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International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
IMPACT OF THE ECONOMIC SITUATION POST RECESSION: SOUTH
AFRICA
Vartikka Indermun
Academic Lecturer- Management College of Southern Africa (MANCOSA)
Abstract
If you deprive a person of oxygen, he will turn blue, collapse and eventually die. Deprive
economies of credit and a similar process kicks in. The South African economy has begun to
suffocateas the financial crisis has broadened and intensified. World central banks have begun
administering emergency measures, which include a round of co-ordinated interest-rate cuts on
October 8th. With some luck they will prevent catastrophe. However, it is unlikely that it will
avert a global recession.
Keywords: Economy, inflation, unemployment, distribution of income, balance of payment.
INTRODUCTION
South Africa is a middle-income, emerging market with an abundant supply of natural resources;
well-developed financial, legal, communications, energy, and transport sectors; a stock exchange
that is the 18th largest in the world; and modern infrastructure supporting a relatively efficient
distribution of goods to major urban centers throughout the region. Growth was robust from
2004 to 2007 as South Africa reaped the benefits of macroeconomic stability and a global
commodities boom but began to slow in the second half of 2007 due to an electricity crisis and
the subsequent global financial crisis' impact on commodity prices and demand. GDP fell nearly
2% in 2009 but recovered in 2010-12. Unemployment remains high, at nearly one-quarter of the
work force, and outdated infrastructure has constrained growth. Daunting economic problems
remain from the apartheid era - especially poverty, lack of economic empowerment among the
disadvantaged groups, and a shortage of public transportation. South Africa's economic policy
focuses on controlling inflation; however, the country has had significant budget deficits that
hamper its ability to deal with pressing economic problems. The current government must
contend with the impact of the global crisis and is facing growing pressure from special interest
groups to use state-owned enterprises to deliver basic services to low-income areas and to
increase job growth.
This article provides a discussion on inflation, unemployment, distribution of income and
balance of payment deficit with regards to South Africa. At the outset we must bare in mind the
main objectives which can be used to judge the performance of the economy. They are:
 Economic growth
 Full employment
 Price stability
 Balance of payment stability
 Equitable distribution of income.
When comparing the current economic situation of South Africa to these objectives, we would
be able to understand the exact situation in which our country is in. And hopefully derive some
solutions to strengthen our economy for the future generations to come.
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
INFLATION
Nature of Inflation
“Inflation is defined as a continuous and considerable rise in prices in general”(Mohr, 2008:
474).Economists use the term “inflation” to denote an ongoing rise in the general level of prices
quoted in units of money. The magnitude of inflation- the inflation rate- is usually reported as the
annualized percentage growth of some broad index of money prices (White, 2008). According to
Mohr (2008) the definition of inflation has four aspects, which have to be emphasised:
 It is a neutral definition, which allows for all possible causes of inflation to be taken into
account. It also provides a sounder basis for anti-inflation policy.
 It describes inflation as a process in which the prices of most goods and services are
increasing from year to year.
 Inflation is concerned with a considerable increase in prices.
 Inflation refers to an increase in prices in general. There is inflation only when the prices
of most goods and services in the economy are increasing. Economists therefore often
refer to inflation as increases in the general (or average) price level.
The CPI (consumer price index) is a measurement of the cost of a representative basket of
consumer goods and services. Inflation rate is the percentage change in CPI from one period to
another.
Causes of Inflation
Inflation occurs when the purchasing power of the rand shrinks to such an extent that the
nominal supply of rand’s grows faster than the real demand to hold rand’s. (White, 2008)
Inflation is a dynamic and complex process, which cannot be ascribed to a single cause. We look
at four approaches, which explain inflation. The approaches are:
-
The monetarist approach (the quantity theory of money)
The demand-pull and cost-push approach
The structuralist approach
The conflict approach
The monetarist approach says that the high rate of monetary growth causes inflation.
The Demand-pull approach inflation is a result of the aggregate demand increasing while the
aggregate supply remains unchanged.
