Economic growth and development through agriculture the case of the north west province of south africa

Economic Growth and Development through Agriculture: The Case of the North West Province of South Africa By Philippus Christoffel Cloete Submitted in accordance with the requirements for the degree: Philosophiae Doctor in the Department of Agricultural Economics Faculty of Natural and Agricultural Sciences University of the Free State Bloemfontein, South Africa May 2010 Declaration: I declare that the thesis hereby submitted by me for the PhD degree in Agricultural Economics at the University of the Free State is my own independent work and has not previously been submitted by me at another university/facility PC Cloete Date _ Acknowledgements _ Firstly, I thank God, for giving me the inner strength and wisdom to pursue my studies A number of people have made important contributions to this study by sharing their experience, knowledge, advice and encouragement It is therefore appropriate to thank the following people who had contributed directly or indirectly to the completion of this study I would like to express my gratitude to my supervisor, Prof H.D van Schalkwyk who through having countless other responsibilities guided me through the course of this study Secondly, my appreciation is extended to Dr Pieter Taljaard for his time, effort and valuable inputs during the completion of this study Secondly, I wish to express my thanks to Mr Johan Cartsens for his contributions, support and encouragement Thirdly, my appreciation is extended to Dr Dawie Mullins and Riekie Cloete from Conningarth Economist for their time and valuable inputs during the completion of this study I also which to thank my colleagues at the Department of Agricultural Economics, University of the Free State, especially Dr Bennie Grove, Mr David Spies, Mr Johan van der Merwe, Mr Ernst Idsardi, Mr Herny Jordaan, Ms Nicky Mathews, Miss Annely Minnaar and Miss Louise Hoffman I am also grateful to Ms Lorinda Rust whose encouragement and support was integral in the completion of the study To my wife, Annemie Cloete, I thank you for your understanding, encouragement, and all the sacrifices you made Lastly, I would like to extend my gratitude to my mother, grandparents, parents-in-law, family and friends, for all your support (whatever in nature) and interest throughout this study ii This thesis is dedicated to my father Pieter Andries Cloete Who passed away on 26 October 2006, shortly after I commenced with my PhD study My greatest mentor and example in life iii Economic Growth and Development through Agriculture: The Case of the North West Province of South Africa By Philippus Christoffel Cloete Degree: PhD Department: Agricultural Economics Promoter: Prof H.D van Schalkwyk Co-promoter: Dr P.R Taljaard ABSTRACT The overall objective of the study was two-folded, firstly to improve the success of rural agricultural development in the North West Province (NWP) through the development of an institutional framework and secondly, to quantify the impact of the proposed institutional changes on the different agricultural sectors in the province The development of an institutional framework contributes towards the existing mechanisms available to role-players and decision makers involved with rural agricultural development The ability to quantify and simulate the impact of changes in the institutional framework addresses the concerns of researchers that theory is outstripping empirical research to an excessive extent in the field of institutional economics Furthermore, by simulating the impact of the proposed institutional framework, indepth knowledge on the economic impact of rural agricultural development in the NWP was gained iv In order to reach the first objective, a review/study was undertaken of the principles of the New Institutional Economics theory and how it relates to agricultural development in the NWP This was followed by a SWOT-analysis to identify the main agricultural opportunities and factors inhibiting rural agricultural development in the province From this, an institutional framework was developed to create an enabling environment for rural agricultural development in the NWP The proposed institutional arrangements/improvements include amongst others: the establishment of public-private partnerships between government, private sector and communities, the introduction of rural finance systems, equity sharing schemes, integrated research-training programmes and market access solutions A strategic framework for the implementation of the proposed institutions and institutional arrangements was also developed The second objective was achieved through the application of two methodological approaches In the first approach, the economic impact of the proposed institutional framework was estimated through a partial macro-economic equilibrium model, calibrated to a Social Accounting Matrix for the NWP Different scenarios were simulated, with the land reform programme that served as a proxy for calculating the impact of the proposed institutional changes From this, the baseline scenario assumed 30% of agricultural land being redistributed with a 20% success rate This scenario closely mimics reality in the province The second scenario assumed a success rate of 35%, with the success rate in the third scenario being 50% The main results from this analysis include the quantitative impact of the land reform policy on the different agricultural sectors of the province as well as the impact of the proposed institutional framework thereon The simulated results proved that development policies (i.e land redistribution) yield different economy-wide impacts within the various agricultural sub-sectors of the province Results from the baseline scenario show that the grain and