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South Africa Macroeconomic/Financial Profile Essay

1459 words - 6 pages

South Africa Macroeconomic/Financial Profile
Any attempt at explaining recent South African economic history must begin with a discussion of apartheid. Beginning around the middle of the 20th century and ending in 1990, the ruling government of the National Party (NP) engaged in the systematic oppression of non-white South Africans, in what became known as the apartheid system. To understand the net economic consequences of apartheid, consider the graph in the lower right hand corner of Figure 1 which shows real GDP per capita in constant PPP US dollars from 1980 until 2008. Looking at the graph, we see that, despite a few infrequent growth spurts, the South African economy generally suffered negative growth in per capita income between 1980 and 1993.
A 1997 Economist Intelligence Unit (EIU) report gives one possible explanation for this trend. From the mid-1970s until the early 1990s, the South African economy suffered a nearly continuous decline in domestic investment. This fact, coupled with fiscally conservative government policies, forced the economy to increasingly rely on private consumption to propel growth. However, private consumption was unable to do so because of high interest rates, high levels of personal debt, and negligible employment growth.
Although true, the above explanation does not discuss the the root cause of South Africa’s economic struggle during this period, i.e. apartheid. In the mid-1980s, growing international opposition to apartheid led to the involvement of the United States, among other countries, in a disinvestment campaign against South Africa (Knight 1990). United States participation included the passing of the Comprehensive Anti-Apartheid Act in 1986, which limited investment into and imports from South Africa (Knight 1990). Due to the disinvestment campaign and the repayment of foreign debt, South Africa experienced severe capital flight during this period (Knight 1990). This resulted in a depreciation of the exchange rate, which made imports more expensive and, in turn, contributed to high levels of inflation. To observe the effect of this depreciation on inflation, consider Figure 2, which shows consumer price inflation in South Africa (calculated as percent change) from 1980 to 2008. From the graph we observe that from 1981 to 1991 the South African economy experienced an erratically changing and high inflation rate, which reached a peak of 16% in 1986.
To understand the effect of this depreciation on exports and imports, consider the graphs in the northeast and southeast corners of Figure 1, which show exports and imports of goods and services as a percent of GDP from 1980 to 2008, respectively. Exports steadily declined from 1980 to 1983 before drastically increasing to 31.4% of GDP in 1985. Following this spike, exports steadily fell until 1992, reaching a minimum of 21.3% of GDP. This trend may be attributed to the turning of global sentiment against South Africa which...

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