Download An overview of the South African macro

An overview of the
South African macroeconomic
environment
1
Study instruction
Study
Study guide: study unit 1
Study unit outcomes
Once you have worked through this study unit, you should be able to give an overview of the
performance of the South African economy with regards to the following macroeconomic
aspects:







economic growth
business cycle
stabilisation policy
inflation
unemployment
balance of payments
distribution of income
Contents
1-1
THE DIFFERENCE BETWEEN MICROECONOMICS AND MACROECONOMICS
Microeconomics deals mainly with the behaviour and decisions of individual consumers,
households or families (eg groups of consumers), business enterprises (eg a vegetable farmer
or electricity supplier) and other organisations (eg welfare organisations). It also studies the
demand for and supply of individual goods and services and the determination of their prices.
Macroeconomics deals with the economy as a whole. It involves determining and exploring the
relationship between aggregate concepts (variables), such as aggregate income or production
and expenditure, economic growth, inflation (changes in the aggregate price level), aggregate
unemployment, the balance of payments, exchange rates and interest rates.
Instead of studying individual markets, we will be focusing on the interaction between the
different macro markets, such as the market for goods and services, the financial market, the
labour market and the foreign exchange market, as well as the nature of these markets, the
process whereby equilibrium may be achieved and the implications of disequilibrium for these
markets. We will concentrate on stabilisation policies, with the main focus on the need for and
use of fiscal and monetary policies to stabilise the macro economy.
While microeconomics studies the operation of the economy at the level where basic economic
decisions are taken, macroeconomics concentrates on aggregate economic behaviour and the
aggregate performance of the economy.
1-2
ECONOMIC GROWTH
Economic growth takes place when the total production of goods and services in an economy
increases. It is traditionally defined as the annual rate of increase in total production or income
in the economy. This definition has to be qualified in two important respects. Firstly, production,
or income, should be measured in real terms – that is, the effects of inflation should be
eliminated. Secondly, the figures should also be adjusted for population growth. In other words,
they should be expressed in per capita terms.
The growth in total production (economic growth) can be measured by calculating the
percentage change in the real gross domestic product (GDP) from one year to the next.
Real GDP growth rate =
Gross domestic product (GDP)
The GDP is the total value of all final goods and services produced within the boundaries of a
country during a particular period (usually one year). GDP is an official measure of how much
output was produced in a country or region during a specified time period. It is also the
broadest, best-known and most frequently used measure of economic activity.
GDP is a gross measurement because it includes the total amount of goods and services
produced, some of which are simply replacing goods that have depreciated or worn out.
GDP measures the goods and services produced inside the borders of a country by both the
citizens and foreigners. This then reflects the level of economic activity that is taking place in the
country.
Total value is measured by expressing the value of production in terms of the prices of the
various final goods and services. GDP is usually valued at market prices, but it is also
possible to value it using basic prices or factor cost (or factor income).
Only final goods and services are included. Final goods and services refer to those goods
and services that are consumed by households and firms. Final goods are things such as
television sets, clothes, chairs, bookcases, hats, and so on, while services are things such as
the services provided by lawyers, doctors, teachers, plumbers, beauticians, and so forth. In the
production of the final goods and services, intermediate goods are used. Intermediate goods
are purchased to be used as inputs in producing other goods before they are sold to end
users. Intermediate goods, such as the crude oil used to manufacture petrol, or flour for baking
bread, are excluded to avoid double counting.
GDP measures the production of new goods and services (also called current production)
during a specified period and is an annual flow because it measures the value of goods and
services produced over a year. A GDP of R60 billion implies that the South African economy
produced R60 billion worth of final goods and services during a specific year.
Nominal GDP versus real GDP
Nominal GDP or GDP at current prices is the sum of the quantities of final goods and services
produced, multiplied by their current price. An increase in nominal GDP might increase over
time as a result of


