Question

Capital formation and economic development south africa

Answer 1

In South Africa the export sector is frequently accorded a special role in encouraging faster economic growth. Nonetheless, a question that remains unresolved is whether higher export growth indeed leads to higher economic growth and what particular role exports may play within the overall economic growth process of the country. This study applies Johansen’s cointegration procedure, impulse response functions, variance decomposition analysis and Granger causality tests to shed light on the channels through which export growth may impact South Africa’s economic growth rate. Quarterly time series data ranging from 1975q1 to 2012q4 is employed in the study’s empirical tests. The results support the notion that the role of exports lies in their ability to encourage investment and capital formation. While export growth directly supports higher economic growth in the short-run, the long-term effect was found to lie in supporting faster capital formation, and in turn, significantly increasing economic growth. Overall, a strategy of export-led growth that does not explicitly emphasize the export-capital-growth connection is likely to fall short of reflecting the dynamics contained within the exports-growth relationship in South Africa.