Nov 24, 1971 - For example, in 1958 Sadie stated that "...the post-war eco- ..... as reasons for this trend include: the recession of 1958-1959, during which real.
37
South Afr ica' s balance of payments 1946-1985 by PHILIP MOHR, MARIANA BOTHA AND JON INGGS Univer sity of South Afr ica
Economic activity and economic policy in South Africa are presently constrained by the low level of foreign exchange reserves and the need to meet the country's foreign debt commitments in 1990 and 1991. Since there is no realistic possibility of a nett inflow of foreign capital, South Africa's short- to medium-term economic future thus hinges on the ability to restructure the foreign debt and to maintain a surplus on the current account of the balance of payments. Although the present crisis is particularly severe, it is important to realise that South Africa's economic fortunes have always been determined to a large extent by the country's economic links with the rest of the world, as reflected in the balance of payments. Moreover, economic policy frequently had to be directed towards improving the balance of payments, irrespective of the severity of other economic problems. For example, in 1958 Sadie stated that "...the post-war economic scene in South Africa has been dominated by balance of payments problems... in consequence the subject matter of foreign capital has been uppermost in the minds of policy-making authorities and critics alike".1 Seventeen years later Reynders and Van Zyl also emphasised that "South Africa had been under almost continuous pressure to achieve short-term balance in its external accounts during the post-war period".2 This article is an attempt to identify some of the major non-cyclical or structural changes in South Africa's balance of payments between World War II and the foreign-debt standstill of August 1985. After a few introductory comments on definitions and data problems, the "typical" cyclical pattern of the balance of payments is described briefly in the second section. This is followed by a short discussion of the major changes in South Africa's balance of payments constraint in the postwar period. The rest of the article is devoted to a discussion of developments
1. 2.
J.L. Sadie, "Foreign Capital I: A Reappraisal of Our Needs", Finance and Trade Review, 3(1), March 1958, p 3 H.J.J. Reynders & J.C. van Zyl, "Foreign Trade Policy" in J.A. Lombard (ed), Economic Policy in South Africa: Selected Essays, Cape Town, 1975, p 89
38 in some of the major components and subaccounts of the balance of payments between 1946 and 1985. 1. DEFINITIONS AND DATA PROBLEMS A country's balance of payments consists of two major subaccounts: the cur r ent account, which pertains to trade in goods and services, and the capital account, which records purchases and sales of assets. The current account can be subdivided into the tr ade account, which records imports and exports of goods only, and the ser vice account, which records service receipts and payments for services. The remaining component of the current account, transfer payments, is insignificant and has been eliminated from the data used in this article. Ideally, a detailed investigation of South Africa's balance of payments in the postwar period should involve analyses of all its major components and subaccounts. However, since space does not permit such a detailed breakdown and analysis, only nett gold exports, merchandise exports and imports, the trade balance, the current account balance and the capital account are illustrated and briefly discussed.3 Balance of payments data are only available in nominal terms, i.e. at current prices. Unadjusted balance of payments time series spanning an inflationary 40year period are therefore not particularly useful. In an attempt to overcome this problem, all the data presented in this article are expressed as a percentage of nominal gross domestic product (GDP).4 Although this is decidedly more satisfactory than simply using unadjusted time series, ratios also have to be interpreted carefully.5 In this case, for example, it must be noted that cyclical changes in
3.
4.
5.
The service account, which tends to be more stable than the trade account, is not shown separately. South Africa's service account is always in deficit and during the period under review the magnitude of the deficit varied between approximately four and six per cent of GDP. In addition, very little detail is provided on the components and subaccounts of the capital account. In certain cases other series or ratios could have been used. For example, gold production, imports and exports are all available in volume terms or indices while nominal imports should also rather be expressed as a percentage of nominal gross domestic expenditure (GDE). However, to be consistent all the series are expressed as a percentage of GDP. All the data used have been obtained from various issues of the South African Reserve Bank Quarterly Bulletin. In this regard special mention should be made of the two supplements containing relatively long time series on the balance of payments, viz. A statistical presenta tion of South Africa' s balance of payments for the period 1946 to 1970 (Supplement to the March 1971 issue) and South Africa' s balance of payments, 1956-1975 (Supplement to the March 1977 issue). Also note that the exclusive use of annual data implies that certain short-term trends and/or the effects of isolated occurrences are not necessarily reflected in the graphs. See P.J. Mohr, C. van der Merwe, Z.C. Botha & E.J. Inggs, The Practical Guide to South African Economic Indicators, Johannesburg, 1988, pp 100-01.
