Financial Systems and Monetary Policy in Africa
Publication date: September 2007
This paper examines the role of the financial system in the operation and evolution of monetary policy. The financial system is comprised of the banking system, non-bank financial institutions and the capital markets. The role of the central bank is two-fold, that of price stability, and stability of the payment system. We look at the evolution of monetary policy in Africa over the last forty years, through five stages namely, Currency Board, Rationing Regime, Discretionary Regime, Credit Ceiling regime, and Market Clearing Regime. The paper shows how the financial system is important for the effective conduct of monetary policy. The paper discusses the objectives of financial sector reforms in Africa namely, to reduce financial sector repression by liberalizing interest rates; to institute transition from direct to indirect monetary policy; to restructure the balance sheets of banks and restore their solvency; and to develop financial markets. We then present the state of the financial sector in most African countries before and after the financial sector reforms.
Total downloads: 443
Do Free Trade Agreements Create Trade for South Africa?
Publication date: September 2006
This paper shows that South Africa’s exports and imports had been determined by the normal variables found in gravity models, namely GDP, population and distance. However, differences in the composition of trade had resulted in distance from markets having a greater adverse effect on exports than imports. Cross section estimates of the impact of the free trade agreements between South Africa the EU and SADC failed to show significant effects. Panel estimates on the other hand yielded positive effects for EU exports and imports with South Africa. The SADC FTA was found to have stimulated South Africa’s exports to SADC but with little effect on SADC imports into South Africa. Finally, it was found that preferential access under the US AGOA had not particularly benefited South African exporters.
Total downloads: 401
Macroeconomic News 'Surprises' and the Rand/Dollar Exchange Rate
Publication date: March 2005
Journal: 2005, Studies in Economics and Econometrics, 29(3),1-16
Economic theory in the context of floating exchange rates has focussed on underlying medium and long term direction of exchange rate movements. Daily volatility is less well understood. One theory that offers an explanation for short term exchange rate movements is that of the efficient market hypothesis or EMH. Its application to the forex market allows exchange rate movements to be understood as the reaction of traders to relevant news. In an efficient market traders react to news and specifically to surprise news events which necessitate a re-evaluation of the currency value. We test for the validity of this hypothesis in the context of the daily rand/dollar forex market over a three year period, adding an emerging market case to the literature. We test the significance of macroeconomic news surprises -measured by the difference between actual and forecast data - in driving daily exchange rates. We find that surprises in both real and nominal variables cause a statistically significant reaction in the exchange rate. The results support an asymmetry between news of different origin as only surprises that originate in the U.S. prove significant. Good news also seems to receive greater attention from traders than bad news in our sample. Finally, we find that the statistical significance of variables is time-varying.
Total downloads: 401
The Impact of Performance Intensive Policy Intervention: Aid Policy that is Performance Intensive
Publication date: December 2005
We examine a two country aid model with performance intensive aid. The aid budget is determined by a donor country legislature, but allocated by a donor agency in terms of a performance criterion of its choice. Five sources of slippage in policy delivery are introduced: the donor agency observes the performance of the aid recipient imperfectly; the donor agency and the aid recipient are subject to inefficiency; the aid recipient experiences corruption; and adjustment of aid recipient performance is costly. Incentives between the aid donor and the aid recipient are intentionally aligned - to explore the best-case for the policy intervention. Immediate implications are then that optimal level of effort and governance in the aid recipient increase under performance intensity of aid. Moreover, performance intensity of aid has fundraising effects. While the aid recipient also has an incentive to increase the measurement noise in governance, this incentive is weaker than that to raise true underlying governance, is weakest for the poorest aid recipients and provided that the donor agency is sufficiently efficient, measurement error itself will serve to raise optimal effort in the aid recipient. The importance of aid agency self-monitoring is thereby identified. Three important qualifications on the anticipated success of the policy emerge, however. Despite the elimination of incentive misalignment, aid donors may come to rely on performance intensity precisely where such a reliance is likely to be least successful in aid recipients. Second, performance intensity of aid maximizes its impact under conditions where it is supplemented by technical assistance to improve the effectiveness of own effort by the aid recipient. Finally, under convex adjustment costs the general class of optimal time paths in governance in aid recipients will be non-monotone, such that governance may get worse before they get better - optimally so. Performance intensive policy may thus appear to fail - immediately after imposition.
