Abstract
This Selected Issues paper discusses the policy response by a sample of central banks to the ongoing oil and food price shocks in South Africa, drawing some lessons, which can help put in context developments in the country. The paper discusses first- and second-round effects of “supply shocks,” and attempts to gauge second-round effects in South Africa. The paper also analyzes the factors that have constrained South Africa’s growth since the end of apartheid, by comparing its GDP components and its saving and investment performance with those of a panel of faster-growing countries.
II. Constraints on Growth in South Africa: Lessons from a Cross-Country Comparison1
A. Introduction
1. Over the last decade, South Africa’s macroeconomic performance has on average been strong, but its growth outcomes have been disappointing in comparison with peers. Although the country’s growth rate has picked up in recent years relative to past performance, its annual average per capita GDP growth rate (1.7 percent) was only half that of low and middle income countries (3.6 percent) between 1996 and 2006.2 Given South Africa’s relatively stable macroeconomic environment, abundant natural and labor resources, and developed financial markets, its growth rates should arguably have been much higher.
2. The purpose of this paper is to examine the factors that have constrained South Africa’s growth since the end of apartheid, by comparing its GDP components and its saving and investment performance with those of a panel of faster-growing countries.3 The panel comprises the ten fastest-growing economies in terms of GDP per capita, which meet a minimum criterion on population size (to maintain comparability with South Africa) and for which the necessary data are available.
3. The overall messages that emerge are the need to increase South Africa’s investment and savings rates, its labor productivity, and its openness to trade. The study finds that sluggish investment has significantly hampered growth since the end of apartheid and that underinvestment is, in turn, partly explained by limited saving capacity. Interactions between investment, saving, and production may have perpetuated a slow growth trap during the last decade.
B. What Have Been the Main Constraints on Growth in South Africa over the Last Decade?
4. In this section, to better understand differences in growth performance, we decompose GDP growth data for South Africa and the panel in three different ways.4 The first decomposition computes the contribution to growth of expenditure components of GDP and highlights differences in the structure of aggregate demand. The second breaks down GDP growth into contributions of labor productivity and employment, which allows for a more detailed view of the labor-force-related differences. Lastly, a production-function decomposition separates the contributions of labor, capital, and total factor productivity (TFP).
First Decomposition: Demand Components of GDP
5. The first decomposition breaks down GDP growth into the contributions of absorption and trade balance (see methodology in Appendix, Box 1). The panel’s real per capita GDP growth averaged 4.7 percent a year between 1996 and 2006 (versus 1.7 for South Africa).5 Two main conclusions arise from the comparison of South Africa to the panel.
6. First, South Africa’s growth is less export driven than the panel. In South Africa, two-thirds of the real growth of domestic production comes from growth in domestic demand and one-third from growth in foreign demand. For the panel it is the opposite (see Figure II.1). This is confirmed by traditional openness indicators: trade flows as a share of GDP are higher in the panel (on average, over the period the ratio of exports and imports to GDP equals 63 percent for the panel and 53 percent for South Africa). The gap in openness is particularly high for goods.
Contributions to GDP Growth
Citation: IMF Staff Country Reports 2008, 347; 10.5089/9781451841060.002.A002
Sources: World Development Indicators and IMF staff calculations.Note: X = foreign demand; A-M = absorption minus imports = domestic demand.7. Second, the contribution of investment to growth is relatively low in South Africa and the contribution of consumption relatively high. Investment contributes only a quarter of GDP growth in South Africa compared with almost a third in the panel (see Table II.1). This stylized fact will be analyzed further below (see section C). Contributions of household and government consumption are higher in South Africa, suggesting a lower savings rate than for countries in the panel (indeed, on average over the decade gross domestic saving amounted to 15 percent of GDP in South Africa versus 29 percent of GDP in the panel).6 South Africa’s trade balance thus makes a much more negative contribution to GDP growth, notwithstanding the substantial natural resource base.
Normalized Contributions of Demand Components to GDP Growth
(In percent)
Normalized Contributions of Demand Components to GDP Growth
(In percent)
| GDP | Trade balance | Absorption | |||
|---|---|---|---|---|---|
| growth | Private Consumption |
Investment | Public consumption | ||
| South Africa | 100 | -17 | 73 | 25 | 19 |
| Panel | 100 | -4 | 69 | 32 | 9 |
Normalized Contributions of Demand Components to GDP Growth
(In percent)
| GDP | Trade balance | Absorption | |||
|---|---|---|---|---|---|
| growth | Private Consumption |
Investment | Public consumption | ||
| South Africa | 100 | -17 | 73 | 25 | 19 |
| Panel | 100 | -4 | 69 | 32 | 9 |
Productivity and Labor Input Characteristics
8. In the second decomposition, GDP growth rate is written as the sum of the growth of five components: labor productivity, employment rate, participation rate, working age population share, and population size (see methodology in Appendix, Box 2). With a shift in country composition (necessitated by data availability), for 1996–2006 average real GDP growth rate per capita in the panel amounts to 4.4 percent.7
9. The most striking result is the much lower contribution of labor productivity growth in South Africa compared with the panel (Figure II.2). Had labor productivity in South Africa grown at the same rate as in the countries in the panel, other things being equal its average annual GDP growth rate would have been 3 percentage points higher—a substantial difference in living standards if sustained over a decade. Because labor productivity is a function of the capital labor ratio and Total Factor Productivity (TFP), paragraphs 11–13 examine a decomposition that distinguishes between capital deepening and TFP.
