Rural versus urban wealth inequality in South Africa

Abstract

This study sought to understand wealth creation amongst South Africans living in rural areas versus those living in urban areas. The study made a distinction between income inequality and wealth inequality and acknowledges that while income and wealth are different, the two variables are intertwined. The relationship between the two is based on the notion that accumulated wealth diminishes the incentive to seek labour income. As such, it is possible to have households with low wage income but high wealth income in terms of assets. Given the different modalities of generating savings in rural areas in comparison to urban areas is it possible that the drivers of savings, wealth and income are different in rural and urban households? Is it even possible that rural households are wealthier than urban households? These questions are addressed plausibly using Life cycle theory.

Studies show that in South Africa income inequality is increasing and the poor are getting poorer (Hamilton, 2014:48). Previous studies however, do not make a clear distinction between wealth inequality and income inequality. Dearth of empirical work that looks at sustainable wealth inequality between rural and urban households give a distorted picture of the living standards and welfare scene in South Africa. The purpose of this study was to fill this gap in knowledge. Accordingly, the study had three key objectives. The first objective was to construct a composite measure of wealth using General Household data. The second objective was to examine urban/rural differences in the magnitude and composition of wealth. The third objective was to test the hypothesis that household income and consumption have an effect on wealth. The study utilised the Ordinary Least Squares model (OLS), a category of time series models to test the effects of income inequality and consumption on household wealth.

The study confirmed that even though rural households are likely to have less income than their urban counterparts, the magnitude of wealth in rural and urban households is almost equal since rural households have little to no debt and consume less than urban households. Furthermore, the study confirmed that while wealth is a much stronger predictor of consumption, than income in a rural setting in an urban setting income is a much stronger predictor of consumption than wealth