This paper was inspired in the first place as the author observed extraordinary resilience in the domestic real economy in the wake of not only the world recessionary conditions of 2000/1 but also the dramatic slide of the currency towards the end of 2001. As possibly the first hard evidence of meaningful (structural) change, this paper may be premature, however, it sets out to study the domestic business cycles of the 1990s and establish in what way has the reintegration of the SA economy into the world economy influenced the business cycle. Running the risk of being premature the paper attempts to derive policy information as well as to provide pointers to what we may expect in the current business cycle.
The banking sector in South Africa is highly concentrated. When there is high concentration, it is necessary to examine the effects on efficiency and prices. In this paper, we discuss the fact that there are various types of efficiency in banking, and that high levels of concentration tend to reduce the overall level of efficiency. The presence of an oligopoly structure implies that the level of competition required to induce efficiency improvements may not exist. So one of the key methods of improving efficiency is to increase the level of entry and to make the banking market more contestable, which can be done by reducing the cost of entry and the welfare costs of exit.
However, costs of entry and exit in the retail and corporate sectors of the industry are very different. Entry into multi-branch retail banking is more much more expensive than entry into single-branch corporate banking. The nature of the services provided entails the use of different types of technology for service delivery; this difference in the types of technology has implications for the nature of speed of entry and exit. This in turn has implications for the level of competition, which then affects the level of efficiency. The oligopoly structure and the perception that there are high costs in delivery of retail banking services in South Africa have militated against entry into the retail banking sector. However, a number of foreign entrants have taken advantage of the relatively lower costs of entry into the corporate banking sector, which has increased the level of choice and countervailing power in this sector. Anecdotal evidence suggests that in the corporate banking sector, interest-based income and fee income spreads are competitively driven, and the level of competition in the corporate banking sector has contributed to the level of efficiency.
Conversely, the absence of entry into the retail banking sector has had a negative effect on competition. As a result, it is fair to suggest that cost efficiency is less than it would be in the presence of greater entry into the retail sub-sector. The perception that there is an absence of competition and countervailing power has contributed to a growing debate regarding the impact of the high concentration levels on the welfare of consumers of retail banking products.
Recalling that it is necessary to examine the impact of concentration on prices as well as on efficiency, and in order to test the validity of this view, a structure conduct analysis has been undertaken in this paper so as to assess whether the level of concentration influences the pricing of retail banking products in South Africa. The findings herein suggest that the pricing of retail banking products fits with the structure-conductperformance framework, which suggests that the industrial structure influences the prices charged for banking services. Specifically, we see that banks pay lower rates to depositors and charge higher deposit rates to their borrowers than they would if the level of concentration were lower.
This elicits a number of policy responses that should be focused on methods of introducing greater competition and regulatory reform in order to reduce welfare costs.
The reform of the financial sector has been an important component of the structural adjustment programmes pursued by developing countries, whereby reform entails reducing government involvement, freeing up financial markets, and strengthening
financial institutions. In Southern Africa, however, the financial systems of most countries remain relatively underdeveloped, in spite of these reforms. The Southern African Development Community (SADC) is currently in the process of drafting a protocol on finance and investment, which should address the issue of financial sector development. The questions that arise from this are, firstly, what kind of role can SADC play in promoting financial sector development, and secondly, what are the possibilities for financial integration within SADC?
One of the stated aims of SADC is monetary integration; however, no timetable for monetary integration has been drawn up, nor has there been any in-depth discussion of the issue at SADC level. It seems that, while monetary integration may be a long-term goal of the organisation, it is not considered achievable at present. To complement monetary integration, the establishment of a wider internal market for financial services would be required, as well as the convergence of a number of financial variables. Financial integration encompasses all of these goals, including a common currency. Some SADC leaders have spoken of the need for financial integration within the region, but the use of the term has not been clearly defined. Indeed, Linah Mohohlo, the governor of the Bank of Botswana, recently said that, “financial integration should not require any surrender of sovereignty” (Business Week, 18/9/2000), which raises the question of what exactly is meant by the term “financial integration.” The question of whether SADC should aim to follow an EU-style approach to financial integration, or whether it should continue with its current ad hoc approach, has therefore not been addressed.
A related issue is the questionable political will with regard to economic integration, as demonstrated by SADC’s leaders. The 14 countries of SADC are at differing levels of economic development, with South Africa accounting for about 78% of the region’s total GDP. Some countries, such as Angola, the DRC, and (increasingly) Zimbabwe, are facing economic crises, due to internal instability. Other countries, like Botswana and Mauritius, are stable and have reasonable growth rates, but face the problem of diversifying their economies. The countries of the Common Monetary Area1 are still heavily dependent on South Africa. Others, such as Tanzania, Mozambique and Zambia, are dealing with the transition from a heavily state-dominated economy to one that relies on market forces. Each nation has its own development strategy that has been tailored to the specific needs of their own economy. However, economic integration by its very nature requires some sacrifice of national sovereignty, in order to reap the benefits of a single market. While the rationale for economic integration in Southern Africa is wellunderstood, there appears to be an unwillingness on the part of member states (perhaps understandably) to substitute regional priorities for national ones, making the decisionmaking process slow and difficult. The result is that little progress has been made towards economic integration thus far.
