Download South Africa as an open economy

7
South Africa as an open economy:
Problems and potentialities
Kenneth Creamer
South Africa’s post-apartheid political and economic transformation has advanced
on three identifiable fronts: efforts to build an effective developmental state capable
of bringing services inter alia to historically excluded black communities; efforts to
change the racial composition of the owners of capital, which had been historically
the preserve of the white community; and efforts to guide the economy off a
structurally limited growth path to one of inclusion and opportunity for all.
While advances along all of these fronts have been discernible over the 20 years
from 1994 to 2014, progress has been slow and uneven, at times reverses have
been suffered and inevitably class contradictions have emerged within the ANCled ‘historical bloc’1 – as the effort to manage and racially transform a relatively
sophisticated capitalist economy has at times superseded working-class interests.
These contradictions also emerge at an international level as powerful foreign
investment interests rail against state efforts to encourage black participation in
business.
It is against this backdrop that the present chapter considers the South African
economy’s interaction with the global economy, the main question being what
the potentialities, problems and limitations are that the South African economy
faces as it trades and financially integrates with the rest of the world. In order to
answer this, the chapter presents data which show that South Africa has always
been, comparatively speaking, a relatively open economy; presents some theoretical
discussion on the policy limitations resulting from South Africa’s open-economy
flows; and outlines the strategic posture that should be adopted by South Africa’s
policy-makers towards the open economy.
Overall, the chapter contends that South Africa should adopt a strategic approach
which is alive to the fact that interactions with the global economy bring with them
the threat of increased volatility and even increased income inequality (in a society
whose income inequality is already most unequal), but they also have the potential to
increase the resources available for development. Resources are gained for the South
African economy both through the gains from export trade and from the inflow
of foreign investment which enable investment to continue at a higher level than
domestic savings can sustain.
It is such resources that are required by a developmental state to build an effective
public schooling and health system. It is such resources that are required for the
142
success of efforts to change the racial composition of the owners of capital in South
Africa. Finally, it is such resources that will assist in funding the developmental
state’s large-scale infrastructure programme, which has the potential to change
the growth trajectory of the South African economy from one of exclusion and
deindustrialisation to one of inclusion and reindustrialisation.2
Open for trade, open to shocks
It is common cause in all South Africa’s key economic policy statements, such as the
New Growth Path framework (DED 2010), the various iterations of government’s
Industrial Policy Action Plans (see, for example, DTI 2013) and the National
Development Plan (NPC 2012) that the country’s economic growth will, together
with efforts to stimulate domestic demand, achieve dynamism through exports to,
and interactions with, the rest of the world economy.
The National Development Plan states:
The share of exports in South Africa will rise and the profile will be
more diverse, with a growing portion of non-mineral manufactures and
services. A greater proportion of exports will be directed to emerging
markets. Opportunities for increased trade and bilateral investment in
Africa will develop. Offshore business services will be attracted, fuelling
site development and employment. (NPC 2012: 120)
The New Growth Path promises to focus more sharply on ‘measures to enhance
domestic and regional demand as well as extending export promotion strategies to
the rapidly growing economies of the global South’ (DED 2010: 18).
The growth and development of South Africa’s economy is strongly influenced by
its high degree of openness. South Africa’s imports and exports as ratios of GDP are
comparatively high. In fact, the ratio is historically higher than the world average
and also exceeds that of South Africa’s partners in the Brazil, Russia, India, China
and South Africa (BRICS) bloc, although the larger Indian, Chinese and Russian
economies have in the past two or three decades experienced significantly increasing
trade ratios.
Figure 7.1 indicates that South Africa has been a relatively open economy over the
past 50 years: sanctions against apartheid decreased trade ratios in the 1980s and
1990s, but increasing openness has been a feature of the economy under democracy
since 1994. Due to various economic and political reforms, India, China and
Russia have rapidly opened up to international trade in past decades, Russia having
experienced a particularly sharp adjustment into world trade with the collapse of
the Soviet system in the late 1980s and early 1990s. Brazil is noticeably less open
than the other BRICS countries, but it, too, is showing signs of increased export and
import ratios.
