When South Africa emerged from the apartheid era in 1994 it had an urgent need to complement its political liberation and its openness to global trade and investment with economic growth that would benefit all members of the population. In 1996, macroeconomic policies were incorporated by the new government into a strategy to promote Growth, Employment and Redistribution (GEAR) strategy. This study looks at the macroeconomic goals and policies introduced and how these have been fulfilled. It attempts to answer the following questions:
to what extent have monetary and fiscal policies affected economic growth in South Africa?
what are the most important shocks that have been affecting long-run economic growth in South Africa?
can the effect be mitigated by public policy interventions aimed at improving the investment climate?
how have the shocks been affecting monetary and fiscal policies in South Africa?
Based on estimations of a simultaneous equation system, the analysis show that:
real income growth is positively related to gross domestic savings, changes-in-the-money-stock variable, total mining production and its own past values
changes in the real effective exchange rate are negatively related to changes in the money stock and its own past values, and positively related to changes in the foreign price and domestic nominal interest rate.
the hypothesis that imports growth hinders economic growth is confirmed
foreign inflation shock and the foreign monetary shock have literally no effect on the real GDP
the hypothesis that external shocks have a very profound effect on South African monetary and fiscal policies is not verified
In general, the paper concludes that domestic nominal interest rate, corporate income tax, money stock, foreign nominal interest rate domestic savings and imports determine economic growth in South Africa. It argues that the South African government is not doing enough to stimulate economic growth in the economy, and suggests nominal interest rate to be cut down by the monetary authorities during recession periods in order to stimulate capital inflow for domestic investment. Besides, a fiscal solution would be to offer foreign investors substantial tax holidays or tax cuts.