This report was prepared for National Treasury to support its assessment of administered prices in South Africa. The objective of the study was to assess the processes involved in setting prices in regulated industries. By evaluating the efficiency, effectiveness and analytical rigour of the regulatory processes involved in setting prices for the services involved, an assessment can be made of the likelihood that the resultant tariffs approach efficient levels. Volume I of the report sets out the main findings and recommendations with supporting information relating to the individual sectors included within the scope of the study provided in a summarised form. Volume II contains more detailed sectoral reports, covering individual review of the water, electricity, telecommunications, transport, health and education sectors.
The report does not offer a detailed quantitative assessment of the performance of the regulatory regime, and is largely based on in-depth interviews and documentary analysis. The authors would like to thank the interviewees for their cooperation and valuable insights. Although much care was taken to provide a correct reflection of the opinions expressed, the authors remain entirely responsible for any inaccuracies. The project was coordinated by Trade and Industrial Policy Strategies (TIPS) and generous funding of the project was provided by DFID, as part of its Support for Restructuring of State-Owned Enterprises in South Africa Project.
In this paper we aim at identifying the determinants of South African currency premia in order to assess the scope of South African economic policies to narrow the spread on local-currency denominated debt. South Africa is one among very few emerging economies able to borrow long-term abroad in its own currency and one of the few that has developed its domestic bond market fairly well. However, allowing for the heightened and increasing instability in the nominal exchange rate of the rand over the last years, this fortunate specificity may fade away: local-currency denominated issues might become more expensive and less liquid overtime. Therefore, a key policy issue is how South African monetary policy may influence exchange rate determination and how it can be instrumental in stabilising expectations about the course of the rand, thus bringing down local-currency denominated debt costs. Moreover, lower debt costs are of utmost importance in boosting investment and future output growth. Using high frequency data and resorting to volatility modelling, we carry out an empirical analysis of the determinants of the 1-month and 1-year currency premia. Among these determinants, the South African Reserve Bank's Net Open Forward Book and the misalignment of the real effective exchange rate stand out. We also control for global risk aversion, the dollar price of gold, idiosyncratic and regional political shocks as well as other shifts in monetary policy, like the inflation targeting regime set up in early 2000.
Since the attainment of independence in 1994 the new government in South Africa has adopted two outward looking development-oriented economic reform programmes, that is, the Reconstruction and Development Programme, (RDP) in 1994 and the Growth Employment and Redistribution (GEAR) strategies in 1996. RDP clearly outlined the broad framework of the new government's economic and social policy while GEAR clearly defined the policy instruments and objectives to be pursued from 1996 to 2001. These initiatives have however not been able to put the country on a stable growth path and only marginal growth has been realized. Both internal and external shocks have resulted in negative developments of most macroeconomic variables. In light of the above developments, this paper provides a Vector Auto Regression (VAR) empirical analysis of macroeconomic fluctuations in the South African economy from 1972 to 2002. An analysis of the role of domestic and external factors on macroeconomic shocks is conducted through a focus on real domestic product, terms of trade, inflation, government consumption, money supply, real exchange rate, and the world interest rate.
The paper also evaluates the effectiveness of South Africa's macroeconomic policy framework, with particular emphasis on its ability to counteract trade and financial shocks as well as its overall success in achieving positive structural change and a sustainable growth path. The results indicate a general validity of the predictions of the analytical model and hence confirm macroeconomic theory postulations about the nature of the relationship between each of the variables and macroeconomic fluctuations in South Africa. The analysis shows that although the South African economy has experienced marked fluctuations in output and macroeconomic fundamentals, the economy shows resilience to permanent effects of shocks, as these tend to be short-lived and this reflects macroeconomic policy effectiveness. Money supply and world interest rates account for 30% and 18% of the output fluctuations respectively. On the other hand, real exchange rate fluctuations are more associated with monetary policy. There is strong evidence that exchange rate stability is also susceptible to external shocks.
Policy makers in the public sector are often faced with requests for financial and other support of investment projects and incentive schemes. Frequently, such requests are accompanied by or require economic impact analyses of some sort. Economic impact assessment of investment projects can be undertaken at various levels. At one level, decision makers are interested in the financial viability of the investment project, in other words a comparison of income and expenditure. Taking a broader view, the challenge is to assess the impact of the proposed investment on the economy in which it takes place. Often, rather wild statement can be found in the media in which it is, for example, argued that one job is created for every 12 foreign visitors or so many Rands invested. Although such statements are appealing to the general public, decision makers need to go beyond these aggregate effects and extent the analysis to a more disaggregated level. For example, what will the effects be on the different economic industries? Will these jobs be created for highly skilled or unskilled labor?