Given this rather discouraging background, this paper looks at the role that SADC can realistically play in developing the financial systems of the countries of Southern Africa. Section I reviews some of the literature and theory around financial sector reform, particularly in the context of Southern Africa. Section II offers an overview of the financial systems of the various SADC countries. Section III considers regional integration, looking at SADC as an organisation, as well as highlighting some of the possible barriers to integration. Section IV explores the issue of SADC’s role in financial sector reform, and makes some suggestions that could perhaps be considered in the drafting of the Finance and Investment Protocol. Finally, Section V contains some concluding comments as well as suggestions for further research.
The Government of South Africa apparently is clear about its goals for the reform of public enterprises. In his 2001 Budget Speech (RSA, 2001a, p.1), the Minister of Public Enterprises explains ?restructuring? as the generic term taken to represent the set of strategies employed by the state to ensure that public enterprises in South Africa are efficient, effective, and powerful engines of socio-economic development.Restructuring aims to maximize the contribution that these state assets can make to de- velopment through the integration of public, private and social capital and expertise.
The post-apartheid government of South Africa inherited over 300 state- owned enterprises [SOEs], with four of the firms accounting for 86 percent of aggregate turnover, 94 percent of total income, 77 percent of all employment, and 91 percent of the total assets of these enterprises. These key enterprises, as they are collectively described in the Government's Policy Framework Paper, are in telecommunications (Telkom), energy (Eskom), transportation (Transnet), and defense (Denel). None of these firms are slated for outright privatization in the near future. The debate is joined around the wisdom of the Government?s model of reform, its so called matrix of options.
This paper examines the relation between the institutional structures of advanced OECD countries and the comparative growth and investment of 27 industries in those countries over the period 1970 to 1995. The underlying thesis that the paper examines is that there is a matching between the institutional structures of countries and the characteristics of industries, which is reflected in the comparative growth and investment of industries in different countries. We find support for this hypothesis and report that the marked differences in institutional structure that exist across advanced countries are associated with comparative growth and investment of different industries. Consistent with theory, we find that relations between institutional structures and investment differ between fixed investment and research and development, and that relations between institutions and growth are sensitive to the relative degree of development of countries.
This paper will evaluate the micro-finance sector in South Africa, its scope and development, and its role in the financial sector and the economy more generally. It is informed by the premise that households and institutions save and invest independently, and that the financial system's role is to intermediate between them and to cycle available funds to where they are needed. Consequently the primary objective of this paper is to understand the key factors that affect the micro-finance (MF) sector.
The MF industry was formally (legally) established in 1992 when the state issued an Exemption to the Usury Act that removed interest rate ceilings on small loans under R6,000.00 with a repayment period of less than thirty-six months. Since then there has been phenomenal growth of a formally non-existent industry, providing a good example of how micro-financiers were able to develop given a favourable incentive system. The rapid growth of the industry provided the impetus for a second Exemption to the Usury Act in 1999, where revisions to the amount of small loans were increased from R6,000.00 to R10,000.00, the Micro Finance Regulatory Council (MFRC) was established to manage the sector, and new regulations to govern the way that micro-loans could be administered and repayments collected were added. However, the growth of the industry has raised as many questions of the financial sector's operation as it has answered those concerning a conducive regulatory climate. Firstly, why has there been such rapid growth in the industry given that SA has a fairly sophisticated financial sector in the first place? Partly related to this is the question of who are the end-users of the loans supplied by the MF industry. Put differently, we need to understand the determinants of the demand for debt, and the segment of society who demands the services supplied by the MF industry. We then need to analyse the parameters of the regulatory framework and identify how lenders are affected by it. Lastly we will provide insights into the structure and performance of the sector in an attempt to augment the discussion.
The rest of the paper proceeds as follows. Firstly, the depth, structure and efficiency of South Africa's financial sector are discussed in comparative perspective in order to contextualise the discussion. Secondly, the structure and size of the industry are estimated. We then proceed to investigate the demand for debt using the Income and Expenditure Survey (Statistics South Africa, 1995) and an adjusted dataset compiled by Wefa Southern Africa for 1999. Lastly, we turn our attention to the regulatory framework of the sector and the degree to which it complies with international best practise.
The South African financial sector, described here as the banking, insurance and securities industries, is a sophisticated enclave within widespread financial exclusion. The financial sector is generally regarded as stable and well regulated; indeed it is to the latter that the robustness of the sector has been attributed, in the wake of the Asian and other financial crises.
In recent years the sector has been opening up with greater participation from foreign and niche-seeking domestic firms. There has also been considerable transformation of the regulatory requirements of the sector, demanding greater compliance in terms of corporate governance and transparency. The regulations have also lead to greater equity in terms of regulatory treatment between and within the industries. However, while the recent promulgation of regulatory legislation in each of the industries has resulted in greater compliance with international standards, the adjustment required to meet worldclass standards is not yet over. In addition, meeting international standards for compliance and regulation is only one part of the dual pressure facing the sector: the other lies in the growing political and economic imperative to address widespread financial under-provision in South Africa. The report examines the implications of compliance with international trends for greater openness and tighter regulation, within the context of domestic pressures to extend financial services to the majority of South Africans.
