An empirical analysis of the role of imports in the South African economy.

Abstract

It is generally acknowledged that there is no sufficient, exhaustive and elaborate empirical examination of the quantitative impact of policies pertaining to import demand and economic growth in South Africa. In order to arrive at conclusive, sagacious and applicable policies on the economic growth potential of an economy, it is imperative to evaluate, empirically, whether envisaged economic growth rates and employment creation are feasible, given the socio-economic circumstances. The fundamental question of the constraint or rather effective constraints to high economic growth rates, measured by gross domestic product, has always desired urgent attention but has been neglected. There appears to be strong reasons to believe that the South African economy, like other middle-income developing economies, is subject to a "powerful balance of payments constraint that effectively aborts the growth process before it is able to deliver rising per capita incomes" (Industrial Strategy Project1, 1995:49 ). Furthermore, although this issue is widely recognized, there has been little systematic analysis of this important question. Many writings which, implicitly or explicitly, note the foreign exchange shortages as adversely affecting the economy's growth capacity have tended to focus and give enormous emphasis on exports and export expansion as a means to eradicate this economic dilemma. However, together with exports the demand for imports clearly determines the behavior of the trade account of the balance of payments as a whole. Consequently, this dissertation intends to consider one important aspect of the balance of payments constraint, namely, the determinants of the demand for imports in South Africa and the behavior of foreign trade. This study briefly examines the theoretical foundations of the savings and foreign exchange constraints using the 'two-gap' model. In that the main lesson is that the economy characterized by foreign exchange bottlenecks and/or lack of savings will not accomplish its perceived growth capacity. This is the background and motivation for the study of import demand elasticities as it gives impetus to the importance of both imports and exports in an economy. The dissertation derives the import demand function and employs the recent time-series techniques to modeling economic time-series. Prior to the empirical model, the study quantitatively describes the behavior of both imports, and exports, though more emphasis is placed on the former than the latter. In this section, simple quantitative techniques are utilized in order to determine the cyclical and trend behavior of import performance since the beginning of the 1970s. The study also briefly looks at the relationship between import of capital goods and investments into South Africa. Description of trade behavior involves examination of trade flows and their geographical destination by regional trading blocks. That is followed by an extensive literature survey conducted on import demand elasticities in South Africa and trade elasticities in general. This analysis gives a strong background to the time-series model of import demand estimated in this work. Time-series analysis examines the import demand at both aggregate and sectoral levels. Prior to the empirical model chapter there is an overview of time-series econometrics with regards to co-integration, error correction and non-stationary data. Import performance and import demand functions were studied in an economic policy context and the analyses were in some cases restricted by data constraints. Import behavior patterns and empirical results of the import demand models are discussed and international comparisons are drawn. 1 The Industrial Strategy Project (ISP) was authored by Joffe et al (1995). In this dissertation it is referred to as ISP (1995) although in the reference section I refer to Joffe et al (1995) as done in other publications. For instance, see Bell (1995). The same applies to the Normative Model Approach (NEM), in the text it is referred to as NEM (1993) while in the references it is reflected as Central Economic Advisory Services (1993).