Department of Economics

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The application of the marketing concept to independent radio and appliance retail
(University of the Western Cape, 1982) Venter, J; van de Byl Smuts, Michael
Independent Radio and Appliance retailers face very strong competition from chain groups, discounters and hypermarkets. These organisations rely on bulk-buying and negotiated deals to elicit favourable terms from suppl iers. Due to the volume of their turnover they can afford to work on lower profi t margins than the independent operator. Large marketing organisations also benefit from economi es of seal e in adverti si ng and promoti ons. In short the 1arge groups have a di fferenti al advantage over the small er i ndependents i n that thei r cost of sales and overhead structure is generally lower. The purpose of this study is to develop a marketing strategy for independent radio and appliance retailers which will enable them to survive, grow and trade profitably under current highly competitive conditions.
An investigation into the usefulness and empirical application of project planning and control techniques to small building contracting
(University of the Western Cape, 1985) Mentoor, Etienne R.; Kritzinger, A.
As gevolg van dte huldlge stram ekonomiese omstandlghede in suid-Afrlka is dlt noodsaakrik dat die bou-aannemers, veral die klelneres, deeglik moet besin oor die doeltreffendheld van hur bedrywlghede. Die bestuursfunksles, veral beplanning en kontrore, behoort meer aandag te genlet indien bou-aannemers hur proJekte op rn winsgevende basis wiI deurvoer. Die bestaande proJekbepranning- en kontroletegnieke, veral die Gantt-kaart en dle pERT-netwerk, kan tot rn groot mate by klein proJekte toegepas word. Heelwat voordele kan ook benut word deur dle gebruik van die genoemde tegnleke. Daar moet egter gelet word op die vermoef van dle projekbeplanner om die tegnleke sinvol te kan toepas. verderre1 die bestaande tegnleke ook aala ernstige gebreke en tekortkominge. Dit skyn te blyk dat dle krein bou-aannemers in die Hottentots Holland gebied nie oor dle nodlge kennis en kundigheid besklk om die bestaande projekbeprannings- en kontroletegnieke te kan toepas en benut nle. Dle bepranning en kontrore van projekte geskied tans op rn baie onsistemati.ese wyse. Daar word weinlg rekords vau vortooide proJekte gehou met dle gevorg dat die bou-aannemers baie op hu1 geheue, €D selfs intulsie, moet staatmaak.
Stock returns as predictors of interest rates and inflation: The South African experience.
(University of the Western Cape, 1990) Swanepoel, C.V.; Van der M Smit, E
This study analyses the extent to which stock returns provide forecasts of changes in interest rates and inflation for the South African market. The period under investigation, January 1966 - February 1989, is characterised by structural changes in the South African economy, especially in the financial markets. The earnings yield on shares is used as a measure of the return on stocks. Stock returns of 10 specific industries are used in addition to the overall market return. Monthly inflation series were constructed by employing both the Consumer Price Index (CPI) and the Producer Price Index (PPI). Before examining that relationship, tests were done to examine the relationship between nominal stock returns and expected inflation. The relation between the stock market and expected inflation is estimated by using three measures of expected inflation. The results appear to suggest that the stock market reacted positively to expected inflation during the 1966 - 1982 period. Two proxies of expected inflation. Best results inflation are used to were obtained with measure future the Fama-Gibbons measure. In addition, the results suggest that stock returns provide additional information of future inflation to that contained in the Fama-Gibbons and interest rate models. Returns for specific industries, used in this study, appear to provide marginally better forecasts of inflation than the overall market return. The results also suggest that stock returns provide forecasts of changes in interest rates and inflation. There is no evidence that the specific industries used, provide consistent better forecasts of interest rate changes than the overall market.
Industrialisation and the decline of the coastal cities in South Africa: A neglected dimension
(Development Southern Africa, 1990-05) Roux, A.D.; Black, A.D.
