Policy Briefs

The Bill of Rights of the Constitution of the Republic of South Africa envisages sustainable human settlements including housing, education, health and access to cultural and leisure activities. This remains a significant policy challenge, with widespread inequality and divided societies still being prevalent in the country (Adams, Gallant, Jansen & Yu, 2015). Poor education outcomes, a divided community, uneven public service performance, divided spatial patterns and a crumbling infrastructure is some of the key challenges that have to be addressed in order to overcome persistent poverty and inequality in South Africa (NPC, 2011:19).

Economic variables tend to exhibit variation not only over time, but also across space. Space influences the way an economic system works and is a source of economic advantages or disadvantages. Proximity brings agglomeration to industries and enhances knowledge spill-overs and transfers. In trade it promotes integration, enhances cross-border trade, reduces transport costs and reduces non-economic barriers. In development, it has a pulling effect. It is however, not clear if proximity matter in services, more so in finance and financial development. Two critical issues arise: first, whether being close to a financially developed economy is advantageous for financial sector development. Second, whether financially less developed economies realise any externalities from their proximity to, and linkages with, a financially developed economy. Given the evident discrepancy between South Africa and the rest of the countries in the region in terms of financial development, spatial theory suggests that proximity to South Africa should drive financial development in other SADC countries.

Countries that are successfully executing trade and economic liberalization are experiencing high levels of economic growth and improved living standards. Therefore, in striving to eradicate poverty and promote economic growth the African Union (AU) made its goal to form a monetary union followed by a single currency for the whole continent of Africa (Tipoy, 2015), thereby fostering trade and economic liberalization in the African continent. Building from the AU’s goal, the Southern Africa Development Community (SADC) decided to establish a monetary union by 2016 to be followed by the launch of a single currency in 2018. The plan to form a monetary union and establish a single currency in the SADC area not only aims to reduce poverty but it also aims to reduce heterogeneity among SADC economies. Simply put, it aims to achieve convergence in economic growth among SADC member states (Tipoy, 2015).

The impact of internal migration on regional income inequality of the receiving areas has hitherto gone largely unstudied. This dearth of literature is especially surprising because income inequality and in-migration into urban centers of growth are two issues that many developing economies are faced with and tackling these issues effectively involves understanding the interactions between these two related phenomena.

Among other factors, the World Bank indicates that with an anticipated human population growth of about 1.458 billion by 2025, Africa is increasingly becoming a frontier for investment and world economic development. Increases in demographic transitions opens a window of opportunities, as the working age population increases. This presents an opportunity to open up the African market to enhance intra-African trade, as well as the flow of capital across borders and between Africa and the rest of the world over time. The African Development Bank, UNDP, and OECD report that recent trends in African total trade flows – exports and imports, highlight a shift in trade dynamics and increasing competition from China for the African market. From 2010 to 2013, intra-African exports grew by 50% and by another 11.5% in 2014 to USD61.4 billion. Despite Europe’s dominance in Africa trade, Africa’s trade with Asia rose by 22% between 2012 and 2013. Moreover, since 2000 official remittances to Africa increased six-fold and were projected to reach USD64.6 billion in 2015 with Egypt and Nigeria receiving the bulk of flows. At the same time, increasing Greenfield investments from China, India, and South Africa are expected to increase foreign investment in the continent. The resultant effects of these are improvements in the overall economic growth and developments in the financial sector. In fact, Ahmed et al., (2014) estimates the contribution of Africa’s demographic dividend to gross GDP volume growth of 10-15% by 2030. Standard economic theory postulates that the flow of foreign capital to a recipient country increases its stock of capital and technological knowledge, leading to better economic performance. Capital flows could also enhance local savings, promote capital accumulation, and market efficiency. To reap the above benefits, African countries ought to establish stronger ties and collaborations with the global economy. However, the degree and extent of both inter- and intra-regional interconnectedness ought to be pegged at certain optimal levels in order to reap benefits from scale economies.

Banking sector efficiency measures the proximity of a decision making unit to its production possibility frontier, composed of sets of points that optimally combine inputs in order to produce one unit of output. Banking sector efficiency has been of interest to policymakers and scholars for a number of reasons. Efficiency leads to a reduction in spreads between lending and deposit rates which stimulate greater demand for loans and an increase in mobilisation of savings. Wide spreads affect intermediation and distort prices which impairs the role of the financial system. Efficiency contributes to the understanding of the primary monetary policy transmission channel helping policymakers to obtain feedback on how changes in the regulatory environment affect bank efficiency and how efficiency translates into bank performance. Banking sector efficiency assists in benchmarking an individual bank against international best practice and assessing the effect of various policy measures on the sector performance.

Although the development of macroeconomic models with a role for credit has come a long way since Kiyotaki and Moore (1997), the majority of models assume a single representative credit market. As such, the literature is silent on the evolution of credit composition over the business cycle. Furthermore, the absence of credit market heterogeneity implies an incomplete understanding of the benefits associated with operational diversification in the financial sector. We aim to fill this gap in the literature by investigating how financial sector balance sheet linkages within the financial sector impacts on the stability benefits offered by operational diversification.

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).

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.

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.