our national priorities are discussed.

As tribal warriors of old discovered, with the right breathing and rhythm a chant can become as hypnotic as lungs full of dagga, robbing the chanter of any rational thinking and preparing him to charge into the cannons for some ungodly cause. So it is with GINI, and if only the refrain were based on the whimsical melody of the lady with the light brown hair, it may have been more rationally analysed in informing our economic challenges, before being so expediently and incitingly used in political vapour.

The facts are simply that while we have for some years now been paraded as the “most unequal society in the world”, based on a GINI metric of about .65, we could, in fact be much closer to the global average of .47. This according to statistics iconoclast, Mike Schussler who, in this article on Moneyweb puzzlingly hid the crucial finding in an expose of our warped tax perspectives, in itself a highly important topic.

It’s not the first time Schussler has tilted his formidable lance at fellow economists, statisticians and academics. He has on previous occasions challenged the basis of the all-important Gross Domestic product calculation, and the racially prejudicial perversion of income distribution reflected in the Census, joining the chorus of many such as 19th century British politician Benjamin Disraeli who spoke of “lies, damn lies and statistics”, and Albert Einstein’s aphorism that “not everything that can be counted counts, and not everything that counts can be counted”.

The inequality fraud Schussler points out is based on the exclusion of state wealth redistribution of the 27% of GDP revenue collected from a small tax base. The GINI measurement is based on gross income of measured households where 45% have at least one person receiving social grants which he believes is the highest rate in the world, and “our taxation system makes huge inroads into the inequality that the country has.” To this he adds other “equalising” factors such housing, water and electricity, pointing out that “home ownership is a staggering 67% and is also one of the highest in the world. Seventy-eight percent of all housing is formal brick and mortar.”

No doubt, Schussler’s arguments will be opposed with some vigour from his peers. But GINI has always had serious challenges. Eighteen months ago, in this Moneyweb article called “A crisis of perceptions” I challenged its veracity in reflecting the true nature of wealth disparities in South Africa. In this Daily Maverick article late last year, writer Paul Berkowitz also gave a detailed account of its shortcomings.

Apart from GINI, there are many other measurements of inequality and the list is growing as economists and statisticians challenge each one. They include the 20:20 ratio, the Palma Ratio, the Hoover Index and the Theil Index. I’m not sure why statisticians have not designed some or other “weighted average” of all of these metrics to present us with one globally accepted inequality ruler. The problem with all of these calculations is that they are mostly based on surveys and averages and as most of us intuitively know, no-one is average, let alone a weighted average.

Admittedly, I have also been guilty of GINI’s facile use in discussing the issue of global wealth disparities, but the problems we may have with the measurement should not detract from the polarising threat I outlined in this Moneyweb Article recently. What deserves repeating is that “inequality is a complex issue with many facets beyond comprehensive treatment in an article. It cannot be restricted to income or material assets, but has to embrace access to services and amenities such as food, water, shelter and, above all, education.”

It is, nevertheless, an issue that “could become an economic game changer of the same magnitude as the industrial revolution or the Great Depression.” And as French Economist, Thomas Pikkety, has found in his ground-breaking research it is being exacerbated by the fact that capital, and the money that it produces, accumulates faster than economic growth. Disturbingly, the UNICEF Global Inequality report concludes that the “champagne glass effect” is a serious threat to global economic growth.

South Africa is politically playing with inequality at its own peril. It’s an explosive issue that is already feeding labour unrest and populist extremism. What is astounding is that politicians have not latched on to the fact that far from presenting the country as an unequal basket case, it could have paraded its success at countering inequality through the social wage to bring us in line with the world average. That would have placed the government in a far better position to address the unintended debilitating consequences of social grants which Schussler outlined in his article.

Instead we simply fuel the flames with expedient often ethnically biased rhetoric on a false measurement. To what end one may well ask.

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