South African Fiscal and Monetary Policy - Essay Example

? Is South Africa Fiscal and Monetary Policy Complementary? Insert Insert Insert 12 September Table of Contents Table of Contents 2 Introduction 3 Fiscal policy 3 South African fiscal policy 3 Roles played by fiscal policy in South Africa 4 Fiscal policy’s advantage to South Africa 5 The fiscal policy’s disadvantages to South Africa 6 Monetary policy 6 South Africa’s monetary policy 6 Role played by monetary policy in South Africa 7 The monetary policy’s advantages to South Africa 8 The monetary policy’s disadvantages to South Africa 9 Comparison of monetary and fiscal policy 9 Conclusion 10 References 10 Introduction South Africa is among the nations whose policies have changed drastically in the past ten years. Among the policies of this country, the ones that have experienced great changes are fiscal policy and monetary policy. According to Kashalala (2006), fiscal policies are actions and strategies designed by a country to foster economic growth through controlling the fiscal components of the economy. The fiscal components that fiscal policies aim to control include physical properties and capital flow. On the other hand, monetary policy is action or decision by a monetary authority to influence the interest rate and exchange rate in an effort to foster economic growth (Mbwoweni 2003). This paper undertakes an analysis of whether the fiscal policies in South Africa have complementary effects. In the analysis, the paper uses the actual monetary and fiscal policy that has been in this country from 2002 to date. Fiscal policy South African fiscal policy Government of South Africa has undertaken several fiscal policy adjustments since the end of apartheid. This is because of changes in economic situations in the country and the need of the country to foster economic development. The reason for the changes in the fiscal policy is to overcome the economic problems that South Africa faced due to the effects of the apartheid. These problems include low levels of education, high poverty levels, poor health, unemployment, and increase in violence and crime. The problems were great during apartheid. As a result, they continued to exist in the period that followed the apartheid. Therefore, the fiscal policies made during the period that followed the apartheid were to address these problems. South Africa has been affected greatly by globalization. Since the end of Apartheid, its trade with other countries has been increasing almost annually. The political and economic environments of the trading partners of South Africa differ significantly from those of South Africa. This difference has been affecting this country’s economy greatly in the past ten years. As a result, the fiscal policy of this country has been influenced by both domestic and international factors in the period after 2002. The domestic factors that affect the fiscal policy of this country include the economic problems that this country experiences. International factors that affect this country are both the economic situation in other countries and the economic problem experienced in the world market. In the adjustment of fiscal policy, the government of this country has to consider these two categories of factors. South Africa’s fiscal policy has several dimensions. The dimensions are identified as very essential components of the policy. This is because they are the ones that dictate the kind action taken by the policy in its effort to achieve economic growth and sustainability. Major dimensions of the fiscal policy of this country include taxation levels, individual and government spending, fiscal relations, and debt and interest costs (Jooste, Liu, & Naraidoo 2012). These dimensions control the fiscal components of an economy either directly or indirectly. As a result, they influence the economic activities that relate to the fiscal components of this country’s economy. This plays a very significant role on controlling the economy and enhancing sustainability of economic growth. Roles played by fiscal policy in South Africa Fiscal policy for the period between 2002 and today was designed to serve different roles to the economy of South Africa. Naidoo et al. (2008) divides it into two faces: the expansion face and the confronting of new challenges phase. These phases appeared from a period in which the economy was trying to recover from problems caused by the apartheid fiscal policies. In this period, fiscal policies were designed to reduce or eliminate the fiscal deficit that result from apartheid. However, during this two faces the deficit had already been reduced to levels that could not affect the economy of this country significantly. Therefore, the focus of the fiscal policy in two phases is very different from its focus in the previous period. This makes the role that fiscal policy played during the period after the year 2002 to be very different from the role it played in the previous period. Expansion phase of the South Africa’s fiscal policy was very crucial in the growth of this country’s economic growth and its sustainability. This phase was experienced between 2002 and 2006 and had the main objective increasing public spending (Naidoo et al. 2008). In this phase, fiscal policy played several roles in the economy of South Africa. One of the roles it played was increasing the aggregate demand of fiscal components of the economy. This was achieved through lowering taxes charged on this components as well as the lowering of interest rates. Another role that it played was making the government to give more priority to provision of public services. This raised the standards of living for the citizen of this country thus enhancing economic growth. After the expansion phase, the government had dealt with much of its previous challenges. Moreover, it had significantly increased provision of essential services to its citizens. However, it had started to encounter new challenges with its fiscal policy. The challenges came due to the deterioration in the overall world economy. These challenges threatened to affect the economy by making it difficult to sustain economic growth. As a result, the country was forced to modify its fiscal policy. Fiscal policy adapted in this phase played the role of confronting the challenges that were realized after 2006. Challenges continue to be identified in the economy of