The impact of an economic stimulus on specific institutions or industries can usefully be analysed with input-output analysis or social-accounting matrix (SAM) based models. These models use a database or snapshot picture of the economy, and then basically multiply the stimulus with the relevant institution's or industry's output multiplier. However, these analyses rely on strict assumptions, for example production technologies remain constant, which ignores any dynamic effects such as substitution between labor and capital, and a non-substitutability between different types of labor such as skilled and unskilled labor (Holub and Tappeiner 1989).
More specifically, in terms of employment it is often assumed that the average employment-output ratios of the relevant industry apply for all sectors that will indirectly receive a boost as a result of the production activities at hand. If substantial evidence exists of economies of scale and many economic observers have noted the recent phenomenon of jobless growth an alternative specification of the relationship between a change in output and the associated change in employment becomes critical.
Therefore, a time series regression analysis approach will be followed in analyzing the impact of output on labor demand or employment. Apart from generating employment output elasticities, so necessary for a more appropriate application of input-output or first generation SAM based modelling, with this approach it is possible to allow for phenomena such as input substitution and jobless growth, as well as other structural changes to be examined. The study is outlined as follows: the next section summarizes the economic determinants of labor demand. Section three explains the methodology followed in the study, while section four briefly described the econometric techniques used. Section five describes labor demand in South Africa, and section six presents the results of the empirical analysis. Section seven provides some conclusions.
The government of South Africa comes across clear in enunciating its goals for the reform of public enterprises. According to the Minister of Public Enterprises, “restructuring” is the generic term taken to represent the set of strategies employed by the state to ensure that public enterprises in South Africa are “efficient, effective, and powerful engines of socio-economic development…. Restructuring aims to maximise the contribution that these state assets can make to development through the integration of public, private and social capital and expertise.” (RSA 2001a, 1) In its vision for restructuring, the government declares:
Development cannot be measured only by financial criteria, and restructuring is not a means of improving government finances and enterprise efficiency at the expense of the poor. Rather, the success of restructuring will be measured by its contribution to improving the standard of living of the majority of the population. The goal of restructuring should therefore be sustainable economic and social benefits. (RSA 2000a, 14)
The post-apartheid government of South Africa inherited over 300 state-owned enterprises (SOEs), with four of the firms accounting for 86% of aggregate turnover, 94% of total income, 77% of all employment, and 91% of the total assets of these
enterprises. These “key enterprises,” as they are collectively described in the government's Policy Framework Paper, are in telecommunications (Telkom), energy (Eskom), transportation (Transnet), and defence (Denel). None of these firms are slated for outright privatisation in the near future. The debate is joined around the wisdom of the government's model of reform, its so-called “matrix of options.”
The study provides a general overview of current issues in the South African Distribution Sector. It is restricted to focussing on three industries namely, pharmaceutical distribution, distribution in the food industry and distribution in the automotive industry. In examining the behaviour of SA retail pharmacies it becomes apparent that retailers have attempted to obtain political support for regulations that bolster cartel structures and behaviour, and which discourages innovation in distribution. The outcome is perverse. Retailers do not achieve economies of scale, while consumers do not receive lower prices. In the SA food sector it was found that retail and wholesale industries are highly concentrated. The result is that retail and wholesale chains largely compete with one another on price and operate with low margins. Manufactures distribute direct to retail chains at the discretion of the chains. In examining the SA automotive industry it was found that the industry has developed from a highly protected, inward-focused industry to one with a marked export orientation. All South African light vehicle assemblers are either affiliates or licensees of foreign MNEs. The key factors that have assisted in integrating the industry into global networks have been the incentives provided under the motor industry development programme (MIDP), falling tariff protection that has increased import competition, and access to international markets through the parent company. The study also notes the increasing importance of E-commerce in the retail chain. The Internet mode of retail is used extensively in the South African distribution channel, however South Africa's lack of bandwidth development may be constraining South African retailers from effectively competing with foreign retailers.
