Book Description

In common with emerging countries in Asia and Latin America, South Africa received substantial capital inflows following socio-political and financial liberalisation in the mid-1990s. However, unlike many other emerging countries, the bulk of South Africa’s post-liberalisation inflows have been in the traditionally short-term forms of portfolio and other investment. Hence, in this thesis, a macroeconometric analysis of South Africa’s post-liberalisation capital flow components is conducted to investigate the extent to which their divergent impacts have complicated, or even rendered impotent, the dual policy goals of attracting capital inflows on the one hand, while mitigating any significant detrimental impacts on the other. The results of the analysis show that foreign direct investment is responsive to domestic factors, while portfolio and other flows respond to a combination of domestic and foreign factors. However, domestic business cycle fluctuations are found to have a greater effect on the capital outflows than the capital inflows, and are thus associated with heightened capital flight and repatriation during expansionary phases. Although the capital flow components are found to have varied effects on South Africa’s macroeconomy, transmission mechanisms, nominal Rand/U.S. Dollar exchange rate, and economic growth dynamics, the ‘hot’ flows are found to demonstrate greater boom-bust characteristics compared to foreign direct investment. Conventional economic theory posits that the destabilising effects can be controlled using fiscal and monetary policy mechanisms. However, analysis of the cyclical relationships between the capital flows and fiscal policy finds that net direct investment and net other investment tend to be counter-cyclically associated with fiscal policy, while net portfolio investment tends to be acyclical, indicating that the bulk of South Africa’s net capital inflows do not have a significant cyclical relationship with fiscal policy.