WAGNER'S LAW: AN ECONOMETRIC TEST FOR SOUTH AFRICA, 1960‐2006

The main objective for this paper is to test Wagner's law by analysing the causal relationships between real government expenditure and real income for South Africa for the period 1960‐2006. The paper tests the long‐run relationship between the two variables using the autoregressive distributive lag approach to cointegration suggested by Pesaran et al. We use the Granger non‐causality test procedure developed by Toda and Yamamoto, which uses a vector autoregression model to test for the causal link between the two. Evidence of cointegration is sufficient to establish a long‐run relationship between government expenditure and income. However, support for Wagner's law would require unidirectional causality from income to government expenditure. Therefore, cointegration should be seen as a necessary condition for Wagner's law, but not sufficient. This research does find a long‐run relationship between real per capita government expenditure and real per capita income. Results for the short‐run causality find bidirectional causality. On the basis of empirical results in this paper, one may tentatively conclude that Wagner's law finds no support in South Africa.     

SOUTH AFRICA'S INTERGOVERNMENTAL FISCAL RELATIONS: AN EVOLVING SYSTEM

Across Africa, Latin America, Asia and the transition economies of Eastern Europe, the need to enhance the capability and capacity of sub‐national governments (SNGs) in providing public goods and services has become a main theme of development programmes. Central to this theme is the need to design an intergovernmental fiscal relations (IGFR) system that enhances the effectiveness of sub‐national governments in mobilizing revenues and implementing expenditure programmes. For South Africa, the post‐1994 dispensation has involved significant reforms to the structure and administrative capacity of the three spheres of government. Critical to these reforms is the need to formulate an IGFR framework that takes cognisance of South Africa's past, and serves as an effective policy tool in ensuring that public sector service delivery is well structured and managed. This paper provides an analysis of South Africa's evolving IGFR system. It outlines the historical evolution of the current IGFR system, identifies current challenges, and discusses implications that these challenges have for the functioning of the IGFR system. The general conclusion emerging from this study is that in the South African context, the key elements necessary for an effective IGFR system are in place. Ongoing reforms have improved the capacity of provincial and municipal authorities in carrying out their revenue and expenditure responsibilities. However, the evolving nature of South Africa's IGFR system requires that significant attention be devoted towards enhancing coordination between delivery departments and improving the capacity of many SNGs. These should not only aid the effective functioning of the IGFR system but also ensure that the gains of decentralisation are sustainable.     

South Africa's infrastructure service delivery needs: The role and challenge for public‐private partnerships

South Africa's development challenges include over R100 billion needed in investment in infrastructure over the next ten years. Municipalities lack the institutional and financial capacity to address this alone and have to raise private sector finance to supplement their own resources and government grants. The borrowing of capital requires a well‐run administration that is able to raise sufficient revenue to meet all running costs, including loan redemption. Municipalities are showing increasing interest in municipal service partnerships (MSPs), including public‐private partnerships (PPPs), as a way of improving efficiency and accessing capital markets. This raises a number of challenges that include understanding and dealing with the continuing negative perceptions of the role of the private sector; clarifying the roles of the private sector and the government, especially local government; and addressing those issues necessary to produce effective and efficient MSPs in South Africa.     

Nelspruit and Dolphin Coast: Lessons from the first concession contracts

South Africa's first two long‐term concession contracts for water and sanitation were signed in early 1999. These complex public‐private partnerships (PPPs) in Nelspruit and Dolphin Coast will use private sector management expertise, as well as huge amounts of private capital investment, to address service delivery challenges in both areas. Especially important will be the extension of essential services to previously disadvantaged residents of both municipalities. The processes of preparing and negotiating these deals have been long and difficult. Councillors and officials have had to overcome a series of obstacles on their way to closing the deal, including fundamental misunderstandings about how such projects work on the part of unions, the general public, other government officials and even some members of South Africa's financial services community. This article provides an account of how and why these PPP projects were developed, and offers some of the key lessons learned regarding how to improve the process in the future.     

