The Political Economy of Institutions, Stability and Investment: a simultaneous equation approach in an emerging economy – the case of South Africa
Publication date: November 2005
The modern theory of investment identities the importance of uncertainty to investment. A number of empirical studies have tested the theory on South African time series, employing political instability measures as proxies for uncertainty. This paper verifies that political instability measures are required in the formulation of the investment function for South Africa. It also establishes that there are distinct institutional factors that influence the uncertainty variable such as property rights and crime levels. We find that rising income and property rights lower political instability, and that rising crime levels are positively related to political instability. The inference is that political instability in South Africa may not represent uncertainty directly, since it is systematically related to a set of determinants. Instead, uncertainty would have to be understood as being related to a broader institutional nexus that in concert may generate uncertainty for investors.
Total downloads: 778
Corporate Governance, Manager Behavior, and Analyst Behavior as Determinants of Mergers and Acquisitions
Publication date: September 2006
The literature on Mergers and Acquisitions activity has espoused various explanations for M&A activity. Some of this captures the nature of defence mechanisms again takeovers. In all the expositions the agency conflicts and degrees of collusion among the claimants to the firm’s cash-flows, are apparent. In this paper we add to the literature by presenting an integrated framework that classifies manager behavior and corporate governance, and show how a manager can use M&A bids as a vehicle for maximising their own benefits, rather than shareholder value. The M&A bid targeted by the manager could simply be for diversionary reasons that seek to enable the manager to hold on to his employment and benefits, even though he may be a poor manager. We also consider M&A activity that benefits both managers and shareholders. In this analysis, M&A activity is driven by the manager’s appetite for M&A activity, both beneficial and unbeneficial. The analysts, who are employed by investment banks, that advise on the M&A activity, collude with management. The analysts forecast inflated earnings for a company because the fees they earn as a portion of what the investment bank earns, are related to the size of the transaction which in turn is determined by the inflated future earnings. The agency conflicts between shareholders, investment banks and their analysts, and managers of the company, are central to our framework.
Total downloads: 386
Challenging Cassandra: Household and Per Capita Household Income Distribution in the October Household Surveys 1995-1999, Income and Expenditure Surveys 1995 & 2000, and the Labour Force Survey 2000
Publication date: July 2004
Journal: 2006, Economic Modelling, 23, 738 - 60
This paper examines household income inequality in the South African October Household Survey datasets between 1995 and 1999, the Labour Force Survey 2000, and the Income and Expenditure Surveys 1995 and 2000. The paper reflects both on changing patterns of income inequality in South Africa, and on the quality and comparability of the data employed. We employ several measures of income inequality, employing nominal income and expenditure data from South Africa over the 1995-2000 period. Results prove sensitive to the choice of welfare measure. Furthermore, results from income data and expenditure data provide contrasting results. On self-reported income data, our findings are that inequality measures increased over the 1995 - 2000 time period. While we do not attach much credence to the evidence for reasons attaching to data quality, there is nevertheless evidence suggesting that the general increase in inequality for the African race group also hides a decrease in inequality for the bottom 1/3 of the income distribution, and (more unambiguously) a widening of inequality for the middle 1/3 of the income distribution for Africans. There is also some evidence of a narrowing inequality amongst rich households for the population as a whole. This suggests that there is at least some evidence consistent with a successful redistribution of income from richest to poorest households, though this has not yet reversed the high aggregate level of inequality in South Africa. Evidence from inequality measures based on expenditure data reverse the findings based on self-reported income. Where there is evidence of an increase in inequality, in most instances this proves to be statistically insignificant. On some measures African as well as total population inequality has declined significantly, and for a number of racial groups inequality has remained unchanged. The central conclusion of the paper is therefore that there is much contradictory evidence that emerges from household level data on income inequality - suggesting that the choice of data set is non-trivial in drawing inference on income inequality in South Africa.
