NATIONAL SCIENCE and TECHNOLOGY FORUM Growth and Innovation: Perspective on the Interaction Between Economic Growth, Science, Technology and Human Capital
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NATIONAL SCIENCE AND TECHNOLOGY FORUM Growth and Innovation: Perspective on the interaction between economic growth, science, technology and human capital The study was jointly commissioned by the NSTF and NACI and undertaken by Professor J W Fedderke of Econometric Research Southern Africa, University of the Witwatersrand ©2001NSTF and NACI CONTENTS Executive Summary i Chapter 1: Growth, Employment and Human Development: an overview of the issues 1 1.0 Introduction 1 1.1 A Brief Initial Overview 2 1.1.1 The Growth Performance 3 1.1.2 The Labour Market 6 1.1.3 The Quality of Life of South African Citizens 8 1.2 Can we provide a framework to understand these developments? 16 1.2.1 So why should we be concerned with growth in the first place? 17 1.2.2 So how does it all work?: the general structure of growth models 21 1.3 Some further thoughts on the question of human development 24 1.4 Conclusion 29 Chapter 2: The Role of Technology in Long-Run Economic Development: Does it Make a Difference? 31 2.0 Introduction 31 2.1 The magnitude of the contribution of technological advance to economic growth: some international evidence 31 2.2 The magnitude of the contribution of technological advance to economic growth: some South African evidence 34 Case Study 1: A Misconceived Boast? Lessons from a Planned Economy, by Raphael de Kadt 48 2.3 Conclusion and Evaluation 51 Chapter 3: Four Core Explanations of the Growth – Technology Nexus 53 3.0 So how doe we explain the impact of technology on economic growth? 53 3.1 Technology as a public good, or the traditional view of technological change 53 3.1.1 Augmented Technological Change 54 3.1.1.1 Neutral 54 3.1.1.2 Labour Augmenting 55 3.1.1.3 Capital Augmenting 55 3.1.2 Embodied Technological Change 56 3.1.3 Conclusion and Evaluation 59 3.2 Endogenous technological change, or the “new” growth theory 61 3.2.1 Endogenous technological change: the perfect university view 61 3.2.2 Endogenous technological change: knowledge spill-over effects, or learning by doing 62 3.2.3 Endogenous technological change: the intentional creation of new knowledge through R&D 67 Case Study 2: The Vital Triad, by Raphael de Kadt 74 Case Study 3: Brazil (Latin America): Technology and Industrialization by John Luiz 76 3.3 The technology gap approach, or technology as a private good 79 3.3.1 The nature of the technology of production 79 3.3.2 Leaders and followers, and the technological frontier 80 Case Study 4: Technology, the human capital base and R&D in the Asian tigers by John Luiz 88 3.3.3 Conclusions and Evaluation 94 3.4 Conclusion 95 Chapter 4: Testing for the Nature of the Technology Impact 96 4.0 Introduction 96 4.1 The international experience 96 4.1.1 Does endogenous growth theory find empirical support? 96 4.1.2 The impact of positive externalities: spill-over effects 99 4.2 The South African evidence: findings on the relevance of endogenous growth 101 4.3 Conclusions and evaluation 111 Appendix 1: Dynamic Heterogeneous Panel Estimation Methodology 112 Chapter 5: Revisiting the Role of Human Capital 116 5.0 Introduction 116 5.1 The significance of having a learning society 116 5.2 A direct impact of human capital on economic growth? 121 5.3 Further extensions: back to endogenous growth and some additional lessons 127 Case Study 5: The Parable of the Sage by Raphael de Kadt 131 Case Study 6: India: awakening information technology giant by John Luiz 133 5.4 Some international evidence on the impact of human capital on economic growth 135 Case Study 7: Small Countries, Big Achievements: Ireland, Finland and New Zealand, by Raphael de Kadt 138 5.5 The South African Experience 142 5.5.1 South Africa’s legacy of human capital creation 142 5.5.1.1 A characterization of the performance of South Africa’s schooling system 142 5.5.1.2 A characterization of the performance of South Africa’s tertiary educational system 151 5.5.2 Testing for the impact of human capital creation on long run economic development in South Africa 160 5.6 Conclusions 167 Appendix 1: ARDL cointegration estimation 168 Appendix 2: The Johansen VECM methodology 170 Appendix 3: Detailed estimation results 171 Chapter 6: The Contribution of Factor Markets to Economic Growth – Capital and Labour 174 6.0 Introduction 174 6.1 The capital market: some descriptive evidence 175 6.1.1 The distribution of capital stock across South Africa’s economic sectors 175 6.1.2 The growth rate of the physical capital stock 177 6.1.3 The investment rate by economic sector 180 6.1.4 Links between capital productivity, real cost of capital