143
s tat e o f t h e n at i o n 2 0 1 3 – 2 0 1 4
Figure 7.1 Imports plus exports in BRICS countries (% of GDP)
Percentage
120
100
Brazil
India
China
Russia
80
South Africa
World
60
40
20
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
0
Source: Data obtained from World Bank online databases3
South Africa also has a comparatively higher integration with world financial
markets, as it allows free movement of international capital into its bond and equity
markets, contributing to a situation where the rand is one of the world’s more
frequently traded currencies.
Integration with the large, but volatile, global economy comes with benefits and
shocks. On the plus side, the export of minerals, manufactured goods, agricultural
produce and tourism services means that South Africa can sustain higher levels of
imports, investment, output and employment than would be possible if production
were confined to the home market.
On the downside, the degree of openness exposes South Africa to negative shocks
such as during the global recession of 2008 and 2009, which resulted in declining
growth rates (Figure 7.2), falling imports and exports, and falling investment and
employment.
144
S o u t h A frica as an open econo m y: P rob l e m s and potentia l ities
Figure 7.2 Real GDP growth (% change)
Percentage
8
South Africa
7
Sub-Saharan Africa
6
World
5
4
3
2
1
0
–1
12
11
20
20
09
10
20
08
20
20
06
07
20
05
20
20
03
04
20
02
20
20
00
01
20
99
20
19
97
98
19
96
19
19
94
95
19
93
19
19
91
92
19
19
19
–3
90
–2
Source: Data obtained from South African Reserve Bank online databases4
In addition to showing the integrated growth movements of South Africa and the
rest of the world economy, Figure 7.2 also indicates that sub-Saharan Africa is a
high-growth region and that closer integration would likely offer significant benefits
for the slower-growing South African economy.
Due to the openness of South Africa’s capital markets, the economy is also exposed
to currency volatility. As is clear from Figure 7.3, the volatile rand has experienced
substantial periods of weakening (1996 to 2002, 2005 to 2008, 2011 to 2013) as well
as periods of strengthening (2002 to 2005 and 2008 to 2010) during South Africa’s
democratic period.
Such volatility occurs, for example, when capital inflows slow down due to the
emergence of negative fundamentals or even as the result of negative sentiment
in international markets towards South Africa, or more widely towards emerging
markets as an asset class. On a deeper, structural level the manner of South Africa’s
interaction with the world economy can dictate the shape of industry and the type of
growth for the economy, which is exacerbated by unfair global trade structures that
favour the interests of the advanced economies.
145
s tat e o f t h e n at i o n 2 0 1 3 – 2 0 1 4
Figure 7.3 Rand real exchange rate (2000 = 100)
Rand exchange rate
130
120
110
100
90
80
70
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
19
19
19
95
96
93
94
92
19
19
19
19
90
91
60
Source: Data obtained from South African Reserve Bank online databases5
Trade and financial flows
The apartheid-era economy was relatively closed – in the sense that trade in goods
and services was constrained by sanctions and embargoes aimed at isolating and
weakening the apartheid regime – and the inflow of foreign capital was severely
restricted. The dawn of democracy in 1994 ushered in a new era for South Africa, in
which both trade and financial flows became relatively free.
Figure 7.4 shows how both South Africa’s imports and exports increased (as a
percentage of GDP) after 1994, until the global recession of 2008 dented the
country’s imports (due to slowing domestic growth) and exports (due to the poor
performance of South Africa’s major trading partners). In recent years, South Africa
has tended persistently to run a trade deficit, in the sense that the value of imports
exceeds the value of exports.
Figure 7.5 shows how the post-1994 period heralded a rapid increase in financial
inflows into South Africa. This is represented by a surplus on the financial account for
most years since 1994, as compared to the deficit on the financial account during the
mid-1980s and the early 1990s – a period of growing financial isolation for apartheid
South Africa. However, the increased financial inflows of the post-1994 era have
coincided with a period of persistent current account deficits for South Africa. This
gives an indication that democratic South Africa has, to a significant extent, relied
on the inflow of savings from abroad, rather than on export revenues, to provide the
foreign currency necessary to fund the country’s economic growth and development.
