Institutional and macroeconomic policy dynamics in transition economies

• Main Author: Kularatne, Chandana
• Other Authors: Fedderke, Johannes
• Format: Doctoral Thesis
• Language: English
• Published: University of Cape Town 2015
• Subjects: Economics
• Online Access: http://hdl.handle.net/11427/11545

Includes bibliographical references (leaves 197-214). === This study is an investigation of some of the developmental challenges facing transition economies. The thesis provides empirical and theoretical analyses on some of the institutional and macroeconomic challenges experienced by transition economies along their developmental trajectory. The thesis begins with an analysis of the reallocation of resources. Chapter 2 presents a model in which two groups in society are engaged in strategic interaction. Privileged members of society have the opportunity to allocate resources either to their own productive capacity, or to enhance the productive capacity of the disadvantaged. Redistribution to the disadvantaged can increase the productive capacity of society, but comes at the cost of rising political aspirations of the poor, which erodes the power of the rich. The results of the model derive possible political outcomes for society under which the rich will redistribute to the point of equality with the poor; conditions under which the disadvantaged face genocide; as well as the range of intermediate redistributive activity likely to be employed by the privileged. Transition economies also face limited infrastructure development. This is especially true for countries in post-conflict situations. Increasing levels of infrastructure expenditure is argued to have a positive effect on growth. Chapter 3 analyses the impact of economic and social infrastructure on economic growth for a specific transition economy - South Africa. South Africa experienced a declining trend in physical infrastructure development. over the recent past. The econometric results find that while economic infrastructure has a positive effect on output, social infrastructure has no effect. Crowding out effects arising from both economic and social infrastructure expenditure are also discovered. The data also reveals that both output and private investment have a positive effect on economic and social infrastructure expenditure. The short term fluctuations in output, employment and labour productivity in South Africa are also investigated. The empirical evidence of negative correlation between employment and labour productivity contradicts the hypothesis of standard real business cycle theory. A model with monopolistic competition, sticky prices, and variable effort is shown to be able to account for the empirical findings. The findings indicate that technology shocks generate a negative co-movement between labour productivity and employment in South Africa. In addition, the degree of monetary accommodation, returns to labour and the degree of price stickiness and imperfect competition affects economic fluctuations in employment and labour productivity due to technology and demand shocks. Moreover, they affect the response of prices, real money balances and real interest rates to a technology shock.