Output, Employment and Financial Sanctions in South Africa

IMF Working Papers, December 1, 1990

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The paper quantifies the effects of the marked slowdown in the growth of the capital stock in South Africa since 1985, associated with political uncertainty and financial sanctions, and assesses future growth prospects using a modified version of the Lewis development model.
Production functions are estimated for the nonprimary and mining sectors involving skilled (white) labor, unskilled (nonwhite) labor, and capital.
It is concluded that each 1 percent change in the growth rata of the capital stock leads to at 0.8 percent change in output growth, and hence the fall in investment since 1985 has lead to significant falls in growth, employment and real wages.

Analytical framework: modified Lewis development model applied to sectoral production functions.
Sectors analyzed: nonprimary sector and mining sector.
Inputs in production functions: skilled (white) labor, unskilled (nonwhite) labor, and capital.

Each 1 percent change in the growth rata of the capital stock leads to at 0.8 percent change in output growth.
The fall in investment since 1985 is linked to significant falls in:
- output growth,
- employment,
- real wages.

The sensitivity of output growth to capital stock growth (0.8 percent change in output per 1 percent change in capital stock growth) implies that policies affecting investment and financial openness materially influence growth, employment, and real wages in South Africa.
Political uncertainty and financial sanctions that reduce capital accumulation have direct and sizable adverse effects on labor market outcomes, particularly for unskilled (nonwhite) labor as considered in the sectoral estimations.

Tamim Bayoumi. "Output, Employment and Financial Sanctions in South Africa", IMF Working Papers 1990, 113 (1990), December 1, 1990.