Impact analysis of the floating exchange rate on the output, export and employment in the South African red mead industry, 1995-2020

Abstract

The rate at which one country’s currency is exchanged for another country’s currency is known as the exchange rate. The external value of each currency is reflected in the country’s economic conditions in general and the purchasing power of the currency relative to that of other currencies in particular. An exchange rate is the main indication signalling the current trends in the economy. The study analysed the impact of a floating exchange rate on production output, exports volume and employment in the red meat industry of South Africa. However, the study prioritised three industries within the red meat industry, which are relevant contributors to agricultural sector in terms of production output, exports volume and employment. The three types of red meat considered for this study are cattle/beef, sheep and goat and pig. The relationship between a floating exchange rate and red meat production is continuously significant, especially with a global increase of red meat consumption and demand. The overarching theoretical framework guiding research on the impact of a floating exchange rate on production output, exports volume and employment is the theory of imperfect competition. The overall aim of the study was to analyse the impact of a floating exchange rate on production output, exports volume and employment in the South African red meat industry from 1995 until 2020. The study had five objectives for the study and they are broken down as follows: profiling the performance of the South African red meat industry in terms of production output, volume of exports and employment; secondly, to analyse the impact of floating exchange rate on production output, volume of exports and employment in the three selected South African red meat industries; thirdly, to analyse the short-run relation among production output, export volume, employment and exchange rate in the red meat industry of South African, fourthly, to determine the causality relationship or effects amongst production output, volume of exports, exchange rate and employment within the three South African red meat industry; and lastly, to determine the effects of red meat consumption on production output, volume of exports and employment in the South African red meat industry. The study adopted secondary time series data and employ the following numerous and various analytical techniques to address the objectives: Augmented Dicer Fuller (ADF) test for stationarity test data, descriptive statistics, to profile the three prioritised red meat industries; error correction model of the autoregressive distributed lag (ARDL-ECM), to analyse the impact of floating exchange rate on production output, volume of exports and employment in the selected three South African red meat industries; ARDL bound test was used to analyse the short-run relation among production output, export volume, employment and exchange rate in the red meat industry of South African; granger causality test, to determine the causality relationship or effects amongst production output, volume of exports, exchange rate and employment within the three South African red meat industry; and ordinary least squares (OLS), to determine the effects of red meat consumption on production output, volume of exports and employment in the South African red meat industry. ADF results showed that for the three selected red meat industries, the variables were integrated at different levels I (0) and I (1). ARDL-ECM estimation measured the long run cointegration among production output, volume of exports, exchange rate and employment through the error correction term adjustment speed. The results showed that in the long run, an exchange rate affects production output, volume of exports and employment in the three South African red meat industries. ARDL bound test confirmed the short run relationship among production output, volume of exports, exchange rate and employment for the three selected South African red meat industries. Granger causality estimation indicates single and bi-directional causality effect among production output, volume of exports, exchange rate and employment for the three selected South African red meat industries. Ordinary least squares (OLS) results show that red meat consumption positively and significantly affects total production output, volume of exports and total employment across the three selected South African red meat industries. Conclusively, it is recommended that policymakers should not interfere with a floating exchange rate policy. Since the exchange rate volatility positively impacts on production output, exports volume and employment, it implies that the exchange rate volatility can support growth in small open economies by encouraging international capital inflows, excessive capital inflows into the country. The South African government in collaboration with the red meat industry should undertake more investments aimed at boosting the production of the red meat industry. The recommended investments may include agricultural research and development. Through the adoption of science and technology-based innovations, such as breeding improved livestock that is adaptive to different climatic conditions and improving intensive management methods, the investment on research and development will make the industry to be a sustainable supplier of quality red meat in domestic and various international markets, as South Africa is known to be the leading producer of red meat in the continent of Africa.