Assignment: Economic analysis of South Africa
(ii) Balance of payments
1.1South Africa’s rate of unemployment…………………………………………….....
1.2Costs of unemployment in South Africa….................................................................
1.3Types of unemployment in South Africa……………………………………………..
1.5Policies to reduce unemployment in South Africa…………….………………...........
2.1The trends of inflation in South Africa ………………………..………………………
2.2The types of inflation in South Africa …………………………………………………
2.3The effects of inflation in South Africa……………………….……………………….
2.4Methods of combating inflation in South Africa……………………………………....
Balance of payments
3.1Balance of payments in South Africa…………………………………………….…….
3.2 The balance of payments statistics South Africa……………….……………….……..
3.3 The effects of negative and positive balance of payments………………………. ……
4.1Economic growth in South Africa………………………………………………………
4.2 Costs and benefits of Economic Growth in South Africa……………………………...
4.3Trends of economic growth from 2002 to 2009 in South Africa………………………
The conclusion …………………………………………………………………………………
Economic analysis of South Africa
The achievement of the five macro economic objectives is the bases of any country’s economy in the world and to South African the five macro economic objectives are also important. This essay is going to analyze and elucidate the economy of South Africa focusing on the four economic objectives which are unemployment, balance of payments, inflation and economic growth
South Africa’s unemployment rate.
Unemployment according to Sloman and Sutcliffe (527; 2001) is those of working age who are without work, but are available for work at current wage rate. Unemployment in South Africa is more stable than most of the countries in Africa. According to the website http://www.statssa.gov.za/newsletters/StatsOnline07May2009.html South Africa’s unemployment rate has increased by 1.6 percent quarter on quarter to 23.5 percent in the first quarter of 2009, compared with the 21, 9 percent of the last quarter of 2008. Job losses are estimated at a total of 208 000 jobs being cut quarter to quarter. The unemployment rate however has increased by 0.1 percent or 13 000 jobs yearly. The majority of job cuts took place in the informal sector, with 88 000 jobs cut in the quarter. The trade sector experienced loss of 193 000 jobs. Another 65 000 jobs in construction, 62 000 jobs in manufacturing and 26 000 jobs in agriculture were cut in the quarter. Refer fig 1.1
Types of unemployment in South Africa
There are various types of unemployment which exist in South Africa which are frictional, seasonal, structural and cyclical unemployment. According to http://upetd.up.ac.za/thesis/available/etd-08162004-135251/unrestricted/01dissertation.pdf at the present moment there is a decrease in aggregate demand which is resulting in cyclical unemployment. There is a low demand of labour in recessionary periods hence the cyclical unemployment is high in the country. Frictional unemployment is very common in South Africa especially to unskilled labourers as they move from one place to the other because they is lack of communication infrastructure thus the internet ,telephone, and employment stations unlike in the developed countries. According to Haydam (2002:198) frictional employment occurs when people moves from one job to the other. Seasonal unemployment is also dominant in South Africa according to http://upetd.up.ac.za/thesis/available/etd-08162004-135251/unrestricted/01dissertation.pdf it occurs due to normal and expected changes in economic activities during the course of single year, the seasonal worker in the vineyards in the Western Cape. According to Haydam (2002:197) structural unemployment occurs when there is a mismatch between worker qualification and job requirements or when jobs disappear because of structural changes in the economy. Technological advancements in the SA economy has resulted in structural unemployment as human labour is no longer required, this is the main result for unemployment in SA.
The costs of unemployment in South Africa
The costs of unemployment can be very devastating to South Africa as the economy production lowers which results in inflation and a low GDP. According to Haydam (2002:199) the costs of unemployment is divided into two the economic and non economic costs, the economic cost is the lost of output of workers who are unproductive and the non economic cost results in the high level of crime and labour unrest. In South Africa the economic cost of unemployment can be noticed in the low level of GDP and the increases in transfer payment of the government for example the child grants and the UIF (unemployment insurance funds) this raises government expenditure. With one of the highest crime rate in the world it shows that the people who are involved in the crime activities are unemployed.
