Testing for linkages in sectoral development an SVAR approach to South Africa

South Africa has a peculiar industrial structure given its factor endowments: production is capital intensive in sectors and concentrated in capital intensive sectors despite an abundance of unskilled labour. Part of the reason for this phenomenon lies in the development process of South African industry: it grew around the mining sector and its core sectors remain close to the minerals endowment up until today.

A possible explanation for this path dependent development is the existence of forward and backward linkages between sectors that drive industrial development. We use an SVAR approach with realistic identification assumptions from input-output relations - following a paper by Abeysinghe and Forbes from 2005 that analysed trade linkages between Asian countries - to estimate the effect of linkages between sectors on sectoral growth performance. Impulse response analysis allows us to estimate the impact of a shock in one sector on other sectors of the economy and therefore points toward the 'pulling power' of various sectors of the South African economy.