Transcript PowerPoint-Präsentation

Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
Presentation of Draft Report
Balance of Payments Dynamics, Institutions and
Economic Performance in South Africa
Workshop organised by
SAIIA/TIPS/FES
August 13, 2008
Pretoria
Andreas Freytag
FSU Jena and ECIPE, Brussels
© Freytag 2008
1
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
Balance of Payments Dynamics, Institutions and
Economic Performance in South Africa
Outline of the Presentation
1. Introduction
2. Balance of payment in South Africa: an overview
3. Theoretical background
4. The evidence
5. Policy conclusions: preliminary lessons for South Africa
© Freytag 2008
2
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
1. Introduction
•
The Economist: The global current account deficit ( 132 bn US-$)
demands for urgent responses: an appropriate means may be a trade
barrier against Mars!
•
In the last decade, current account imbalances increased all over the
globe, both in absolute terms and in relation to GDP.
•
South Africa has experienced an increasing current account deficit
since 2003.
•
Many observers see huge current account imbalances as a threat for
global stability.
•
From a theoretical perspective, imbalances in the balance of payments
indicate that an intertemporal trade has taken place. Consumption
today is exchanged against consumption tomorrow.
© Freytag 2008
3
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
•
Whether this trade is welfare enhancing, is depending on how capital
imports are used (sustainability?)
•
in other words: is a bop-imbalance automatically a disequilibrium?
•
What factors does the current account depend on?
•
We attempt to combine the dominant macroeconomic analysis with
institutional economics to sort out how to judge the South African
current account development.
© Freytag 2008
4
BoP-Dynamics in South Africa: The Micro Perspective
Andreas Freytag
2. Balance of payments in South Africa: an overview
Figure 1 shows the current account in South Africa, figure 2 gives an
overview about global imbalances, Table 1 displays the current economic
situation in South Africa.
Figure 1: South African Current Account 1953 to 2007
South African Current Account Balance, US$
10000
5000
0
-5000
-10000
-15000
© Freytag 2008
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
-25000
1953
-20000
Source: IMF
5
BoP-Dynamics in South Africa: The Micro Perspective
Andreas Freytag
Figure 2: Global imbalances in 2007: current account in bn US-$
SA: -17
China: 363
Developing
countries
630.9
USA: -736.8
Sub-Saharan
Africa: 1.6
EU: -202.8
Capital
Emerging Europe:
-121.5
© Freytag 2008
Oil exporters
423.5
Japan
212.8
Source: IMF, World Economic Outlook April 2008.
6
BoP-Dynamics in South Africa: The Micro Perspective
Andreas Freytag
Since 2002, South Africa has been rapidly growing. Employment has also been
increased, inflation has been moderate (until late 2007), fiscal policy prudent.
The current account deficit of roughly 6 per cent of GDP in 2006 is obviously
caused by private savings-investment gap (IMF 2007).
Table 1: Main economic South African indicators 2003 - 2007
Real GDP1
CPI
Unemployment
National government budget²
National government debt²
Current account
Gross reserves³
2003
3.1
5.8
28.0
-2.0
35.4
-1.1
1.6
2004
4.8
1.4
26.2
-1.7
35.1
-3.2
2.6
2005
5.1
3.4
26.7
-0.6
33.9
-4.0
2.9
2006
5.0
4,7
25.5
0.4
31.4
-6.5
3.3
20074
4.8
7.1
24.2 (20)
0.7
30
-6.5
3.5
1: annual growth rate; ²: in per cent of GDP; ³: in months of next year’s imports; 4: partly projections.
© Freytag 2008
Sources: IMF (2007, International Annex, p.10), SA Reserve Bank, Stats SA
7
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
Following the IMF (2007, Box 2, p. 10 and p.6, see below), the current account
deficit is driven by an increase in private investment and a decrease in private
savings.
X-M = S-I
Figure 3: Investment, Savings, Current Account
Is this development
worrying, as some observer
claim?
 “sudden stop” argument
1) How to define reversals?
2) What drives reversals?
3) What are the effects?
(Smit 2007 on the macro
perspective)
© Freytag 2008
8
Source: IMF (2007, p. 5)
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
3. Theoretical Background
To explain and judge developments in the balance of payments (BoP),
many approaches are available.
Identity: Exports minus imports equals savings minus investments! Thus, it
is impossible to analyse the current account and/or trade balance without
looking at the capital account.
The most serious and widely accepted view is the intertemporal approach
to the balance of payments (e.g. Böhm-Bawerk 1914; Obstfeld and Rogoff
1994; Dluhosch, Freytag and Krüger 1996; Corden 2007).
According to this approach, the balance of payments is the result of
disaggregated, i.e. individual decisions about consumption, sales, savings
and investments, i.e. intertemporal trade.
© Freytag 2008
9
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
Unless trade is forced or restricted, the balance of payments is based on
optimal plans (which may turn out to be suboptimal in the future).
Instead of being a disequilibrium, current account imbalances can be
interpreted as sustainable equilibria (Dooley, Garber and Folkerts-Landau
2007).
Thus, it seems inappropriate to talk of improvement or worsening with
respect to the trade balance.