Policies to reduce unemployment in South Africa
South Africa’s basic problem is rapid population growth; the steps taken to limit population growth can be regarded as part of the strategy to reduce unemployment. Enforcement of stricter immigration control policies of other sub-Saharan countries entering the country legally or illegally in pursuit of employment according to http://www.home-affairs.gov.za/immigration_policy_doc.asp there is need to control the inflows of migrants in the country because they are limited jobs for the unskilled which forms a large number of the unemployed. There is an access supply of semi-skilled and unskilled workers in the labour market but a shortage of skilled workers, therefore the government initiative is to improve of labour through education and training. Policies range from special employment programmes by the government of South Africa aimed at employing as many people as possible to build roads, dams and clean the environment as according to Haydam (2002:200) the government can be the employer of last resort. Another possibility is tax incentives or subsides to stimulate employment. Here the employers will receive tax benefits or subsides if they employ more people, but again there are drawbacks and such benefits are abused by firms as they tend to hired people at very low wages simply to claim these benefits.
The trends of inflation in South Africa
Just like any other country in the world South Africa is faced by the problem of Inflation in the economy. Inflation is one of the most important macroeconomic objective is supposed to be taken into consideration in any economy, as its effects can be so devastating. According to Mohr and Fourie and Associates (2000:588) inflation is a continuous and considerable rise of prices in general. The historical trends of inflation in South Africa show that it has a strong economy with a stable economic growth. According to http://www.reservebank.co.za year-on-year CPIX inflation rate peaked at 13, 6 per cent in August 2008 and then declined continuously to 10, 3 per cent in December. The main drivers of inflation over the last quarter of 2008 were food prices, fuel and power (electricity prices), and transport (petrol prices). In 2009 the inflation figure declined as according the o http://www.reservebank.co.za consumer price index (CPI) for all urban areas declined from 8,4 per cent in April 2009 to 8,0 per cent in May. In the past years the South African inflation was relatively low with a single digit.( refer to fig 1.2)
The causes of inflation in South Africa
The South African inflation is mainly triggered by the cost of production and the demand within the economy. According to Mohr,Foure and Associates (2000:605) the production costs push up the cost price level which results in the inflation called the cost push inflation the production cost are those of wages costs, imported capital costs. The South Africans firms incur costs in their production of products which will force them to pass the cost to the consumer in selling of the final product. The other type of inflation is the demand pull inflation that greatly affects the South Africa consumers and the economy according to Mohr,Foure and Associates (2000:604) the aggregate demand for goods and services increases while the aggregate supply remains unchanged. The increase in the money supply within the economy creates some major shortages as consumers in the South African economy have more purchasing power there by agitating the increase in the aggregate demand.
The effects of inflation in South Africa
The effects of inflation can be so devastating to the South African economy as the costs of production increases which results in the high costs of products to consumers and shortages of manufacturing products are likely to occur in the manufacturing industry as well in the economy. According to http://www.reservebank.co.za/internet/Publication.nsf/WCEV/6C2F8BBEB5A083EF42256B5E003A3089 inflation undermines the role of money as a unit of account and as a monetary standard. According to Mohr, Foure and Associates (2000:598) inflation results in distribution effects were inflation benefits debts (borrowers) at the expense of the creditor. This scenario will likely result in banks not offering credit facilities to investors. Mohr, Foure and Associates (2000:599) also elaborates that inflation causes instabilities in the economy as it discourage saving and affects the balance of payments as the South African exports are likely to become cheaper on the world market hence losing international competitiveness. The most devastating effect of inflation can be easily noted in the political and social effects like the increases in the standard of living. According to Mohr, Foure and Associates (2000:600) inflation creates a climate of conflict and tension which is not conducive to political progress. When the South African inflation reached the pick of 13.6 in August 2008 political tensions between political parties emerged worse between the DA and the ANC blaming each other of incompetence of the running of the economy.
How to combat inflation in South Africa
The use of the contractionary monetary policy and the fiscal policy is very important in the South African economy as according to Mohr, Foure and Associates (2000:604) the restrictive monetary policy entails the raising interest rates and the limiting of the increase in the money supply and the restrictive monetary policy entails a reduction of government spending and increased taxation. According to http://www.reservebank.co.za the reserve Bank Governor Mr T T Mboweni when he presents his monetary policy for 2009, inflation was the main focus to encourage economic growth the use of the monetary instruments to combat inflation by the SARB is very important to reduce the devastating impacts of inflation in the South African economy. The fiscal policy has been one of the most influential ways to combat inflation with government of South African making policies that limits the increase of inflation in the economy.
Balance of payments in South Africa
The Balance of payments measures the payment that flows between any individual country and all other countries, it summarizes all the international economic transactions for a country during a specific time period and it is usually a year this description obtained from http://www.resrvebank.co.za. The Balance of payments measured by the countries exports and imports of good and services and financial capital as well financial transfers. In the South African economy the South African Reserve Bank (SARB) is official responsible for putting together the South African balance of payments from the data obtained from various sources including the South African Revenue Service ( SARS) and it uses two sub accounts which is the current account and the capital account.
