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(1) OVER THE PAST SEVERAL YEARS the flexibility of exchange rate policy in South Africa has been increasing. Officials have frequently indicated that a 'market based' exchange rate policy is being followed which the De Kock Commission (1985) has described as a managed float. Certainly fluctuations in the rand exchange rate against all major currencies have increased in the recent past. With this greater variability, however, it has become increasingly difficult to determine exactly what has been happening to the competitiveness of the economy, given the substantial fluctuations in the exchange rates of the major trading partners of South Africa and the difference in their rates of inflation. The purpose of this paper is to examine some alternative measures of the exchange rate changes in order to determine exactly what has taken place in the period since the breakdown of the Bretton Woods system as well as to provide a framework for analysts seeking to make judgements about the appropriateness of the level of the exchange rate. In addition, we will discuss some of the issues surrounding the suitability of various exchange rate regimes for South Africa and measure whether in fact policy has become more flexible in the recent past. Calculation of Effective Exchange RatesIn the fixed exchange rate world that existed prior to 1971, exchange rate developments could be satisfactorily described in terms of the numeraires of the international monetary system -fine ounce gold equivalents or the dollar exchange rate. In a world of variable gold prices and frequent exchange rate changes, however, using a bilateral exchange rate no longer gives an accurate indication of the effects of movements in a country's exchange rate. For example, if the rand depreciates against the U. S. dollar by 10 per cent but the dollar appreciates against all other currencies by 20 per cent, then changes in the rand/dollar rate alone would indicate an increase in the competitiveness of the rand when in fact it has lost competitiveness both in the United States and in the rest of the world. As a result, a number of alternative measures have been developed to give a more accurate indication of exchange 1985 SAJE v53(4) p352 rate movements. The most widely used of these is the so-called trade weighted exchange rate (also known as the effective exchange rate). In its simplest form, bilateral trade weights are calculated and then multiplied by exchange rate changes in order to obtain a weighted average index of exchange rate movements. Many alternative weighting schemes can be used, depending on the use to which the calculations are to be put and the amount of data available. As Rhomberg (1976, p. 69) has pointed out: 'The proper choice of weights for an index of the effective exchange rate depends on its purpose. An index of the effective exchange rate intended to be used in connection with estimation or analysis of exchange rate effects on the trade balance has to use as weights some estimates, however imperfect, of the relative influence of changes...
2) THE PURPOSE OF THIS STUDY is to calculate rates of effective tariff protection for South Africa for two points in time. This is of interest for a number of reasons. Firstly, there has so far been no published calculation of effective rates of protection for South Africa. Secondly, it is important to know how nominal rates of protection change over time compared with changes in effective rates. Frequently, the structure of nominal protection is so complex that the ultimate protection accorded to industry cannot be ascertained. It is therefore advantageous to have some knowledge of effective tariff rates in evaluating and rationalizing commercial policy. Finally the determination of how effective rates have changed through time is an important first step in assessing the influence of effective tariff rates on resource allocation, an area where there remains an important gap in the effective protection literature.Economists have long realized that nominal tariff rates do not provide an accurate indication of the influence of protective policy on resource allocation. However, it was only in the 1950s that the concept of effective protection was conceived and a satis factory analytic foundation remained undeveloped until the mid-1960s. Since then the theory and application of effective protection has commanded the attention of an increasing number of economists, effective tariff rates have been computed for many countries, both developing and developed, and the underlying theory has been extended. The theory of effective protection provides an understanding of how nominal tariff rates affect a country's pattern of production. Effective protection can be most simply defined as the proportionate change in the value added of a process due to the tariff structure. A simple example should serve to illustrate the difference between nominal and effective rates. Let us assume that a country can manufacture shoes at a world price of $10 a pair; $8 of inputs such as leather and buckles are required per pair, and the value added by labour and 1975 SAJE v43 (3) p371 capital in the final stage of manufacture is $2 per pair. To simplify, assume that the prices of the non-labour and non-capital inputs are equal to their world prices. The government of the country now decides to place a nominal tariff of 20 per cent on shoes, and 10 per cent on other traded goods. This raises the price of shoes to $12 and other inputs to $8.80 per pair. This means that the shoe manufacturing process can now spend $3.20 per pair on labour and capital. The theory of effective protection infers that given a nominal tariff of 20 per cent on the final good with a nominal tariff of 10 per cent on other traded inputs, the effective tariff protection given to the shoe manufacturing process is 60 per cent. The effective rate of protection f j can be defined as the proportionate increase in value added in an industry due to the tariff' structure, -relative to what the value added would have been in the absence of tariff protection. Then where V' j is the va...
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