Why South Africa is Cheap for the Rich and Expensive for the Poor: Reconsidering the Balassa-Samuelson Effect

29 Pages Posted: 6 Aug 2019

See all articles by Vincent Dadam

Vincent Dadam

University of Pretoria

Marek Hanusch

World Bank

Nicola Viegi

University of Pretoria - Department of Economics

Date Written: July 22, 2019

Abstract

This paper investigates cross-sectoral productivity differentials in South African industry and their distributional consequences. The analysis shows that typically, traded sectors have experienced low productivity growth over the past decade, while skill intensive service sectors have had significant productivity growth. This is the inverse of the traditional Balassa-Samuelson sectoral transformation hypothesis, where high wages in high-productivity traded sectors increase wages throughout the economy, thus increasing prices on non-traded goods and revaluing the country's real exchange rate. Instead, the higher productivity of non-traded sectors experienced in South Africa induces a devaluation of the real exchange rate and a contraction of the traded sectors. The results of the estimation show evidence of this "inverse" Balassa-Samuelson effect for agriculture and manufacturing and in particular mining. This "inverse" Balassa-Samuelson effect has important distributional consequences: the high-productivity sectors are associated with cheaper goods and services for wealthy households. This in turn burdens poor households, which are more dependent on traded goods, with higher prices, which are a consequence of low productivity and high markups.

Keywords: Construction Industry, Common Carriers Industry, Food & Beverage Industry, Plastics & Rubber Industry, Business Cycles and Stabilization Policies, General Manufacturing, Pulp & Paper Industry, Textiles, Apparel & Leather Industry, Mining & Extractive Industry (Non-Energy), International Trade and Trade Rules, Food Security

Suggested Citation

Dadam, Vincent and Hanusch, Marek and Viegi, Nicola, Why South Africa is Cheap for the Rich and Expensive for the Poor: Reconsidering the Balassa-Samuelson Effect (July 22, 2019). World Bank Policy Research Working Paper No. 8942. Available at SSRN: https://ssrn.com/abstract=3430556

Vincent Dadam (Contact Author)

University of Pretoria ( email )

Physical Address Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

Marek Hanusch

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Nicola Viegi

University of Pretoria - Department of Economics ( email )

Pretoria 0002
South Africa

HOME PAGE: http://www.nviegi.net

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