The effect of BRICS trade relations on South Africa’s economic growth.

Abstract

South Africa‟s joining of the BRICS was supposed to transform the economy into high levels of growth but this has not been realised to date. Critics have labelled the failure on BRICS policies vague towards import substitution, unfair labour practices and the collapse of the local industry through cheap imports and dumping incidences. The study addressed the central issue on whether joining BRICS has led to a sustainable growth as was envisaged. An econometric assessment was done using two different estimation techniques, the Autoregressive Redistributive modelling on quarterly data from 1990quarter1 to 2014quarter 4 and the Dynamic Panel Data Analysis using the General Method of Moments on annual data from 1990 to 2014. Results from the Autoregressive Redistributive model were insignificant to explain the long-run relationship between trade, direct foreign investment and growth. Save for foreign direct investments, the short-run cointegration form for all regressors carried positive signs. The contribution of trade was little to instil significant effect on SA growth. The Generalized Method of Moments results were insignificant to explain the growth effect of real exchange rate on the BRICS economies. The long-run effects of foreign direct investment and trade were positive and statistically significant. This reinforces the Autoregressive Distributive Modelling results which showed little trade impact and negative foreign investment impact in the short run and insignificant long run relationship. Results from the Granger Causality test cement the argument. The tests results showed that Average trade balances with the BRIC, Average foreign direct investments and real effective exchange rates Granger Cause growth uni-directionally in both South Africa and the BRICS economies. On the other hand the null hypothesis that economic growth Granger Cause Average trade balances, Average foreign direct investments and real effective exchange rate bi-directionally was rejected. The results were similar to the Autoregressive modelling and the General Method of Moments results which showed absence of any significant long run relationship with growth and little growth effects respectively. These findings are an indication that little has been done to foster cordial relations in foreign capital investments and trade between South Africa and the BRICS, and hereby support claims that the BRICS grouping is meant to enrich the BRICS member countries at the expense of South Africa. Unbalanced trading trends and foreign investment relations between South Africa and the BRIC reinforce the claims. South Africa‟s exports and foreign direct investments in BRICS are concentrated in the primary sector with more than 65 percent of total output in iron and steel, ores, slag and ash and mineral fuels and oils. This has slowed growth as most of the BRICS have similar economic structures of less manufacturing and insignificant value addition. More so, the negative trade balance between South Africa and the BRIC has employment implications as the influx of cheap imports deters local production. Proper governance of the BRICS institutions, especially the New Development Bank, tariff reviews, adoption of a single currency and value addition will serve as ways to improve BRICS trade with South Africa. On the other hand, increase in bilateral investment treaties, better regulation and review of competition policy will help in boosting South Africa‟s foreign investments with the BRICS.