39 GDP, including those that are unrelated to - or not reflected in - balance of payments developments, will be manifested in the ratios between balance of payments variables and GDP. 2. THE "TYPICAL" CYCLICAL PATTERN OF THE BALANCE OF PAYMENTS When considering balance of payments developments, it should be borne in mind that these developments are closely related to cyclical changes in the domestic economy in a cause and effect relationship. On the one hand imports are highly correlated with domestic expenditure, while exports have often provided the initial spark which triggers an upswing in domestic economic activity. The "typical" interaction between the South African business cycle and the balance of payments during the greater part of the period under review can be summarised as follows.6 The lower turning point of the cycle was usually characterised by abnormally low imports and a concomitant surplus or negligible deficit on the current account of the balance of payments. There was little if any nett inflow of capital and the gold and other foreign reserves were usually at a relatively high level. The next cyclical upswing then often started with an increase in exports, one reason being a prior upswing in the United States and Western Europe. The South African cycle often lagged behind the cycle in the United States by as much as nine to 15 months and behind that in Western Europe by as much as six to 12 months. The rising exports then stimulated domestic consumption and investment, resulting in a strong upswing in gross domestic expenditure. This, in turn, usually resulted in a spectacular increase in imports of goods and services and a deterioration of the current account of the balance of payments. At the same time, however, there was usually a tendency for the nett capital inflow to increase substantially, in the form of not only direct investment and long-term loans to public and private enterprises in South Africa, but also trade credits and other shortterm capital to finance the rising imports and economic activity generally. Nevertheless, the current account deficit normally became so large that the gold and other foreign reserves usually declined significantly during the later stages of the upswing. To prevent the balance of payments deficit from getting out of hand, the monetary authorities then usually applied a restrictive monetary policy, while import control was also frequently tightened. After an upper turning point was reached, the exact opposite of the upswing occurred. By now the economies of the United States and Western Europe usually had been in a downturn for some months, resulting in a weak market for South African exports. The major feature of the South African downswing, however, was a sharp decline in imports - any marked slowing down in the rate of increase of economic activity inevitably resulted in lower imports of capital, intermediate
6.
This description is based on G.P.C. de Kock, "The business cycle in South Africa - recent tendencies", South African Journal of Economics, 43(1), 1975, pp 3-7.
40 and consumer goods. This led to a decline in the deficit on the current account of the balance of payments and even though the nett capital inflow usually also tended to decline, the nett outcome was generally an overall balance of payments surplus and a concomitant increase in the gold and other foreign reserves. This, in turn, helped to set the stage for the next upswing. Another reason why the current account of the balance of payments tended to deteriorate during cyclical upswings was the fact that South African exporters of manufactured goods often switched from overseas markets to the buoyant domestic market during such upswings.7 As mentioned previously, the focus of this article is on structural changes and little further attention will be paid to cyclical factors. 3. THE BALANCE OF PAYMENTS CONSTRAINT Balance of payments constraint means different things to different people. To some freemarketeers the notion is ridiculous. They believe that the course of the balance of payments is largely, if not solely, determined by domestic developments and policies and that all balance of payments problems can be solved by applying appropriate monetary and fiscal policies and allowing interest rates and exchange rates to find their market-clearing levels. According to them the balance of payments can therefore not act as a constraint on domestic economic activity and policy. A more conventional view, often associated with the International Monetary Fund and the World Bank, is that a developing country requires foreign finance, just like any growing firm requires external finance. According to this view, which Bouchet8 has termed the official
approach, economic growth and development can therefore be constrained by a lack of foreign capital, which will only be forthcoming if foreign investors have confidence in the prospects for economic growth and stability in the country concerned. An even more widely-held view, which may be termed the Keynesian or functionalist approach,9 is that domestic economic growth can be constrained by a lack of domestic saving relative to domestic investment and/or a lack of the necessary foreign exchange to finance the required level of imported capital and intermediate goods (given the level of exports). As a result foreign capital is often required to eliminate the saving gap and/or the foreign exchange gap.