an increase in the quantity of goods and services produced
an increase in the prices of goods and services produced
Real GDP or GDP at constant prices is a measure of GDP in which the quantities produced are
valued at the prices in a base year instead of at current prices. Real GDP therefore measures
the actual physical volume of production. A base year is used to overcome the problem of price
changes by expressing the prices of goods and services in terms of prices in a particular year.
TABLE 1.1
GDP at current and constant prices
1990–2009
R millions
Year
Current prices
Constant
prices (2005)
1990
289 816
1 086 901
1991
331 980
1 075 833
1992
372 225
1 052 843
1993
426 133
1 065 830
1994
482 120
1 100 300
1995
548 100
1 134 582
1996
617 954
1 183 445
1997
685 730
1 214 768
1998
742 424
1 221 053
1999
813 683
1 249 847
2000
922 148
1 301 773
2001
1 020 007
1 337 382
2002
1 171 086
1 386 435
2003
1 272 537
1 427 322
2004
1 415 273
1 492 330
2005
1 571 082
1 571 082
2006
1 767 422
1 659 121
2007
2 016 166
1 751 499
2008
2 274 139
1 814 134
2009
2 395 969
1 783 617
The table gives both the evolution of
nominal GDP (current prices) and real
GDP (constant prices) for South Africa
from 1990. The base year in the table is
2005. In other words, the GDP for each
year is expressed in terms of 2005 prices.
Since the base year is 2005, nominal GDP
for 2005 is equal to real GDP for 2005.
This shows that real GDP for 2009 was 1.6
times higher than real GDP for 1990, while
nominal GDP indicates that it was 8.3
times higher.
Source: South African Reserve Bank, Quarterly
Bulletin Time Series
Real per capita GDP
Positive economic growth actually occurs only when total real production or income grows at a
faster rate than the population. If population growth rate exceeds the economic growth rate, a
decline in real GDP per capita occurs.
Real GDP per capita is widely used as a measure of the economic welfare or wellbeing of
residents of a country. If real GDP per capita rises, it is assumed that people are better off.
There are, however, a number of problems with using real GDP per capita as a measure of
economic welfare. Apart from the measurement problems associated with GDP, there is also a
problem with the composition of output and the distribution of income. If a factor such as an
increase in defence expenditure was responsible for the increase in GDP, it does not
necessarily follow that there was a concomitant increase in economic welfare. An unequal
distribution of income implies that the benefits of an increase in GDP flow largely to a relatively
small group of people and do not "trickle down" to the poor.
Economic growth in South Africa
According to the data in the following table, the economic growth performance of the South
African economy has, on average, deteriorated significantly since the 1960s. For example, the
rate of growth in real GDP declined from an annual average of 5.5% during the 1960s to 1.4%
during the 1990s and increased to 3.6% during the 2000s. This had an important impact on the
living standards of the average South African as will be explained in the section below.
TABLE 1.2
Real economic growth in South Africa
(Five-year average growth rate in real GDP)
1960-64
1965-69
1970-74
1975-79
1980-84
1985-89
1990-94
5.66
5.32
4.38
2.12
2.98
1.5
0.2
Source: South African Reserve Bank, Quarterly Bulletin, various issues
1995-99
2000-04
2005-09
2.58
3.62
3.68
If we take a closer look at the growth performance after 1990, the following picture emerges:
TABLE 1.3
Real economic growth in South Africa
Annual percentage change in
Year
Real GDP
Real GDP per
capita
1990
-0.3
-2.4
1991
-1.0
-3.1
1992
-2.1
-4.2
1993
1.2
-0.9
1994
3.2
1.1
1995
3.1
1.0
1996
4.3
2.1
1997
2.6
0.5
1998
0.5
-1.6
1999
2.4
-0.2
During the first three years of the 1990s,
South Africa experienced negative economic
growth rates. A negative economic growth
rate means that the real value or volume of
production in that particular year was lower
than in the previous year. Looking at the
growth rate since 1994, the downward trend
after the 1960s appeared to turn around. The
period after 1994 was characterised by two
important developments that had a particular
influence on the South African economy: the
political democratisation of South Africa and
economic globalisation. Economic
globalisation refers to the integration of the
2000
4.2
2.1
2001
2.7
0.8
2002
3.7
1.9
2003
2.9
1.3
2004
4.6
3.1
2005
5.3
3.9
2006
5.6
4.2
2007
5.6
4.3
2008
3.6
2.4
2009
-1.7
-2.7
Source: South African Reserve Bank, Quarterly
Bulletin Time Series
South African economy into the international
economy.
There are three ways in which the dismal performance of the South African economy after the
early 1980s can be explained. One explanation is that the decline was largely inevitable
because the South African economy was in the downward phase of the so-called “long wave” in
economic activity. Another view is that the downward trend was a symptom of growing social
and political conflict in South Africa, which resulted in stagnating private fixed investment, high
inflation and balance of payments problems. A third view ascribes problems to the use of
inappropriate economic policies during the period.
Given a population growth rate of 2.5% per annum in South Africa, a real economic growth rate
of more than 2.5% was needed for the real GDP per capita to increase. According to the above
table, South Africa has experienced an increase in real GDP since 1993. In spite of the fact that
real GDP has increased, this increase has not always been sufficient to bring about an increase
in the real GDP per capita. During 1993, 1998 and 1999 and 2009, a decline in real GDP per
capita was experienced. This was an indication that the economic growth experienced during
those years was not enough to increase the per capita GDP. The cause of the 2009 decline was
the impact of the international financial crises that led to what is now known as the Great
Recession. The extent of the impact on the South African economy can be seen from the
following quarterly data:
TABLE 1.4
Real economic growth in South Africa
(Quarterly data)
2008/03
1.13
2008/04
2009/01
2009/02
2009/03
2009/04
2010/01
2010/02
2010/03
2010/04
0.76
-6.45
2.14
1.69
2.30
-4.24
3.50
1.28
3.37
Source: South African Reserve Bank, Quarterly Bulletin Time Series

