The formal economy of South Africa started with the arrival of the Dutch in 1652. As the Dutch colony increased in size some of the colonists were set free to pursue commercial farming leading to the dominance of Agriculture in the economy. Then at the end of the 18th century when the British came, farming spread deeper into the inner Mainlands.
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Then in 1870 diamonds were discovered in Kimberly, and worlds largest gold deposits were seen in Witwatersrand making the economy as the resource dominated one. The country also entered into a period of industrialization during this time including the organization of the first South African trade unions. The government soon started putting laws distinguishing between different races. In 1948 the National Party won the national elections and the started implementing even stricter race based policy named Apartheid, thus dividing the economy into a privileged white one and an impoverished black one.
It was estimated that in the 1980s the government of republic of South Africa owned 40% of the physical capital of the economy. The government also set prices and enforced regulations. The name of the economic system in South Africa under the National Party was called Corporatism. Corporatism means private ownership with extensive public regulations.
For the last 2 decades (1980 onwards) privatization has been an important issue for the South African economy. The move towards privatization was prompted by several factors such as:
The state enterprises were suffering losses that had to be covered from government revenues.
The revenue from the private sector would alleviate the government shortage of funds.
The new government in 1994 refrained from resorting to economic populism. Inflation was brought down, public finances were stabilized and some foreign capital was attracted. However the growth at that time was still below level. At the start of 2000 the president of South Africa vowed to promote economic growth by stepping up the pace of privatization and cutting down unwanted government spending. From 2004 onwards the economic growth picked up significantly and both employment and capital formation increased.
So in all the South African economy can be divided into 8 main periods. They are:
From 1910-1922: when British influence dominated in economic and political terms and a racially segregated community was formed.
From 1922-1933: The era of economic nationalism
From 1933-1948: Dominance of English power and birth of industrialization with less government interference.
From 1948-1960: The period of Afrikaner ascendancy (Afrikaners were the descendants of the Dutch and German settlers)
From 1960-1973: Black urbanization became important and attempts were made to impart more institutional force to Apartheid.
From 1973-1984: Industrialization and realization that the racial policy was damaging the country.
From 1984-1994: transitions where economic growth decreased mainly due to economic sanctions placed on South Africa by many countries.
1994 onwards: Apartheid ended and democratic elections were held. The new government elected initiated economic reforms to establish South Africa as a more dynamic and internationally competitive economy.
GROSS DOMESTIC PRODUCT
After World War II when manufacturing industry began to grow as the biggest contributor to the GDP and the overall economic growth in the 1960 rivaled that of Japan averaging about 6.9% per year in real terms.
In 1970 however both agriculture and manufacturing industry stagnated and the service sector (especially insurance industry, financial services and transport services) became the fastest growing sectors.
The price of gold was allowed to float in the 1970s and by the end of the decade the high prices of gold and other export commodities led to a brief recovery in economic growth.
Mining still continued to be important because of minerals like gold which dominated exports. So when the importance of gold in GPD declined, it still continued to affect the balance of payments.
Economic growth slowed in 1970s because of declining gold prices and gold revenues and rising prices of oil imports.
Severe droughts hit in 1980s affected the agricultural output. Then the erratic changes in gold prices led to a series of boom and busts, reducing average annual GDP to only 1.5%
National economic stagnation continued in the 1990s and GDP declined further in 1991 and 1992. In 1993 private consumption accounted for 57% of the GDP in 1993 representing a minimal increase (0.4%) over 1992.
The recovery strengthened in 1994 where GDP represented a 2.6% real growth over 1993. Per capita GDP averaged about US$ 3010 placing South Africa in upper income developing countries.
For many rural families in South Africa informal activities are the major source of household income hence GDP measurements were adjusted upward by 5.6% to include a modest estimate of output from the informal sector.
Annual GDP growth between 2004 and 2007 averaged 5% but fell to 3.7% in 2008 because of higher interest rates.
After 2008 the GDP contracted and the economy plunged into recession. This contraction continued into the first and second quarters of 2009 with GDP growth at -6.4% and -3% respectively.
