South Africa’s Economic Environment

Questions: 1.Africas most developed, but stuttering economy faces the danger of ratings cuts from agencies worried that Pretoria might not stay on a thrifty fiscal path, after President Jacob Zuma inexplicably shuffled finance ministers twice four days in December? 2.Moving forward, structural reforms are imperative to reduce policy uncertainty, boost confidence, tackle structural impediments, and lower vulnerabilities, the global lender said? 3.Explain what appropriate steps the South Africa government and reserve bank might have taken? 4.Discuss the effect of South Africas challenging economic environment as outlined in the article, on unemployment. Make special reference to the effect of appropriate steps to counter rising government debt and inflation? 5.Discuss the Market structure of the grocery market in South Africa as outlined in the article. Make reference to characteristics of market structures? 6.With reference to the kinked demand curve do you a price war is a good strategic move for the four main food retailers in the current South African grocery market? Discuss the effect of a price war on consumers and smaller rival grocery retailers? 7.A single national grocery retailer operating in a Shopping Centre may be in position to charge higher prices due to the lack of competition. Discuss , with the aid of a fully labeled diagram how the exclusivity clauses in the lease agreements allow for monopoly prices and therefor economic profit for food retailers operating in malls? 8.Explain, using examples, how the four main retailers can use concepts of price elasticity of demand cross elasticity of demand and income elasticity of demand for revenue maximization and demand planning? Answers: South Africas Tough Economic Environment 1. For some time now, the South African economy has been stuttering. Mainly, this was brought about by President Jacob Zumas unprecedented reshuffling of the countrys finance ministers twice in four days in at the end of last year. As a result, the economy faced the danger of rating cuts from organizations that were worried about Pretorias fiscal stability (SA Faces Tough, 2016). In addition to this, one can attribute the economys stuttering to the fact that the government goals, although honorable and justifiable are accompanied with large amounts of wastage, cronyism and policy experimentation. Furthermore, the international community has lost confidence in the Zuma administration. For this reason, there is great fear that the government might instigate unfavorable fiscal policies that may affect the business environment in the country (Mapenzauswa, 2016). Besides, South Africa is a divided nation. Specifically, the ruling party, African National Congress has adopted populist policies in the economy to gain mass support (Tshabalala, 2015). All these factors combined have led to the stuttering of the economy, exposing it to the risk of rating cuts from institutions who are concerned that the economy might dwindle. 2. The Zuma administration set a nine-point plan to initiate structural reforms and promote business and investments in the country. Firstly, the plan sought to resolve the energy challenge in the nation (Pressly, 2015). Secondly, it highlights the need to revitalize and increase the agriculture value chain. This way, the economy can reap gains more from the agricultural sector. Thirdly, the strategy focuses on advancing beneficiation and addition of value to the countrys mineral resources. In turn, these structural reforms in the energy, agricultural, and mining would bring about intense economic growth in the country. The fourth agenda pertains to the governments plan to ensure efficient execution of a higher impact Industrial Action Policy (IPAP). Through this reform, the government can raise the impact of its interventions to support industrial development and re-industrialize the economy (South African Government, 2015). Likewise, the fifth plan aims at encouraging private sector investments in South Africa. To this effect, the Zuma administration set up an investment clearinghouse in the Department of Trade and Industry to support international and local investments and reduce regulatory inefficiencies. Consequently, this would enhance investments and business in the nation. The sixth agenda sought to moderate workplace conflict. On the other hand, the primary goal of the seventh agenda is to unlock the potential of rural enterprises, cooperatives, townships and SMMEs (Pressly, 2015). Subsequently, this is expected to pilot the informal sector and increase business activities in the aggregate economy. Correspondingly, the eighth point focuses on advancing the role of state-owned enterprises, information and communication technology infrastructure and sanitation, water, and transport infrastructure. Lastly, the ninth plan is the Operation Phakisa whose primary goal is to grow the ocean economy (South African Government, 2015). Indeed, the implementation and complete execution of these structural reforms would bring about an increase in investments and business activity in South Africa. 3. In order to counter the rising inflation and government debt, the SA government together with the SA Reserve Bank instigated appropriate steps in the economy. To begin with, the two set the public finances under control despite the adverse political development at the time. In addition, the Zuma administration continued to demonstrate a commitment to translate the nine-point development plan into action, thus ensuring that the economy remained an investment hub (Reuters, 2016). Further, the government made excellent progress on countering rising debts. Particularly, the 2016/2017 budget and the fiscal plan is expected to create stability in the economy and reduce the overall debt metric (Khuzwayo, 2016). Moreover, the Reserve Bank works towards a less severe tightening of monetary policy in the country. In turn, this supports economic growth. 