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.     

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 CONTRIBUTIONS OF MANUFACTURING AND SERVICES TO EMPLOYMENT CREATION AND GROWTH IN SOUTH AFRICA

This study examines the linkages between the manufacturing and services sectors, and between each of them and the rest of the domestic economy, based on analysis of input-output tables and employment trends. This reveals that manufacturing is particularly important as a source of demand for the services sector as well as the rest of the economy through its strong backward linkages, which suggests that in this respect a decline in manufacturing could negatively affect future growth. Services are especially important in terms of employment creation, both direct and indirect.     

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.     

MACROECONOMIC UNCERTAINTY AND AGGREGATE PRIVATE INVESTMENT IN SOUTH AFRICA

This paper investigates the effects of time varying uncertainty on aggregate private fixed investment in South Africa. The GARCH generated measures of volatility of selected macroeconomic variables indicating five measures of uncertainty are used in the analysis. These are output growth uncertainty, uncertainty about changes in the real effective exchange rate, uncertainty about changes in the real interest rate, producer inflation uncertainty, and terms of trade uncertainty. The results of the estimation by an empirical ECM model of conventional investment determinants controlling for the effects of uncertainty indicated that, over all, time varying macroeconomic uncertainty significantly reduces private fixed investment.     

TAX REFORM AND THE PROGRESSIVITY OF PERSONAL INCOME TAX IN SOUTH AFRICA

This paper investigates the progressivity of personal income tax in South Africa over the period 1989 to 2003. We use the effective, redistributive and disproportionality measures of progressivity and find that progressivity of the tax system increased over the period 1990 to 1994. However, during the first phase of the reform programmes the results are inconclusive with the Kakwani index (disproportionality measure) showing increased progressivity. The redistributive effect measure, on the other hand, indicates a marginal decline in progressivity. During the second phase of the reform programmes, both techniques suggest a worsening in progressivity. One explanation for the decline in progressivity during the latter period in the analysis is the fact that many more “new” taxpayers entered the tax net (higher income groups in our database) which made the distribution of pre‐tax income more unequal thus impacting on progressivity. On the other hand, the disproportionality measure shows a continuous, albeit volatile increase in progressivity over the latter period under investigation.     

IMPACT OF MACROECONOMIC CONDITIONS ON GOVERNMENT POPULARITY: AN ECOWAS INVESTIGATION

A main focus of this paper is our analysis of the vote function using the vote share of government parties as the proxy variable for government popularity. Utilising Pedroni's (1999 ) panel cointegrated test and the fully modified OLS (FMOLS) technique, we empirically examine the long-run co-movement relationship in a bivariate model between government popularity and macroeconomic outcomes as well as a lag term in accordance with updated data for 11 countries of the Economic Community of West African States (ECOWAS) during the 1975-2005 period. The results indicate the existence of panel cointegration relationships in our empirical model. The panel FMOLS shows that several macroeconomic shocks are responsible for positive contributions to government popularity, especially in regard to economic growth and government expenditures. By contrast, currency depreciation, higher interest payments, and a greater taxation burden on households all contribute to lower government support in our sample countries. Based on such evidence, important policy implications emerge for ECOWAS.     

REVISITING INFORMAL EMPLOYMENT AND SEGMENTATION IN THE SOUTH AFRICAN LABOUR MARKET

This study revisits the definition of informal employment, and it investigates the puzzle of high open unemployment co‐existing with relatively limited informal employment in South Africa. We estimate earnings equations using data from the September 2004 Labour Force Survey and present evidence of persistent earnings differentials not only between formal and informal employment, but also between types of informal employment. These persistent earnings differentials are suggestive of complex segmentation in the South African labour market and challenge the presentation of informal employment as an undifferentiated residual with no barriers to entry or mobility.     

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.     

'HOME IS NOT SO VERY FAR AWAY': CALIFORNIAN ENGINEERS IN SOUTH AFRICA, 1868–1915

This article describes the fate of Californian engineering and technology in South Africa during the years around the Jameson Raid. In theory, progress promised many things: commercial development, scientific and social enlightenment, free markets and rule of law. But in South Africa, these tools of progress came together in ways that differed from Californian engineers' own frontier experience. While mining flourished agriculture remained undeveloped. And both, far from producing the society imagined by Californians, furthered imperial goals.     

FORECASTING THE SOUTH AFRICAN ECONOMY WITH VARs AND VECMs

The paper develops a Bayesian Vector Error Correction Model (BVECM) of the South African economy for the period 1970:1‐2000:4 and forecasts GDP, consumption, investment, short and long term interest rates, and the CPI. We find that a tight prior produces relatively more accurate forecasts than a loose one. The out‐of‐sample‐forecast accuracy resulting from the BVECM is compared with those generated from the Classical variant of the VAR and VECM and the Bayesian VAR. The BVECM is found to produce the most accurate out of sample forecasts. It also correctly predicts the direction of change in the chosen macroeconomic indicators.     

LABOUR AND LAND IN GHANA, 1874–1939: A SHIFTING RATIO AND AN INSTITUTIONAL REVOLUTION

The Second Industrial Revolution created markets for new products for Ghana, rubber and then cocoa beans. Mechanised transport spurred the spread of cocoa planting. The paper estimates the resultant shift in factor ratios, and synthesises the data for prices of land-use rights and wages as the economy moved from land abundance to localised land scarcity. The consequences for factor markets were institutional rather than simply quantitative. For the first time markets in land use rights became widespread, while hired labour and farm pledging replaced slavery and debt bondage, as cocoa income made it possible for farmers to offer labourers sufficient inducement to enter the labour market.     

ECONOMIC INFRASTRUCTURE: A REVIEW OF DEFINITIONS, THEORY AND EMPIRICS

Infrastructure investment, especially in South Africa, is currently at the forefront of policy and public debate. But the term ‘infrastructure’ has a variety of definitions and interpretations; the reason for the various definitions is related to infrastructure's various impacts and incidence. Three levels of infrastructure are identified: local, national and transnational. Infrastructure at all three levels are subject to certain market failures which require some form of government intervention. Furthermore, theory postulates a number of benefits from infrastructure, both on economic growth and equity. Both the quantity (access to infrastructure) and quality (reliability of infrastructure or accompanying services) are important. Finally, empirical analysis tests whether these theoretical benefits are indeed realised. However, it seems as though infrastructure empirics are subject to a number of serious limitations.     

INVENTION AND INNOVATION IN THE AUSTRALIAN NON‐FERROUS MINING INDUSTRY: WHOSE TECHNOLOGY?

Metalliferous mining was of major importance to the Australian economy throughout the nineteenth and twentieth centuries. The industry depended heavily on technology transfer for efficient and economical operations. The country's isolated mining fields tended to rely on adaptation rather than on invention, with toughness, portability and ease of repair and use being the prime criteria for the adoption of new machinery. This article argues that both the internationalism of the mining industry and the nature of its technology transfer blur the lines between invention, innovation and adaptation. Mining machinery, techniques and people were all highly mobile. Hence, attributing national origins to mining technology often seems irrelevant.     

FOREIGN INVESTMENT AND THE ROLE OF JOINT VENTURES

Foreign investment in developing countries and in economies in transition may be discouraged by fluctuations in the value of local currencies, particularly when risk sharing markets, such as currency future markets are missing. International joint ventures can be regarded as an institution for risk sharing. We demonstrate that a properly designed joint venture between the foreign firm and a local partner makes foreign investment more likely. Furthermore, foreign investment may be increased by a joint venture.