South Africa’s Current Account Deficit: Are Proposed Cures Worse than the Disease?

The report argues that South Africa's current account deficit is sustainable and driven by net capital inflows that foster necessary structural change. It cautions against using currency depreciation, selective industrial policy (NIPF), or trade barriers to address the deficit, suggesting instead that the government focus on removing microeconomic bottlenecks in infrastructure and education to boost productivity.

• The authors argue that South Africa's current account deficit is sustainable because capital inflows are primarily used for investment rather than consumption, with private investment outpacing public investment.
• Real exchange rate appreciation between 2003 and 2006 acted as an adjustment mechanism that fostered structural change, leading to faster growth in the non-tradable sector compared to the tradable sector.
• The report warns that the National Industrial Policy Framework (NIPF) carries risks of failure due to the 'pretence of knowledge' in picking winning industries and its susceptibility to rent-seeking and corruption.
• Currency depreciation is viewed as an ineffective and risky tool for correcting the trade deficit, as it could spur inflation and lead to a real appreciation of the Rand.
• Trade restrictions are deemed counterproductive because they slow structural change and increase input costs for the tradable sector, effectively acting as a tax on exports.
• Significant microeconomic bottlenecks in network sectors—specifically electricity, transport, and telecommunications—hinder productivity growth and the competitiveness of downstream industries.
• While South Africa's governance quality is moderate globally, it remains exceptional within Africa, though a decline in the 'Rule of law' and 'Functioning of government' could increase the risk of a 'sudden stop' in capital inflows.
• The report identifies a high unemployment rate of 25 per cent, attributed to a lack of entrepreneurship, poor infrastructure, and a failing education system rather than employment protection legislation.

APA

Draper, P., & Freytag, A. (2008). South Africa’s Current Account Deficit: Are Proposed Cures Worse than the Disease? South African Institute of International Affairs. https://saiia.org.za/wp-content/uploads/2008/09/South-Africas-Current-Account-Deficit.pdf

Chicago

Draper, Peter, and Andreas Freytag. South Africa’s Current Account Deficit: Are Proposed Cures Worse than the Disease? South African Institute of International Affairs, 2008. https://saiia.org.za/wp-content/uploads/2008/09/South-Africas-Current-Account-Deficit.pdf.

Wikipedia

{{cite report |last1=Draper |first1=Peter |last2=Freytag |first2=Andreas |title=South Africa’s Current Account Deficit: Are Proposed Cures Worse than the Disease? |publisher=South African Institute of International Affairs |date=2008 |url=https://saiia.org.za/wp-content/uploads/2008/09/South-Africas-Current-Account-Deficit.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{draper2008south, author = {Draper, Peter and Freytag, Andreas}, title = {{South Africa’s Current Account Deficit: Are Proposed Cures Worse than the Disease?}}, institution = {South African Institute of International Affairs}, year = {2008}, url = {https://saiia.org.za/wp-content/uploads/2008/09/South-Africas-Current-Account-Deficit.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }