Assessing the General Equilibrium Effects of Social Grants in South Africa

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Assessing the General Equilibrium Effects of Social Grants in South Africa By: R. Mabugu, M. Chitiga, I. Fofana, B. Abidoye. and V. Mbanda. 2.1 Introduction South Africa has one of the largest cash transfer
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Assessing the General Equilibrium Effects of Social Grants in South Africa By: R. Mabugu, M. Chitiga, I. Fofana, B. Abidoye. and V. Mbanda. 2.1 Introduction South Africa has one of the largest cash transfer systems in Africa. In 2012/13, about 16 million people, or 31% of the population, received a social grant (National Treasury, 2013), compared to 2.5 million beneficiaries in More than half of the country s households benefit from some form of social assistance, with 22% relying on it as a main source of income. Social grants are considered an important instrument in fighting poverty in South Africa. Previous studies on the impact of social grants in South Africa made a strong assumption of the absence of a general equilibrium effect. The question still remains of the value/benefit to society at large, especially given the R158-billion invested in the programme in 2012 (representing 9% of the government s budget). As a result, it remains uncertain whether the government is making the best use of its money according to a well-defined set of goals. Assessing the effectiveness of the South African social grants system is especially important given the various assistance programmes and subsidies offered by the government in an economic situation where funding is becoming scarce and there is need to efficiently direct these scarce resources to alleviate poverty and aid economic growth. The grant system is an important component of South African s overall social security architecture. The social protection system as defined within the fiscal framework has two separate but interrelated entities: social assistance (the grants system, through which the state provides basic minimum protection to relieve poverty) and social insurance (mandatory employee contribution schemes). Government is responsible for three primary social insurance mechanisms: the Unemployment Insurance Fund (UIF), the Compensation Fund and the Road Accident Fund (National Treasury, 2010). The particular area of interest for the purposes of this study is the Comprehensive Social Security Programme, which incorporates both social assistance and social insurance. The specific purpose of this programme is to alleviate and reduce poverty, vulnerability, social exclusion and inequality. Social assistance helps prevent vulnerability and destitution, as a result of loss of income, and contributes to poverty alleviation. The Comprehensive Social Security Programme strategically facilitates effective and efficient implementation of social policies and procedures and ensures compliance through regular appraisals and reviews of implementation options. This is often achieved through the payment of cash transfers in line with the Social Assistance Act. Social assistance is provided in the form of social grants (for adults who are 18 years and older), children s grants (for those younger than 18 years) and a special award or the social relief of distress grant. Social grants for adults are: old age grant (OAG), disability grant (DG), war veterans grant and grant-in aid (GIA). Social grants targeted to benefit children are: care-dependency grant (CDG), foster child grant (FCG) and child support grant (CSG). The actual performance of the South African economy was compared to the results of a counterfactual scenario, i.e. what the state of the South African economy would be without beneficiaries of the social grant system, in order to gain insight into the biases introduced by social grants into the South African economy and to assess their overall impact. The main hypothesis of the study is that social grants have significant and important indirect effects through labour market participation and households total consumption patterns, consumption budget shares and saving-investment behaviour. Submission for the 2015/16 Division of Revenue 79 A recursive micro-macro modelling is developed to quantify the impact of social grants on the South African economy. The framework is used to simulate a hypothetical South African economy without child support grantees. As sampling weights are readjusted across the survey, it is likely that the aggregate labour supply and consumption outcomes will change (Counterfactual Scenario Building). Therefore, the aggregate changes in labour supply and employment status, and total consumption expenditure and consumption by products are simulated at the macro level, along with alternative government revenue adjustment (Macro-Modelling). Then, the induced prices, unemployment, income and output affect households consumption patterns. At this stage, a sample re-weighting technique (nonparametric) is used to assess the second order effects of the social grant