Cost-push inflation is triggered by increases in the cost of production. Price levels are increased
when there are increases in production costs.
According to the Structuralist approach the interaction between the three interrelated set of
factors, which are the underlying factors, initiating factors and propagating factors result in the
inflation process (Mohr, 2008).
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
Addressing Inflation
Source: Quarterly Bulletin, Mar 2009
In 2000, the Minister of Finance announced that South Africa would be adopting an inflationtargeting framework for monetary policy. In consultation with the SARB, the Minister set an
initial target, which was to achieve an average inflation rate of between six and three per cent in
2002. When inflation targeting was first introduced in South Africa, the annual rate of increase in
the CPIX was about 7 per cent, which was above the target range. (Mohr, 2008: 494)
Trend Analysis: During 2004, 2005 and 2006 the CPIX was maintained within the range. In
2007 however, it breached the upper level of the target range. This was primarily a result of high
global food and crude oil prices. (Netshitenzhe, 2008)
When looking at the broad policy implications of the various approaches to inflation, we see that
Monetarists want the central bank to control inflation by controlling the rate of increase in the
money supply. They believe that if the rate of increase in the money supply is restricted to a rate
approximately equal to the growth in real output, then inflation can be avoided. The first problem
with such a policy prescription, however, is that the money supply is not controlled by the South
African Reserve bank. However, if it were possible to control the rate of increase in the quantity
of money, there is no guarantee that a restrictive monetary policy will affect only nominal
variables such as inflation. Other variables such as employment might also be affected. Another
problem is that the velocity of circulation of money is probably not as stable as the monetarists
have led us to believe (Mohr, 2008).
“In terms of the demand versus cost-push approach, the appropriate anti-inflation policy will
depend on the type of inflation being experienced. In South Africa we are currently experiencing
cost-push inflation, hence the situation is more complex. Pure cost-push inflation by definition is
already accompanied by a decline in production and income (and therefore an increase in
unemployment). If contractionary monetary and fiscal policies are applied to combat such a type
of inflation, the initial negative impact on production, income and employment will be
reinforced, pushing the economy even deeper into recession” (Mohr, 2008:492).
In theory, the appropriate solution would be to increase aggregate supply, this is illustrated by a
rightward or downward shift of the AS curve on the Philips curve. “One of the options is to
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
apply an incomes policy, while another option is to apply the policy recommendations of the
supply-side economists” (Mohr, 2008: 492).
Supply-siders call for a decrease in tax rates. The aim of this is to encourage people to save more
of their incomes, invest more and work harder. If saving is increased then interest rates would be
low, which in turn would stimulate further growth and investment. In this way the aggregate
supply of goods and services would increase. At the same time, the supply-siders also call for a
tight monetary policy to keep inflation under control (Mohr, 2008).
UNEMPLOYMENT
Nature of Unemployment
Unemployment is something, which everybody understands, but at times it seems to be quite
difficult to define and to measure. When we look at South Africa, the unemployment rate is so
high that it is the most serious social and economic problem facing the country (Mohr, 2008).
According to Wikipedia (2009) Unemployment arises when a person is available to work and
currently seeking a job, but the person cannot get a job. The prevalence of unemployment is
measured using the unemployment rate. The unemployment rate is the percentage of those in the
labour force who are unemployed.
There are many causes, which contribute to unemployment. There are different policies from the
different schools of economic thought, which address unemployment. Monetarists believe that to
increase employment in the long run, it is important to control inflation to facilitate growth and
investment. Keynesians on the other hand manipulate aggregate demand by smoothing out
business cycles.
Types of Unemployment
“There are various types of unemployment. The most basic distinction is between voluntary and
involuntary unemployment, but this classification can be questioned. Economists usually
distinguish between frictional unemployment, seasonal unemployment, structural unemployment
and cyclical unemployment” (Mohr, 2008:499).
According to Wikipedia (2009):
 Frictional unemployment occurs when a person moves from one job to another. During
this period, when he is searching for a job, he is experiencing frictional unemployment.