Total downloads: 305
What is the Structure of South African Happiness Equations? Evidence from Quality of Life Surveys
Publication date: November 2005
The issue of what determines subjective well-being has been at the centre of a recent flurry of research in the economics field. A necessary part of this understanding is the role relative positions (economic, social, geographic) of economic agents, particularly individuals, play in life (commonly referred to in the literature as rivalry). In this paper we concentrate on whether the structure of happiness equations of South Africa are the same/similar to those of developed countries. The analysis uses three of the Durban Quality of Life Studies. Firstly these three data series are pooled and a variety of covariates are tested for their significance on happiness. These include age, marital status, employment status, household income and relative household income. Next we estimate yearly cross-sectional models to see if there are consistent findings of what determines happiness across the period considered. Our findings indicate there maybe some structural differences between results from the Durban studies and those of international findings. Age appears to play no role in happiness likelihood, nor does marital status. Being unemployed does significantly and negatively effect happiness as does the size of household income, relative household income and whether living in a formal dwelling place. When we distinguish between employment categories we find that being self-employed negatively affects happiness, contradicting findings for developed countries. Future research will concentrate on the most recent Durban studies, in which information on health and crime are available, both of which are expected to significantly effect happiness given the well documented nature of these problems in South Africa.
Total downloads: 446
The Political Economy of Institutions, Stability and Investment: a simultaneous equation approach in an emerging economy – the case of South Africa
Publication date: November 2005
The modern theory of investment identities the importance of uncertainty to investment. A number of empirical studies have tested the theory on South African time series, employing political instability measures as proxies for uncertainty. This paper verifies that political instability measures are required in the formulation of the investment function for South Africa. It also establishes that there are distinct institutional factors that influence the uncertainty variable such as property rights and crime levels. We find that rising income and property rights lower political instability, and that rising crime levels are positively related to political instability. The inference is that political instability in South Africa may not represent uncertainty directly, since it is systematically related to a set of determinants. Instead, uncertainty would have to be understood as being related to a broader institutional nexus that in concert may generate uncertainty for investors.
Total downloads: 437
Corporate Governance, Manager Behavior, and Analyst Behavior as Determinants of Mergers and Acquisitions
Publication date: September 2006
The literature on Mergers and Acquisitions activity has espoused various explanations for M&A activity. Some of this captures the nature of defence mechanisms again takeovers. In all the expositions the agency conflicts and degrees of collusion among the claimants to the firm’s cash-flows, are apparent. In this paper we add to the literature by presenting an integrated framework that classifies manager behavior and corporate governance, and show how a manager can use M&A bids as a vehicle for maximising their own benefits, rather than shareholder value. The M&A bid targeted by the manager could simply be for diversionary reasons that seek to enable the manager to hold on to his employment and benefits, even though he may be a poor manager. We also consider M&A activity that benefits both managers and shareholders. In this analysis, M&A activity is driven by the manager’s appetite for M&A activity, both beneficial and unbeneficial. The analysts, who are employed by investment banks, that advise on the M&A activity, collude with management. The analysts forecast inflated earnings for a company because the fees they earn as a portion of what the investment bank earns, are related to the size of the transaction which in turn is determined by the inflated future earnings. The agency conflicts between shareholders, investment banks and their analysts, and managers of the company, are central to our framework.
Total downloads: 376
Challenging Cassandra: Household and Per Capita Household Income Distribution in the October Household Surveys 1995-1999, Income and Expenditure Surveys 1995 & 2000, and the Labour Force Survey 2000
Publication date: July 2004
Journal: 2006, Economic Modelling, 23, 738 - 60
This paper examines household income inequality in the South African October Household Survey datasets between 1995 and 1999, the Labour Force Survey 2000, and the Income and Expenditure Surveys 1995 and 2000. The paper reflects both on changing patterns of income inequality in South Africa, and on the quality and comparability of the data employed. We employ several measures of income inequality, employing nominal income and expenditure data from South Africa over the 1995-2000 period. Results prove sensitive to the choice of welfare measure. Furthermore, results from income data and expenditure data provide contrasting results. On self-reported income data, our findings are that inequality measures increased over the 1995 - 2000 time period. While we do not attach much credence to the evidence for reasons attaching to data quality, there is nevertheless evidence suggesting that the general increase in inequality for the African race group also hides a decrease in inequality for the bottom 1/3 of the income distribution, and (more unambiguously) a widening of inequality for the middle 1/3 of the income distribution for Africans. There is also some evidence of a narrowing inequality amongst rich households for the population as a whole. This suggests that there is at least some evidence consistent with a successful redistribution of income from richest to poorest households, though this has not yet reversed the high aggregate level of inequality in South Africa. Evidence from inequality measures based on expenditure data reverse the findings based on self-reported income. Where there is evidence of an increase in inequality, in most instances this proves to be statistically insignificant. On some measures African as well as total population inequality has declined significantly, and for a number of racial groups inequality has remained unchanged. The central conclusion of the paper is therefore that there is much contradictory evidence that emerges from household level data on income inequality - suggesting that the choice of data set is non-trivial in drawing inference on income inequality in South Africa.
