Christopher Malikane

Foreign Direct Investment, Democracy and Economic Growth in Southern Africa

This paper investigates the link between foreign direct investment (FDI), democracy and economic growth on a panel of eight Southern African countries for 1980–2014 using the system generalized method-of-moment (GMM) estimator. We find that FDI has a direct positive effect on economic growth and that strong democratic institutions are a significant driver of economic growth in the sample countries. The impact of FDI on economic growth is dependent on the level of democracy in the host countries. This implies that countries with strong democratic institutions are better able to absorb the positive spillovers from FDI. In policy terms, Southern African countries should sustain the institutional reform policy agenda already in place in order to benefit more from the significant inflows of FDI.

The new Keynesian Phillips curve: endogeneity and misspecification

The wrong or insignificant sign of the forcing variable in the new Keynesian Phillips curve estimations may be a result of the endogeneity of the labour share and misspecification of real marginal cost in the baseline model. We address the misspecification of real marginal cost by formulating a broad measure that features the labour share, output gap and supply shock variables. The endogeneity of the labour share is addressed by using an appropriate lag of the labour share in the Phillips curve. Reduced-form evidence from five developed and five emerging market economies support the empirical validity of the NKPC.

Income distribution, persistent unemployment, and the classical growth cycle: evidence from South Africa

I formulate and calibrate a small 3D classical growth cycle model to explain the rise of income inequality, growth stagnation and the persistence of unemployment in South Africa between 1970-2005. This model exhibits interactions between economic growth, the employment rate, and the rate of profit. Simulation of the estimated model produces an underlying 59-year growth cycle for the South African economy, which is close to the one observed in the data. I find that the South African economy entered a phase of employment-enhancing growth in output around 2005, implying an estimated 37-year depression of the labour market.

Strategic Competition, Valuation, Costs and Growth Potential: The Example of Global Product Design and Development

We study the performance attributes of an international production form that is designed for success in an increasingly global marketplace‐global product design and development. We find that firms elicit higher returns from their global product development when they compete in strategic complements than when they compete in strategic substitutes. These firms are most likely to compete in strategic complements if they have higher free cash flows, but are most likely to compete in strategic substitutes if they are more dominant in their industry. Importantly, global product development reduces cost largely via variable cost reduction. Moreover, we find that global product development contributes to the firm’s growth potential when pursued in conjunction with high multinationalism, aggressive competitive strategy, and high cost saving.

Segmented Labor Markets and the Distributive Cycle: A Roadmap towards Inclusive Growth

The paper builds on the Goodwin (1967) model which describes the distributive cycle of capitalist economies whereby mass unemployment is generated periodically through the conflict about income distribution between capital and labor. We add to this model a segmented labor market structure with fluid, latent, and stagnant components. The model exhibits a unique balanced growth path which depends on the speeds with which workers are pushed into or out of the labor market segments. We investigate the stability properties of this growth path with segmented labor markets and find that, though there is a stabilizing inflation barrier term in the wage Phillips curve, the interaction with the latent and stagnant portions of the labor market generates potentially (slowly) destabilizing forces if policy measures are absent that regulate these labor markets. We then introduce an activating labor market policy, where government in addition acts as employer of last resort thereby eliminating the stagnant portion of the labor market, whilst erecting benefit systems that partially sustain the incomes of workers that have to leave the floating/latent labor market of the private sector of the economy. We show that such policies guarantee the macrostability of the economy’s balanced growth path.

Monetary Policy in a Small Open Economy with High Unemployment

A number of developing countries and emerging markets have now adopted inflation targeting as a framework for monetary policy. Yet some of these countries have high structural unemployment rates. One question that has not been addressed in the monetary policy literature is the implications of inflation-targeting in the context where the unemployment rate is in the double-digit range1. The consensus view in macroeconomics within which many inflation-targeting central banks operate, summarized by Taylor (1997) and emphasized by Svensson (2003), says monetary policy cannot have long-run effects on the growth rate of output and the rate of employment. In this view, the growth rate of output in the long run is determined by the growth rate of labor productivity and the labor force. The seminal models, such as the ones in Svensson (1997, 1999), Ball (1999) and Clarida et al. (1999) among others, fall within this view.

Sovereign wealth funds and macroeconomic stability in oil-exporting African countries

This paper investigates the effectiveness of sovereign wealth funds (SWFs) in reducing macroeconomic volatility occasioned by oil price shocks in oil‐exporting African countries. The oil price boom‐bust cycles complicate fiscal operations, distort budget implementation and trigger macroeconomic instability in oil exporting African countries. We formulate and simulate a dynamic stochastic general equilibrium model that features SWFs and the fiscal sector. We compare a baseline model without the SWFs to a model with the SWFs. The simulation analysis suggests that the establishment of SWFs can mitigate the vulnerability of oil‐exporting African countries to oil price shocks. In particular, SWFs can reduce fiscal expenditure and real exchange rate volatility. Furthermore, SWFs can stabilise the level of external debt and reduce the level of money supply thereby sterilising the oil revenue. Since oil price shock is one of the important external shocks inducing economic instability in oil‐exporting African countries, the creation of SWFs can insulate these economies from external shocks.

Real exchange rate (RER) as a policy tool for industrial diversification and growth in Africa

ABSTRACT Appropriate exchange rate (ER) policies in some Asian and Latin American countries have led to improvement in industrial diversification and growth. The growth ‘miracle’ of the Asian countries centres on the effective use of ER and trade policies, specifically the adoption of depreciation of real exchange rate (RER). However, the case of Africa is different, as the continent is yet to adopt an appropriate ER policy that enhances industrial diversification and growth. Examining the effectiveness of the RER as a policy tool for industrial diversification and growth in 36 African countries, this study applied a dynamic generalised method of moments (GMM) estimation technique to determine how changes in RER affects the growth composition of the three main productive sectors – primary, secondary, and tertiary and their response rates. Our findings suggest that the primary sector leads to appreciation of the RER, while the secondary and tertiary lead to depreciation of the RER. This result has serious policy implication for the Africa continent that has relied so much on the production of primary commodities. Rather than pursue the policy of ER depreciation which affects the primary and secondary sectors, policy shift in favour of the tertiary sector should be highly encouraged.

The labour share and the dynamics of output

ABSTRACT We derive a new Keynesian IS curve that is augmented to capture the direct effects of the labour share on output. Our derivation shows that the direct effect of the labour share on output is ambiguous. Furthermore, theory suggests that the expected labour share negatively affects output. Empirically, we find that the labour share plays a significant role in driving output dynamics. However contrary to theoretical expectation, the expected labour share positively affects output in some cases, a finding we call the ‘labour share puzzle’. We also find that over time, there seems to be a general shift in aggregate demand dynamics towards being profit-led, i.e. rising labour share decreases output. We conclude that policymakers should not ignore the labour share in their decisions.

What really drives inflation

We derive a broad measure of real marginal cost which features the labour share, output gap and supply shock variables. We evaluate the contribution of each of these components of real marginal cost as driving forces for inflation. We find that supply shock variables dominate the output gap and the labour share in driving inflation dynamics. This finding suggests that a more elaborate real marginal cost function should be considered by the new Keynesian literature. Tests of the new Keynesian Phillips curve that are based on the restrictive one-factor production technology should therefore be reconsidered. In the light of this, forecast-based policy rules require more serious study, since they permit more flexibility to respond to supply shocks without generating significant output loss.