South Africa. Therefore, fiscal policy continues to play the role of confronting new challenges even in the current economic situation of South Africa. Fiscal policy’s advantage to South Africa When used to solve an economic problem, fiscal policy has several advantages. One of the advantages is that one single intervention policy can be used to address several economic problems. An example is an intervention policy to address the economic problem of low level of investment and the problem of unemployment. These two problems can be addresses by a policy of reducing tax charged on investors. This is because such a policy would attract investors in the country thus resulting to increase in the demand for labor. South Africa has been taking this advantage of fiscal policy since 2002. This is because most of the fiscal policies designed by this country since independent are aimed to address more than one economic problem indirectly. Moreover, different arms of government control fiscal policies. A fiscal policy concerned with improving agricultural activities in an economy is made and implemented by the agricultural ministry. The one for regulating industrialization activities in an economy are made and implemented by the industrialization ministry. However, any ministry making and implementing a fiscal policy has to consult other related ministries. As a result, fiscal policy made to address specific economic problem in a given sector of the economy. This makes them to have high effectiveness in terms of finding solutions to specific economic problems. The fiscal policy’s disadvantages to South Africa Fiscal policy used in South Africa in the period after the year 2002, has two major limitations. One of the limitations is its failure to eliminate the effects of apartheid on the economy. Despite achieving great improvement on the economy of South Africa and sustaining growth, the country continue to experience high poverty levels, high unemployment rate, and high violent and crime level. The other limitation is that only automatic policy stabilizers could control them (Jooste, Liu, & Naraidoo 2012). Other attempts to control fiscal policy could have great negative impact to the economy. This indicates that fiscal policy is not sufficient in solving economic problems. Therefore, it requires other policies to either complement or supplement it in solving a country’s economic problems. Monetary policy South Africa’s monetary policy Monetary policy in South Africa has changed significantly since the country acquired independent. A major change was experienced in the year 2000. According to Aron & Muellbauer (2006), this change was characterized by introduction of inflation targeting monetary policy framework. In the beginning of the period after 2002, the framework had already been introduced in the economy of this country and was being introduced in the economy of the other trading partners of South Africa. Therefore, its impact had started to be felt on the economy. However, the effect was not that conspicuous even to this country’s economists. As a result, some individuals criticized it and proposed other ways of controlling the inflation of the economy. However, this framework revealed several benefits that could not be found on other approaches suggested to control inflation. One of the benefits is that it resulted to increased credibility and effectiveness of macro-economic policies like the monetary policy. The improved credibility resulted from an increased transparency in the macro-economic policies designed by South Africa. Another main benefit of this framework is the provision of a clean nominal anchor for the monetary policy (Nene 2012). The framework defines clear inflation levels that should be achieved by the monetary policy. This is what is used to provide the clear nominal anchor for the monetary policy. Interest rate is the major monetary policy tool that is used by monetary authority of South Africa to control economic activities. When interest rates are raised, economic activities in the country are greatly reduced. As a result, the economic development is greatly affected. However, when it is reduced economic activities are greatly encouraged thus resulting to an enhanced economic development. The monetary policy adapted by South Africa has been maintaining low interest rates since 2002. As a result, it encourages economic activities in the country thus resulting to a sustainable growth in the economy of South Africa. Other tools of controlling inflation also exist. These tools include credit ceiling, open market operations, repo rate, and cash reserve requirements (Mboweni 2003). However, it is not advisable to use these tools because of their possible negative effects. According to Nene (2012), business thrives well when inflation and interest rates are low. Low inflation and interest rates could only be achieved through use of effective monetary policy. The businesses comprise the private sector on an economy. Therefore, monetary policy has a very huge impact on the private sector of an economy. The private sector of the economy of South Africa has been greatly promoted by the monetary policy adapted by the country since 2002. This is because the policy has been maintaining low inflation and interest rates in the economy. The monetary policy has also influenced the public sector of the economy. This is mainly through increasing government revenue and government spending in the provision of essential social amenities. Role played by monetary policy in South Africa Monetary policy plays a very great role in the economy of South Africa. One of the roles it plays is enhancing economic growth. It achieves this by controlling the interest rates of the economy. The changes in the interest rates results to high exchange rate and low levels of inflation. This encourages economic activities to be undertaken in the economy. As a result, economic growth and development is greatly enhanced. Moreover, it plays a very significant role in the sustainability of the achieved economic growth and development. The monetary policy has been sustaining economic development through overcoming the emerging challenges of economic development. This has mainly been done by raising or lowering the interest rates. Moreover, like in the case of promoting economic growth, sustaining the growth has been enhanced by stimulating economic