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Latest Publications

Decomposition of the Technical Efficiency: Pure Technical and Scale Efficiency of the Financial System

Sanderson Abel and Alex Bara
Banks are vital institutions in any society as they significantly contribute to the development of an economy through facilitating development of saving plans and are instruments of the government's monetary strategy. Given the centrality of banking institutions an analysis of the bank efficiency is used to evaluate the sources of banking profitability. An efficient bank is supposed to generate its profits through effective utilisation of resources rather than through exploitation of market. Banks that are efficient reduces wastage of resources and enhance competition. Bank managers can improve cost efficiency by adopting better technologies; alternatively, enhance capital through improving profit efficiency by adopting new marketing and pricing methods.

The concept of efficiency in banking is controversial hence has been studied in different dimensions. Allocative efficiency is the extent to which resources are being allocated to the use with the highest expected value. A firm is technically efficient if it produces a given set of outputs using the smallest possible amount of inputs. Alternatively, technical efficiency is the ability of the firm to maximise outputs from a given set of inputs and is associated with managerial decisions. The technical efficiency scores can be decomposed into pure technical and scale efficiency to determine the main source of the technical efficiency. Scale efficiency refers to the relationship between the level of output and the average cost hence it relates to the size of operation in the organisation.

The study sought to measure the technical efficiency of the commercial banks in Zimbabwe during the period 2009 -2015 using the non-parametric approach of data envelopment analysis. The study decomposed the technical efficiency of commercial banks into pure technical efficiency and scale efficiency. The choice of Zimbabwe as the laboratory has been chosen because of the unique developments that characterised the country. There has been an increase in net interest rate margin, which approximates banking sector efficiency, nine bank failures since 2009, signifying an element of inefficiency in the system. The banking system has been characterised by deteriorating asset quality during the period 2009 to 2016, which could signal managerial inefficiency in the process of asset creation.

The study has revealed that commercial banks in Zimbabwe are technically inefficient. The results revealed that commercial banks in Zimbabwe were technically inefficient with the average efficient score of 82.9 percent during the period 2009-2015. This result implies that the average commercial bank suffered a 17.1 percent level of technical inefficiency. In other words there was increased scope for the commercial banks to increase their output if they had operated at the same efficient level as the most efficient bank in the sample.

The average pure technical efficiency score was 96.6 percent for the period 2009-2015. The pure technical efficiency score was increasing over the period 2009-2015 implying that the managerial efficiency of the banks was improving during that period. The average pure technical efficiency was one in 2014, meaning that all the commercial banks attained pure efficiency of one during that year. The average scale efficiency of the commercial banks in Zimbabwe for the period 2009-2015 was 0.8564.

Overall the results means that the technical inefficiency of commercial banks is a result of scale inefficiency rather than pure technical inefficiency. The results mean that most of the commercial banks are operating at the wrong scale of operations. Specifically the banks were operating under decreasing returns to scale, where there is still opportunity to increase operations to obtain optimum scale.

The study therefore recommends that banks should review and rescale their scope of operations so that they optimize the scale of operations to levels that guarantees both pure technical and scale efficiency. The lessons drawn from the study which can be applicable to other countries including South Africa is that there is need for constant review of the efficiency of the banking sector so as to determine whether banks are operating at the correct scale of operations or bank management are deploying resources to their best use in order to produce optimum output.

Public-private sector wage differentials and household poverty among Black South Africans

This paper examines the extent and implications of the public-private sector wage differential prevalent amongst the Black South African populace. In this paper we quantify the public sector wage premium, examine the impact of the wage premium on the incidence of household poverty, and perform a robustness analysis to determine whether the poverty effect of the wage premium varies by household type.

Do monetary policy announcements affect foreign exchange returns and volatility? Some evidence from high-frequency intra-day South African data

Cyril May, Greg Farrell and Jannie Rossouw
Understanding exchange rate dynamics is one of the crucial issues in international finance and open-economy macroeconomics. In South Africa, exchange volatility is an important element of exchange rate, monetary and macroeconomic policy decisions. Currency volatility often acts as a signal of uncertainty to market participants and policymakers.

Our empirical study addresses the question: How does the South African rand respond to scheduled domestic repo rate announcements – surprises and expected changes? Analysis results suggest that monetary policy news is an important determinant of the exchange rate. An unexpected repo rate change, or no change when the market anticipates one, leads to statistically and economically significant rapid adjustments in the level of the exchange rate, and an escalation in its volatility shortly after the rate pronouncement. A 100-basis-point positive (negative) repo rate shock will appreciate (depreciate) the rand/US dollar exchange rate by approximately 1.3% 30 minutes immediately after the announcement. Most of the 60-minute exchange rate adjustment (+90%) occurs within the 30-minute interval. The relatively rapid rate of exchange rate response to a 100-basis-point hike – elevated returns peak within 30 minutes post-announcement and volatility subsides about 40 minutes following the event – suggest a relatively high degree of market “efficiency” in a mechanical sense – communications are speedy and exchange rates adjust rapidly to new unanticipated announcements. The non-instantaneous response based on the 5-minute window may be attributed to inconsistent event times or an initially less swift price adjustment as market participants absorb the information and revise expectations.
 
Theoretically, and evidently, a clear or improved understanding of monetary policy objectives and repo rate decisions would tend to reduce foreign exchange market volatility, other things equal. We hypothesise that the introduction of scheduled monetary policy announcement dates and central bank policy signals between monetary policy committee (MPC) meetings since the implementation of the inflation targeting framework in 2000 have contributed to the ability of market participants to better understand the monetary policy reaction function. In support of earlier studies, increased monetary policy transparency by the South African Reserve Bank (SARB) is tentatively evident in the declining trend in the number and magnitude of repo rate shocks suggesting that market participants have improved their understanding of the central bank’s monetary policy reaction function; hence, the central bank has reinforced the gains from policy transparency uncovered in earlier work between 2005 and 2007. The finding that anticipated repo rate changes effect neither the foreign exchange returns nor volatility of the rand/dollar exchange rate after the announcement indicates that the foreign exchange market response to repo rate shocks conforms to the first implication of the efficient market hypothesis; that is, market traders react to only new information in the form of unexpected announcements.
 