Total downloads: 412
Growth Impact and Determinants of Foreign Direct Investment into South Africa, 1956-2003
Publication date: December 2004
The paper is concerned with the growth impact and the determinants of foreign direct investment in South Africa. Estimation is in terms of a standard spill-over model of investment, and in terms of a new model of locational choice in FDI between domestic and foreign alternatives. We find complementarity of foreign and domestic capital in the long run, implying a positive technological spill-over from foreign to domestic capital. While there is a crowd-out of domestic investment from foreign direct investment, this impact is restricted to the short run. Further we find that foreign direct investment in South Africa has tended to be capital intensive, suggesting that foreign direct investment has been horizontal rather than vertical. Determinants of foreign direct investment in South Africa lie in the net rate of return, as well as the risk profile of the foreign direct investment liabilities. Policy handles are both direct and powerful. Reducing political risk, ensuring property rights, most importantly bolstering growth in the market size, as well as wage moderation, lowering corporate tax rates, and ensuring full integration of the South African economy into the world economy all follow as policy prescriptions from our empirical findings.
Total downloads: 741
Monetary Policy, Determinacy, and Learnability in the Open Economy
Publication date: May 2005
We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique rational expectations equilibrium worldwide which can be learned by market participants. We study cases in which optimal policies are being pursued country by country as well as some forms of cooperation. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation.
Total downloads: 418
Reconsidering the business cycle and stabilisation policies in South Africa
Publication date: September 2006
Classification-JEL: E32, E52, E62, E63
This paper applies an alternative dating algorithm - suggested by Harding and Pagan (for example, 2002a) - to identify the turning points of the South African business cycle. The characteristics of the resulting business cycle are analysed and compared with results obtained for the o¢cial cycle in recent papers on the South African business cycle (du Plessis and Smit, 2003; du Plessis, 2004). The alternative business cycle has plausible characteristics and provides supporting evidence for the thesis that monetary policy has been used more consistently to dampen the cycle of economic activity in South Africa since the early nineties.
Total downloads: 2 062
Demand for health care in HIV/AIDS – affected households in two communities in the Free State province of South Africa
Publication date: October 2005
This paper analyses differences in the choice of health care facility by ill individuals in HIV/AIDS-affected households in the Free State province of South Africa. Secondary education, access to medical aid, and household income are significant determinants of choice, as are severity and type of illness, and type of health care required. Ill persons with HIV/AIDS-related illnesses are significantly more likely to opt for public health care, although the strength of this preference declines as household income increases. Ill persons with severe and in particular severe HIV/AIDS-related illness in turn are significantly more likely to opt for private health care, especially at higher levels of income. Furthermore, health care costs associated with HIV/AIDS-related illness is likely to push HIV/AIDS-affected households deeper into poverty, especially where private care is preferred over public health care. The public health care sector therefore will remain the backbone of the health care system in providing health care to those infected with HIV/AIDS.
Total downloads: 395
Entering and exiting collaborative purchasing relationships
Publication date: September 2006
Many companies establish collaborative relationships (CRs) with suppliers either alongside or in preference to purchasing parts through a process of competitive bidding (CB). CRs over flexibilities and options arising mainly from the “looseness” of the contractual relationship. One significant decision element confronting a firm intending to engage in a CR is when to enter such a relationship and when to abandon it. This paper develops a model that focuses on such timing issues. It provides an optimal timing valuation approach to establishing/abandoning a CR that incorporates differential learning rate payouts. To achieve this, a real options’ frame of reference is adopted that enables a formal analysis of the contingencies embedded in a CR. A standard illustration of the application of the model is provided.
Total downloads: 412
Deriving a theoretically defensible measure of risk
Publication date: March 2009
According to economic theory, risk is a central consideration in financial decision-making. In practice, though, it is difficult to quantify the uncertainty faced by investors, particularly if the aim is to present a risk measure that is consistent with economic theory, is objective and can be replicated.
Total downloads: 595
Free public healtcare does not remove inequality of healthcare access
Publication date: August 2009
Despite the availability in South Africa of free public health care for young children, sick children in poor households are less likely to receive medical treatment than those from more well-off households.
Total downloads: 512