146
S o u t h A frica as an open econo m y: P rob l e m s and potentia l ities
Figure 7.4 South Africa’s imports and exports (% of GDP)
Percentage
40
South African exports
35
South African imports
30
25
20
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
15
Source: Data obtained from South African Reserve Bank online databases6
Figure 7.5 South Africa’s current account and financial account (% of GDP)
Percentage
8
6
Current account
Financial account
4
2
0
–2
–4
–6
19
8
19 5
86
19
8
19 7
88
19
8
19 9
90
19
9
19 1
92
19
9
19 3
94
19
9
19 5
96
19
9
19 7
98
19
9
20 9
00
20
0
20 1
02
20
0
20 3
04
20
0
20 5
06
20
0
20 7
08
20
0
20 9
10
20
1
20 1
12
–8
Source: Data obtained from South African Reserve Bank online databases7
147
s tat e o f t h e n at i o n 2 0 1 3 – 2 0 1 4
The potential benefit for South Africa of such an open-economy relationship is that
• access to foreign finance will assist in funding investment in necessary
infrastructure, as foreign finance means that the size of the savings pool available
to fund such investment is increased, resulting in a lower cost of capital; and
• increased investment in growth-enhancing infrastructure such as power stations
and road, rail and harbour networks will increase the future growth and export
potential of the economy in the medium run, easing the current account deficit
in future.
On the other hand, the potential risk for South Africa of such an open-economy
relationship is that
• if financial inflows result in a consumption boom, particularly increased
importation of consumer goods, and are not accompanied by an effective
growth-enhancing infrastructural expansion, then the possibility of an intertemporal reduction in the current account deficit is reduced;
• if financial flows are mainly speculative and financial rather than real, this
could contribute to increased income inequality as it benefits almost exclusively
only those well-paid individuals working in, and benefitting from, the financial
sector;
• if the country experiences negative wealth effects associated with increased
foreign ownership of capital, this will, in the medium run, lead to reduced
domestic consumption and will constrain output; and
• as ‘hot money’ financial inflows are notoriously reversible and sentiment-driven,
this means that the country’s growth trajectory is subject to reversals based on
foreign perceptions of the risks associated with domestic policy interventions,
the risks associated with being categorised along with other emerging markets
and related contagion effects.
Policy constraints: A trilemma
South Africa faces what has been termed by macro-economists as an open-economy
trilemma,8 in that it can only simultaneously choose two out of three of the following
policy options:
• To have an open capital market, in which foreign finance can flow freely into and
out of the economy.
• To have monetary policy autonomy, where interest rates are set by the central
bank based on the conditions and goals of the domestic economy, rather than
based on the interest rate decisions of another country’s monetary authorities.
• To peg or manage the country’s exchange rate – that is, to set the exchange rate
at a competitive level to promote a country’s exports and avoid exchange rate
volatility.
Diagrammatically, the trilemma implies that the macroeconomic authorities are
constrained to choosing only one side of the triangle shown in Figure 7.6.
148
S o u t h A frica as an open econo m y: P rob l e m s and potentia l ities
Figure 7.6 The open-economy trilemma
Fixed exchange rate
China
Monetary independence
Hong Kong
South Africa
Free movement of capital
Source: Based on Pilbeam (2006)
For example, Hong Kong has chosen a fixed exchange rate and free movement of
capital; therefore its interest rate is determined by factors outside of the Hong Kong
economy, which as a result is not capable of an independent monetary policy. If
Hong Kong tries to increase interest rates due, for example, to a scenario where its
interest rates (which are linked to US interest rates) are deemed to be too low and
thus to be promoting a bubble of increased prices in Hong Kong’s property market,
then capital will flow into the economy and capital will have to be blocked, or the
exchange rate will strengthen and will no longer be fixed.
