Policy Briefs

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.

Property rights remain important for economic growth and development, but more recent research have started to show that it is more complex – the local conditions also matter. We gave another example, here, of how local conditions and how these rights are perceived matters as well. Besley (1995) said “…formal (de jure) rights might have very little to do with the ability to exercise these rights (de facto).” If the answer of institutional economics is to give de jure property rights in land to individuals, without taking into account the local de facto conditions, property rights might not lead to the expected gains in economic growth. Schlager and Ostrom (1992) already called for investigation into “how various types of institutional arrangements perform comparatively when confronted with similarly difficult environments”. In line with the literature, we attempt to show the perception of property rights at the Cape, or the de facto mattered more than de jure property rights delineated by laws.

This paper focuses on two key questions: How are Africa’s emerging stock markets related to advance stock markets? Do extreme price movement in advanced stock markets have an impact on African stock markets? The importance of this work stems from the fact that the nature of dependence across stock returns plays a crucial role in asset pricing, portfolio allocation and policy formulation. Investment practitioners pay close attention to the co-movement between equity markets, as a proper grasp of its nature and measurement affects the risk-return trade-off from international diversification; typically, international portfolio diversification becomes less effective when markets are in turmoil. Policy makers, on the other hand, are more interested in how strong linkage across stock markets influences the transmission of shocks, its consequences as well as implications for risk management.

Improved health status in Africa is one of the most important items on the international development agenda. The significance of better health status in development-related policy making stems mainly from the linkages between better health status and increased productivity as well as enhanced well-being.

South Africa's high level of dependence on imported crude oil exposes the economy to global events that impact on crude oil supply and prices. Given the country's vulnerability to global crude oil price shocks these events have the potential to undermine South Africa's economic growth and development. The renewed efforts to develop a biofuel industry in South Africa are undoubtedly motivated by such concerns. The development of a national policy that promotes commercial biofuels production has however been countered by concerns relating to food security issues within South Africa. This concern has seen the prohibition of maize and the favouring of sugar cane as a feedstock in South Africa's Biofuels Industrial Strategy. The paper set out to analyse the economic feasibility of producing bioethanol from sugar based on the industry's efforts to diversify its product market base. The promotion of commercial bioethanol production in South Africa is seen not only as an opportunity to support the long-term financial survival of the country's sugar industry but also as an opportunity to promote social development within the country.

It has been argued that business cycles in emerging economies are subject to substantial volatility in trend growth, while the volatility of developed economies’ cycles has moderated in recent decades, and further, that the high volatility in trend growth observed in emerging economies is the result of large and frequent changes in fiscal, monetary and trade policies. Emerging economies are characterised by countercyclical current accounts and a high volatility of aggregates such as consumption and investment compared to the volatility of output. Emerging economies’ further exhibit substantial reversals in fiscal, monetary and trade policies particularly during the economic crises periods. The excess volatility in trend growth observed in emerging economies business cycles is termed the cycle is the trend hypothesis. The cycle is the trend hypothesis predicts that the shocks to trend growth are the primary source of business cycle fluctuations in emerging economies while transitory shocks are important in developed economies.