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Introduction
South Africa’s economy has been considerably affected by the drastic conditions of the global crisis. The country’s economic processes are insignificant for now, given the apparent slump and recession indicators. Hence, it would be relevant to discuss the current economy’s state of the country. Below, three main macroeconomic problems of South Africa, the influencing factors, tools that the South African Reserve Bank could employ to deal with the situation, and possible governmental beneficial policies will be explored.
Three Crucial Macroeconomic Problems
It is not just that international financial speculators view South Africa as one of the emerging markets and that investments in this country are subject to general cyclical changes. They are inherent in capital flows to developing countries – with corresponding implications for the dynamics of exchange rates. For a number of reasons, the rand is particularly volatile and vulnerable to such market fluctuations. The movement of its course is traditionally perceived by analysts as an indicator of the attitude of investors not only to emerging markets but also to the state of the world economy as a whole (Vadra, 2017). It usually happened that if the situation in it improved, then investors bought rand instruments, and in case of negative changes, they got rid of these assets.
The decline in the real effective rate of the rand in the 2010s was significant. If the devaluation of the rand caused by the opportunistic outflow of foreign capital only compensated for its previous reinforcement, then such, albeit painful, the correction could only benefit the South African economy and, mainly, its export sector. But against the background of monetary and financial instability in the national economy, a whole range of vulnerability factors emerged, which, in turn, increased the amplitude of fluctuations in the rand exchange rate.
Here, it should be noted the second most acute problem for South Africa, directly related to the above. The capital outflow has made the problem of financing the current account deficit more urgent. In the years of excess liquidity in the world economy, investors could not pay special attention to this chronic weakness of the South African economy. Then, with the beginning of monetary tightening, it became an additional argument in favor of withdrawing funds from local financial markets. Meanwhile, the current account deficit, which decreased in 2009–2010. Under the influence of the crisis contraction of domestic demand for imports and the rise in prices for raw materials exported goods, since 2011, it began to grow again. Its increase was initially promoted by the stagnation of export deliveries from South Africa to the crisis-ridden eurozone countries (Gumede, 2015). China, which has already become the main foreign sales market for South Africa, has become more and more evident, has slowed down the rate of economic growth. This affected the actual supply of raw materials from South Africa to the Middle Kingdom, the prices of raw materials in world markets in general and, accordingly, the incomes of South African exporting companies.
The third most visible and important macroeconomic problem for South Africa is the steady downward trend in GDP. World crisis 2008-2009 put an end to 17 years of continuous economic growth in South Africa. The rate of growth of the country’s GDP in 1994-2001 averaged 2.9% per year, and in 2002-2009, they increased to 4.5% (OECD, 2010). But by the end of the 2000s, the weakening of economic dynamics was objectively overdue. Households have accumulated significant debt on loans, and the expansion of consumer demand could not help but slow down. A gradual increase in 2006-2008. The Reserve Bank of Interest Rates, pursuing anti-inflationary goals, aggravated the recession in the real estate market that had emerged in the mid-2000s. However, the decisive factors in the slide into recession were apparently the contraction of external demand for South African goods and the tightening of conditions for external financing of the economy during the global crisis.
Symptoms of unhappiness in one way or another have been inherent in all components of aggregate demand in recent years. The increase in household consumption was constrained by the sluggish growth of their disposable income and the deplorable situation on the labor market, as well as regular increases in administratively set prices. In theory, the accumulated devaluation effect can have a positive effect not only on export but also on import-substituting industries, and this will contribute to some economic revival. However, it is unlikely that such a simple way will fundamentally solve the fundamental problems of accelerating economic growth and balancing the current account (Gumede, 2015). This is because the root causes of these problems are rooted in the most prevalent model of socio-economic development in South Africa in recent decades. This aspect will be dealt with in the next section of this discussion.
