Trade Liberalization and Pro-Poor Growth in South Africa

Abstract

Trade liberalization has been at the center of South Africa’s post-Apartheid development strategy. However, despite reforms, the country has failed to generate pro-poor growth, with both unemployment and inequality worsening over the last ten years. This raises concern that liberalization may have undermined the country’s development objectives. This study uses a general equilibrium and microsimulation model to assess the effects of liberalization on growth, employment and poverty. The results indicate that liberalization has not increased poverty and has accelerated growth. However, liberalization has altered production structures and exacerbated inequality. Coloured households in the coastal provinces have borne most of the structural adjustment costs. Trade reforms also contributed to the rising capital and skill-intensity of production, so that the decline in poverty has been small. Therefore, while there may not be a trade-off between trade reform and poverty reduction, the country should not overemphasize the role of further liberalization in generating pro-poor growth.

Notes

1 Some interpretations of recent evidence find that poverty may have fallen since 2000 (Van der Berg et al., 2005).

2 See Fedderke and Vase (2004), Holden (2005), Rangasamy and Harmse (2004), and Edwards (2005).

3 The real exchange rate is measured in the model as the amount of local currency required to purchase a unit of foreign currency. Therefore, a depreciation is reflected as an increase in the real exchange rate.

4 The 1993 CGE model is linked to the 1995 household survey, implying that the initial poverty rates and income distribution are for 1995.

5 This is 1.5 per cent (66.8 minus 65.3) of the total population of 47 million people in 2003.

6 his result should be treated with caution since there is only a small sample of unskilled White workers and low-income White households in the household survey used to construct the SAM and CGE-microsimulation model.