Analysing South Africa’s 2011-15 Depreciation: Trade, Sectoral and General Economic Consequences
The South African Rand experienced an almost continual state of depreciation over the period 2011-2015, culminating in a massive risk premium shock to the currency, and an acceleration in the rate of depreciation, in December 2015. Economic theory shows that the ultimate economic impact of a currency devaluation will depend on a range of factors, the most important of which are the export and import price elasticities in the devaluing country. These elasticities in turn depend heavily on the country’s market power, i.e. whether it has a ‘small’ or ‘large’ economy.
South Africa is a ‘small’ country in respect of its global market power, and most studies have confirmed that it fulfils the Marshall-Lerner condition for a devaluation to be BOT improving. This paper does not contradict this finding, but in a simulation of the disaggregated impacts of a ‘devaluation’, finds that the overall economic effect of the fall in the value of the currency is contractionary.
Not every sector contracts, however, and some sectors benefit from improved export and import-substituting competitiveness. Interestingly, the winners and losers of the ‘devaluation’ are highly consistent with the current industrial policy emphasis of the South African Department of Trade and Industry (the IPAP). However the Rand’s loss in value does not support the financial, technological, and human capital development of the economy, since the tertiary sector unambiguously loses out as a result of the ‘devaluation’.
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