Working Paper 263 - Factor Productivity and Potential Output Growth in South Africa

This study conducts an economic growth decomposition exercise to measure factorcontributions to growth in post-apartheid South Africa (1996–2015). It also investigates trends in factor intensity, potential output growth and the output gap in the period. The study finds that total factor productivity (TFP) remained the dominant source of economic growth. The key driver of TFP gains was the democratic transition in 1994 that transformed the political system, ending decades of international isolation and leading to trade liberalization. Improved macroeconomic policies, reforms and strong institutions led to rapid gains in TFP and in efficiency in the following decade. Yetgrowth in TFP has lost momentum in recent years due to structural constraints, in particular severe skills shortages, an infrastructure deficit and weak domestic competition. Capital intensity gradually declined in the first decade of democracy, butsubsequently increased rapidly, particularly after the 2008–09 global financial crisis, to reach its 1980s’ level. Given that much of the last decade has seen a gradual deterioration in factor intensity, employment gains, TFP growth and growth in actualand potential output, bold structural reforms are critical to boost TFP and resuscitate South Africa’s growth.