activities. The monetary authority in this country has been achieving this through lowering of the interest rates. Monetary policy could also promote the state involvement in the provision of essential services to its residents. This is because through the interest rates, monetary policy enhances economic activities in an economy. Enhanced economic activities in an economy increases the revenues generated by the government. As a result, the government could have the ability to increase the provision of essential social services as well as improve the existing social amenities. The monetary policy adapted by the republic of South Africa has been maintaining low interest rates. This has been enhancing the economic activities in this country since 2002 thus increasing the government revenues. As a result, the social and economic services provided by the South African government to its people have been improving almost annually since the adoption of a new monetary policy in 2000. The monetary policy’s advantages to South Africa Unlike fiscal policy, the monetary authority could control the monetary policy. Monetary authority in any country has the authority and mandate of controlling the interest rates of an economy. In South Africa, the monetary authority changes its monetary policy to increase or reduce interest rates. This has been influencing the economy of this country greatly since 2002. Moreover, unlike the fiscal policy, monetary policy has direct impacts on the countries exchange rates and interest rates. As a result, the policy can achieve solutions to economic problems much more quickly. Monetary policy is designed to influence specific aspects of economic growth directly. This is different from what the fiscal and other policies do. Other policies use other factors that contribute to economic activities to initiate or promote economic growth. This makes them ineffective especially when the economic problem that they are intended to solve is complex. South Africa is one country that has a strong monetary policy in place. As a result, it derives most of the benefits that could be derived from monetary policies. However, it put itself at a risk of becoming a victim of the disadvantages that might be associated with use of monetary policy in solving economic problems. The monetary policy’s disadvantages to South Africa Monetary policies also have limitations when used to seek a solution to an economic problem. One of the major disadvantages of a monetary policy is that it is centrally controlled. Only the monetary authority is mandated to make changes to the policy. This authority could be slow to react especially when an economic problem seems insignificant. Moreover, monetary policies are limited in scope. This is because they are mainly made to address specific economic problems. This is contrary to other policies like the fiscal policy. The limitation in the scope of monetary policy makes it very unsuitable for handling multiple problems requiring a single intervention. Comparison of monetary and fiscal policy Both monetary and fiscal policy is used to address economic problems. Moreover, the play the two policies play in a country’s economy is identical. This suggests that they might be used together or one can be used in place of the other. In addition, the two policies use different approaches to address economic activities. Some of these approaches could have counteracting effects on the process of seeking a solution to an economic problem. As a result, the two policies could not be used together to address the same economic problem. These policies could therefore only be used in place of each other. This indicates that the monetary policy and the fiscal policy of a country are complementary. Fiscal policy has advantages different from those of the monetary policy. This indicates each of these two policies is suitable for specific situations. Monetary policies are suitable for situations that require immediate solution to an economic problem. Fiscal policy on the other hand is suitable for situations that have enough time for seeking solutions to economic problems. The difference in situations in which the policies are most effective suggest that the two policies could not be used together to solve an economic problem. However, they could be used for similar problems occurring in an economy. Therefore, the fiscal policy and the monetary policy are complementary. This is the case with the fiscal and monetary policy used by South Africa since 2002. Fiscal policy and monetary policy differ in terms of their advantages. Fiscal policy favors use of a single policy intervention to address multiple problems. Moreover, it is specifically made to address a problem in a sector of the economy. Monetary policy on the other hand has a centralized form of control and addresses problems related to a specific component of the economy. In addition, the disadvantages of the two policies are different. This indicates the fiscal policy and the monetary policy could be used as complements of each other. Conclusion Fiscal policy and monetary policy are two great important interventions to economic problems. The two differ in terms of both applicability and characteristics. In addition, they differ in terms of their advantages and disadvantages. This indicates that the two can be used either as supplements or as complements. However, the properties of the two policies indicate a counteracting effect might result when these two policies are used together. As a result, these two macro-economic policies could not be supplements of each other. Therefore, the two are complements of each other thus one can be used in the place of the other. References Aron, J., & Muellbauer, J 2006, Review of Monetary Policy in South Africa since 1994, viewed 12 September 2012, . Jooste, C., Liu, G., & Naraidoo, R 2012, Analysing the Effects of Fiscal Policy Shocks in the South African Economy, viewed 12 September 2012, . Kashalala, G. T 2006, Is Fiscal Policy Sustainable in South Africa? An Application of the Econometric Approach, viewed 12 September 2012, . Mboweni, T. T 2003, Monetary Policy Making in South Africa, viewed 12 September 2012, . Naidoo, K. et al. 2008, Fifteen-Year Review of Fiscal Policy in South Africa, viewed 12 September 2012, . Nene, N 2012, The Evolution of Fiscal and Monetary Policies in South Africa, viewed 12 September 2012, . Read More