In 1960s average annual inflation was about 3%. In line with the worlds trend it rose above 10% in 1974 and fluctuated between 11 to 14% in the early 1980s
Inflation reached a high of 18.6% in 1986 forcing a depreciation of rand and it continued to be high thereafter.
The erratic price of oil ( a crucial import bought on black market due to the OPEC sanctions) provided a continuous inflationary pressure.
Inflation continued to be high in early 1990s but it declined to 9.1% in 1995. This lower rate was due to decline in food prices, the relative stability of rand, and the lowering of import tariffs.
A new constitution approved in 1993 followed by a plea by African National President Nelson Mandela for foreign nations to lift sanctions led to a pledge of US$ 850 million in economic aid by the International Monetary Funds (IMF). This gave a signal to the foreign investors that South Africa was a safe place to invest and thus opening way to the current economic era.
There has been a long term transition from a production based on agriculture economy to a production based on industries. Consumer spending pattern changed from spending on basic goods to diverse and luxury items. Its vast mineral resources and natural assets have contributed to increase in the economic growth.
Mining has been one of the main driving force behind the development of South Africa. The mining industry in South Africa continues to play a strategic role in the country’s economic growth and development and in 2004 accounted for 6.6 percent of the gross domestic product (GDP). However, if the indirect multiply effects of the industry i.e. backward linkages such as transport and professional services and forward linkages such as power generation, among others are added to this the industry’s contribution is closer to 16 percent. In the same year the industry was a substantial foreign exchange earner representing 29.3 percent of the country’s total merchandise exports, contributing an approximated R90.3-billion to SA’s exports. It is the fifth largest contributor to the GDP.
However, due to the global recession, the mining industry experienced a series of disastrous events, such as a fall in commodity prices and consumer demand. This led to production cuts and cutbacks on major projects. Mining production fell alarmingly in 2009 after the highs of January 2005.The turnaround for this industry has been attributed to a gradual rise in oil and commodity prices worldwide, weakening of the US dollar, and the resurgence of the Chinese economy.
With expansion of manufacturing and mining industry, the share of Agriculture in GDP has fallen from 20% in 1930 to 3% in 2009.Due to diverse climate, terrain and ecology almost all kinds of food crops are cultivated in South Africa. The agriculture sector provides for most domestic needs, and South Africa exports corn (maize), wool, sugar, peanuts (groundnuts), tobacco, and other farm products.
The challenges which lie ahead in this sector pertain to the land reform policy of the Government. The South African Government has set a target of transferring 30% of productive farmland from whites to ‘previously disadvantaged’ blacks by 2014. This can lead to a similar situation currently in Zimbabwe where the whites have stopped producing due to uncertainty and the whole economy has gone for a toss because of hyper inflation.
The share of manufacturing is around 30% in the GDP and with continuing relationship building with the Government of China there is going to be increased investment in this sector.
Out of this the automotive industry is one of South Africa’s most important sectors, with many of the major multinationals using South Africa to source components and assemble vehicles for both the local and international markets.
Despite its distance from some of the major markets South Africa produces high quality products at prices competitive with other automotive manufacturing and assembly centers. Vehicle manufacturers such as BMW, Ford, Volkswagen, Daimler-Chrysler and Toyota have production plants in the country, while component manufacturers (Arvin Exhust, Bloxwitch, Corning, Senior Flexonics) have established production bases in the country.
The South African automotive industry accounts for about 10% of South Africa’s manufacturing exports, contributes 7.5% to the country’s GDP and employs around 36,000 people. Vehicle exports were in the region of 170,000 units in 2007, exported mainly to Japan (about 29% of the value of total exports), Australia (20%), the UK (12%) and the US (11%). South Africa also exported ZAR 30.3 billion worth of auto components in 2006.
The outlook for the vehicle industry is bright in terms of both exports and the domestic market. A key challenge will be to raise local content, particularly in the vehicles now being exported in large volumes.
