This paper uses as its point of departure the recent demise of the world's largest financial institutions that set in motion the current global financial crisis. These financial institutions look set to re-evaluate their model of global finance and it is anticipated that western finance will be dramatically transformed in the near future (Meyer, 2008). The void created by the fall of these financial powerhouses is expected to be filled in by private financial institutions from China and Japan. The focus in this paper is on China, however, because of its aggressive drive to acquire markets as well as resources from Africa. Over the years, China has come to be touted as the new economic powerhouse on account of its economic growth and its share in world trade, despite its developing country status. China's emergence in the global economy is also linked to enhanced Sino-African relations, particularly in the context of political and economic links.
This paper integrates two mechanisms of economic growth barriers to international spill-overs and skill-biased effects on the income distribution. South Africa (SA) is an interesting case study because of dramatic changes in international barriers over time and policy focus to productivity and distribution. Barriers affect the balance between innovation and adoption in the productivity growth and thereby the skill bias. The productivity dynamics and the distributional implications are investigated in an inter-temporal Ramsey growth model. The model offers a calibrated tariff equivalence measure of the sanction effect and allows for counter-factual analysis of "no-sanctions".
Increased openness is shown to reduce barriers to technology adoption, leading to skill-biased economic growth and worsened income distribution. The result is consistent with the observation that economic growth under sanctions has been slow and with an increase in the relative wage of unskilled labour. The trade-off between barriers and skill bias, foreign spill-over driven by productivity growth and income distribution is obviously a challenge for growth policy.
Since 1994, some restructuring of state-owned enterprises (SOEs) has taken place in South Africa (SA), which has included elements of corporatisation and commercialisation, as well as partial privatisation. The Government has committed itself to more reform. This is an ongoing process, and to inform this process an investigation into its economy-wide impacts in SA has been suggested.
Such an investigation would benefit from a two-stage approach, starting with a scoping exercise that aims at assessing relevant international experiences and the most appropriate methods to be adopted for the actual analysis, which is to take place in the second stage. In this report we undertake the following:
In spite of the main interest being an economy-wide impact analysis of restructuring and privatisation, the main drivers of any macroeconomic or economy-wide impact analysis of restructuring and privatisation are to be assessed at the micro level. Given bottom-up inputs from the micro scoping analyses, the challenge then is to consider appropriate ways of undertaking an economy-wide impact analysis.
Restructuring and privatisation is an ongoing process, with some milestones having been achieved while others are lagging behind the initial schedule. It is not easy to establish a definitive point at which, or period in time during which, a particular process of restructuring and privatisation was undertaken, sealed and closed off. In most cases, the reforms in SA focussed on corporatisation of the SOE, which was poorly sequenced with the introduction of new, more appropriate regulatory frameworks and regulatory institutions. Changes to the market structure, aimed at introducing competition, have not played a significant role in this process. The result has been ineffectually regulated public monopolies, which are detrimental to consumers and the economy at large.
Consequently, given the dearth of actual reforms, there is perhaps little that can be learnt from an economy-wide impact analysis of these rather convoluted and limited restructuring processes. Instead there may be greater interest in the economy-wide implications of more stylised type of processes. We think it is important to ask a number of 'what if' questions while keeping everything else constant. With this 'tool', the relevant stakeholders (policy-makers, union representatives and business) will perhaps find it easier to assess the likely impact of major policy choices with regard to key industries. In the past, these discussions were often based on rather dogmatic conjecture, with the direct impact of restructuring (such as employment losses in Telkom) the dominant concern, with little appreciation of the broader, economy-wide consequences.
Moreover, the stylised approach allows for comparative scenario analysis, which will provide valuable insights into the inevitable trade-offs in reform processes. It will, for instance, be possible to rank the scenarios with respect to certain critical variables, be these employment, prices or other policy variables, so that informed decisions can be made regarding the preferred road ahead. This approach will provide a 'menu of options' to form the basis of discussion between Government and other stakeholders, hopefully preventing a focus on direct employment effects unbalanced by the costs of inefficiency commonly associated with restructuring debates.
In addition, the economy-wide modelling framework proposed will allow for anomalous economic events to be excluded from the analysis so that the impact of reform can be discussed in the absence of events that may have exaggerated or mitigated SOE restructuring and may well have resulted in unexpected and unpredictable economic outcomes in the opposite direction of the intended reform.
