South Africa has been experiencing platinum mine tribes. The Association of Mineworkers and Construction union (MAGIC), which is the majority union in the platinum belt, has been demanding R 12 500 salary for its members (sinews. Gob. AZ, 2014). The main employers Anglo American Platinum, Impala Platinum and Looming signed a wage agreement to end the 5 month strike. The agreement provides for a RI ,OHO-a; month increase each year for the two lowest bands of employees (Vacation, 2014). The Platinum strikes have caused what is called an adverse supply shock.
Adverse supply shocks cause prices for a given amount of output to increase. Firstly, the strikes cause a decrease in production and when employers give in, an increase in wages. The price setting rate is given by the equation (W/P) W being wages and p price, therefore an increase in wages causes price setting rate to increase. This increase in real wages will cause the mining companies to lay off employees and the natural rate of unemployment to decrease. Alternatively the wage increase can be put on consumers by an increase of the mark up.
The price setting rate is given by the equation (1/1+m), therefore an increase in mark up (m) causes this rate to increase. The effect of the price setting increase is strong because the mining sector is a big employer. The industry is the largest employer, rivaled only by the public service which employs over a million people (sinews. Gob. AZ, 2014). The seasonally adjusted unemployment rate increased marginally to 25 percent in the first quarter of 2014, the bank said. (SPA, 2014). The AS/AD model shows the relationship between Aggregate supply and Aggregate demand. In the short run represented by Fig. An increase in the price setting causes the AS curve to shift right to ASIA . This shift represents a decrease in institution due temporary loss of wages and a drop in investor sentiment. As shown in Fig. 1 prices to go up. Consumer price inflation breached the upper limit of the inflation target range in April this year (SPA, 2014). Output also decreases. The negative growth in the first quarter of 2014 was mainly brought about by a marked decrease in the real value added by the mining sector, reflecting the impact of a prolonged strike in the platinum mining sector. SPA, 2014). Real gross domestic product shrank at an annelids rate of 0. 6 percent in the first quarter of 2014 following fairly strong growth in he final quarter of 2013. (SPA, 2014). Price (P) ASS AD Y(n) AS 1 Output (Y) AS/AD Model Overtime prices continue to increase to ASS. This is because although the new output level has fallen it is still higher than natural rate of output. For this reason prices will continue to increase until output reaches the new natural output rate.
At the new equilibrium in addition to output being equal to the natural rate of output, price is equal to expected price and employment to the new natural rate of employment. At this point there is no reason for wage setters to increase price expectations. Price is higher than before the strikes ND Output lower than before the strikes. Real GAP at constant 2005 prices (Reserves, 2014) Real GAP at market prices (Reserves, 2014) Fig. 2 Fig. 3 The two graphs above show the macroeconomic conditions in South Africa between 2007-2013 in the form of its GAP. Fig. Shows GAP in terms of constant 2005 prices which shows the overall trend whereas Fig. 3 shows GAP in terms market which shows all the fluctuations. South Africa enjoyed largely uninterrupted growth between 1994-2007. But this came to an end in 2008. With South Africans increased integration into the global market, there was no shaping the impact of the 2008-09 global economic crisis, and GAP contracted to 3. 1%. (southeaster. Info, 2014). Exports took up an increasing amount of the GAP from 2004 to 2008, reaching 31. 1 percent in 2008. In 2008, GAP reached RI ,814. Billion and exports reached RARE. 3 billion (Sautéing Provincial Treasury, 2012). In 2009, however, the global recession led to a fall in South Africans exports as the country’s trading partners were no longer able to maintain their previous expenditure levels. Exports thus fell to RARE. 4 billion (Sautéing Provincial Treasury, 2012). The effects were worsened y a decrease in consumption and investment. This caused a decrease in GAP due to the fall of output. The decrease in GAP is shown by the sharp decline in mid-2008 on Fig. 3. The government’s response was to fiscal expansion.
There was an increase in government spending and decrease in tax. In his presentation of the 2009 Medium-Term Budget Policy Statement, Finance Minister, Honorable Pravda Gordian stated that government expenditure would increase by RI 27 billion despite an estimated ERR billion decrease in tax revenue (Sautéing Provincial Treasury, 2012). A bulk of went towards infrastructure development. A sign efficient amount of the infrastructure development went towards the 2010 World Cup preparations. This policy could not be used with impunity as it caused a budget deficit.