Factors of the Slump
The very composition of the factors of economic growth in South Africa is not balanced. Its main driver is consumer demand, whose share in GDP is close to 80%. In turn, the accumulation rate barely exceeds 20% of GDP, and the saving rate is even lower. In other words, investment processes in the South African economy are highly dependent on capital inflows from abroad. On the whole, world experience shows that in order to maintain high growth rates and modernize a developing economy, the share of savings and investment in GDP should approach 30% (Vadra, 2017). The wave-like influx of speculative foreign capital into the country creates the conditions for revaluation pressure on the rand exchange rate. Periodic re-strengthening of the national currency has a depressing effect on non-resource exports from South Africa, and the export of goods from the extractive industry is very sensitive to price fluctuations in international markets. As a result, even in the most favorable period for the national economy in the mid-2000s, the growth rate of exports from South Africa was low (Vadra, 2017). For the progress of a developing economy, in addition to effective mechanisms of capital accumulation, steady growth in exports and an increase in its share in GDP are also needed.
The African National Congress (ANC), which has always ruled in South Africa during the period after the liquidation of the apartheid system, is a left-wing party, of which the Communist Party is an associated member. With the coming of the ANC to power, fears were associated with a slide towards economic populism, especially since the country’s budget system was thoroughly shaken back in the 80s and early 90s (Vadra, 2017). However, these expectations were not confirmed – during the first decade and a half of the ANC government’s tenure, its fiscal policy was deliberately restrained.
The state budget deficit, which reached 8% of GDP in the early 1990s, was gradually decreasing, and in the mid-2000s, it was even replaced by a slight surplus for some time. Skillful management of the public debt allowed to reduce its share in GDP from 42.0% in 2000 to 26.8% in 2008. Then, the cost of servicing decreased from 5.7% of GDP in 1998 up to 2.3% of GDP in 2010 (Indian Ministry of Finance, 2012, p. 145). However, at the peak of the economic recovery in the middle of the last decade, the authorities still could not resist an excessive increase in spending obligations. In 2008-2009 they were forced to increase government spending for anti-crisis purposes. As a result, since 2009, quite significant deficits have again been observed in the state budget of the country.
Even the rates of GDP growth that were gained by the South African economy in the mid-2000s are not sufficient to solve the fundamental socio-economic problems of the country. Since the second half of the 1990s, officially registered unemployment has been steadily in South Africa at over 20% (Vadra, 2017). The mentioned aspects are many reasons for such significant unemployment. With the end of the apartheid era, a large mass of black job seekers gained access to the labor market, who had previously been prevented by discrimination from competing for legal jobs. These were mainly people with a relatively low level of qualifications and education. Meanwhile, in the country’s economy, there is a large proportion of capital-intensive industries that present a relatively small demand for labor, moreover, sufficiently qualified.
However, the imbalance between the needs of the economy and the real qualifications of the available labor force is being reproduced even now due to the low efficiency of the national education system. The ANC government has made some efforts to develop it. However, opportunities for access to education remain extremely unevenly distributed. Those who study in the few schools previously reserved only for whites are in a better position. These schools continue to receive government funding as a priority, and they often charge tuition fees, which allows them to hire the best teachers and acquire other educational resources they need (Gumede, 2015). At the same time, the bulk of schools where children from black families study, being formally free, that is, relying on government funding, experience an acute shortage of teaching staff and teaching materials.
Nevertheless, the most significant reason for high unemployment may be the very institutional structure of the labor market in South Africa. The formation of basic wage rates by industry occurs as a result of negotiation interaction between business councils. They are dominated by representatives of state-owned enterprises and large private businesses, on the one hand, and trade union associations, as a rule, associated with the ruling party, on the other. The salaries set in this way are imposed on the entire industry, including medium and small businesses, for which they often turn out to be overwhelming. This blocks the possibility of absorbing unemployment through the mass creation of small private enterprises.
Reserve Bank Approach
Since 2000, the Reserve Bank of South Africa has adhered to a policy of targeting inflation and, accordingly, a floating exchange rate of the rand. Interventions are undertaken by the Central Bank, as a rule, only when there is strong revaluation pressure and when the rand is weakened, monetary authorities usually do not intervene in the situation. The evidence of their relative inertness in the foreign exchange area is the relatively small foreign exchange reserves of South Africa by the standards of commodity exporters.