Empirical evidence points to a mismatch between the growth of population and the growth of manufacturing activity among the metropolitan centres of South Africa. While the coastal metropoles lag behind the PWV and certain secondary cities and towns in terms of manufacturing growth, the opposite applies to urbanization. Various market failures and policy-induced distortions may have contributed to the relatively poor performance of manufacturing in the coastal cities. Until such time as these distortions have been completely removed by suitable changes to government policy, temporary subsidies to offset the disadvantages of the coastal areas may be advisable. © 1990, Taylor & Francis Group, LLC. All rights reserved.
The choice of technique in the brick making industry in the Western Cape: Opportunities for establishing worker controlled enterprises in this sector.
(University of the Western Cape, 1991) van der Westhuizen., Willem A; Loots, L.J.
The thesis focuses on the choice of technique as a key component in creating viable enterprises, including those controlled by their worker-members. A theoretical model of the choice of technique is presented, with its roots in the works of Pasinetti and others. Then a picture of the technological opportunities in the brick making industry is constructed through analyzing the actual technical choices made by a sample of firms in the industry. Implications for worker controlled enterprises are drawn throughout. The choice of technique function is shown to be more complex than is usually assumed. In the presence of uncertainty an enterprise has to search for a viable operating space rather than an optimum position.. The decision making criteria are firm specific decision rules built up over time. As such the enterprise can be viewed as 'embodied learning', with the power relations which characterise all social organisations. When making a choice, the enterprise has to reconcile the conflicting requirements of the technological system, the effective demand criteria and the the context in which the technique will operate. A key component of this context is the nature of the enterprise, the learning embodied in it, and the resources it possesses. The specific conditions within a worker controlled enterprise require changes to the institutional framework in which they can be successful. These are directly related to the distribution of income and the nature of the organisation of production. The former affects the capacity of a worker controlled enterprise to acquire human and physical resources required to invest in new techniques. The latter relates to the establishment of efficient management structures. The choice of technique in a sample of firms in the brick making industry in the Western Cape is investigated, and the technological opportunities and constraints analyzed. It is shown that smaller mechanised concrete masonry techniques seem to hold the most potential for a worker controlled enterprise under certain conditions. These conditions include particular state policies to foster the housing delivery systems geared towards small building contracts and squatter upgrading. These have to be supplemented with appropriate financing strategies and the provision of serviced land. The ability of worker controlled enterprises to attract efficient management skills will most probably depend on their capacity to integrate horizontally, and in so doing create economies of scale in the provision of managerial resources. The viability of an enterprise will ultimately depend on whether it is able to adopt a technique which can deliver the products wi th appropriate char act.erLst i cs , to a market segment which requires products of that nature at the cost required. In the Western Cape that growing market seems only to be possible in the sectors where housing is currently not affordable. Therefore, lack of effective demand places a limit on the viability of new enterprises until such time as state policies and the institutional context of land use and availability have been addressed.
The development region as opposed to the "Homeland" as the essential element of regional development policy.
(University of the Western Cape, 1991) Jared, Mohammed Iqbal; Roux, A
This study is an evaluation of development strategies that have been followed in South Africa. Lebowa is used as a case study for an assessment of the present strategy. The basic question is whether or not it is economically, politically and socially effective to follow the "homeland" development strategy. This approach places "homeland" states within confined political borders. Development policies are also confined to these borders. An alternative is to follow a broader regional development strategy, that spans across both political and economic borders. This may provide a more feasible approach to development. The present regional pattern of development, which focuses mainly on industrial decentralization, is discussed. The evaluation of the present strategy explores various other alternatives which may provide for a more effective regional development policy. In this context an assessment of 'backward regions/homelands' is provided. The central problem addressed is the country or 'homeland' versus regional orientation. To