Abstract
This thesis studies the integration of South Africa into the global economy. It uses a structural
dynamic factor model approach, instead of the well known structural vector autoregressive
method, as it accommodates a large panel of time series variables characterized by a number
of series significantly larger than the number of observations available. South African
economic cycles show some comovement with cycles of its trading partners. But the
synchronization with major trading partners has declined over time due to structural reforms
initiated by the post-apartheid government. A new monetary regime, trade and financial
openness, an increase in political stability together with reduced uncertainty have outweighed
South African output comovement with the rest of the world. Shocks from advanced
economies (the US and the EU) and East Asian countries, especially demand shocks, affect
domestic variables significantly. The main channels are business and consumer confidence,
trade variables, interest rates, and the exchange rate. Although South Africa comoves with
Latin American countries, trade and financial linkages are still very weak. The level of
development, perceptions of economic agents, and fluctuations of advanced economies (the
US and the EU) are the main reasons contributing to the synchronization of their variables.
South Africa’s position in Africa as economic leader starts to produce results leading to
output synchronization with some of its partners’ from SADC. Similar to the Latin American
scenario, the main reason is that the two sides share the EU as primary trading partner.
Because of the vulnerability of the South African economy, policymakers must pay a
particular attention and monitor closely developments in the global economy. In the same
line, they should promote policies that enable the country to have access to international
markets. Given the interdependence with the rest of the world, policymakers should monitor
closely the performance of the global economy. Nevertheless, idiosyncratic features of the
South African economy do play a role in the explaining fluctuations in economic activity.
Hence, policies that lead to a structural transformation of the domestic economy are
necessary. Reforms that allow labor market flexibility; promote competition; and support
human capital formation through education, are imperative.
Doctor Francisco Nadal De Simone
Professor Daniel Marais