Contributions to GDP Growth (1996–2006)
(In percent)
Citation: IMF Staff Country Reports 2008, 347; 10.5089/9781451841060.002.A002
Sources: World Economic Outlook and IMF staff calculations.10. Higher growth in the labor force has more than offset favorable employment dynamics in South Africa. Between 1996 and 2006, in South Africa there is a negative contribution of the employment rate and a positive contribution of the participation rate; it is the opposite in the panel (see Figure II.2). This result can be explained by the larger increase in labor force in South Africa. Even though employment growth has been 3.5 times higher in South Africa than in the panel, it has not been sufficient to accommodate the huge increase in labor force, which grew at five times the rate of the panel (see Table II.2). 8 As a consequence, the employment rate has decreased over the period while the participation rate has increased. On average, however, both employment and participation rates are lower in South Africa than in the panel.
Employment and Labor Force in South Africa and the Panel
(average 1996–2006)
(In percent)
Employment and Labor Force in South Africa and the Panel
(average 1996–2006)
(In percent)
| Employment growth per year |
Labor force growth per year |
Employment rate | Participation rate | |
|---|---|---|---|---|
| South Africa | 2.8 | 3.2 | 74.5 | 52.6 |
| Panel | 0.8 | 0.6 | 91.0 | 66.2 |
Employment and Labor Force in South Africa and the Panel
(average 1996–2006)
(In percent)
| Employment growth per year |
Labor force growth per year |
Employment rate | Participation rate | |
|---|---|---|---|---|
| South Africa | 2.8 | 3.2 | 74.5 | 52.6 |
| Panel | 0.8 | 0.6 | 91.0 | 66.2 |
Capital, Labor, and Total Factor Productivity
11. The third decomposition breaks down real GDP growth (1996–2006 average) into three components: capital, labor, and TFP contributions. To understand the TFP component better, two computations are carried out, one where TFP implicitly includes improvements to labor quality and the other where labor quality improvements are in principle recorded as increases in effective labor and thus removed from the TFP component (see methodology in Appendix, Box 3). The change in the panel composition due to data limitations now shifts the panel’s average real GDP growth per capita to 3.8 percent for the period.9
12. The main result highlighted by the third decomposition is the weaker contribution of capital in South Africa.
The contribution of capital in South Africa is one-third of that in the panel. The difference in the capital contribution is the main explanation of the GDP growth gap. This confirms the results of the first decomposition (which showed South Africa to have a comparatively lower contribution of investment to growth) and will be analyzed further in section C.
The contribution of TFP in South Africa is about two-thirds of that in the panel. The lower performance may be linked to underinvestment in Research and Development (R&D): between 1996 and 2006, R&D expenditures amounted to 0.76 percentage points of GDP in South Africa vs. 0.92 percent in the panel. On average, there were 307 R&D researchers per million people in South Africa vs. 1,207 in the panel.10 Notably, when the TFP component is adjusted for labor quality, the difference in TFP contribution is reduced, suggesting that part of the productivity gap stems from lower labor force skills in South Africa.
The contributions of labor in the panel and in South Africa are very close, especially when labor quality improvements are incorporated in the labor component. This result seems surprising, because the second decomposition indicated that South Africa’s employment growth was larger than that of the panel. The explanation is that the panel now includes countries with fast employment growth (Malaysia, Morocco, Spain, Mexico, and Egypt), replacing East European countries that had to be dropped because investment data was not available.
13. Our results for South Africa differ from those of earlier studies in that the contribution of labor to growth is higher than estimated previously (see Table II.4). The difference is due to the fact that the sample period in previous studies generally covers the 1990s, when employment growth in South Africa was sluggish (especially formal nonfarm employment); our study covers more recent years when employment growth has been greater.11
Results of the Third Decomposition
(In percent)
Results of the Third Decomposition
(In percent)
| GDP growth |
Capital contribution |
Labor contribution |
TFP contribution |
||
|---|---|---|---|---|---|
| Without Labor | South Africa | 3.5 | 0.6 | 1.8 | 1.1 |
| quality adjustment | Panel | 5.1 | 1.8 | 1.6 | 1.7 |
| With Labor | South Africa | 3.5 | 0.6 | 1.9 | 1.0 |
| quality adjustment | Panel | 5.1 | 1.8 | 1.9 | 1.3 |
Results of the Third Decomposition
(In percent)
| GDP growth |
Capital contribution |
Labor contribution |
TFP contribution |
||
|---|---|---|---|---|---|
| Without Labor | South Africa | 3.5 | 0.6 | 1.8 | 1.1 |
| quality adjustment | Panel | 5.1 | 1.8 | 1.6 | 1.7 |
| With Labor | South Africa | 3.5 | 0.6 | 1.9 | 1.0 |
| quality adjustment | Panel | 5.1 | 1.8 | 1.9 | 1.3 |
Production-Function Decomposition in South Africa
(In percent)
Production-Function Decomposition in South Africa
(In percent)
| Time period | GDP | Capital | Labor | TFP | |
|---|---|---|---|---|---|
| Fedderke (2002) | 1990’s | 0.9 | 0.4 | -0.6 | 1.1 |
| Du Plessis and Smit | 1995–2004 | 3.1 | 0.6 | 0.6 | 1.9 |
| (2007) | 0.9 (quality adj) | 1.6 (quality adj) | |||
| IMF (2005) | 1995–2003 | 2.9 | 0.7 | 0.9 | 1.3 |
| IMF (2008) | 1996–2006 | 3.5 | 0.6 | 1.8 | 1.1 |
| 1.9% (quality adj) | 1.0 (quality adj) |
Production-Function Decomposition in South Africa
(In percent)
