SECTORAL ELASTICITY OF SUBSTITUTION AND RETURNS TO SCALE IN SOUTH AFRICA

Elasticity of substitution and returns to scale are estimated on a sectoral basis for South Africa using panel-based generalised least square procedure. Apart from sectoral differences in terms of elasticity of substitution, the study found that elasticity of substitution is below unity in all of the sectors. Most of the sectors studied are found to have increasing returns to scale in production. The study further explores the implications of elasticity of factor substitution and returns to scale on growth and employment creation. It is argued that a greater number of jobs can be created from growth of sectors with constant or decreasing returns to scale than from the same level of output growth generated by sectors with increasing returns to scale. This is the case when the employment-creating potential of the same amount of additional output is compared in all the sectors examined. By virtue of scale economies, a sector like finance, insurance, real estate and business services generates more output with less proportional increase in inputs, which means growth in this sector may not have the desired impact on job creation. However, given the sector's large share (20%) of the country's total output and employment, it may generate more jobs, even if sectors like utilities and construction experience the same level of output growth. Given its importance for growth and employment, the study recommends further investigation into the reasons why elasticity of substitution is lower in sectors like utilities, mining and trade, catering and accommodation services.     

AN ANALYSIS OF INVENTORY INVESTMENT IN SOUTH AFRICA

This paper describes the evolution of inventory investment in South Africa over the past two decades, and identifies the factors influencing inventory investment over this period. An econometric model of inventory investment in South Africa, based on the production smoothing approach, is constructed. The results of the model indicate that actual sales, production, unfilled orders, price levels, interest rates and expected sales have an influence on the evolution of inventory investment. These variables are directly or indirectly influenced by macroeconomic policy decisions and through their influence on inventory investment they also influence changes in gross domestic product. Therefore, prior information on the factors that influence inventory investment contributes to explaining changes in gross domestic product and may help to prepare more accurate short‐term forecasts of overall economic activity.     

DURATION ANALYSIS IN SOUTH AFRICA: THE SEARCH FOR SUPERIOR MEASURES

The Macaulay duration is a highly successful tool for measuring and managing interest rate risk. However, it employs restrictive assumptions which constrain its usefulness in a rapidly evolving market. The Basel II implementation and ongoing accounting standard reassessments highlight the requirement for accurate, robust risk measures. Contemporary research has focused on augmenting the existing duration definition. We extend this work by relaxing some input assumptions, describing a different duration measure and applying it to interest rate driven price changes and examining the influence on the duration gap. The economic market value of equity (an important metric for regulators and risk management) is significantly improved.     

AN ANALYSIS OF ECONOMIC INFRASTRUCTURE INVESTMENT IN SOUTH AFRICA

This paper analyses long‐term trends in the development of South Africa's economic infrastructure and discusses their relationship with the country's long‐term economic growth. A database covering national accounts data, railways, roads, ports, air travel, phone lines and electricity was established for this purpose, and may facilitate further quantitative research. PSS (Pesaran, Shin and Smith, 1996, 2001) F‐tests are used to identify directions of association between economic infrastructure and economic growth. These indicate long‐run forcing relationships from public‐sector economic infrastructure investment and fixed capital stock to gross domestic product (GDP), from roads to GDP, and from GDP to a range of other types of infrastructure. There is also evidence of potential simultaneity between specific types of infrastructure and GDP. The evidence suggests three main findings. Firstly, the relationship between economic infrastructure and economic growth appears to run in both directions. Inadequate investment in infrastructure could create bottlenecks, and opportunities for promoting economic growth could be missed. Secondly, South Africa's stock of economic infrastructure has developed in phases. Policymakers should focus on choosing or encouraging the right type of infrastructure at the right time. Thirdly, the need for investment in economic infrastructure never goes away. The maintenance and expansion of infrastructure are important dimensions of supporting economic activity in a growing economy, provided that individual projects are chosen on the basis of appropriate cost‐benefit analyses.     

THE CHANGING FACE OF PUBLIC FINANCING OF HIGHER EDUCATION,WITH SPECIAL REFERENCE TO SOUTH AFRICA1

Higher education displays characteristics of both private and public goods and there is a trend worldwide to expect individuals to pay more of the costs of their higher education. In South Africa public funding of higher education decreased from 0.86% of GDP in 1986 to only 0.66% in 2006; so that student tuition fees had to be increased to compensate for this loss of income. In the process staff numbers were kept relatively constant while student numbers increased appreciably. Two future scenarios, based on public higher education expenditure as a percentage of GDP and on real state allocation per WFTES, are spelt out. Although the qualifications awarded per FTE academic staff member increased over time, the graduation rates of the higher education institutions in South Africa are worsening. High‐level research, measured in publication units per FTE academic staff member, shows a disturbing decreasing trend since 1997.     

MODELLING INFLATION IN SOUTH AFRICA: A MULTIVARIATE COINTEGRATION ANALYSIS

We employ an expectations augmented Phillips curve framework to investigate the link between inflation, unit labour costs, the output gap, the real exchange rate and inflation expectations. Using multivariate cointegration techniques, we find evidence consistent with mark‐up behaviour of output prices over unit labour costs. Most importantly, we find that the mark‐up in the South African economy is much higher than in the U.S. For South Africa we find a markup of about 30 per cent: three times as high as the 10 per cent markup found for the U.S.     

A NOTE ON THE SUPPLY OF ECONOMISTS IN SOUTH AFRICA

If true delight you would afford him You'd give him Adam Smith to read. A deep economist, indeed, He talked about the wealth of nations; The state relied, his friends were told, Upon its staples, not on gold—This subject filled his conversations. His father listened, frowned, and groaned, And mortgaged all the land he owned.     

THE RELATIONSHIP BETWEEN SAVING AND GROWTH IN SOUTH AFRICA: A TIME SERIES ANALYSIS

This paper uses the Johansen VECM estimation technique to examine the directions of association between saving and growth in South Africa over the period 1946–1992. We examine the aggregate private saving rate and its interaction with investment and growth. The paper finds that the private saving rate has a direct, as well as, an indirect effect on growth. The indirect effect is through the private investment rate. In turn, we find that growth has a positive effect on the private saving rate. The extent of this effect is determined by liquidity constraints. Thus, we have a virtuous cycle, as growth enhances saving, which in turn further enhances growth.