China, on the other hand, has chosen a fixed exchange rate and independent monetary
policy; therefore China cannot allow free movement of capital. If China tries to allow
free movement of capital, as it may wish to do in order to assist in facilitating the
country’s geopolitical ‘rise’ through extending the power of its financial system, then
capital is likely to flow into the economy, thus strengthening the exchange rate, which
could then no longer be fixed. Alternatively, if China wished to keep a fixed exchange
rate, it might need to lower its interest rate to avoid a currency appreciation and thus
lose its ability to have an independent monetary policy.
In the post-1994 era, South Africa has generally opted to solve the open-economy
trilemma by choosing an open capital market to attract foreign capital (although
restrictions have been maintained on domestic capital), and monetary policy
autonomy, to set its interest rates based on its domestic conditions, guided
specifically by an inflation-targeting framework.
As such, South Africa has eschewed the possibility of fixing its exchange rate and
has allowed its currency to float relatively freely. The free-floating South African
rand has experienced periods of extreme exchange rate volatility, including both
sharp currency depreciations as well as prolonged periods of relative currency
strength. Periods of currency weakness have been associated with increased
inflation and higher interest rates, as well as increased prices of imported goods,
including oil imports and technology imports. Periods of currency strength,
although associated with lower inflation and lower interest rates, have complicated
and contradicted efforts to promote industrial investment and related export and
employment possibilities.
149
s tat e o f t h e n at i o n 2 0 1 3 – 2 0 1 4
Nonetheless, there was an episode, during the Asian crisis in 1998, when South
African policy-makers attempted to beat the open-economy trilemma and aimed
to achieve all three objectives – that is, an open capital market, monetary policy
autonomy and intervention in the currency markets aimed at avoiding a sharp
depreciation of the South African rand. A number of problems arose as a result of
this unsustainable policy stance.
Faced with a rapidly depreciating South African rand, associated with the negative
contagion effects rolling over emerging markets due to the 1998 Asian crisis, the
South African authorities attempted, not only to keep the capital account open and
conduct autonomous monetary policy, but also to intervene in the currency markets
to avoid a currency depreciation. The authorities did this apparently due to their
concern over the perceived negative political implications of a sharply weakening
rand for South Africa’s relatively new democratic government, and due to the
inflationary effects that the currency deprecation would have.
The South African authorities borrowed and spent about US$25 billion buying rands
in an attempt to avoid the depreciation of the rand. To the same end, the authorities
also raised interest rates by seven per cent. Given the magnitude of capital outflows
associated with the contagion, the efforts of the authorities were ineffective. The
rand eventually depreciated to a new level, about twenty per cent weaker than before
the crisis, but the cost to the country’s holdings of foreign currency reserves was
substantial. It took over five years, until early 2004, for the country’s reserve position
to recover from the decisions taken during the 1998 currency intervention.
After the 1998 episode the South African authorities ceased trying to beat the openeconomy trilemma. Instead, an inflation-targeting framework was adopted, under
which two of the trilemma’s objectives could be pursued – that is, the allowance of
free capital flows and the maintenance of monetary policy autonomy – but attempts
to influence the value of the currency were disavowed and the currency was allowed
to float freely.
More recently, since the mid-2000s this position has been tempered somewhat in
that pressure has arisen on the authorities to respond to the appreciation of the
rand, which has had negative implications for South African growth, exports and
employment. In response, the authorities have put downward pressure on the rand
by gradually building up South Africa’s holdings of foreign exchange reserves.
However, due to the costs associated with the 1998 attempt to beat the open-economy
trilemma, it is unlikely that the South African authorities would again intervene in
the currency markets in an attempt to avoid a currency depreciation, as they did
during the Asian crisis. For example, during the period of sharp depreciation of the
rand in 2013, the South African Reserve Bank stated that it would allow the rand to
float freely and that it would not intervene in the foreign currency markets or raise
interest rates with the objective of trying to restrengthen the rand.
150
S o u t h A frica as an open econo m y: P rob l e m s and potentia l ities
Strategic posture towards the open economy
Based on an understanding of the limitations posed by the open-economy trilemma,
the strategic question arises as to how South Africa should best take advantage of its
trade and capital linkages with the global economy. This raises the related question of
how best South Africa should go about constructing an open-economy, democratic,
developmental state. The answer to such questions requires a long-run strategic
perspective which, despite the potential for short-run reversals, will, over time,
maximise the positives and minimise the negatives of South Africa’s interaction with
the global economy.
