Applying the National Income Identity Approach in Examining Determinants of Economic Growth in South Africa

Abstract

From the mid-1990s to mid-2000s, the economic performance of the South African economy was relatively good but lower than growth of comparable economies. This is attributed to different factors such as low savings, low investment levels as well as the structure of the South African economy. The paper applies the macroeconomic identity to explore the impact of the key drivers of the South African economy, using the Autoregressive Distributed Lag (ARDL) econometric approach and data from 1980 to 2019. To test for the long-run relationship we used the co-integration test and the Vector Error Correction Model (VEC). The main results are that consumption, investment, and exports are key economic growth determinants in South Africa. This holds regardless of the time horizon. To confirm the long-run relationship we further performed the robust bound tests and the results indicate that there is a long-run relationship among the variables. From a policy perspective, it would be recommended that government ensures that there is higher investment in the economy and that exports are increased. In addition, based on the results, it is important to not only focus on the national income identity variables but also other factors that can negatively affect economic growth.