shock (Micro-Modelling).13 The review of studies on South Africa and other countries in Section 2 provides evidence of the impact of various social grants. The methodological framework is detailed in Section 3. Results from the counterfactual scenario experiment are presented and discussed in Section 4. The document concludes by summarising the key findings, the limitations and the future extension of the analysis in Section Impact of Social Grants: A Literature Review The literature assessing the impact of social grants in South Africa and around the world is extensive. These studies have covered issues such as labour participation, poverty, inequality, education, health and nutrition. The impact of cash transfers (CTs) on welfare depends on how the recipients use the cash. Since cash is fungible, there are concerns that the poor might be tempted to use the money on non-essential goods, including alcohol and drugs. This argument has sometimes been used to advocate in-kind transfers rather than CTs. Another question is on the sustainability of CTs. There is a difference between livelihood protection and livelihood promotion impacts of interventions meant to reduce poverty (Devereux, 2002). Livelihood protection leads to the maintenance of minimum living standards and allows for smoothing of consumption, whereas livelihood promotion allows for a longer term and more sustainable improvement in living standards. In the past, CTs were seen as a livelihood protection measure, especially when people faced crises. However, recent studies have begun to show that CTs can also lead to livelihood promotion (Devereux, 2002). Hence, it has become important to understand, via various methods, the impacts of various social grants on economies. The sections below give brief reviews of international and South African evidence of the impact of social grants. Many of the studies found a positive impact of social grants on various socio-economic outcomes. With respect to the empirical evidence, the UK s Department for International Development (DFID) (2011) notes that cash transfers are one of the more thoroughly researched forms of development intervention. Furthermore, over the past 15 years, a quiet revolution has seen governments in the developing world invest in increasingly large-scale cash transfer programmes. Their findings indicate that while the evidence base for cash transfers is better than for many other policy areas, it is also uneven. Less is known about some instruments (public works) and outcomes in certain regions (sub-saharan Africa). However, there is convincing evidence from a number of countries that cash transfers can reduce inequality and the depth or severity of poverty. Furthermore, cash transfers may support graduation from poverty for those of working age. One can use parametric micro-simulation modelling and estimate the income and prices elasticities, as well as the modelling of employment status and labour supply Evidence is mixed for the effects of cash transfers on health and nutrition. Brazil s health and nutrition conditional cash transfer (CCT) programme, Bolsa Alimentação 2001, provided eligible households with a monthly cash transfer on condition that they complied with various compulsory programme activities. The programme was targeted at pregnant women, breastfeeding mothers with children below six months, and children from six months to seven years of age (Bassett, 2008). Morris et al. (2004) conducted a study which assessed the impact of Bolsa Alimentação on anthropometric status in four municipalities in north-east Brazil. The study used a random effects regression model to compare programme beneficiaries with matched individuals from households that were originally selected to receive the benefit, but were later excluded due to quasi-random administrative errors. A total of 472 beneficiary and 158 excluded children under three years of Submission for the 2015/16 Division of Revenue age were included in the analysis. The results showed that, for each additional month of exposure to the programme, the weight of beneficiary children was 31 grams lower than that observed in excluded children of the same age. These results were relatively startling and Morris et al. (2004) attributed the failure to respond to the programme to the possible perception that benefits would be discontinued if the child s health and nutrition status improved. Agüero et al. (2007) observed that the child height-for-age data indicates that the CSG payments, which are assigned to women, boost early childhood development. The study uses the 1998 KwaZulu-Natal Income Dynamics Study (KIDS) data to measure the nutritional impact of the CSG received in the first three years of a child s life. A continuous treatment method was used to estimate how child nutrition, as measured by height-for-age, is affected by receipt of the CSG. The national Department of Social Development (DSD) et al. (2012) also observe that receiving the CSG in early life improves height-for-age scores for children whose mothers attained schooling beyond