Policy Change and Economic Growth: A Case Study of South Africa

Literature › Works

David Faulkner; Christopher Loewald (2008). Policy Change and Economic Growth: A Case Study of South Africa. Commission on Growth and Development Policy Paper Series, Policy Paper Number 14. National Treasury of the Republic of South Africa.

Type	working paper
Scope	Post-1994 South African economy
Method	synthesis review
Period studied	1970–2007
Regions	South Africa
Themes	macro fiscal finance debt, transition post apartheid, sanctions divestment, labour markets wages, manufacturing industrial policy, education human capital, comparative theory, business and state, inequality poverty unemployment
Citation key	faulkner2008

Argument

The paper argues that South Africa's growth experience pivots around political change. Long-term decline before 1994 gave way to recovery after the transition to democracy. In the final decade of apartheid, sanctions, political instability and inflationary macro policy raised uncertainty and depressed investment, while import-substituting protection, concentrated markets and rising unit labour costs held back productivity. After 1994, democracy, prudent fiscal policy and macro stability (GEAR, inflation targeting) lowered the cost of capital and uncertainty, and TFP growth became the main driver. The authors reach this through a synthetic review, growth accounting, an HP-filter estimate of potential output and the secondary literature, most of it on the post-1994 period. They conclude that micro reforms in competition, trade, labour markets and education are needed.

Evidence and method

Secondary literature, mostly econometric work by Fedderke and co-authors, Edwards, Aghion and others. Also Quantec employment series, SARB Quarterly Bulletin and IMF IFS macro data, October Household Survey/Labour Force Survey tables, and Kingdon and Knight reservation-wage data. The authors' own HP-filter potential output and growth accounting calculations are also used.

Findings

• The decade before 1994 was the worst growth period since the Second World War, and its proximate causes were sanctions, instability and macro policy. (p. 2)

  In the decade prior to 1994, South Africa experienced the worst period of economic growth since the end of the Second World War, with growth variable and declining.

• Potential output fell sharply from the mid-1970s to the mid-1990s. (p. 7)

  Du Plessis et al. (2007) calculate that potential output fell by 30 per cent from the mid-1970s to the mid-1990s.

• Public-sector investment, boosted by state-owned enterprises in a bid for autarky, peaked in 1976 and then collapsed. (p. 9)

  Government’s share of total investment reached 53 per cent in 1976 before approximately halving to 27 per cent in 1994.

• Growth was labour-saving and employment growth slowed steadily from the 1970s. (p. 9)

  Employment growth weakened from 2.8 per cent in the 1970s to 2 per cent in the 1980s and registered an average rate of growth of just 0.67 per cent between 1990 and 1993

• Exports stagnated under import substitution and sanctions, and per capita exports fell. (p. 10)

  Over the period 1970 to 1984, the value of exports did not change while export volumes grew by a mere 13 per cent.

• Per capita GDP fell sharply in the 1980s and early 1990s. (p. 11)

  On a per capita basis, the economic damage was catastrophic, with per capita GDP falling 16 per cent between 1981 and 1993.

• The growth accounting shows TFP was negative before 1994 and became the main source of post-1994 growth. (p. 25)

  the fundamental driver of accelerating growth has been TFP growth, accounting for 60 per cent of post-1994 economic growth.

• The transition and the removal of sanctions lowered uncertainty and revived investment. (p. 13)

  The peaceful and stable transition to democracy combined with the removal of sanctions dramatically reduced political instability, reversed investor sentiment at a basic level