Melbourne Institute Working Paper Series Database (1984 - 2010)

Melbourne Institute Working Paper No. 17/2005

Trade Liberalisation, Poverty and Inequality in South Africa: A CGE-Microsimulation Analysis

by

Nicolas Hrault

Date: November 2005

Abstract: This paper aims to study the effects on poverty and income inequality of trade liberalisation in South Africa. This is achieved by using a micro-macro model. The main issue of interest is the effect of international trade on households (especially their income); some changes may contribute to reduce poverty while other changes could work against the poor. The approach presented in this paper relies on combining a macro-oriented computable general equilibrium (CGE) model and a microsimulation (MS) model. Combining these two models the microeconomic effects (on poverty and inequality) of a macroeconomic policy (trade liberalisation) can be analysed. The paper gives details about the MS model, the CGE model and the "top-down" approach used to link the two models. The main concern regarding poor households is whether the decrease in real (or nominal) earnings for formal low-skilled and skilled workers is offset by the upward trend in formal employment levels. This appears to be the case implying a decrease in poverty due to trade liberalisation. Although whites emerge as the main winners, the increase in inter-group inequality is more than compensated by the decrease in intra-group inequality.

 

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