| Time period | GDP | Capital | Labor | TFP | |
|---|---|---|---|---|---|
| Fedderke (2002) | 1990’s | 0.9 | 0.4 | -0.6 | 1.1 |
| Du Plessis and Smit | 1995–2004 | 3.1 | 0.6 | 0.6 | 1.9 |
| (2007) | 0.9 (quality adj) | 1.6 (quality adj) | |||
| IMF (2005) | 1995–2003 | 2.9 | 0.7 | 0.9 | 1.3 |
| IMF (2008) | 1996–2006 | 3.5 | 0.6 | 1.8 | 1.1 |
| 1.9% (quality adj) | 1.0 (quality adj) |
C. Has Low Saving Contributed to the Relative Weakness of Investment in South Africa?
14. The weakness of investment in South Africa is a common feature of the three decompositions performed above. The first and third show that in South Africa the contributions of investment and of capital are smaller, and South Africa’s lower labor productivity growth in the second decomposition is consistent with a lower capital-labor ratio than the panel. The difference in TFP (including lower skill levels) also seems to explain part of the growth gap, but it is less striking than the gap in investment.
15. Between 1996 and 2001 investment growth in South Africa was sluggish and the recovery since 2002 has not been sufficient to close the investment rate gap with the panel. On average for the period, the investment to GDP ratio in South Africa has been 10 percentage points lower than in the panel (see Figure II.3), and annual real investment growth has been 1.5 percentage points lower. Although since 2002, real investment has accelerated and the investment ratio has increased significantly, in 2007 it was still 9 percentage points below the panel’s ratio.
Gross Capital Formation
(In percent of GDP)
Citation: IMF Staff Country Reports 2008, 347; 10.5089/9781451841060.002.A002
Sources: World Economic Outlook and IMF staff calculations.16. Lower saving could explain the relative lack of dynamism of investment in South Africa compared with the panel:
Lower saving in South Africa is likely to have constrained investment given the high correlation generally seen between domestic saving and investment rates.12 Over the period, the saving to GDP ratio has been on average 14 percentage points lower in South Africa than in the panel, and the gap increased over the period studied from an average of 12 percentage points for 1996–2001 to 16 percentage points for 2002–06.
Reflecting the shortage of savings, the cost of capital has been slightly higher in South Africa. Although the real interest rate has been only 0.2 percentage point higher a year on average, the gap has widened substantially over time (from an average of -1.4 percentage point for 1996–2001 to +2.2 percentage points for 2002–06) because real interest rates have decreased more in the panel than in South Africa (see Figure II.4).
Econometric estimates confirm the sensitivity of investment to real interest rates. A simple econometric equation with two variables—the capacity utilization in the manufacturing sector and the real interest rate—accounts for 60 percent of the volatility of real investment growth in South Africa since 1970.13 The effect of interest rate is substantial: other factors being equal, a 1 percentage point increase in the real interest rate decreases real investment growth by 7 percentage points after a year.
In principle, poor investment growth could also result from liquidity constraints on private sector financing (banks may be reluctant to lend regardless of the level of interest rates). But the argument doesn’t seem to hold for South Africa: financing appears to be more abundant than in the panel, even if access is concentrated.14 The more developed financial markets in South Africa seem to allow the difference in real interest rates with respect to the panel to be reduced despite the large savings shortfall.15
Real Interest Rate
(In percent)
Citation: IMF Staff Country Reports 2008, 347; 10.5089/9781451841060.002.A002
Sources: International Financial Statistics, World Development Indicators and IMF staff calculations.D. How to Release the Saving Constraint Weighing on Investment and Growth?
17. Having identified saving as a main constraint on investment, we now analyze South Africa’s saving performance from a cross-country perspective. After setting out stylized facts on national saving and its components, we investigate the accounting and economic determinants of private saving.
Some Features of National Saving in South Africa
18. Since 1980 national saving in South Africa has trended downward (Figure II. 5): the national saving rate has decreased from an average of 26 percentage points of Gross National Disposable Income (GNDI) during 1960–1985 to 15 percent of GNDI in 2007 (the large spike in saving around 1980 appears to have been associated with a bubble in gold prices).
National Saving in South Africa
(In percent of GNDI)
Citation: IMF Staff Country Reports 2008, 347; 10.5089/9781451841060.002.A002
Sources: South Africa Reserve Bank and IMF staff calculations.19. Since 1996, the decline in national saving has been the net outcome of a deterioration in private saving and an improvement of public saving. The decline in national saving (1.8 percentage points of GNDI between 1996 and 2007) reflected an 8.1 percentage point fall in private saving that was partially offset by a 6.2 percentage point rise in public saving (see Figure II.6). Over the last decade tax revenue gains from robust economic growth and improved revenue administration have more than offset the increase in public current expenditures. The interdependence of public and private saving is analyzed more closely below.
