FINANCIAL INTEGRATION IN THE COMMON MONETARY AREA*

This paper assesses the level of financial integration within the CMA countries, using the concept of the uncovered interest rate parity. The impact of foreign interest rates on the domestic interest rates, in this case the South African rates on the rates of the LNS countries, is analysed. For comparative purposes, other neighbouring countries such as Botswana, Zambia and Zimbabwe are brought into the analysis. The results from the uncovered interest rate parity approach show that Lesotho, Namibia and Swaziland can be considered to be well financially integrated with the South African market, while for Botswana, Zambia and Zimbabwe it shows the contrary.     

Strangers in a strange land: citizenship and the immigration debate in Lesotho

Lesotho, a small sovereign country located within the borders of the Republic of South Africa, displays a paradox as regards immigration. It lacks the attributes of a typical receiving country, but it has been attractive to immigrants, especially from those countries in sub-Saharan Africa which are not members of the Southern African Development Community (SADC). Lesotho's attraction to immigrants is explained largely by its ability to offer better remuneration for skilled workers than many non-SADC sub-Saharan African countries, and by its strategic location as an easy transit gate into South Africa, widely perceived as the ‘Europe’ of the continent. However, the influx of immigrants into Lesotho has generated a wave of anti-foreigner feelings among sections of the population and heightened the debate about the relevance of foreigners to national development. The paper reiterates the principal conventional arguments against immigration: that it compromises jobs, raises crime rates, intensifies the spread of diseases, undermines the homogeneity of the state and nation and exerts additional strain on the country's already overstretched resources. Demonstrating the limits of these arguments, the paper argues that for Lesotho, grappling with unemployment and manpower shortages, immigration is an asset rather than a liability because it creates jobs, brings in skills that are otherwise in short supply and raises the country's international profile and competitiveness.     

Pro-poor microcredit in South Africa: cost-efficiency and productivity of South African pro-poor microfinance institutions

This article compares the performance of selected South African microcredit non-governmental organisations (NGOs) that have a poverty-alleviation focus against various benchmarks drawn from the MicroBanking Bulletin. Donors, governments and many analysts regard sustainability as the benchmark of microfinance institutions' (MFIs) performance. However, the most relevant question is whether microcredit NGOs are doing as well as they can in their context. Of particular contextual importance is income inequality in a society. South Africa has the world's second worst income inequality, after neighbouring Botswana. This creates a situation in which microcredit NGOs must recover ‘First World’ costs, particularly salaries, from revenues based on clients who can only afford loans on a par with Third World countries. Compounding this situation are structural obstacles to microenterprise in South Africa, as well as obstacles to productivity in microcredit NGOs. Taken together, this creates a ‘salary burden’ for South African microcredit NGOs, which is the highest in the world according to relevant benchmarks. South African MFI managers face significant obstacles to improving productivity to compensate for the divergence between staff and client living levels. These include an inadequate skills base, the small scale of the market, rapid labour turnover, and limited resources for capacity development. South African MFIs face the options of moving upmarket (which many have done), adopting methodological innovation or new product development, or closure. Of these, there is a strong argument to be made for supported savings and credit approaches as an alternative to NGO-based microcredit. Such an approach has the advantages of greater voluntary input and social capital formation.     

European trade liberalisation and the stillborn Nordic customs union in the 1950s

Abstract

Historical research on the aborted Nordic customs union of the 1950s has emphasised the conflicting commercial interests of the countries involved. This study identifies the common commercial interests that from 1954 committed governments to further progress in the customs union issue. It argues that increased frustration over the ‘hardening’ of the European commercial regime made the governments opt for a customs union to develop Nordic manufacturing industries.     

Integration among unequals: The Southern African Customs Union and Development

The Southern African Customs Union agreement has been reappraised in several recent articles. This note attempts to extend the reappraisals in four ways. They deal with: (1) the 1976 amendment to the revenue-sharing formula, (2) the use of non-tariff barriers by South Africa, (3) the effects on real income distribution, and (4) questions of broader development possibilities and policies when the Customs Union is viewed within the broader context of integration in Southern Africa. The tentative conclusion is that membership of the Customs Union is probably advantageous for Botswana, Lesotho and Swaziland unless conditions in South Africa change radically.     