The balance of payments statistics South Africa
According to http://www.sagoodnews.co.za/trade_investment/current_account_deficit_narrows_significantyl.html The South African trade statistics for July 2009 and 31 august 2009 are as follows. July statistics recorded a trade surplus of R0.4billion, which is the third surplus since May this year. The last time this occurred was way back in 2005. The deficit in January of R17, 5 billion has attributed into the R17, 4 billion progress deficit from January to July. If we compare the progressive deficit of 2008 the same period as 2009 we find that the trade deficit last year it was R48.09 billion. The increase in imports by 10.54% and an increase of exports by 3.31% has resulted to the surplus that we have discuss earlier which is R0.4 billion exports for July 2009 were R44.4 billion and the imports were R44 billion. (Refer to fig 1.3) The trade balance has improved significantly in 2009 at R14, 6 billion compared with the R45, 8 billion deficits posted over same period one year ago. According to http://www.reservebank.co.za competitiveness in the markets the volume of goods exports was down at 21% 21 percent annualized rate in the first three months of 2009.Relative to real gross domestic product, the value of goods exports dropped from 20.8 per cent to 16.7 per cent during the first quarter. Although declines were noted in all major export categories, the decrease in the volume of manufactured exports was strongly related to the sharp contraction in manufacturing activity among South Africa's most important trading partner countries. As a result, the deficit on the trade account of the balance of payments widened once more to a same level which is the same as the one that occurred in the first quarter of 2008, when exports were restrained by the load shedding that was experienced by the country that time. (Refer to fig 1.4)
The effects of negative and positive balance of payments
Accordingtohttp://www.reservebank.co.za/internet/Publication.nsf/LADV/89640885A90008694225729D003055BD/$File/Abedian.pdf. The time South Africa spend more on imports than on exports the trade balance turns negative or runs the deficit . That is why by account definition the sum of these two accounts should be zero (current account and financial accounts). The effects of the negative balance of payments in South Africa have lead to more money being pumped into the excess consumption. This excess consumption can be financed through borrowing or accumulated official reserves. The current account deficit results in the depreciation of the currency which leads to a weaker exchange rate. An inflow or surplus on the financial account appreciates the currency. As long as the financial account surplus is larger than the current-account deficit, the currency will face overall appreciation pressures. The positive balance of payments will lead to economic growth as the exports become competitive on the international market however it can also result in a negative balance of payment as the exchange rate become strong to other countries which results in the decrease in demand of the South Africa Products.
Economic Growth in South Africa
According to Sloman and Sutcliffe (519:2001) an economic growth is the expansion of the economy’s production possibilities-an outward shifting in the production possibility frontier. Economic growth in South Africa implies that there is growth in total output of total quantity of goods and services and it is important because it results in an increase in the standards of the population because there will be more job opportunities available for the growing population. According to Haydam (221:2002) growth is required to solve the problem of poverty by providing more job opportunities. Without growth (an increase in the production of goods and services), fewer people will be employed and poverty will set in. The government of South Africa has created a better atmosphere for business expansion and increase in foreign direct investment (FDI) by reducing the red tape that is needed for business establishment. Post 1994 there has been in increase in small business SMEs that are being funded by the government there by increasing growth. According to http://www.usaid.gov/sa/furtherinfo5.html 1996 and 2000, South Africa’s economic growth program focused on the strategic objective “Increased Access to Financial Markets for the Historically Disadvantaged Population”. There are various economic growth programmes that were formulated by the government like Southern Africa Enterprise Development Fund (SAEDF), the Small Business Loan Portfolio Guarantee (LPG) Program and the Financial Sector Program (FSP) aimed at expanding access to financial services and lowering the cost of financing for small and medium enterprises (SMMEs) in the bid to increase economic growth.
