Can trade liberalisation in South Africa reduce poverty and inequality while boosting economic growth? Macro–micro reflections

Abstract

South Africa is trapped in a cycle of modest growth, unacceptable poverty levels and record unemployment. This has led to renewed interest on the relationship between macro (growth) and micro (poverty and distribution) issues. This paper uses a macro–micro tool that couples a computable general equilibrium model with microsimulation models to examine the impact of further unilateral trade policy reforms on growth, poverty and welfare. Trade liberalisation alone has very minimal short-run macroeconomic consequences while its long-term impacts are positive and magnified by technical factor productivity (TFP) effects. Trade liberalisation has no appreciable impact on poverty in the short run even if we allow for trade-induced TFP increases. In the long run, however, poverty reduces even in the case when we do not allow for TFP increases. Trade liberalisation policy has been found to be progressive despite the low level of tariff protection remaining in South Africa.

Keywords:

• trade
• poverty
• economic growth

JEL codes:

• C68
• D31
• D58

Notes

³While trade policy can have impacts on poverty, the main anti-poverty response in South Africa is in the form of social policy interventions that are delivered through provision of basic and free basic services, subsidies as well as assets that aim to benefit the poor. The package contributing to social wage includes free primary healthcare, no-fee-paying schools, social grants (such as old age pensions, and child support grants), free housing for indigents, provision of basic and free basic services in the form of reticulated water, electricity, sanitation and sewerage particularly for those categorised as indigent.

⁴These are usually based on drawing or identifying groups of micro units exposed to the policy reform being studied (‘treated’ groups) and groups of individuals not exposed to the reform (control groups).

⁵For a recent and concise review of trade-focused CGE modelling in South Africa, see Mabugu & Chitiga-Mabugu (2009).

⁶Trade policy is guided by multilateral arrangements as well as by bilateral and regional agreements. The Southern African Customs Union between South Africa, Botswana, Lesotho, Namibia, and Swaziland is the oldest Customs Union in the world. There are two Free Trade Areas between the European Union and the Southern Africa Development Corporation that the country has so far concluded. The country also benefits from the US African Growth and Opportunity Act. There are planned Free Trade Areas with India, the USA and MERCOSUR countries.

⁷For a review of different models on trade, see Mabugu & Chitiga-Mabugu (2009); and for a review of microsimulation models, see Davies (2004).

⁸Some examples are the Foster Greer and Thorbecke index, Watts's index, and the Clark, Hemming and Ulph index.

⁹When α = 0 the expression simplifies to J/N, or the headcount ratio. This is a measure of the incidence of poverty. When α = 1 the expression gives us poverty depth measured by the poverty gap. When α = 2 the expression gives us the severity of poverty measured by the squared poverty gap.

¹⁰Annabi et al. (2005b) find a similar effect in a study on Bangladesh.