7. 8. 9.
See Report of the Commission of Inquiry into the Export Trade of the Republic of South Africa (RP69/72), Pretoria, 1972, pp 7, 29. M.H. Bouchet, The Political Economy of International Debt, New York, 1987, ch 3 Ibid, ch 4
41 No attempt will be made in this article to analyse these and other10 views on the existence, nature and possible implications of the balance of payments constraint. Instead, it is simply assumed (a) that a developing country such as South Africa requires a nett inflow of foreign capital, (b) that such an inflow will only be forthcoming if a minimum degree of economic growth and stability is achieved or is expected to be achieved, (c) that domestic economic stability requires a minimum level of foreign exchange reserves, which can only be supplemented by balance of payments surpluses, and (d) that serious balance of payments constraints on domestic economic activity and policy can therefore be experienced from time to time. It comes as no surprise that South Africa has experienced its fair share of balance of payments crises in the postwar period. This by itself is no cause for alarm - all countries experience balance of payments crises from time to time. What is worrisome, however, is the fact that South Africa's balance of payments constraint has tended to become progressively more serious during the postwar period. Before examining certain balance of payments developments during this period it is perhaps appropriate to briefly paint a very broad picture of these developments. Between 1946 and 1976 South Africa could generally afford to run currentaccount deficits (amounting on average to about three per cent of GDP) since these deficits were largely financed by nett inflows of foreign capital. During this period, therefore, the country could generally sustain levels of domestic expenditure significantly in excess of domestic production. Stated differently, saving or foreign exchange gaps were closed by surpluses on the capital account of the balance of payments (although capital inflows often fell short of complete accommodation of current-account deficits). From 1976 onwards, however, South Africa was faced with a new type of balance of payments constraint. Persistent nett outflows of foreign capital as well as important structural changes in the capital account11 meant that the country could no longer afford to run persistent current-account deficits. Instead, a zero balance had to be aimed for. In other words, domestic expenditure had to be brought in line with domestic production. The third significant change occurred in the 1980s when domestic and international political and economic developments resulted in South Africa's own foreign debt crisis in August 1985. The subsequent foreign debt standstill, renegotiated debt commitments and financial sanctions implied that South Africa had been forced to become a nett exporter of financial resources. Moreover, the deteriorating domestic economic and political situation and increased uncertainty about South Africa's economic prospects gave rise to capital flight from South Africa. The upshot of this was that South Africa had been forced to run current-account surpluses, i.e. domestic expenditure had to be kept significantly lower than domestic production.
10. Ibid, chs 2, 5 and 6 11. See E.J. van der Merwe & M.C. Bester, "South Africa's's foreign liabilities and assets, 1956 to 1981", Quarterly Bulletin of the South African Reserve Bank, 148, June 1983, pp 23-35.
42 GRAPH 1 Nett gold expor ts as a per centage of GDP 1946-1985
GOLD - SOME IMPORTANT FACTS AND DATES* 1946-1970
Annual gold production increases from 370 metric tons to 1 002 metric tons
1971-1985
Annual gold production decreases from 976 metric tons to 671 metric tons
1946-22 December 1971
Official price of gold constant at US $35 an ounce
18 November 1967
Sterling devalued by 14,3%; Gold Pool under pressure
17 March 1968
Introduction of two-tier gold market
December 1969
Free market price of gold falls below US $35 an ounce
End of 1970
Gold price starts increasing
30 December 1974
Gold price reaches US $195 an ounce
26 August 1976
Gold price falls to US $105 an ounce
21 January 1980
Gold price reaches all-time high of US $850 per fine ounce
* See graph 4 for details on devaluations of SA currency
43 These changes in the nature and intensity of South Africa's balance of payments constraint go a long way towards explaining the deteriorating performance of the economy during the past two decades. We now turn to a brief examination of developments in some of the major components and subaccounts of the balance of payments between 1946 and 1985. 