The other major industry is the ICT & Electronics which can be divided into three sub sectors:
Telecommunication, Electronics and Information Technology
The telecommunications industry is thriving contributing more than 7% to South Africa’s gross domestic product (GDP). With approximately 5.5 million installed fixed-line telephones, South Africa is ranked 23rd in telecommunications development in the world and represents more than 30% of the total lines installed in South Africa.
Growing at a rate of 50% per year and fourth fastest growing cell phone market in the world the South African GSM cell phone market has three operators: Vodacom, MTN and Cell-C. Some of the worlds leading telecommunication brands like Siemens, Alcatel, SBC Communications, Telecom Malaysia, Cell C and Vodafone have made significant investments in the country. Investment opportunities lie in the development of access control systems and security equipment, automotive electronic subsystems, systems and software development in the banking and financial services sector, silicon processing for fiber optics, integrated circuits and solar cells. There are also significant opportunities for the export of hardware and associated services as well as software and peripherals.
It contributes 65% of the total GDP. Financial sector and tourism play a major role in this sector.
South Africa’s financial services sector backed by a sound regulatory and legal framework is superb, boasting dozens of domestic and foreign institutions providing a full range of services – commercial, retail and merchant banking, mortgage lending, insurance and investment.
South Africa’s banking sector compares favorably with those of industrialized countries. Foreign banks are well represented and electronic banking facilities are extensive, with a nationwide network of automatic teller machines (ATMs) and internet banking facilities available
South Africa’s natural beauty, magnificent outdoor life, good climate and cultural diversity have made the country an ideal destination for foreign tourists. International travel to South Africa has increased manifold since the ban on apartheid policies in the early 1990s.Revenue equaling between 1% and 3% of GDP is generated by the tourism industry. South Africa’s sports tourism sector has blossomed in recent times. Due to numerous sporting tournaments like the 1995 Rugby World Cup, the 2003 Cricket World Cup, the inaugural World Twenty20 Cricket Championships in 2007,IPL in 2008 and the FIFA World Cup in 2010 which alone led to an increase in 0.5% of GDP.
III. ECONOMIC DEVELOPMENT, UNEMPLOYMENT AND INFLATION MANAGEMENT
By: SAINYAM KUMAR-10BSPHH010668
Before talking about the present unemployment in South Africa, a glimpse of employment patterns of the past is very important. The major shift from the agrarian sector took place with the discovery of diamond and gold mines in the Cape district and infusion of foreign capital into the economy. The peasants had little interest in mining activities and thus there was a shortage of labor and to curb it, the tax laws were changed so that people start shifting to the mining activities to get money to pay taxes but the rush of black peasants meant higher costs for the companies as most of them were unskilled laborers. A consequent conflict with the white workers and forcing of white peasants to be landless led to a clear clash between the blacks and the whites and it increased to such an extent that a report on ‘Commission on the Poor White Problem in South Africa’ laid the grounds for formalized racial discrimination. The domination of white continued till 1990s before Nelson Mandela was released from jail and African National Congress was unbanned. This was followed by black empowerment and transfer of interest from the whites to the blacks.
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Amongst all the social changes that took place, one thing remained constant i.e. high rate of unemployment. During the first three months of 2009, 179000 jobs were lost and these are the permanent jobs lost of the employees whose employers had contributed to the national unemployment fund. The number of temporary jobs lost is uncountable and in an economy where majority of households have a single breadwinner, such a number will have a ripple effect.
The lack of labor and capital in the country and availability of opportunities meant trade liberalization and opening up of the economy. Although this step led to inflow of skilled labor and a lot of investment across sectors, it increased the risk as well. The economy did not enjoy the cushion of being confined to the domestic risks. The opening up of the economy added a lot of accolades to the economy. It made surges and made sure that various stakeholders in the economy started recognizing South Africa on the world map.
