South Africa in the 21st Century

My exchange semester at Auckland University of Technology is officially over! Now I am waiting on my exam results and I am also about to head back to Germany tomorrow for the summer break. This is why today’s post is not going to be a long one. Rather I would like to share one of my research essays that I completed in my Growth and Development Economics paper at AUT.

The task was to choose one of the BRICS economies and write a research essay on their growth and development performance in the last decade. In particular, we were supposed to analyse the extent to which institutional development supported or hindered the process of economic development. The essay should include four parts: an introduction to the country, a section on growth and development trends, a section on institutional development and lastly a summary including policy implications.

I chose to focus on South Africa and I have to say that it was a very interesting assignment and it helped me significantly in developing my research skills. Doing all this research on South Africa also changed my impressions on the current state of human and economic development in the country. It has been 22 years since the end of apartheid but South Africa continues to face significant obstacles as highlighted in the essay. Despite a range of headwinds identified in the essay there is however the possibility for South Africa to regain its strength and play up to the expectations of becoming one of the future drivers of world economic growth as part of the BRICS as argued in the last part of the essay.

I hope you enjoy reading my research! The abstract of the essay is included below and complete file is available from here.

Jasse


SOUTH AFRICA IN THE 21ST CENTURY

Abstract

South Africa joined the BRICS for their 3rd BRICS Summit in 2011 after being predicted to become one of the future drivers of world economic growth. However, both in the area of economic growth and development as well as governance South Africa continues to face substantial challenges. The aim of the essay is to assess the country’s performance in these areas over the past decade. After a brief overview on South Africa the essay analyses growth and development trends with the use of the Human Development Index (HDI), the inequality adjusted HDI and the Multidimensional Poverty Index. In the second part, the essay focuses on institutional development employing the World Governance and Doing Business Indicators, as well as the Index of Economic Freedom.

The main findings are that South Africa’s economic development is impeded by sluggish growth rates and a contracting economy as well as the rising burden in fiscal debt and its servicing costs. South Africa’s society still faces racial and gender inequality as well as multidimensional poverty. The country’s potential human development in all three areas of health, education and income remains dampened by inequality which persists after the transition to a more open society and economy under the post-Apartheid regime. The country has suffered from a deterioration of institutional quality over the last years, especially in corruption coupled with an on-going underperformance in political stability. Furthermore, the ease of doing business is impeded by constraints in getting electricity and a deterioration of conditions regarding the access to credit.  A major concern is that business freedom, labour freedom and investment freedom have seen a long-term deterioration in conditions.

The essay’s policy recommendations centre on a holistic reform of South Africa’s institutional system in order to reshape incentives to invest in physical and human capital and to establish incentives for innovation. The recommendations derive from the World Bank Growth Commission’s 5 common growth ingredients of market incentives, trade openness, future orientation, macroeconomic stability and good governance with a focus on inclusive growth.


Droege, J. (2016). South Africa in the 21st Century. Auckland University of Technology, Auckland. Retrieved from https://theaspiringeconomist.files.wordpress.com/2016/05/south-africa-in-the-21st-century-jasmin-droege.pdf 

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The Structural Transformation of the South African Economy

I did not find the time to do a blog post yesterday, because I had the Macroeconomics class test coming up (which went quite well). So I sat down to do some exercises for the blog today instead and again ended up having a look at South Africa’s economy over the time period from 1961-2014 for which data is available from the World Governance Indicators by the World Bank.