The paper begins by sketching the background to the sector, providing a brief overview and highlighting some of the reasons for the importance of the sector.
The paper examines the impact of financial deepening on long run economic growth in South Africa over the period 1954-92. Two models are developed using the Johansen VECM structure. The first model investigates whether the financial system has a direct or indirect effect on per capita output via the investment rate. The second model attempts to investigate the possibility of feedback effects between the financial and real sectors. We find that both dimensions of the financial system - financial intermediation and securities affect economic growth in both models. Furthermore, both models reveal that the financial system has an indirect effect on GDP via the investment rate. Feedback effects are also found to exist between the real and financial sectors. One interpretation of the evidence is that credit rationing is prevalent in South Africa with firms extensively relying on internal finance to meet their financing requirements.
This study is published by the World Bank in its informal series of Discussion Papers on the South African Economy. It draws on research supported by discussions and interaction with staff from a wide range of South African institutions.
Since 1994, South Africa has made undeniable progress across a number of critical areas. On the political front, democratic institutions are well established, and the 're-invention'Â of government that is continuing through the creation of new tiers of government (provincial and local) has changed the environment for governance and service delivery. On the economic front, the government has pursued policies that have restored and maintained macroeconomic stability in the context of a difficult global environment.
But despite these areas of success, there exists a widespread perception that South Africa's economic performance since 1994 has been disappointing. Real GDP growth has been erratic, formal sector job losses have continued unabated, and the key objectives of poverty reduction and improved service delivery remain largely unmet.
This study examines the pressing challenge of generating sustainable growth, job creation, and poverty reduction in South Africa. In doing so, it draws on a broad range of analysis and research on related topics undertaken by World Bank staff over the last few years, as well as work by other researchers in South Africa and elsewhere. The underlying message is that the challenge facing South Africa will not be solved by one (or more) 'quick fix' solutions, but instead demands concerted initiatives across a range of issues that reflect the underlying dependencies and 'interconnectedness'Â of the economy. We hope that this study (and its supporting materials) can contribute to the discussions and debate that will help South Africa move forward towards a better future.
The aim of this paper is to consider the relationship between competitiveness, international trade and financial factors in the South African economy.
The term ‘competitiveness’ is used here in two closely related, but distinctly different, senses. One of these refers to a country’s ability ‘to realise central economic policy goals, especially growth in income and employment, without running into balance of payments difficulties’ (Fagerberg, 1988:355). This may be thought of as competitiveness in the macroeconomic sense, or what we shall refer to as macro-competitiveness. Competitiveness, however, may also be defined as the ability of an economy, or sectors of it, to compete in world markets. Conventionally emphasised sources and indicators of competitiveness in this sense are movements in real exchange rates, productivity and unit labour costs, which are reflections of price-competitiveness. As distinct from these, there are various sources of the ability to compete in world markets, such as product differentiation and innovation, and (of particular interest in the context of the present study) access to finance, which may be regarded as aspects of non-price competitiveness.
Section 2 considers the competitiveness of the South African economy in the macroeconomic sense, by examining the historical relationship between GDP growth and the ratio of the current account deficit to GDP. On this basis, it finds that there has apparently been a significant deterioration in the competitiveness of the South African economy.
The rest of the paper is in effect an attempt to shed light on this problem. The rate of growth of exports is clearly one factor pertinent to South Africa’s macro-competitiveness. One concern of the paper, thus, is with explaining trade performance in recent years. However, a long historical view is seen as indispensable for this purpose. The evolution of the growth and sectoral pattern of South Africa’s exports in the period 1911-72 is therefore described briefly in Section 3.
Section 4, the longest in the paper, discusses variations in the growth and sectoral pattern of South Africa’s trade in 1972-97, divided into two sub-periods: 1972-83, which includes the great gold-led, commodity price boom of that decade; and the period of adjustment from the onset of economic crisis in the mid-1980s, through to 1997, which is the main focus of attention. The emphasis is on changes in relative prices, in particular on real exchange rates, as the determinant of variations in the growth rate and composition of South Africa’s exports, though some consideration is also given to productivity and unit labour costs. The problem of sustaining rapid growth of exports, and hence of increasing macro-competitiveness, is seen as lying in the sectoral pattern of South Africa’s exports.
The effect of financial factors based on trade and competitiveness, one of the particular concerns of the studies in this volume, is the subject of Section 5. Matters considered there, in varying degrees of detail and in different sub-sections, are the effects of South Africa’s relatively advanced stage of financial development; the availability of credit and economic instability as factors relevant to the level of investment; differences in the severity of financial constraints between groups of firms categorised according to trade orientation and trade performance, and hence relevant to competitiveness (in both senses stated above); and the question whether the ownership of banks by South Africa’s conglomerates has skewed the allocation of credit in sub-optimal directions. Section 6 consists of concluding remarks.