Developing countries have low levels of capital. They are usually net borrowers, supplementing their low domestic savings with external finance. During the 1970s and 1980s many developing countries borrowed from international financial institutions on a large scale. Surprisingly, private citizens of these developing countries were investing in foreign assets at an increasing rate. This observation raised a great deal of interest among academics, policy-makers and the general public concerning capital flight from developing countries . Some of the effects of capital flight on the domestic economy of a developing country are as follows : Firstly, capital flight causes a reduction in available resources to finance domestic investment. This leads to a decline in the rate of capital formation and adversely affects the developing country's economic growth rate. Secondly, capital flight reduces the government's ability to tax all the income of its residents because the government experiences difficulty in taxing wealth held abroad as well as income that is generated from that wealth. Capital flight thus reduces government revenues and the ability to service external debt. Thirdly, as the government revenues fall with the erosion of a tax base there is an increased need to borrow from international financial institutions thereby increasing the foreign debt burden. Capital flight conforms to the portfolio allocation theory , which states that capital flows are determined by rates of return and risk. Capital flows respond positively to higher rates of return and negatively to risk. The present study investigates the effect of political risk on the magnitude of capital flight in South Africa over the period 1960-1995. South Africa is a good test case because the country experienced high political risk and capital flight for many of the years between 1960 and 1995. We replicate the Fedderke and Liu's study (1999) by recollecting the data from original sources. After conducting tests for cointegration we estimate the impact of political risk measured by a political instability index on capital flight. We find support for the hypothesis that higher instability results in greater capital flight. This is the result we are able to replicate thus supporting Fedderke and Liu. We also use our results to show how capital flight can depreciate the exchange rate. Finally we point to. some possible policy implications. / Thesis (M.Comm.)-University of Natal, Pietermaritzburg, 2002.

M.Com (Economics) / Please refer to full text to view abstract

This study examines the indirect linkages between foreign direct investment (FDI) and economic growth in South Africa utilising 36 years’ (1980-2016) time series data obtained from the South African Reserve Bank (SARB). South Africa’s economy has been experiencing unsteadiness in recent years. Despite the government’s execution of different strategic initiatives to draw in FDI into South Africa, the country’s FDI remains lower than that of other emerging economies. Domestic investment by government, public corporations and the private sector is also relatively unsteady. Slow economic growth has put tremendous weight on the government to borrow externally for developmental purposes. This study tests two models – model I and model II. In model I, real GDP per capita (RGDP) is the dependent variable and foreign direct investment (FDI), domestic investment (DI), real exchange rate (EXR) and foreign debt (FD) are modelled as explanatory variables while in model II, FDI is the dependent variable and RGDP, DI, EXR and FD are modelled as explanatory variables. Domestic investment is sub-divided into credit to the domestic private sector (CPS), public investment (PI) by public corporations and government investment expenditure (GOVIN). The analysis of the relationship was carried out using econometric methods such as the Augmented Dickey-Fuller (ADF) and Phillips Perron (PP) unit root tests to identify the order of integration of the variables. The bounds cointegration test was applied to establish the long-term association among variables. The Autoregressive Distributed Lag (ARDL) model was utilised to test the long-run and short-run equilibrium conditions. Diagnostic tests were employed to check the model adequacy and the Granger causality tests were utilised to establish the causal relationships among variables. The discoveries from the ADF and PP tests uncovered that all the variables are non-stationary at level but became stationary at first differences. The bounds tests suggest that there is a long-run relationship and cointegration between variables. Following the presence of cointegration, the outcomes from ARDL model uncovered that FDI, CPS and GOVIN have a positive relationship with RGDP in the long run (crowding-in effect), while, a negative relationship occurs between PI, FD, EXR and RGDP in the long run (crowding-out effect) in model I. In model II, the outcomes revealed that RGDP, CPS, and PI have a positive relationship with FDI in the long run (crowding-in effect). Then again, the outcomes presented a negative connection between GOVIN, FD and v © Pamba, D, University of South Africa 2020 EXR to FDI in the long run (crowding-out effect). The short-run estimate of the coefficient of the error correction term (ECM) in model I and model II are statistically significant and negative. The negative indication of the error correction term shows a backward movement towards long-run equilibrium from short-run disequilibrium. In model I, the short-run coefficient results uncovered that FDI, lagged PI and lagged EXR are positively linked with RGDP (crowding-in effect). Then again, lagged CPS and lagged GOVIN are inversely related to RGDP (crowding-out effect). In model II, the short-run coefficient of FDI is certainly related to GOVIN (crowding-in effect). FDI, on the other hand, indicated a negative relationship with PI in the short run (crowding-out effect). The Granger causality tests for the variables uncovered a unidirectional causal connection running from RGDP to FDI and from FDI to RGDP in both models. The outcomes obtained for RGDP and FDI models pass all the diagnostic tests on serial correlation, normality and heteroscedasticity. The test for adequacy performed on the residuals demonstrates that they are homoscedastic and have no serial correlation, signifying that the model is acceptable. The Cumulative Sum (CUSUM) tests show that the extracted models are structurally steady and remain within the 5 percent level of critical bounds. / Economics / M. Com. (Economics)

