Effects of Financial Autarky and Integration: The Case of the South Africa Embargo¶
Brahima Coulibaly (2005). Effects of Financial Autarky and Integration: The Case of the South Africa Embargo. International Finance Discussion Papers, No. 839. Board of Governors of the Federal Reserve System.
| Type | working paper |
| Scope | Economics and economic history of apartheid |
| Method | mixed |
| Period studied | 1970–2001 |
| Regions | South Africa |
| Themes | sanctions divestment, macro fiscal finance debt, comparative theory, methods data sources, transition post apartheid |
| Citation key | coulibaly2005 |
Argument¶
The paper treats the 1985-1993 sanctions as a natural experiment in financial autarky and reintegration. The imposition and removal of the embargo were driven by politics, not by economic performance, so endogeneity is limited. Aggregate data show lower growth and lower levels of investment, capital and output per worker during the embargo than before or after it. A calibrated small-open-economy neoclassical growth model with adjustment costs, in which borrowing is blocked for eight years and a tax on output stands in for capital flight, reproduces the same pattern. The author then argues that trade sanctions, domestic policy, political instability and global shocks cannot explain the results, so the embargo was effectively a financial one and financial integration is growth-enhancing.
Evidence and method¶
South African Reserve Bank series on net capital inflows, foreign liabilities and the current account. The TIPS (Trade and Industrial Policy Strategies) database for fixed investment, capital stock, output, trade and employee compensation, 1970-2001. World Bank World Development Indicators for middle-income comparators. Country risk measures from Erb et al. Press and secondary accounts of disinvestment (IRRC, GAO 1990, Lipton 1988, Ovenden 1989, the Economist, the Journal of Commerce).
Place in the debates¶
- Does financial integration raise growth in emerging economies (mixed capital-account liberalisation literature)? (see Finance, capital flight, the 1985 debt crisis and banking). Supports a positive integration-growth link. It argues that using the embargo as an exogenous event avoids the measurement and endogeneity problems of earlier cross-country studies.
- Sanctions effectiveness: trade versus financial sanctions (see Sanctions, disinvestment and the anti-apartheid movement). Finds the trade embargo a 'paper tiger' with aggregate trade unaffected, while financial isolation and disinvestment were effective and produced the macroeconomic damage.
- Cost of apartheid-era isolation and the role of domestic policy (see Sanctions, disinvestment and the anti-apartheid movement). Argues that capital controls, the dual exchange rate and the 1985 debt standstill contained rather than caused the fall in investment, capital and output.
Findings¶
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Average growth rates of investment, capital per worker and output per worker all fell during the embargo relative to the preceding period. (p. 5)
During the embargo period, average growth rates fell from 0.2 percent to -2.6 percent for investment, from 3.5 to 1.3 percent for capital per worker, and from 2.2 to 0.8 percent for output per worker.
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Investment levels during the embargo were about a quarter below the counterfactual of continued pre-embargo growth (capital -12.5%, output -9.5%). (p. 9)
Results indicate that the average level of investment fell by 25.6 percent during the embargo period compared to the level that would have prevailed if investment had grown at its pre-embargo growth rate.
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The author argues the embargo was not endogenous to economic performance, since its imposition was political. (p. 4)
The decision by the world to impose an economic embargo on South Africa was not related to the country’s economic performance, but to the desire to change its political regime.
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Before 1985 the foreign liability structure had already shifted toward short-term debt, which left the country exposed to the withdrawal of credit. (p. 6)
By 1985, total foreign liabilities as a percentage of GDP had increased from 53 percent to nearly 70 percent
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The IMF estimate of forgone foreign investment is quantitatively significant relative to GDP. (p. 7)
The IMF estimated that South Africa had forgone $8 billion in foreign investment between 1985 and 1991, which amounted to 3 percent of the 1985-1991 period cumulative GDP.
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Foreign liabilities shrank during the embargo as capital withdrew. (p. 8)
Foreign liabilities as a percentage of GDP fell from 53 percent prior to 1985, to 44 percent during the embargo period.
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Aggregate trade grew during the embargo, so the trade sanctions are ruled out as the cause of the slowdown. (p. 16)
Both exports and imports continued to grow at a healthier rate than in the pre-embargo period, and the trade balance improved a bit on average during the embargo period.
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The 1987 debt rescheduling agreement with foreign banks is one of the domestic policy responses examined, which the paper judges to have contained the crisis. (p. 17)
In March 1987, the government reached a three-year agreement with foreign banks on rescheduling its debt.
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Political instability is dismissed as an alternative explanation. (p. 18)
The political situation during the 1985-1993 period was unstable, but no worse than in previous years.
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South Africa's growth fell more during the embargo and rebounded more afterwards than in the world or in comparable middle-income economies, which argues against global shocks as the cause. (p. 19)
In other words, output growth fell more during the embargo period and increased more in the post-embargo period in South Africa than it did in the world economy and in comparable middle-income economies.
