A DYNAMIC ADJUSTMENT MODEL FOR SOUTH AFRICAN AGRICULTURE: 1965–97

This paper utilises an optimal intertemporal investment model to examine short-run dynamics in South African agriculture between 1965 and 1997. The use an optimal intertemporal investment theory provides an insight into aspects of firm behaviour, including quasi-fixity of inputs, rates of adjustment of quasi-fixed inputs and short-run elasticities of factor demand for labour, capital and land. The principal empirical finding is that quasi-fixity of inputs of labour, capital and land is characteristic of agricultural production. Empirical results indicate that it takes about two years for labour, four years for capital and six years for land to adjust to their long-run optimal levels. Results indicate that investment decisions about labour, capital and land are made independently of each other. Short-run factor demand responses are inelastic with respect to own-price and cross-price of inputs used in agricultural production. The results demonstrate that changes in input and output prices are likely to have a less than proportionate impact on the demand for inputs in South African agriculture.