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The Political Economy of Institutions, Stability and Investment: A Simultaneous Equation Approach in an Emerging Economy. The Case of South Africa

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  • J. W. Fedderke
  • J. M. Luiz

Abstract

The modern theory of investment identifies the importance of uncertainty to investment. A number of empirical studies have tested the theory on South African time series, employing political instability measures as proxies for uncertainty. This paper verifies that political instability measures are required in the formulation of the investment function for South Africa. It also establishes that there are distinct institutional factors that influence the uncertainty variable such as property rights and crime levels. We find that rising income and property rights lower political instability, and that rising crime levels are positively related to political instability. The inference is that political instability in South Africa may not represent uncertainty directly, since it is systematically related to a set of determinants. Instead, uncertainty would have to be understood as being related to a broader institutional nexus that in concert may generate uncertainty for investors. The paper highlights the significance of getting institutions right to ensure that uncertainty is kept to a minimum by providing a predictable long-term environment. Stability at a systemic level appears crucial if investment rates are to rise in South Africa and this paper demonstrates that stability in turn is driven by a sound institutional environment that has multiple dimensions.

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Article provided by Taylor & Francis Journals in its journal Journal of Development Studies.

Volume (Year): 44 (2008)
Issue (Month): 7 ()
Pages: 1056-1079

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Handle: RePEc:taf:jdevst:v:44:y:2008:i:7:p:1056-1079

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Cited by:
  1. John M. Luiz & Henry Stephan, 2011. "Determinants of Foreign Direct Investment of South African Telecommunications Firms into Sub-Saharan Africa," Working Papers 222, Economic Research Southern Africa.
  2. John Manuel Luiz & Luis Brites Pereira & Guilherme Oliveira, 2011. "Constructing Institutional Measures: Indicators of Political and Property Rights in Mozambique, 1900-2005," Working Papers 219, Economic Research Southern Africa.
  3. Fedderke, J.W. & Perkins, P. & Luiz, J.M., 2006. "Infrastructural investment in long-run economic growth: South Africa 1875-2001," World Development, Elsevier, vol. 34(6), pages 1037-1059, June.

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