Market imperfection and rural-urban effects of agriculture and non-agriculture productivity shocks : a dynamic CGE model analysis for South Africa

Abstract

This study uses a recursive dynamic Computable General Equilibrium (CGE) model focused on South Africa to explore the interconnections between strategic initiatives in agricultural and non-agricultural sectors within a rural development strategy. It assesses how different policy interventions affect agricultural growth and rural household well-being, considering two scenarios: one targeting agricultural growth and the other non-agricultural growth. It is observed that Gross Domestic Product (GDP) experiences an elevation of 1.1 percentage points above the baseline growth rate with a 1% increase in agricultural productivity. Though agriculture contributes just 2.5% to the national GDP, its projected impact on annual growth rate of 1.1 percentage points is expected to boost the economy, adding one billion rand to non-agricultural sectors. In return, non-agricultural industries positively affect agricultural growth and rural consumption. Sectors aiding rural areas include food, beverages, tobacco; mining; transport; and catering. Meanwhile, urban-favoured sectors are government, finance, business services, retail, manufacturing, health, and community services. The findings underscore two primary considerations for policymakers. Firstly, although the agricultural sector's contribution to GDP is modest, emphasizing agricultural enhancement can result in accelerated growth, improved resource allocation to the sector, and poverty alleviation, particularly when synergized with supportive non-agricultural measures. Secondly, growth in non-agricultural sectors does not uniformly support agricultural and rural income growth; sectors such as agro-industrial and exportable industries primarily bolster agriculture by mitigating real exchange rate appreciation.