Assessing the General Equilibrium Effect of Social Grants in South Africa

South Africa has one of the largest cash transfer systems in Africa, which benefited about 16 million people in 2012/13. Social grants have significantly expanded since 1998 - with 2.5 million beneficiaries - and are considered important instruments with which to fight poverty in South Africa. Previous studies on the impact of social grants in South Africa made a strong assumption of the absence of a general equilibrium effect. Social grants investment growth increased by more than 9 per cent in 2012, reaching a total amount of R158 billion over the same period. Because of their huge budget and their contribution to the lives of the poor, the main contribution of this study is to attempt to quantify the overall direct and indirect effect of the major social grants. This paper is one in a series of papers attempting to quantify the impact of these grants. The novelty in these studies is in the methodology used to quantify the impact. The papers use an estimation system with a micro and a macro analysis working together. A recursive micro-macro modelling is developed to quantify the impact of the social grant on the South African economy. The framework is used to simulate a hypothetical South African economy without social grantees. The aggregate changes in labour supply and employment status, and total consumption expenditure and consumption by products are simulated at the macro level along with alternative government revenue adjustment (Macro-Modelling). Then the induced prices, unemployment, income and output affect households’ consumption patterns. At this stage, a sample re-weighting technique (nonparametric) is used to assess the second order effects of the social grant shock (Micro-Modelling). The current paper contributes to the literature on the effects of a combination of grants on households and the economy in a general equilibrium framework. The paper thus has two distinct contributions...