Targeting inflation (the Reserve Bank keeps it within the target range of 3–6%) made it possible to achieve a significant reduction in interest rates on loans in the 2000s. This undoubtedly had a positive effect not only on consumer demand but also on investment processes. However, the impossible trinity of simultaneous control over inflation, interest rates, and the exchange rate made the rand overly dependent on fluctuations in cross-border flows of speculative capital (Vadra, 2017). This had negative consequences for export dynamics and economic growth. On the whole, the experience of South Africa once again confirms the regularly illustrated pattern. Good fiscal and monetary indicators and liberalization of regulation of financial markets by themselves do not guarantee investment activity and high rates of economic growth. Hence, it might be assumed that if the Reserve Bank would increase the target range and implement more specific provisions in this framework, targeting inflation can fit the current country’s needs.
Four Recommendations
South Africa is a country with huge information and communication technologies development needs. The rapid development of ICT will allow South Africa to make a qualitative leap in the development of all sectors of the economy, which will lead to both GDP growth and the living standards of the South African population. The development of digital information and the growth of networking have already impacted the social, political and economic spheres, changing the way of doing business, which has created many new opportunities for South Africa. However, the development of small and medium-sized enterprises in the field of ICT requires the following. It is the support from the state, the allocation of subsidies for the purchase of high-tech equipment, and an increase in the level of education and qualifications of South Africans (Gumede, 2015). In turn, SMEs contribute to job creation, thereby raising the standard of living of the population. The development of an electronic platform in the field of trade will help to optimize financial costs and save time for buyers and suppliers of various products.
The second recommendation concerns the state policy in the field of innovation implementation. Tax benefits are one of the most common methods of stimulating innovation. The use of taxes as an instrument of state influence on the economy is based on the implementation of the regulatory function of taxes. It is manifested in the uneven taxation of various objects and categories of taxpayers; due to this, the effect of regulation is achieved. By easing the tax pressure in a certain direction by changing the elements of taxation, the state creates more favorable conditions for the development of certain activities (Beresford, 2019). Tax revenues as the main source of revenue generation of budgets at all levels provide an opportunity to stimulate the economy through the expenditure side of the budget.
Third, the basis of state regulation of the economy should be a systematic approach. The economic function of state regulation is generated by the actual reproductive process of social production (social division of labor, economic isolation of producers). Strengthening market orientation and market trends in the market economy should be carried out with increasing state influence in the social sphere. Any attempt to move to market self-regulation in the field of distribution in a country with a weak economy is disastrous. An appropriate economic model should provide for the long-term functioning of the strong public and private sectors of the economy. Moreover, the share of the latter should increase annually. This indicates the need for structural restructuring not only of intersectoral complexes but also the economy as a whole.
Fourth, it is the state’s focus on ensuring fair and effective competition. State regulatory influence on economic competition is managed through legal, organizational and economic means. Legal remedies include the adoption of regulatory acts on the rules of conduct of management bodies and business entities in the economic sphere. Properly adjusted legal instruments to influence competition not only protect economic actors but also contribute to their emergence, resulting in the creation and functioning of a modern market economy.
Conclusion
It was found that the most pressing macroeconomic problems in South Africa are unstable national currency, the current account deficit, and the steady downward trend in GDP. Among crucial factors that contribute to such a state of affairs are the inappropriate structure of the government, unemployment, and the educational system. The enhancement of the targeting inflation instruments was claimed to be a significant tool that the Reserve Bank could apply. For the government, it was recommended to stimulate ICT, provide tax benefits within the scope of innovations, enhance the role of the private economic sector, and maintain fair competition.
References
Beresford, M. (2019). Entrepreneurship as legacy building: Reimagining the economy in post-apartheid South Africa. Economic Anthropology, 7(1), 65–79.
Gumede, V. (2015). Political economy of post-apartheid South Africa. CODESRIA.
Indian Ministry of Finance. (2012). The BRICS report: A study of Brazil, Russia, India, China, and South Africa with special focus on synergies and complementarities. Web.
OECD. (2010). OECD economic surveys: South Africa, 2010.
Vadra, R. (2017). Knowledge economy in BRICS: A case of South Africa. Journal of the Knowledge Economy, 8(1), 1229–1240.
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