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

26 September 2012
Author: Duncan Hodge
Publication Type: Working Paper
JEL Code: E20, E31, F43, O55

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.

Series title: Working Paper 281
1 May 2012
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