Do activity 1.1 in the workbook.
1.3
The SOUTH AFRICAN BUSINESS CYCLE
A business cycle refers to the
expansion (ups) and contraction
(downs) of economic activity in a
country. An increase in economic
activity is followed by a decrease in
economic activity, which is followed
again by an increase in economic
activity.
From the data on past business cycles in South Africa, we see that there are no simple patterns.
Some are long and some are short, others are mild and others again are severe.
99
100
90
80
70
60
50
40
30
20
10
0
44
40
36
8
17
20
7
24
51
44
35
19
15
42
33
21
The longest business cycle in South Africa, if measured from trough to trough, started in March
1986, reached a peak in February 1989, and ended in a trough in May 1993 – a total period of
86 months.
The shortest contraction phase lasted seven months, starting in June 1967 and ending in
December 1967, while the longest contraction phase lasted 51 months, starting in March 1989
and ending in May 1993.
The shortest expansion phase lasted 15 months, starting in April 1983 and ending in June 1984,
while the longest expansion phase lasted for 99 months, starting in September 1999 and ending
in November 2007. The end of the expansion phase was caused by the international financial
crises that originated in the USA.
In the rest of the module we will be using models to look at the causes of these fluctuations and
how fiscal and monetary policies can be used to smooth the cycle.
Do activity

Do activity 1.2 in the workbook.
1-4
STABILISATION POLICY
In this module, our main concern is how fiscal and monetary policy can be used to stabilise the
economy as opposed to analysing the determinants of economic growth.
The following two policies play a major role here:
Fiscal policy
Fiscal policy is the government's policy in respect of the nature, level and composition of
government spending, taxation and borrowing, aimed at pursuing particular economic goals.
The main instrument of fiscal policy is the budget, while the main policy variables are
government spending and taxation. In South Africa, the budget is presented to Parliament
annually by the Minister of Finance, usually in February.
A distinction can be made between an expansionary and contractionary fiscal policy. An
expansionary fiscal policy entails an increase in the demand for goods in the economy by
increasing government spending and/or decreasing taxes. A result of such a policy is that the
budget deficit increases. A contractionary fiscal policy entails a decrease in the demand for
goods in the economy by decreasing government spending and/or increasing taxes. A result of
such a policy is that the budget deficit decreases.
At the macroeconomic level, fiscal policy is one of the main elements of demand management
or stabilisation policy. In the models you will be studying in this module fiscal policy has a vital
impact on the equilibrium level of output and income.
Monetary policy
This involves all deliberate actions by the monetary authorities to influence the monetary
aggregates, the availability of credit, interest rates and exchange rates, with a view to affecting
monetary demand, output, income, prices and the balance of payments.
A distinction can be made between an expansionary and contractionary monetary policy. An
expansionary monetary policy entails an increase in the money supply to bring about a
decrease in the interest rate in order to increase the demand for goods in the economy. A
contractionary monetary policy entails a decrease in the money supply to bring about an
increase in the interest rate in order to decrease the demand for goods in the economy.
It is mainly the impact of the interest rate on the equilibrium level of output and income that we
will study in this module.

