Production, inequality and poverty linkages in South Africa

The Kuznets inequality-development hypothesis can be tested with time-series data rather than the cross-section analyses found in earlier literature. Single-country time-series analysis cannot be done without addressing endogeneity between output and inequality. South Africa has been under-researched in this area due to a lack of data. Recent data released by the Presidency of South Africa makes such analysis possible. Besides, the use of a single inequality index in such a multiracial society is likely to capture only average effects. This paper jointly estimates production, inequality (decomposed by sub-group) and poverty with 3sls using South African data. The findings suggest that production is affected negatively by between-group inequality. Credit constraints and interracial tensions are possible causes, generating significant adverse effects that stifle economic productivity. Within-group inequality enhances production, possibly due to within-group social capital. There is evidence of an inverted U-shape relationship between per capita income and between-group inequality, but a U-shaped one between per capita income and within-group inequality. However due to the effects of the active post-apartheid policies — which reduce between-group inequality, but increase within-group inequality — it is doubtful if this relationship is capturing a Kuznets process. There is a significant poverty-increasing (reducing) effect of total and between-group inequalities (output). The abjectly poor seem to suffer more from inequality than others do. Policy efforts have to focus on reducing between-group inequality.