Saving Rates of the Public and Private Sectors
(In percent of GNDI)
Citation: IMF Staff Country Reports 2008, 347; 10.5089/9781451841060.002.A002
Sources: South Africa Reserve Bank and IMF staff calculations.20. Within the private sector, the decline in saving has been higher for corporations than for households (Figure II.7). While the corporate saving rate fell by 6 percentage points of GNDI between 1996 and 2007, the household saving rate decreased by 2.1 points (though from a lower starting level).16 The decrease in both household and corporation saving rates does not seem to validate the hypothesis that households “pierce” the corporate veil.17
Saving Rates by Institutional Sector
(In percent of GNDI)
Citation: IMF Staff Country Reports 2008, 347; 10.5089/9781451841060.002.A002
Sources: South Africa Reserve Bank and IMF staff calculations.21. From a cross-country perspective, private saving is significantly lower in South Africa than in a panel of faster-growing countries.18 First, between 1996 and 2007, the national saving rate averaged more than 10 percentage points lower in South Africa than in the panel. Second, the national saving rate has decreased in South Africa since 1996 but has increased in the panel. Third, most of the gap in level and evolution between South Africa and the panel is explained by differences in private saving (see Table II.5).
Comparison of the Saving to GNDI Ratios in South Africa and the Panel
Comparison of the Saving to GNDI Ratios in South Africa and the Panel
| Evolution between 1996 and 2007 (In percentage points) |
Average level 1996–2007 (In percent of GNDI) |
|||||
|---|---|---|---|---|---|---|
| South Africa | Panel | Gap | South Africa | Panel | Gap | |
| National Saving | -1.8 | +2.9 | 4.7 | 15.7 | 27.7 | 12.0 |
| Public Saving | +6.2 | +6.1 | -0.1 | 0.2 | 2.0 | 1.8 |
| Private Saving | -8.1 | -3.2 | 4.9 | 15.6 | 25.6 | 10.0 |
Comparison of the Saving to GNDI Ratios in South Africa and the Panel
| Evolution between 1996 and 2007 (In percentage points) |
Average level 1996–2007 (In percent of GNDI) |
|||||
|---|---|---|---|---|---|---|
| South Africa | Panel | Gap | South Africa | Panel | Gap | |
| National Saving | -1.8 | +2.9 | 4.7 | 15.7 | 27.7 | 12.0 |
| Public Saving | +6.2 | +6.1 | -0.1 | 0.2 | 2.0 | 1.8 |
| Private Saving | -8.1 | -3.2 | 4.9 | 15.6 | 25.6 | 10.0 |
22. Both corporate and household savings seem to be low in South Africa by international standards. Due to lack of data, the comparison at the household and corporation levels can only be carried out in relation to OECD countries (rather than to the previous panel). In 2006, the household saving rate averaged 4.8 percentage points in OECD countries vs. -0.5 in South Africa; the gap was less significant for corporations (11.5 percentage points in OECD countries vs. 10.1 in South Africa).19
An Accounting Decomposition of the Corporate Saving Rate
23. To understand the decrease in private saving in South Africa between 1996 and 2007, it is helpful to look at the accounting components of corporate saving. Apart from the advantages of a more detailed analysis, there are two reasons for focusing on corporate saving: (i) corporate saving accounts for over 90 percent of total private saving over the period, and (ii) corporate saving is the main reason for the decrease in private saving between 1996 and 2007 (see paragraph 20).
24. The corporate saving rate is broken down into four accounting components that have intuitive interpretations: gross operating profit rate, ratio of total corporate income to production income, retained earning ratio, and ratio of profit after social contributions (see methodology and results in Appendix, Box 4). Three results emerge from the decomposition:
The significant increase in the amount of tax paid by corporations is the main reason for the decrease in corporate saving.20 The component of the corporate saving rate that has shown the highest variation over the period is the ratio of profit after social contributions, which declined by 27 percentage points. This ratio depends, in turn, on the evolution of two subcomponents, net transfers and taxes on income and wealth; further analysis shows that, for corporations, the ratio of taxes to gross primary income increased by 25 percentage points between 1996 and 2007, whereas the net transfer ratio was very stable. This result is surprising because the corporate income tax rate has decreased over the last decade. In fact, the broadening of the tax base (notably the introduction of a capital gains tax in 2001), the rise in companies’ gross operating surplus, and better tax collection have more than offset the decrease in the tax rate.
The increase in tax payments had the effect of transferring saving from the corporate to the public sector, with negligible net effect on total saving. From an accounting point of view, corporate taxation decreases corporate saving and increases public saving by the same amount; all else being equal, the effect on total saving is therefore neutral.
The increase in corporate dividend payments also exerted, to a lesser extent, downward pressure on corporate saving. The retained earnings ratio decreased by 21 percentage points between 1996 and 2007. The drop is especially noticeable before 2001; since then, better investment opportunities seem to have increased the incentives to retain earnings.
Economic Determinants of Private Saving
25. As a complement to the accounting approach, econometric analysis can help identify behavioral determinants of private saving. The econometric literature on private saving is abundant and deals with both specific countries and panels. Standard determinants include domestic income (level and growth rate); financial variables (interest rates, financial depth indicators, measures of saving constraints); demographic variables (dependency ratio, pension regime); crowding out terms (fiscal balance, external financing); measures of uncertainty (inflation, unemployment, urbanization); and persistence terms (lagged saving rates). Many determinants have ambiguous theoretical effects.
26. To explain the decrease in private saving in South Africa and its average relative to the panel, we use the parameter estimates from a 2000 World Bank study by Loayza, Schmidt-Hebbel, and Serven. Their study has the advantage of covering a large number of countries (150, including South Africa) and a long period (1965 to 1994). It is the most comprehensive study to date in terms of methods and scope, and many of the results are typical of those found elsewhere in the literature. We apply their estimated private saving equation to South Africa and to the panel between 1996 and 2006 (see methodology in Appendix, Box 5). Two main results arise from the econometric analysis.
