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The impact of international capital flows on the South Africa economy since the end of apartheid

Fall 2006

By Seeraj Mohammed

This paper will consider international capital flows into and out of South Africa during the post-apartheid era. It will examine the types of flows that have been entering the country and how they are absorbed into the economy. In addition, it will consider the effects of these capital flows on the economy, taking into account the broad range of literature that link financial crises to volatile surges in capital flows.

The post-apartheid government has a policy of “gradual” liberalization of exchange controls. They have significantly eased the ability of South African residents to withdraw capital from the economy. Nonresidents are allowed virtually free movement of capital into and out of the economy. Current policies allow more and more South African capital to leave the country. The government hopes that a large share of the capital required for domestic investment, employment creation and development of the economy will come from foreigners. Within this approach, the government’s policies on capital controls do not differentiate much between long-term foreign direct investments and short-term capital flows. Instead senior government officials have argued that liberalization of financial markets will lead to deepening of financial markets. Even if this policy leads to more inflows of capital, will it lead to more and better investment?

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