Since the attainment of independence in 1994 the new government in South Africa has adopted two outward looking development-oriented economic reform programmes, that is, the Reconstruction and Development Programme, (RDP) in 1994 and the Growth Employment and Redistribution (GEAR) strategies in 1996. RDP clearly outlined the broad framework of the new government's economic and social policy while GEAR clearly defined the policy instruments and objectives to be pursued from 1996 to 2001. These initiatives have however not been able to put the country on a stable growth path and only marginal growth has been realized. Both internal and external shocks have resulted in negative developments of most macroeconomic variables. In light of the above developments, this paper provides a Vector Auto Regression (VAR) empirical analysis of macroeconomic fluctuations in the South African economy from 1972 to 2002. An analysis of the role of domestic and external factors on macroeconomic shocks is conducted through a focus on real domestic product, terms of trade, inflation, government consumption, money supply, real exchange rate, and the world interest rate.
The paper also evaluates the effectiveness of South Africa's macroeconomic policy framework, with particular emphasis on its ability to counteract trade and financial shocks as well as its overall success in achieving positive structural change and a sustainable growth path. The results indicate a general validity of the predictions of the analytical model and hence confirm macroeconomic theory postulations about the nature of the relationship between each of the variables and macroeconomic fluctuations in South Africa. The analysis shows that although the South African economy has experienced marked fluctuations in output and macroeconomic fundamentals, the economy shows resilience to permanent effects of shocks, as these tend to be short-lived and this reflects macroeconomic policy effectiveness. Money supply and world interest rates account for 30% and 18% of the output fluctuations respectively. On the other hand, real exchange rate fluctuations are more associated with monetary policy. There is strong evidence that exchange rate stability is also susceptible to external shocks.