Africa's clientelist budget policies revisited: public expenditure and employment in Kenya,Tanzania and Uganda, 1960–2010

What can be learned about policy prioritization in Africa by examining long‐run trends in public expenditure and employment? Many have contended that Africa's post‐colonial leaders pursued economically unproductive budget policies that prioritized the growth of their patronage networks over socially beneficial spending, resulting in bloated payrolls, persistent deficits, and a large rent‐seeking public service. Using a purpose‐built dataset of annual public expenditure and employment series from Kenya, Tanzania, and Uganda for 1960–2010 against which to test these assumptions, this article questions whether there was anything exceptional about the growth or composition of East Africa's post‐independence expenditure. All three states grew and contracted in roughly the same periods as other regions of the world, although their contraction after 1980 was particularly marked. Industrial policy and capital investments influenced budget priorities in the early independence era, while military expenditure and debt service payments escalated in the late 1970s. The government wage bill, meanwhile, fell as a proportion of total spending over the same period. To finance employment growth while the wage bill contracted, governments allowed real wages to plummet in the 1970s–90s. In light of these external constraints and legacies, this article questions whether a budget unencumbered by patronage would have looked very different.     

FISCAL ILLUSION AT THE LOCAL SPHERE: AN EMPIRICAL TEST OF THE FLYPAPER EFFECT USING SOUTH AFRICAN MUNICIPAL DATA1

While South Africa operates a relatively decentralised governance and administrative structure, an important feature of the country's intergovernmental fiscal relations system is the gap that exists between the expenditure responsibilities of sub‐national authorities and their assigned revenue bases. The resulting vertical fiscal imbalance is mainly addressed via significant intergovernmental transfers to provinces and local governments. This factor presents strong a priori grounds for assuming that in the South African context, the heavy dependence of many local governments on intergovernmental transfers may generate fiscal illusion. Despite this, there have not been many empirical studies of fiscal illusion in South Africa's intergovernmental transfer system. This paper extends existing literature on fiscal illusion by using the fiscal year 2005/06 financial and expenditure data from 237 local government authorities in South Africa to evaluate the flypaper variant of the fiscal illusion hypothesis. Empirical results indicate that the marginal effects of municipal own‐source revenues on local expenditure exceed those of intergovernmental transfers. No statistical evidence in support of the flypaper hypothesis within the context of municipal expenditures in South Africa is found.     

THE REVENUE-EXPENDITURE NEXUS: HISTORICAL EVIDENCE FOR SOUTH AFRICA

Results from unit root and cointegration tests suggest that, allowing for structural breaks, government revenue and expenditure in South Africa during 1895‐2005 were I(1) series and cointegrated. Results from Granger‐type causality tests suggest that a bidirectional Granger‐causal relation existed between revenue and expenditure for the full sample period and for sub‐periods up to the 1960s, consistent with the so‐called “fiscal synchronisation hypothesis”. However, in the 1960s the causal relation appears to have shifted to run from expenditure to taxation, consistent with Peacock and Wiseman's “displacement effect”. In the context of the recent fiscal consolidation literature, the South African fiscal experience would appear to be generally consistent with either revenue‐ or expenditure‐led fiscal consolidation efforts, but with the more recent evidence favoring expenditure‐led consolidations.     

Public Revenue‐Expenditure Nexus in South Africa: Are there Asymmetries?

This paper re‐examines the government revenue and expenditure relationship in South Africa using Enders and Siklos' Threshold adjustment and Granger causality tests. The paper allows for structural breaks in the unit root and cointegration tests. The results indicate the absence of any asymmetries in both the threshold autoregression and momentum threshold autoregression specifications of adjustments in the South African's budgeting process. The estimated symmetric error‐correction models provide support for the fiscal synchronization hypothesis of government revenues and expenditures for long‐run and short‐run dynamic equilibrium. These findings indicate that the South African fiscal authorities should try to maintain or even improve the control of their fiscal policy instruments to sustain the prudent budgetary process.     

Fiscal Consolidation and the Public Sector Balance Sheet in South Africa

Between 1994 and 2008 the South African government reduced its debt/GDP ratio from almost 50% to 27%. Unfortunately this reduction was accompanied by a significant decrease in government's fixed capital/GDP ratio from 90% to 55% – fiscal sustainability might have been restored, but government's balance sheet did not improve. A similar story can be told for State Owned Enterprises. Since the Great Recession the fiscal situation worsened markedly – the public debt ratio again approaches 50%. To restore fiscal sustainability this article suggests that the government faces two options: (1) to create room for future countercyclical policy, the government must cut current expenditure and reduce the public debt/GDP ratio to its pre‐crisis level, or (2) substitute much‐needed infrastructure capital expenditure for current expenditure while stabilising the debt/GDP ratio at its post‐crisis level. Given that the much lower fixed capital/GDP ratio inhibits economic growth, the latter option might be more sensible.     

