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Prepared by Vivek Arora, Ashok Bhundia, and Gustavo Bagattini.
See U.S. Congressional Budget Office (2001) and DeMasi, Chan Lau, and Keenan (1999) for a description of the production-function approach and estimates based on alternative methodologies for the United States, respectively.
Statistical tests for a structural break in the real GDP series indicated a break in 1993. The recent data also reflect a statistical revision in June 1999, which implemented the 1993 System of National Accounts and resulted in an upward revision in measured annual real GDP growth during 1994–98 from 2.2 percent to 2.7 percent.
Due to data availability, the analysis in this section is based on annual data for 1980–2001.
See IMF (1998) for an analysis of GDP growth in South Africa based on a Cobb-Douglas production function, and U.S. Congressional Budget Office (2001) and DeMasi, Chan Lau, and Keenan (1999) for an analysis for the United States. The shares of labor and capital in the production function were based on their shares in national income—55 percent and 45 percent, respectively. The use of national-income shares has been criticized by Sarel (1997), as discussed below, but the results do not vary significantly with alternative assumptions regarding the labor and capital shares.
The weights are equal to the labor and capital shares in the production function. Employment is used as the labor variable in the production function because it is employment, rather than the total labor force, that has contributed to past production.
It would have been preferable to estimate potential employment based on its economic determinants rather than on statistical time trend techniques such as HP filters. However, such estimation was impeded by data limitations, in particular breaks in the employment series in the mid-1990s. These also hindered estimation of a NAIRU for South Africa, as tests for a Phillips-curve relationship failed to find any robust inflation-unemployment relationship after controlling for other factors. For the period through 1991, Chadha (1995) found that the high unemployment in South Africa was largely structural rather than cyclical in nature.
The capital stock is used in its actual rather than smoothed form because it is assumed to be fully utilized. Also, it is lagged one period. These are standard assumptions (e.g., see CBO, 2001).
The production-function method is used because it has the strongest economic basis. However, as noted, the results are not significantly different than those based on the other approaches.
The correlation coefficients are 0.41 and 0.64, respectively.
This reinforces the conclusion of the previous staff study on the subject of growth accounting which found that TFP growth turned around during the early 1990s and bolstered a flagging growth performance (see IMF, 1998). The data for the subsequent period indicate that the increase in TFP growth has been sustained and has contributed to a substantial increase in real GDP growth.
This general conclusion is robust to alternative assumptions regarding the shares of capital and labor in output. The use of national-income-based shares is sometimes criticized in part because it assumes that capital and labor markets are perfectly competitive. In South Africa, with large imperfections in labor market, the assumption may be unrealistic. However, an alternative estimate of the labor share based on Sarel (1997), which uses a disaggregated approach and adjusts for market imperfections, is 0.68 instead of 0.55. Under this alternative assumption, it is still true that the turnaround in GDP growth in the recent period owed to TFP growth, whose annual contribution increased from0.2 percentage points in 1980–93 to 3.4 percentage points in 1994–2001.
The production function is Y = A.KαLI–α, where Y represents real GDP; A, K, and L represent TFP, capital, and employment, respectively; and a and (1 -α) represent the shares of capital and labor in output. The growth rate of output is thus: ΔY/Y=ΔA/A+ α.ΔK/K + (1-α).ΔL/L. In the steady state, if the capital-labor ratio is constant (as it is in the neoclassical growth model), then ΔY/ΔY = ΔA/A + AL/L.
In this scenario, growth rates could be even higher than 5 percent if labor-market and other reforms are substantial enough to generate employment growth that absorbs not only increases in the labor force, but also the currently unemployed, resulting in a decline in the unemployment rate.
All of these conclusions are based on a neoclassical growth model. In an endogenous growth model, the steady state is characterized by a constant capital-output ratio and output growth is given by ΔY/Y = [(ΔA/A)/ (1-α)] + ΔL/L. There are no diminishing returns to capital and long-run growth is thus higher. Under the same assumptions as above on labor-force growth and labor-market reforms, this model would suggest that long-run GDP growth rates could be in the 5½–7½ percent range. However, such high growth rates should be considered only a theoretical possibility at this stage, given that they have not been observed over sustained periods in South Africa in the past and the many assumptions that are involved.