Is There a Relationship between Productivity and Relative Prices in South Africa?

Abstract

Abstract The Balassa–Samuelson hypothesis proposes that there should be a direct relationship between a country’s real exchange rate and its productivity performance. Given South Africa’s (SA’s) poor relative productivity performance, a weak and depreciating real exchange rate would be expected under this hypothesis. However, the real effective exchange rate has been relatively stable since the early 2000s. We construct tradable and nontradable price and productivity measures and show that tradable sectors have tended to experience more rapid productivity growth than nontradable sectors in both SA and the United States. However, we show that there is not a strong relationship between sectoral productivity and prices in SA, or with the real exchange rate with the United States. Better explanations for SA’s deteriorating international competitiveness (shown by higher relative prices) are a relatively high domestic inflation rate caused by nontradable sectors, as well as disproportionately large increases in government wages over the post–global financial crisis period.