27. First, four factors account for private saving being lower in South Africa than in our panel of fast-growing countries: (i) a younger population; (ii) a higher rate of urbanization; (iii) lower growth in GDP per capita ; and (iv) lower inflation (Table II.6). The higher young dependency ratio in South Africa seems to be the main variable explaining the gap, but its impact is mitigated by the lower old dependency ratio; thus, demography seems to have a neutral effect on saving differences between South Africa and the panel. Urbanization also plays a crucial role, but its theoretical interpretation is ambiguous.21 Lower GDP growth in South Africa would also explain part of the gap, if the econometric method (GMM) really sorts out the endogeneity problem.22 Lastly, lower macroeconomic uncertainty in South Africa (measured by lower inflation) has induced people to save less for precautionary reasons.
Average Long-Term Contributions of the Explanatory Variables to the Private Saving Rate Level: Results for South Africa, the Panel and the Gap between South Africa and the Panel
Average Long-Term Contributions of the Explanatory Variables to the Private Saving Rate Level: Results for South Africa, the Panel and the Gap between South Africa and the Panel
| South Africa | Panel | Gap | |
|---|---|---|---|
| Actual private saving rate (av. 96–06) | 19.7 | 30.1 | -10.4 |
| Real growth rate income | 0.9 | 3.1 | -2.2 |
| Real per capita income | 94.4 | 96.0 | -1.6 |
| Real interest rate | -4.9 | -3.6 | -1.3 |
| Terms of trade | 1.3 | 0.5 | 0.8 |
| Urbanization ratio | -53.1 | -47.3 | -5.7 |
| Old dependency ratio | -9.6 | -18.3 | 8.7 |
| Young dependency ratio | -38.7 | -30.0 | -8.6 |
| Gov saving | 0.0 | -1.7 | 1.7 |
| Private credit | -8.2 | -6.4 | -1.8 |
| Inflation | 2.4 | 5.0 | -2.6 |
| Implied constant + residual | 35.0 | 31.2 | 3.8 |
Average Long-Term Contributions of the Explanatory Variables to the Private Saving Rate Level: Results for South Africa, the Panel and the Gap between South Africa and the Panel
| South Africa | Panel | Gap | |
|---|---|---|---|
| Actual private saving rate (av. 96–06) | 19.7 | 30.1 | -10.4 |
| Real growth rate income | 0.9 | 3.1 | -2.2 |
| Real per capita income | 94.4 | 96.0 | -1.6 |
| Real interest rate | -4.9 | -3.6 | -1.3 |
| Terms of trade | 1.3 | 0.5 | 0.8 |
| Urbanization ratio | -53.1 | -47.3 | -5.7 |
| Old dependency ratio | -9.6 | -18.3 | 8.7 |
| Young dependency ratio | -38.7 | -30.0 | -8.6 |
| Gov saving | 0.0 | -1.7 | 1.7 |
| Private credit | -8.2 | -6.4 | -1.8 |
| Inflation | 2.4 | 5.0 | -2.6 |
| Implied constant + residual | 35.0 | 31.2 | 3.8 |
28. Second, the decrease in South Africa’s private saving rate over the last decade is due to: (i) relaxation of credit constraints; (ii) increased urbanization; (iii) the increase in public saving and; and (iv) the ageing of the population (Table II.7). The main explanatory variable is the private credit term, which measures the release of borrowing constraints after apartheid. Intensified urbanization was also a factor. The importance of the crowding-out effects of public saving is consistent with the results of the accounting decomposition (the transfer from corporate to public saving). Finally, though the increase in the old-age dependency ratio contributed to the decline in private saving, the effect is more than offset by a decrease in the young-age dependency ratio, which had the opposite effect.
Average Long-Term Contributions of the Explanatory Variables to the Private Saving Rate Decrease in South Africa
Average Long-Term Contributions of the Explanatory Variables to the Private Saving Rate Decrease in South Africa
| Actual decrease (between 95–97 and 04–06) | -5.7 |
|---|---|
| Estimated long-term decrease | -4.6 |
| Real growth rate income | 1.8 |
| Real per capita income | 0.7 |
| Real interest rate | 2.9 |
| Terms of trade | 0.4 |
| Urbanization ratio | -4.0 |
| Old dependency ratio | -2.1 |
| Young dependency ratio | 4.0 |
| Gov saving | -3.4 |
| Private credit | -3.9 |
| Inflation | -1.0 |
Average Long-Term Contributions of the Explanatory Variables to the Private Saving Rate Decrease in South Africa
| Actual decrease (between 95–97 and 04–06) | -5.7 |
|---|---|
| Estimated long-term decrease | -4.6 |
| Real growth rate income | 1.8 |
| Real per capita income | 0.7 |
| Real interest rate | 2.9 |
| Terms of trade | 0.4 |
| Urbanization ratio | -4.0 |
| Old dependency ratio | -2.1 |
| Young dependency ratio | 4.0 |
| Gov saving | -3.4 |
| Private credit | -3.9 |
| Inflation | -1.0 |
E. Conclusion and Policy Implications
29. Over the last decade the main constraints on growth in South Africa have been the low investment rate, insufficient labor productivity gains, reduced openness to trade and slower technical progress. Underinvestment, a common factor to the three growth decompositions, has significantly impeded growth since the end of apartheid. Despite a pickup in recent years, the investment rate remains low compared to faster-growing countries. Continuing to boost investment is therefore critical for accelerating growth.