Mobile entrepreneurship: Informal sector cross-border trade and street trade in South Africa

This article presents the results of a study on the participation of non-South Africans in the handicraft/curio sector of street trade in South Africa in informal sector cross-border trade. The findings provide an introduction to the largely unexplored phenomenon of informal sector cross-border trade between South Africa and neighbouring states and challenge some of the common myths about non-South African street traders which pervade public discourses around migration. The Southern African Development Community (SADC) is presently involved in prolonged and contentious negotiations to establish a free trade area for the region based on the SADC protocol on trade and development. At the same time, against a backdrop of anti-immigrant rhetoric, the South African government is developing a new migration policy. The article argues that informal cross-border entrepreneurs should not be disadvantaged by the renegotiation of regional trade agreements and the reformulation of South Africa's new migration policy.     

ADJUSTING SOUTH AFRICA'S FISCAL BALANCE FOR TERMS-OF-TRADE EFFECTS

Standard output gap‐based calculations and interpretations of the cyclical component of the fiscal balance may convey a misleading picture in countries such as South Africa which experience substantial movements in their terms of trade. This paper therefore adjusts South Africa's general government primary balance for terms‐of‐trade effects by means of an alternative calculation of the transitory component based on a measure of the real income gap rather than the real output gap. The results indicate that measures of the cyclical component of the budget balance based on real income and real output gaps generally yield broadly similar results over history, but during exceptional periods of rapid changes in commodity prices, the measures can be very different.     

THE RELATIONSHIP BETWEEN TOURISM AND TRADE IN SOUTH AFRICA

This article explores the relationship between tourist arrivals and trade in South Africa. Two analyses were conducted – a panel data analysis, which included tourism and trade data of 40 countries with South Africa, and a time‐series analysis that involved South Africa's main tourism and trade partners. Cointegration tests, Granger causality and Block exogeneity tests were used to investigate the nature of the relationship. The results of the panel data analysis show that for South Africa as a whole, there is indeed a long‐term relationship between tourist arrivals and trade, and that bidirectional causality exists. The results for the country case studies are mixed, although the evidence is stronger for the hypothesis that tourism causes trade.     

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.     

Trends in living conditions and satisfaction among poorer older South Africans: objective and subjective indicators of quality of life in the October Household Survey

The majority of South Africa's older population is income poor and lives in multigeneration households. Since the first democratically elected government came into power in 1994, South Africans have been promised ‘a better life for all’. A range of policies and programmes has been implemented to improve the living standards and quality of life of the poor. The article asks how the older poor have benefited from government interventions in the period 1995–8. Drawing on data compiled from Statistics South Africa's household surveys in 1995 and 1998 (n=20 000–30 000 households), a set of over 35 objective and subjective indicators broken down by income and younger and older households is reviewed. Older households include at least one member over 60 years of age. Results show that access to services and opportunities improves systematically from poor to rich households. Major material gains for the poor and older households during the review period include access to clean water, electricity and home ownership. Older poor households with better access to services and opportunities are more likely to express overall satisfaction with their living circumstances. The study concludes that the most effective mechanism for poverty alleviation appears to be the non-contributory, means-tested state old-age pension, which lifts some households out of the most disadvantaged bottom income group. Policies under discussion promise further opportunities for empowering poor households with older members.     

Exchange rate volatility and agricultural trade under policy reforms in South Africa

Decades of government intervention have helped develop the South African agriculture sector to its present state. Policy reforms have included trade and exchange rate policies to increase the country's international competitiveness, reduce poverty and promote economic growth. These reforms are facilitating the growth in agricultural trade and South Africa's reintegration into the global economy. Annual agricultural exports and imports have increased. This paper uses annual data and a vector error-correction model to investigate the supply and demand relationships for agricultural trade flows in South Africa during the past four decades. The results show that prices, real exchange rates, domestic production capacity and real incomes have significant impacts on the country's agricultural trade. In particular, exchange rate volatility has negative impacts. This cannot be viewed solely as an exogenous source of macroeconomic instability in South Africa, as domestic policies play a crucial role in influencing the movement of exchange rates.     