 Structural unemployment is caused by a mismatch between potential workers and jobs
offered by employers. This may apply to skills, geographical location and many other
factors.
 Seasonal unemployment occurs when there are no jobs for workers during certain
seasons.
 Cyclical or Keynesian unemployment, also known as demand deficient unemployment,
arises when there is not enough aggregate demand in the economy. This is usually caused
by a business cycle recession or wages not falling to meet the equilibrium rate.
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
Addressing Unemployment
Source: Quarterly Bulletin, Mar 2009
Trend Analysis: As the number of jobs created started to outstrip the growth of the labour force,
the rate of unemployment began to fall from 2003 onwards. We note however that South
Africa’s labour force participation rate is 56.5%, which is well below the rate of other
comparable countries, which average 65% (Netshitenzhe, 2008)
During the past two decades in South Africa, both the supply side of the labour market and the
demand side of the labour market contributed to the rapid increase in the unemployment rate. In
a stagnating and declining economy, there were few new job opportunities for the large number
of workers entering the labour market each year. “South Africa’s unemployment problem
therefore stems from both a rapid increase in the supply of labour and a constant, slowly growing
or declining demand for labour” (Mohr, 2008:500). If we can limit the supply of labour and
stimulate the demand for labour then we have a good chance of combating Unemployment.
One of the causes of unemployment on the supply side is rapid growth of the population.
Therefore to curb unemployment, steps could be taken to limit population growth. However, this
is at best a long-term strategy. When implementing a strategy, it is wise to include policies to
improve the quality of labour, for example through education and training.
If we consider the demand side, employment opportunities can be created if the aggregate
demand of goods and services is raised, and the labour intensity of production is increased. “If
more goods and services have been produced, more job opportunities will be created and the
greater the labour intensity of production, the more favourable the ratio between the growth in
output and the growth in labour demand will be” (Mohr, 2008:501).
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
DISTRIBUTION OF INCOME
Nature of Distribution of Income
“The distribution of income lies at the heart of an enduring issue in political economy- the extent
to which government should redistribute income from those with more income to those with
less” (Levy, 2008:1).
According to Wikipedia (2009), in economics, income distribution explains how a nation’s total
economy is distributed among its population. Economic theory and policy concerns such as the
relationship between inequality and economic growth have always been a central concern. The
Lorenz curve is used to represent the distribution of income within a community. It is closely
associated with measures of income inequality, such as the Gini coefficient. The Gini coefficient
measures the inequality as a proportion of its theoretical maximum. It can range from 0 (no
inequality) to 1 (complete inequality) (Netshitenzhel, 2008).
Addressing Distribution of Income
Trend Analysis: The Gini coefficient shows the level of income inequality. Due to higher
economic growth, inequality seems to have deteriorated somewhat. The income of all sectors has
improved, and the richer segment of society seems to have improved at a faster rate. In contrast
to the rising inequality in the Coloured population, inequality within the African population has
declined since 2000 (Netshitenzhe, 2008).
“In South Africa, poverty and unemployment are inextricably linked. According to Statistics
South Africa, the number of unemployed individuals in 2005 was considered to be over 8 million
persons if you subscribe to the expanded definition of unemployment. Overall, inequality is
widening as a result of the unemployment crisis” (Triegaardt, 2008:1).
From 1996 to 2006, there has actually been a slight rise in inequality in South Africa as a whole
(the Gini increased from 0.60 to 0.64). Within race groups, there was an increase in inequalities
among black South Africans from 0.53 to 0.64; among coloureds from 0.48 to 0.56; and for
Indian South Africans from 0.47 to 0.50. The only race group where inequality has declined in
post-apartheid South Africa is for whites, where the Gini declined slightly from 0.45 to 0.44
(Triegaardt, 2008).
