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I am grateful to Johannes Mueller for helpful comments. I also would like to thank Jan Gottschalk, Anne Grant, Rainer Koehler, Thomas Krueger, and Joannes Mongardini for their comments. The paper also benefited from discussion with participants at seminars held at the Bank of Namibia during the 2006 Article IV mission and at AFR Division 7. Any errors are my own.
The loti of Lesotho, the Namibia dollar of Namibia, and the lilangeni of Swaziland are pegged to the South African rand at par. The rand circulates freely in these countries. Foreign exchange regulations and monetary policy throughout the CMA reflect the influence of the South African Reserve Bank.
The current account balance has been in surplus primarily thanks to revenues from the Southern African Customs Union (SACU). SACU consists of Botswana, Lesotho, Namibia, South Africa, and Swaziland. South Africa is the custodian of the pool of SACU revenues, which constitute a substantial share of the state revenue of all the other member countries.
Competitiveness is rather an ambiguous concept and has been defined in a variety of ways. The OECD (1992) definition is often referred to: “Competitiveness is the degree to which a nation can, under free trade and fair market conditions, produce goods and services that meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term.”
Because unemployment in Namibia is highly affected by education and skill levels, the paper considers labor market issues relevant to long-run competitiveness.
The results of the PPP approach can only be suggestive. PPP is not considered an appropriate model for determining the equilibrium level because the REER mean reverts only slowly to a constant level, which is the long-run equilibrium implied by the PPP assumption.
FEER is the exchange rate consistent with macroeconomic balance and depends on the terms of trade, the current account balance target, and the full employment target.
Namibia’s inflation rates have recently converged to South Africa’s.
This relies on the classification provided by the World Bank. Due to data constraints, the following countries are not included: Cuba, Iraq, Marshall Islands, Micronesia, Serbia and Montenegro, and West Bank and Gaza.
Because the countries included are at similar stages of growth, the Balassa-Samuelson effect is likely to be much less pronounced in case (iii) than in the other two cases.
The paper uses the Johansen cointegration test and VECM as robustness checks.
This approach tests for the existence of a level relationship using the F-test.
LNTOT and OPEN are expressed relative to trading partners, while LNTOTNAM and OPENNAM represent only Namibia data.
Results were essentially unchanged when the number of lags was increased to three. Setting them at two facilitates computation.
This significantly increases the reliability of our choice of the best model. Regressions are estimated aided by an econometric template developed by Chudik and Mongardini (2007).
Using the SBC criterion, the best model is chosen from equations that have large enough F-statistics, which indicate the existence of significant level relationships, and coefficients with statistical significance and plausible signs (Appendix, Table 1).
The terms of trade are usually found to be a main determinant of the REER and are positively correlated with the REER in the case of Namibia, the correlation coefficient being 0.4. However, our best models for Namibia according to our selection criteria do not include the terms of trade.
See Appendix Table 2. For BM, we referred to the results without trend (intercept only) as it appears trendless. The other variables likely being trended, we referred to the results with intercept and trend.
See AppendixTable 3. Trace test and maximum-eigenvalue tests indicate 4 and 3 cointegrating equations at the 5 percent level.
The four fundamentals are government consumption, openness, productivity, and the terms of the trade; the fifth is debt service as a share of exports.
Economies with GDP per capita below U$2,000 are classified as in stage 1; those above U$3,000 in stage 2. Namibia’s GDP per capita is estimated to have reached U$3,157 in 2006, up from U$2,984 in 2005.
25 reforms are reported to have made business more difficult.