This Selected Issues paper highlights that cautious monetary and fiscal polices of South Africa during 1997 resulted in a return of financial investor confidence and capital inflows during 1997 and through April 1998. These policies helped the South African economy emerge successfully from the exchange market pressures of 1996 and weather the contagion from the East Asian crisis in the second half of 1997. Throughout 1997 and up until May 1998, inflation and market interest rates fell considerably, net international reserves increased, and the net open forward position of the Reserve Bank was reduced sharply.


This Selected Issues paper highlights that cautious monetary and fiscal polices of South Africa during 1997 resulted in a return of financial investor confidence and capital inflows during 1997 and through April 1998. These policies helped the South African economy emerge successfully from the exchange market pressures of 1996 and weather the contagion from the East Asian crisis in the second half of 1997. Throughout 1997 and up until May 1998, inflation and market interest rates fell considerably, net international reserves increased, and the net open forward position of the Reserve Bank was reduced sharply.

II. Growth Accounting

A. Introduction

78. This section undertakes an examination of the growth performance of the South African economy since 1970 from a supply side perspective. It seeks to identify the contribution of three factors—capital, labor, and technological progress (or alternatively efficiency)—to economic growth. One of the motivations underlying such an exercise is to explore whether the growth process has been “intensive” or “extensive”. The former occurs when long-run economic growth is driven predominantly by an increase in factors of production—labor and capital; the latter occurs when such growth is a result of increases in the efficiency of the economy. High rates of economic expansion are not sustainable under an intensive growth process.29 Extensive growth—based on improvements in technology or efficiency—can, on the other hand, be sustained over longer periods of time, and thus offers the best basis for increasing the economy’s long-run supply potential.

79. Based on measurements of total factor productivity (TFP) growth at aggregate and sectoral levels, this study compares the performance of the South African economy with that of some high-performing East Asian countries, discusses the possible determinants of TFP growth, examines the performance of the manufacturing and mining sectors, and estimates the long-run growth potential of the South African economy as well as the inefficiency in the nonfinancial public enterprise sector and its output consequences.

B. Methodology

80. Growth accounting exercises are based on the following relationship between output, inputs, and technology, and are derived from a simple Cobb-Douglas production function:


where, q, k, and ℓ denote respectively output, capital, and labor; A represents the level of technology; α and (1-α) are the shares of output that accrue to capital and labor, respectively. Equation (1) simply states that the rate of growth in output per capita (the left hand side) is the sum of: the rate of change in the technology (△A/A, hereafter referred to as total factor productivity growth (TFP)); the rate of growth in capital per capita weighted by its share in output; and the rate of growth of labor per capita weighted by its share in output.

81. TFP growth is a key variable of interest in a growth accounting exercise because it measures how efficiently the factors of production are being used in generating output. In equation (1), given data on q, k, ℓ, and α, TFP growth is determined as the residual. The parameter α can be estimated in three ways: first, by directly using data from the national income accounts (hereafter referred to as the “NIA approach”) which measure the income that is distributed to factors of production; and second, by a regression approach, where typically output per worker is regressed on capital per worker. Both these approaches suffer from disadvantages which are described in Sarel (1997).30

82. Instead, this study uses values of α computed by Sarel (1997) (hereafter referred to as the “SM approach”) for each of the 9 major kinds of activity in the national income accounts.31 These sectoral values of α are the simple average for a sample of 26 countries for which disaggregated data were available.32 To obtain the value of α at an aggregate level, sectoral values of the capital shares are weighted by the share of each sector in aggregate output. Hence, under the SM methodology, the capital shares vary over time only to the extent that the sectoral composition of output changes. Figure 6 compares the capital share obtained under the NIA and SM approaches. Two differences are discernible. First, whereas the SM approach yields a relatively constant capital share, the NIA approach yields values that change significantly over time. Two such episodes of striking change in the capital share occurred in the early 1970s and early 1980s when the marked surge in the price of gold increased the profits accruing to this sector and hence for the economy as a whole. Second, for the nongovernment sector, the NIA approach yields a value for the capital share that is about 12 percentage points greater on average than under the SM approach. The larger average capital shares recorded in the national income accounts can possibly be ascribed to two factors. First, to the favorable treatment of capital (Selected Issues Paper, SM/95/90) which could have increased the returns to capital; and the significant labor market distortions, resulting in wages above their market clearing levels, combined with a greater-than-unity elasticity of labor demand, could also have reduced the share of labor in total output.33

Figure 6.
Figure 6.