This study examined the impact of financial liberalisation on economic growth in South Africa. The study used quarterly time series data for the period 1980 to 2010. A vector error correction model was used to determine the short run and long run effects of financial liberalisation on economic growth in South Africa. The other explanatory variables considered in this study were government expenditure, investment ratio, public expenditure on education and trade openness. Results from this study revealed that financial liberalisation, government expenditure and public expenditure on education have a positive impact on economic growth while trade openness negatively affects economic growth in South Africa. Policy recommendations were made using these results.

A number of developing countries have been on a quest to attract foreign direct investment (FDI) with the intention of increasing capital inflow through technological spillovers and transfer of managerial skills. FDI can increase economic growth and development of a country by creating employment, and by doing so, increasing economic activity that will lead to economic growth. South Africa is one of the economies that strive to attract more FDI inflows into the country to be able to improve its economy, and the country has adopted policies that drive the motive to attract FDI inflows. This study investigated the effect of FDI on sectoral growth over the period 1970–2014. The purpose was to find out where in the three key sectors of South Africa FDI is more significant. The review of theoretical and empirical literature on FDI revealed that FDI has a diverse effect on economic growth, both in developed and developing countries. Theoretical literature analysed the behaviour of multinational firms and the motive behind multinationals investing in foreign countries. According to Dunning (1993), firms have four motives to decide to produce abroad, namely natural resource-seeking, market-seeking, efficiency-seeking and strategic asset-seeking. Empirical studies on sectors show that FDI inflows affect different sectors in different ways, and that the agricultural sector does not usually gain from FDI inflows, whereas subsectors in the industry and services sector grow from receiving FDI inflows. Sectoral analysis revealed that the services sector receives more FDI inflows, when compared to the agriculture and industry sector. The study followed an econometric analysis technique to test the effect of FDI inflows on the agriculture, industry and services sectors. The augmented Dickey–Fuller and Phillips–Perron tests were used to test for unit root. Both tests revealed that variables were not stationary at level, but that they become stationary at first difference. Vector autoregressive (VAR) models were estimated, and four types of diagnostic tests were performed on them to check the fitness of the models. The tests showed that residuals of the estimated VARs were robust and well behaved. The Johansen cointegration test suggested there is cointegration and that there is a long-run relationship between variables. Following the existence of cointegration, the estimated Vector error correction model (VECM) results showed that FDI has a significant effect on the services and industry sector, but has a negative effect on the agricultural sector. Impulse response analysis results revealed the correct signs, and confirmed the VECM results. FDI inflows explain a small percentage of growth in agriculture and industry, but a sizable and significant percentage in the services sector. / Economics / M. Com. (Economics)

