Latest News, Publications and Workshops

Latest Publications

Economic Valuation of Forest Ecosystem Services in Kenya: Implication for Design of PES Schemes and Participatory Forest Management

Forest ecosystem services are critical for human well-being as well as functioning and growth of economies. However, despite the growing demand for these services, they are hardly given due consideration in public policy formulation. The values attached to these services by local communities are also generally unknown in developing countries.

Aid Volatility and Structural Economic Transformation in sub-Saharan Africa

Emmanuel Kumi, Muazu Ibrahim and Thomas Yeboah
To what extent does Official Development Assistance (ODA) volatility affect sectoral growth in developing countries? Interrogating this question is crucial as sustained economic growth is a necessary condition for poverty reduction and other development outcomes. To this end, many SSA countries are highly dependent on ODA and it therefore comes as no surprise that the sub-region is the largest recipient of ODA such as country programmable aid in the world.

The burgeoning literature on aid has mostly focused on the totality of aid and its effects on macroeconomic indicators such as economic growth to the neglect of the effects of aid volatility on specific sectors including agriculture, service and industry. Nonetheless, the discussion on aid sector volatility is important as it could have serious implications on growth.
 
In the literature, it is often assumed that aid flow is predictable which makes it possible for recipient countries to factor such inflows into their development planning because of the close elision between aid commitment and disbursement. Our purpose in this paper is to go beyond the debates on aid volatility–growth nexus and to examine the effect of aid and aid volatility on sectoral outputs. Indeed, individual sectoral effects of aid volatility matters in the same manner as total aid volatility because merely regressing aid on economic growth is not instructive, hence the need for an in-depth knowledge and understanding into how individual sector is uniquely affected. In this paper, we focus on aid unpredictability disbursement relative to commitments.
 
We contribute significantly to literature. Incorporating aid volatility into the standard aid–growth framework will provide an indication of the extent to which aid vagaries may have eroded sectoral output over the period under consideration, where the region has received substantial ODA. Undoubtedly, our study provides a strong alternative to examining aid–growth relationship in SSA. More specifically, our study focuses on sub-sector effects of aid and aid volatility and how financial sector development impact on volatility–sector output nexus. To the best of our knowledge, this is the first study attempting to quantify the unique impact of aid and its volatility of the various sectors of SSA. In doing so, we deal with the question of whether aid and its volatility have counteracting effect on each sector. Apart from this, our study empirically examine whether development of the financial sector which has been low in SSA relative to other emerging economies mitigates or amplifies the potential impact of volatility in the region’s structural economic transformation process.
 
This paper therefore examines the effect of aid and its volatility on structural economic transformation in SSA using on a panel dataset of 37 countries for the period 1980–2014. We resolve potential endogeneities in aid–sectoral growth nexus by employing the system generalised methods of moments (GMM) while dealing with country-specific effects. Our findings show a positive and significant impact of aid on agricultural, service and manufacturing output suggesting that aid inflows to SSA propels economic transformation. In other words, foreign inflows spur both the tradable and non–tradable sectors revealing some degree of interdependence. This notwithstanding, aid volatility deteriorates sectoral value additions with huge impact on the non–tradable sector. However, excessive aid vagaries do not appear to impact on the agricultural sector. The immunity of this sector from the ravages of the unpredictable pattern of aid can be attributed to the comparative advantage the region already enjoys hence any volatility in aid inflows does not seem to matter for agricultural output. To the extent that aid provides more resources to governments of the recipient countries by far reduces the crowding out of the private sector stemming from government borrowing from financial sector consequently freeing credit to the private sector. Consistent with our hypothesis, the damaging effect of aid volatility on structural economic transformation in SSA is weakened by a well-developed financial system with a large dampening impact on the tradable sector (such as manufacturing) and a no apparent influence on agriculture. Our evidence therefore provides unequivocal support for the notion that development of domestic financial markets enhances aid effectiveness.

An Econometric Method for Estimating Population Parameters from Non-Random Samples: An Application to Clinical Case Finding

The problem of sample selection complicates the process of drawing inference about populations. Selective sampling arises in many real world situations when agents such as doctors and customs officials search for targets with high values of a characteristic. We propose a new method for estimating population characteristics from these types of selected samples. We develop a model that captures key features of the agent's sampling decision.

Shaping macroeconomics outcomes

By early 2016, financial market participants had become increasingly critical of unsustainable current account deficits and low, unbalanced growth in many emerging economies. In response, adjustments have occurred (or are in process) in a wide range of countries – including Russia, Brazil, Mexico, Colombia, Ghana – gradually guided by policy in some instances and much more abruptly forced by recession in others.

The behaviour of the real effective rate of South Africa: is there a misalignment

Melvin M. Khomo and Meshach J. Aziakpono
The debate about the equilibrium level of the South African rand and the factors driving the currency is ongoing, with a concomitant lack of consensus on the most appropriate level of the exchange rate. The New Growth Path Framework (2011), which provided government’s blueprint for economic growth and job creation, calls for a more competitive exchange rate that should support government’s initiatives, indicating that policymakers have a vested interest in seeing the exchange rate at a level that would support South Africa’s economic growth. Against this background, the aim of this study was to determine the extent to which the rand’s real effective exchange rate (REER) is misaligned from its equilibrium level. Cointegration techniques in the behavioural equilibrium exchange rate (BEER) framework of Clark and MacDonald (1988) were applied to estimate the equilibrium value of the rand consistent with economic fundamentals, and to interpret the deviation of the observed exchange rate from this level as REER misalignment. This study adds to the literature in the following aspects: firstly, we apply more recent data to estimate the equilibrium REER and exchange rate misalignment. Secondly, the subject of exogeneity in the equilibrium exchange rate model is addressed to ensure a proper specification is obtained. Finally, the study uses non-linear regime switching methodology to model the misalignment behaviour.