Total downloads: 422
Growth Impact and Determinants of Foreign Direct Investment into South Africa, 1956-2003
Publication date: December 2004
The paper is concerned with the growth impact and the determinants of foreign direct investment in South Africa. Estimation is in terms of a standard spill-over model of investment, and in terms of a new model of locational choice in FDI between domestic and foreign alternatives. We find complementarity of foreign and domestic capital in the long run, implying a positive technological spill-over from foreign to domestic capital. While there is a crowd-out of domestic investment from foreign direct investment, this impact is restricted to the short run. Further we find that foreign direct investment in South Africa has tended to be capital intensive, suggesting that foreign direct investment has been horizontal rather than vertical. Determinants of foreign direct investment in South Africa lie in the net rate of return, as well as the risk profile of the foreign direct investment liabilities. Policy handles are both direct and powerful. Reducing political risk, ensuring property rights, most importantly bolstering growth in the market size, as well as wage moderation, lowering corporate tax rates, and ensuring full integration of the South African economy into the world economy all follow as policy prescriptions from our empirical findings.
Total downloads: 828
Monetary Policy, Determinacy, and Learnability in the Open Economy
Publication date: May 2005
We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique rational expectations equilibrium worldwide which can be learned by market participants. We study cases in which optimal policies are being pursued country by country as well as some forms of cooperation. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation.
Total downloads: 422
Reconsidering the business cycle and stabilisation policies in South Africa
Publication date: September 2006
Classification-JEL: E32, E52, E62, E63
This paper applies an alternative dating algorithm - suggested by Harding and Pagan (for example, 2002a) - to identify the turning points of the South African business cycle. The characteristics of the resulting business cycle are analysed and compared with results obtained for the o¢cial cycle in recent papers on the South African business cycle (du Plessis and Smit, 2003; du Plessis, 2004). The alternative business cycle has plausible characteristics and provides supporting evidence for the thesis that monetary policy has been used more consistently to dampen the cycle of economic activity in South Africa since the early nineties.
Total downloads: 2 089
Demand for health care in HIV/AIDS – affected households in two communities in the Free State province of South Africa
Publication date: October 2005
This paper analyses differences in the choice of health care facility by ill individuals in HIV/AIDS-affected households in the Free State province of South Africa. Secondary education, access to medical aid, and household income are significant determinants of choice, as are severity and type of illness, and type of health care required. Ill persons with HIV/AIDS-related illnesses are significantly more likely to opt for public health care, although the strength of this preference declines as household income increases. Ill persons with severe and in particular severe HIV/AIDS-related illness in turn are significantly more likely to opt for private health care, especially at higher levels of income. Furthermore, health care costs associated with HIV/AIDS-related illness is likely to push HIV/AIDS-affected households deeper into poverty, especially where private care is preferred over public health care. The public health care sector therefore will remain the backbone of the health care system in providing health care to those infected with HIV/AIDS.
Total downloads: 397
Entering and exiting collaborative purchasing relationships
Publication date: September 2006
Many companies establish collaborative relationships (CRs) with suppliers either alongside or in preference to purchasing parts through a process of competitive bidding (CB). CRs over flexibilities and options arising mainly from the “looseness” of the contractual relationship. One significant decision element confronting a firm intending to engage in a CR is when to enter such a relationship and when to abandon it. This paper develops a model that focuses on such timing issues. It provides an optimal timing valuation approach to establishing/abandoning a CR that incorporates differential learning rate payouts. To achieve this, a real options’ frame of reference is adopted that enables a formal analysis of the contingencies embedded in a CR. A standard illustration of the application of the model is provided.
Total downloads: 416
‘Who replies in brackets and what are the implications for earnings estimates? An analysis of earnings data from South Africa’
Publication date: January 2006
In household surveys, earnings data typically can be reported as point values, in brackets or as ‘missing’. In this paper we consider South African household survey data that contain these three sets of responses. In particular, we examine whether there are systematic differences between the sample of the employed with earnings reported as point values and those with earnings responses in brackets; we compare five di¤erent methods of reconciling bracket and point responses so as to generate descriptive measures of earnings; and we investigate empirically how earnings measures differ by approach.
Total downloads: 416
Optimal timing of defections from price-setting cartels in volatile markets
Publication date: March 2005
Journal: 2006, Economic Modelling, 23(5), 792-804
We model cartel defection in markets with stochastic demand fluctuations as an investment timing problem. We show that (i) the optimal timing of cartel defection is pro-cyclical, suggesting higher probability of competitive pricing during booms; and (ii) the defection trigger is a positive function of demand variability, and larger than its deterministic demand counterpart, implying that market volatility facilitates collusion. The first result is consistent with the counter-cyclical pricing prediction originally due to Rotemberg and Saloner (1986), but not dependant on lack of persistence in demand fluctuations. The analysis reveals insights on implications of co-variation between volatility and demand shocks.
