The impact of population aging on local revenue : district-level evidence from South Africa

Abstract

M.Com. (Local Economic Development)Abstract: This paper examines the empirical relationship between the population ageing and local revenue in South Africa. Using annual datasets for the period 1995 to 2013, the study focuses on the 52 districts municipalities in South Africa, over these 18 years. It analyses this relationship by utilising district-level output as a proxy for local revenue, dependency ratio, gross capital formation and employment rate data drawn from Quantec. Districts are categorised into young and old, depending on their average national old-age dependence ratio. The study adopts dynamic panel methodologies, generalised methods of moments and dynamic fixed effects as the estimation techniques in a growth model framework. One major advantage of using these methodologies is their ability to control for endogeneity, heterogeneity and cross-sectional dependence in the case of dynamic fixed effects. The results show that in the period under study, the population structural changes in South Africa had a substantial impact on the performance of the economy at the district level. The age-dependency ratio coefficient is not only statistically significant, but exerts a negative influence on gross added value. The impact is greater in young districts than in old districts. Gross capital formation is statistically significant and positively related to gross added value, and in contrast to the age dependency, it exerts more influence in the old districts. Employment is insignificant in explaining gross added value. These disparities might be justified by the fact that there is higher economic activity in the young districts, which are predominantly occupied by the productive age cohort