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Latest Publications

Impact of Crime on Firm Entry: Evidence from South Africa

Godfrey Mahofa, Asha Sundaram and Lawrence Edwards
High crime rates in South Africa are an important aspect of the business environment and hence they affect the costs of doing business. In this study we employ the regional variation in the incidence of crime and business registrations across local municipalities in South Africa to investigate the effect of crime on the entry of firms. We utilize a unique dataset of business registrations and the incidence of crime from the South African Police Service for 330 municipalities in South Africa. South Africa provides us a valuable case study for this analysis. The relationship between crime and business activity is well-established in the South African literature. The World Bank Enterprise Surveys of South African firms reveal that South African firms are far more likely to rank crime as a major constraint compared to similar upper-middle income countries. Consequently, the costs of crime as a percentage of revenue are higher in South Africa than in comparator upper-middle income countries (World Bank 2010). A survey of firms about constraints to private sector investment in the Johannesburg area highlighted crime and safety as one of the key constraints to doing business (Rogerson and Rogerson, 2010).

We argue that crime imposes a cost on firms and that this in turn might inhibit entry of less productive small firms by negatively affecting their expected profits.  Crime may increase firm costs in myriad ways.  Firms may have to spend on security systems such as alarms, trackers on vehicles, electric fences or armed guards to keep their property and staff secure.  Available evidence at the firm level shows that crime may induce substantial costs in South Africa. Security costs accounted for about two-thirds and a third of the total costs of crime in 2003 and 2008 respectively for the average firm (World Bank, 2005; 2010). World Bank (2005), reported the costs of crime for the median firm of about 5 percent of labour costs. In addition, firms may incur higher costs of recruiting or relocating skilled labour. Finally, they may be reluctant to invest in expensive equipment and machinery for fear of losses due to theft or vandalism, which might negatively affect productivity.  Our empirical strategy relies on relating changes in firm entry, measured by business registrations, in a municipality over time, and changes in the incidence of crime, after controlling for municipality specific trends and other factors such as income, infrastructure quality and service provision. Thus we identify the effect of crime on firm entry after accounting for any economic shocks associated with municipality trends and average crime rates in a municipality.

We find that an increase in crime rates, in particular, the property crime rate reduces business entry. A one percent increase in total crimes reduces business entry by 0.53 percent. Focussing on crime types, we find that a one percent increase in property crime is associated with a decrease in firm entry of 1.04 percent. We also show that the effect of property crimes is different across sectors. Results are also robust to using rainfall shocks as an instrument for crime, to control for the potential endogeneity bias that  arises from the fact that crime might be a consequence rather than a cause of greater business activity. Intuitively, our results suggest that if we have two municipalities, for example, with the same characteristics in terms of income, access to infrastructure, and other unobserved characteristics but only differ in terms of crime, firms will register in a municipality with low crime rates.

Our study has several policy implications.  First, it highlights the importance of strong institutions such as policing and private security, particularly at the regional level, for economic growth and business dynamism.  This is particularly relevant for emerging economies like South Africa that grapple with concerns of regional inequality.  Given the historical context of Apartheid, most economic activity in the country is concentrated in the three provinces of Gauteng, Western Cape and KwaZulu-Natal, which have contributed about two-thirds to overall economic activity since 1996 (StatsSA, 2012). However, 60 percent of the South African population resides in other marginalized areas (World Bank, 2014), suggesting that it is crucial to identify constraints to private sector development in such regions. Second, it suggests that the high costs that crime imposes is most likely to deter smaller firms from entering the market. This might have implications for the labour market, since smaller firms typically employ more unskilled labour relative to larger, more productive firms.  Finally, by deterring entry, crime might be associated with reduced competition in the industry, and this can have welfare implications. 

Lifestyle and Income-related Inequality in Health in South Africa

Evidence suggests that lifestyle factors may explain the income-related inequality in self-reported health. This paper expands this literature by examining the contribution of smoking and alcohol consumption, incorporating more objective measures of health directly associated with these lifestyle practices. The Erreygers' corrected concentration index is used to measure health inequalities over time. The indices are decomposed into observable covariates including smoking and alcohol use.

