Dissecting the transmission of financial shocks to household income distribution in South Africa

Abstract

The onset of the 2008-09 global financial crisis induced a coeval shrinkage to relatively all fields of production in several countries (Baxter, 2009:106). While the contraction of sectors of production was a common effect of the financial crisis among the affected countries, the degree of the impact and the channels of transmission of the financial shock to households and individuals differ among the affected countries (Gumata, Ncube & Ndou, 2012:5). Most people affected by the financial crisis in the developed countries (such as those in the Eurozone and the US), are exposed to the peril of poverty and segregation. On the other hand, the 2008-09 financial crisis has worsened income redistribution for a number of countries in the developing world (Otker- Robe & Podpiera, 2013:4). South Africa has not been immune to the consequences of the 2008-09 global financial crisis emanating from developed countries‟ financial sectors and the resulting slowdown in real economic activity (Essers, 2013:2). As a result, South Africa entered a recession late in 2008 and its financial growth has not reached pre-crisis levels ever since. Furthermore, growth has been handicapped by the renewed global slowdown, due to the unfolding Eurozone crisis and a disappointing economical recovery in the US (Essers, 2013:2). One can expect such an adverse economic trajectory to have real consequences for South African households and individuals. In analysing the consequences of financial shocks, it was evident in the previous financial crises (such as the 1930 Great Depression, 1997Asian financial crisis), that a distinct style of income distribution is generated during the crisis (Azis & Mansury, 2003:112). One of the common patterns of income distribution in a time of crisis stems from the fact that currency deflation as well as elevated interest rates favour the high-income households (Azis & Mansury, 2003:112). However, this assumption is not always true, since these high-income households might be at a disadvantage if they were investing in sectors which rely more on imports. These patterns of income distribution tend to vary among economies, therefore, understanding how these mechanisms manifested themselves in a local economy, is critical for policy formulation in order to counter the effects of financial shocks and manage risks effectively. The aim of this study is to identify the transitional channels or networks through which a financial shock influences household income distribution in South Africa. In order to do this, the study used social accounting matrices (SAM), multiplier analysis, and the structural path analysis (SPA). The results for South Africa indicated that low-income mining households were more severely affected during the crisis owing to their substantial dependence on low-skilled jobs in the mining industry. In effect, the households‟ income declined as a result of lost or reduced salaries and wages from this industry. It was confirmed that the mining industry is the main channel (among others) disseminating the effects of the shock from a credit crisis to a decline in income of the low- and middle-income households in South Africa. Conversely, in the case of high-income households, capital was prevalent, channelling the impact of the financial shock. This entails that the South African high-income households‟ income was reduced through investment returns and the availability of credit.