South African Journal of Economic and Management Sciences, Vol 11, No 1 (2008)

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Rethinking ASGISA and the rand exchange rate

Willem H Boshoff

Abstract


 Abstract: The ASGISA policy document identifies the exchange rate as one of the factors constraining accelerated growth in South Africa.  This note argues that currency developments do not translate into business cycle movements in the aggregate economy, and that a weaker exchange rate is less likely to boost either foreign investment or export performance in the face of regulatory uncertainty. 

The South African government has recently launched the Accelerated and Shared Growth Initiative (ASGISA) aimed at raising the long-term growth path of the economy. The plan identifies several so-called “binding constraints” that are considered to be inhibiting the economy from rising to more elevated levels of economic growth. One such “constraint”, according to the ASGISA policy document, is the “volatility and level of the currency” (Republic of South Africa, 2006). By including this issue, policymakers have signalled that fluctuations in the Rand are considered significant to broader economic fluctuations in South Africa. This research note questions such a conviction by offering evidence that currency fluctuations are not mirrored in the South African business cycle. Nonetheless, proponents may argue that a weaker Rand will stimulate particular sectors, mostly those that are export-oriented, while it will boost Foreign Direct Investment (FDI). However, this note argues further that a weaker Rand is less likely to generate sustainable improvement in either export-oriented industries or FDI in the absence of other reforms. The following sections consider these two issues in sequence. 


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EISSN 2222-3436 (Online)