Assessing the Economywide Effects of Development Interventions: An Analytical Framework Applied to the South African Child Support Grant

South Africa has one of the largest cash transfer systems in Africa, which benefited about 31 percent of the population in 2012. More than half of the households benefit from some form of social assistance with 22 percent relying on it as a main source of income. Social grants have considerably expanded from 2.5 to 16.0 million beneficiaries in 1998 and 2012 respectively and are considered an important instrument to fight poverty in South Africa. The question still remains of the benefit to the society at large especially with the R158 billion invested in the program in 2012, representing 9% of the Government budget. Although an increasing number of studies have shown interest in assessing the impact of social grants in South Africa, none of them has looked into the economywide implications and the impact on non-beneficiaries. Because of their important share in the Government budget and contribution to the lives of the poor, previous studies on the impact of social grants in South Africa made a strong assumption of the absence of a general equilibrium effect. This study develops a framework to capture the direct and indirect effects of large public interventions such as the South African Child Support Grant (CSG). Its novelty is in the methodology used to assess the overall impact of the program. A recursive micro-macro model is built up and used to simulate a hypothetical South African economy without CSG beneficiaries. Thus, a matching technique identifies and replaces CSG beneficiaries by their matched non-beneficiaries in the survey (Counterfactual Scenario Building). Then, the induced changes in labor supplies and consumption expenditures are simulated at the macro level along with alternative government revenue adjustment. The induced prices, unemployment, and income effects estimated at the macro level are passed into the households’ consumption modeling at the micro level (Macro-Micro Modeling). A Computable General Equilibrium (CGE) modeling is used to assess the impact of the CSG on the South African economy. The impact of the social grant shock on households’ consumption, poverty and inequality measures is assessed by a nonparametric microsimulation modeling. The results show direct differences between the beneficiaries and non-beneficiaries of the program in terms of their observed outcomes. Beneficiaries of the program increased there supply of labor for agricultural activities and reduced labor supply in the nonagricultural sector. There is also evidence that beneficiaries of the CSG spend more on clothes and footwear, energy and water, and municipal services relative to if they were not beneficiaries. Looking at the macro results, we found a positive contribution of the grant program to the economic performance in South Africa as measured by the level of GDP. The program leads to a 0.5 percent increase in GDP. Poverty index and inequality are also shown to decline as a result of the program. Our analysis leads to the recommendation that while fiscal prudence and consolidation are pursued in the medium term, social security spending should be preserve, especially in the wake of the prolonged aftermath of the global financial crisis which is still being felt today. This must be coupled with decisive responses to the crisis in the public education and health systems and effective job creation initiatives to ensure that growing social grants do not unnecessarily become a permanent feature of the South African landscape.