oil-seed sectors of the province have the most significant impact on the economy, reducing provincial GDP by 6.19% compared to the 4.19% of the livestock sector Moreover, under the assumptions of the baseline scenario, the grain and oilseeds sub-sector will reduce employment opportunities with 25 307, and government income with an estimated R 160 million v The rest of the scenarios confirm that the creation of an enabling environment for rural agricultural development through the introduction of the proposed institutional framework will significantly reduce the impacts of development policies For example, in scenario the grain and oilseed sector reported a 3.19% decline in the contribution to GDP compared to the 6.19% under the assumptions of the baseline scenario The impact on employment opportunities is also likely to decrease by 3% for every 15% increase in the success rate The second methodological approach entails the calculation of three sets of economic multipliers (production, value added and labour) The calculated multipliers were used to determine the economy-wide impact of the proposed institutional framework Despite numerous shortcomings of economic multipliers, this analysis was performed to quantify the direct, indirect and induced economy-wide impacts resulting from the proposed institutional changes Results from the multiplier analysis confirm the positive impact that the creation of an enabling environment might have on the proposed land reform policies The main conclusion of the study is that the lack of proper and functional institutions could be seen as the main reason for the high rate of rural agricultural development failure in the NWP Thus, should government fail to address the identified institutional shortcomings, the success rate of rural agricultural development will remain a mere 20%, which will have severe consequences for the economy and the rural people in the province It therefore calls for the creation of an enabling environment that will support rural agricultural development This could be achieved through the implementation of the proposed institutional framework; however, commitment from all role-players involved in rural agricultural development will be a prerequisite for success in this regard vi _ Table of Contents _ Contents PAGE Acknowledgements i Abstract iii Table of Contents vii List of Tables xiv List of Figures xv Chapter Introduction 1.1 Background 1.2 Problem Statement 1.3 Objectives 1.4 Motivation 1.5 Methodology and Data Used 1.6 Outline of the Study Chapter Background and Literature Review _ 2.1 Introduction 2.2 What is an Institution? 11 2.3 New Institutional Economics 13 2.4 Framework of New Institutional Economics 16 2.4.1 Social Embeddedness 17 2.4.1.1 Social Capital Theory 18 2.4.2 The Institutional Environment 22 vii 2.4.2.1 The Formal Rules and Regulations 23 2.4.2.2 Property Rights 24 2.4.2.3 Informal Regulations 28 2.4.3 Governance Structures 29 2.4.3.1 Transaction Cost Economics 29 2.4.3.2 Factors Causing Transaction Cost 31 2.4.3.3 Modes of Governance 33 2.5 Resource Allocation and Employment 34 2.6 The Institutional Environment in Developing Countries 35 2.7 Application of the New Institutional Economic Framework 37 2.8 The Relevance of the New Institutional Economics for Agricultural Development 41 2.9 Employing the New Institutional Economics Framework 45 2.10 Conclusion 47 Chapter Overview of the Socio-Economic, Economic and Institutional Profile of the North West Province _ 3.1 Introduction 49 3.2 Socio-economic demographics 50 3.2.1 Population profile 50 3.2.2 Age distribution 53 3.2.3 Economically active population 54 3.2.4 Poverty 56 3.2.5 Unemployment 57 3.2.6 Education and literacy 60 3.2.7 Income 63 3.2.8 Health and healthcare 65 3.2.9 Prevalence of HIV/AIDS 68 3.2.10 Tuberculosis 69 3.2.11 Life expectancy 70 viii 3.2.12 Social security 71 3.3 Economic structures and performance of the North West Province 72 3.2.1 Infrastructure as a necessity for sustainable economic growth and development in the North West Province 73 3.3.2 Rail and road infrastructure 73 3.3.3 Electricity infrastructure and electricity supply to the agricultural sector 76 3.3.4 Agricultural markets 78 3.3.5 Water catchment areas 80 3.3.6 Economic performance of the North West Province 83 3.3.7 Economic sectors 85 3.3.8 Primary industries 87 3.3.8.1 Agriculture, forestry and fishing 88 3.3.8.2 Mining and quarrying 99 3.3.9 Secondary industries 101 3.3.9.1 Manufacturing and processing 101 3.3.9.2 Utilities 101 3.3.9.3 Construction 102 3.3.10 Tertiary industries 102 3.3.10.1Wholesale and retail trade; hotels and restaurants 104 3.3.10.2Transport and communication 104 3.3.10.3Financial and business services 105 3.3.10.4Tourism 105 3.3.10.5Community and government services 106 3.4 Institutional environment 106 3.4.1 Broad policies and priorities 108 3.4.1.1 Strategic plan for South African agriculture 109 3.4.1.2 Accelerated and Shared Growth Initiative of South Africa (ASGISA) 109 3.4.1.3 Provincial Growth and Development Strategy (PGDS) 110 3.4.1.5 Agricultural Black Economic Empowerment Programme (AgriBEE) 111 3.4.1.6 Micro Agricultural Finance Institutions of South Africa (MAFISA) 111 3.4.1.7 Land Reform 111 ix ... study My greatest mentor and example in life iii Economic Growth and Development through Agriculture: The Case of the North West Province of South Africa By Philippus Christoffel Cloete Degree: PhD... 71 3.3 Economic structures and performance of the North West Province 72 3.2.1 Infrastructure as a necessity for sustainable economic growth and development in the North West Province. .. having a profound influence on economic growth, on the one hand, and that economic growth and development often result in a change in institutions, on the other However, as an expansion of economics