grade eight. Yamauchi (2005) used several rounds of the KIDS data to show that grant-financed nutritional improvements led to positive educational outcomes for children; for example reducing repetition in school and allowing for early schooling. Williams (2007) noticed that the probability that any child goes hungry falls by 8-14% for each CSG a household receives. The majority of the studies in South Africa concur that CSG promotes school attendance among beneficiary children (Budlender and Woolard, 2006; Case et al. 2005; Leibbrandt et al., 2010). The exception is a study of children between seven and 13 years by the Community Agency for Social Enquiry (CASE) that found no major difference between children receiving the grant and children not receiving the grant (CASE, 2008). However, it is important to qualify these results by pointing out that South Africa already has high enrolment and attendance rates. Therefore, the evidence suggests that receiving grants is very important for reducing school non-attendance (Budlender and Woolard, 2006). Mothers in their twenties who receive grants (on behalf of their children) show on average a 15% increase in employment probability and a 9% increase in labour force participation (Eyal and Woolard, 2011). Broad labour force participation increased by 7 14% for mothers who had a child receiving a CSG, with the most positive impact being among mothers and household heads who did not complete their matric and mothers who lived in informal residences (Williams, 2007). Although the study did not find that the CSG has a negative impact on labour supply, it suggested that further research is needed into the complex dynamics between social grants, poverty, and reproductive and remunerated labour (Williams, 2007). Haarmann (2000) investigated the potential effects of social assistance (CSG and OAG) on poverty alleviation in South Africa using a micro-simulation model. Using Southern Africa Labour and Development Research Unit (SALDRU) data, updated to 1996 with 1996 census data, the study observed that the CSG has the potential to effectively alleviate extreme poverty, as it reaches some of the poorest households. However, Haarmann (2000: 190) commented that the current support, both in terms of coverage and quality, is far from being able to break the poverty cycle effectively. On average, only 36.8% of the poverty gap in the first two quintiles will be closed by transfers if the system is to work with 100% efficiency (Haarmann, 2000). The possibility of introducing other forms of social assistance, (a Basic Income Grant, an Unemployment Benefit, and a Household Grant), in addition to the OAG and the CSG, was analysed. Haarmann (2000) found that a Basic Income Grant would effectively reduce poverty across the various household types. Submission for the 2015/16 Division of Revenue A study commissioned by the DSD found that South Africa s system of social security successfully reduces poverty, regardless of which methodology is used to quantify the impact measure or identify the poverty line (Samon et al., 2004: 1). The study evaluated the OAG, CSG, DG, CDG, FCG and GIA, using micro-simulation modelling to assess the impact of social grants on poverty alleviation. The measurement of poverty and the evaluation of the impact of social grants was done at the household level. The analysis focused on the OAG, the CSG and the DG. The measures of poverty lines used in the analysis are the poverty headcount, the average poverty gap, the poverty gap ratio and the rand poverty gap. The results indicate that extending the eligibility age of CSG receipt has the greatest potential of reducing poverty. Samson et al. (2004) found that a combination of extending the CSG to age 14, with full uptake of the state old age pension (SOAP) and the DG, would 81 reduce the total rand poverty gap by 29%. However, the measurement of the quantitative impact was found to be greatly affected by the choice of the poverty line. The measured impact is consistently greatest when employing the total rand poverty gap and consistently smallest when using the poverty headcount measure as an indicator (Samson et al., 2004). In order to highlight the role of social assistance in providing income support to the poorest households, Woolard et al. (2010) disaggregated household income sources by income quintile. They found that two-thirds of the income to the bottom quintile comes from social assistance grants, with most of this income coming from child grants (the CSG, the FCG and the CDG combined). According to the Studies in Poverty and Inequality Institute (SPII), social grants are beneficial to society, but are often diverted into areas other than their intended purpose, given the conditions faced by the poor (SPII, 2012). Some of the benefits come from the CSG, which increases labour force participation rates among woman, and from the SOAP, which leads to about a half year s growth for children aged 0 6, and also leads to higher school enrolment rates of girls, because it is spent on education in poor households. SPII (2012) claims that a huge proportion of social grant income is often diverted to repayments of debts. Because of high rates of unemployment, the dependency ratio for grandparents who receive the SOAP is said to be high, especially in rural areas. The social grant income supports, not only the qualifying recipient (child or adult), but also the entire household, improving the welfare of recipients and the households in which they reside (SPII, 2012). Grants also support investment in productive capital, as the social grant money left over from food and fuel purchases is used for education expenditure (SPII, 2012). Social grants do inject significant resources into poor households and can have both negative and positive impacts on working-age individuals incentive to work (Williams, 2007). The UIF is the main instrument used to provide unemployment benefits in South Africa and is a contributionbased social insurance institution. Grants are thus only given to people with disabilities among the working-age population (subject to the means test). Despite this, the social assistance system still has some impact on labour-market participation, although the channels are different from those predicted by conventional theory (distortion of the relative prices of work and leisure) (Van der Berg and Siebrits, 2010). The Human Sciences Research Council s South African Social Attitudes Survey revealed that the poor prefer labour-market income to that from grants (Noble et al., 2008). The grant system influences labour supply through direct and induced effects on retirement decisions, household formation and job search activities (Van der Berg and Siebrits, 2010). Direct effects, covering incentives actually faced by recipients, are largely influenced by the means test, which discourages elderly people from working after reaching eligibility age (by imposing an effective marginal tax rate of 50% on non-pensionable incomes). Disability grants are also subject to a means test and reveal similar discouraging effects. The situation is worsened by the high levels of unemployment and other labour-market disadvantages faced by elderly and disabled South Africans, while many members of these groups have limited skills and reside in rural areas, where job opportunities are scarce (Van der Berg and Siebrits, 2010). The small difference between the DG and available labour-market wages offers little incentive for persons with disability to seek or take up paid work, especially casual and temporary jobs (Johannsmeier, 2007). Receipt of an OAG lowers the labour-market participation of working-age adults (Bertrand et al., 2003), but only for household members, especially if the grant recipient is female (Posel et al., 2006). Using data from a panel designed to investigate the household impact of the epidemic, Booysen (2004) observed that the CSG, DG and FCG have the potential to mitigate the impact of HIV/AIDS, reducing morbidity or mortality for households affected by the pandemic. In summary, previous studies generally indicated that social grants, and the CSG in particular, have positive impacts on recipients and households. In the short run, the CSG leads to improvements in beneficiary children s health and nutrition (DSD et al., 2012) and educational outcomes, through reducing repetition in school, allowing for early schooling and reducing the probability of schoolage children not attending school (Case et al. 2005; Williams, 2007; Yamauchi, 2005). However the results for grants such as the OAG and DG are mixed, and research into the combined grants is insufficient. This is a contribution of this paper. 82 Submission for the 2015/16 Division of Revenue 2.3 Analytical Framework The analytical approach integrates the following three methods into a single framework: the Propensity Score Matching (PSM) Technique, Computable General Equilibrium (CGE) Modelling, and Micro-Simulation (MS) Modelling. The approach, developed in eight steps, is presented in Figure 25. Step 1: A nationally representative sample of beneficiary (social grant recipients) and non-beneficiary (receive no grants) households were developed. Step 2: The impact of the social programme was estimated by modelling the probability of being in the programme, given the observed characteristics of the household. Step 3: Using the probability(or propensity) score from Step 2, the simulation variables for the households in the counterfactual scenario were identified. Building the simulation scenario in Step 5 requires a selection of the simulation variables in Step 3, using the available matching techniques and the building of a counterfactual sample in Step 4. Step 4: The counterfactual sample a nationally-representative sample of non-beneficiary households was built from a nationally representative sample of beneficiary and non-beneficiary households (the real sample in Step 1) and the results of the propensity score estimation in Step 2. Step 5: The simulation scenario compares the outcomes of the simulation variables (iden
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