4. Characteristically, South Africas challenging economic environment has had an adverse impact on the level of unemployment in the nation. However, the steps undertaken by the government has reduced the level of unemployment. Precisely, the implementation of these strategies has brought about an increase in opportunities in various sectors of the economy. Specifically, opportunities have been created in the agricultural, marine, manufacturing and transport and communication sector. In turn, this has led to the improvement of the citizens standards of living. In addition, the subsequent drop in government debt will allow the economy to invest locally and create more employment opportunities for its residents. South Africas Grocery Market 5. Profoundly, the grocery market in South Africa is oligopolistic. Mainly, is based on the fact that few large retailers dominate the market. These firms include PicknPay, Woolworths, Spar, and Shoprite. Cumulatively, these four enterprises have a market share of 90 percent (SA Aims, 2016). For this reason, they have a tremendous market power and dominate the industry. In addition, these firms collude to create barriers that prevent the entry of rival firms. Currently, these firms have signed leasing agreements that restrict malls from renting out space to rival retailers. In turn, this has made it difficult for other retailers to join the grocery industry in the country. Moreover, their large market share allows them to influence market prices. Thus, they can charge higher prices without necessarily losing their market share. Besides, the lack of direct competition has increased their power to raise prices beyond the rate that would prevail in a competitive market. 6. With reference to the kinked demand curve, a price war is not a good strategic move for the four large retailers in the South African grocery market. According to this model, sellers follow a price cut policy and ignore a price rise strategy by the rival company. Thus, by engaging in a price war, firms will continuously reduce their prices in response to a competitors price decrease strategy. The more aggressive the price war is, the more the companies will offer price discounts. Notably, the introduction of price cuts will significantly reduce revenues and profits. In the long run, this may result in losses for the retailers. In extreme cases, losses may result in the closing down of a companys operations. For this reason, it is irrational for oligopolies to engage in price wars. Instead, it is advisable that they engage in non-price wars such as warranties, gifts, and advertising. 7. A single national grocery retailer operating in a shopping center may be in a position to charge higher prices due to lack of competition. Particularly, this occurs because the company dominates the market. Specifically, the retailer possesses a great market power that allows it to influence the prices of its goods and services. At this point, the firm operates as a monopoly due to lack of competition which is facilitated by the exclusivity clauses in lease arrangements. Consequently, this results in higher economic profits for the food retailers operating in malls while reducing the economic welfare of its customers. Source: (Khan, n.d.). 8. Notably, the four retailers can adopt the concept of cross elasticity of demand price elasticity of demand, and income elasticity of demand to plan for demand and achieve maximum revenues. Usually, different products have different types of price elasticity of demand. Therefore, for those products that have a high PED, the retailer should refrain from increasing their prices as it would significantly reduce their demand and decrease sales. In contrast, the retailer may increase the prices of products with low PED such as milk and kales. Normally, a significant increase in the price of these products leads to only a slight drop in its demand. Therefore, the store may reap more profits from increasing their prices. In the same way, the four retailers may implement the concept of cross elasticity of demand to improve their sales. Basically, the model elucidates the sensitivity of demand for one commodity following a variation in the price of another product (Moffatt, 2017). Thus, using this concept, firms can influence the pricing of goods depending on whether they are supplementary or complementary. Generally, retailers should refrain from increasing the price of commodities that have substitutes since it will lead to a reduction in their demand (Khan, n.d.). For example, if it increases the prices of fresh tomatoes, consumers may shift to tomato paste. On the other hand, it may increase the price of products that do not have substitutes such as onions, without reducing their demand, thereby safeguarding their sales and revenue. Furthermore, these retailers may use the theory of income elasticity of demand (YED) to improve its sales. Basically, YED pertains to the sensitivity of demand for a product to variation in the income of customers. Thus, they should increase the price of normal goods when the income of the consumer increases. This way, an increase in the buyers income will lead to a higher demand for these products. However, for inferior goods, an rise in the consumers earnings will result in a decline in their demand. For example, they should increase the price of fish and beef following an increase in buyers income since their demand rises with increases in consumers income. This way, they can enhance their revenue and profits. References Khan, S. Cross elasticity of demand. Khan Academy. Retrieved from https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-tutorial/v/cross-elasticity-of-demand. Khan, S. Monopolist optimizing price: Dead weight loss. Khan Academy. Retrieved from https://www.khanacademy.org/economics-finance-domain/microeconomics/perfect-competition-topic/monopolies-tutorial/v/monopolist-optimizing-price-part-3-dead-weight-loss-avi. Khuzwayo, W. (2016). IMF and Moodys see SA recovery. Business Report. Retrieved from https://www.iol.co.za/business-report/markets/imf-and-moodys-see-sa-recovery-2019014. Mapenzauswa, S. (2016). 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