Abstract
M.Com. (Development Economics)
Like many developing countries, South Africa has experienced significant current account imbalances, standing at -4.34% of GDP in 2015. While conventional wisdom emphasises the role of various economic fundamentals in driving current account imbalances, empirical evidence has recently been provided on the potential role of demographic factors in shaping current account dynamics. In fact, the current account deficit ultimately reflects a low level of national savings; which, according to the life cycle hypothesis, is contingent on population structure. With the increased rate of population aging in South Africa and the doubling of the population between 1977 and 2015, it is imperative to investigate the purported existence of the life-cycle hypothesis and its related impact on current account dynamics in South Africa. In light of this set of prevailing circumstances, this research examines whether and how changes in demographic structure affect saving behaviour in South Africa, and hence, the current account balance. Using national and regional data from 1961 to 2016 and 2006 to 2013 respectively, the Johansen-Juselius multivariate cointegration procedure is used in conjunction with univariate autoregressive distributed lag (ARDL) bounds testing and panel ARDL (PARDL) approaches. Various stability checks are administered, and the findings generally suggest that a reduction in age dependency is largely ineffectual on the current account balance, both nationally and provincially. Although the results obtained from the PARDL analysis are interpretable, the data shortage may be exceedingly constraining.
Since the findings are decidedly inconclusive insofar as credible links between life-cycle theory and the current account balance are concerned, the most compelling policy recommendation at a macroeconomic level is to perhaps look beyond strategies concerned with population age dynamics in the improvement of the current account in South Africa. Furthermore, the consistency of the life-cycle theory is itself chiefly questionable in South Africa.