Working Papers

This paper presents an analysis of the interaction of human capital investment and the development of social and political institutions. We find that human capital matters - for growth through its quality dimension; for distributional conflict by raising political aspirations. But human capital does not stand alone either. The level of economic development (output) matters, distributional (instability) conflict as well as the rights dispensation can come to influence human capital investment decisions in their own right. Social, human capital, political as well as economic dimensions are densely interwoven in webs of association.

The paper examines whether endogenous growth processes can be found in middle income country contexts. Estimation proceeds by means of dynamic heterogeneous panel analysis. Empirical evidence finds in favour of positive impacts on total factor productivty growth by Schumpeterian innovative activity. A crucial finding is that it is the quality of human capital rather than the quantity of human capital that is important for TFP growth. We also find that human capital is both influenced by, and determines the institutions of society that serve to determine the long run productivity of all factors of production.

Scholars have focused their efforts to explain poor growth and development in regions such as Sub-Saharan Africa, and parts of Asia, Eastern Europe, and Latin America, using arguments based on quality of institutions and geography and the structure and process of resource allocation and endowment. This paper presents a different argument based on an incentive compatibility and asymmetric information framework. We characterize the decision-making problem in government and public sector as being fraught with mis-information about the true state of economic performance. Misinformation can also result in a legal liability which may depend on probability of losing elections, income, and attitude to risk. The agency conflicts between the elected politicians and career-bureaucrats contribute to the mis-information problem, resulting in poor policy choices that may lead to poor economic performance. The role of international financial aid flows is examined and the paper argues that such aid flows may only serve to subsidize the inefficiencies of political leaders and reduce the economic gap created by poor policy choices. More financial aid flows may not be a panacea for poor economic growth and its insurance characteristics may cause recipient governments to choose even riskier policies. We also examine why Foreign Direct Investment (FDI) flows to poor regions, such as Sub-Saharan Africa, are low. We show that the risky policy choices create conditions that increase the value of the option-to-wait on investment decisions, thus reducing the flow of FDI. We undertake empirical analysis on some African Countries and show that the quality of governance influences GDP growth, Employment Creation, and Poverty Reduction in Africa.

This paper examines industry concentration for the South African manufacturing sector over the 1972-1996 period, for the three digit industry classification. The paper notes both the high level of industry concentration in South African manufacturing, and a rising trend in concentration across a wide range of industries. The paper further explores the impact that industry concentration has on a wide range of indicators of industry performance. We find that increased concentration serves to lower output growth, raise unit labour costs, and to lower labour productivity. The impact on employment, total factor productivity and investment rates based on bivariate examinations of the data are ambiguous. The paper concludes by examining the impact of concentration on employment and investment rates using a dynamic heterogeneous panel estimation methodology. We find that increased concentration unambiguously lowers employment. For investment rates, increased inequality of market share serves to raise investment rates, while falling firm numbers for any given inequality of market share lowers investment rates. The difference can be interpreted as the distinct impact that the pursuit of managerial objectives (large market share promoting further productive capacity expansion) and that market contestability (under falling numbers of firms in an industry, monopolistic incentives to curtail productive capacity rise) have on investment.

Unemployment among semi- and unskilled workers has reached severe proportions (over 50 %) and threatens the political and economic stability of the South African economy. In this paper a computable general equilibrium (CGE) model of the South African economy to assess the economy-wide impact of a wage subsidy targeted at semi- and unskilled workers. We find that employment of semi- and unskilled workers can be raised quite significantly, although the financial costs can be substantial. The targeting of the correct sectors as well as the budgetary process (deficit financed versus balanced budget) followed play an important role in the outcome.

This paper shows that South Africa’s exports and imports had been determined by the normal variables found in gravity models, namely GDP, population and distance. However, differences in the composition of trade had resulted in distance from markets having a greater adverse effect on exports than imports. Cross section estimates of the impact of the free trade agreements between South Africa the EU and SADC failed to show significant effects. Panel estimates on the other hand yielded positive effects for EU exports and imports with South Africa. The SADC FTA was found to have stimulated South Africa’s exports to SADC but with little effect on SADC imports into South Africa. Finally, it was found that preferential access under the US AGOA had not particularly benefited South African exporters.

We examine a two country aid model with performance intensive aid. The aid budget is determined by a donor country legislature, but allocated by a donor agency in terms of a performance criterion of its choice. Five sources of slippage in policy delivery are introduced: the donor agency observes the performance of the aid recipient imperfectly; the donor agency and the aid recipient are subject to inefficiency; the aid recipient experiences corruption; and adjustment of aid recipient performance is costly. Incentives between the aid donor and the aid recipient are intentionally aligned - to explore the best-case for the policy intervention. Immediate implications are then that optimal level of effort and governance in the aid recipient increase under performance intensity of aid. Moreover, performance intensity of aid has fundraising effects. While the aid recipient also has an incentive to increase the measurement noise in governance, this incentive is weaker than that to raise true underlying governance, is weakest for the poorest aid recipients and provided that the donor agency is sufficiently efficient, measurement error itself will serve to raise optimal effort in the aid recipient. The importance of aid agency self-monitoring is thereby identified. Three important qualifications on the anticipated success of the policy emerge, however. Despite the elimination of incentive misalignment, aid donors may come to rely on performance intensity precisely where such a reliance is likely to be least successful in aid recipients. Second, performance intensity of aid maximizes its impact under conditions where it is supplemented by technical assistance to improve the effectiveness of own effort by the aid recipient. Finally, under convex adjustment costs the general class of optimal time paths in governance in aid recipients will be non-monotone, such that governance may get worse before they get better - optimally so. Performance intensive policy may thus appear to fail - immediately after imposition.