Does Education Help Local Economies Reach Economic Potential? Evidence from South Africa

Abstract

It is widely understood in development circles that poverty alleviation is elusive unless local economies operate productively with limited resources and existing technology. With a high rate of poverty on the back of weak output growth at municipality level in South Africa since 1994, this background makes it necessary to establish factors that could increase the pace of economic development and help local economies produce at full capacity. Using a stochastic frontier analysis of South Africa’s 234 municipalities observed between 1995 and 2018, this paper finds postgraduate education (Masters and Doctorates) relevant in explaining the ability of these local economies to reach their full potential and the effect increases with the size of the manufacturing sector, life expectancy and trade. The stock of high school, diplomas, bachelors, and honours does not significantly contribute towards productive efficiency of these 234 municipalities reinforcing concerns of a possible structural mismatch between lower-level qualifications and the labour market demands. Consequently, moving these municipalities closer to their full potential may be achievable through ensuring that the undergraduate cohorts reach Masters, and PhD level complemented by a manufacturing-oriented structural change. Keywords: education, technical inefficiency, structural transformation, stochastic frontier model, local municipalities, South Africa