Restless minds: South African students and the brain drain

This article reports the results of a 2002 survey of emigration potential among a representative sample of 4784 postgraduate and final-year undergraduate students at South Africa's tertiary educational institutions. The authors created a valid and reliable index of emigration potential and found slightly higher levels than those measured by identical questions in previous surveys of skilled adult South Africans. Multivariate regression analysis revealed that the factors that most increase emigration potential among South Africa's future skills base are logistical ones, including family encouragement and financial resources. Next in importance are students' prospects of a better life for themselves and their families in their target countries than in South Africa. Finally, the study showed that patriotism and strong national identity decrease emigration potential while previous travel abroad and access to information about life abroad increase it. It also found that a range of possible government attempts to make emigration more difficult would only increase students' probability of leaving the country.     

Tourism impact,distribution and development: The spatial structure of tourism in the Western Cape province of South Africa

The structural dimensions of a country's tourism sector, and in particular the spatial structure of tourism production and consumption, relate closely to the nature and extent of the impact that tourism can have. This article examines the spatial characteristics of tourism in the Western Cape province, one of South Africa's foremost international tourist regions, and where its government seeks to use tourism as an instrument of development and socio-economic transformation. To understand how this could be effected it is necessary to understand the spatial distributional effects of tourism, and the underlying reasons for it. To this end the article examines the spatial structure of the provincial accommodation sector as evidenced in patterns of accommodation supply and tourist usage (demand); and trends in the nature, direction and distribution of public and private-sector tourism investments. The central argument is that tourism is geographically focused, with tourist activities concentrated in a few locales and sub-regions. This follows the general demographic and economic contours of the province. Yet trends in capital investments tend to reinforce the spatial concentration of tourism. Attempts by the government to spread tourism's benefits have not been too successful due to institutional and capacity deficiencies. Greater emphasis should be placed on developing domestic tourism.     

THE ROLE OF COMMODITY PRICES IN MACROECONOMIC POLICY IN SOUTH AFRICA

This paper examines whether commodity prices can be used as signal for informing macroeconomic policy in South Africa using the new approach for testing Granger causality developed by Toda and Yamamoto (1995 ). Evidence of causality from average gold price to interest rate, money, exchange rate and the consumer price index was observed. Again, evidence of causality was observed from metals price index to interest rate, money and exchange rate. The results suggest there is merit in using South Africa's average gold price and the metals price index of the International Monetary Fund as informational variables in setting monetary policy.     

Manufacturing in South Africa over the last decade: a review of industrial performance and policy

This article outlines South Africa's comparative industrial performance over approximately the last two decades. It then examines the policies effected by the Department of Trade and Industry since 1994 to promote the development of industry. The focus is on the sector‐specific supports available to the auto and auto components and the clothing and textiles sectors. The final section locates these sector‐specific support measures within a broader discussion of industrial policy.     

SOUTH AFRICA AND THE NEW PARTNERSHIP FOR AFRICA'S DEVELOPMENT: ECONOMIC SPIN-OFFS AND LINKAGES

The New Partnership for Africa's Development (NEPAD) is a concerted effort by Africa's political leaders to develop a comprehensive and integrated strategic policy framework to raise current levels of socio‐economic development and reduce high levels of poverty across the African continent. The NEPAD framework recognises the need for African countries to pool their resources together in order to enhance regional development and economic integration. To this end, NEPAD emphasises capacity building and also seeks to solicit and disburse funds towards infrastructural development programmes and poverty alleviation projects, among others. South Africa's involvement with the rest of Africa has increased significantly since 1994. Trade exports, foreign direct investment (both market and resource‐seeking in nature) and public‐private partnerships have mushroomed in many parts of the continent. Many South African firms are providing the financial impetus for the infrastructural development and rehabilitation of African economies. This paper discusses salient economic linkages between South Africa and the rest of Africa within the framework of NEPAD. South Africa is the economic hub of sub‐Saharan Africa (and indeed of the African continent), with significant agricultural, manufacturing and services capacity. South African firms have invested in the development of a number of sectors in the rest of Africa, taking advantage of the new investment incentives offered by the NEPAD framework. The target sectors range from mining, the hospitality industry, engineering and construction, finance to telecommunications. These investments and economic involvements are crucial to the development of African countries and the relevant sectors that are important for the realisation of some of the objectives of NEPAD.