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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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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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  • J. W. Fedderke & J. M. Luiz, 2008. "The Political Economy of Institutions, Stability and Investment: A Simultaneous Equation Approach in an Emerging Economy. The Case of South Africa," Journal of Development Studies, Taylor & Francis Journals, vol. 44(7), pages 1056-1079.
  • Handle: RePEc:taf:jdevst:v:44:y:2008:i:7:p:1056-1079
    DOI: 10.1080/00220380802150854
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    References listed on IDEAS

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    1. Stanley L. Engerman & Kenneth L. Sokoloff, 2003. "Institutional and Non-Institutional Explanations of Economic Differences," NBER Working Papers 9989, National Bureau of Economic Research, Inc.
    2. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
    3. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
    4. Drazen, Allan & Sakellaris, Plutarchos, 1999. "News About News: Information Arrival and Irreversible Investment," Macroeconomic Dynamics, Cambridge University Press, vol. 3(03), pages 451-462, September.
    5. M. Hashem Pesaran & Yongcheol Shin, 2002. "Long-Run Structural Modelling," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 49-87.
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    1. 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.
    2. Luiz, John M. & Stephan, Henry, 2012. "The multinationalisation of South African telecommunications firms into Africa," Telecommunications Policy, Elsevier, vol. 36(8), pages 621-635.
    3. Awais Anwar & Noman Arshed & Sofia Anwar, 2017. "Socio-economic Determinants of Crime: An Empirical Study of Pakistan," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 312-322.
    4. Alexandre Repkine, 2014. "Ethnic Diversity, Political Stability and Productive Efficiency: Empirical Evidence from the African Countries," South African Journal of Economics, Economic Society of South Africa, vol. 82(3), pages 315-333, September.
    5. 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.
    6. 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.

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