June 2001 - Article - Dynamics of capital flows in SA - an empirical investigation
G R Wesso
Last Modified Date:
2020-10-01, 09:31 PM
Quarterly Bulletins > Articles and Notes
Many investors have rediscovered South Africa since the democratisation process started in 1994. Political developments paved the way for the re-introduction of the South African economy to the world economy, and for the awakening of new interest in its economic potential. South Africans have suddenly found themselves in a world where there is keen competition, and where a number of emerging and developing countries are sometimes slightly ahead in a race for the excess savings of more developed communities. South Africa has re-entered this changing environment in full awareness of the pressing need for economic growth and development, for the creation of jobs and for the generation of income to improve the standard of living of its entire population. Out of its own saving, running at an unsatisfactorily low rate of only 15,5 per cent of gross domestic product in the fourth quarter of 2000, it will hardly be possible to sustain a high economic growth rate. A net inflow of foreign capital therefore becomes a basic precondition if South Africa is to catch up on the huge backlogs of existing unemployment. Tax reforms, fiscal discipline and the gradual liberalisation of exchange control are all aimed at increasing South Africa's attractiveness as a destination for foreign investment. Apart from changes in investor sentiment, capital flows are also sensitive to changes in economic growth, government deficits, exchange-rate-adjusted returns on investment and domestic inflation relative to those in other economies. Identifying relevant factors is therefore crucial in designing an effective policy. This article therefore investigates capital mobility in South Africa through an examination of the commonly used determinants of capital flows in developing economies. Following the introduction, Section 2 gives an overview of capital flows into and from South Africa since 1991. Determinants of capital flows and their composition appear in Section 3. Section 4 summarises the empirical evidence on the factors influencing capital flows. In this section, error-correction techniques and an unrestricted vector autoregression (VAR) model are used to determine the dynamics between capital flows and other relevant economic variables, using quarterly South African data from 1991.1 to 2000.4. Section 5 offers some concluding remarks and directions for future research.