understand the problem, the core-periphery view on South Africa's regional growth pattern, is utilized. The PWV, Durban/ Pinetown and the Cape metropole areas may be taken as "core", where most of the economic activity takes place. One can also distinguish between the "inner-periphery", which is close to the core, and the "outer-periphery", further away from the core and which includes the Black Homelands. This core-periphery approach provides an understanding of the polarisation effect, which results in the "homelands" becoming poorer, whilst the urban areas grow richer. The main criticism of the of the modernisation or diffusionist approach is that the "trickle-down" or spread-effect from the core to the other regions does not really take place. Thus, regional aspirations are not satisfied. The South African Government's attempts to counter some of the forces of concentration have been questionable. Within the context of the diffusionist paradigm, trickle-down effects have not occurred because of the super-imposition of a political ideology onto this approach. Rather these areas are the result of polarization (re-inforced by political consideration) brought about by the concept of separate development. It is clear that South Africa's approach to regional development is in a process of change. This is mainly due to the failure of the "homelands" strategy. Since the mid 1970's it has become increasingly clear that the "homelands" could not really become economically independent (and internationally recognised), and development strategy concentrating on each that the uneconomic and inefficient."homeland" would be uneconomists critical of this unified economy. planners and politicians. approach have suggested that the whole South African economy should be planned as one economy, even if the homelands still maintain political independence. The nine development region mapping of South Africa, Regions A - J, came about as a result of attempting to address South Africa as a more unified economy. Up to now, the proposed role of the regions have not been clearly stated
An empirical study of the development of factory shops in the clothing industry in the Cape Peninsula
(University of the Western Cape, 1991) Visser, D.J.; Kritzinger, André
Over the 1ast eight years up to 1989, a new business phenomenon has manifested itself in South Africa. During this period, the so-ca 11ed "factory shop" concept has developed into one of the fastest growing industries in both the manufacturing and commercial sectors. In South Africa, factory shops have initially established in the Cape Peninsula.4,5. The nature of these shops is such that their creation may be attributed to the clothing industry itself ;" This trend originated in about 1980 at a few clothing manufacturers in Cape Town, inter alia, Desiree, Readywear, Atlantic Knitting Mills. Originally these factory shops were open for limited hours, I usually over lunch-time and on only one Saturday per month. They were strictly limited to and for the sole benefit of I the staff of those firms. Gradually, however, family and later friends and acquaintances of these staff members became aware of the so-called bargain prices at these stores. Both supply and demand played important roles in the development of factory shops. For example, increasing pressure on management to supply larger quantities of these merchandise items at bargain prices, as well as the fact that clothing factories had excess stock which was difficult to clear through the normal distribution channels. Factory owners recognized and seized this opportunity to reduce stock at little additional cost. From their inception, factory shops have had a significant influence on the turnover and profitability of the retail clothing industry. This trend is documented in reports by the organ i zed trade, 7 ,B where reference has been made to the influence of these factory shops and where independent clothing retailers have been calling for a plan of action for protect i on against the encroachment by these factory shops on their (the clothing retailers') markets. However, up to that stage, no in-depth study or formal research was done to justify such action for protection. The ref 0reitwa s felt that" An empirical stud y of the development of factory shops in the clothing industry in the Cape Peninsula" was needed to acquire an objective view of the state of affairs.
The econometrics of structural change: statistical analysis and forecasting in the context of the South African economy
(University of the Western Cape, 1994) Wesso, Gilbert R.; Kótze, D.
One of the assumptions of conventional regression analysis is I that the parameters are constant over all observations. It has often been suggested that this may not be a valid assumption to make, particularly if the econometric model is to be used for economic forecasting0 Apart from this it is also found that econometric models, in particular, are used to investigate the underlying interrelationships of the system under consideration in order to understand and to explain relevant phenomena in structural analysis. The pre-requisite of such use of econometrics is that the regression parameters of the model is assumed to be constant over time or across different crosssectional units.