The Competitive Status of the South African Wheat Industry

This article investigates the competitiveness of the South African wheat industry and compares it to its major trade partners. Since 1997, the wheat-to-bread value chain has been characterised by concentration of ownership and regulation. This led to concerns that the local wheat market is losing international competitiveness. The competitive status of the wheat industry, and its sub-sectors, is determined through the estimation of the relative trade advantage (RTA). The results revealed declining competitiveness of local wheat producers.

Financial sector development, economic volatility and shocks in sub-Saharan Africa

Muazu Ibrahim and Paul Alagidede
Evidence abounds of the positive relationship between financial development and economic growth. While the empirical and theoretical literature has established a positive impact of financial sector development on economic growth, the potential links between financial development and volatility in developing countries and sub-Saharan African (SSA) in particular have been understudied despite the apparent rampant shocks. Specifically, the channels through which financial development potentially affects growth volatility remain unknown. More so, the extent of the volatility–financial development nexus is very mute in the literature. Meanwhile volatility, regardless of its source, is a natural source of worry in a world of market imperfections. This holds with particular force in developed economies where the financial sectors are relatively well developed. Some studies have long revealed greater forms of volatilities in high income countries on account of greater economic concentration. Legitimate as it is, if volatility matters in developed economies, then it must pose an even greater source of concern for developing countries that are still struggling to meet basic needs. Empirically, what we know so far on the financial development–volatility nexus is inconclusive and none of earlier studies on finance–volatility nexus have investigated the channels through which finance impacts on volatility in SSA. Even the few existing studies have failed to decompose volatility into its various components thereby obscuring how finance uniquely interacts with each component, and leaving out much of the richness of the volatility–finance–shocks relationships as much of the real world interactions can best be explained by disaggregated models of economic fluctuations. By disaggregating volatility, this study examines the effect of financial development on volatility as well as channels through which finance affects volatility components in 23 SSA countries over the period 1980–2014 using the newly developed panel cointegration estimation strategy.

Key Findings and Policy implications

Our evidence highlights the role of financial sector in economic fluctuations given the negative relationship between financial development and business cycle volatility. The implication is that, developed financial systems are more capable of screening potential borrowers, which should reduce the likelihood that projects with greater probability of failure are financed. Thus, smoother business cycle is associated with financial systems characterized by reduced credit markets imperfections. Because external shocks to economic activity are magnified by asymmetric information, lowering the level of market imperfections is therefore expected to reduce volatility at the business cycle. The overall result is that economic fluctuations are less volatile with developed financial sector. However, unbridled financial development associated with over developed financial sector is not healthy for growth as financial development–volatility nexus is intrinsically nonlinear. While developed financial systems tend to be more efficient in identifying those firms that wrongly overstate the extent of their liquidity, over developed financial sector is often associated with excessive credit growth to the private sector thus permitting the financing of unsustainable projects magnifying business cycle volatility. Policy makers should rather seek to strengthen the appropriate size and quality of finance rather than expanding the financial sector.

Further evidence suggests that volatility caused by monetary shocks is more important and persistent than that caused by real shocks and financial underdevelopment of SSA. However, while monetary shocks have large magnifying effect on volatility, their effect in the short run is minuscule. The reverse however holds for real shocks. If domestic output fluctuations were primarily driven by external shocks, then our evidence would have supported the real business cycle view that economic fluctuations are largely influenced by world productivity disturbances. Rather, our findings show that factors driving fluctuations are largely internal. Turning to the transmission channels, higher levels of financial development magnify the impact of monetary shocks. Rising inflation reduces consumers’ spending as this erodes purchasing power thus lowering firms’ revenues, net worth and creditworthiness. These increases the agency costs and the external financing premium magnifies shocks to economic activity by amplifying spending, borrowing and investment vagaries. The magnifying effect of financial sector is however higher at the short run business cycle relative to the long run. This notwithstanding, financial development dampens the positive effect of real shocks on volatility components. Apart from relaxing credit constraints for firms, deepening the financial sector may also help mitigate real shock to economic activity as it promotes diversification thereby lowering risk. Strengthening financial sector supervision, including cross-border oversight as well as adoption of inflation targeting may be very crucial in examining the right levels of finance and price stability necessary to falter economic fluctuations.