4. NETT GOLD EXPORTS The value of nett gold exports,12 expressed as a percentage of GDP, is illustrated in graph 1. The box accompanying the graph also contains a few significant dates, as do all the subsequent graphs. Gold was, and still is, the most important single determinant of the balance of payments and the course of economic activity in South Africa. However, important structural changes occurred during the period under review, which can be divided into two distinct subperiods: 1946-1970 and 1971-1985. Between 1946 and 1970 the official dollar price of gold remained unchanged at $35 an ounce, while the price of gold in South African currency only increased once - by 44 per cent as a result of the devaluation in September 1949. During the same period the volume of gold production almost tripled as a result of the development of the OFS goldfields13 and the opening of new mines in the Eastern Transvaal (Evander), Western Transvaal (Klerksdorp) and the Far West Rand. The increased volume of production helped to offset the disadvantages of a fixed price, especially during the latter part of the period. The resultant steady increase in the value of gold production helped to ease the balance of payments constraint and was a major source of economic stability in South Africa during this period, especially in view of the instability of the other South African exports. However, after 1970 all this changed. Gold production reached a peak in 1970 and subsequently declined fairly steadily between 1971 and 1985, both in absolute terms (by about a third) and as a percentage of Western gold production (from approximately 80 to 55 per cent). During the same period changes in the dollar price of gold became a significant source of instability in the balance of payments and the domestic economy, as can be seen in graph 1. Sustained and fairly rapid price increases between 1971 and 1974 were followed by a lower rate of increase and subsequent decline, but from late 1976 the price resumed its upward march, reaching an all-time high in January 1980. This was followed by a dramatic decline. Subsequently the dollar price of gold continued to fluctuate, albeit within narrower limits, but these fluctuations were largely neutralised by changes in the rand-dollar exchange rate.
12. Nett gold exports are defined as nett foreign sales of gold plus changes in gold holdings of the Reserve Bank and other banking institutions. For all practical purposes it therefore represents the value of gold production. 13. See, for example, H.F. Oppenheimer, "The Orange Free State Gold Fields", South African Journal of Economics, 18(2), June 1950, pp 148-56 and W.P. de Kock, "The Influence of the Free State Gold Fields on the Union's Economy", South African Journal of Economics, 19(2), June 1951, pp 128-48.
44 GRAPH 2 Nominal value of mer chandise expor ts (excluding gold) as a % of GDP 1946-1985
EXPORTS - SOME IMPORTANT FACTS AND DATES* 1949-1950
Wool boom (value of wool exports two-thirds of gold exports)
1950-1952
Korean war
1952
Uranium production commences
1956
Suez crisis
1957-1958
Sharp decline in international commodity prices (e.g. wool, diamonds)
1968
Sharp increase in maize exports
1970
Sharp decline in wool price and other commodity prices
1971
Reynders Commission appointed
1972
Excellent agricultural crops, commodity prices improve
1975
Coal exports take off
1980-1982
Policy-induced international recession
1983-1984
Serious drought in maize-producing areas
1985
Boom in world trade, massive depreciation of rand
* For dates of devaluations of SA currency, see graph 4.
45 5. MERCHANDISE EXPORTS The ratio between the annual value of merchandise exports (excluding gold) and nominal GDP is illustrated in graph 2. The major features of this graph are: (a) a sharp increase in the ratio between 1946 and 1951; (b) a fairly steady, secular decline between 1951 and 1971; and (c) a more unstable pattern during the rest of the period. As far as (b) and (c) are concerned, it should be noted, however, that the denominator (GDP) grew steadily during the 1950s and 1960s but became more erratic during the 1970s and 1980s. This illustrates a major drawback in using a ratio of this type. Another important change between the pre- and post-1970 periods was the exchange rate instability which followed the demise of the Bretton Woods system in 1971. We now turn to some of the events which shaped the course of South African merchandise exports during this period, certain of which are also indicated in the box accompanying graph 2. South Africa's merchandise exports have always been dominated by primary and intermediate products and although the composition of these exports changed, they continued to be dominated by agricultural and mining products during the period under review. This had two major implications. Firstly, it meant that the value of South African exports were particularly sensitive to developments in the flex-price international commodity markets, where suppliers are price takers. Secondly, the impact of climatic conditions on agricultural production was a significant cause of fluctuations in South African exports, especially during the 1950s.14 Not surprisingly, therefore, the sharp increase in merchandise exports between 1946 and 1951 consisted of significant increases in the volume and prices of agricultural and non-gold mineral exports. These were caused by factors such as the devaluation of the South African pound in 1949, the record wool clip of 1950 and the increased demand for raw materials as a result of the Korean war.15 This export boom was followed by a secular decline in the share of merchandise exports in GDP. During the 1950s exports were generally not regarded as a growth factor in South Africa - the major focus was on the domestic market and the promotion of import substitution.16 There were, however, a number of events which impacted favourably on South African exports, including the mining of uranium from 1952 onwards, the international
