southafricanrealexchangeratesandmanufacturing.docVIP

South African Real Exchange Rates and Manufacturing Competitiveness* Stephen S. Golub Swarthmore College Janet Ceglowski Bryn Mawr College Revised July 2002 Direct correspondence to Stephen Golub Department of Economics Swarthmore College Swarthmore PA 19081 USA Email: sgolub1@swarthmore.edu Tel: (1-610) 328-8103 Abstract International price and cost competitiveness is commonly measured by real effective exchange rates (REERs). This paper calculates South African REERs and examines the quantitative relationships between these REERs and trade in manufactured goods. The REERs presented here differ from those of the IMF and the South African Reserve Bank (SARB) by including a larger number of developing countries, especially from Africa and Asia, and by considering a larger set of alternative price indexes. The choice of weights matters surprisingly little; the choice of price series, however, does have important bearing on the time path of the REER. The effect of competitiveness on manufacturing trade flows is evaluated through multivariate regressions. We find that price and cost competitiveness has an important and statistically significant effect on both exports and imports of manufactured goods.  Introduction With the end of Apartheid in the early 1990s and the new government’s implementation of the outward-oriented GEAR (Growth, Employment and Redistribution) strategy, South Africa has shifted towards greater integration into the global economy. GEAR substantially liberalized international trade with the hope of expanding employment and promoting economic growth through diversification and export growth, particularly of manufactured goods. The experiences of East Asian countries and others such as South Africa’s neighbor Mauritius have demonstrated the potential catalytic role of manufactured exports in the development process. Of course, imports of manufactured goods are also likely to be affected by the new policies and environment