Government Expenditures to Lead Long-Run Economic Improvement SOUTH AFRICA Nicole Lusignan & Ben Taylor

Summary Background on South Africa’s Economy Unemployment Problem Current Account Deficit Problem Exchange Rate Depreciation Problem Recommendation: Expand Fiscally Short-Run Results from Fiscal Expansion Long-Run Results from Expansion Plan Implications for South Africa

South Africa’s Economy Positives: – 4% GDP growth over last 3 years – Decreasing inflation – Increasing investment – Public debt decreased by 50% since 1999 – Liberalized trade and increased consumption – Steady interest rates

South Africa’s Economy Negatives: – Booming current account deficit – High unemployment rates – AIDS epidemic stunting productivity – South African currency – the rand – is depreciating – Major socioeconomic disparities – Lacking in infrastructure and social services – In the 3 rd (worst-off) zone of economic discomfort

Unemployment Problem 40% of South Africans are unemployed, up 9% over last decade Joblessness attributed to AIDS epidemic, lack of education, high crime rate, low productivity, and powerful labor unions Lack of jobs and productivity has led to a cycle of deepening unemployment due to lack of new investment Trend has been improving slightly very recently South Africa is likely not at its full employment level of output due to such high unemployment

Current Account Deficit Problem In 2002, there was small current account surplus Since then, it has become negative and exploded in magnitude, going from $0.884 billion to -$15.5 billion in 5 years Deficits have grown in all current account components: goods, services, transfers and income balances CA Deficit is now 6% of GDP and is a definite problem due to the unemployment and monetary depreciation problems

Exchange Rate Depreciation South African Rand has free-floating exchange rate Appreciated steadily from after large depreciation due to Argentina crisis Fall dramatically in mid-2006 due to global currency sell-off due to US monetary contraction Has continued to depreciate and is projected to continue depreciation through 2011 Vulnerability of rand has also increased to due free- floating rand and continually exploding current account deficit

Expansionary Fiscal Policy: SR Fiscal expansion will be long run investment in the country’s productivity by adding infrastructure and social services In SR, an increase in G would theoretically increase Y and shift the DD curve outward, causing increased output and appreciation of the rand However, due to the huge current account deficit, it will likely counteract the fiscal expansion in the short run and actually cause the DD curve to shift backward, decreasing output and depreciating the rand further Investment from increase in G will still start to slowly increase productivity and joblessness and even indirectly curb the current account deficit

Expansionary Fiscal Policy: LR Over time, the repeated increases in G will overtake the current account deficit (that may be decreasing too) DD curve will shift out in small increments over the long run until full employment is reached At this point, unemployment will be lower, the rand appreciated, output increased and perhaps even an indirect decrease in current account deficit At the very least, the economy will be in far better shape, be more productive and attract more investment – and be less negatively affected by a current account deficit

In Conclusion While it will take a very long time for the investment now to have a serious impact, a commitment to these policies should lead to our expected results and more economic prosperity in South Africa Especially because in the alternative, unemployment and the exchange rate may continue to worsen South Africa and make the country at high risk for economic crisis

Government Expenditures to Lead Long-Run Economic Improvement SOUTH AFRICA The End