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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bloc’1 – as the effort to manage and racially transform a relatively sophisticated capitalist economy has at times superseded working-class interests.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. 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