Should the public sector (central government) borrow domestically or offshore
(University of the Western Cape, 1995) Maleka Dennis, Mandla
1. Taxes are an important source of government revenue (income). A failure by the government to collect sufficient taxes to cover for its ever increasing expenditures, engenders fiscal problems. Amongst others the government is compelled to borrow to finance its budget short fall. In this instance, should the government borrow domestically or offshore to finance its short fall . 2. Amongst the theories discussed in this paper, are the views of the Neoclassical Keynesian and the Ricardi an schools of thought. Further more, South African theories on government debt are also discussed. 3. There is a considerably large number of indicators that can be used to determine an appropriate level of both domestic and foreign debt of a country. Certain well establish criteria such as the ratio of foreign interest payments to exports, the ratio of foreign debt to gross domestic product, the ratio of·govemment debt to gross domestic product and the ratio of foreign debt to exports, are amongst the pool of indicators that can be used. However, the following indicators have been identified as the most commonly used in the analysis of budget deficits, and they are; ratio of deficit before borrowing and debt repayment to GDP, the ratio of government debt to GDP, the ratio of interest payments to government expenditure, the level of real interest rates relative to economic growth and the net asset value or net worth of the government. 4. Deficit financing refer to the ways in which the budgetary gap is financed. Overreliance on domestic borrowing may mean high real interest rates and falling investment, and overreliance on foreign borrowing can cause appreciating real exchange rates and unsustainable external indebtedness, amongst others. 5. Amongst the available remedies for debt ills in this country, is the suggestion to significantly cut government expenditure. However, realities currently confronting the authorities, like the increase in public servants as a result of the abolishment of homelands and the constitutionally guaranteed employment of civil servants from the old order, automatically put pressure on public consumption. 6. On the international front, South Africa is underborrowed. In this regard favour should go more for offshore borrowing. Certainly South Africa has to generate the means of meeting debt obligations by running a surplus of exports over imports of goods and services. The bulk of the country's debt is of domestic origin which account for well over 90 % of total debt. The current anti inflationary monetary policy with its concomitant high interest rates, makes domestic borrowing more costly.
A cost-analysis study of primary diabetes treatment at day-hospitals and a provincial hospital in the Western Cape
(University of the Western Cape, 1996) Hamdulay, G.
The provision of health care in South Africa is undergoing major restructuring. The aim is to achieve substantial, visible and sustainable improvements to the efficiency and accessibility of primary healthcare (PHC) services for all South Africans. One of the country's most critical problems is the weak and fragmented public sector PHC system. The most critical problems contributing to this are the maldistribution of resources (financial, physical and human) between hospitals and the primary care system, and between rural and urban areas. The health sector, therefore, faces the challenge of a complete restructuring and transformation of the national health care delivery system and related institutions. Choices need to be made about which services to cut, which to streamline and where savings can be made. Ways need to be found to use ALL of South Africa's resources optimally. This process of restructuring would be facilitated by the availability of accurate information on resource utilisation in the health sector. This study estimates the difference in the cost of primary diabetes treatment at dayhospitals and a provincial hospital in the Western Cape in 1992/93. Health economics is in its infancy in South Africa and serious data limitations exist. This study is therefore a pioneering effort in many ways. An appropriate methodological framework in which to conduct the costing had to be developed. The South African health sector, health spending arid the cost of primary diabetes treatment at day-hospitals and the provincial hospital are reviewed. Theoretical perspectives of the health care market and the methodologies of cost analysis are discussed. The cost analysis method of study is chosen, and arguments are advanced for its suitability in the South African context. A simple method of calculating the direct costs to obtain the average cost is proposed for the purpose of the study. Direct costs consist of staff costs and other related costs, such as medical supplies, non-medical supplies, building operations, equipment etc. These costs are then used to calculate the average costs per diabetic patient at the day-hospitals and the provincial hospital. The average cost per diabetic patient at day-hospitals amounted to R18.76, while at the provincial hospital the cost was R59.60.