The GDP rose at an average of 3% for the period of 1993-2003 and reached an astounding average of 5% for 2003-2007. Till the second quarter of 2008, the country had achieved a consecutive growth in GDP for 62 quarters. This was a result of economic stability, political reliability, resilience to external shocks and a reduced debt burden which in turn improved the rating of the country. South Africa which was rated as STABLE got promoted to GROWTH rating. The country started being tagged along with the other major developing countries although its growth rate was much less as compared to these nations (BRIC countries).
The turning point in the economy came when the economic recession hit the world in 2008. When the so called ’emerging economies’ managed to keep their GDP going in green zone, SA’s GDP plunged to reach the red area. As seen in the graph, it reached to as low as -7%.
The problems didn’t stop here. 2010 witnessed a bounce back in the country’s growth rate. The major driver for this growth was FIFA World Cup 2010 which South Africa hosted. The world witnessed a repetition of events as what happened after 2006 World Cup in Germany. German economy had a problem of money being injected into people’s pocket in the form of unilateral payments but not coming out of them. The money earned by Germans because of this mega event saw the economy get stabilized a bit. Similarly, in South Africa tourism was the sector that picked up during and after the gala event. It generated about $2 billion for the tourism industry and another $1.1 billion for the retail sector. This totaled to 1.8% of country’s GDP. (http://www.ftkmc.com/newsletter/Vol1-18-july19-2010.pdf)
Everything set and done, one problem continued to haunt the economists, the policymakers and other stakeholders, UNEMPLOYMENT. The unemployment remained as high as 25.3% for the 3rd quarter of 2010 with the sole silver lining that it has not increased since 2009 but the major increase has been due to the employment lost in the construction sector. The major gain has been in finance and this is no surprise as the banking sector of SA is said to be one of the most mature ones across the globe.
The major problem that SA faces is that it is heading a family with too many people being dependent on it. It shelters 6% of Africa’s population and they hold 50% of the continent’s purchasing power. Moreover 45% of Africa’s mineral wealth has its home in SA. South Africa is often termed as the Germany of Africa.
The impact of recession was felt on inflation rates as well. The rise in prices peaked to 13% in January 2009. This alarming rate of inflation was a set back for the government but it made sure that the rate was called back within the controlling limits pretty quickly. The correction was induced by the Government to an extent that the within one year of inception of the financial recession in 2008, the inflation was brought down to 5.9% and further down to 3.2% within two years.
As explained earlier, the major demand pick-up came during the world cup and it was ensured that the markets will have enough quantities to satisfy the customer demand rather than more demand following low supply leading to a sharp rise in the prices. Moreover, the country adopted the fiscal policy measures to ensure the smooth running of the economy and reduced its sensitivity to the world markets by cutting down the tax rates.
A very interesting step by the Reserve Bank of South Africa has been to let the Rand (SA’s currency) appreciate without any regulations. The main reason behind is that this will lead to cheaper imports, which are basically channelized towards energy and transport and other infrastructure. Another important measure by the Government to combat effects of recession from reaching out to the inflation is the three year infrastructure development program which would be worth US $ 98 billion. This project would focus on upgrading and expanding transport, increasing electricity capacity and improving the health infrastructure.
Moreover, the economy is now walking towards the path of rebuilding the local industries and de-industralization. The focus is on increasing certain tariffs (although keeping them within the WTO limits) to protect the locals. The government wants to get on the path of what it calls ‘real economy’ where the growth is a result of the economy growing because of being self-reliant rather than making strides because of foreign sector investing heavily. This might give a short run shock to the economy as their might be a moderate inflation based on the change in the tariffs but it will be very effective in the case of the long run.
We all know that it is in the hand of the policy makers to play with the interest rates and other macro economic variables in such a way that they can either increase the employment or reduce the inflation. But from the political point of view, inflation affects the economy at a larger scale as compared to the unemployment which comparitively affects a smaller portion. This is the reason that from the political point of view curbing inflation gets the priority as compared to reduction in unemployment.