30. Low saving capacity has constrained the expansion of investment but the scope to increase private saving seems limited by structural features of the economy. The low level of private saving in South Africa mainly result from structural factors, like shifts in demographics, urbanization, and financial sector deepening, that are not easily affected by public policies. The two main factors that explain the difference in the private saving rate between South Africa and the panel (apart from the persistence term) are both demographic: the young dependency ratio and the urbanization rate.
31. Macroeconomic instruments meant to increase private saving seem to be either self-defeating with regard to national saving or costly in terms of other consequences. Despite the importance of structural factors, some macroeconomic variables impact private saving, but their effect can be detrimental to national saving (for example, decreasing public saving) or may induce macroeconomic costs (for example, increasing inflation).
32. The safest way to increase national saving in South Africa is to continue raising public saving, preferably by containing the growth of public consumption. An increase in public saving would have a positive effect on national saving even if it were partially offset by the private sector. An increase in the tax take (whether through an increase in the tax rate or a broadening of the base) is likely to be less effective in boosting national saving than a slowdown in public consumption, because the offset by the private sector is likely to be higher, as illustrated for example by our accounting analysis of corporate saving.23
Appendix
Computation of the First Growth Decomposition
GDP growth is broken down into two components: the contribution of absorption (A) and the contribution of the trade balance (TB). Absorption is itself the sum of household consumption (C), government consumption (G), and investment (I); trade balance is the difference between exports (X) and imports (M). Thus:
where (1) = contribution of domestic demand for domestic products and (2) = contribution of foreign demand for domestic products.
Results are presented in a normalized form (with each side of the equation being divided by GDP growth):
Contributions are computed annually and then averaged out for the period 1996-2006.
Computation of the Second Growth Decomposition
Real GDP is written as the product of ratios: labor productivity, employment rate, participation rate, working age population share, and total population:
where Lempl is employment, Lforce is labor force, L15–64 is working age population, Ltot is total population.
In growth terms:
This highlights the contributions to growth of (1) productivity, (2) the employment rate, (3) the participation rate, (4) the “demographic dividend” term (working age population share) and (5) population size. Unlike the first decomposition, contributions are not normalized.
Contributions are computed annually and then averaged out for 1996–2006.
The decomposition is applied to South Africa after correcting the official data on employment and labor force.24
Computation of the Third Growth Decomposition
Contributions are computed annually and then averaged out for the period 1996-2006.
First decomposition
Real GDP growth is broken down into three components: capital (K), labor (L) and TFP (A) contributions. With a Cobb-Douglas function Y = AKα L 1- α:
To apply the decomposition, the following assumptions are made:
- α =1/3 in all countries.
- L = Employment or Labor force (depending on whether or not employment data are available). The 2000 employment growth rate is adjusted for South Africa (see Box 2).
- Capital stocks are computed using a perpetual inventory method. Parameters (geometric depreciation at 5%, asset life 21 years) are chosen to be consistent with a degree of declining balance to depreciation equal to 1.05 (and to meet the constraint that investment series are short for some countries). This methodology is also applied to South Africa (the capital stock computed by the SARB with a straight-line depreciation method is not used).
Alternative decomposition
In decomposition (1), TFP is computed as a residual and thus includes changes in the quality of labor that should, in fact, be attributed to L. Transferring labor quality from TFP to L can be performed in different ways. We use the Barro (1999) and Bosworth-Collins (2003) framework and formalize production with a function that explicitly includes labor quality. If H = (1.07)s with H human capital and s average number of years of schooling, then Y = AKα(LH)1- α and
Transferring labor quality from TFP to L has two consequences: (1) it increases the labor contribution (and decreases the TFP contribution) in both South Africa and the panel. (2) In so far as improvement in labor quality (education) seems to have been stronger in the panel than in South Africa over the period, transferring labor quality should increase relatively more the L contribution in the panel and decrease relatively more the TFP contribution in the panel, closing the gap between South Africa and the panel for both.
Accounting Decomposition of the Corporate Saving Rate
The corporate saving rate25 S/VA is broken down into four multiplicative components. Each reflects the deduction made by a specific agent from the corporate value added. The sum of all deductions make up the gap between value added and saving:
(1) The gross operating profit rate GOS/VA (ratio of the Gross Operating Surplus, GOS, to the Value Added of the corporate sector, VA) can be seen as the residual after the deduction made by workers from the corporate value added.
(2) The ratio of the Gross Primary Income before dividends paid (GPI+d) to GOS, which varies with the amount of net interest paid, represents what is left after the lenders’ deduction.
(3) The retained earning ratio GPI/GPI + d (ratio of the Gross Primary Income GPI to GPI+d), which fluctuates with dividends paid, represents what is left after the shareholders’ deduction.
(4) The ratio of profit after social contributions S/GPI (ratio of saving, S, to GPI), which measures taxes and transfers, can be seen as what is left after the government’s net deduction for taxes, other levies, and transfers.
