Download Government Expenditures to Lead Long

SOUTH AFRICA
Government Expenditures to Lead Long-Run Economic Improvement
Nicole Lusignan & Ben Taylor
Summary
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Background on South Africa’s Economy
Unemployment Problem
Current Account Deficit Problem
Exchange Rate Depreciation Problem
Recommendation: Expand Fiscally
Short-Run Results from Fiscal Expansion
Long-Run Results from Expansion Plan
Implications for South Africa
South Africa’s Economy
• Positives:
– 4% GDP growth over last 3 years
– Decreasing inflation
– Increasing investment
– Public debt decreased by 50% since 1999
– Liberalized trade and increased consumption
– Steady interest rates
South Africa’s Economy
• Negatives:
– Booming current account deficit
– High unemployment rates
– AIDS epidemic stunting productivity
– South African currency – the rand – is depreciating
– Major socioeconomic disparities
– Lacking in infrastructure and social services
– In the 3rd (worst-off) zone of economic discomfort
Unemployment Problem
• 40% of South Africans are unemployed, up 9% over
last decade
• Joblessness attributed to AIDS epidemic, lack of
education, high crime rate, low productivity, and
powerful labor unions
• Lack of jobs and productivity has led to a cycle of
deepening unemployment due to lack of new
investment
• Trend has been improving slightly very recently
• South Africa is likely not at its full employment level
of output due to such high unemployment
Unemployment in South Africa (1993-2005)
45
40
35
% Unempl
30
25
Broad Definition
20
Narrow Definition
15
10
5
0
1992
1994
1996
1998
2000
Year
S o urc e : C S A E
2002
2004
2006
Current Account Deficit Problem
• In 2002, there was small current account surplus
• Since then, it has become negative and exploded in
magnitude, going from $0.884 billion to -$15.5 billion
in 5 years
• Deficits have grown in all current account
components: goods, services, transfers and income
balances
• CA Deficit is now 6% of GDP and is a definite
problem due to the unemployment and monetary
depreciation problems
South Africa Current Account Balance in Dollars
2,000.00
0.00
2000
-2,000.00
2001
2002
2003
2004
2005
2006
2007
-4,000.00
CA ($)
-6,000.00
-8,000.00
Series1
-10,000.00
-12,000.00
-14,000.00
-16,000.00
-18,000.00
Year
S o urc e : E c o no m is t Int e llige nc e Unit
Exchange Rate Depreciation
• South African Rand has free-floating exchange rate
• Appreciated steadily from 2002-2006 after large
depreciation due to Argentina crisis
• Fall dramatically in mid-2006 due to global currency
sell-off due to US monetary contraction
• Has continued to depreciate and is projected to
continue depreciation through 2011
• Vulnerability of rand has also increased to due freefloating rand and continually exploding current
account deficit
Exchange Rate in South Africa (2001-2011, projected)
Nominal Exchange Rate, Rand:$
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2000
2002
2004
2006
2008
Year
So urce: Eco no mist Int elligence Unit
2010
2012
Expansionary Fiscal Policy: SR
• Fiscal expansion will be long run investment in the
country’s productivity by adding infrastructure and
social services
• In SR, an increase in G would theoretically increase Y
and shift the DD curve outward, causing increased
output and appreciation of the rand
• However, due to the huge current account deficit, it
will likely counteract the fiscal expansion in the short
run and actually cause the DD curve to shift backward,
decreasing output and depreciating the rand further
• Investment from increase in G will still start to slowly
increase productivity and joblessness and even
indirectly curb the current account deficit
Exchange Rate, E
SR: AA-DD Model with DD pushed back due to CA deficit
DD'
DD''
AA'
Output, Y
Expansionary Fiscal Policy: LR
• Over time, the repeated increases in G will overtake the
current account deficit (that may be decreasing too)
• DD curve will shift out in small increments over the long
run until full employment is reached
• At this point, unemployment will be lower, the rand
appreciated, output increased and perhaps even an
indirect decrease in current account deficit
• At the very least, the economy will be in far better
shape, be more productive and attract more investment
– and be less negatively affected by a current account
deficit
Long Run Success Plan: Increase Y, Appreciate Rand and Attain Full Employment
Exchange Rate, E
AA'
DD'
DD''
DD'''
DD''''
DD'''''
Full
Employment
Level of Output
Output, Y
DD''''''
In Conclusion
• While it will take a very long time for the
investment now to have a serious impact, a
commitment to these policies should lead to
our expected results and more economic
prosperity in South Africa
• Especially because in the alternative,
unemployment and the exchange rate may
continue to worsen South Africa and make the
country at high risk for economic crisis
SOUTH AFRICA
Government Expenditures to Lead Long-Run Economic Improvement
The End