In this study an analysis of the long-term equilibrium relationship between economic growth measured as real GDP growth and private capital inflows is explored. The link between private capital inflows and economic growth is well-documented in the literature. However, a void in the literature relates to examining the cointegrating relationship between private capital inflows and economic growth particularly for South Africa. It is widely claimed that private capital inflows foster economic growth by closing the savings/investment gap. However, clarity on this point is necessary because of the seemingly unclear nature of the relationship in the literature. The exact form of this relationship as well as the nature of capital flows that could impact on real growth requires further investigation. Moreover, what exactly happens to this relationship in an economic crisis such as recently recorded in the global financial crisis is not clear. The analysis is undertaken by employing cointegration and vector error correction modeling approach using quarterly data for the period 1989q4-2009q4. This study employs the Johansen (1998) cointegration test. This technique distinguishes itself since it establishes the long run relationship between variables. Thereafter, residual diagnostic checks are performed on the variables. Our results show among others, that private capital inflows have impacted positively on the growth of the South African economy. The areas for further research that emerge from this study include the effect of some government policies on economic growth that should also receive more attention in the future since political instability slows down investment.

This study examined the role of export diversification on economic growth in South Africa. The study used annual time series data for the period covering 1980 to 2010 and employed a Vector Error Correction Model to determine the effects of export diversification and possible factors that affect it on economic growth. Possible factors that affect export diversification considered as independent variables in this study include gross capital formation, human capital, real effective exchange rate and trade openness. Results of the study reveal that export diversification and trade openness are positively related to economic growth while real effective exchange rate, capital formation and human capital have negative long run relationships with economic growth. The study recommended the continual implementation of trade liberalisation by the South African government. The South African government is also encouraged to promote the production of a diversified export basket through subsidisation, promotion of innovation and production of new products.

The neoclassical theory suggests that free flows of external capital should be equilibrating and thereby facilitating smoothening of an economy's consumption or production patterns. South Africa has a very low savings rate, making it highly dependent on capital inflows which create instability and volatility in global markets. A policy dilemma is undoubtedly evident: capital inflows help to cater for the domestic low savings and at the same time the inflows pose instability, a threat on competitiveness and volatility challenges to the same economy due to their impact on exchange rates. The question is: are all forms of capital flows equally destabilizing? Since studies based on South Africa considered only the relationship between aggregate capital flows and real exchange rate, modelling individual components of capital flows could enlighten policy formulation even further. The composition of the flows and their effects on the composition of aggregate demand determine the evolution of real exchange rate response to surges in capital flows. Through co-integration and vector error correction modelling techniques applied to South African data between 1990 and 2010, the study found out that foreign portfolio investment exerts the greatest appreciation effect on the South African real exchange rate, followed by other investment and finally foreign direct investment. Thus the impact of capital flows on real exchange rate in South Africa differs by type of capital. This presents varied policy implications.

This study assessed the effects of currency volatility on the Johannesburg Stock Exchange. An evaluation of literature on exchange rate volatility and stock markets was conducted resulting into specification of an empirical model.The Generalised Autoregressive Conditional Heteroskedascity (1.1) (GARCH) model was used in establishing the relationship between exchange rate volatility and stock market performance. The study employed monthly South African data for the period 2000 – 2010. The data frequency selected ensured an adequate number of observations. A very weak relationship between currency volatility and the stock market was confirmed. The research finding is supported by previous studies. Prime overdraft rate and total mining production were found to have a negative impact on Market capitalisation. Surprisingly, US interest rates were found to have a positive impact on Market capitalisation. This study recommended that, since the South African stock market is not really exposed to the negative effects of currency volatility, government can use exchange rate as a policy tool to attract foreign portfolio investment. The weak relationship between currency volatility and the stock market suggests that the JSE can be marketed as a safe market for foreign investors. However, investors, bankers and portfolio managers still need to be vigilant in regard to the spillovers from the foreign exchange rate into the stock market. Although there is a weak relationship between rand volatility and the stock market in South Africa, this does not necessarily mean that investors and portfolio managers need not monitor the developments between these two variables.