In the course of policy formulation, it is impractical to rely on unassisted intuition. Models provide a logical abstract template to sort out complicated chains of cause and effect, and influence between the numerous interacting variables in an economy. By virtue of their logically consistent framework, they can provide the analyst and policymaker with a valuable economic representation of the sector and a laboratory for testing ideas and policy proposals (Hazel and Norton, 1986:2). Though imperfect abstractions, economists can experiment, at least logically, the effect of alternative policy options. Models have become a useful devise for formulating plans and investigating trade-offs. They are used mainly for forecasting, consistency checks and optimisation. It must be emphasized that while models provide a formal and quantified framework that is an irreplaceable adjunct to the processes of policy thought, they are not substitutes for the exercise of reasoning, judgement and political choice.
More than sixty years of experimentation, since Jan Tinbergen formulated the first structural macroeconomic model for the Dutch economy in 1936, has brought considerable progress in the field. Macroeconomic models have undergone a lot of refinement in line with the changing economic paradigm, new research on economic theory, development of new algorithms to solve large non-linear systems of equations, and advances in computer hardware and software, which have led to richer and more complex models. A wide spectrum of choice is now available, ranging from sectoral to economy-wide models, static to dynamic and short to long term incorporating insights of many theoretical approaches including Keynesian, neoclassical, monetarist, supply-side, and rational expectations.
The transition to a multiracial democracy in 1994 posed difficult political, social and economic challenges. On the economic front, the new government inherited a dysfunctional and distorted economy reflecting several decades of isolation. South Africa’s noteworthy achievements in surmounting these challenges, especially the attainment and restoration of macroeconomic stability have been widely recognized (Lewis, 2001). Despite the apparent success, concerns over slow growth, unemployment, poverty and inequality are widespread and mounting. The real growth performance over the last decade has failed to reverse the secular deterioration that has been occurring for decades. Thus, as the nation attains ten years of democracy and begins a new phase in its history, a major issue in the discourse on economic policies and performance relates to how South Africa can move on to a much faster all inclusive growth path that will benefit the poorer majority of its citizens. In the light of a decade of post-apartheid experience in development thought and practice, it is opportune and challenging to contemplate the future of economic models in economic policy-making. What is the state of the art in economic modelling? Have models lived up to expectation? This study intends to provide answers to the above questions. It undertakes a survey of macroeconomic models for policy analysis in South Africa.
The depth of the topic requires some selectivity. We focus on models with policy relevance. The description of the structure and dynamics of models as well as the analysis of their key properties is based on official publications, discussions with modelers and responses to a questionnaire on model properties. Some of the models involved in this research project are, however, subject to ongoing modification. With time, the versions described may change.
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