14. Report of the Commission of Inquiry into the Export Trade, op cit, pp 44, 47-48 15. T.H. Kelly, "South Africa's Foreign Trade, 1933-1953", South African Journal of Economics, 22(1), March 1954, p 78 16. Report of the Commission of Inquiry into the Export Trade, pp 7, 29
46 GRAPH 3 Nominal value of mer chandise impor ts as a per centage of GDP 1946-1985
IMPORTS - SOME SIGNIFICANT FACTS AND DATES* 1946-1948 5 November 1948
Postwar import boom Prohibition of imports of certain non-essential commodities
July 1949
Full, direct import control (licensing)
1950-1951
Korean boom
1950-1956
Periodic relaxation and tightening of import control
1957 cars)
Significant relaxation of import control (particularly on motor-
May 1961
Drastic import control in wake of Sharpeville shootings
December 1969
Import control relaxed almost completely
24 November 1971
Tightening of import control
July 1972
Import control relaxed
1973/74
First oil shock
1975/76
Large imports of defence equipment and strategic supplies
1979/80
Second oil shock
* For dates of devaluations of SA currency, see graph 4.
47 stockpiling of strategic minerals during and after the Korean war and the Suez crisis in 1956.17 On the negative side there were a few unfavourable movements in the terms of trade, especially in 1957/58 and 1970/71, when international commodity prices fell sharply. In 1971 the secular decline in South Africa's export performance led to the appointment of the Commission of Inquiry into the Export Trade of the Republic of South Africa (the Reynders Commission) which reported in 1972. The period after 1971 was characterised by the instability of international commodity prices, exchange rate instability (and uncertainty) and significant increases in non-gold mineral exports. International commodity prices (e.g. wool, diamonds, sugar and platinum) increased rapidly between 1972 and the middle of 1974. This was followed by a reversal of the commodity boom as a result of depressed conditions in the industrial countries. This sequence of events was repeated during the late 1970s and early 1980s, as can clearly be seen in graph 2. Although the share of agricultural products in South Africa's merchandise exports had declined since earlier years, climatic conditions also still affected the overall export performance. Some excellent agricultural crops were experienced during the early 1970s, while serious drought conditions in 1983 and 1984 resulted in a drastic fall in nett agricultural exports. The volume of mineral exports increased sharply, however. Particularly significant in this regard was the spectacular increase in coal exports from 1975 onwards.18 In 1985 a sharp increase in world trade and the massive depreciation of the rand against most leading currencies impacted favourably on the volume and value of South African exports. 6. MERCHANDISE IMPORTS Graph 3 illustrates the ratio between the annual value of merchandise imports and nominal GDP during the period under review. Although this ratio suffers from the same basic defects as the ratio between exports and GDP, it is obvious that it indicates a definite cyclical pattern. This is not surprising, in view of the typical cyclical changes in imports described in section 2. Although annual data cannot be linked satisfactorily to the different phases of the business cycle, the data points for the years during which lower turning points of the business cycle occurred have been highlighted in the graph. This gives some indication of the cyclical nature of the import bill. Broadly speaking the troughs of the business cycle coincide with low or declining values of the ratio. The other major features of the graph include: (a) the extraordinarily high import levels during the years immediately following World War II; (b) a fairly steady
17. T. van Waasdijk, "Changes in South Africa's Terms of Trade, 1950-1958", South African Journal of Economics, 27(2), June 1959, p 116 18. The Nedbank Group, South Africa: an appraisal (2nd ed), Johannesburg, 1983, p 56
48 decline between 1951 and 1962; and (c) subsequent swings around a slightly increasing trend. The immediate postwar period was characterised by unprecedented and hitherto unequalled increases in imports. The reasons for this import boom include (a) the pent-up consumer demand and liquidity after the war,19 (b) the need to replace capital goods which had been worn out during the war, and (c) the new capital goods required for the development of the OFS and Western Transvaal goldfields, the new Iscor works and Sasol.20 The most interesting feature, however, was the fact that large nett capital inflows (see section 9) precipitated the rise in imports.21 In other words, the current account deficits during the postwar period were caused, in part at least, by the surpluses on the capital account.22 This situation was therefore diametrically