Private Wealth in a Developing Country:Evidence from South Africa

• Published date: 01 September 2019
• Author: Anna Orthofer,Stan Du Plessis,Monique Reid
• Date: 01 September 2019
• DOI: http://doi.org/10.1111/roiw.12361

PRIVATE WEALTH IN A DEVELOPING COUNTRY:EVIDENCE FROM

SOUTH AFRICA

by Anna Orthofer

Stellenbosch University

Stan DuPlessis

Stellenbosch University

and

Monique Reid*

Stellenbosch University

The point of departure of Pikettys influential Capital in the Twenty-FirstCentury (2014) was the dra-

matic growth of private wealth-income ratios in advanced economies between 1970 and 2010. Using

official balance sheet data for South Africa—the first country to publish such data in the developing

world—, this paper examines to whatextent this re-emergence of private wealth was also experienced

in the developing-country context. First, we find that the SouthAfrican current wealth-income ratio is

very close to its 1975 level, and much lowerthan those of Pikettys sample of advanced economies. Sec-

ond, we show that the discrepancy is explained not only by South Africas relatively low savingsrates,

but also by the reduction of wealth before and during the transition to democracyin the 1990s. Since

then, private wealth recovered significantly, but the U-shaped relationship does not support the argu-

ment that there is a clear correlation between the capital-incomeratio and capital share.

JEL Codes: E01, E21, D33

Keywords: asset accumulation, saving, wealth

1. Introduction

Until recently, the macroeconomic literature on developing countries was pri-

marily concerned with the flows of income and expenditure rather than with the

stocks of assets and liabilities. This owes not only to the theoretical notion that

flows and stocks are consistent over the long term, but also to the scarcity of reli-

able balance sheet data for empirical analyses: while flow variables have been

recorded in the national accounts since the 1940s, stock variables are only gradu-

ally being included in official statistics.

When Thomas Piketty used these novel balance sheet data for a sweeping

account of the accumulation and distribution of wealth in the major advanced

economies, it therefore attracted considerable attention. Capital in the Twenty-

First Century (2014) presented the argument that private wealth re-emerged in the

*Correspondence to: Monique Reid, Department of Economics, CGW Schumann Building,

Bosman Street, Stellenbosch University, South Africa. (mreid@sun.ac.za).

V

C2018 International Association for Research in Income and Wealth

1

Review of Income and Wealth

DOI: 10.1111/roiw.12361

bs_bs_banner

632

Series 65, Numb er 3, September 2019

second half of the twentieth century following the great contraction during and

after the world wars, approaching levels last seen in the rentier-societies of

nineteenth-century Europe. He argued that as wealth gains importance over

incomes, wealth inequality—which typically exceeds income inequality signifi-

cantly—plays an increasing role in shaping overall inequality, therefore raising

the redistributive potential of capital relative to labor-related taxes: In an environ-

ment where national income is dwarfed by private wealth, the redistribution of

income alone is likely insufficient to effectively reduce overall inequality (see also

Piketty and Zucman 2014; Piketty 2015).

Although Pikettys analyses were confined to the largest advanced econo-

mies, his work has been highly influential even in the developing world.

1

But to

what extent are his conclusions really applicable to emerging economies, in which

persisting capital scarcity tends to cause at least as much concern as increasing

wealth concentration? An important obstacle in answering this question is that

reliable information on wealth is even scarcer in developing countries than in the

advanced economies. To the authors knowledge, South Africa is the only emerg-

ing market for which sufficiently detailed sectoral balance sheets exist such that

Pikettys analyses on wealth-income ratios can be replicated. With retrospective

estimates dating back to 1975, we are able to study private wealth over the same

period in which the wealth-income ratios of rich countries expanded from their

historic low-point of about 200–300 percent to their current levels of 400–700

percent.

The analyses presented in this paper suggest that the South African experi-

ence contrasts with those of the advanced economies. First, we compare the

wealth income ratios of South Africa and the eight major advanced economies

over the 1975–2010 horizon, and use Piketty and Zucmans methodology to

decompose their development into quantity (saving-induced) and price (revalua-

tion-induced) effects. While we find that the wealth-income ratio for South Africa

was comparable to the rich countries at the beginning of this period (at 240 per-

cent in 1975), the experiences diverged thereafter: instead of seeing the emergence

of dominant private wealth, South Africas wealth-income ratio of 255 percent

today is very close to its level in 1975. While the South Africas structurally lower

savings rate contributed to this divergence, the relatively less pronounced asset

price boom also played a role.

Second, we study the South African wealth-income ratio over time, as the

long-term view masks important shorter-term dynamics. Rather than remaining

stable as the comparison between 1975 and 2014 suggests, wealth-income ratios

actually trended downward from the mid-1980s to the mid-1990s, reflecting dwin-

dling asset prices in a period of economic sanctions against the apartheid regime

and political uncertainty over the transfer of power. From the late 1990s onwards,

private wealth recovered, as asset price increases more than compensated for

steadily falling savings rates. South Africas wealth-income ratio is thus still sub-

stantially lower than those of the advanced economies. It is possible to argue that

1

Pikettys influence in South Africa is particularly visible in the ongoing reform of the tax system

(see, for example, the First Interim Report on Estate Duty for the Minister of Finance of the Davis Tax

Committee, January2015).

2

633

Review of Income and Wealth, Series 65, Number 3, September 2019

V

C2018 International Association for Research in Income and Wealth