A cost-analysis study of primary diabetes treatment at day-hospitals and a provincial hospital in the Western Cape
(University of Western Cape, 1996) Hamdulay, Goolam; Adams, Ismail
The provision of health care in South Africa is undergoing major restructuring. The aim is to achieve substantial, visible and sustainable improvements to the efficiency and accessibility of primary healthcare (PHC) services for all South Africans. One of the country's most critical problems is the weak and fragmented public sector PHC system. The most critical problems contributing to this are the maldistribution of resources (financial, physical and human) between hospitals and the primary care system, and between rural and urban areas. The health sector, therefore, faces the challenge of a complete restructuring and transformation of the national health care delivery system and related institutions. Choices need to be made about which services to cut, which to streamline and where savings can be made. Ways need to be found to use ALL of South Africa's resources optimally. This process of restructuring would be facilitated by the availability of accurate information on resource utilisation in the health sector. This study estimates the difference in the cost of primary diabetes treatment at dayhospitals and a provincial hospital in the Western Cape in 1992/93. Health economics is in its infancy in South Africa and serious data limitations exist. This study is therefore a pioneering effort in many ways. An appropriate methodological framework in which to conduct the costing had to be developed. The South African health sector, health spending arid the cost of primary diabetes treatment at day-hospitals and the provincial hospital are reviewed. Theoretical perspectives of the health care market and the methodologies of cost analysis are discussed. The cost analysis method of study is chosen, and arguments are advanced for its suitability in the South African context. A simple method of calculating the direct costs to obtain the average cost is proposed for the purpose of the study. Direct costs consist of staff costs and other related costs, such as medical supplies, non-medical supplies, building operations, equipment etc. These costs are then used to calculate the average costs per diabetic patient at the day-hospitals and the provincial hospital. The average cost per diabetic patient at day-hospitals amounted to R18.76, while at the provincial hospital the cost was R59.60. https://
The effects Personal of Income Tax on the savings behaviour of households in South Africa
(University of the Western Cape, 1997) Southgate, Ada Isobel; Loots, Lieb
The "new" South Africa faces a big challenge. Unemployment, poverty and economic hardship still characterise the life of the majority of South Africans. Most people expect this to change under democracy. This will only be possible, however, if the economy can grow fast enough. What type of economic policies can a future government adopt to bring about economic growth and the reduction of poverty? More specifically, can the government raise taxes in order to spend more on the poor without reducing economic growth? The increased expenditure, given the existing deficit, will pressurise government to increase taxes. If this were to happen, the question that comes to mind is whether a savings constraint will develop. At the moment South Africa is not experiencing a savings constraint. This can be attributed to the fact that investment declined more than saving over the past few years. However, if investment has to increase over the next few years to achieve higher economic growth, the question arises whether domestic saving will increase enough to finance it. This will be difficult if an increasing tax burden has a negative impact on saving. Saving has long been recognized as a major factor in the process of economic development, directly by its diversion of resources into the formation of capital, and indirectly through changes in technology which are implemented when new capital is put to use. Few would dispute that domestic saving is important for the financing of development and it is evident that a country will require higher saving rates if it wants to invest more.
Prescribed asset requirements as a second best solution: the South African experience
(University of the Western Cape, 1998) Hardien, Adenaan; Adams, Ismail
This paper explores the feasibility and desirability of the South African Government imposing a policy of prescribed asset requirements on contractual savings. This would serve as a short-term measure to secure finance for investment in high priority development projects. Such a policy would encourage contractual savings institutions to become active participants in the process of development by requiring them to diversify their assets to include claims on either the government or other identified institutions engaged in the above projects. The first section of this mini-thesis discusses some features of the South African economy focussing broadly on recent political changes and economic challenges facing the country. The second section of the paper reviews current literature on issues related to the thesis, exploring topics in public finance and financial liberalisation. The third section analyses the nature of tax concessions on contractual savings, the effects of tax distortions on the savings behaviour of individuals and problems that have arisen because of tax concessions. The fourth section uses a microeconomic approach to illustrate the bias that individuals have toward contractual savings. The fifth section develops analytical models, which illustrates how prescribed asset requirements could constitute a second best solution. Section six explores possible solutions based on the modelling exercises. Finally, section seven highlights some of the main conclusions reached.