opposite to the post-1985 situation in which capital account deficits have necessitated current account surpluses. Nevertheless, it still constituted a balance of payments crisis - South Africa's first prolonged peacetime balance of payments problem - which required corrective action. Among the most important steps taken were the prohibition of imports of certain non-essential commodities on 5 November 1948, the introduction of a comprehensive system of import licensing in July 1949 and a 30,3 per cent devaluation of the South African pound along with sterling in September 1949. Import control was relaxed in 1951 but tightened again after another sharp increase in imports during the Korean boom.23 This pattern of alternative relaxation and tightening of import control was maintained through the greater part of the 1950s with the tendency being towards generally strict import control until 1956 and a more relaxed approach between 1957 and 1960. The most significant feature of the 1950s, which can be attributed partly to import control,24 was the high rate of import substitution which contributed towards the declining ratio between imports in GDP illustrated in graph 3. But the possibilities for further import substitution gradually diminished and it
19. A.S. Tancred, "South Africa's External Trade and Balance of Payments", Financial and Trade Review, 1(1), July 1952, p 20; T. van Waasdijk, "Some Notes on Price Inflation in South Africa, 1938-1948", South African Journal of Economics, 17(3), September 1949, p 261; J.L. Sadie, Funk Money and its Aftermath", South African Journal of Economics, 19(2), June 1951, pp 161-64 20. H.W.J. Wijnholds, "South Africa's Balance of Payments - Prewar and Postwar", Finance and Trade Review, 1(2), January 1953, pp 29-37; The Nedbank Group, op cit, p 89 21. Sadie (1951), op cit, p 175; C.G.W. Schumann, D.G. Franzsen & G.P.C. de Kock, Ekonomie : ' n Inleidende Studie, p 596; D.G. Franzsen & H.J.J. Reynders (eds), Die Ekonomiese Lewe van Suid-Afrika (3rd ed), Pretoria, 1966, p 223 22. The massive speculative capital inflows after World War II were only one example of a "fortuitous" event stimulating imports. An interesting micro example was the importation of expensive American motorcars by wool farmers in the wake of the 1950 wool boom. D.H. Houghton, The South African Economy (2nd ed), Cape Town, 1967, p 173 23. Schumann et al, op cit, p 597 24. C.L. McCarthy, "Structural Development of South African Manufacturing Industry", South African Journal of Economics, 56(1), March 1988, p 9
49 therefore lost impetus during the 1960s.25 Moreover, import substitution had a significant impact on the composition of imports26 particularly in so far as capital and intermediate goods became more important.27 This, in turn, meant that increases in domestic production had become even more dependent on imports, thus contributing towards the decidedly more pronounced cyclical pattern in imports in recent years. Apart from this cyclical tendency, a number of non-cyclical factors also have to be taken into account in trying to explain the movement in imports since 1970. These include: the demise of the Bretton Woods system and the subsequent exchange rate instability (and uncertainty); speculative activity in anticipation of devaluation, depreciation or import control measures; the 1973/74 and 1979/80 oil shocks; and stockpiling of strategic goods and purchases of military equipment following the deterioration in South Africa's international political position during the mid-1970s. 7. TRADE BALANCE Graph 4 illustrates the annual trade balance, expressed as a percentage of GDP. As indicated in the graph, this balance, a combination of graphs 1 to 3, has generally been positive during the period under review. Most of the major underlying causes of movements in the trade balance have already been discussed in sections 2, 4, 5 and 6. The most significant remaining feature of this graph is the three periods during which a trade deficit was recorded for more than a single year. Each of these periods, 1946-1949, 1970-1971 and 1975-1976, coincided with or culminated in devaluations of the South African currency against the US dollar. It can therefore be concluded that a trade deficit constituted a fundamental balance of payments disequilibrium which required a devaluation of the currency. It is also interesting to reflect on the factors which contributed to subsequent improvements in the trade balance. While the devaluations probably had some effect, the improvements can largely be ascribed to other factors already referred to, such as import substitution and increased gold production during the 1950s and increases in the price of gold during the early and late 1970s. It should be noted, however, that the three periods referred to fell in the era of fairly fixed (and stable) exchange rates. When the trade balance deteriorated again in 1981 the rand was allowed to depreciate against the dollar, eventually breaching the psychological $1-00 level in February 1982. Subsequently an almost continuous (and occasionally fairly dramatic) depreciation of the rand helped to maintain the trade surplus.