This policy initially increases output, overtime output will return to natural level of output but interest rate will remain higher than before the deficit. The SARA exercises a targeted inflation of 3-6%. In the 2008 situation the reserve bank used monetary expansion. Monetary expansion increases the monetary supply so as to stimulate consumption, which increases GAP. Inflation had caked at 1 1. 5% in 2008; as a result rep-rate went from an average of 1 1. 6% in 2008 to 7% by end of 2009. The measures above brought South Africa out of recession.
Fig. 3 shows that the recovery was slow. This was due to South Africans high unemployment, skills shortage and electricity shortages. Recovery in India and China led to revivalists demand for South African mining and manufacturing exports and real wages increased due to monetary policy easing (Sautéing Provincial Treasury, 2012). Growth maintained briefly dropping mid-2009 as shown by Fig. 3. This was due to strikes across several industries. The strike issues were resolved and the dip was overshadowed by a steep increase shown Fig. 3 in 2010.
South Africa enjoyed significant economic growth in 2010. The world cup brought increased output and consumption. The success also assured increased consumer confidence. The net effect was a steep increase in output. The government used this opportunity of high growth to decrease the budget deficit procured during the 2008 recession. There was an increase in tax revenue and decrease in government spending. After South Africans initially promising recovery allowing the global economic crisis, real GAP growth peaked at 3. 6% in 201 1, sliding to 2. 5% in 2012 and to 1. 9% in 2013.
Sluggish growth in South Africans major European and North American trading partners combined with ongoing labor unrest and fading business and household confidence all underlay this performance (Wallows Lassos Sumo, 2014). 201 2 saw wide spread labor unrest in the mining sector. The unrest came to a climax at the ‘Marinara Massacre’ where police opened fire on protestors. The unrest caused a decrease in consumer confidence and come beginning of 201 3 South Africa faced a trade deficit as the mining sector comprised a significant amount of their exports. The net effect of these factors was a decrease in output and slow growth.
The strikes in 2012 were followed by some recovery but unrest continued. 201 2 saw strikes in the Agriculture and manufacturing industries. Agricultural strikes were largely in the first half of the year and the manufacturing strikes in the second half. The automobile sector was worst hit with strikes in August and September resulting in a 75% quarterly fall in vehicle production and a 6. 6% quarterly fall in total manufacturing output. Wallows Lassos Sumo, 2014). To undo the fall in GAP caused by the unrest the South Africans response was once again a mixed fiscal and monetary policy.
The government wants to decrease the deficit yet keep the economy growing. They opt to continue with high government expenditure but couple it with increased tax revenue. The main aspect of high government expenditure was the national development programmer (AND). The AND aims to increase infrastructure investment (including renewable energy), increased public works, new spatial plans for cities, improved public transport, upgrading informal settlements, tax wage busily ,education accountability and phasing in of national health insurance.
The increased spending on education is meant to deal with the skills shortage. The skills shortage is one of the factors that are hindering economic growth. One of the main projects of the NYPD is the Medium power station. This power station is key in overcoming the economic bottleneck of insufficient electricity. This bottleneck is another of South Africans problems hampering growth. The mining industry especially will welcome the increase in electricity as they are the industry most affected by the power issues. The effect of the NYPD is an increase output and therefore real GAP.
There were reforms in the tax system aimed at increasing tax revenue. Increase in tax causes a decrease in output and increase in government expenditure causes an increase output. The two effects are opposing. The government expenditure effect was stronger and output increased, meanwhile increased tax revenue caused a decrease in the budget deficit. The reserve bank once again exercised the same policy of maintaining rep rates low so as to increase monetary supply, which increases consumption, which increases aggregate demand and therefore Real GAP.
My essay has shown that the recent platinum mine strikes have had an adverse effect on the economy. These strikes cause supply shocks. These supply shocks decrease employment and output while increasing prices. The essay also shows that the platinum industry action is not an isolated incident. South Africa has been experiencing increasing labor unrest in the last 4 years. This reputation is causing the country to have low investor confidence which last long after the supply shocks have been reverted. The unrest is a reflection of the low income, increasing inflation and a big income gap.