South Africa: Selected Indicators, 1971-96

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A002

Sources: South African Reserve Bank; and Fund staff estimates

C. Results

Growth performance

83. The growth accounting exercise is carried out at an aggregate level as well as for different sectors. Real GDP of the private nonagricultural sector34 grew at an annual average rate of about 3.5 percent in the 1970s, slowing down considerably to about 1 percent a year in the 1980s and 1990s (Figure 6). At a disaggregate level, manufacturing output also exhibited this pattern of robust performance in the 1970s (5.4 percent annual average rate of growth) followed by faltering growth thereafter. In contrast, the mining sector has witnessed declining trend growth since the 1970s, with some deceleration in this trend in the 1980s, owing in part to the gold boom, which saw a large increase in gold prices.

Contribution to growth

84. Table 2 depicts the contribution of the factors of production and TFP to aggregate and sectoral growth performance. Here too, a common pattern emerges. The 1970s witnessed substantial capital accumulation, averaging over 6 percent a year for the economy as a whole, and as high as 8 percent a year in manufacturing. During this period, employment creation was quite substantial, varying between 2 percent a year for the mining sector, and close to 2.5 percent a year for the rest of the economy. TFP growth, however, was poor. Thus, capital and to a lesser extent labor, were the primary engines of growth. In other words, South Africa was at a stage of intensive rather than extensive growth.

Table 2.

South Africa: Growth in Output, Factors, and Total Factor Productivity, 1971-1996

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Sources: Fund staff estimates

Figures in parentheses use capital shares derived from the national income accounts; all other figures use capital shares based on Sarel (1997)

1977-1996; annual average growth of output during 1977-80 was about 12 percent

85. During the 1980s, factor accumulation slowed down, mirroring the decline in output growth. Excluding the mining sector, which saw substantial investments related to the boom in gold prices and to the fact that mines were becoming deeper, capital growth declined to an average of about 2-3 percent a year. Employment growth, at about 0.7-1 percent a year, started lagging behind the growth in the labor force. At the same time, aggregate TFP growth remained broadly unchanged, although it deteriorated substantially in the manufacturing sector (see below).

86. While real GDP growth in the 1990s remains close to that in the 1980s, its determinants have been very different. Capital accumulation slowed further in the 1990s, employment started to exhibit substantial negative growth rates, but TFP growth turned around and began to increase substantially, bolstering the flagging growth process. In each sector and at the aggregate level, TFP growth improved by about 2 percentage points a year (see below). Thus, insofar as there has been growth in the 1990s, it has been extensive rather than intensive.

87. The robustness of these estimates of TFP growth was tested using an alternative estimate of the capital share (obtained from the national income accounts). The absolute magnitude of TFP growth was modified somewhat, but the change in TFP growth over time remains broadly as described above. For example, if the capital share is estimated using the NIA approach rather than the SM approach, TFP growth in the private nonagricultural sector was about 0.4 of a percentage point a year lower in the 1970s and 1990s and 0.2 percentage point a year lower in the 1980s.35 Accordingly, the turnaround in TFP growth between the 1980s and 1990s was about 1.7 percentage points a year rather than 1.9 percentage points under the SM approach.

Possible determinants of TFP growth

88. Whereas the neoclassical growth model assumes technological progress to be exogenous, the new (or endogenous) growth theory views TFP growth as an outcome of policy and institutional factors. One important determinant of TFP growth emphasized in the latter is the amount of research and development undertaken in an economy (Romer (1997) and Grossman and Helpman (1997)). For countries such as South Africa that do not invest greatly in research and development, international trade and FDI offer important vehicles for technological spillovers that allow them to close the technology gap vis-à-vis industrial countries (Coe et al. (1997)). More specifically, since this technology will be embodied in machinery and equipment, capital goods imports acquire special significance. Relatedly, De Long and Summers (1991) have argued that investment in equipment has been a critical variable explaining differences in growth performance across countries. In the case of South Africa, FDI has traditionally been low and cannot explain the variations in TFP growth. However, Figure 6 and the table below suggest that all these factors, namely, openness of the economy, imports of capital goods, and equipment investment, may have had a role in explaining the improved TFP growth performance of South Africa in the 1990s relative to the 1980s.

