Resource boom, productivity growth and real exchange rate dynamics — A dynamic general equilibrium analysis of South Africa

Abstract

We study the impact of a natural resource boom on structural change and real exchange rate dynamics, taking into account the indirect effect via relative sectoral productivity changes.Our contribution relative to the Dutch disease literature is threefold. First, the productivity specification is extended from simple learning by doing to include trade barriers and technology gap dynamics, consistent with the modern understanding of productivity growth.Second, we offer a dynamic general equilibrium model with imperfect substitution between domestic and foreign goods. Third, the model is applied to South Africa and analyzes the macroeconomic impact of the gold price increase in the 1970s. Political pressure for rapid domestic spending after a surge in resource rents tends to generate myopic government behavior with unsustainable high consumption spending. Such fiscal response to higher resource income is captured by the model specification. Numerical simulations show how the resource boom can help explain the structural change and real exchange rate path observed in South Africa. Due to productivity effects the initial real appreciation is followed by gradual depreciation of the real exchange rate.JEL no: O33, O41, O55, Q33.

On the Rand: Determinants of the South African Exchange Rate

“…Among those who have found mineral prices or the terms of trade to be an important determinant of the value of the rand are Aron et al. (2000), MacDonald and Ricci (2004), Ngandu (2005), Ricci (2005), Mtonga (2006), and Stokke (2006).…”

Natural Resources: Curse or Blessing?

“…OPEC as a whole saw a decline in GNP per capita while other countries with comparable GNP per capita enjoyed growth. The deindustrialization and disappointing growth experience of South Africa following the boom in gold prices can be explained by the appreciation of the real exchange rate in the 1970's followed by gradual depreciations together with increased barriers to technological adoption (Stokke, 2007). The disruption of the 'air bridge' from 1994 onwards shifted the production of coca paste from Peru and Bolivia to Columbia and led to a huge boom in the demand for Columbian coca leaf.…”

Liberalising Trade in South Africa: A Survey of Computable General Equilibrium Studies

“…It implies that even when agents know that something drastic is going to happen to the economy the following year, they take no action until after the event has occurred. Inter‐temporal dynamic optimisation models on the other hand can address such a problem, as seen in the work of Stokke (2008), who has analysed the impact of a resource boom on structural changes and the real exchange rate dynamics in South Africa. Unfortunately, inter‐temporal CGE models do not lend themselves to an easy extension to poverty analysis, and it also seems hardly plausible that agents could ever have so much information about the distant future as postulated in such models.…”

“…The use of recursive dynamics has its shortfalls that researchers need to address. The work of Rattsø and Stokke (2007) and Stokke (2008) takes a step in this direction and needs to be complemented by more work focusing on trade liberalisation and poverty.…”