Trade linkages
With regard to trade linkages, increased exports can assist in expanding access to
larger African and global markets and creating space to develop domestic industry
and employment. Technology transfer can be used to seed the development of
domestic industry and stimulate jobs through, for example, the effective enforcement
of local content requirements around programmes such as South Africa’s electricity
and rail infrastructure expansions. Aggressive positioning is required to make the
most beneficial use of trade and to engage in asserting South Africa’s trade interests
during trade negotiations and trade disputes. Here, heeding the sagacious advice
of an economist such as Ha-Joon Chang, to do as developed economies do rather
than as they say, will go a long way to developing the correct self-interested posture
for such engagements (Chang 2002). Geopolitical alliances such as those offered
through BRICS and the African Union have the potential to provide an important
foundation for this strategic approach.
Capital linkages
With regard to capital linkages, the inflow of foreign capital can assist in lowering
interest rates and lowering the cost of investment, which will in turn stimulate
growth and investment. However, short-run capital flows can promote income
inequality, can misalign the currency, and can be sentiment-driven; they are thus
potentially volatile and disruptive.
A number of policy options have been suggested in this regard – for example, making
use of South Africa’s holdings of foreign reserves in order to attempt to influence
the value of the rand in foreign exchange markets, or implementing controls or
taxes over capital flows so as to limit the volatile effects of these flows. However,
such proposals come with their costs and limitations. South Africa’s foreign reserve
holdings are limited and are in essence too small to be able to affect the value of the
rand in large, liquid, international currency markets. The introduction of controls
or a tax on capital flows has the potential to trigger the very volatility, via negative
sentiment, that such proposals would be hoping to avoid. Recently, Brazil introduced
151
s tat e o f t h e n at i o n 2 0 1 3 – 2 0 1 4
and then discontinued such taxes as they were found to be costly and ultimately
ineffective in influencing the value of the Brazilian currency.
Nonetheless, there is considerable opinion that some controls on capital inflows may
be necessary, as these flows have the potential to be highly disruptive to emerging
market economies. For example, Rey (2013) has shown the existence of a global
financial cycle, where asset prices in emerging markets and developed economies
move up and down together, regardless of whether the exchange rate is fixed or
floating. As a result, she suggests that the one method of achieving some monetary
policy independence would be to limit capital inflows in some way. If this is not done,
then when the central banks of large economies, such as the US and the EU, lower
interest rates, capital washes into emerging market economies, potentially fuelling
asset price bubbles. When interest rates are raised in the US and the EU, capital flows
are reversed, leading to sharp currency devaluations and other forms of disruption.
In addition to limiting capital flows, which may be easier to achieve in theory than in
practice, a number of writers have advocated national macroprudential policies aimed
at limiting credit growth during upswings in the global financial cycle, and increasing
limits on leverage by financial institutions (see, for example, Barwell 2013).
Another approach is to highlight the need for developed-world economic policymakers to take greater cognisance of the effects of their policies on developing
countries. In this regard, South Africa’s authorities have used international platforms,
such as the G20, to begin to challenge the disruptive effects of the global financial
cycle. President Jacob Zuma, in his statement to the G20 Summit in St Petersburg in
2013, reminded those present that
the summit will take place at a time of increased turbulence in global
financial markets, which has been brought about by speculation that
the US Federal Reserve will soon cut back on the $85 billion it has been
pumping into the financial markets every month. Emerging economies
like South Africa have benefitted from the actions of the Federal
Reserve, as foreign investors have bought huge amounts of South
African government bonds at fairly low yields and equities. Therefore,
the prospect that the Federal Reserve will cut off these flows of funds
has resulted in emerging market currency volatility, which has been
yet another reminder of the risks and the potentially destabilising and
negative effects that policies and shocks in major economies can have
on other countries and regions. (Zuma 2013)
Perhaps the correct long-run strategic approach should be informed by the following
cost–benefit calculation: do the potential benefits of such inflows as access to foreign
capital, related lower interest rates and increased investment outweigh the potential
costs of such inflows, in the form of increased currency volatility, deindustrialisation
pressures due to misaligned currency strength and potential income inequality
pressure and asset prices bubbles (assuming such bubbles are not mitigated by
appropriate macroprudential policies)?
