Socio-economic transformation and inequality in South Africa: a regional analysis

Abstract

Socio-economic transformation is the process through which the main sources of national income, output, and employment shift away from primary sector activities such as agriculture towards more productive sectors like manufacturing and services. This transition is widely recognised as a critical driver of rapid and sustained economic growth. However, since the seminal contributions of Simon Kuznets, it has been broadly argued that structural transformation may initially be associated with rising income inequality, a phenomenon known as the developer’s dilemma. As a result, in the short run, countries undergoing transformation may face a trade-off between promoting economic growth and managing inequality. When policymakers are confronted with the trade-off, concerns over widening inequality may sometimes lead them to slow down, alter or even reverse reforms aimed at advancing socio-economic transformation. The study aims to estimate the effects of the socio-economic transformation (SET) on inequality in South Africa at the regional level to determine the extent to which regional economies are socioeconomically transforming. This is motivated by high regional disparities in development outcomes across the nine provinces. The Driscoll–Kraay Fixed Effects regression was adopted given that the regional panels were characterised by cross-sectional dependence and slope heterogeneity using Statistics South Africa regionally disaggregated data from 2008Q1 to 2022Q4. Evidence of a structural transformation dilemma in development is confirmed: regions with greater employment concentration in the primary sector exhibit higher inequality, whereas expansion of secondary and tertiary employment facilitates more inclusive growth and equitable income distribution. Given that greater employment in secondary and tertiary activities is associated with lower inequality, South Africa should accelerate structural transformation by fostering value addition in agriculture and mining, investing in industry-relevant skills, and utilising Special Economic Zones to facilitate industrial development and inclusive growth