An econometric analysis of the relationship between economic globalisation and public debt in South Africa

Abstract

In recent decades, globalisation has reshaped economic landscapes worldwide, increasing the interconnectedness of markets and intensifying cross-border trade and financial flows. Emerging economies, such as those in sub-Saharan Africa, face unique challenges in managing the consequences of economic integration as they navigate the risks and opportunities that come with increased exposure to global trade and capital markets. For South Africa, one of the largest economies on the African continent, globalisation presents a double-edged sword. While trade and financial openness can spur economic growth and development, these processes also complicate public debt management. Amid rising debt levels and fiscal constraints, understanding how various dimensions of globalisation, specifically trade and financial integration, affect public debt has become essential for informing policy and ensuring economic stability. This complexity has made public debt management an urgent priority in South Africa. Given these rising concerns, South Africa's growing public debt has raised apprehensions about the country's fiscal health and long-term economic stability. As the government seeks to address structural budget deficits and pressing socio-economic demands, it faces the added complexity of navigating an increasingly globalised economy. Although globalisation can foster growth, it also heightens exposure to external financial pressures, potentially exacerbating public debt. While extensive research exists on globalisation's effects on economies worldwide, few studies examine its distinct impact on South Africa's public debt. Furthermore, much of the existing literature has relied on broad proxies, such as foreign direct investment (FDI) and trade openness, which only partially capture the complexities of globalisation. This study seeks to address this gap using the KOF Globalisation Index, a more comprehensive measure differentiating between de facto (actual flows) and de jure (policy measures) globalisation. The research aims to provide a clearer picture of how specific facets of globalisation affect South Africa's debt burden. In light of the above discussion, the primary objective of this study was to examine the relationship between economic globalisation and public debt in South Africa. To achieve this objective, the study utilised secondary annual time-series data collected from the South African Reserve Bank (SARB), the KOF Swiss Economic Institute, and the World Bank Development Indicators. Covering the period from 1980 to 2022, this dataset provided 43 annual observations, carefully chosen based on data availability and relevance. This timeframe captures the critical phase of South Africa's integration into the global economy, coinciding with the lifting of Apartheid-era sanctions. For data analysis, the study employed econometric techniques, specifically the autoregressive distributed lag (ARDL) model and the error correction model (ECM), to accurately investigate both short- and long-run dynamics. These models allowed for a robust assessment of globalisation's impact on public debt within the South African context. The study's findings revealed that economic globalisation has distinct effects on South Africa's public debt, with notable differences between trade and financial globalisation and between de jure and de facto aspects. In the short-run, trade globalisation is associated with a reduction in public debt, while financial globalisation exerts a positive and significant impact, indicating a rise in debt levels. Over the long term, de jure financial globalisation, driven by policy-based financial openness, is linked to a sustained increase in public debt. This suggested that financial integration may place upward pressure on debt levels. Conversely, trade globalisation, particularly in its de facto form, is associated with a reduction in public debt over time, indicating its role as a stabilising factor. Therefore, based on the discussed empirical findings, the study recommended promoting and diversifying trade globalisation by expanding export markets through trade agreements and regional partnerships, as well as supporting small and medium enterprises (SMEs) to participate in international trade. Furthermore, to mitigate the effects of financial globalisation, the study recommended carefully managing capital flows and external debt in addition to reforming financial legislation to balance integration and debt management in South Africa. The study concluded that while globalisation can facilitate economic growth, effective debt management and policy adaptation are essential for minimising potential vulnerabilities in an increasingly interconnected global economy.