and capital usage 183 6.1.5 Evaluation of the descriptive evidence 187 6.2 An econometric examination of South Africa’s investment function 188 6.2.1 Conclusions and evaluation 196 6.3 The labour market 198 6.3.1 Employment in South African economic sectors, 1970-97 199 6.3.2 The relative rate of change of employment in South African economic sectors 200 6.3.3 Some possible reasons for the changing patterns of employment 203 6.3.3.2 Real labour remuneration 203 6.3.3.2 Labour productivity 205 6.3.4 Some preliminary conclusions 209 6.3.5 A further investigation into the determinants of labour usage in South African labour markets 210 6.3.6 Conclusions 215 1 Chapter 1 Growth, Employment and Human Development: an overview of the issues 1.0 Introduction South Africa’s democratic transition now lies close to a decade in the past. The transition carried with it much by way of hopes in terms of a greater access by its population not only to an improved rights environment. It was envisaged that the political self- realization of all South African citizens would bring with it access to improved economic well-being also. Employment as well as rising per-capita income are obvious indicators of progressive development for the population of a country. But the strong emphasis placed on a strong rights-culture in the negotiated transition leading to the first democratic elections of 1994, and the reflection of these values in the constitution accepted in 1996, makes it clear that the concern in South Africa lies not merely with the immediate and narrowly “economic” indicators of development, but that broader “human development” indicators of progress featured prominently in the transition South Africa embarked upon. For these reasons South Africa constitutes an important case study in at least two senses. In the first South Africa is important to anybody interested in either the processes that govern democratic transitions, and whether such transitions lead to broader transformations of well-being also. But South Africa also constitutes a central case of an instance in which the extent to which “good things go together” across a broad range of developmental indicators beyond the narrowly economic. Given the elapse of almost a decade since the political transition, it is perhaps time to take stock. In this document we will do so by reference to the growth performance of South Africa, as well as developments in its labour markets in terms of employment opportunities created. But we will also attempt to consider the wider dimension of the human development indicators that may give a more comprehensive view of the developmental successes and failures of the South African economy and society. In developing such an assessment, it will be important to take cognizance of the fact that the new South Africa was not born of a vacuum in 1994. South Africa in 1994 carried with it the baggage of its prior developmental strategies and the structural characteristics this provided it with. That the prior developmental strategy of apartheid was fundamentally flawed and damaging to long-term economic development as been amply 2 documented and established by now, and thus requires little by way of emphasis.1 But a legacy of four decades of seriously misguided developmental strategy does not dissipate overnight. Putting South Africa onto a new and better growth path will take time, no matter how good the new policy initiatives may be. Understanding the growth trajectory that South Africa finds itself on will have to pay attention to longer-term trends in the key variables of interest. In similar vein, the South African economy does not exist in isolation of the rest of the world. Trade linkages, international financial, physical and human capital flows, the exchange of information and the dissemination of technological advance all mean that our economy and society at large is in constant interplay with other economies and societies. Ignoring such forces would be to leave aside both significant enabling forces for development in the domestic context, as well as significant constraints on the policy options that are feasible for the South African economy. This study therefore hopes to provide an understanding of the wider context within which the South African economy finds itself in its developmental path. In doing so we will consider both international trends in crucial variables, as well as the longer term historical context within which South African development has to be understood. Moreover, in developing our argument, we will consider key lessons that we can heed from the experiences of other countries around the world – countries chosen both for the sake of their similarity to the South African context, as well as for their difference.