In an economy where there’s a free market, unequal distribution of income tends to occur. The
structure of demand is determined by the distribution of income. We find that there are various
causes of income inequality. However, we must bare in mind that an absolute equal distribution
of income is, of course, unattainable in a market-based economic system. In fact, it is not
advisable, as it is highly unlikely that everyone will make the same contribution to production. A
link between reward (or remuneration) and effort (or contribution) should always be present in a
well- functioning economic system (Mohr, 2008).
One measure that the government should consider implementing is progressive income taxation.
Basically this measure would mean that the higher the income which a person earns a month, the
higher his taxes would be. These taxes could be used to provide free or subsidised services for
the poorer citizens of South Africa, for example medical or primary health care. Another way to
reduce inequality is to promote factor mobility, through education, training and assisting people
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
to help them-selves. Rather than using taxes to redistribute income, the best solution would be to
create equal opportunities for everyone (Mohr, 2008: 348).
Balance of Payment Deficit
Nature of Balance of Payment
According to Wikipedia (2009) “In economics, the balance of payment measures the payments
that flow between any individual country and all other countries. It is used to summarise all
international economic transactions for that country during a specific time period, usually a year.
The balance of payment is determined by the country’s exports and imports of goods, services,
and financial capital, as well as financial transfers. It reflects all payments and liabilities to
foreigners (debits) and all payments and obligations received from foreigners (credits). Balance
of payment is one of the major indicators of a country’s status in international trade, with net
capital outflow.” Foreign assets and flows are valued at the exchange rate, at the time when the
transaction is done.
Balance of Payment Deficit in South Africa
South Africa no longer needs to feel sheepish about a deficit on the current account of its balance
of payments. Because at present, even Japan has a deficit on its current account, of its balance of
payments. “Its current account fell into deficit in January, for the first time since 1996, as the fall
in global demand hit its export dependent economy. Japan had current account surpluses for
most of the past 30 years, because it saved more than it invested, produced more than it
consumed. But the turn of the balance of payments tide is another symptom of just how much the
world has changed as the crisis in financial and real economies has deepened” (Business Day,
2009:1).
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
Source: Quarterly Bulletin, Mar 2009
Trend Analysis: The current account balance has deteriorated progressively since 2003,
reflecting in part movements in the trade balance. In the tradable goods sector, exports suffered
from the relatively slow growth of productivity. Since 2004, the current account deficit increased
because of a rising demand for imports, fuelled by high consumer spending and fixed capital
investment, while exports lagged, this increase of the current account deficit was due to the
economy’s growth rate, which exceeded 4% per annum. As a result of the investment boom,
imports of capital goods have also contributed to the current account deficit. In 2006 the deficit
reached 6.5% of GDP and widened further in 2007 to 7.3% of GDP (Netshitenzhe, 2008).
As the credit crunch cuts financing for importers and exporters, World trade is shrinking rapidly.
According to latest data, the volume of merchandise trade showed to be falling at an annual rate
of 22% in the fourth quarter. Although world leaders are cautioning against protectionism, there
is a big chance that political pressure will bring at least some protectionist measures in advanced
economies (Business Day, 2009).
South Africa has already seen its trade deficit balloon to a record R17, 4bn in January.
Commodity and vehicle exports have plunged, but despite the economic slowdown imports
haven’t fallen nearly as fast. Because imports are required for infrastructure investments, it is
unlikely that imports will slow down this year. However the outlook for exports is not good,
especially since it now seems recovery in the advanced economies could take much longer than
it was anticipated (Business Day, 2009).
“Fortunately, the trade deficit is only part of the broader current account deficit, which also
includes dividends and interest to foreign holders of South African assets as well as transfers to
neighbouring countries under the Southern African Customs Union agreement. Those transfers
have been running at as much 1% of gross domestic product, and as our imports decline they
should come down. So too will dividend payments, because cash-strapped companies are paying
out a lot less to shareholders, if they pay dividends at all” (Business Day, 2009:1).
