Volatile Capital Flows and a Route to Financial Crisis in South Africa

This is a review article; its purpose is to support a debate on the use of the best available economic theory and evidence in monetary policy in contemporary South Africa. In order to do so, I contrast South Africa's laissez-faire management of capital flows with the experience of other countries where the authorities have opted to use capital control techniques of one type or another. The empirical evidence is fairly substantial, capital control techniques can play a useful part in staving off fragility and financial crisis in the event of sharp surges in capital flows. The key idea is that capital control techniques would offer the authorities more freedom and flexibility in the management of capital flows and the pursuit of monetary policy. The article follows on from Mohammed (2010) who concludes that South African policy makers have not yet learned the relevant lessons stemming from their neoliberal embrace. This article takes up that theme and uses macroeconomic data to show that without capital controls South Africa courts a financial crisis that can be transmitted via any one of at least three channels.