The Exchange Rate, Dutch Disease and Manufacturing in South Africa: What do the Data Say?

The Dutch disease argument suggests that in commodity exporting countries “overvaluation” of the currency due to increases in commodity prices harms manufacturing even though the economy as a whole benefits, led by the booming natural resources sector. The relationship between the real exchange rate and manufacturing is studied here with regard to South Africa as a minerals-rich export-led economy. Since manufacturing is co-determined within a system of inter-related variables, a Johansen VAR/VEC cointegration approach was used to estimate these relationships. Using quarterly data for the sample period 1980—2010, the main findings are: world growth is the single most important determinant of domestic manufacturing; while the real exchange rate has the predicted negative sign, there is no evidence of a Dutch disease specific effect on manufacturing; large increases in unit labour costs since the early 1980s have dragged down manufacturing in South Africa over the sample period.