Trade Liberalization and Pro-Poor Growth in South Africa

Trade liberalization has been at the center of South Africa's post-Apartheid development strategy. However, despite considerable 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 trade liberalization may have worked against the country's development objectives. This study uses a dynamic general equilibrium and microsimulation model to assess the effects of trade liberalization on growth, employment and poverty. The results suggest that trade policies have not contributed to increased poverty and that trade-induced technological change has accelerated growth. However, liberalization has changed the structure of production and exacerbated income inequality. While all population groups have benefited from trade-induced growth, it is higher-income and African and White households who have benefited more than lower-income and Asian and Colored households. Furthermore, 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. Accordingly, the decline in poverty has been small and it is higher-income households that will benefit more from further liberalization. Therefore, while there may not be a trade-off between trade reform and poverty reduction, the country should not rely on further liberalization to generate pro-poor growth or address the prevailing inequalities.