Estimation of the East African Community's trade benefits from promoting intra‐regional trade

In the literature on economic integration, the optimum currency area (OCA) theory says that there should be a high degree of trade between potential members of a monetary union for them to benefit from the use of a single currency. This study uses an augmented gravity model of trade to estimate the East African Community's (EAC) trade effects, as this community decided to participate in a monetary union by 2024. The study uses the fixed effect filter (FEF) estimator, which follows a two‐step approach and outperforms the standard fixed effects (FE) estimator. The results indicate that EAC has the potential to increase trade among partner states by 122% more than expected from the normal trade levels. The study, therefore, supports the ongoing East African Monetary Union process. However, to improve the likelihood of creating a more sustainable monetary union, the study recommends these countries to primarily focus on the full implementation of the customs union and common market steps. The main contribution of this study is that it provides robust estimates of the EAC's effects on intra‐regional trade using more recent data and updated econometric techniques.     

Enhancing productive capabilities through intra-regional trade and cross-border investments in Southern Africa

Regional integration is an important factor for enabling knowledge flows between economies and enhancing the capacity of firms within the integrated block to benefit from local knowledge spillovers. This study analyses data on economic interactions between Botswana and its technologically more advanced southern neighbour, South Africa, to examine the extent to which knowledge flows facilitated by geographical proximity translate into fostering technological learning and productivity of manufacturing firms. Industry- and firm-level data on bilateral capital goods trade and investments over the period 1991–2013 are used to assess the technological learning of the manufacturing sector in Botswana. This study also applies the Hunt, J, &; Tybout, J (1999. Does Promoting High-Tech Products Spur Development? FEEM Working Paper REG 42. Milan: Fondazione Eni EnricoMattei) technological sophistication framework to analyse the role played by regional trade and investment flows between the economies of South Africa and Botswana in the skills intensification of manufacturing firms. Skills intensity decomposition reveals that Botswana’s manufacturing technical intensity has been positively influenced by the extent of capital goods trade and investment linkages with South African economy.     

Price‐Setting Behaviour in Lesotho: Stylised Facts from Consumer Retail Prices

This paper documents some of the main features of price‐setting behaviour by retail outlets in Lesotho over the period March 2002 to December 2009. These features include the frequency, size, duration and synchronisation of price changes. In addition, the paper compares price‐setting behaviour in Lesotho and South Africa using a comparable set of products. The findings reveal considerable heterogeneity in price‐setting behaviour across products, outlets, locations and time. Variations in inflation are strongly correlated with the average size of price changes, but rising inflation raises the frequency of price increases and reduces the frequency of price decreases. Price decreases constitute an important determinant of inflation movements. Surprisingly, the frequency and size of price changes in Lesotho differ substantially from those in South Africa, despite the presence of common retail chains and their joint membership in a customs union and common monetary area. These findings open up opportunities for further research into the sources of heterogeneity across products and Lesotho and South Africa in the setting of prices.     

PRICE FLEXIBILITY IN THE COMMON MONETARY AREA

This paper examines the presence of flexibility within the common monetary area (CMA) as compared to a selected group of Southern African Development Co-operation (SADC) countries. The study tests for the readiness of SADC countries towards macroeconomic convergence and monetary unification. The methods followed examine the concept of (relative) purchasing power parity and test for the speed of adjustment of prices after a shock. The results suggest that the level of price flexibility is high within the CMA as opposed to the control group. The implication is that the CMA arrangement has managed to foster price flexibility among its member countries. Furthermore, Botswana could be a potential candidate for a monetary union with the CMA group.     

The impact of trade facilitation factors on South Africa's exports to a selection of African countries

Economic growth can be enhanced through increased trade among countries, provided the correct institutional structures are in place. A country's trade is dependent not only on its own trade facilitation reforms but also on those of the trading partners. This paper, using an augmented gravity model, examines trade facilitation factors that impact on South Africa's exports to other selected African countries. The results of the estimation reveal the following. An improvement in the customs environment within the importing country provides the largest gain in terms of increasing trade flows, followed by the regulatory environment and domestic infrastructure. Furthermore, adjacency and common language impact positively on South African exports, while distance between countries impacts negatively on it. Being part of the Southern African Development Community is also enhancing exports from South Africa, compared with being part of the East African Community.     

Are Manufacturing Exports the Key to Economic Success in Africa?