Total downloads: 394
Trade liberalisation and labour demand within South African manufacturing firms
Publication date: September 2005
Classification-JEL: J2, F13, F16, C67
Journal: 2006, Studies in Economics and Econometrics, 30(2), 127-46
Using new detailed tariff data, wages disaggregated by skill level and firm level information, this paper ascertains the relationships between trade, technology and labour demand and investigates the effects of tariff changes on factor prices in South African manufacturing. We find evidence that trade liberalization and technological change have affected the skill structure of employment. Export orientation, raw materials imports, training, investment in computers and firm age are positively associated with the skill intensity of production. We also find that tariff liberalisation raised the return to capital relative to labour, but that the negative impact on labour is concentrated on semi-skilled workers. Tariff liberalisation mandated a rise in real returns to unskilled workers.
Total downloads: 631
Inflation Targets as Focal Points
Publication date: September 2005
Journal: 2008, International Journal of Central Banking, 4(1), 55-87
In a world characterised by noisy information and conflicting signals, no Central Bank is always able to affect private sector expectations. Based on Morris and Shin’s model, monetary policy then becomes an information game, in which individuals form their expectations based on all the information that is available to them (public and private). However individual agents also know that ultimately inflation is affected by both the objectives of the Central Bank (and hence the policies it pursues) as well as the average expectation formed by the all agents. They thus need to evaluate both actions. Central to our argument is the way that individuals interpret these actions to form their expectations. We apply Bacharach’s methodology to provide a framework for assessing everyone’s interpretations. Our contribution is to merge these two models to show that a monetary policy regime that has explicit quantitative objectives may provide individuals with better anchors for expectations to coordinate at. However, that is only true first, if no great shocks are anticipated to hit the economy and second, when all other public information is very unclear thus rendering the inflation target the only clear piece of information. We derive in detail the conditions under which this is true.
Total downloads: 579
Mark-up Pricing in South African Industry
Publication date: April 2005
Journal: 2007, Journal of African Economies, 16(1), 28-69
This paper investigates the extent of the mark-up of the South African manufacturing sector, taking into account a number of characteristics of its component industries. We find significant mark-ups to be present in the South African manufacturing industry. In comparative terms, the mark-up is approximately twice that found for the US manufacturing sector. We find that industry concentration exerts a positive influence on the mark-up over marginal cost whilst an indicator of competitiveness suggests that an increase in an industry’s competitiveness relative to other industries allows it to raise its mark-up. However, within-industry increases in competitiveness reduces the mark-up. We also analyze the impact of import and export penetration. Both import and export penetration serve to lower the mark-up. The impact of the business cycle on mark-up indicates that the mark-up is countercyclical. Finally, accounting for intermediate inputs significantly lowers the absolute size of the mark-up, controlling for the industry’s concentration ratio. However, relative to findings on the US manufacturing sectors, SA manufacturing mark-ups remain approximately twice as large.
Total downloads: 525
Has transition improved well-being? An analysis based on income, inequality-adjusted income, nonincome, and subjective well-being measures
Publication date: May 2005
In this paper we examine trends in economic well-being in transition countries from 1988-2002. To do this, we examine economic performance, inequality-adjusted well-being measures, subjective well-being measures, and non-income dimensions of well-being. While for some of the transition countries in Central Europe, the level of well-being is now higher than prior to transition, it is far below those levels in most other transition countries. The only indicator which has shown consistent improvements are measures of political and civil liberties.
Total downloads: 373
Using Fractionalization Indexes: deriving methodological principles for growth studies from time series evidence
Publication date: January 2008
Journal: Social Indicators Research, 85, 257-78
Recent cross country growth studies have found that ethnolinguistic fractionalization is an important explanatory variable of long-run growth performance. This paper highlights some limitations of cross country studies by focusing on the time series evidence for South Africa. In presenting variation over time in a number of social, political and economic dimensions, this paper adds longitudinal evidence on a range of dimensions that have been linked to long run economic development. Given South Africa’s history of ethnic and racial politics, it constitutes a useful case study to explore the dynamics of the possible effects of ethnolinguistic fractionalization on growth. We introduce three new sets of fractionalization indicators for South Africa and one set of political indicators. The results of this study provide important nuance to the existing body of evidence, for the use of fractionalization indices in growth studies.
Total downloads: 405