Essays on economic growth, education, and the distribution of income: a structural analysis for the case of South Africa.

Abstract

Since the fall of the Apartheid regime in South Africa in 1994, the democratically elected post-Apartheid governments have engaged in social and economic reforms aimed at improving welfare of millions of the left offs during this regime and at enhancing economic growth. Among these reforms, the most important have consisted of achieving structural transformation of the South African economy through technology advancements, improving skills by investing massively in human capital through education and training, reducing income inequality across racial groups through access to programs that facilitate the acquisition of skills by the left offs of the Apartheid rather than through massive income redistribution, liberalizing the labor markets and the formation of labor unions, privatizing statal and para-statal corporations and abolishing monopolies in public services, liberalizing trade and capital movements, promoting new investment through tax incentives, promoting private initiative, reducing or at least freezing government expenditures, reducing poverty, and so on. In this dissertation, we analyze the relationship between growth and a few of issues targeted by the aforementioned reforms through two separate essays. In the first essay (Essay 1), we analyze the growth and welfare effects of public spending on education in the post-Apartheid South Africa; while in the second essay (Essay 2), we investigate the dynamics of income inequality, poverty, and growth in the post-Apartheid South Africa. Starting with the first essay (Essay 1), South Africa has launched since the abolition of its Apartheid regime in 1994, a massive program of education and training, which has been financed through resources representing annually and on average 21% of the national budget or 7% of GDP. Today, the GDP share of public spending on education is 1.3 times the average of industrialized countries (5.4%) and almost twice that of developing countries (3.9%). In this essay (Essay 1), we simulate fiscal policy experiments to analyze the growth and welfare effects of a reduction in or an elimination of spending on education in a model of endogenous growth with human capital accumulation and policies for the Post Apartheid South African economy. The first and second experiments consist of reducing the GDP share of educational spending to the averages of industrialized and developing countries, respectively; while the third experiment consists of eliminating government in the educational sector (a 100% tax cut), respectively. The results of the simulations demonstrate in all instances that a reduction in or an elimination of educational spending does affect negatively the long run as well as the transition rates of growth of per capita GDP, wage of skilled workers as well as welfare. Further, the effects on the other variables in the economy (physical capital, human capital, labor, consumption, and the interest rate) vary across experiments. Nonetheless, these growth and welfare effects are small. Turning now on to the second essay (Essay 2), we construct a model of growth with heterogeneity in asset holdings and skills and solve it numerically to the Post-Apartheid South African economy to analyze the dynamics of income distribution, income inequality, poverty, and growth. We find that growth is achieved at all levels of incomes and poverty is totally eliminated by the end of the process, which last 73 years (from 1993 to 2065). Furthermore, the economy achieves the overall convergence noticeable through the improvement in the relative positions of poor consumers in the distribution of wealth as well as in that of income and the worsening of those of rich consumers. Next, we combine the results of the heterogeneous model with the microeconomic data (the South Africa's 1996 October Household Survey) to estimate the distributions of income and analyze thoroughly the interaction between growth, income inequality, and poverty. We find that a one percent increase in the rate of growth of income causes on average poverty to drop by 3.7% at the $2 per day poverty line and by 1.3% at the $1 per day poverty line. Moreover, growth causes overall decline in income inequality but the effect is very small. A one percent-increase in the rate of growth of income results on average in a decline in income inequality of only 0.056% by the Gini coefficient and of 0.11% by the Global Theil index.