1-5
Do activity 1.3 in the workbook.
INFLATION
Inflation is defined as a continuous and considerable rise in prices in general. Note that this is a
neutral definition of inflation as opposed to a causal definition of inflation, since it does not tell
us what the causes of inflation are.
The most commonly used indicator of changes in the general price level (inflation) is the
consumer price index (CPI). This reflects the cost of a representative basket of consumer goods
and services. The CPI is calculated by comparing the index of a particular month with the index
of the corresponding month in the previous year, and then expressing it as a percentage.
The following table summarises the inflation history of South Africa after 1960:
TABLE 1.5
Increase in CPI in South Africa
(Five-year average)
1960-64
1965-69
1970-74
1975-79
1980-84
1985-89
1990-94
1995-99
2000-04
2005-09
1.6
3.2
7.5
11.8
13.5
15.7
12.5
7.3
5.5
6.8
Source: Statistics South Africa
TABLE 1.6
Inflation in South Africa, 1990–2010
Year
Annual percentage
increase in CPI
1990
14.4
1991
15.3
1992
13.7
1993
9.8
1994
9.2
1995
8.6
1996
7.3
1997
8.6
1998
6.8
1999
5.1
2000
5.4
2001
5.8
2002
9.1
2003
5.8
2004
1.4
2005
3.4
2006
4.6
2007
7.2
2008
11.5
2009
7.1
2010
4.3
Source: Statistics South Africa
Between 1973 and 1992, South Africa
experienced an inflation rate in excess of
10%. In 1993, an inflation rate below 10%
was recorded for the first time and from
then on the trend was downward until the
end of the decade. In 2002, inflation
increased sharply in the wake of a
depreciation of the rand against the major
international currencies. In 2008, it again
rose sharply, and then decreased again.
In study units 8 and 9, we will take a closer look at the impact of the demand for goods as well
as the supply of goods on the price level.

Do activity 1.4 in the workbook.
1-6
UNEMPLOYMENT
An unemployed person is someone who is willing and able to work but who does not have a job.
But this is where the simplicity ends and, for the purpose of measurement, different definitions
are used.
The strict definition of unemployment used by Statistics South Africa is as follows:
Unemployed persons are those persons who, being 15 years and older,