Costs and benefits of Economic Growth in South Africa
The benefits of Economic Growth in South Africa is the rise of standards of living where there is better infrastructure development according to Haydam (2002:23) “the benefits of economic growth are expanded consumption possibilities including better healthcare, better roads, better housing and cleaner environment” The economic growth also has some benefits on the social side as they is job creation and enables South Africa to save which is an increase in reserves. The increase in reserves in the South African economy also resulting in it to invest more on capital goods such as technology. The costs on Economic growth can be environmental degradation as the environment is being continuously depleted and pollution sets in. Economic growth can led to a mass consumption of electricity which results in load shedding which means all the sectors in the economy must experience growth simultaneously so that they will not be trade off between the sectors. According to http://tutor2u.net/economics/revision-notes/a2-macro-economic-growth-costs-benefits.html there is danger of demand-pull and cost-push inflation if demand grows faster than long run productive potential High and rising inflation can be destabilizing for an economy because it puts pressure on interest rates to rise and can cause a loss of competitiveness for domestic businesses in international markets.
Trends of Economic Growth from 2002-2009
South Africa has experienced a strong economic growth since the ending of the apartheid era in the early 1990s. The restructuring of the economy after the apartheid era improved productivity in capital and labour, and also resulted in a boom in exports. In 2002 according to http://southafricaeconomywatch.blogspot.com manufacturing grew by 5.4 percent, the fastest increase since 1995. The South African economy grew by 1.9 percent in 2003 as compared with 3.6 percent in 2002. In 2003, real GDP rose by 2 percent while on a quarter-to-quarter basis, the lowest annualized growth rate recorded was 0.5 percent in the second quarter. South Africa’s economic performance has steadily been strengthening in recent years at an annual rate of average rate of 4.6 percent in the years between 2005 and 2008. South Africa’s economy grew by 5.4 percent in 2006, following an increase of 4.9 percent and 5.2 percent in 2004 and 2005; this is the highest since 1980. Growth in recent years has been driven by strong domestic demand, with private consumption and investment spending supported by consumer and business sentiment. Household consumption was also boosted by growing disposable income, rising employment and wealth effect from rising asset prices until late 2007.After all this previous growth, in 2008 there was a slowdown economic growth reflecting the impact of electricity power shortages, the global slowdown and a policy of monetary tightening. Real GDP slowed down and the country entered a recession refer fig 1.5. South Africa’s economy is expected to stabilize in the third quarter and expected to move back into growth by the fourth quarter of 2009.
The achievement of the 5 macro objectives is very much important to the South African economy, the effects of the failure to achieve these objectives will lead to social, politically and economically instabilities. Over the past years the South African government and the reserve bank SARB have managed to achieve the five macro objectives effectively thus why it is ranked among the fast developing nations.
Figure 1.1 Unemployment trends in South Africa (Creamer Media Reporter: 2009).
Fig 1.2 Inflation trends in South Africa South African inflation graph source http://southafricaeconomywatch.blogspot.com/
June to July change (up by 10.54 %) in imports reflected increase mainly in
Minerals products (up by R1.5 billion (18%)
Original equipments components (up by R0.5 billion 28%)
Vehicle, vessels and aircrafts (up by R14.4 billion 44%)
The June to July change up by 31% in exports goods reflected increases mainly in
Base metals and articles thereof (up by R0.7billion 11%)
Minerals products (up by r1.5 billion (18%))
Machinery and electrical appliances (up by R0.5billion 14%)
Vehicle, vessels and aircrafts (up by R0.5 billion 19%)
Fig 1.4 the trends of balance of payments http://www.sagoodnews.co.za/trade_investment/current_account_deficit_narrows_significantyl.html (accessed on 16 September 2009)
Fig 1.5 Trends of economic growth in South Africa http://southafricaeconomywatch.blogspot.com).
ECONOMIC GROWTH http://www.usaid.gov/sa/furtherinfo5.html#previous
Haydam. N; 2002; The Principles of Macro economics 2nd edition: Van Schaik: Pretoria
Inflation, balance of payments, unemployment and economic growth in South Africa http://www.reservebank.co.za (accessed on 22 September 2009)
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Mohr and Fourie and Associates 2001 Economics for South African Students 2nd edition Van Shaik Publishers, Pretoria
The South African Balance of Payments Statics
http://www.sagoodnews.co.za/trade_investment/current_account_deficit_narrows_significantyl.html (accessed on 16 September 2009)
The cost of inflation http://www.reservebank.co.za/internet/Publication.nsf/WCEV/6C2F8BBEB5A083EF42256B5E003A3089/?opendocument (accessed on 28 September 2009)
The South African inflation graph according tohttp://southafricaeconomywatch.blogspot.com/(accessed on 22 September 2009)
SOUTH AFRICA'S INFLATION DYNAMICS: IMPLICATIONS FOR POLICY1 www.essa.org.za/download/papers/07.pdf (accessed on 22 September 2009)
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