This research also contains a cautionary note on data assembling for analysts of policy impact. The stated lifting of the MPC statement embargo is not consistent with the actual time of the repo rate announcement. The official release time of the statement is stated as 15:00, with one exception, but the statement released at that time does not contain the actual announcement of the repo rate decision. It merely contains the discussion of economic indicators considered by the members of the MPC. The Governor takes between 15 to 25 minutes to announce the MPC’s rate decision after the commencement of the media conference, during which time she/he reads the statement on economic indicators – the timing of the announcement of each decision would depend on the actual commencement time of the written media statement, the pace of the reading of each statement and the length of each statement. This has been confirmed by viewing the last 22 available webcasts of the media conferences on the Bank’s website. The actual repo rate decision is only known once read by the Governor after the time lapse described above. The implication for policy analysts is clear: Avoid the trap of using official release times of statements and determine actual moment of release for purposes of analysing reactions to policy announcements.

Evolution of Institutions in Ghana and Implications for Economic Growth

This report discusses the evolution of institutions and compares the quality of key formal institutions (Political and Civil Liberties, Political Instability, and Property Rights) from Ghana’s colonial era to its post-independence. The Political and Civil Liberties and Political Instability are studies from 1820 to 2010, while Property Rights were analyzed for the periods 1849-2010. It has been found that, on average, the post-independent democratic regimes guaranteed the best political and civil liberties, and property rights.

Analysis of tax harmonisation in SADC

Michael Ade
In this paper the authors provide an analysis of the extent of tax harmonisation (including tax rates and tax policy) in the SADC and also assess robust levels of tax harmonisation on foreign direct investment (FDI) inflows. Anecdotal evidence shows that the environment in which multinationals operate in the SADC is characterised by tax information asymmetry, corruption, inefficiency, lack of specialised skills and tax policy uncertainty. All such factors reinforce each other, creating a situation in which countries tend to be inward looking (focusing domestically), striving to maximise FDI inflows and tax revenue from their respective tax bases. This can result in costly tax competition, a governmental strategy of attracting capital and high value human resources by minimising the overall taxation level (Letete, 2012). For instance, countries in the SADC can lower their tax rates on income earned by foreigners within their borders, so as to attract FDI from such parties. The argument is that without harmonised or co-operative regimes, such a practice may lead to an inefficient tax level or what the Tax Justice Network-Africa and ActionAid International (2012) termed the race to the bottom. This contrasts with a common SADC practice (on taxation or FDI) as outlined in the 2002 MOU on taxation or the 2006 finance and investment protocol (FIP). Consequently, the ability for countries to attract FDI through taxation is largely based on a country-by-country initiative, rather than regional initiative. Given that countries may advertently or inadvertently gravitate towards tax competition, the paper argues the increased need for better coordination in taxable activities, towards improved economic activities and FDI.

In the discussion a comprehensive analysis of the tax rates in the SADC is conducted. The data shows that in terms of the CIT rates, the SADC region has slightly higher CIT rates than the EAC (Burundi, Kenya, Tanzania, Uganda and Rwanda); but does comparatively well in terms of VAT rates posting lower rates. Globally, the data generally shows that both the CIT and the VAT rates in Africa (including the SADC) are high. Accordingly the study highlights the need for Africa to lower tax rates and move towards more internationally competitive average tax rates in order to boost FDI and tax revenue. The analyses also emphasises the importance of tax harmonisation for the SADC, as it helps address the concern of tax information asymmetry leading to better decision making by multinationals in bringing in foreign capital. Improved fiscal harmonisation in the SADC augurs well for external private capital flows which can - together with domestic capital flows - significantly improve economic growth and development. Generally, the analyses enables a better understanding of the quandary faced by the SADC in setting tax rates, developing tax policy, administering taxes and pursuing a regional tax policy harmonisation initiative. This paper also contributes to the discourse and existing empirical literature on the role of tax harmonisation towards FDI inflow across SADC countries by employing a broad panel dataset (including cross-sectional data) in the investigation.
 
A further computation of a tax policy harmonisation measure (TPHM) and an optimum tax rate (OTR) for the SADC is done in this paper. In this regard, the study makes a contribution in terms of the methods used and the new dataset derived from the computations. The data obtained from the TPHM and the OTR was further used to ascertain robust measures of tax rates on FDI in the SADC through an extreme bound analysis (EBA) technique. Specifically, the results highlight the fragile role of TPHM in influencing FDI flows to the SADC in 2010, while also delineating the robust role of OTR in enhancing FDI. Jointly the TPHM, the OTR and the EBA all form part of a comprehensive analysis of the extent of tax harmonisation in the SADC. Importantly, the sensitivity analysis (by means of the EBA results) provided impetus to further empirical investigations on the effects of tax harmonisation towards better FDI flows to the SADC. The analysis highlights some important policy implications for the SADC countries, aimed at enhancing the process of regional tax harmonisation.

References:

  • Letete, P. (2012). Between tax competition and tax harmonisation: Coordination of value added taxes in SADC member states. Law, Democracy and Development, 16.
  • Tax Justice Network-Africa & ActionAid International (2012). Tax competition in East Africa: A race to the bottom? [Online]. Available: http://www.actionaid.org/sites/files/actionaid/eacreport.pdf. (Accessed 1 August 2012).

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.