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Type Journal Article - The Journal of Developing Areas
Title Identifying the binding constraints of the township economy of South Africa
Volume 55
Issue 4
Publication (Day/Month/Year) 2021
Page numbers 455-464
Despite the growing interest and efforts of policy makers in enhancing the township economy1, it remains weak and vulnerable to shocks. Yet the development of township economy is crucial to the development of the country's economy. Township economic activities play essential role in the interaction between the rural and urban economy. The transition of most economies from poverty driven to wealthier economies is attributed to the promotion of SMMEs . The sector plays an essential role in the growth of any economy. Binding constraints (such as cost and supply of electricity and access to finance) could be some of the driving forces behind this phenomenon. This paper empirically investigates the effect that binding constraints might have on the township economy of South Africa using Sustainable Livelihoods Foundation Township Micro-Enterprise Survey dataset for the period 2010 to 2013. To the best of the authors' knowledge, this is the first study to use this data in an empirical investigation of binding constraints for township economy in South Africa. Employing fixed effect model, we find some evidence to suggest that the main binding constraints for township economy in South Africa are cost and supply of electricity. The control variable coefficients are mostly in keeping with our expectations and with the existing literature. With the exception of gender, whether or not the shop owner receives delivery from supplier, no of fulltime family employees and whether or not the shop owner owns a cellphone, the rest of the other control variables are mostly significant. We found that being part of any buying collectives enhances the profitability of the business. This buying strategy might be desirable for the small businesses as it reduces the average cost while increasing revenue generated by the owner. The estimates survive a whole range of robustness tests, including alternative measures of binding constraints plus other control variables. Thus, our finding sheds more light and nuance to much of the existing studies in South Africa which was often aimed at providing descriptive analysis of the impact of binding constraints on the township economy.

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