The lack of adequate housing in the Western Cape and its impact on the environment: A theoretical analysis
(University of the Western Cape, 1998) Hassan, Mohamed; Schultz, Carl- Erik
The debate, about the role of the State, involves both normative and ethical judgements. Thus, what should the state do and not do? How can the desired ends be attained most efficiently? What distribution of income and services is socially just / desirable? Economic change must proceed apace with political dispensation. Democracy pre-supposes that conflicting needs and desires of the various groups in society can be fairly sorted out through enfranchisement and participation. This can only be judged as fair if its base (society) has shared values, which is only possible if society is not too divided by inequality in Income, Wealth and Opportunity. A precondition for success is an increase in per capita income i.e. economic growth. South Africa in many ways has Third World characteristics. This and its racially associated differences requires urgent attention. Apartheid has resulted in the nation foregoing several decades of potential economic and human development gains. Apartheid has resulted in a number of development issues reaching crucial / crisis levels ( Van Der Berg: 1991 :A): -Dualism resulting in85Yo of income inequality (O. Shima, 1962) -Income inequality, with a gini coefficient of 0.6. -Rural to urban unemployment, urban growth outstripped urban infrastructural and industrial development. -Squatter settlements resulting in the concentration of poverty, crime, dehumanization, etc. -Unemployment at a conservative estimate of 40%. Whites reinforced the initial inequality in technological endowment with customary discrimination and legislative measures which prevented equal access to social services and employment opportunities, hence the accumulation of wealth. The budget was one of the major forms of economic discrimination in South Africa. It is also the most effective instrument available for redistribution and restitution. The budget will have to bear a large part of the burden for ensuring a smooth transition to sustainable democracy. The dilemma in South Africa lies in reconciling democracy with a limited tax capacity. Large scale increases in social transfers seem premature in the light of large scale unemployment, underemployment, the lack of an institutional basis for such transfers, and most importantly, the resource constraints. The causes of the economic malaise are sufficiently numerous that only multi-dimensional strategies would be likely to succeed. Policies will have to be implemented over longer periods of time and will have to be guided and nurtured all the way through. The development process must be based on participatory processes and upon consensus by society at large. What we had in the past is what Jerry Eckert calls "...….unfettered capitalism placed in an un egalitarian setting....". As a result we are now faced with these development problems. Since apartheid entailed a redistribution from nonwhites to whites, the demise of apartheid should imply a redistribution from the rich to the poor, which in reality is from the whites to the non-whites. So, non-whites have a basis for redress.
An investigation into the developmental model of social welfare service delivery: a Western Cape case study
(University of the Western Cape, 1998) Demas, Carla; Thompson, Lisa
This study explores the extent to which welfare policy in South Africa is suitable to the country's needs and is translated into practice. lt focuses on the White Paper for Social Welfare and looks specifically at the developmental model of welfare. The study draws on the experiences of various stakeholders within the welfare sector, such as social work lecturers, social work students, social welfare practitioners and the director of developmental social welfare. The study indicates that the developmental approach has potential to the address the welfare needs in South Africa. However, factors such as confusion about the meaning of the term developmental social work and the lack of resources have limited the extent to which this approach is translated into practice and consequently it's potential to transform social welfare in South Africa. 1l
Regional economic integration and trade liberalisation towards a free trade area in Southern Africa: A critical assessment
(University of Western Cape, 2000) Adams, Ismail; Huda, S
Regionalism has become a prominent feature of the current international landscape. During the last decade and a half there has been an increasing number of countries that opted to form regional blocs. 1 Developing countries fear of marginalisation and their need to be part of a larger economic entity has been an important motivation in signing regional trade agreements (RTA's).
An analysis of management's approach to occupational health and safety in the Western Cape chemical sector
(University of the Western Cape, 2002) Le Roux, P.J; Hirschsohn, P
Employers in South Africa are keen to be referred to as being responsible when dealing with workplace health and safety. However, the poor health and safety record of South African companies generally and especially in the mining and fishing sectors is internationally known. Many observers comment that the picture at plant level does not reflect a commitment and willingness by management to even implement the minimum standards stipulated by legislation without pressure from external sources such as government enforcement agencies or export market pressure. It is well known that the lives of black labourers were worth little during the apartheid era as workers were simply replaced when injured, killed or unable to perform duties due to illness. This legacy still exists today under high unemployment rate in the country does not allow workers the freedom to turn down jobs in high-risk environments or to refuse unsafe tasks. The steady increase of work-related injuries and diseases reported under the Compensation for Occupational Injuries and Diseases Act it came into effect in 1993, is sufficient proof of this sad state of affairs with 289 952 accidents and 3615 occupational diseases reported during the 199711998 financial year. The fatality rate reported in 1996 was 2 220 inclusive of all sectors in the economy. These figures illustrate the need for a new mental model that will value human life irrespective of colour or status in the economy.