are not in paid employment or self-employment
were available for paid employment or self-employment during the seven days preceding
the interview and
took specific steps during the four weeks preceding the interview to find employment or
self-employment.
The expanded definition of unemployment omits the requirement that a person actively seeks
employment. The argument is that many people are discouraged from actively seeking work
owing to the small probability of finding a job.
In South Africa, the unemployment rate is calculated by Statistics South Africa, which conducts
a survey on a representative sample of the South African population on an annual basis (or
more frequently).
The unemployment rate is the number of unemployed people as a percentage of the
economically active population.
The number of unemployed people will differ, depending on whether the strict or the expanded
definition of unemployment is used.
The table below indicates the unemployment rate as well as the percentage change in the
unemployment rate, according to this strict definition, in South Africa since 1994.
TABLE 1.7
Unemployment rates in South Africa: 1994–2010
%
Change
Year
Unemployment rate
%
1994
22.9
3.3
1995
16.7
-27.0
1996
19.3
15.6
1997
21.0
8.4
1998
25.2
20.3
1999
23.3
-7.4
2000
25.6
9.7
2001
29.4
14.8
2002
30.4
3.5
40.0
2003
28.0
-8.1
30.0
2004
26.2
-6.3
2005
26.7
2.0
2006
25.5
-4.4
2007
22.7
-11.2
2008
21.9
-3.7
2009
24.3
11.2
2010
24.8
2.1
Percentage
Unemployment rates for South Africa
20.0
10.0
0.0
1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: Statistics South Africa, Household survey, various issues.
These figures can be regarded as minimum figures for unemployment in South Africa. Statistics
South Africa also provides a figure for discouraged workers. These are people who do not
qualify according to the strict definition because they are not actively seeking work. Adding this
figure to the number of strictly unemployed will increase the unemployment rate.
Another problem with the estimation of unemployment in South Africa is the issue of
unemployment in the informal sector. If the informal sector is to be regarded as a last resort for
those who are unable to find jobs in the formal sector, the labour absorption capacity of the
formal sector can be used to gauge the extent of unemployment in South Africa. The following
table shows changes in employment in the non-agricultural sectors of the South African
economy:
TABLE 1.8
Employment in the non-agricultural sectors in
South Africa, 1995–2009
Year
Number
% change
1995
5 269 118
1.4
1996
5 235 979
1.4
1997
5 146 030
-0.1
1998
4 966 132
-2.2
1999
4 866 714
-0.9
2000
4 734 158
-1.5
2001
4 658 411
-0.8
2002
5 576 838
0.6
2003
6 395 847
-1.6
2004
6 660 960
2.1
2005
7 110 705
1.1
2006
7 910 778
2.9
2007
8 322 650
2.7
2008
8 469 409
1.8
2009
8 218 498
-3.0
Source: South African Reserve Bank, Quarterly
Bulletin Time Series
In spite of the economic growth rates that
were recorded, these did not always
translate into significant employment
opportunities in the formal sector – hence
the occurrence of so-called “jobless
growth”. The decline in the labour
absorption capacity of the formal sector
clearly indicates a growing unemployment
problem given that it is currently estimated
that in South Africa, between 400 000 and
500 000 new people enter the labour
market every year. Unemployment is a
major economic issue that needs to be
addressed in South Africa.
The unemployment rate is not only high in South Africa, but also differs in terms of race, gender,
age and educational qualifications. A young black female who failed to complete her secondary
schooling has the highest probability of being unemployed.
Unemployment has a negative impact not only on the individual and his or her family, but also
on society. High unemployment is associated with crime and social unrest and presents a loss
of output. We are all worse off because of unemployment.
The causes of unemployment are varied, and at any given time, it may be caused by more than
one factor. It might, for instance, be the result of the contraction phase of the business cycle as
well as structural changes in the economy.
Because the causes of unemployment are varied and complex, there is not only one solution to
the problem. To deal with unemployment, one needs to simultaneously address low economic
growth, the cost of labour, labour market flexibility and the promotion of labour-intensive
strategies.
In this module we deal with unemployment caused by an insufficient demand for goods and
services (study units 2 to 7) and unemployment relating to the structure of the labour and
product markets (study units 8 and 9). When working through the module keep in mind that
there is a close relationship between output and unemployment. An increase in output implies
an increase in employment and a decrease in unemployment.

1-7
Do activity 1.5 in the workbook.
BALANCE OF PAYMENTS
The balance of payments is a systematic statistical record of all economic transactions between
residents in the reporting country (eg South Africa) and the rest of the world during a particular
period (a quarter or year). The South African balance of payments summarises the transactions
between South African households, firms and government and foreign households, firms and
government.
The balance of payments consists of four basic accounts:




