Exploring unbalanced growth: Understanding the sectoral structure of the South African economy

This paper presents empirical evidence in support of an account of unbalanced growth in the South African economy: an interaction between sectorally differentiated total factor productivity growth, with a price elasticity of demand below unity. As sectors with faster TFP growth produce more real output over time, their relative prices fall, with the price changes triggering increases in consumption demand that less than offset the price fall. As a result sectoral shares in nominal output decline. This generates a structural shift of the labour factor input to low productivity sectors over time. Policies targeting returns to labour and wage growth alone will be insufficient to address unemployment. Instead, policies targeting the supply side of the economy and international competitiveness are likely more effective for raising employment and growth. The paper is the first to test the TFP-price elasticity mechanism on emerging market data, and a first explanation of unbalanced growth in South Africa.