The Economic Effect On Income Transfer To Reduce Poverty

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The Macro-economic Implications of Poverty-reducing Income Transfers INTRODUCTION This paper explores how income transfers to the poor may support a macro-economic strategy promoting economic growth, employment creation, and equitable redistribution. The central hypothesis of this paper is that transfers not only directly improve the well-being of the poor, they may also increase employer demand for labour while bolstering workers' effective supply, thus stimulating a growth process. In addition, income transfers may increase labour productivity, fostering a "virtuous circle"� in which growth propels socio-economic progress that in turn extends the growth even further.

Whether universal, means-tested, or asset-based, the macro-economic consequences of redistributive transfers are similar. This paper lays out a framework for a universal grant, assessing the costs and benefits. The analysis readily applies (with modifications) to a targeted or means-tested grant, or to social expenditure that supports the development of an asset base for the poor.

The feasibility of substantial income transfers hinges on three critical issues: (1) the initial affordability given South Africa's macro-economic budget constraints, (2) the administrative and institutional capacity of the government to efficiently implement the programme, and (3) the long-term sustainability of financing income grants taking into account the social and economic benefits that expand the nation's productive and fiscal capacity.

The combination of severe poverty and high unemployment in South Africa raises the question of whether income transfers could provide a critical tool for reducing poverty and improving the efficiency of social delivery. The long-term nature of job creation strategies suggests the need for immediate measures that support basic living standards for the poor. Direct income transfers to poor households could resolve the counter-productive predicament of extending infra-structural investment in basic services (water, sanitation, electricity, and communications) to households that lack the income to finance usage charges. Likewise, the favourable investment returns of...