 

Concluding thoughts

This paper quantified the relative importance of a monetary and real shocks and the how finance affects business cycle and long run volatilities through its interaction with the broad set of shocks. Our overall finding shows that while well-developed financial sector dampens volatility at the business cycle, unbridled financial development may also magnify fluctuations. Further findings show that while monetary shocks have large magnifying effect on volatility at the long run business cycle, their effect in the short run is minuscule. The reverse however holds for real shocks. Our main conclusion is that irrespective of the component, volatility caused by monetary shocks is more persistent than those caused by real shocks and financial underdevelopment. This notwithstanding, our evidence reveals that irrespective of the time horizon, financial development dampens (magnifies) the effect of real shocks (monetary shocks) on the components of volatility although the dampening effects are huge in the short run.

Can social grants promote small-scale farming to improve food security?

Dieter von Fintel and Louw Pienaar
Public expenditure on South Africa’s cash transfer (or social grants) programme is one of the most extensive (as a proportion of GDP) among developing countries. Most evaluations of this large-scale policy focus on how grants change individuals’ incentives to enter or exit the labour market (with conflicting results), while others focus on the benefits for childrens’ health and educational outcomes. No studies have considered the role that grants play in promoting informal economic activity, especially in contexts of high unemployment and poverty. New research that focuses specifically on their role in small-holder farming fills this gap.

South Africa’s National Development Plan prioritises rural economic development, with technical support to small-scale farmers proposed as one way to achieve this. Small-scale farmers remain largely concentrated in former apartheid homelands, where poverty and unemployment are also most severe nationally. Similarly, social grant recipients are also largely concentrated in these regions. This research asks whether the two policies are complementary: does social grant receipt provide necessary incomes to promote the uptake of and investment in small-scale farming in former apartheid homelands, and can food security be improved if households opt to farm?

Farming households in the former homelands do not enjoy the same access to salary incomes and credit as households that do not embark on any agricultural activities. They therefore generally face resource constraints that would, presumably, also limit their ability to invest in small-scale farming. Instead, they report their main source of income to be derived from social grants. It appears, therefore, that small-scale farming is a necessary supplementary activity to obtain food when market income is lacking and households rely on social grants. Turning the question around, however, is it possible that the cash injection from grants can promote farming activity and improve food security? International evidence suggests that this is possible, but only when complementary interventions are also pursued. By contrast, South African grant recipients are not required to participate in any other programmes, so that the anticipated effects could be zero.

Limiting ourselves to homelands households that live on tribal lands, we first establish that the state-funded Old Age Pension (OAP) causally raises the probability of household farming. There is no evidence to suggest that household members exited the formal labour market to instead start farming. In other words, the increase in home production arises among households that would otherwise not have worked or farmed, so that the additional farmers represent new informal economic activity. How is this achieved? Especially among households headed by women, the cash injection from the OAP was invested in fertilizer for the purposes cultivation. Other unmeasured inputs may have also increased in response to the income, though this cannot be firmly established by the data used.

Importantly, farming and non-farming households’ food security situation in these regions changes in different ways in response to incomes from grants. Non-farming households report zero changes in self-reported hunger rates when they receive income from the OAP; however, they do report more expensive food purchases in the marketplace and greater diversity in the food groups contained in their diets (which indicates improved nutrition). Overall, this slightly richer group used the cash injection to improve the quality of their diets by buying more food types, while maintaining their levels of food consumption. To the contrary, farming households reported reductions in self-reported hunger, indicating that more food was available for consumption. However, no shifts in the levels or diversity of their market purchases could be detected. Instead, the monetary value of their own production increased, as did the number of food groups they could consume from their yields.

Food security improved for both farming and non-farming households when they receive OAP income. However, the ability of farming households to achieve this position with limited access to salary income and without changing food purchasing patterns, illustrates that this positive impact can be achieved even in regions where labour and product markets are thin. Should the investment in household agriculture resulting from the grant ensure yields in multiple seasons, the food security benefits may additionally extend to the long run rather than only stimulating immediate purchases. Social grants therefore have a role to play in promoting rural development, despite the fact that they are unconditional in nature.

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.