Trade Liberalisation, Household Welfare and Earnings Inequality in South Africa

This paper analyses the effect of trade liberalisation on household welfare in South Africa over the period 1995 to 2011. While tariff liberalisation is expected to raise aggregate welfare (the gains from trade), the distributional effects of lower prices from tariff reductions depend on household consumption patterns and income sources. Using 1995 household income-expenditure survey data, the paper first simulates the first-order distributional effects on real household incomes and expenditure from reductions in import tariffs. This is followed by econometric estimation of the causal effect of tariff liberalisation on regional earnings and inequality. We find that households most exposed to reductions in earnings from tariff liberalisation are those in the middle- to upper-income deciles, in which employment in manufacturing is concentrated. Tariff reductions are found to have reduced aggregate earnings from employment in tradable sectors, as well as to have contributed to rising earnings inequality across most regions in South Africa. Poor households, however, stood to gain more from tariff liberalisation through the expenditure channel, as greater shares of their expenditure are allocated to goods, particularly food products. The household welfare simulations indicate that the net welfare effects from tariff liberalisation, after accounting for income and expenditure effects, are likely to have been pro-poor, with consumption gains more than offsetting the income losses for most households.