Results: Level and Variations of the Accounting Components of the Corporate Saving Rate
Results: Level and Variations of the Accounting Components of the Corporate Saving Rate
| S/VA | (1) | (2) | (3) | (4) | |
|---|---|---|---|---|---|
| 1996 | 29.0 | 45.5 | 103.7 | 75.9 | 80.9 |
| 2001 | 21.1 | 48.3 | 107.2 | 61.0 | 66.7 |
| 2007 | 17.4 | 53.0 | 111.5 | 55.1 | 53.5 |
| Variation 1996–2007 | -11.5 | +7.5 | +7.9 | -20.8 | -27.4 |
Results: Level and Variations of the Accounting Components of the Corporate Saving Rate
| S/VA | (1) | (2) | (3) | (4) | |
|---|---|---|---|---|---|
| 1996 | 29.0 | 45.5 | 103.7 | 75.9 | 80.9 |
| 2001 | 21.1 | 48.3 | 107.2 | 61.0 | 66.7 |
| 2007 | 17.4 | 53.0 | 111.5 | 55.1 | 53.5 |
| Variation 1996–2007 | -11.5 | +7.5 | +7.9 | -20.8 | -27.4 |
Econometric Analysis of the Private Saving Rate
Loayza, Schmidt-Hebbel, and Serven (2000) estimate several private saving equations for a panel of 150 countries, including South Africa, between 1965 and 1994. We use the results of their GMM system estimator specification. As their study ends with 1994, using their estimates for the years 1996 to 2006 constitutes an out-of-sample forecast.
The following variables are included in the selected private saving rate equation26:
The lagged private saving rate (ratio of gross private saving to gross private disposable income, GPDI). Positive sign.
Real per capita GPDI (measured as the difference between gross national domestic income and gross public disposable income, itself equal to the sum of public saving and public consumption). Positive sign.
The real growth rate of per capita GPDI. Positive sign.
The real lending interest rate. Negative sign.27
The terms of trade. Positive sign.
The urbanization ratio (percentage of the population living in cities). Negative sign.
The old dependency ratio (ratio of population above 64 to total population) and the young dependency ratio (ratio of population under 15 to total population). Negative sign.
The ratio of government saving to GPDI.28 Negative sign.
The ratio of the private credit flow to GPDI. Negative sign.
The inflation rate of the GDP deflator. Positive sign.
The estimated econometric equation of the World Bank study is separately applied to South Africa and to the panel. Results are then used for two purposes:
To compute the contribution of the explanatory variables to the average level of private saving in South Africa and in the panel and to the gap between them.
To compute the contribution of the explanatory variables to the decline in South African private saving over the last decade. To reduce the sensitivity of our results to the choice of start and end dates, we compute the contributions between the intervals 1995–1997 and 2004–2006.
Because the equation incorporates a lagged dependent variable, long-term contributions are computed for each explanatory variable in two stages: (1) The long-term multipliers are derived from the estimated short-term coefficients by dividing each coefficient by one minus the coefficient of the lagged dependent variable. (2) Long-term contributions are calculated as the product of the multiplier and the average value of the explanatory variable over the period.
By definition the gap between the actual saving rate and the sum of the explanatory variable contributions is equal to the sum of the estimated residual and the estimated constant. As World Bank estimates are not available at the country level, the constant peculiar to South Africa (as well as the one peculiar to the panel) is unknown, and it is not possible to tell the estimated residual form the estimated constant.
References
Aaron, Janine, and John Muellbauer, 2000, “Personal and Corporate Saving in South Africa,” CEPR Discussion Paper No 2656 (London: Center for Economic Policy Research).
Arora, Vivek, and Ashok Bhundia Ashok, 2003, “Potential Output and Total Factor Productivity Growth in post-Apartheid South Africa,” IMF Working Paper 03/178 (Washington: International Monetary Fund).
Barro, Robert, 1974, “Are Government Bonds Net Wealth?” Journal of Political Economy, Vol 82, pp. 1095–1117.
Du Plessis, Stan, and Ben Smit, 2007, “South Africa’s Growth Revival After 1994,” Stellenbosch Economic Working Paper 01/06 (Stellenbosch, SA: Stellenbosch University).
Edwards, Sebastian, 1995, “Why Are Saving Rates so Different Across Countries? An International Comparative Analysis,” NBER Working Paper No 5097 (Cambridge, MA: National Bureau of Economic Research).
Fedderke, Johannes, 2002, “The Structure of Growth in the South African Economy: Factor Accumulation and Total Factor Productivity Growth 1970–97,” South African Journal of Economics, Vol. 70, pp. 4-ff.
Fedderke, Johannes, 2004, “From Chimera to Prospect: Toward an Understanding of the South African Growth Absence” (Cape Town, SA: University of Cape Town).
Fedderke, Johannes, 2005, “Sources and Constraints of Long-term Growth 1970–2000,” Working Paper (Cape Town, SA: University of Cape Town).
Harjes, Thomas, and Luca Antonio Ricco, 2005, “What Drives Saving in South Africa?” in Post-Apartheid South Africa: The First Ten Years, ed. by Michael Nowak and Luca Antonio Ricci (Washington: International Monetary Fund).
Loayza, Norman , Klaus Schmidt-Hebbel, and Luis Serven, 2000, “What Drives Private Saving Across the World,” Review of Economics and Statistics, Vol 82, No, 2.
Masson, Paul , Tamim Bayoumi, and Hossein Samiei, 1998, “International Evidence on the Determinants of Private Saving,” World Bank Economic Review, Vol. 12, No, 3.
Nowak, Michael, and Luca Antonio Ricci., eds 2005, Post-Apartheid South Africa: The First Ten Years (Washington: International Monetary Fund).
Prinsloo, J.W., 2000, “The Saving Behaviour of the South African Economy,” Occasional Paper No. 14 (Pretoria: South African Reserve Bank).
Prepared by Luc Eyraud.
According to World Development Indicators classification and data.