If we were primarily concerned with stylised reform scenarios, a casual interpretation would imply that we take a forward-looking view (as it will be difficult to explain a 'clean' stylised scenario of reform that has taken place in the past) for which the modelling exercise produces an outcome that is radically different from what has been observed. Typically, exogenous economic events may have thrown a spanner in the works, and for the sake of comprehensive reporting, these other events also need to be taken into account in the analysis, both at the micro and the macro level. Although this is in itself an extremely important exercise and it was indeed one of the objectives of Chisari et al (1999) to show the interplay between major external shocks and reform in Argentina, the interpretation of the ex-post impacts of reform becomes considerably more complicated, as it will be difficult to separate out the impact of reform from the impact of exogenous shocks.
The above also suggests that as drivers of economy-wide policy options, the micro studies should stick to stylised representations of the reform that is still to take place. In the SA context the proposed sectors of relevance are electricity, transport (ports and rail) and telecommunication.
In terms of the organisation of this report, we start with a review of national and international analyses that offer accounts of economy-wide impact assessments of restructuring and reform. This is followed by the scoping of a number of micro-level case studies in the SA context. In section 4 we attempt to pull together the findings from the scoping of case studies at the economy-wide level by giving an indication as to what is possible with the current modelling frameworks available for SA in terms of an impact assessment of restructuring and reform of SOEs. We end with a conclusion.
The current phase of globalisation, from the mid-1980s to the present, has been characterised by farreaching changes in the global trading system. There have been differential economic gains from participation in the global economy, particularly a) between developed and developing countries and b) amongst developing countries. Much has depended on the manner in which countries have been able to make themselves part of the global economy.
Global integration can be viewed from a range of perspectives. This paper interrogates differential country outcomes from a similar perspective as that which a firm might use to locate its activities in a particular market, namely the type of business it is engaged in. We briefly examine what 'businesses' the South African (SA) economy is involved with in the global economy. Specifically, we examine SA's relative presence in the highest growth products in world trade: the top 40 dynamic products.
The South African financial sector, defined as the banking, insurance and securities industries, has contributed to the growth of the economy since democracy in terms of growth in assets and value added, although its provision of financial services to the poor has been less impressive. The article takes a broad approach to evaluating the performance of the sector in terms of the balance between stability and innovation, and the balance between efficiency and allocation of resources. While the financial system has proved to be stable, innovation has generally been for the high-value, contested market. In terms of cost efficiencies and provision of services to small businesses and poorer consumers, there is room for improvement.
This paper describes the status of financial systems for a number of African countries south of the Sahara, identifying various problems that hinder access to finance, especially for the poor, and subsequently those issues that deter economic performance and development. The countries surveyed were selected on the basis of a range of criteria including: geographical spread, economic size and development, level of financial market development and availability of information. Although Angola, Botswana, Gabon, Ethiopia, Kenya, Mauritius, Mozambique, Nigeria, Senegal and South Africa are the focus countries of this survey, many of the scenarios presented in this paper are applicable to other African countries south of the Sahara. Broad policy measures to tackle the bottlenecks that currently undermine financial systems' responsiveness to the needs of the real economic sector are recommended.
The broad structure of this paper is as follows. Section two discusses the nature of financial intermediation in Sub-Saharan countries, while section three presents the financial intermediation challenges that these and other African countries face, in both macro and micro terms. Section four proposes possible policy interventions and ongoing developments in financial intermediation and section five concludes by drawing attention to the key challenges to financial intermediation in Sub-Saharan countries and to the essential prerequisites for successful programmes to respond to these challenges.
This paper examines the impact of formality of employment on the utilisation of financial services, using data from the October 2000 Income and Expenditure Survey and the September 2000 Labour Force Survey. The presence of an employed member in the household is seen to be important for the utilisation of both bank accounts and funeral insurance, even after controlling for income. Furthermore there are strong links between the nature of this employment and utilisation of financial services. Employees are more likely to utilise financial services than the self-employed. Among employees, the probability of utilising financial services increases with the degree of formality of employment. These effects are stronger for formal banking services than for funeral insurance which includes informal burial societies.