89. Another set of factors that could have affected the overall efficiency of the economy relates to the role of the public and private sectors in investment. In the case of South Africa, public sector investment led to significant excess capacity. Mitra (1994) has pointed out that South Africa’s transport, communications, and electricity generation systems faced substantial excess capacity during the apartheid years. In addition, as suggested by the analysis of the performance of nonfinancial public enterprises below, public sector investment may also have been inefficient. Figures 7a and 7b as well as the table above indicate that the sharp increase in the share of the private sector in overall investment and in investment in equipment and machinery may have contributed to the improvement in TFP growth between the 1980s and 1990s.36

Selected Factors Affecting TFP Growth

(In percent)

article image
Sources: Reserve Bank Quarterly Bulletin; and Fund staff estimates.


Figure 7.
Figure 7.

South Africa: Public and Private Sector Investment, 1971-96

(In millions of Rand)

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A002

Sources: South African Reserve Bank; and Fund staff estimates


90. An economy’s supply potential is affected not only by the quality and quantity of its physical capital stock, but also its human capital stock embodied in the labor force. Since the work of Mankiw et. al. (1992) and Barro and Sala-i-Martin (1992), it has become customary to undertake the growth accounting exercise by adjusting the labor force by its human capital content, usually proxied by educational attainment. In the endogenous growth models, human capital is seen as important not only in itself but also in enhancing the ability of an economy to exploit the fruits of technological progress (see Coe et al. (1997)). The analysis in this study does not take account of the human capital factor in part because of the lack of readily available proxies for the human capital embodied in the labor force. Because of this omission, TFP growth should be interpreted as the measure of an economy’s capacity to generate more output using a fixed quantity of inputs, and encompasses factors such as the level of knowledge, proficiency, skill, and other similar concepts.37

Cross-country comparisons

91. A cross-country comparison of South Africa’s growth and TFP performance is sobering, while offering some ground for optimism. The table below compares these indicators for South Africa with five Asian countries—Indonesia, Malaysia, the Philippines, Singapore, and Thailand—and the United States. Over the longer period, South Africa’s performance has, with the exception of the Philippines, been substantially below that of the comparator countries both in terms of output per capita and TFP growth.38 Between 1978 and 1996, the Asian countries grew about 5 percent a year faster than South Africa, while registering TFP growth which was close to 2 percentage points a year higher than that for South Africa.39 However, for the most recent period—1991-96—South Africa’s TFP growth of about 1.6 percent a year was not far behind that of the fast growing Asian economies whose TFP growth averaged between 2 and 2.5 percent a year; notwithstanding this improved efficiency, South Africa’s overall growth performance remained well behind that of the comparator countries.

92. The marginal product of capital (MPK) is not directly related to TFP growth, but is a key variable in determining the return on investment and hence the growth rate of capital and output As Sarel (1997) notes, MPK is particularly important in cross-country comparisons because capital tends to flow to countries that offer a high return to investment.

South Africa: Comparison of Output and TFP Growth with Selected Countries

(In percent)

article image
Source: Sarel (1997); and staff estimates.

93. Under a Cobb-Douglas production function, the MPK is by definition equal to the product of the capital share (∝) and the average product of capital. The table below compares South Africa’s marginal product of capital with those in the comparator countries. Both over the long term and for the most recent period, the MPK for South Africa is lower than that for most comparator countries. The table also shows that the main source of variation in the MPK is not the capital share, which is roughly the same for South Africa as for other countries,40 but the average product of capital which remains substantially below that for comparator countries, including the United States. According to the neo-classical growth model, both average and marginal product of capital will tend to decline over time as capital deepening takes place. The figures tend to suggest that South Africa has experienced significant capital deepening without the commensurate benefits in terms of the higher rates of growth experienced by these countries which suggests that such deepening has been inefficient. The low and declining returns to capital are the dual of the increasing capital intensity, which in turn may have been affected by labor market rigidities and by the negative real interest rates (and correspondingly low user cost of capital) during the 1970s;41 two sectors where this process has been particularly evident are mining and manufacturing (Figure 6) which have seen a rise in the capital-labor ratio by a factor of 2.5 and 3.6, respectively, over the last 25 years.