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
South Africa’s current account deficit, which hit an estimated 8% for last year, should come
down into the 6% range for the next couple of years.But that still leaves the economy very
dependent on foreign inflows. And when we consider that we are living in a world in which
those flows are uncertain and volatile, it’s time not only to look to further belt tightening, but
also to policies that will encourage every bit of foreign capital we can get. However, trying to
come up with a policy to address this is not only difficult, but also a long-term solution (Business
Day, 2009).
Policymakers are confronted with a dilemma. Any measures that they take to raise the level of
production and income will increase the deficit on the current account of the balance of
payments. “The dilemma can be resolved if the current account deficits is financed by net
inflows of foreign capital, that is, by surpluses on the financial account of the balance of
payments. However, South Africa cannot always rely on such inflows and therefore has to
maintain some sort of a balance between imports and exports” (Mohr, 2008: 467).
Current World Economic Turmoil
“Since the fall of 2008, with the decline in financial markets, the collapse of the housing industry
in the United States, and the loss of millions of jobs and small businesses, the politicians in the
Western capitalist states and Japan have sought to remedy the problem through measures aimed
at bailing out the same banks and corporations that are responsible for the meltdown. With the
situation reaching critical proportion in the US, and other industrialized states, the impact of the
economic crisis is becoming more apparent in the so-called developing countries, particularly the
African continent” (Abayomi, 2009:1).
During the past year, headlines about the global financial crisis have regularly made the front
pages of international newspapers. During this time, Europe and the US have come to realize that
corporations are facing the worst economic crisis since the 1929 crash. In South Africa, however,
articles on the global crisis have been few, and tended to be relegated to the back pages of the
newspapers. This is because during the last 17 months, the Reserve Bank Governor, the Finance
Minister, economic journalists and analysts, have all assured the South African public that our
country will remain largely unaffected by the crisis. Reason been, South African banks were
apparently not exposed to the US sub-prime loan market.
“Indeed, in the mist of the crisis, South African mainstream economic analysts have simply
continued to drum on about the supposed innate virtue of unfettered free market fundamentalism.
It is this unflinching faith in the “free” market that has totally blinded them to the reality that
South Africa won’t remain unaffected” (Hattingh, 2008:1). The reality is that because every
single economy in the world is interconnected, through the spread of neo-liberal globalization,
every single economy in the world will be affected in some way or another (Hattingh, 2008).
“Undoubtedly, 2008 would go down in history as the time that the bottom basically fell out of
the international financial market” (Schwartz, 2009:1).
South Africa has proven itself to be a force to be reckoned with during the past 14 years both
politically and economically. Inroads that have been made are been threatened by current
financial pressures and political developments in the country. Failure would result in terrible
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
consequences for the region. Although South Africa has its economic prowess and its influential
status, it still has its own internal challenges. These challenges include unreasonably high-levels
of poverty, unemployment and violence. With elections looming in a matter of days, there is a
degree of political influx (Schwartz, 2009).
In the 2009 budget, South Africa has however tried to respond to the challenges brought about
by the crisis as well as meets its political mandate. For instance, it has built in personal income
tax relief and savings incentives as well as providing a sizable amount for infrastructure
spending.
For South Africa to emerge from this economic crisis stronger and globally more competitive, it
would require a series of microeconomic reforms that included growing the economy more
rapidly, creating more jobs and reducing inequality. It should aim to reach the macroeconomic
objectives of the economy.
CONCLUSION
It has yet to be seen whether what has been provided is enough to stem the tide of recession in
South Africa. With increasing regional obligations and relatively high migrant population,
recession in South Africa would be devastating to the entire Southern African region.Over the
medium-term period, the government’s fiscal stance should provide for sustained growth in
public expenditure. This will cushion the economy and reinforce the social safety net for the
poor, while also ensuring that debt incurred to finance the country’s priorities is kept at
sustainable levels. The central goals of economic policy should remain firmly geared towards
accelerating growth and job creation, thereby reducing unemployment, broadening economic
participation and reducing poverty. However, this would be quite a challenge for South Africa
and the Southern African region.
International journal of Innovative Research in Management
ISSN 2319 – 6912
(December 2013, issue 2 volume 12)
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