IV. SOUTH AFRICA: THE EXTERNAL SECTOR
BY: G.V. SHRIKANT- 10BSPHH010253
The external sector of the economy implies to the international transactions that all residents of the country (the public sector, government and the private sector) conduct with the rest of the world. Such transactions are systematically recorded in detail within a framework that groups them into accounts, where each account represents a separate economic process or phenomenon of the external sector (the National Financial Accounts). The external accounts form part of an integrated system of statistics of the economy, and thus all definitions, classifications and accounting rules must be harmonized so that external sector aggregates can be compared and summed with other macroeconomic data, such as those of national accounts, monetary statistics and government statistics. In this section we evaluate and analyze the external sector of the South African economy and to draw meaningful conclusions from it.
There are 4 main parts to the external environment of an economy viz.,
The Balance of Payments and the Balance of Trade.
The Net flow of funds
The National Financial Account (in case of South Africa)
The balance of trade and balance of payments show the NET TRADE of the economy. The difference in value over a period of time of a country’s imports and exports of merchandise is the Balance of Trade.
A Balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country’s exports and imports of goods, services, and financial capital, as well as financial transfers. Precisely in case of South Africa the National Financial Account is synonymous to Balance of payments. So let’s drive deeper in South Africa’s external sector.
Currency Management and the Exchange Rates.
African countries have since the collapse of the generalized fixed exchange rate regime and the adoption of a generalized floating system by the industrialized countries in 1973, experimented with various types of exchange rate arrangements, ranging from a peg to a single currency, weighted currency basket, managed floating, independently floating exchange rate system and monetary zone arrangements, such as the CFA Franc Zone and the Common Monetary Area (CMA) of Southern Africa. The experiences of various African countries with exchange rate arrangements and management have, therefore, been diverse and varied as these countries have sought to find an “optimal and sustainable” exchange rate regime. Indeed, exchange rate management and determining an optimal and sustainable exchange rate arrangement have been some of the policy challenges facing many monetary authorities in African countries.(source: Wikipedia)
The South African currency
The South African Reserve Bank Act number 90 of 1989 governs currency management by the South African Reserve Bank. Currency management includes the following functions:
The issuance of bank notes and coins.
Managing the quality of bank notes and coins in circulation.
Managing public awareness and measures for fraud prevention.
As the law governing the currency notes and the currency management system, the Government has given the South African Reserve Bank the sole right to issue banknotes and coin in the country. However, all new designs of banknotes and coin must have the prior approval of the Government before it is placed into circulation. The Government also decides on the denominations that should be introduced or removed from circulation based on recommendations received from the South African Reserve Bank. The South African Reserve Bank must ensure that sufficient new banknotes and coin are available to replace banknotes, which are removed from circulation due to soil levels. The South African Reserve Bank calculates the country’s new banknote and coin requirements on an annual basis. The South African Reserve Bank places new banknotes and coin into circulation on an ongoing basis. New banknotes are automatically issued by the South African Reserve Bank’s branches. Orders for new coin are placed with the Bank’s Head Office by the national specie committee, which is appointed by the commercial banks. The value of banknotes and coin in circulation can be obtained from the Bank’s statement of assets and liabilities.
The currency of South Africa consists of banknotes & coin and is denoted in Rand (R) and Cents (c). It is managed by the South African Reserve Bank as prescribed in schedule 2 of the South African Reserve Bank Act no 90 of 1989. The following denominations are utilized:
Bank Notes: R200, R100, R50, R20, R10, R5, R2, R1
Coins: 50c, 20c, 10c, 5c, 2c, 1c. (http://www.reservebank.co.za/internet/publication.nsf/0/18735B8165B1846042256C14004A1EAD?opendocument)
THE EXCHANGE RATES
Exchange rates in Africa reflect the trends and the behavior made at the time of independence as well as more recent trends in exchange rate regimes of developing countries. Exchange rate pegging in many cases evolved over time into flexible exchange rates. That development was
given a further boost by the stabilization and liberalization programmes in the 1980s and 1990s. Former colonies of France constitute a core group in the CFA franc zone of western and central Africa, which is composed of two currency unions with a hard external peg to the euro,
Underpinned by the French authorities. Few neighboring countries of South Africa are part of the Rand zone, where national currencies are exchanged at par with the Rand and the currency circulates extensively inside their borders. Several countries in Africa operate pegged
exchange rate regimes of the more traditional type.