The poor performance of many African economies has been associatedwith low growth of exports in general and of manufacturing exportsin particular. The two most successful countries in Africa havebeen Botswana and Mauritius. In Botswana, rapid export growthfollowed the discovery of diamonds; in Mauritius, manufacturingexports played a major role. In this paper we draw on both macroand micro evidence from nine African countries to investigatewhether manufacturing exports are the key to success in Africa.We do this by posing three questions. First, how close is thelink between export and income growth? Second, is there evidencefrom these African countries that manufactured exports haveled to greater economic success? Third, what has limited thesuccess of firms in the manufacturing sector? We argue thatexport and income growth are very closely linked. However, thereis, for this sample of countries, no evidence that if theirexports are manufactures, growth rates are higher. We show thatthe factors that limit the success of African manufacturingfirms in exporting are their levels of efficiency and smallsize. We argue that the key to success in an area where Africahas a potential cost advantage — labour-intensive garments— is to enable large firms to use a more labour-intensivetechnology than is the case at present.     

Social security for young people amidst high poverty and unemployment: Some policy options for South Africa

South African youth experience extremely high levels of unemployment and poverty. Currently there is no social assistance for low-income young adults in South Africa unless they are disabled. Interventions are needed that can achieve widespread poverty alleviation, as well as help facilitate economic participation to improve lifelong earnings. In this article, six examples of social security policy options are considered, including five grants ranging from an unconditional non-means-tested grant for young people to a conditional grant for young people in training or education, plus an ‘Opportunities voucher’ that is administered through the social security system but paid out to organisations offering youth education or work opportunities. Using a tax and benefit microsimulation model to simulate the five grants, we estimate the potential numbers reached and cost, as well as the impact of these six options on poverty.     

FINANCIAL AND MONETARY AUTONOMY AND INTERDEPENDENCE BETWEEN SOUTH AFRICA AND THE OTHER SACU COUNTRIES

The paper uses cointegration and error correction modelling techniques together with tests of weak exogeneity, and monthly interest rates for the period 1990 to 2005, to examine the degree of financial and monetary autonomy and interdependence between South Africa and the other Southern African Customs, Union (SACU) countries. The results reveal a high level of dependence of the other SACU countries' financial systems on South Africa's financial system, which suggests that a monetary unification with a single central bank (South African Reserve Bank) and monetary policy for the union is feasible.     

Immigration policy in South Africa: does it make economic sense?

Current levels of international labour migration are exceptional. Several thousand skilled South Africans leave the country each year. Historically, the country attracted more skilled workers than it lost, from Europe and, more recently, other African countries. But emigration is increasing and immigration is restricted by policy and a range of socio-economic factors. The trends in the ‘brain drain’ from South Africa and its causes and severity are relatively well understood and will be reviewed in this paper. However, the policy response has been slow and confused. The paper highlights some of the economic determinants and effects of South African emigration and immigration and reviews recent changes to South African migration legislation. It asks how South Africa can attract the right kind of skilled immigrants and what more can be done to stem the loss of professionals from the country.     

Unemployment in Africa: A Fractional Integration Approach

This paper estimates long‐memory models to analyse the stochastic behaviour of unemployment in eleven African countries (Botswana, Ethiopia, Ghana, Kenya, Malawi, Mauritius, Nigeria, Senegal, South Africa, Tanzania and Zambia) from the 1960s until 2010. The empirical results provide very strong evidence of lack of mean reversion in all series under examination. This suggests that hysteresis models are the most relevant for the African experience (not surprisingly, given the rigidities in their labour markets). Therefore in such countries shocks hitting the unemployment series will have permanent effects, and policy makers should take appropriate action to reverse the effects of negative shocks.     

Financial Globalization in Botswana and Nigeria: A Critique of the Thresholds Paradigm

Since the Asian financial crises, economists are more circumspect in their advocacy of ‘financial globalization’. A new consensus emerged which contends that increased financial liberalization and capital account openness may only produce economic benefits when countries are open to trade and have good institutions and policies in place. This paper critically reviews this consensus, which we term the ‘thresholds paradigm’, through a survey of the available literature and a comparative case study of two African countries that have undertaken financial and capital account liberalization: Nigeria and Botswana. The paper argues that the thresholds paradigm leaves important theoretical and policy-related questions unresolved, in particular, the origins of good institutions and policies. Further, while at first glance the paradigm appears to capture the divergent outcomes of financial globalization policies in Nigeria and Botswana, a deeper investigation reveals important factors that are neglected and occluded. The paper concludes that economists need to be more methodologically ambidextrous and must integrate institutional factors in their theoretical frameworks in order to better understand the outcomes of ‘financial globalization’ and to provide useful policy advice to developing countries contemplating financial reforms in the future.     