The study covers the post-apartheid decade from 1996 to 2006. 2007 data are included when available.
All decompositions are applied to GDP growth (rather than GDP growth per capita) to achieve results comparable to previous studies.
The panel consists of China, Vietnam, India, Russia, Poland, Ukraine, Korea, Bangladesh, Iran, and Romania (see selection method in paragraph 2 of the text).
The higher contribution of public consumption in South Africa mainly reflects the higher share of public consumption in GDP (18 percent in South Africa versus 13 percent in the panel).
The composition of the panel changes between decompositions owing to data limitations. For this decomposition, the panel consists of China, Vietnam, Russia, Poland, Ukraine, Korea, Iran, Romania, Morocco, and Turkey.
The panel includes East European countries that showed weak employment growth during the last decade.
The panel now includes China, India, Korea, Bangladesh, Iran, Morocco, Spain, Egypt, Malaysia, and Mexico.
The gap can also be measured with other indicators (for example, the number of publications in scientific and technical journals) but the lack and the questionable quality of data make it difficult to draw reliable conclusions.
Other minor divergence points can be found in the capital stock computation (most studies use the series computed by the South Africa Central Bank rather than applying the perpetual inventory method as we did); the correction of outliers (notably the 2000 employment growth rate, see Appendix, Box 2); the adjustment for labor quality; and the choice of employment series (total or nonfarm formal employment).
See, for instance, Feldstein and Horioka (1980) or Obstfeld and Rogoff (2000).
Variables enter the equation as one-period changes and with one lag (which mitigates the endogeneity problem). The real interest rate is computed as the difference between the nominal lending rate (source: International Financial Statistics) and GDP deflator inflation. The equation is very stable over time. Results are available from the author upon request.
On average over the decade, the annual stock of domestic credit to the private sector amounted to 123 percentage points of GDP in South Africa vs. 51 percent in the panel.
Apart from the shortage of saving and its effect on real interest rates, there are other possible explanations of the investment weakness in South Africa. For instance, indirect evidence (on FDI inflows and stock market returns) seems to suggest that returns on investment have not been as attractive in South Africa than in the panel: between 1996 and 2006, FDI inflows, on average, amounted to 1.6 percent of GDP in South Africa versus 2.3 percent of GDP in the panel; between 1998 and 2006, stock prices grew by 18 percent in South Africa versus 26 percent in the panel.
As a share of their respective starting levels, the decrease has been higher for household saving (which has dropped by half of its 1996 level) than for corporate saving (which has dropped by one third since 1996).
According to the “piercing the veil” theory (Poterba 1991), corporation and household saving should be substitutes, because households realize that corporations save on their behalf. For instance, when corporations retain earnings in response to changed inflation or tax rates (thus increasing their saving), households rationally reduce their saving rate (by continuing to consume despite lower dividend income), because they expect retained earnings to raise the value of their equity portfolio.
This panel consists of China, Vietnam, India, Poland, Korea, Russia, Romania, Bangladesh, Iran, and Turkey.
The household saving rate is computed as the ratio of household net saving to household net disposable income; the corporation saving rate is the ratio of gross corporate saving to nominal GDP.
A simple simulation confirms this result. Under the assumption that the ratio of tax to corporation gross primary income (GPI) is maintained at its 1996 level, the corporate saving rate would have worked out to 15 percent in 2007, and the public saving rate would have been equal to -2 percent (other factors being unchanged). The fact that the simulation falls almost on the 1996 data (respectively 16 and -3) is unexpected; the other components of the gap between corporate saving and national income (apart from the tax component) have offset one another over the period. Intuitively, it means that the other deductions from the value added (i.e., wages, dividends, and interests) have been stable over time on the whole.
According to the authors, the negative effect of the urbanization ratio reflects the precautionary saving motive (lacking the means to diversify away the uncertainty of their agriculture income, rural residents tend to save more). But the variable is also highly correlated with factors (level of development, release of credit constraints) that are supposedly captured by other variables in the equation.
Our analysis shows that, in South Africa, investment has been impeded by insufficient domestic saving and that private saving is partly determined by past GDP growth. A vicious circle may therefore have materialized over the last decade, with low GDP growth constraining private saving, which, in turn, has hampered investment and growth. This circular causality is nevertheless difficult to sort out and to quantify.
Tax payments directly transfer saving from the private to the public sector, as they reduce private income and increase public income by the same amount (other factors being equal). By contrast, a decrease in public consumption has only an indirect effect on private saving through its economic impact on private consumption; the offset is likely to be less and to take more time (the Ricardian hypothesis as originally stated by Barro (1974) applied to taxes rather than to government spending).
The change in survey in 2000 (from the October Household Survey to the Labor Force Survey) creates disruptive evolutions of employment and labor force. The correction uses interpolated data available in the first Labor Force Survey (February 2000) and applies simple corrections to take into account the new benchmark methodology of the 2001 Census.
The corporate saving rate can not be defined in the same way as the households’ (namely, saving divided by disposable income), because saving is, by construction, equal to disposable income for corporations.
The ratio M2 to National Income is not statistically significant in the specification that we adopt.
The estimated negative effect of the interest rate on private saving suggests that the income effect outweighs the sum of the substitution and the wealth effects in a microeconomic framework.
The econometric estimation shows that the private sector reduces its saving rate by 0.3 percentage point in the short term and by 0.7 percent in the long term for each percentage point increase in the public saving ratio (these numbers give the range of estimates of most empirical studies on ricardian equivalence).