The exchange rate is an adjustment parameter to bring about the transfer
from the capital account to the current account.
However: In politics, an alternative thinking, labelled the competitiveness
approach, is fashionable. The exchange rate is a policy instrument to
redirect trade flows  Marshall Lerner condition.
© Freytag 2008
10
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
What drives (individual) decisionmaking with respect to savings and investment?


ability to save (not really given for many in South Africa)
 Drivers of savings: age structure, income, educational level,
institutions, inflation
MEC
 MEC is driven by institutions, that is rules, habits, morale etc which
are investment friendly;
 besides, infrastructure, education and demographics matter;
 natural resources may encourage fdi
 fiscal and monetary stability are encouraging private investment.
A national current account imbalance (deficit or surplus) tells us to what extent a
country is successfully competing on the world’s savings, I.e. mobile capital.
Special role for fdi (vs. portfolio investment)
© Freytag 2008
11
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
Theoretically, a current account deficit makes perfectly sense, if the
accumulated debt is used for investment purposes rather than
consumption (Germany in the early 1990s, US in 2005ff?)
 Sustainability has also a micro dimension!
To aggregate it is sensible to look at the state of development of countries.
The theory of the debt cycle shows how an “ideal development” of the bop
looks like (Figure 3).
Countries undergo this cycle in analogy to firms.
To finance investments, debt is accumulated, accompanied by a trade
deficit (I). The investments pay off, debt is reduced by a trade surplus (II).
Later in the process, net wealth is accumulated, earning capital yields (III).
Finally, a mature creditor country runs a trade deficit and a capital yields
surplus (IV).
© Freytag 2008
12
BoP-Dynamics in South Africa: The Micro Perspective
Andreas Freytag
Figure 3: The Debt Cycle
Young debtor
country
Mature debtor
country
Young creditor
country
Mature creditor
country
I
II
III
IV
Net foreign
wealth
Balance of
capital yields
Time
Trade balance
© Freytag 2008
13
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
The role of the exchange rate
Adjustment parameter?
Real exchange rate defined as follows
ereal = PT/PN
South Africa: Capital inflows⇧  PT constant, PN ⇧, real exchange rate ⇩ 
X ⇩ , M ⇧  current account deficit.
Once the supply side has adjusted so that the appreciation is no longer
needed to allow the current account deficit, the currency may well
depreciate again  overshooting!
Policy variable?
The latest depreciation did not reduce the current account deficit!
© Freytag 2008
14
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
4. The evidence
What are the main drivers of the current account deficit? Does South Africa
match this ideal pattern? How sustainable is the development?
 Macroeconomic conditions
 Exchange rate development
 Structural change
 Structure of imports and capital inflows
 Debt cycle
 Institutions
 South African policy framework (Asgisa, NIPF)
Relevant: OECD report on microeconomic shortcomings and planned remedies!
The Harvard group has also discussed economic policy issues comprehensively.
© Freytag 2008
15
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
Macroeconomic conditions
Figure 4: Inflation in South Africa
Source: SA Reserve Bank
The macroeconomic development since the late 1990s is generally seen
positive, latest increase in inflation makes a bit more sceptical.
Remark: World wide savings up from 20.5 per cent of GDP in 2002 to 23.7 per
© Freytag 2008
16
cent
in 2007; savings glut (Bernanke 2005).
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
Exchange rate development
Figure 5: Exchange rate development
Source: SA Reserve Bank
© Freytag 2008
17
BoP-Dynamics in South Africa: The Micro Perspective
Andreas Freytag
The role of the exchange rate
Adjustment parameter!
Real exchange rate:
ereal = PT/PN ⇩
How have relative prices developed?
Between 2000 and June 2007: dPT = 40 per cent
(Stats SA P0141, CPI)
dPN = 50per cent
Caveat: 1) it depends on whether petrol is a tradable or not
2) CPI may be biased by distortions
3) it is generally difficult to distinguish between tradables and nontradables
Therefore, it makes sense to look at structural change.
© Freytag 2008
18
BoP-Dynamics in South Africa: The Micro Perspective
Andreas Freytag
Structural change
We compare the sectoral development of value added and exports/imports for
the periods 1994-2002 and 2002-2007. How did the value added of the sectors
(Stats SA, P0441, 2000 prices) change (increase in per cent)?
Agriculture
Mining
Tradables
Non-tradables (excl. government)
1994-2002
7
-4
29
38
2002-2007
-3
7
21
37
How did the export value (SARB, current prices) change (increase in per cent)?
Merchandise
Net gold
Services
© Freytag 2008
X: 1994-2002
314
83
206
2002-2007
83
-9
83
M: 1994-2002
262
-333
2002-2007
104
-123
19
Andreas Freytag
Import structure
It is further necessary to analyse the
structure of imports. If imports consist
mainly of consumption goods, the
degree of sustainability would be low.
If, however, imports mainly consist of
capital and intermediate products, one
could expect a boost in productivity.
The distinction is difficult.