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In the model, openness does not change the long-run level of capital, so the embargo effect is a transitional-dynamics effect only. (p. 14)
the steady-state values for capital are identical in both economies
Evidence ledger¶
Sources used¶
| Source | Kind | Period | How used |
|---|---|---|---|
| South African Reserve Bank Balance of Payments section: foreign liabilities stock and composition (FDI, portfolio, loans) (Figures 2-3) | official statistical series | 1970-2001 | Shows the level and composition of foreign liabilities as a share of GDP before, during and after the embargo. |
| Trade and Industrial Policy Strategies (TIPS) database: fixed investment, capital stock, output per worker, exports and imports | official statistical series | 1970-2001 | Supplies the aggregate series for the growth-rate and level comparisons (Table 1, Figures 5-9) and the calibration inputs (labor share, depreciation, productivity growth). |
| World Bank World Development Indicators 2005 (current account to GDP, real GDP per capita of world and middle-income countries) | international trade or finance data | 1970-2001 | Comparator for the global-factors check: South African current account and growth compared with middle-income countries. |
| Investor Responsibility Research Center counts of US company withdrawals, as reported in Lipton (1988) and Baker (1989) | secondary literature compilation | 1984-1988 | Documents the pace of US corporate withdrawals from South Africa. |
| Newspaper and periodical reports (New York Times, Los Angeles Times, Washington Post, The Economist, Financial Times, Journal of Commerce) | newspapers periodicals | 1984-1990 | Anecdotal evidence on state disinvestment, bank withdrawals, Trust Bank forgone-investment estimate, debt standstill, and the ineffectiveness of trade sanctions. |
| Erb, Harvey and Viskanta country risk measures for South Africa (Duke website series) | secondary literature compilation | c.1984-1993 | Used to argue political and country risk was not higher during the embargo than before it. |
| Johannesburg Stock Exchange Index | stock market financial data | 1985-1993 | Resilience of the stock index is cited as evidence that domestic capital controls contained the crisis. |
| Calibration inputs from other studies: Bernanke and Gurkaynak (2001), Blanchard, Rhee and Summers (1993), Barro et al. (1995), Shapiro (1986), Hall (2002) | secondary literature compilation | 1900-2001 | External estimates of labor share, US Tobin's q, and world interest rate used to calibrate the growth model. |
| IIE (Institute for International Economics) sanctions case histories on South Africa; IMF estimate of forgone investment | secondary literature compilation | 1985-1991 | Historical accounts of the embargo and the IMF estimate of forgone foreign investment. |
Inference¶
Quantification: Descriptive tables.
Natural-experiment event study: before/during/after comparison of average growth rates and counterfactual level paths for 1976-2001 aggregates, supported by a calibrated neoclassical small-open-economy growth model with a borrowing limit. Alternative explanations (trade sanctions, domestic policy, political instability, global factors) are addressed through descriptive comparisons and historical accounts. There are no regressions and no formal controls.
Key claims¶
| Claim | Basis | Strength |
|---|---|---|
| Growth rates of investment, capital per worker and output per worker fell during the embargo and rose after it. (p. 8) | TIPS aggregate series, pre-embargo 1976-84, embargo 1985-93 and post-embargo 1994-2001 averages (Table 1). | Partial data |
| Levels of investment, capital and output were substantially below the counterfactual paths implied by pre-embargo growth rates, and above counterfactual paths after the embargo ended. (p. 8) | Extrapolation of eight-year average growth rates applied to TIPS series (Table 2, Figures 5-7). | Partial data |
| Domestic policy responses (dual exchange rate, debt standstill) contained rather than caused the downturn. (p. 18) | Historical accounts (Ovenden, Financial Times) and the JSE index performance. | Illustrative or anecdotal |
| Political instability and global factors do not explain the embargo-period slowdown. (p. 19) | Erb et al. country risk measures, historical accounts of protests, and World Bank WDI comparisons with middle-income and world growth. | Partial data |
The author's caveats¶
The author notes that the embargo included trade sanctions, domestic policy responses, political instability and global shocks that could confound the results. These are addressed in Section 5 rather than by formal controls. Embargo dates are chosen from historical accounts and changes in economic variables. Much disinvestment evidence is described as anecdotal or 'reportedly'.
Gaps in the evidence¶
The argument rests on aggregate before/during/after comparisons with no formal counterfactual (e.g. synthetic control, or regressions with controls for gold prices, terms of trade, and the 1980s drought and unrest). Sectoral or firm-level investment data and bank lending data would help separate financial from trade and political effects. The SARB and TIPS series and World Bank panels existed and could support such tests. Dating of the 1985-93 window is partly endogenous to the outcome variables.
Replicability: Data described but not public.