Faculty of Economic and Management Sciences
School of Economic Sciences
Department of Economics
Selected Highlights from Research Findings
The Department of Economics has been active in investigating the link between the various forms of capital, especially social, natural, and manufactured, and the need for restoring natural capital. Natural capital is a metaphor referring to the stocks of natural resources from which natural goods services flow and the restoration thereof is defined as the replenishment of these natural capital stocks to achieve sustainable, long-term human wellbeing and ecosystem health. The research conducted both locally and abroad indicated that our rapidly dwindling supply of natural capital is insufficient to support the much needed economic development needs, both in the developed countries and in the developing countries. Within the developed countries, countries that generally consume “too much” resources, the restoration is required to offset and mitigate the already too high ecological footprint. Within developing countries, however, the restoration of natural capital is not so much linked to conservation as it is linked to economic development. The restoration of natural capital therefore becomes an economic development strategy. This is since much of the developing countries’ people depend directly on natural capital and it being intact for their livelihoods. What is therefore required is a mindset that states that what is required is “Economics in which ecology matters and ecology in which people matter”. Research conducted leading up to a 2007 Island Press book on the topic with Blignaut as co-editor and work done since indicate that the restoration of natural capital clearly does have a strong scientific component, from various perspectives such as anthropology, economics, hydrology, and ecology. It also involves the practice of ecological restoration, of which numerous examples in South Africa exist. The restoration of natural capital also involves business. Ecological restoration can link the first and the second economies through water, carbon, biodiversity, and tourism development, to mention but a few. Currently research on this is ongoing in the Drakensberg area developing a trading model whereby the restoration of natural capital can act as catalyst for economic development in that area through which the local communities can sell ecosystem goods and services to the first economy. From the research conducted it is therefore clear that the restoration of natural capital is one of the most exciting ideas to emerge in recent years since it links the need to protect biodiversity and conserve natural resources and the demand for natural resources at all scales. But to get such a model to operate, we need to work together, or even ‘leap together’, across traditional disciplinary frontiers or polemical stances, to find innovative solutions that counter the prevailing ideological divide separating economics and ecology as well as the perceived conflict or trade-off between economic development and the conservation of natural and environmental resources. We have to take the examples studied further and demonstrate not only that nature conservation and restoration can be profitable, but that corporations and governments can help rapidly advance environmental goals through simultaneous restoration of natural capital and social capital within communities and countries suffering poverty, joblessness, despair, illiteracy and ensuing loss of skills, dignity, self esteem, and social fibre.
Contact person: Prof JN Blignaut.
During 2007 researchers in the Department of Economics continued with the construction of tax models in order to assist institutions such as the South African Revenue Services (SARS) and the National Treasury with fiscal planning. This micro model brings a new dimension to tax analysis with the profile of taxpayers - both individuals and corporate institutions - now also taken into consideration when calculating the impact of tax policy. Using the micro model constructed by the Bureau for Economic and Political Analysis (BEPA), it is now possible to calculate the result of changes to household taxes in a specific region, age group, gender and income category, while in the case of companies, survey data in addition data from filed tax returns, broadened the scope of indicators used in simulation and revenue forecasting. The impact thereof is that much more accurate analysis and forecasting techniques can now be implemented. In 2007 this model was further expanded to include an additional revenue source namely Value Added Tax (VAT). Also, the corporate income tax model has been expanded to a full sectoral model which improves revenue forecasting given the sectoral differences in economic performance.
Contact person: Prof NJ Schoeman.