In particular, my idea for today was to quantify the economy’s structural transformation since the 1960s. The approach I have chosen for this is to use the growth accounting equation in a modified version including the three sectors agriculture, industry and services and regress the change in log GDP per capita on changes in log value added in agriculture (agr), industry (ind) and services (srv):

South Africa transition structural change 1

In case you want to check on the data I have used, it comes from the World Governance Indicators for South Africa 1961-2014 and are the following series:

  • GDP per capita (constant 2005 US$)
  • Agriculture, value added (constant 2005 US$)
  • Industry, value added (constant 2005 US$)
  • Services, etc., value added (constant 2005 US$)

As you can see from the model specification above I use a difference-on-difference model which has the advantage that it turns non-stationary series into stationary series and helps to avoid spurious regression (Gu, 2013). Personally, I am not sure whether my model really suffers from this problem but I turned to this specification in the first place because there was evidence for model misspecification when only using a log-log model or a difference-on-difference level-data model (Ramsey RESET test). Furthermore, I deploy heteroskedastic robust errors as the Breusch-Pagan/ Cook-Weisberg test for heteroskedasticity in STATA provides evidence for such.

The coefficients can then be interpreted as follows: they measure how much the GDP per capita growth rate changes in response to a 1 percent change in  the value added of a sector. This makes the regression results convenient in their interpretation – as far as I understand – showing the sectors’ impacts on the economy given their relative weights.

The results of the propsed OLS regressions are summarized in the table below where one star, two stars and three stars reflect the significance levels of 0.10, 0.05 and 0.01 respectively. I estimate the coefficients for each decade from 1960s, 70s, 80s, 90s to the most recent somewhat longer period as well as one regression for the whole period looked at.

South Africa transition structural change

The key findings are that over the complete period from 1961 to 2014 all three sectors are statistically significant but agriculture has become “insignificant” in the most recent period (as well as in the 1980s). Industry is significant at 1 percent level except from the 1960s but its impact is steadily declining ever since. Services are on the rise with a sharp increase in their impact from the 1960s to the 1970s. After a short-term decline in 1990s they have now become more important than ever.

These are not particularly surprising finding; they are evidence for the structural change that has happened in South Africa over time. It proofs that South Africa has turned into a services economy in its transition to an emerging market and rise to one of the BRICS. Value added of services now has the largest impact on the country’s growth rate and in the most recent period, a 1% increase in the growth rate of the services sector has translated into a 0.78% increase in the growth rate of GDP per capita (correct me if I am wrong in my interpretation, please).

A cautionary note at the end: One should not forget that there are inter-industrial links that tie agriculture, services and industry together. It would therefore be foolish to focus solely on growth in the services sector even given its importance. What is more, growth of the tertiary sector and structural change must be accompanied by a stable agricultural sector to ultimately stabilize the food supply – assuming that a country is not relying completely on food imports – as admitted by Lewis (1954; Lewis labour surplus model) and formalized by Bruce Johnston and John Mellor in 1961. Another takeaway from this exercise is that – as services are on the rise – improvements in the sector’s overall productivity become crucial to the country’s future economic development and long-run growth.

Thanks for reading!

Jasse


Gu, S. (2013). Are Mortality Rates Random Walk? Panel Unit-root Tests with Evidences from Micro Data. University of Notre Dame, April 2013.

Johnston, B., and Mellor, J. (1961). The Role of Agriculture in Economic Development. American Economic Review, 51(4),  pp.566-593.

Lewis, W.A. (1954). Economic Growth with unlimited Supplies of Labour, The Manchester School of Economic and Social Studies, May 1954.

World Bank (2016). World Development Indicators South Africa [Data]. Retrieved April 9, 2016, from World Development Indicators (WDI) database: http://data.worldbank.org/country/south-africa.

South Africa’s Sources of Growth (or Decline)

I have an assignment about South Africa coming up for my class Growth and Development Economics. The goal is to analyse South Africa’s growth and development performance in the past decade  and to assess the role of institutional development in the country’s growth process.

South Africa was officially invited to join the BRICS (Brazil, Russia, India, China) in 2010. This term used to group together the fastest-growing emerging economies. However, Brazil and Russia have been hit by recessions lately, China’s economy is slowing down, and India is struggling to pass important economic reforms (Foroohar, 2015). South Africa is no exception and faces a range of challenges: Skills shortages, high unemployment, inflation and inadequate infrastructure (mainly constrained electricity supply) have dampened the country’s prospects. Also issues such as high income inequality and political stability play a key role (EIU, 2015).

