Reforming grants to tackle child poverty : an integrated macro-micro approach

Abstract

Social grant schemes have become an important component of many developing countries’ inclusive growth strategies with governments increasingly investing in large-scale cash transfer programs. South Africa’s Child Support Grant (CSG) is one of the largest cash transfer systems in Africa. However, child poverty remains high in the country, leading to calls to expand the CSG. Government faces resource scarcity and therefore needs to create fiscal space to set up such a reform. This paper evaluates the economy-wide impact of the CSG on the economy using a recursive bottom-up/top-down CGE-micro simulation approach. This allows the estimation of the potential effects of a 20% increase in the grant on households’ welfare, the economy, as well as on the fiscal constraint. This reform is evaluated under three fiscal scenarios to take into account the fiscal stress the country is currently experiencing. We find that the reform brings some positive impacts at the macro level, and a decrease in poverty for the whole population as well as for children. The direct effect brought by the CSG increase represents the largest contribution to poverty reduction, but the indirect (general equilibrium) effects globally reduce the positive poverty effects engendered by the CSG. Some interesting heterogeneous effects are also found, with the proposed reform being progressive and the richest percentiles showing a (small) deterioration due to the decrease in wage revenues. However, the overall poverty and inequality effects are small and unlikely to be robust. The paper’s results can assist South Africa, and indeed other African countries, calling for increased coverage of grants as well as exploring universal coverage. Further, the use of the integrated macro-micro simulation methodology is a major contribution of this paper.