© Freytag 2008
BoP-Dynamics in South Africa: The Micro Perspective
Table 2: Import structure
Share of capital
goods
Share of consumption
goods
1994
0.42
0.10
1995
0.38
0.18
1996
0.38
0.19
1997
0.38
0.22
1998
0.42
0.17
1999
0.40
0.18
2000
0.39
0.22
2001
0.39
0.22
2002
0.39
0.20
2003
0.38
0.19
2004
0.38
0.21
2005
0.38
0.20
2006
0.36
0.24
Source: WTO, own calculations
20
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
Structure of capital imports
Also, the structure of capital
imports as well as assets and
liabilities is of interest.
Driver: portfolio investment,
implications?
Recently (Q4/07 and Q01/08) ,
investment has been reduced
and deposits have been
increased.
 “wait and see”-strategy?
Figure 6: Net capital inflows
Source: SA Reserve Bank
© Freytag 2008
21
BoP-Dynamics in South Africa: The Micro Perspective
Andreas Freytag
To what extent
are capital
controls for
South African
contributing to
the deficit?
Figure 7: A start of a debt cycle?
100
50
0
bn Rand
Debt cycle?
1
-50
2
3
4
5
6
7
8
9
10
11
12
13
14
-100
-150
-200
-250
-300
-350
Year
Trade balance
Net foreign assets
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
-5
bn Rand
Role of transfers
(SACU, guest
workers?)
Income balance
Source: SA
Reserve
Bank, own
calculations
-10
-15
-20
-25
© Freytag 2008
Years
Current transfers
22
BoP-Dynamics in South Africa: The Micro Perspective
Andreas Freytag
Institutional aspects
Governance indicators show that there was no significant change after 2002.
Table 3: Governance indicators since 1990
HDI (0-1)
TI CPI (0-10)
FH PR (1-7)
FH CL (1-7)
Fraser (1-10)
1990
0.735
1995
0.742
2000
0.696
2002
2003
0.658
4.8
5
4
5.3
1
2
6.3
1
2
6.8
2005
0.674
4.5
2007
5.1
1
2
6.8
These institutions change only very slowly, but structural breaks possible.
In addition: public spending on health and education is rather low.
© Freytag 2008
23
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
Current economic policy problems, responses and their potential impact
on the current account
The Harvard group as well as the recent OECD (2008) report on microeconomic
shortcomings and planned remedies shows the current problems of the South
African economy:
 governance problems (at least when looked at it from outside),
 high unemployment coupled with poor outcome of education policy,
 brain drain,
 HIV/AIDS (high economic cost)
 monopoly structures in network industries (bottlenecks),
 low productivity growth,
 weak public administration.
© Freytag 2008
24
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
South African has introduced four policy frameworks since 1994 (RDP, GEAR,
AsgiSA, NIPF).
Whereas GEAR was successful with respect to macroeconomic stability, all other
programs so far did not deliver.
Neither AsgiSA nor NIPF is likely to tackle the economic problems adequately.
Rather they contribute to new problems:
 distortions,
 incentives,
 rent-seeking (relatively high number of interest groups) in combination with
corruption,
 knowledge problem (v. Hayek).
© Freytag 2008
25
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
In addition: do the problems as well as inappropriate responses have any effect
on the future development of the current account?
Example: If South Africa allows competition in telecommunication, one can
expect a surge in fdi in this industry. This contributes further to the current
account deficit (in line with the theory of the debt cycle), improving the price
competitiveness of many industries.
But if South Africa increases subsidies to domestic producers while at the same
time restricting trade further, the reversal is more likely, if S-I is changing due to
the policy.
If it does not change, then distortions reduce gross flows without changing the
balances.
© Freytag 2008
26
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
5. Policy conclusions: preliminary lessons for South Africa
1) The capital inflows of the past are obviously less related to institutional change
than to macroeconomic improvements and increased saving in the world.
2) Sustainability is not only dependent on macroeconomic factors, but also
driven by
 private behaviour,
 regulations (market entry, labour market),
 subsidies,
 economic activities of the government,
 trade distortions,
 public investment (education, health, infrastructure).
© Freytag 2008
27
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
3) It is, however, difficult to identify thresholds (e.g. investment structure, import
structure, institutions, net wealth position to GDP) to judge the sustainability.
4) Nevertheless: South Africa needs more capital to modernise the economy and
increase the potential productivity. This implies to import net capital and use is for
investment.
5) In particular, bottlenecks such as telecommunication, transportation and
energy are to be widened.
6) In the longer run, savings have to increase: Education ⇧  Employment ⇧
 GDP ⇧  Savings ⇧.
7) It is too early to state whether or not South Africa is at the beginning of a
beneficial debt cycle. Signs are encouraging.
© Freytag 2008
28
Andreas Freytag
BoP-Dynamics in South Africa: The Micro Perspective
To summarise, today the threat to sustainability (or the danger of a reversal) may
be bigger on the microeconomic front than from the macroeconomic side.
 Therefore, the South African government should seriously rethinking any
interventionist strategies and consider some of the recommendations made by
the Harvard group and even more so the options shown by the OECD.
More attention should also be paid to crime and corruption (rule of law).
© Freytag 2008
29