South Africa has experienced considerable currency volatility during the past few years, despite strong economic fundamentals. Recently this resulted in the appointment of the Myburgh Commission of inquiry into the depreciation of the rand. From January 1, 1996 to May 29, 2002, the value of the rand depreciated from R3.64 per US$ to R9.85, reaching an all-time low of R13.002 on December 20, 2001. Policymakers and academics have increasingly wondered about the nature of these crises, the factors responsible for their spread and particularly whether a country with seemingly appropriate domestic and external fundamentals can suffer a crisis because of contagion. More specifically, why should a country like South Africa be affected if there are problems in Brazil, as these countries are hardly related? Or why do events in Zimbabwe continually "haunt" the rand? The answer to this question requires an examination of the channels through which disturbances are transmitted from one country to another (Hernandez and Valdes 2001:3).
Isolating the relevant contagion channels is key from a policy perspective, for appropriate prescriptions may vary substantially depending on what drives contagion. For instance, if trade linkages were to drive contagion, countries would have few alternatives other than to diversify their trade base or to fix irrevocably their foreign exchange rate. On the other hand, if financial links were to be blamed for contagion, countries should attempt other measures such as imposing prudential capital account regulations. Alternatively policymakers can attempt to protect foreign reserves with a policy of high interest rates. This can have detrimental consequences for the domestic economy.
The purpose of this paper is to analyse empirically the existence and extent of contagion in explaining volatility of the South African rand. Misfortunes in Zimbabwe and other emerging-markets countries (like Argentina) have often been blamed for the recent volatility. This implies the possible presence of financial contagion. On the other hand, declining economic activity in Zimbabwe can also result in contagion through trade linkages. We investigate two alternative contagion channels: (i) real interdependence (trade links) through bilateral trade and trade competition in third markets, and (ii) financial contagion.
Empirical results confirm the presence of contagion. This suggests that no open emerging-market country, even with relatively sound fundamentals and policies, is capable of insulating itself from events in the rest of the world. The difficult challenge still faced by emerging markets is how best to reap the benefits of a more open economy while minimizing the risk of becoming the victim of a potentially devastating financial crisis inherent in the liberalization process.
The paper reports on the construction and testing of a Standard International Food Policy Research Institute (IFPRI) computable general equilibrium model for South Africa. A 1998 social accounting matrix (SAM) for South Africa is compiled using national accounts information and recently released supply-use tables. By updating to a recent year, and by distinguishing between producers and commodities, this SAM is an improvement on the existing SAM databases for South Africa.
Furthermore, this SAM is made consistent with the requirements of IFPRI's standard comparative static computable general equilibrium (CGE) model. This model is then used to simulate the economy- wide impact of a range of hypothetical policy levers, including: increased government spending; the elimination of tariff barriers; and an improvement in total factor productivity. Results indicate that assumptions made regarding the mechanisms of macroeconomic adjustment are important in determining the expected impacts of these policies. Firstly, despite mixed results concerning changes in household income distribution, the impact of expansionary fiscal policy appears to be growth enhancing, with the Keynesian style adjustment mechanism producing the most positive results.
Secondly, a complete abolition of import tariffs also appears to generate increases in gross domestic product, with negative and positive consequences for aggregate manufacturing and services respectively.
Finally, an increase in total factor productivity is growth enhancing, with the most positive results derived under neoclassical assumptions of the macroeconomic adjustment mechanisms. These simulations are meant to demonstrate the usefulness for economy-wide policy modelling and the paper concludes by highlighting areas of policy analysis that might benefit from more detailed applications with this framework.
In the 1980s the UK (and Chile) began the processes of privatizing and restructuring stateowned enterprises, liberalizing the markets in which they operated and regulating their conduct. Since then many countries at all levels of development have implemented their own programmes of regulatory reform. Almost two decades after the process started it is time to take stock and to reflect on the general lessons to be learned from the UK experience. In the rest of the introduction I outline briefly the major events and themes. For detailed surveys of UK regulatory reforms see Armstrong et al. (1994), Helm and Jenkinson (1998) and Newbery (1999). Cowan (2001) covers the theoretical principles of regulation and relates them to UK experience. There were many reasons for privatization and the accompanying regulatory reform. State-owned enterprises had performed poorly in terms of both productive and allocative efficiency because of imperfect monitoring, unclear objectives and lack of competitive pressure. Privatization and, particularly, competition would weaken the power of trade unions in the enterprises. The government was unwilling to finance the major investment programmes required by the enterprises. Shifts in demand and in technology reduced the scope of natural monopoly conditions. The government was keen to obtain an immediate inflow of cash from asset sales. Equity sales offered the opportunity to extend share-ownership.