The models measuring the macroeconomic impact of HIV/AIDS are heterogeneous : each one relies on a specific theoretical background. Nevertheless, there are, at least, three main common limits to those approaches : the authors concentrate on the impact on the labour market ; they neglect the potential implications on the capital market ; and they do not model some essential microeconomic impacts such as the change in the agents economic behaviour. More specifically, the analysis of the impact of HIV/AIDS on savings takes into account direct costs such as health expenditures, seldom indirect costs like the anticipation of funeral costs and they do not model differed indirect costs. The paper proposes an analysis of this last kind of implications through the impact of the epidemic on the saving behaviour. This paper focuses on the uncertainty of life expectancy and is based on two frameworks: the Gali (1990) model which considers the life cycle theory with a finite horizon at the aggregate level and the Moresi (1999) model which species a peculiar consumption utility function through uncertain lifetime. The calibration and simulations of our model reveal a significant drop in the future saving rate in South Africa under the hypothesis of a virus evolution similar to the one given by the UN Population Division: the saving rate in 2015, under those hypothesis, should be at least 5 percentage points inferior to the estimated saving rate that would then prevail in the absence of the epidemic.
In this study, we set out to empirically investigate the impact of interest rates and other macroeconomic factors on manufacturing performance in Nigeria using co-integration and an error correction mechanism (ECM) technique with annual time series covering the period between 1970 and 2002. Some statistical tools are employed to explore the relationship between these variables. The analysis starts with examining stochastic characteristics of each time series by testing their stationarity using Augmented Dickey Fuller (ADF) test. Then, the study estimates error correction mechanism (ECM) model.From the error correction model, several interesting conclusions are drawn from the study. First, interest rate spread and government deficit financing have negative impact on the growth of manufacturing sub-sector in Nigeria. Secondly, the study empirically reveals that liberalization of the Nigerian economy has promoted manufacturing growth between 1970 and 2002. Lastly, the findings are further reinforced by the presence of a long-term equilibrium relationship, as evidenced by the co-integration, and stability in the model.
This paper investigates South Africa's saving-investment behaviour between 1962 and 2001. The results show that due to the unlimited nature of net capital inflows (foreign debt) from 1962 to 1976, saving and investment were not bound by a long-run solvency constraint and thus unrelated in the long run. By contrast, the limit placed on foreign debt and the low level of net capital inflows from 1977-2001 forced saving and investment to move closely together. Further investigation within a structural cointegrating VAR approach reveals that private saving is strongly exogenous to private investment from 1977-2001. The main policy implication is that prior saving matters for investment. However, the interpretation of this result departs from a neo-classical view in which an economy is 'supply constrained'. Rather, the result shows that investment spending in South Africa is balance-of-payments constrained. Policy measures should focus on lifting the ceiling that the balance-of-payments places on the expansion of demand to which supply can adapt.
Botswana's financial sector is relatively small, reflecting the small size of the market and perhaps the thorough approach to licensing and supervision. The size of the sector in relation to the economy (as measured by the ratio of broad money to non-mining GDP) declined in the first half of the 1990's but picked up again from 1995 onwards, suggesting positive signs of financial sector development over this period. Botswana financial institutions have remained solvent, liquid and profitable, which to a large extent can be attributed to the central banks supervisory role as well as the overall stable macroeconomic environment. The financial sector comprises the central bank, commercial and investment banks, insurance companies, leasing finance institutions, a development bank, a savings bank, a building society, a development corporation and a number of non-bank financial intermediaries. Commercial banks are the most significant financial intermediaries in terms of their share of savings from the public.
The financial sector has expanded considerably over the past decade, which resulted in an increase in the infrastructure and the range of services offered. The number of accounts provided by banks has risen faster than the population growth, suggesting that a greater proportion of the population have access to banking services.
Th Botswana Financial Services review was commissioned by the Southern African Trade Research Network (SATRN). The objective of the review was to provide a comprehensive overview of the current financial sector environment. To achieve this, an evaluation of the financial sector (banking, insurance and securities sectors) was undertaken. The evaluation centred around market access policies, particularly issues related to entry, ownership and regulatory measures. A further review of the sectors' performance as measured by prices, quality indicators and accessibility to the poor was conducted. For the purpose of future benchmarking with other SADC countries, a similar study was carried out in other SADC countries with the use of World Bank templates for each of the banking, insurance and securities industries.
The rest of the report is organised as follows: chapter 2 briefly touches on the outline of the template of analysis used for each of the sub-sectors. Chapter 3 to 5 discuss the responses given by the regulators and operators to the World Bank Template in the banking, securities and insurance sub-sectors. Lastly, chapter 6 provides the conclusion.