The decentralisation of primary health care in the metropolitan region of Cape Town
(University of the Western Cape, 2002) Black, P.A.; Shaheeda Sechel
In the interest of holistic integrated management, all functions and resources of primary health care should be transferred to the local authority through the process of decentralisation. Thereby placing all such services under a single authority. The reallocation of resources to local authority alternatives can reduce the cost of providing primary health care services. Such reduction does not necessarily imply budgetary savings; rather, it may imply increasing the number of people who are served or improving the quality of services for a given level of expenditure. The motive for decentralisation, if any, emerges from the majoritarian nature of the political process, efficiency and equity considerations.
Are microfinance institutions in South Africa efficient? - A case study in the Limpopo province
(University of the Western Cape, 2002) Kallis, Denver; Huda, Syed
This minithesis aims to determine whether South Africa's microfinance institutions are operating efficiently and whether efficiency can be enhanced. Using the United Nations model and framework for efficiency, it examines the key principles of operational efficiency in the South African microfinance context. The paper begins with an overview of the literature relating to the principles of efficiency as underscored in the United Nations model.
Exchange rate misalignment and international trade competitiveness : A cointegration analysis for South Africa
(University of the Western Cape, 2002) Asfaha, S.G.; Huda, S.N
Issues pertaining to the misalignment of exchange rate have become central in the analysis of open economy macroeconomics for developing countries. This is at least due to two reasons: first persistent overvaluation of currency is seen as a powerful early warning of potential currency crisis and second protracted periods of exchange rate misalignment are highly associated with poor economic performance in a number of developing countries. Owing to this fact, economists are in concession that aligning real exchange rates towards their equilibrium values is an important component of macroeconomic policy adjustments in order to achieve and maintain a sustainable development. For this purpose the estimation of the degree of the real exchange rate misalignment has become pivotal. However, despite the concession among economists regarding the need to minimize the frequency and magnitude of exchange rate misalignment, the estimation of the equilibrium exchange rate (hence the misalignment) has been among the most controversial and challenging issues in modem macroeconomics. For several decades, the Purchasing power parity (PPP) approach-which is based on the law of one price-has been the most widely used methodology for the estimation of the equilibrium exchange rate in both developed and developing countries. In South Africa some attempts have been made to estimate the misalignment of the rand against major currencies on the basis of the PPP approach. However, large numbers of empirical studies show that PPP does not hold except in the 'ultra' long run. In addition, PPP's assumption of a constant equilibrium exchange rate makes it ill-fitted to serve as a bench-mark for the analysis of the exchange rate in countries such as South Africa that experience substantial structural changes. As a result a number of macro-econometric models underlying on the macroeconomic determinants of exchange rate have been developed, albeit with little applicability in developing countries. In this study, we have used Edwards' (1989) intertemporal general equilibrium model of a small open economy in order to estimate the degree of the real exchange rate misalignment and its impact on the international trade competitiveness of the South African economy for the period 1985:1-2000:4. For this purpose a dynamic single equation error correction model of a first order autoregressive distributed lag model, ADL (1,1), and five years moving average technique have been employed to estimate the exchange rate misalignment. Whereas impulse response analysis and variance decomposition techniques of a cointegrated VAR (vector auto regression) have been established to assess the impact of the misalignment on trade competitiveness. The fmdings of the study reveal that the real exchange rate had been consistently overvalued during the period' 1988:3-1998:2 but undervalued during periods 1998:3- 2000:4. For most of the periods during 1985:1-1988:2 the rand had been undervalued. More over the study discloses that exchange rate misalignment debilitates South Africa's international trade competitiveness accounting for 20 percent of the variation in competitiveness.

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