25. Report of the Commission of Inquiry into the Export Trade, op cit, pp 7, 29, 35 26. McCarthy, op cit, pp 13-14 27. C.F. Scheepers, "The Effect of Import Substitution on the Volume and Structure of South Africa's Imports, 1926/27-1963/64", Finance and Trade Review, 8(4), December 1969, pp 258-71
50 GRAPH 4 Tr ade balance as a per centage of GDP 1946-1985
TRADE BALANCE - SOME IMPORTANT DATES* 18 September 1949
South African pound devalued, along with sterling, by 30,3% (price of gold increases from R17,20 to R24,80)
22 December 1971
Devaluation of US dollar and rand against gold by 12,28% (following Smithsonian agreement)
25 October 1972
Rand devalued by 4,2% against gold
27 June 1975
Rand devalued by 4,76% against US dollar
22 September 1975
Rand devalued by 17,9% against US dollar
24 January 1979
Independent managed floating of rand introduced
February 1982
Rand falls below parity with US dollar
* For facts and dates relating to gold, exports and imports, see graphs 1 to 3.
51 8. CURRENT ACCOUNT BALANCE Graph 5 illustrates that the current account of South Africa's balance of payments was generally in deficit between 1946 and 1985. This balance (which is also expressed as a percentage of GDP) exhibits exactly the same movements as the trade balance, the only difference being that the former includes the service account, which was always in deficit.28 Although the current account balance usually commands significant attention, along with the balance on capital account, it is unnecessary to comment any further on graph 5 because all its major components have already been discussed. GRAPH 5 Cur r ent account balance as a per centage of GDP 1946-1985
28. See footnote 3. Also remember that transfer payments have been excluded from all the data used in this paper.
52 GRAPH 6 Capital account as a per centage of GDP 1946-1985
CAPITAL ACCOUNT - SOME IMPORTANT FACTS AND DATES March 1948
Controls on inflow of sterling
May 1948
National Party unexpectedly wins general election
1957
First annual net outflow of private capital in postwar period
21 March 1960
Sharpeville shootings; state of emergency (lifted on 31 August)
March 1961
Introduction of stringent exchange control in respect of nonresidents
9 May 1969
Share prices on JSE reach peak
Early 1970s
Substantial foreign borrowing by public corporations to finance infrastructural investment
16 June 1976
Soweto riots
5 February 1983
Abolition of financial rand and exchange control in respect of non-residents
1984-1985
Widespread unrest following Vaal Triangle flare-up
20 July 1985
Declaration of partial state of emergency
28 August 1985
Chase Manhattan calls for immediate repayment of all South African credits
1 September 1985
Reinstatement of financial rand and exchange control in respect of non-residents
53 9. CAPITAL ACCOUNT Graph 6 illustrates the annual capital account balance (as a percentage of GDP) between 1946 and 1985. In trying to explain or analyse the distinct changes that occurred during this period it has to be borne in mind that international capital movements are determined by a variety of international and domestic political and economic factors.29 It would therefore be erroneous to ascribe South Africa's capital account deficits solely to political uncertainty in the wake of the Sharpeville shootings, the Soweto riots and the Vaal Triangle unrest. The first major feature of the graph is the dramatic nett inflow of capital during the immediate postwar period. This can largely be ascribed to capital flight from Britain, triggered by economic and political uncertainty which was caused in turn by factors such as the new government's nationalisation programme, the sterling convertibility crisis and fears of the imposition of a capital levy.30 In stark contrast to present circumstances, South Africa appeared at that stage as "a haven of financial security in a world of uncertainty".31 Although this inflow of "funk" or "hot" money was arrested and the nett inflow of capital diminished further after the Nationalist government came to power in May 1948, the capital account remained in surplus until 1957. The significant feature, however, was a definite downward trend in the surplus from 1948 to 1960 which serves to indicate that the post-Sharpeville capital flight was not the only reason for the capital account deficits recorded during the early sixties. The factors cited as reasons for this trend include: the recession of 1958-1959, during which real per capita income fell for the first time since the Great Depression, political developments on the rest of the African continent,32 the high levels of interest rates prevailing abroad,33 the relatively high prices on the Johannesburg Stock Exchange and credit control in the United Kingdom.34