This report forms the first part of a two-part project that was commissioned by the Presidency. There is a strong belief by certain sections of the South African economy that a weaker exchange rate will boost exports thereby employment and growth. Most importantly, the volatility of the rand exchange rate has been cited in government's macroeconomic programme, ASGI-SA, as one of the major constraints inhibiting economic growth in South Africa. Government and in particular the Presidency are keen on finding ways to mitigate the effect of these constraints on growth, and therefore set out a team of researchers to conduct a proper and thorough investigation. Leading economists from Harvard University were sourced for inputs on the various economic constraints. A number of suggestions were made by the Harvard team, one of which is that the South African Reserve Bank (SARB) should switch to a modified inflation targeting framework which allows considerations of competitiveness (or the real exchange rate) to affect its decision-making. The main objective of the study was to analyse growth and competitiveness issues relevant for the South African economy. The project also looked at other policy instruments (additional to and consistent with inflation targeting and the present floating nominal exchange rate regime) that can be used to reduce exchange rate volatility and in that way support the competitiveness of the South African non-commodities tradable sector. For instance, in February 2007, President Mbeki suggested measures other than interest rates that could be employed to manage credit. Although the president did not elaborate on the latter, this would include, amongst other things, credit rationing and/or higher bank reserve requirements. The role of additional instruments is to provide trade-offs: decrease inflation without sacrificing growth via higher interest rates. In this report we analyze the relationships between exchange rates, inflation and competitiveness. We show that over the 1994-2006 sample period real exchange rate depreciations did not improve the trade balance and therefore had no positive effect on growth. One reason is that SA exports are priced in foreign currency (dollars and euros instead of rand). We also show that if the monetary authorities would be interested in targeting competitiveness via the real exchange rate, a good way to do this is by narrowing the present inflation targeting band from the present 3-6 percent, to say 1-3 percent. The reason is that the easiest way to become uncompetitive is to let your domestic price level rise faster than those of your trading partners. Higher inflation does not lower the real exchange rate, it appreciates it. Our paper argues that economic growth is not necessarily spurred by a weaker exchange rate, which makes exports competitive, but rather that the main determinant of exports is foreign activity. One reason is that SA exports are priced in foreign currency. Put another way, the exchange rate alone is not a chief determinant of the quantity demanded by foreigners - the principal determinant is foreign output (overseas economic activity). We also contend that a weaker real exchange rate tends to increase the CPI inflation as a result of higher domestic currency prices of imported final goods and/or higher wage inflation. The second part of the project examines potential growth and its constraints by attempting to sketch an integrated post-GEAR growth and poverty alleviation strategy that is likely to move South Africa from the present low growth state to a high growth state.The views in this report are those of the author and not necessarily those of the South African Reserve Bank or the Presidency. The Report is available from http://www.tips.org.za/node/1368.
Contact person: Prof E Schaling.
The study was commissioned by Higher Education South Africa (Hesa) to determine the impact of the public higher education sector on the national economy. The findings were that:
Increased government spending on higher education without accompanying increases in the professional labour force and productivity of labour and capital has negative effects on GDP and most other economic variables. The money needs to be spent selectively before one could claim that additional spending would benefit the economy.
Retraining the existing workforce through higher education would yield positive effects for the SA economy, but is a costly option.
Putting high school graduates through the higher education system would have much higher GDP effects, 4-5 times higher than retraining other workers.
If government spending were to result in more professionals in the market as well as higher productivity they would almost double the return of what they spend additionally on higher education.
The economy could grow extensively if the expenditure on higher education delivered more professionals that would improve the total productivity in the economy.
Contact person: Prof JH van Heerden.
A group of studies was undertaken to examine South African household expenditure patterns. The primary aim was to determine whether or not alcohol and tobacco consumption had any significant effect on overall consumption patterns. Changes that have occurred since 1995 were taken into consideration. In the first of these studies, published early in 2007, it was found that the use of statistical techniques positively applied in developed countries was left wanting when applied in South Africa, which is broadly considered to be a two-tier economy. In particular, the models seemed to break down due to the bimodality of household expenditure patterns in the economy. In the second study, it was found that tobacco expenditure tended to crowd-out household expenditures compared to many other types of household commodities. Most worryingly, that effect was rather pronounced in lower income households. In the third study it was found that the proportion of household expenditure devoted to alcoholic beverages and tobacco products had increased between 1995 and 2000, especially amongst the poorer households, many of which have unemployed household heads. When these results are put together, the results suggest that poorer households are increasingly turning to alcohol and tobacco, possibly as a crutch or substitute for boredom.
Contact person: Prof SF Koch.
|