The main landmarks in the process were the privatization of telecommunications (1984), natural gas (1986), airports (1987), water and waste-water (1989), electricity supply (1990/91) and rail (1994/95). Sector-specific regulators, with a large degree of independence from the government, were established around the time of privatization to regulate dominant firms' conduct, especially their pricing. The main innovation as far as conduct regulation was concerned was the use of price caps, backed up by yardstick competition in the regionally organized industries (water and electricity). Setting price caps, however, has not proved as straightforward as was imagined by early proponents, and it turned out that regulators have to make substantial use of the tools used when applying rateof- return regulation. A difficult aspect of price control has proved to be the determination of access or interconnection prices, which are the prices that a vertically integrated firm charges rival suppliers for the use of its network services.
Issues of industry structure were initially left to one side, and British Telecom (BT) and British Gas were privatized as vertically integrated dominant incumbents. This contrasts with policy in the USA at the time, which separated AT&T vertically into a long-distance company and the regional Bell operating companies. In the UK a single firm, Mercury, was licensed to compete with BT in the long-distance market with the guarantee that there would be a duopoly for seven years. Since the end of the duopoly policy in 1991 entry into all telecommunications markets has been fully liberalized, though a decade later it is still the case that BT has a dominant market position. British Gas was left untouched as a monopsonistic buyer of gas, as the only gas transporter and with a de facto monopoly in the supply of gas. Although entry into gas supply for large customers was liberalized in a legal sense there was no competitive entry for almost ten years after it had become feasible. Thereafter the regulatory authorities chiselled away at BG's structure and conduct, until BG split itself vertically in 1997 into separate transportation and supply companies. Full competition in supply has existed since 1998.
The regional water and wastewater companies were privatized as vertically integrated entities, and only recently have there been moves to introduce some product market competition in water. The electricity industry, though, was subject to large-scale restructuring. Transmission was separated from generation and the generating company was split horizontally into three competing businesses. A power pool was established to allow spot market trading of electricity. Distribution and retail supply remained regionally organized, with a rolling programme of allowing entry into retail supply. The retail supply markets were fully liberalized in 1998. Ownership structures have changed significantly over time, with many of the regional companies being owned by foreign utilities, and some vertical reintegration has been allowed. Distribution and supply businesses have built new generation capacity and generators have been allowed to buy supply businesses once market power was deemed not to be an issue in generation.
The railway industry was subjected to the largest restructuring of all at the time of privatization. The monolithic state-owned British Rail was transformed into more than eighty companies. Provision of track, stations and signalling was separated from train operation, which was itself split into separate routes and regions and franchised. Train ownership was separated from train operating companies, and track maintenance was likewise divorced from track ownership. In the next section I consider the regulation of conduct, including price controls, quality and investment monitoring and the use of spot markets for intermediate products. Section 3 covers structural regulation and entry conditions. Section 4 considers the role of regulatory institutions. Section 5 concludes.
In recent years, dozens of OECD and non-OECD countries have followed the United States in establishing strong autonomous regulatory institutions empowered with regulatory instruments and financial independence. Flexibility and agility are required to implement ad hoc policies through regulations, resolutions, and decrees. Their special status also responds to the need to operate efficiently in an environment characterized by technical complexity leading to a rise in the number of interested stakeholders; arbitrage conflicts and potential clash of interests with other government bodies; and the risk of regulatory capture, since the agencies repeatedly interact with a reduced number of private firms. They enjoy a quasi-judicial status, but unlike the judiciary which applies the law to facts, they are required to balance the interests of different stakeholders, and promote the development of the sector. The existence of these institutions is deemed necessary to make the regulatory framework credible and transparent and thus allow the mobilization of private investment on the scale required. Where the functions of owner, operator, and regulator of public utilities were previously carried out by government in its different manifestations (including state-owned monopolies), the new market-friendly environment requires a number of institutional changes with a view to separating and more clearly defining responsibilities for policy and planning, regulation, and service provision.
Latin America has been at the forefront of this trends, and indeed the need to carefully analyze what happens on the other side of the Southern Atlantic had already been identified by Alexander and Estache at the 1999 TIPS Forum. In this paper we wish to go a step forward with respect to the useful, but still rather general, issues raised on that occasion by examining the performance of Brazilian regulatory agencies in selected infrastructure sectors electricity (Aneel), natural gas and oil (Anp) and telecommunications (Anatel) in view of making policy proposals to improve the design and functioning of similar regulatory bodies in South Africa.1 Following Spiller (1993), 'it is only through detailed analysis of the economic and political implications of the privatization experiences that we may obtain insights about the role different institutions have in determining the performance of the regulatory and ownership reforms (p. 388).
