An Empirical Analysis of the Determinants of Poverty and Household Welfare in South Africa

Although South Africa is regarded as Africa’s second largest economy, (also ranked as an upper-middle-income economy), the incidence of poverty remains stubbornly high by the standard of other similar countries. Using a baseline poverty line of R450 per capita per month, Tregenna (2012) found a poverty incidence of 52.45% (using expenditure) and 49.56% (using income) in 2006. Employing the National Income Dynamics Study (NIDS) dataset and an appropriate poverty line, Biyase (2014) obtained estimates of 46% for 2008 consistent with those of Finn (2013). This paper contributes to the literature by using data drawn from the first four waves of the National Income Dynamic Study to determine the factors that influence poverty and household welfare in South Africa. Contrary to most existing studies in this field, which have applied ordinary least squares and probit/logit models on cross-sectional data, this analysis attempts to capture unobserved individual heterogeneity and endogeneity, both via fixed effect, and via a robust alternative based on random effect probit estimation. The results from fixed effect and random effect probit indicate that levels of education of the household head, some province dummies, race of the household head, dependency ratio, gender of the household head, employment status of the household head and marital status of the household head are statistically significant determinants of household welfare. Specifically, we found that compared to traditional rural areas (used as reference category), households living in urban and farms are less likely to be poverty stricken and that the probability of being poor for households in the Eastern Cape, KwaZulu-Natal, Northern Cape provinces/regions, is significantly higher than Western Cape province/region. Moreover, we found that, educational levels (primary, secondary, matric and tertiary) of the household head reduce the probability of being poor. These results suggest that investing in education and improving the economic conditions of the rural dwellers (traditional rural areas) should continue to be a major focus of poverty alleviation efforts in South Africa.