Effects of financial autarky and integration: The case of the South Africa embargo

Abstract

The paper interprets the imposition in 1985 and removal in 1993 of the embargo on South Africa as financial autarky and financial integration ‘natural experiments’, and studies the effects on the economy. The aggregate data indicate a decrease in the levels and growth rates of investment, capital, and output during the embargo period relative to the pre-embargo and post-embargo periods. To further rationalize these findings, we calibrate a neoclassical growth model to the economy. During the transition to steady state, we limit the country's ability to borrow for a period corresponding to the duration of the embargo. The derived dynamics for investment, capital, and output support the findings of a positive (negative) link between financial integration (isolation) and economic growth.