In order to set a framework to anayze the performance of regulatory agencies, in the next Section we distinguish between regulatory governance and regulatory incentives (Levy and Spiller 1994). In Section III we sketch the main characteristics of the Brazilian regulatory experience and study the agencies' relationship with other government bodies and state-level regulatory bodies, and in Section IV analyze the agencies' most important decisions and draw some policy implications. The following Sections identify the main challenges open to South Africa in this domain and conclude
The South African financial sector, described here as the banking, insurance and securities industries, is a sophisticated enclave within widespread financial exclusion. The financial sector is generally regarded as stable and well regulated; indeed it is to the latter that the robustness of the sector has been attributed, in the wake of the Asian and other financial crises.
In recent years the sector has been opening up with greater participation from foreign and niche-seeking domestic firms. There has also been considerable transformation of the regulatory requirements of the sector, demanding greater compliance in terms of corporate governance and transparency. The regulations have also lead to greater equity in terms of regulatory treatment between and within the industries. However, while the recent promulgation of regulatory legislation in each of the industries has resulted in greater compliance with international standards, the adjustment required to meet worldclass standards is not yet over. In addition, meeting international standards for compliance and regulation is only one part of the dual pressure facing the sector: the other lies in the growing political and economic imperative to address widespread financial under-provision in South Africa. The report examines the implications of compliance with international trends for greater openness and tighter regulation, within the context of domestic pressures to extend financial services to the majority of South Africans.
The paper begins by sketching the background to the sector, providing a brief overview and highlighting some of the reasons for the importance of the sector.
The past two decades have witnessed far-reaching reforms in the provision of telecommunications services. Before the 1980's, telecoms services were mainly provided by state-owned enterprises and in rare cases by private monopolies with territorial or functional licenses. The 80's saw the role of the state being increasingly changed from that of service provider to that of regulator and policymaker. These developments were a result of technological changes that enabled some segments of telecommunications to be subject to competition. Regulatory reform was also often undertaken by governments as a strategy to attract investment in the sector to enable increased telephone penetration. Developing countries also faced pressure from Bretton Woods institutions and other international organisations to liberalise their markets. Liberalisation, privatisation and deregulation thus became the order of the day (Frempong and Atubra, 2001).
This paper deals with an issue that is often mentioned as an afterthought in discussions of regulatory reform: regulation and regulatory institutions. A review of a recent collection of writings on privatisation in developing countries reveals that little detailed work has been carried out on the experience of regulation (Makhaya, 2001). This tendency to overlook regulation is worrying as a study on developing countries found that the most disturbing issue in telecoms reform is the slow pace in developing regulatory capabilities (Achterberg, 2000). It is now a wellaccepted fact that liberalisation and/or privatisation of utilities such as telecommunications requires post-reform regulation for various reasons. These industries are characterised by natural monopoly in some segments; local calls are a well-cited example. Regulation is needed to protect consumers in areas that, even with modern technology, are still not contestable. In areas that can be opened up to competition, there are barriers to entry due to the nature of capital investment required and incumbency advantages such as customer loyalty. Competition has to be nurtured and the regulator has the power to influence the development of competition and the form it will take (Helm and Jenkinson, 1998).1 Regulation is also needed to ensure that license obligations (e.g. quality standards, interconnection) are met and to monitor the performance of any social obligations that firms have to undertake. Most importantly, regulation is needed to ensure that competition emerges in the sector. Without proper regulation, abuses of market power can go on unchecked and competition stifled.
It should also be acknowledged that privatised infrastructure facilities continue to occupy a strategic role in an economy: they have links to growth, poverty and the environment and regulation has to be put in place to deal with these externalities (Naidu, 1995). Telecommunications form the backbone of the knowledge economy. It is an important provider of income, employment and is a determinant of a nation's competitiveness (Chowdary, 1998). Public investments in communications and transport have been linked to economic growth.2 Community economic development also flows from increasing access to telecommunications: job creation, job maintenance and the creation of home-based industries are all facilitated by access to telecommunications. All the countries that are mentioned in this discussion regard competitive 1 This observation was made for the UK experience. 2 A study of 119 countries spanning the 1960 to the 1980s found a strong correlation between economic growth and public investment in transport and telecommunications (Easterly and Rebelo, 1993). 2 prices for telecommunications services as an important policy goal, given the linkages of the sector to production in other sectors.
