Inclusive Growth in South Africa? Inequality Dynamics and the Role of Trade Openness vs Tax Policies

Market forces, and notably the role of trade openness, contribute to shaping inequality in South Africa and may limit the inclusiveness of its growth path. Recently, policy reforms may have helped to mitigate these effects. To better understand these developments, we analyze trends in post-tax income inequality using matched employer-employee administrative data from 2012 to 2021 and an original decomposition based on counterfactual tax microsimulations. Our results show that the benefits of increased trade openness during this period has benefited top earners essentially, while other workers - particularly those in the middle class - were adversely affected. This inequality-enhancing impact was partially offset by the automatic stabilizing response of the personal income tax system and by reforms that increased its progressivity. Overall, the analysis highlights the critical role of fiscal policy in counteracting inequality arising from labor-market disparities linked to globalization.