South Africa: Capital Share, Marginal and Average Product of Capital

(In percent)

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Source: Sarel (1997) and staff estimates.

D. Sectoral Perspectives

94. It is instructive to examine more closely the growth accounting exercise for two sectors—mining and manufacturing—that are of particular importance for South Africa. Both sectors produce tradable goods and together constitute more than one-third of South Africa’s GDP in 1997. The manufacturing and mining sectors accounted for 27 percent and 5 percent, respectively of total formal sector employment in 1996. Mineral exports constituted about 41 percent of South Africa’s total exports in 1995.


95. The manufacturing sector witnessed high growth rates and rapid accumulation of capital and labor in the 1960s and 1970s, behind high tariff and nontariff barriers, consequent upon South Africa’s decision to adopt an import-substitution strategy. In the 1980s, a constellation of factors, including the progressive exhaustion of import-substitution possibilities, the gold boom of the 1980s which was akin to a “Dutch disease” phenomenon, and rising wages resulted in a loss of competitiveness of the domestic manufacturing sector (Figure 8). In the early 1990s, in contrast, lackluster manufacturing sector performance owed more to the generalized recession, disinflationary policy in the face of a major deterioration in the public finances, and the uncertainties ahead of the political transition.

Figure 8.
Figure 8.

South Africa: Profitability Indices, 1980-96


Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A002

Sources: South African Reserve Bank; and Fund staff estimates

96. However, the progressive liberalization of the economy and the lifting of sanctions, have raised the overall efficiency of the manufacturing sector. TFP growth has increased by about 1.6 percentage points a year relative to the 1980s, reflected in the improvement in the profitability indices (see Figure 8), The increased openness of the economy and the rising share of capital goods imports described above may have played an important role in TFP growth developments between the 1980s and 1990s. It is important to note that the openness indicator also correlates well with the deterioration in TFP growth in the manufacturing sector between the 1970s and 1980s.

97. However, it is striking that TFP growth in the manufacturing sector has consistently lagged behind that in the economy as a whole, by about 1.5 percentage points a year. During the 1990s, even the mining sector has experienced faster TFP growth than manufacturing (see below). This is contrary to the usual pattern observed in other countries of the tradable goods sector witnessing faster TFP growth. One possible explanation for this lagging performance of manufacturing is that it continues to be relatively insulated from foreign competition by high effective protection, which impedes the attainment of higher levels of efficiency.


98. As noted above, the mining sector witnessed substantially negative TFP growth in the 1970s and 1980s, which has been reversed in the 1990s. The low and negative TFP growth in the mining sector observed in South Africa in the 1970s and 1980s would be paradoxical given the fact that this sector was relatively open. But these developments as well as the turnaround in TFP growth in the 1990s can possibly be explained by taking into account the evolution of South Africa’s world market share of its major mining exports.

99. Table 2 and Figure 9 show that in the 1970s and 1980s South Africa invested heavily in the mining sector and reaped high rents despite poor efficiency: one indicator of this was the high MPK, which was in excess of 50 percent in the 1970s and almost 30 percent in the 1980s. The high inefficiency, manifested in the negative TFP growth, was possible given South Africa’s dominant supplier status.42 However, the return to capital declined as this dominance ebbed in the 1990s. This was caused by increased competition from countries that had more easily recoverable deposits than South Africa, where mines were becoming deeper and more capital-intensive; the increased competition probably necessitated restructuring in the South African mining industry, leading to improvements in TFP growth in the 1990s.

Figure 9.
Figure 9.

