Income Dynamics, Assets and Poverty Traps in South Africa

This paper examines income dynamics and the existence of poverty traps in South Africa between 2010 and 2012 using panel data from the first three waves of the National Income Dynamics Study. In order to separate structural trends in income from stochastic shocks and measurement error, the paper makes use of an asset-based approach to estimate the shape of structural income dynamics in order to test for the existence of one or more dynamic equilibrium points. Contrary to earlier findings on South African data from 1993 and 1998, the results do not provide evidence for the existence of an asset-based poverty trap. Instead, the results seem to indicate the existence of a low-level equilibrium beyond which structural income remains very persistent. The robustness of the results is confirmed by making use of control functions in order to correct for any measurement error which may exist in the data on assets.