the current account
the capital transfer account
the financial account
unrecorded transactions
The balancing item in the balance of payments (in principle) is the change in the country's gold
and other foreign reserves.
The two major accounts are the current and financial account. The current account records a
country’s involvement in international trade (exports and imports), while the financial account
records the country’s involvement in international capital flows.
If there is a surplus on the current account, this indicates that the value of the country’s exports
exceeded the value of its imports during the period under review. If there is a deficit, then
imports were greater than exports.
A surplus on the financial account indicates that more funds flowed into than out of the country
during the period concerned and a net inflow of foreign capital occurred. A deficit on the
financial account indicates that the outflow of capital exceeded the inflow of capital and a net
outflow of capital occurred.
The balancing item in the balance of payments (in principle) is the change in the country's
gold and other foreign reserves. The sum of the current account balance, the capital transfer
account, the financial account balance and the unrecorded transactions are therefore reflected
in the change in foreign reserves.
Balance of payments stability exists when there is some balance between exports and imports.
Balance of payments stability is one of the macroeconomic objectives. In technical terms, this
means that the balance of payments and exchange rates should be fairly stable.
The main elements of South Africa’s annual balance of payments between 1990 and 2009 are
summarised in the following table:
TABLE 1.9
South Africa’s balance of payments: 1990–2009 (R million)
Year
Current account
Financial account
Change in net
balance
balance
reserves
1990
3 997
2 708
-871
1991
3 910
1 222
-3 127
1992
5 599
-183
-2 285
1993
9 076
-4 536
-5 500
1994
56
1 792
3 544
1995
-9 045
8 613
20 862
1996
-7 114
-7 101
10 547
1997
-10 231
9 733
25 955
1998
-13 100
-6 928
14 749
1999
-4 156
11 816
19 379
2000
-1 192
5 366
1 909
2001
2 869
-12 237
-23 247
2002
9 680
16 080
12 435
2003
-12 599
-4 858
-14 503
2004
-42 948
37 528
44 139
2005
-54 495
34 263
76 259
2006
-93 799
29 792
106 759
2007
-140 551
47 816
153 513
2008
-161 874
26 066
96 139
2009
-97 062
17 037
113 219
Note:
The sum of the current account balance and the financial account
balance does not add up to the change in net reserves. The difference
is the result of unrecorded transactions.
Source: South African Reserve Bank, Quarterly Bulletin Time Series
The first column shows the balance on the current account, that is, the difference between
exports and imports. The second column shows the balance on the financial account, that is,
net inflow (denoted by a plus) or net outflow (denoted by a minus) of capital. The third column
shows the change in the country’s net gold and other foreign reserves after unrecorded
transactions have been taken into account. This reflects the overall balance of payments
position. The balance of payments is explained in more detail in study unit 5.
In study units 5 to 7 we will develop an economic model to analyse the impact of the demand for
goods on the level of output and income in an open economy.

1-8
Do activity 1.6 in the workbook.
DISTRIBUTION OF INCOME
The following is an extract from Economics for South African students (4th edition) by Philip
Mohr, Louis Fourie and associates.
South Africa has a highly skewed distribution of personal or household income. Income
distributions are difficult to measure and are therefore not estimated regularly. Moreover, the
estimates are subject to a significant margin of error. In some countries, the distribution of
income among individuals or households has never been estimated, while in other countries
such estimates are made only infrequently. Nevertheless, it is widely accepted that South Africa
has one of the most unequal distributions of personal income in the world. In South Africa, the
Gini coefficient has been estimated to be as high as 0.68. This is one of the highest Gini
coefficients ever estimated in the world. Estimates for the industrial countries tend to average
between about 0.30 and 0.45, and for developing countries, the estimates generally vary
between about 0.40 and 0.60. Clearly, South Africa's figure is extremely high. Gini coefficients
for selected countries are included in table 1.10.
TABLE 1.10
Gini coefficients for various countries
Country
Year Estimated
Gini
coefficient
Japan
United Kingdom
United States
1993
1999
2000
0.25
0.36
0.41
Korea
Malaysia
Thailand
1998
1997
2002
0.32
0.49
0.42
Argentina
Brazil
Chile
2003
2003
2000
0.53
0.58
0.57
Kenya
Zambia
1997
2002
0.43
0.42
South Africa's personal income
distribution has traditionally followed
racial lines, with whites earning the most,
followed by Asians, coloureds and
blacks. In recent years, however, the
gaps between the different races have
tended to become smaller. At the same
time, the distribution in the black group
has become much more unequal. This
can be ascribed to increasing
unemployment, the relatively fast rate of
increase in the wages of blacks
employed in the formal sector of the
economy and increased poverty in the
rural areas as a result of the impact of
severe droughts, floods and other
natural disasters. Gini coefficients for the
different population groups in 2000 were
estimated at 0.57 (blacks), 0.51
Zimbabwe
1995
0.50
South Africa
1993/94
0.58
Source: World Bank, World Development Report
(2006)

Do activity 1.7 in the workbook.
(coloureds), 0.51 (Asians) and 0.45
(whites).