South Africa: Nonfinancial Public Enterprise and Mining Sectors, 1971-96

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A002

Sources: South African Reserve Bank; and Fund staff estimates

E. Estimating Long-Run Potential Growth Rates

100. The growth accounting exercise facilitates the estimation of an economy’s long-run potential growth rate of real GDP.43 Under the standard neoclassical growth model, if capital accumulation is determined endogenously, and the growth rate of labor supply and factor shares remain constant, then the current rate of TFP growth can be extrapolated to calculate long-run growth rates. The steady-state solution for the long-run growth rate per capita is equal to the TFP growth rate divided by the share of labor in output, i.e.,:44


101. In the case of South Africa, if current rates of TFP growth are maintained in the future, an assumption that relies crucially on the implementation of the structural reforms envisaged in the GEAR, and if the available labor supply to the economy in the future comprises all new entrants to the labor force, the long-run growth rate will be close to 6 percent a year. However, if the available labor supply to the economy in the future could include the current stock of unemployed in excess of what might be considered a natural rate of unemployment, potential output growth in the future could be higher.

F. The Nonfinancial Public Enterprise Sector and Privatization


102. The nonfinancial public enterprise (NFPE) sector encompasses the public business enterprises and the public corporations. While both types of entities are controlled by the government, the former needs to seek legislative approval for their budgets while the latter does not. Table 3 lists the most important NFPEs as well as their sectors of activity. In South Africa, the share of output accounted for by the NFPEs increased from about 6 percent in 1978 to over 8 percent in 1996.

Table 3.

South Africa: Major Nonfinancial Public Enterprises

article image
Source: World Trade Organization’s Trade Policy Review of South Africa.

Partially privatized.

Fully privatized.

103. As a consequence of an intensive program of public investment, the NFPE sector witnessed substantial real growth averaging about 5 percent a year in the decade and a half prior to the 1990s. However, in the 1990s, their output growth moderated to about 1.7 percent a year (see Table 2). Public sector investment increased as a result of the transportation and communication infrastructure programs (launched by TRANSNET, the transportation conglomerate, and the former Department of Posts and Telecommunications) in the early 1970s, and of the utility services programs (initiated by ESKOM, the electricity company and the Rand Water Board) in the late 1970s. During the 1970s and 1980s, public sector investment also grew through a substantial expansion in industries considered to be strategically important, such as iron and steel (ISCOR), synthetic fuels (Sasol and Mossgas), and armaments (Armscor and Denel).

104. The 1980s saw large increases in factor absorption as capital and employment grew at close to 9 percent per annum accounting for more than 100 percent of the growth in output. Thus, TFP growth of the NFPEs averaged -4 percent during this period. In the 1990s, however, growth of capital and employment slowed down. Labor absorption by the NFPEs far exceeded that of the rest of the economy during the 1980s and 1990s.

105. That NFPEs have not received explicit budgetary support, or that some enterprises—such as ESKOM and TRANSNET—have good credit ratings and regularly access international capital markets, are neither necessary nor sufficient conditions for establishing that they have made efficient use of society’s scarce resources.45 Growth accounting offers a useful tool for measuring the economic performance of the nonfinancial public enterprises (NFPEs) as it allows an estimation of TFP growth.

106. One measure of the inefficiency of the NFPEs is the difference between its TFP performance and that of the rest of the economy. In the 1980s, this differential was close to 4.5 percentage points a year which narrowed to 2 percentage points a year in the 1990s (Figure 9). The methodology described above can be used to measure the output consequences of this inefficiency. If the NFPEs could attain the efficiency levels of the private nonagricultural sector i.e., achieve TFP growth of about 1.6 percent, their steady state growth rate, even allowing for the fact that NFPEs have a lower share of labor in output, could be increased by about 3 percent a year. There is a therefore a need for a major restructuring effort, including privatization and policies to inject competition into the domestic economy, such as trade liberalization and domestic competition policies, to help achieve such higher levels of efficiency.46

G. Summary and Conclusions

107. Moderate rates of real GDP growth in the 1970s were followed by very low rates in the 1980s and 1990s. The sources of growth varied in these three periods. In the 1970s and 1980s, growth was driven largely by increases in the factors of production, notably capital. However, in the 1990s, the improvement in economy-wide efficiency, as measured by TFP growth, was the main engine of growth. This pattern of a turnaround in TFP growth in the 1990s relative to the earlier periods was evident not only at the aggregate level but also at the sectoral level.