152
S o u t h A frica as an open econo m y: P rob l e m s and potentia l ities
Exchange rate management
The logic of the open-economy trilemma appears to present two options for South
Africa. The first option entails a floating exchange rate, free capital flows and
independent monetary policy. The second option entails a targeted exchange rate
and a choice between free capital flows or an independent monetary policy.
An advantage of the ‘floating exchange rate’ option is that it would continue to
give South Africa access to foreign savings, and for as long as there are net inflows
this would assist in lowering interest rates and financing investment, growth and
jobs beyond the potential of South Africa’s own savings base. In theory, a floating
exchange rate can also play a beneficial short-run shock-absorber role. For example,
if demand for South African goods falls due to a global recession, then the rand
might weaken, boosting demand by making exports cheaper and imports more
expensive. In practice, though, currency misalignments – which result when signals
in the foreign exchange market from capital flows overwhelm the signals from trade
flows – tend to undermine this shock-absorber function.
A disadvantage of the ‘floating exchange rate’ option is that it may lead to exchange
rate volatility. During periods of exchange rate strength, driven by capital inflows,
this will lead to falling exports and rising imports, limiting growth and job creation.
Other problems associated with capital inflows are that they can be used to finance
consumption and imports rather than infrastructure investment. Such flows are
often short-term in nature and can lead to bubbles and to financialisation of the
economy rather than real economic activity. Furthermore, foreign inflows will
increase foreign ownership in the economy, putting future pressure on the balance
of payments as dividends are paid to foreign owners.
An advantage of the ‘targeted exchange rate’ option is that it may be able to achieve
a more competitive rand, which will make South Africa’s exports more competitive,
stimulating investment and jobs. A disadvantage is that if South Africa followed
the policy of targeting the exchange rate, it would be forced either to give up its
monetary policy independence or to give up its access to free capital flows. In other
words, South Africa would either have to allow its interest rates to follow those of
the country to which its currency was pegged, or South Africa would have to give up
on free capital flows, which is likely to result in higher interest rates and significant
related adjustment costs for the domestic economy.
A disadvantage of the ‘targeted exchange rate’ approach – aimed at setting the
exchange rate at a more competitive level – is that it would require capital flows to
be regulated or monetary policy independence to be abandoned. There is also the
very real probability that any competitive boost given to the economy by a weakened
rand would only be temporary, and would be erased by rising wages and prices in
the domestic economy. It would be particularly problematic to adopt any policy that
might cause a sharp drop in investment inflows during a phase of infrastructure
expansion, as this would serve to push up the costs of infrastructure investments.
153
s tat e o f t h e n at i o n 2 0 1 3 – 2 0 1 4
On the balance of evidence, it would appear that the ‘floating exchange rate’ option
is preferable as it provides access to foreign financial flows that are essential to
the growth and infrastructure investment phase that South Africa is undertaking,
even though this option brings with it very real risks, such as those associated with
exchange rate volatility and misalignment.
While working within the framework of the ‘floating exchange rate’ option, there is
some potential to use foreign exchange market intervention to influence the value of
the currency in a way that does attempt to beat the open-economy trilemma while
working within its logical constraints. In this approach the interest rate instrument is
used to maintain low inflation, which is regarded as the primary target, and sterilised
foreign exchange market interventions are used as an instrument to ameliorate
volatile currency movements, although such amelioration of currency movements is
clearly regarded as a secondary target.