The issue of regulation is particularly relevant to South Africa at this stage as the telecommunications industry is undergoing restructuring. Various policy directives have been issued to determine the course of the sector's development. The development of regulatory institutions is thus a crucial matter that needs to be adequately addressed. The regulator has various important functions to perform in this period of transition and beyond. Thus it is a cause of concern that ICASA is perceived as weak and under-resourced (Business Day, 01 February 2001). Policies such as market liberalisation and privatisation can lead to sub-optimal outcomes if the right institutions and processes do not exist. A study by Wallsten (1999) demonstrates that privatisation without competition can have negative effects. Wallsten performs a regression using data from 30 African and Latin American countries between 1984 and 1997 to show that privatisation, by itself, is negatively correlated with mainline penetration and connection capacity. Only when a strong regulator and competition accompany privatisation do gains such as increases in per capita main lines, increases in payphones and decreases in local price calls begin to emerge.
Most discussions of regulatory reform often assume that the appropriate regulatory institutions exist without exploring the validity of this assumption. This paper will attempt to identify the main determinants of regulatory effectiveness, especially in the context of setting up new institutions. The discussion will include a comparative study of the development of regulatory institutions in Ghana and Malaysia and the lessons these countries hold for South Africa. The paper will begin by a brief outline of the countries and their efforts towards regulatory reform followed by a discussion of what is meant by an effective regulator. The paper will then provide a comparative study of the determinants of regulatory effectiveness followed by a concluding section.
The determinants of economic growth have long interested economists. A number of variables have been found to be significant, among them the private investment rate, human capital investment rates, the political stability of a country and others. An important sub-category of such determinants is policy variables. Specifically, two such variables are government consumption expenditure and the inflation rate.
In this paper we will employ an endogenous growth model as we investigate the effects of policy on per capita GDP. We allow for the possibility of non-linearities in the relationship between government consumption expenditure and the inflation rate and GDP.
Cross-sectional studies of the determinants of economic growth find the impacts of both government consumption expenditure and the inflation rate to be negative, as shown in Table 1. A distinguishing feature of these studies is that the policy variables enter the specification linearly. Either of the feasible signs on the policy variables implies a corner solution that seems implausible. Complete reliance on private markets is challenged at least by the literature surrounding the impact of human capital on economic growth. Complete nationalization of the economy is difficult to justify on efficiency grounds. The implied interpretation of the policy variables in growth studies is that they capture piecewise linearity. A better solution, therefore, would be to recognize the likely nonlinearities explicitly. It is with this task that the present paper is concerned.
The idea is that for relatively low levels of government consumption spending and inflation, the impact on the growth rate may be positive but as the ratio of government consumption spending to GDP and the inflation rate increase they begin to have negative effects on GDP. Time series estimations of this hypothesis show that this may indeed be the case for South Africa.
This is the only known study of its kind to undertake such an investigation. While the South African literature is peppered with comments and thoughts on the role of policy with respect to economic growth there have been no empirical investigations. Further, there is no known study worldwide that examines the possibility of a non-linear impact of policy on growth.
The paper draws from both the theoretical literature on growth as well as the international empirical findings. The following section provides a brief summary of the literature. In Section 3, we extend the finding of Barro (1990) that government consumption expenditure has an optimal level beyond which it begins to reduce per capita consumption to show that it also has an optimal level with respect to the growth rate of output. We also present a brief analysis of the effects of inflation on growth.
We then allow for the possibility that policy may have an indirect effect as well as a direct effect on growth via its effects on investment. We show that government policy 3 can affect investment, which, as shown by Levine and Renelt (1992), is one of the most robust determinants of growth.
Section 4 outlines the econometric methodology to be used, specifically the Johansen estimation approach as well as the autoregressive threshold effects methodology. We provide an outline of the models to be estimated. In Section 5 we discuss the data to be used. Section 6 outlines the univariate time series characteristics of the data and reports the empirical results. Using appropriate time series estimation techniques the empirical findings show that policy does indeed have a significant direct effect on per capita GDP in that higher levels of government spending and inflation reduce GDP. An examination of the possibility of the existence of an optimal level of government consumption spending and inflation show that there could indeed exist such threshold levels for both variables. The final estimation suggests that it is insufficient to examine only the direct effects of policy. It is necessary to examine the indirect impacts too. Section 7 concludes the paper.