108. This improvement in TFP growth in the 1990s could have been due to (i) technological factors, as reflected in the increased share of capital goods in imports and the increased share of machinery and equipment in investment; and (ii) to efficiency-inducing factors such as the increased openness to trade and a greater role for the private sector in investment. There is some evidence of large-scale and inefficient capital accumulation, reflected in the high and rising capital-labor ratios and in the attendant low returns to capital compared with, for example, the East Asian countries.

109. If the TFP growth achieved during the 1990s is maintained, for which the implementation of structural reforms is a prerequisite, the potential growth rate of the South African economy can be close to 6 percent a year.

110. Despite relatively low levels of efficiency, the mining sector enjoyed high returns to capital in the 1970s and 1980s, possibly because of South Africa’s dominant supplier status in those periods. However, as this dominance ebbed, this sector was forced to improve its efficiency levels which resulted in a strong increase in TFP performance in the 1990s.

111. The manufacturing sector also effected improvements in efficiency in the 1990s, but the level of TFP growth still lags behind the rest of the economy. This is contrary to the pattern observed in most countries, possibly due to the high levels of effective protection which hamper efficiency.

112. The growth accounting exercise also reveals the magnitude of the inefficiency of the nonfinancial public enterprise sector. TFP growth in the NFPEs has remained negative in the 1990s and substantially less than that for the economy as a whole. If this difference could be bridged through restructuring and privatization as well as other measures to enhance domestic competition, potential output growth of the NFPEs could be increased by about 3 percent a year, yielding considerable efficiency gains, and fiscal benefits could also be achieved as privatization proceeds are used to reduce government debt and the interest bill.


  • Barro, R.J., and X. Sala-i-Martin, 1992, “Convergence,Journal of Political Economy, Vol. 100, No. 2, pp. 223251.

  • Chadha, B., 1994, “Disequilibrium in the Labor Market in South Africa,IMF Staff papers, Vol. 42, No. 3, pp. 642669.

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  • Sarel, M., 1997, “Growth and Productivity in ASEAN Countries,IMF Working Paper, WP/97/97.

APPENDIX: Data Sources and Methodology

Data for the growth accounting exercise were obtained from the South African Reserve Bank’s Quarterly Bulletin. Selected data on nonfinancial public enterprises (nominal value added, nominal capital stock at replacement value, and nominal remuneration of employees) were provided by the Reserve Bank.

All aggregates relating to the private sector exclude “General Government.” The agricultural sector includes agriculture, forestry and fishing. The mining sector includes mining and quarrying. Thus, GDP of the private nonagriculture sector is the difference between series 6003 (GDP at factor cost) and the sum of the series 6031 (GDP of agriculture, forestry and fishing) and of series 6043 (GDP of general government).47

Fixed capital stock for the economy (series 6149) and individual sectors (series 6140–6148) are calculated on a replacement value basis. Employment data refer to the formal sector (series 7000–7009). National income-based capital share estimates were derived from series 6285 which is the ratio of remuneration of employees to GDP.

For the NFPEs, real value added was obtained by deflating nominal value added using a price series for the nonagricultural sector. An employment series for the NFPEs was obtained by deflating the nominal wage bill by remuneration per worker in the public authorities (series 7011). Estimates of the real capital stock were derived by deflating the nominal capital stock by the price series for gross domestic fixed investment. Two estimates of the share of capital in output of the NFPEs were used: the first was the capital share for the private, nonagricultural, nonmining sector, and the second, based on the ratio of the nominal remuneration of employees to nominal value added in the NFPE sector. The data on NFPEs exhibit discontinuities owing to the reclassification of some enterprises: TRANSNET was classified as an NFPE in 1990, and TELKOM and the South African Post Office were added to the list of NFPEs in 1992.


This is because there are limits (usually demographic) to the increase in the growth of labor; also, higher growth in capital (than in labor) will lead to diminishing returns to capital thereby reducing output growth over time even if capital growth is maintained.


