Abstract
The main objective of this study is to examine whether long-term economic growth in South Africa has been demand-constrained by its balance of payments. Empirically, the focus is on the application of the simple version of the balance-of-payments-constrained growth (BPCG) model, originally developed by Thirlwall (1979), over the full sample period from 1960 to 2016, and across several economic growth regimes (1960-1976, 1977-2003, 2004-2016 and 2008-2016). To fit the simple version of the BPCG model, the traditional import demand function is estimated using the autoregressive distributed lag (ARDL) modelling procedure of Pesaran, Shin and Smith (2001). The estimation results show that South Africa’s import demand function appears to be stable, well specified and theory consistent over the period 1960 to 2016.
The BPCG model under predicts the actual growth rate across all the regimes, with the exception of the second regime from 1977 to 2003, in which the actual growth rate is not significantly different from the predicted growth rate of the BPCG model. The period 1977 to 2003 serves as a useful reference point to evaluate the relevance of the simple version of the BPCG model. Outside the period 1977 to 2003, South Africa has relied heavily on capital inflows to lift the balance-of-payments constraint on demand. Although long-term inflows were a characteristic feature over the period 1960 to 1976, inflows during the sub-periods 2004 to 2016 and 2008 to 2016 were more volatile and short term in nature. To generate sustained growth in South Africa, the analysis suggests that policy makers cannot rely on a continuous depreciation of the real terms of trade, nor on an indefinite inflow of capital. Alternatively, to ensure long-run growth, policy measures should focus on the key predictions of the simple version of the BPCG model. Improvements should be directed towards the structural demand characteristics of exported goods, such as quality, design, technical sophistication and delivery service, as well as a reduction in the income elasticity of demand for imports.
M.Com. (Development Economics)