Whither the study of development in South Africa?

In South Africa we have, since 1990, experienced an upsurge of interest in the study and teaching of development. In this article it is argued that two brands of development research and teaching have emerged in South Africa: one brand has a distinct public administration/management focus, while the other has a more pan-disciplinary, development studies focus. Despite these different focuses, a peculiar convergence has taken place in that the themes of study of the two ‘schools’ often overlap. This convergence demands further exploration of a number of themes, such as the research methodologies appropriate to the South African development context; approaches to administration and management relevant to South African development; balancing the role of state and civil society in South Africa; and clarity on what we mean by the concept ‘empowerment’ in our deliberations on development in South Africa.     

Deconstructing ‘the foreign’: The limits of citizenship for explaining price competition in the Spaza sector in South Africa

An important component of the informal economy in South Africa, the Spaza sector is portrayed as dominated by foreign nationals who outcompete South African shopkeepers on price. Indeed, this business competition from foreign nationals is a key reason given to explain xenophobia in South Africa. This article sets out to interrogate this widely held assumption. Drawing on evidence from over 1000 Spaza shops from South Africa’s three main cities, the article makes the case that business competitiveness does not correspond with ‘foreign’ or South African identities in a simple way. Firstly, while citizenship or nationality is a factor, it is not captured by the labels of ‘foreign’ versus South African, as there are significant differences by nationality within the ‘foreign’. Secondly, not all foreign nationalities out-compete South Africans on price. Thirdly, place matters too, not only because we find different nationalities in different cities, but also because there are different patterns of price competition by nationality in each place. Lastly, there are product-specific dynamics that impact on price more profoundly than nationality. For example, regardless of nationality, milk is cheaper in Cape Town and bread is cheaper in Johannesburg.     

Dualism or underdevelopment in South Africa: what does a quantitative assessment of poverty,inequality and employment reveal?

Debate over the nature of South African society has continued through the first decade of democratic government, including the question of a ‘First’ and a ‘Second’ economy. This paper focuses on the numbers and characteristics of those who might fit into the ‘Second’. The data examined suggest that both poverty and inequality have increased in South Africa since 1993, while also suggesting the presence of poverty traps that may hinder mobility and prevent individuals getting ahead despite the dramatic economic and political reforms since 1994. We estimate that some 6.2 million could be described as belonging to the ‘Second’ economy. However, we argue that there is more to the relationship between those who are marginalised and those who are benefiting from South Africa's achievement than a dualistic and disarticulated ‘First’ and ‘Second’ economy. Linkages of inclusion and exclusion determine the size, characteristics and future of the two economies.     

Stratégies de développement et ouverture sur l'extérieur

Résurné: Cet article examine d'abord la notion de strategie de developpe- ment: il en propose une definition et des criteres de mesure: la strategie de developpement, mode de developpement choisi par le pays, autrement dit ce qui ne resulte pas de I'environnement, est appreciee a travers divers indicateurs, dits de performance, de choix structurels et de choix instrumentaux. Les indi- cateurs sont mesures en purgeant les donnees brutes de I'influence de l'envi- ronnement. Abstract: This paper first considers the concept of development strategy, of which it offers a definition and measurement criteria. Development strategy is defined as the development pattern chosen by the country, that is to say the pattern which does not result from the environmental factors. It can be appreciated by several indicators of ‘performance’, ‘structural choices’ and ‘instrumental choices’, most of them measured by eliminating from gross variables the influence of the environment. This methodology is then applied to the study of the trade strategy. The ‘openness’ of ‘outward orientation’ is here defined and measured by the level of export-GDP ratio which does not result from environment. Environmental variables acting on the export ratio, as estimated by a cross-sectional analysis, are the per capita income level, the country size, and the mineral exports. This ‘revealed’ outward (or inward) orientation is compared between African and non African countries. Finally, the implications of an informal trade for the outward orientation index are discussed in the case of African countries.