Explaining the Growth Absence: Reviewing the Evidence that can Account for the Poor Growth Performance of the South African Economy

Explaining the Growth Absence: reviewing the evidence that can account for the poor growth performance of the South African economy

South Africa's democratic transition now lies close to a decade in the past. The transition carried with it much by way of hopes in terms of a greater access by its population not only to an improved rights environment. It was envisaged that the political self-realization of all South African citizens would bring with it access to improved economic well-being also. Employment as well as rising per-capita income are obvious indicators of progressive development for the population of a country.

In this paper we review evidence that has emerged over the past four years that can provide some insight into the growth and employment creation performance of the South African economy. The emphasis is explicitly on why limitations in the growth performance of the South African economy may have emerged. As such, the tone will have a tendency toward the gloomy. So let me start at the outset by reminding ourselves that the past decade has seen much by way of achievement on the policy front. Success particularly with regard to macroeconomic stabilization policy is notable, and should not be obscured behind the veil of woe that is the topic of the present discussion. But enough of optimism - and to the task in hand.

We begin with a consideration of some evidence on the long run growth performance of the economy, as well as the track record of employment creation in the economy. Growth in the South African economy is decomposed into its primary sources, in order to identify any fundamental structural changes in the source of economic development. The evidence will indicate that not only has growth and employment creation in South Africa been subject to long term structural decline, but the source of economic growth has also shifted from capital accumulation to TFP growth over time.

Section 2 of the paper is concerned with an analysis of the determinants of perhaps the most fundamental driver of long term growth: investment in physical capital stock. The evidence suggests that rates of return on capital and the user cost of capital are fundamental to the determination of investment in fixed capital stock, but exercise their influence subject to a powerful impact exercised by uncertainty. What is more, the evidence reviewed demonstrates that uncertainty is crucial not only for investment in physical capital stock, but also for the determination of the capital flows that are required to finance the short-fall of savings relative to investment expenditure in South Africa.

In the case of South Africa, uncertainty has strong institutional underpinnings, which section 3 elaborates on. The evidence reviewed in section 3 points to a number of crucial institutional dimensions that exercise an influence not only on capital accumulation, but on employment creation, international trade flows, and the efficiency of output markets in South Africa.

Finally, in section 4 of the paper we consider evidence on the importance of the factors identified by modern (endogenous) growth theory in determining South Africa's growth performance. While a number of different determinants are considered, the discussion focuses on the contribution of investment in human capital. The evidence suggests that what counts is quality of human capital investment rather than quantity. In an extensive review of published evidence we establish that in generating quality human capital, South Africa still leaves much to be desired.