Asymmetric Response of Poverty to Growth and Inequality in South Africa: Implications for Current and Future Shocks

Abstract This study investigates the effect of economic growth on poverty reduction, given inequality in South Africa. It focuses on whether the poor suffer more losses of welfare during economic recessions and depressions than they gain during expansions. It further explores the factors that can assist the poor to stay afloat during times of economic shocks. Individuals in micro-datasets are matched with municipality-level data and in binary, truncated, panel, instrumental variables and quantile regression techniques to estimate poverty and welfare effects of positive and negative economic growth rates. The study finds that, whilst economic growth reduces poverty, it is not enough to compensate for the poverty-raising effects of inequality. Moreover, economic decline raises poverty, but economic prosperity more than compensates by a higher magnitude. The study also reveals that social grants, free health care and free basic education policies have limited effects on poverty reduction during economic downturns. Additionally, the provision of good education up to tertiary level and access to the labour market are crucial for sustaining poverty reduction efforts in South Africa. The findings call for policy measures that reduce inequality and promote economic growth to help cushion the poor during times of significant economic decline.