So, if the rand appreciates and the authorities regard it as misaligned and thus limiting
the competitiveness of the South African economy, then they can intervene in the
foreign exchange market by buying foreign reserves (dollars, euro, yen, yuan, gold, and
so on). This will serve to weaken the rand, as buying foreign reserves is tantamount to
increasing the supply of rands. As a result of the increased supply of rands there is a risk
of increased inflation, so the foreign exchange market intervention must be sterilised
by selling bonds, thus decreasing the money supply as money is taken out of the
market through the process of buying bonds. A cost associated with such sterilisation
activity is that the authorities must then pay the cost of servicing such bonds to private
sector bond holders. A further limitation is that, if inflation persists, interest rates will
have to rise in order to bring down inflation. Rising interest rates may cause the rand
to appreciate, which is the very problem that the authorities were attempting to address
through the original foreign exchange market intervention.
If, on the other hand, the rand depreciates too sharply and the authorities wish to
attempt to strengthen the rand, they will intervene in the foreign exchange market by
buying rands with the foreign reserves that they hold. Clearly, this strategy is limited
by the finite quantity of foreign reserve holdings which the authorities possess,
unless foreign currency is borrowed as South Africa attempted to do, with perilous
consequences, during the Asian crisis of 1998. A further consideration is that if
foreign reserves are used to buy rands in this manner, the South African money
supply would tend to fall, leading to falling inflation and lower interest rates, which,
all else being equal, could result in further weakness in the currency.
Many economists regard the exchange rate as the most important price in any
economy; accordingly, there has been much debate about whether South Africa’s
exchange rate should be allowed to float or be targeted. On balance, it would seem
that a policy targeting the exchange rate would bring with it other compromises,
such as lost monetary policy independence, and related interest rate volatility, or
reduced access to foreign capital inflows, which have the potential to severely limit
economic development in South Africa.
154
S o u t h A frica as an open econo m y: P rob l e m s and potentia l ities
Resourcing the developmental state
The relative openness of the South African economy to trade and capital flows
increases the economy’s potential to grow output, investment and employment. A
South Africa closed off from the world would have fewer resources, a smaller market,
and less growth and jobs potential. Given the increased potential that open-economy
access offers to the South African economy, as well as a clear understanding of the
threats and trade-offs which are a part of open-economy economics, a clear strategic
perspective is required regarding the South African economy’s interaction with the
rest of the world.
The overriding objective of South Africa’s economic policy should be reconstruction;
that is, the objective should be to change the inherited, unequal and exclusionary
structures of the South African economy to an economic structure that is more
equitable and which offers better opportunities for all people living in South Africa.
This overriding objective can be facilitated by having a clear, strategic view of the
resourcing and growth potential which South Africa has as an open economy –
trading and integrating with Africa and the rest of the world. In order to change lives
and the structure of opportunity in South Africa, effective open-economy relations
will be required with the rest of the world. It is only through such a configuration
that there will be sufficient economic growth and resources available to fund the
programmes of a developmental state and to equip it to engage in effective economic
reconstruction, by, for example, vastly improving outcomes in public education,
health and welfare; significantly expanding social and economic infrastructure; and
effectively accelerating land and agricultural reform.
The racial transformation of South Africa’s economy – in particular the need
to continue to include black owners of capital and to create more employment
especially for black people – will most likely be assisted by well-shaped relations
with the global economy, but contradictions and contestations will undoubtedly
occur. For example, a national political effort will likely be required to ensure the
characterisation of South Africa’s programme of black economic empowerment as a
necessary phase of de-racialising capital reform, rather than as a form of cronyism.
South Africa’s macroeconomic policies must be designed to ensure that sufficient
resources are made available for development. In a mixed economy such as South
Africa’s – where the public and private sectors are both sizeable and symbiotically
linked – the resources for development come both from internal sources, such as
taxation and borrowing, and from external sources, such as through foreign trade
and investment flows. Policy should seek to optimise such flows.
Notes
1
Reference to Antonio Gramsci’s Prison Writings 1929–1935 (Forgacs 1998) provides insight
into how such a ‘historical bloc’ forms the basis of consent to a certain social order. This
consent allows for the production and reproduction of the necessary hegemonic authority
through a nexus of institutions and ideas.
