In his bestselling Capital in the 21st Century, Thomas Piketty drew the world’s attention to the fact that private wealth in rich countries had grown significantly faster than national incomes for more than four decades. Since wealth tends to be concentrated in far fewer hands than incomes, this observation raises concerns about increasing levels of inequality.

Despite the fact that Piketty’s research was focused on the world’s richest economies, it resonated widely with South African policymakers, and informed the efforts of reforming the tax system towards more capital-related taxes. This paper examines the extent to which Piketty’s findings are applicable to South Africa, where persisting capital scarcity tends to cause as much concern as increasing wealth concentration.

The analyses presented in this paper suggest that the South African experience contrasts with those of the advanced economies in several respects. In contrast to the dramatic increase in private wealth-income ratios described by Piketty (from 200-300% in 1970 to 400-700% in 2010), South Africa’s growth in private wealth remained in line with incomes over the same 40-year horizon. At 255%, our current wealth-income ratio is very close to its 1970-level of 240%, and substantially lower than those of the advanced economies.

In part, this discrepancy reflects general structural features of developing economies (lower savings and higher income growth rates). However, the specific experiences surrounding the political transition in the 1980s and 1990s also play an important role in explaining South Africa’s low wealth-income ratio. After hitting a trough in the mid-1990s, private wealth started to grow significantly faster than national incomes again, leading to a U-shaped trajectory of the private wealth-income ratio. If the trend of the last two decades continues, South Africa might resemble the rich countries more closely in the future.

Even as private wealth grows in South Africa, however, some structural differences remain. While the prolonged disproportionate growth of private wealth in the rich countries was driven primarily by household savings and the booming housing market, South Africa’s more recent growth in wealth was generated almost entirely through corporate savings and the strong performance of the stock market. This revaluation has benefitted millions of South Africans, as a large share of domestic equities are held through pension and retirement funds. At the same time, it is very likely that the growth in stock market wealth enriched a smaller number of shareholders disproportionately, contributing to a rise in overall inequality.

What does this mean for policymakers? First of all, this paper serves as a reminder about the importance of carefully analyzing the domestic context when formulating policies on the basis of economic theory. Given that the wealth-income ratio is so much lower in South Africa than it is in rich countries, capital-related taxes not only have much lower revenue potential than elsewhere, but might also undermine the country’s simultaneous efforts of encouraging capital formation and lowering the dependency on foreign capital inflows. A more targeted approach for South Africa could focus on promoting saving and investment among lower and middle income households.

It is, however, important to note that this paper does not allow us to draw robust conclusions about the distribution of wealth in the population. Although there is barely any reliable data on this issue, the available evidence suggests that the concentration of private wealth is enormous – in which case capital-related taxes could play an important political role even if their fiscal potential is limited.