Agricultural distortions, poverty and inequality in South Africa

Type Working Paper
Title Agricultural distortions, poverty and inequality in South Africa
Publication (Day/Month/Year) 2009
South Africa has rapidly reduced trade barriers since the end of Apartheid, yet agricultural
production and exports have remained sluggish. Also, poverty and unemployment have risen
and become increasingly concentrated in rural areas. This paper examines the extent to which
remaining price distortions, both domestic and foreign, are contributing to the
underperformance of the agricultural sector vis-à-vis the rest of the economy. We draw on a
computable general equilibrium (CGE) and micro-simulation model of South Africa that are
linked to the results of a global trade model. This framework is used to examine the effects of
eliminating global and domestic price distortions. Model results indicate that South Africa’s
agricultural sector currently benefits from global price distortions, and that removing these
would create more jobs for lower-skilled workers, thereby reducing income inequality and
poverty. We also find that South Africa’s own policies are biased against agriculture and that
removing domestic distortions would raise agricultural production. Job losses in
nonagricultural sectors would be outweighed by job creation in agriculture, such that overall
employment rises and poverty falls. Overall, our findings suggest that South Africa’s own
policies are more damaging to its welfare, poverty and inequality than distortionary policies
in the rest of the world. Existing national price distortions may thus explain some of the poor
performance of South Africa’s agricultural sector and rural development.

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