155
s tat e o f t h e n at i o n 2 0 1 3 – 2 0 1 4
2
It is projected that over the three years from 2013 to 2015 the public sector will have spent
about R827 billion on infrastructure. Over the longer term, it is expected that between 2013
and 2023 public infrastructure projects valued at R3.6 trillion will be undertaken. According
to South Africa’s Budget Review 2013, of the R3.6-trillion, electricity projects make up
55.7%, transport 22.9%, liquid fuels 6.8%, water 3.6%, education 3.6%, health 3.2%, human
settlement 3.2% and telecommunications 1% (National Treasury 2013: 97).
3
World Bank online database accessed 28 January 2014, http://data.worldbank.org/.
4
The data for this and the following three figures were obtained from South African Reserve
Bank online databases, accessed 28 January 2014, from http://www.resbank.co.za/Research/
Statistics/Pages/OnlineDownloadFacility.aspx.
5
Data obtained from http://www.resbank.co.za/Research/Statistics/Pages/
OnlineDownloadFacility.aspx.
6
Data obtained from http://www.resbank.co.za/Research/Statistics/Pages/
OnlineDownloadFacility.aspx.
7
Data obtained from http://www.resbank.co.za/Research/Statistics/Pages/
OnlineDownloadFacility.aspx.
8
The theory of the trilemma, or impossible trinity, has become a staple of macroeconomic
theory since it was first outlined in the work of Obstfeld and Taylor in 1997 and 2004. More
recently, a study by Helene Rey (2013), which is still too recent to have achieved the status of
Obstfeld and Taylor’s trilemma, but which raises some very important issues, has suggested
that the workings of the global financial cycle has meant that the trilemma has been replaced
by a dilemma – that is, ‘independent monetary policies are possible if and only if the capital
account is managed … regardless of the exchange rate regime’ (2013: 20). In terms of Rey’s
dilemma a country must choose either free capital flows or an independent monetary
policy. This insight may have serious implications for South Africa, as it suggests that it may
only be through the limitation of capital inflows that South Africa will be able to maintain
an independent monetary policy, but this does not take into consideration the significant
adjustment costs of limiting capital inflows for a relatively low-savings economy like South
Africa. Furthermore, it implies that if South Africa followed the international interest rate
cycle, i.e. gave up its monetary policy independence, then the imbalances associated with
capital flows might be diminished. At first blush, this appears to be a very unlikely conclusion.
References
Barwell R (2013) Macroprudential policy: Taming the wild gyrations of credit flows, debt stocks and
asset prices. New York: Palgrave Macmillan
Chang H-J (2002) Kicking away the ladder: Development strategies in historical perspective.
London: Anthem Press
DED (Department of Economic Development) (2010) The New Growth Path framework.
Accessed 30 December 2013, http://www.info.gov.za/view/DownloadFileAction?id=135748
DTI (Department of Trade and Industry) (2013) Industrial policy action plan 2013/14–2015/16.
Accessed 30 December 2013, http://www.thedti.gov.za/news2013/ipap_2013-2016.pdf
156
S o u t h A frica as an open econo m y: P rob l e m s and potentia l ities
Forgacs D (Ed.) (1998) A Gramsci reader: Selected writings 1916–1935. London: Lawrence and
Wishart
National Treasury (2013) South Africa’s budget review. Accessed 30 December 2013,
http://www.treasury.gov.za/documents/national%20budget/2013/review/FullReview.pdf
NPC (National Planning Commission) (2012) National Development Plan 2030: Our future –
make it work. Republic of South Africa: The Presidency
Obstfeld M & Taylor A (1997) The Great Depression as a watershed: International capital mobility
over the long run. NBER Working Paper No. 5960. Cambridge, MA: NBER
Obstfeld M & Taylor A (2004) Global capital markets: Integration, crisis and growth. New York:
Cambridge University Press
Pilbeam K (2006) International finance (3rd edition). New York: Palgrave Macmillan
Rey H (2013) Dilemma not trilemma: The global financial cycle and monetary policy
independence. Paper presented at Kansas Federal Reserve Bank Policy Symposium at
Jackson Hole, USA
Zuma J (2013) Statement by the Presidency, President Zuma to lead SA delegation to the G20
Summit in Russia, 2 September. Accessed 9 January 2014, http://www.thepresidency.gov.za/
pebble.asp?relid=16023&t=79
157