Results endorse the existence of a cointegrating relationship between the exchange rate and terms of trade (including gold), external openness, capital flows and government expenditure. A 1% increase in the country’s terms of trade leads to an appreciation in the real effective exchange rate of about 0.82%. A similar directional relationship is observed between capital flows and the exchange rate. Increases (1%) in external openness and government expenditure however cause depreciation in the exchange rate of 0.85% and 0.37% respectively. We also confirm that the exchange rate deviates from its equilibrium level over time with the historical misalignment pattern witnessed confirming similar observations from previous studies including De Jager (2012), Saayman (2010) and MacDonald and Ricci (2004). The Markov Switching Model correctly captures the misalignment over the sample period (1985-2014) as distinct episodes of overvaluation and undervaluation.
 
Four overvaluation episodes are identified (1986-1988; 1997-1998; 2003-2006 and 2010-2012) with the study indicating that the exchange rate was undervalued (to deferring extents) over most of the period studied. Extreme undervaluation in the exchange rate is recorded in 1998-2003, and during the midst of the global financial crisis in 2007/2008. Results of the study also indicate that the currency was undervalued between 2013 and 2014. An interesting observation from the study is that the exchange rate tended to be more undervalued than overvalued over the period studied with undervaluation episodes lasting longer than overvaluation periods. A closer look at the trade figures over the sample period indicates that South Africa’s imports have been growing faster than exports thus feeding into the current account deficit problem. On the one hand, such developments should have been expected to be inflationary, but inflation on average came down over this period mainly due to a successful inflation targeting monetary policy framework by the South African Reserve Bank. The challenge for the SARB is the ability to deal with abrupt exchange rate misalignment episodes that are accompanied by high levels of nominal exchange rate volatility.
 
With an undervalued currency seen as supportive for growth through higher exports (Rodrik, 2008a), the question is why has the country failed to take advantage of such misalignment episodes? From a policy perspective, this means policymakers have to look at other factors in an effort to boost export performance since there is no clear evidence that the exchange rate has been detrimental to exports. Rodrik (2008b) notes that South Africa’s unsatisfactory growth and employment path realized since the democratic transition is a function of an under-performing, non-resources tradable sector, in particular manufacturing. With the country’s unemployment rate very high (especially amongst unskilled labour), having more flexible labour laws where wages are linked to productivity could be one way of boosting the manufacturing sector and hence more exports. There is a need for government, organized labour (unions) and the private sector to work together to find sustainable solutions to these challenges. In terms of further research, it would be interesting to formally ascertain the impact of such a misalignment on economic indicators such as growth, exports and the current account deficit. Since the study merely sought to measure if the exchange rate was misaligned over time, another future area of research would be to determine the factors that drive such a misalignment within a regime switching context.
 
References:
  • Clark PB and MacDonald R. (1988). Exchange rates and economic fundamentals: a comparison of BEERs and REERs. IMF Working Paper No. 98/67.
  • De Jager S. (2012). Modelling South Africa’s equilibrium real effective exchange rate: a VECM approach. South African Reserve Bank Working Paper WP/12/02.
  • MacDonald R and Ricci LR. (2004) Estimating the Equilibrium Real Exchange Rate for South Africa. South African Journal of Economics Vol 72(2).
  • Saayman A. (2010). A panel data approach to the behavioural equilibrium exchange rate of the ZAR. South African Journal of Economics 78: 57-75.
  • Rodrik D. (2008a). The Real Exchange Rate and Economic Growth. Brookings Papers on Economic Activity 2: 365–412.
  • Rodrik D. (2008b). Understanding South Africa’s economic puzzles. Economics of Transition 16(4): 769-797.

Latest Workshops

Skills Development

Monday, July 3, 2017 to Friday, July 7, 2017

Call for Application for Skills Development Training in Econometrics

The ERSA is pleased to invite applications for the Skill Development Training Programme in basic Econometrics for academics and postgraduate students (masters and PhD) with limited training in Econometrics and quantitative methods. The skills development initiative is in line with ERSA’s objective to deepen economic research capacity and to train young economists in Southern Africa.

7th Annual Meeting of the African Economic History Network: Innovation and the African Past

Wednesday, October 25, 2017 to Friday, October 27, 2017

The African Economic History Network, in association with the Laboratory for the Economics Africa's Past at Stellenbosch University, Harvard Univeristy's Center for African Studies and Economic Research Southern Africa announces a Call for Papers.

Lecture Series in Economic Theory: "Asymmetric Information in Markets and Organizations"

Monday, March 14, 2016 to Tuesday, March 15, 2016
In part 1 of this lecture, we are going to introduce the basic set-up of credence goods markets and discuss how markets should be designed to provide the right incentives for experts and their customers. The theoretical analysis will be complemented by the discussion of evidence of expert behaviour and market outcomes from empirical as well experimental studies. 
 
In part 2 of the lecture, the emphasis will be on information disclosure by interested parties and evidence provision by intermediaries.

The Third ERSA Political Economy Workshop

Tuesday, February 16, 2016 to Wednesday, February 17, 2016

Economic Research Southern Africa (ERSA) and the Institutions and Political Economy Group (IPEG) at the University of the Witwatersrand invite SA-based researchers with a focus on political economy, including public choice, to participate in the upcoming February 2016 workshop. Contributions, even in progress, on all political economy topics will be considered though preference will be given to: corruption, dictatorship, fiscal federalism, intergovernmental grants, political entrepreneurship, and regulation.