Abstract
Abstract: The ASGISA policy document identifies the exchange rate as one of the factors constraining accelerated growth in South Africa. This note argues that currency developments do not translate into business cycle movements in the aggregate economy, and that a weaker exchange rate is less likely to boost either foreign investment or export performance in the face of regulatory uncertainty. The South African government has recently launched the Accelerated and Shared Growth Initiative (ASGISA) aimed at raising the long-term growth path of the economy. The plan identifies several so-called “binding constraints” that are considered to be inhibiting the economy from rising to more elevated levels of economic growth. One such “constraint”, according to the ASGISA policy document, is the “volatility and level of the currency” (Republic of South Africa, 2006). By including this issue, policymakers have signalled that fluctuations in the Rand are considered significant to broader economic fluctuations in South Africa. This research note questions such a conviction by offering evidence that currency fluctuations are not mirrored in the South African business cycle. Nonetheless, proponents may argue that a weaker Rand will stimulate particular sectors, mostly those that are export-oriented, while it will boost Foreign Direct Investment (FDI). However, this note argues further that a weaker Rand is less likely to generate sustainable improvement in either export-oriented industries or FDI in the absence of other reforms. The following sections consider these two issues in sequence.
Highlights
Introduction to sectionIn line with international trends, the SAJEMS editorial board decided to introduce a section in the journal called: Viewpoints, perspectives or letters to the editor
The causality issue is not pursued further here and MacDonald and Ricci (2004) for a discussion of plausible causal linkages). How do these results compare when, instead of one output component such as industrial production, the aggregate South African business cycle is taken into consideration? Table 2 reports the results when both the official South African Reserve Bank (SARB) business cycle and the GDP growth rate cycle are used
There is evidence for arguing that, while the exchange rate is of great importance for certain sectors of the South African economy, currency developments do not translate consistently into lagged cyclical movements in the aggregate economy
Summary
In line with international trends, the SAJEMS editorial board decided to introduce a section in the journal called: Viewpoints, perspectives or letters to the editor. We see this section as an opportunity for senior scholars to provide insight into specific issues or ideas that are unlikely, or not ready, to take the form of a full scientific manuscript. We see this as an opportunity for students and young scholars to share their research results from a less daunting (and belligerent) platform. I would wish to extend an invitation to all our readers to submit shorter, focused, robust and well-articulated views, perspectives, comments, letters or papers to this new section
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