This paper uses the Johansen VECM estimation technique to examine the directions of association between savings and growth in South Africa over the period 1946- 1992. We examine the aggregate private saving rate and its interaction with investment and growth. The paper finds that the private saving rate has a direct as well as an indirect effect on growth. The indirect effect is through the private investment rate. In turn, we find that growth has a positive effect on the private saving rate. The extent of this effect is determined by liquidity constraints. Thus we have a virtuous cycle as growth enhances saving, which in turn further enhances growth.
This paper assesses the economy-wide impact of implementing and financing a universal or basic income grant (BIG) in South Africa. The various financing scenarios suggested by the proponents of the grant are presented, and these are compared using an applied general equilibrium model for the South African economy. The results indicate that the required changes in direct and indirect tax rates needed to finance the grant without increasing the government deficit are substantially higher than currently predicted. Furthermore, the alternative of reducing government recurrent expenditure to finance the BIG will undoubtedly undermine other government policy objectives. The paper therefore proposes a shift in the current debate, away from determining which of the individual financing options is preferable, towards an acknowledgement that a 'balanced' approach is likely to provide the only feasible scenario. Furthermore, the impact of the grant on economic growth is found to hinge on its ability to enhance factor productivity. These results suggest that the possibility of South Africa becoming the continent's first welfare state is as likely to rest with the macroeconomic impacts of financing the grant, as with the ability of the grant to address the country's prevailing poverty.
The new international financial architecture has its roots in the financial crises that shook emerging-market economies in the l990s Mexico in 1994-5, and East Asia in 1997-8. The problems there, as well as in Russia in 1998, in Brazil in 1998-9, and more recently in Turkey and Argentina, underscored the importance of strengthening the international financial architecture.
These crises generated a broad consensus that fundamental reforms were required in the international financial system.
The international community has launched a series of initiatives referred to collectively as the new international financial architecture to strengthen the operation of the global financial system. A focal point of this architecture is the prevention of crises.
Work on strengthening the international financial architecture is being undertaken on several fronts simultaneously. The major building blocks of this undertaking are transparency and accountability, international standards and codes, the strengthening of financial systems, capital account issues, sustainable exchange rate regimes, the detection and monitoring of external vulnerability, private sector involvement in forestalling and resolving crises, and IMF facilities.
This paper focuses on one of these building blocks: the strengthening of financial systems. In the search for increased international financial stability and possible measures to prevent future periods of systemic risk, concerns have grown that international financial markets themselves may be increasingly important sources of financial instability.
The implementation of the proposed Basel Accord on capital adequacy is another important initiative of the new financial architecture. By more closely aligning regulatory capital charges and banks' risk profiles, the adoption of the proposed Accord could substantially strengthen banking systems, thereby increasing the overall stability of the financial system. In the current environment of globalisation and increasing competition in the financial services industry, risks are larger in scope and scale than ever before. Keeping pace with the changes in the risk environment, as well as with the newest developments in risk-management practices, poses significant challenges to regulators and banks alike. For supervisors, the most important challenge involves developing an approach to capital regulation that works in a world of diversity and near-constant change. Financial institutions face the challenge of implementing advances in risk modelling in a coherent and systematic fashion, and of coping with conceptual difficulties regarding model specification and data limitations The new capital adequacy framework proposed by the Basel Committee is an attempt to address these challenges. However, implementing the proposed Accord creates additional challenges, especially in an emerging-market context.
This paper gives a perspective on the new financial architecture from the viewpoint of banks, and concentrates on the effect of the implementation of the Basel Accord on the South African banking system. A secondary aim of the paper is to identify the challenges posed by the implementation of the proposed capital adequacy framework to South African banks and bank supervisors and to see how prepared they are for these challenges.
Although a review of annual reports of South African banks suggests a relatively sophisticated approach to credit risk management and the use of internal credit risk ratings, it is likely that the rating systems of South African banks do not meet all the requirements set out by the Basel Committee for the internal ratings-based approach to setting regulatory capital requirements. Recent problems at Saambou and Unifer also point to potential shortcomings in the credit risk management processes of certain South African banks.
Against the background of South Africa's sophisticated and efficient financial markets and yet its vulnerability as an emerging market∩┐╜ï∩┐╜¿∩┐╜½∩┐╜Ã∩┐╜┬é∩┐╜ï∩┐╜¿∩┐╜½∩┐╜Â∩┐╜ an overview is given of the structure of the South African banking sector. This includes quantitative indicators of financial system soundness, like various indicators of credit risk and capital adequacy. An overview is given of the risk management practices of South African banks, as well as of the supervisory approach of the South African Reserve Bank. All of this is compared to international best practice policy guidelines.