29. In 1971 the Economic Department of the South African Reserve Bank emphasised that capital inflows were influenced by the rate of economic growth, domestic monetary and fiscal policies and "exogenous factors such as changes in the international monetary field, devaluations or revaluations, credit and exchange policies followed abroad, interest rate patterns and political developments" - South African Reserve Bank Quarterly Bulletin, September 1971, p 27. 30. For a discussion of the causes of these capital inflows, see: Sadie (1951), op cit, pp 158-76; F.D. Holzman, "Dollar Capital Outflow in the South African Balance of Payments", South African Journal of Economics, 18(3), September 1950, pp 285-92; and Schumann, et al, op cit, p 596. 31. Sadie (1951), op cit, p 160 32. Houghton, op cit, pp 178, 180 33. Franzsen & Reynders, op cit, p 226; J.L. Sadie, "Foreign Capital in South Africa II: Its Burden", Finance and Trade Review, 3(2), September 1958, p 74 34. Economic Department of the South African Reserve Bank, "Post-war growth and structural changes in the South African economy : an analysis of national accounts and balance of payments data", South African Reserve Bank Quarterly Bulletin, September 1971, p 23
54 Once the consequences of the Sharpeville incident, the state of emergency, South Africa's decision to leave the Commonwealth, become a Republic and the widespread turmoil on the rest of the African continent had been overcome, inter alia , by the introduction of stringent exchange control, the remainder of the 1960s was characterised by significant economic growth and stability and substantial nett inflows of private long-term capital.35 During the 1970s, however, a variety of factors, including greater exchange rate uncertainty and lower economic growth, resulted in a more erratic pattern of capital flows. After the Soweto unrest nett capital outflows became the norm rather than the exception. Even more important than the changes in the level and direction of capital flows were a number of significant changes in the composition of the inflows. In particular, there was a definite shift from long-term direct investment in the private sector to short-term borrowing by the public and banking sectors. Between 1969 and 1985: (a) the share of direct foreign investment in total foreign investment in South Africa fell from 61,1 to 33,5 per cent; (b) the private sector's share in total foreign investment fell from 87,5 to 60,4 per cent; and (c) the share of long-term foreign investment in total foreign investment declined from 81,5 to 55,9 per cent.36 This switch to short-term foreign borrowing increased South Africa's vulnerability to changes in foreign confidence or increased international pressure and goes a long way towards explaining the severity of the foreign debt crisis of August 1985. 10. CONCLUDING REMARKS In 1962 Graaff emphasised that economic growth in South Africa cannot be explained without examining changes in South Africa's position in the international economy.37 Four years earlier the Viljoen Commission had also strongly emphasised the role of external factors in shaping the direction and rate of economic growth.38 In this article we have outlined some of the major events and structural changes underlying South Africa's balance of payments between 1946 and 1985. Following Graaff and the Viljoen Commission, it can be reiterated that economic growth in South Africa has continued to be governed by events and occurrences relating to, or affecting, South Africa's international economic position. This is also borne out by our present predicament and there is no reason to presume that the future will be any different.
35. Ibid, p 28. These inflows have been linked to speculation about a possible increase in the price of gold and the consequent share price boom. See J.A. Lombard & J.J. Stadler, Die Ekonomiese Stelsel van Suid-Afrika (5th ed), Cape Town, 1978, p 327. 36. The 1969 graphs were obtained from Van der Merwe & Bester, op cit, pp 27-29 and those for 1985 were calculated on the same basis from data provided in subsequent issues of the South African Reserve Bank Quarterly Bulletin. 37. J. de V. Graaff, "Alternative Models of South African Economic Growth", South African Journal of Economics, 30(1), March 1962, pp 44-49 38. Report of the Commission of Enquiry into Policy relating to the Protection of Industries, (UG36/1958), Pretoria, 1958, par 224