The national income approach implicitly assumes that capital and labor markets are perfectly competitive and that the income accruing to each factor of production is equal to the value of its marginal product. In the case of South Africa, with large imperfections in the labor market this assumption does not hold. Second, this approach ignores the impact of government policies that affect the returns to the different factors. For example, subsidies to capital could result in the return to capital exceeding its marginal product. The regression approach suffers from two drawbacks: it assumes that factor shares are constant over time and that the growth rate of each input is exogenous.


The nine activities with their respective capital shares are: agriculture (0.275), mining and quarrying (0.601), manufacturing (0.308), utilities (0.538), construction (0.189), commerce (0.232), transportation and communication (0,320), financial and business services (0.604), and government and other services (0.0812). It can be seen that the more capital-intensive sectors such as mining and utilities have higher capital shares.


To check whether the typical capital share is affected by the level of development of a country, Sarel regresses these sectoral capital shares on the average capital stock per person, and finds that the coefficients are insignificant for all sectors at the 1 percent confidence level, and marginally significant for three sectors at the 5 percent confidence level. This statistical insignificance validates the use of the average sample value for all countries.


For South Africa, Chadha (1994) estimates an elasticity of unskilled labor demand with respect to wages of -1.5.


The private nonagricultural sector excludes the category of “general government” but includes the nonfinancial public enterprises.


A higher capital share reduces the contribution of TFP (the residual) because the growth in capital exceeds the growth in labor.


It is possible that there were also complementarities between public and private investment that affected TFP growth with a lag in the 1990s.


It should be noted, however, that the failure to incorporate human capital will affect the measurement of TFP growth only to the extent that rate of growth in the proxy for human capital has been different from the rate of growth in the changes in employment.


The comparison’s are based on Sarel’s estimates for these countries for the period 1978–96.


As noted below, in the steady state, each 1 percentage point difference in TFP growth translates into a difference of output growth of over 3 percent a year, assuming a capital share of about two-thirds.


This is partly by assumption but also reflects the fact that South Africa’s sectoral composition of output may not be very different from that of the comparator countries.


However, real interest rates which were negative during the 1970s turned around in the 1980s and 1990s without any apparent impact on the capital-labor ratio.


South Africa’s share of world gold production is shown below.

(In percent)

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Source: Commodity Year Book


Such an estimation is very sensitive to the underlying assumptions and should be viewed as indicative of possibilities rather than as a serious forecasting tool.


In the standard neoclassical growth model, the capital-labor and capital-output ratios are constant given the level of technology. However, equation (2) expresses the change in the steady state value of output per capita (or per worker) when there is technological progress (i.e., TFP growth). Under these conditions although the steady state value of the capital-output ratio does not change, the capital-labor and output-labor ratios do; thus, output grows faster than the growth in the labor force with the difference being related to TFP growth.


For example, ESKOM’s positive financial performance may to some extent be related to the fact that it has not had to pay income tax and stamp duties. Further, several parastatals received substantial financial support from the Reserve Bank in the form of subsidized cover for their international borrowing during the 1980s and early 1990s.


In 1996, under the auspices of the National Economic Development and Labor Council (NEDLAC), a National Framework Agreement was concluded among the social partners, establishing the guidelines for the process of restructuring state assets. For the purposes of privatization, the NFPEs have been placed in three categories (Table 3): (i) NFPEs with an explicit role in the provision of basic needs; (ii) NFPEs which do not provide essential infrastructure services but nevertheless have a public policy dimension; and (iii) NFPEs which fit neither of the above descriptions. The restructuring process has a number of objectives, including the need to make NFPEs more competitive, to assist in the repayment of government debt, to deliver affordable services to the population, and to address historical imbalances. At this stage, whereas restructuring could take the form of majority divestiture for the last category, the government intends to devise specific divestiture strategies for enterprises in the first two categories on a case-by-case basis, taking into account the needs of individual sectors.


All series references relate to those in the Reserve Bank’s Quarterly Bulletin.

South Africa: Selected Issues
Author: International Monetary Fund