This paper examines the response of South African manufacturing production to changes in prices and exchange rates. A restricted profit function is used to model the behaviour of the manufacturing sector, as well as a number of manufacturing sub-sectors, and of the agricultural and coal mining sectors. Labour and intermediate imports are treated as variable inputs into the productions process. Capital is treated as a fixed input. Outputs of the production process are goods for the domestic market and exports. Using estimates derived from the restricted profit function, both price and exchange rate elasticities are calculated.
There are a number of key findings:
The results of our estimations suggest three areas particularly relevant for policies designed to increase export supply and labour demand (and consequently decrease unemployment):
South Africa has experienced considerable currency volatility during the past few years, despite strong economic fundamentals. Recently this resulted in the appointment of the Myburgh Commission of inquiry into the depreciation of the rand. From January 1, 1996 to May 29, 2002, the value of the rand depreciated from R3.64 per US$ to R9.85, reaching an all-time low of R13.002 on December 20, 2001. Policymakers and academics have increasingly wondered about the nature of these crises, the factors responsible for their spread and particularly whether a country with seemingly appropriate domestic and external fundamentals can suffer a crisis because of contagion. More specifically, why should a country like South Africa be affected if there are problems in Brazil, as these countries are hardly related? Or why do events in Zimbabwe continually "haunt" the rand? The answer to this question requires an examination of the channels through which disturbances are transmitted from one country to another (Hernandez and Valdes 2001:3).
Isolating the relevant contagion channels is key from a policy perspective, for appropriate prescriptions may vary substantially depending on what drives contagion. For instance, if trade linkages were to drive contagion, countries would have few alternatives other than to diversify their trade base or to fix irrevocably their foreign exchange rate. On the other hand, if financial links were to be blamed for contagion, countries should attempt other measures such as imposing prudential capital account regulations. Alternatively policymakers can attempt to protect foreign reserves with a policy of high interest rates. This can have detrimental consequences for the domestic economy.
The purpose of this paper is to analyse empirically the existence and extent of contagion in explaining volatility of the South African rand. Misfortunes in Zimbabwe and other emerging-markets countries (like Argentina) have often been blamed for the recent volatility. This implies the possible presence of financial contagion. On the other hand, declining economic activity in Zimbabwe can also result in contagion through trade linkages. We investigate two alternative contagion channels: (i) real interdependence (trade links) through bilateral trade and trade competition in third markets, and (ii) financial contagion.
Empirical results confirm the presence of contagion. This suggests that no open emerging-market country, even with relatively sound fundamentals and policies, is capable of insulating itself from events in the rest of the world. The difficult challenge still faced by emerging markets is how best to reap the benefits of a more open economy while minimizing the risk of becoming the victim of a potentially devastating financial crisis inherent in the liberalization process.
This paper looks at the policy of financial liberalisation within the context of a small developing economy that is experiencing financial sector distress. The performance and structure of the banking sector of the economy of Lesotho is in particular reviewed before, during and after the reform period. The paper also draws on the theoretical arguments for financial liberalisation in developing countries in line with distinguishing structural features of financial systems in developing countries. The implications of the analysis are extended to make an analysis of the likely effects of financial liberalisation in a group of countries that are a part of trade and monetary arrangements. Particular attention is given to the institutional arrangements that deal directly with financial issues, in this case the CMA. The primary outcome of the paper is that the economy hardly met the prerequisites for financial liberalisation at the time when the policy was implemented hence the distress in the banking sector that followed. While contagion may not be a significant problem given the size of the economy relative to its closest neighbour, South Africa, the experience nevertheless provides important lessons for economies in similar situations.
Based on Edwards' (1989) intertemporal general equilibrium model of a small open economy, this study attempts to estimate the degree of real exchange rate misalignment and its impact on the international trade competitiveness of the South African economy for the period 1985:1-2000:4. For this purpose, a one-step Engle-Granger approach and five years moving average technique have been employed to estimate the exchange rate misalignment, while impulse response analysis and variance decomposition techniques of cointegrated VAR (vector auto regression) have been established to assess the impact of the misalignment on trade competitiveness. The study reveals that the real exchange rate had been consistently overvalued during the period 1988:3-1998:2 but undervalued during periods 1998:3-2000:4. For most of the periods during 1985:1-1988:2 the rand had been undervalued. Moreover, the study discloses that the exchange rate misalignment debilitates South Africa's international trade competitiveness accounting for 20 percent of the variation in competitiveness.