Before actually starting my essay and as a nice exercise for today, I decided to produce an overview on South Africa’s economic performance from 1960 to 2011. I deploy the Penn World Tables 8.1 – in particular, the Growth Accounting Data for South Africa – for the analysis. The standard production function used in the Penn Dataset is:

Y = A f (K, L) = A Kα (E hc)1−α

where HC stands for human capital (education) and E represents the number of workers in the economy (Inklaar and Timmer, 2013). By definition GDP increases if there is an increase in capital, increase in labour or increase in human capital. As these factors alone would be inadequate to explain sustained long-run economic growth (see basic and augmented Solow growth model), it is assumed to be Total Factor Productivity (A) which allows economies to grow in the long run. This production function can then be rearranged to the growth accounting equation which I’ll use to assess South Africa’s performance shortly. I don’t want to go too much into detail here but the growth accounting framework merely states that output growth per worker can be decomposed into growth in physical capital per worker, human capital and growth in total factor productivity (measured as residual because it is not observed).

South Africa Sources of Growth

The diagram above includes the three key elements of the sources of growth in addition to real GDP per worker* which is measured at constant national prices and stated in 2005 US$. Firstly, there is total factor productivity at constant national prices and indexed at 2005=1. The second element on the vertical primary axis is the Human Capital per person which is based on years of schooling (Barro/Lee, 2012) and returns to education (Psacharopoulos, 1994). On the secondary vertical axis we have capital stock per worker**. I chose per worker figures for convenience. Also, when using real GDP and capital stock without accounting for changes in the labour force, I end up with the somewhat misleading diagram below:

South Africa Sources of Growth 1.png

So, what can be inferred from the first diagram? Total factor productivity has actually declined on average since the 1970s. What is more, it relatively closely matches changes in GDP over time. This supports the assumption that TFP is a major determinant of long-run economic growth. From 1984 the capital stock per worker starts to plunge dramatically until the end of 2002. Since then it has increased again rapidly. One potential explanation are the government’s white elephant projects. These are uneconomic large-scale infrastructure projects with the goal to stimulate FDI and generate returns exceeding the initial investment (Saul and Bond, 2014). However, due to corruption and mismanagement, these projects may have only increased total physical capital per worker while failing to spur the economy. Lastly, South Africa experienced large improvements in human capital per person from the beginning of 1986 to 1995. After a subsequent drop it reached its 1995-level of human capital per person in 2007 again. It seems that there was a re-orientation from investment in physical capital to investment in human capital in the 1980s to 1990s. Overall, the diagram clearly shows that the impressive growth in physical and human capital per person failed to result in similar growth rates in output per person. It may well be that low factor productivity dampens the transmission mechanism between investment in physical and human capital and the South African economy’s output. In short, South Africa will likely need to re-orientate towards enhancing its productivity rather than accumulating more and more capital stock per worker which does not seem to add much value.

Thanks for reading my post today!

Jasse


*Real GDP at constant 2005 national prices (in mil. 2005US$)/Number of persons engaged (in millions)

**Capital stock at constant 2005 national prices (in mil. 2005US$)/Number of persons engaged (in millions)

EIU (2015). Country Report South Africa September 2015. London: The Economist Intelligence Unit N.A., Incorporated.

Feenstra, Robert C., Inklaar, R., and Timmer,M.P.  (2015). The Next Generation of the Penn World Table, forthcoming American Economic Review, available for download at http://www.ggdc.net/pwt

Foroohar, R. (2015). Why the Mighty BRIC Nations Have Finally Broken. [online] Available at: http://time.com/4106094/goldman-sachs-brics/

Inklaar, R. and Timmer, M.P. (2013). Capital, labor and TFP in PWT8.0. Groningen: Groningen Growth and Development Centre, University of Groningen July 2013.

Saul, J. S., and Bond, P. (2014). South Africa, the present as history: from Mrs Ples to Mandela & Marikana. Woodbridge, Suffolk, James Currey.