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I would like to thank Jim Vein and Bruce Smith, who suggested the topic, and Peter Fallon, Hari Vittas, Desmond Lachman, Thierry Pujol and other participants at an informal seminar at the IMF for useful comments and suggestions. All remaining errors are, of course, my own, as are all opinions expressed.
As a result of these sanctions the rate of growth of the capital stock slowed from 4 percent per annum in the early 1980s to 1 percent in the later half of the decade.
Iyengar and Porter (1990) is an exception. They calibrate a simple computational equilibrium model and use it to look at aspects of labor market constraints in South Africa. However, since the analysis abstracts from effect of different levels of the capital stock, it is somewhat tangential to the issues considered in this paper.
This reduction does not correspond to the experience of other developing countries. While there is some fall over the 1980s, particularly in Africa and the Western Hemisphere, these falls occur in the early 1980s. The only area of the world in which investment fell in the mid-1980s was the Middle East, which was clearly due to the fall in the oil price (World Economic Outlook (1990)). Hence, it appears reasonable to attribute the reduction in investment to financial sanctions, rather than more general economic forces.
This slowdown in the rate of growth of the capital stock did not result in a shift in the composition of the capital stock towards business investment; the capital stock associated with community, social-and personal services grew at 2.4 percent between 1985 and 1989, above the average for all sectors. Indeed, from 1985 to 1989 the capital stock actually fell in agriculture, manufacturing, electricity, gas and water, construction, and transport, storage and communication.
There is also, of course, the possibility of a catch up effect as investment which was postponed due to lack of access to foreign saving is reactivated. Since we are interested in medium term prospects for the economy these effects will be ignored.
Within this the most under privileged group, blacks, are growing fastest.
The numbers are 62.4, 64.8 and 61.3 percent respectively.
Knight (1982) discusses why this might imply inequality between wages in different sectors of the economy.
Keeping black wages at a low level raises white incomes by increasing the real return to white labor and capital. This assumption fits in with the rationale of apartheid, that of maximizing incomes for the white minority; this paper models apartheid as a system which differentiates the work force, driving down the wages for nonwhite labor in order to maximize white incomes. For more sophisticated models of apartheid controls, see the references cited above.
These data do not include Asian and colored workers, however blacks make up the vast majority of the nonwhite labor force. As noted by Knight (1988), these educational differences imply continued large income inequalities between whites and nonwhites under almost any scenario.
A second, and more general, issue has to do with whether differences in nonwhite and white wages in South Africa should be analyzed in terms of market forces at all. Estimating a production function is only useful if the underlying assumption of market behavior is correct. Analyses of the South African labor market in Knight and McGrath ((1977) and (1987)) and Porter (1984) conclude that wage differentials are largely based on a combination of education, skills, and access to skilled jobs, rather than straight discrimination between workers in the same jobs.
This can be seen as a second order approximation to an arbitrary production function.
Much of the recent empirical work in production economics has concentrated on the dual formulation, since prices are exogenous to decisions; quantities of inputs, on the other hand, are endogenous, which creates econometric problems when estimating the primal (see Varian (1984), Ch 4 for a good account of the problems).
Unfortunately there is no direct correspondence between the parameters in the production and cost functions. Hence it is not possible to make direct inferences between the two sets of coefficients. For more details on the dual function see Jorgenson (1983).
The employment and remuneration series comes from the quarterly employment survey, which cover most of the formal sector of the economy. The output and capital stock data, which come from the national accounts were adjusted for differences in coverage.
As noted above, inputs are not necessarily exogenous, hence instrumental variables were used; the instruments being a constant, a time trend, current factor prices and the first lag of factor quantities. Standard errors are shown in parentheses.
Adding a first order autogressive process produces similar coefficient estimates. Since the coefficient in this process was insigificant the results are not repeated.
If these coefficients were zero the production function is Cobb Douglas, with elasticities of substitution of one. The negative coefficients indicate that the elasticities of substitution are above unity.
Terreblanche and Nattrass (1990 p.15) characterize the period after 1973 as one of steady liberalization in the labor sphere.
The simulations assumed that both black and white real wages moved in tandem in the two sectors. For the capital stock, however, the two sectors were projected separately. This was done because the location of capital between the two sectors turned out to be unrealistically sensitive to price movements.
It is estimated that in 1989 both white and nonwhite labor received about 25 percent of output, and capital the remaining 50 percent.
Unfortunately, the results from estimating the dual cost function do not find the same high level of substitutability. Indeed, they show rather low elasticities of substitution. Hence this feature of the model is not robust to alternative estimation techniques. However, the results from estimating the dual were unsatisfactory in other ways.
This simulation assumes that in the absence of financial sanctions, external capital inflows to South Africa would revert to their pre-1985 levels. It must of course be recognized that it is highly probable that with the changed conditions in the international capital market, capital flows to South Africa might not revert to their former levels in the event that sanctions were lifted.