The Balance of trade and The Balance of Payments:
South Africa’s current Account deficit in the recent years has increased to potentially alarming proportions thrown into sharp dent by the Global Financial crisis. South Africa reported a trade deficit equivalent to 3.2 Billion ZAR in October of 2010. South Africa has rich mineral resources. It is the world’s major exporter of gold, platinum, coal and diamonds. South Africa imports mainly machinery, foodstuffs, equipment, chemicals, petroleum products and scientific instruments. Its major trading partners are: European Union (U.K. Germany, Italy, Belgium), The United States, China, and Japan.
Introduction- In order to attract a whole lot of foreign investments and encouraging long term domestic investments, South Africa thought of maintaining a fair amount of credibility and a good reputation in macro policy. In the year 2000 an inflation targeting framework of Monetary Policy was introduced in South Africa which improved the credibility and effectiveness of macro- economic policy.
Monetary policy regimes prior to inflation targeting- Since the 1960s, there have been three broad monetary policy regimes.
The first regime was a liquid asset ratio-based system with focus on quantitative controls on interest rates and credit.
From the early 1980s initiatives got started towards a cash reserves-based system. Under the cash reserves system, the SARB.s discount rate influenced the cost of overnight collateralized lending and hence market interest rates. The supply of credit was influenced by open market operations and various other policies acting on overall liquidity.
A third type of monetary step was introduced from March 1998, with the repurchase (repo) interest rate being determined by market forces in daily tenders of liquidity through repurchase transactions.
Inflation targets-The adoption of inflation targeting in 2000 aimed to enhance policy transparency, accountability. Currently, the inflation target aims to achieve a rate of increase in the overall consumer price index, excluding the mortgage interest cost (the so-calledCPIX), of between 3 and 6 percent per year. CPIX is defined for metropolitan and urban areas and has a wider coverage of households (80 percent) than CPI (metropolitan), with only 40 percent coverage.
Transparency, credibility and predictability of monetary policy-The advance economic thinking suggest that greater transparency of policy may also influence the effectiveness of monetary policy. Anchoring agents, inflationary expectations around a credible target facilitates a more moderate approach to shocks by the central bank as agents will discount short-term volatility. By increasing the predictability of interest rate policy, market interest rate volatility is reduced, lowering uncertainty in the economy of South Africa.
Has monetary policy become more credible in South Africa?-If economic agents believe that the central bank will achieve its inflation target, their inflation expectations are more likely to be anchored around the inflation target, and price and wage setting will be far less responsive to temporary fluctuations in inflation, creating stability. The cost of expectations of not being anchored to the target is that a more aggressive monetary policy may be required to gain credibility for the central bank in its price stabilizing goal.2
Currently in South Africa, keeping high interest rates is not good for the growth of small and viable businesses. According to Afripol (Africa Political and Economic Strategic Center) High interest rate make it difficult for an economy to flourish. So they thought that cutting of interest rate can stimulate economic activities and can help to regenerate economic growth in South Africa in era of global recession, ultimately setting the climate for job creation that is badly needed in the country. A way lower interest rate may certainly encourage more borrowing but more spending and as we know easy money have its downside too. Excessive liquidity may trigger inflationary trends and higher inflation that may retard economic growth that comes with higher unemployment and even weaker rand.3
FISCAL POLICY- As actual budget balances reflect both cyclical developments and discretionary measures, they are not very useful when we wish to assess the orientation of underlying fiscal policy and possible structural imbalances in the budget balance. The influence of fluctuations in economic growth on the government’s budget balance can be examined by decomposing the actual budget into a cyclical and a structural or cyclically adjusted component.
The first component shows the effect of cyclical fluctuations on the government budget in economic activity.
The latter reflects what the budget balance would be if economic activity were at its trend level.
In South Africa Fiscal policy can help to stabilize the economy through the operation of automatic stabilizers. Government balances tend to rise when ou