The findings of these studies contrasted with more recent studies in terms of their effects on economic growth. I will be looking at several research papers, as well as analyzes of economic indicators and various other sources, in order to determine whether or not South Africa is heading towards a depression because of this. Literature Review: When an economy is in difficulty, a country typically experiences a high budget deficit as the government attempts to subsidize economic recession, rising poverty rates from low levels of employment, and cutbacks, in countries in developing world: a simultaneous increase in population levels as uneducated teenagers may mistakenly assume that having children will increase subsidies from the government, or allow more family members to earn an income, adding fuel to the economic fire. When real income falls, along with employment levels, consumers hold onto savings and spend down loans, and they find it more advantageous to invest their money as interest rates are high, rather than investing in capital projects. The problem begins when the government cannot raise taxes, but faces a high deficit and has no additional revenue sources. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay They start lending money through open market transactions internally or by borrowing externally. Low levels of government debt are believed to lead to economic growth. A statistical model explains the 1% increase in public debt; resulted in an increase of 0.8118% the increase is economic growth. One possible explanation could be that the debt incurred by the government needs to be pumped back into the economy in the form of revenue-inducing productive projects. Revenue obtained from projects or economic stimuli (subsidies that reduce production or agricultural costs, allow decreases in food prices, in line with the decrease in consumer prices, decreases in production costs allowing an increase in employment, with the increase in income therefore increase in spending, need for production leading to increasing demand for money Associated with the decrease in interest rates and the increase in investment spending by a decrease in the opportunity cost of saving and holding money. bonds. This is the ideal outcome: where money created within the economy allows the government to repay its debts and therefore debt is needed to save an economy. However, this ideal long-term outcome is questioned from the U-shaped non-linear model, which suggests a non-linear relationship existing between public debt and economic growth: that is, up to a certain “threshold”, the debt will translate into positive growth and, beyond that, the economy will start to fall, the general finding is a 50-90% threshold after which growth declines. Some studies find that there is no threshold and the results are not sensitive enough to conclude that it exists. Krugman's model explains that as debt increases and investors' demand for risk compensation increases, the contract value of the loan, i.e. the repayment amount, can be greater than the actual value, so countries can be incentivized to not paying the loan rather than repaying it. This diminishes both their credit rating and investor confidence, increasing the cost of future borrowing or jeopardizing the possibility as a whole. There is also the aspect of dead weight spending, where the revenue received leads to projects that do not induce revenue,such as for military or social customs purposes. In West Asia, Jordan went through a two-decade period before 2015 of relying heavily on government debt to stimulate its economy. The period 2000-2015 was analysed: specifically, from 2007 to 2005, total public debt increased by 17.1% of gross domestic product (GDP), correlated with a significant decline in economic growth of 8.6% . [Appendix 1] it was also noted that in this study there is an inverse relationship between GDP growth and Public Debt. Furthermore, the government budget was negatively affected after the 2008 economic crisis due to the increase in foreign debt. [Appendix 2]However, economic growth was not negatively affected by increases in domestic growth, signaling that when it borrows internally, the redistribution of resources may not necessarily stimulate growth, but does not cause a decline.CHART AND TABLE: SOUTH INDICATORS AFRICAN ECONOMIC AS % OF GROSS DOMESTIC PRODUCT: Appendix 3+4. South Africa has a pattern of increasing external debt when a crisis hits. Around 2001-2003 there was a massive increase in external debt. During this period, South Africa was facing economic difficulty. Once again, in 2008, due to the global recession, external debt increased significantly and has increased at a rapid pace since then. Investment spending/gross capital formation decreased slightly and shows a negative relationship between peaks in external debt and investment spending. This relationship could either increase external debt causing a decrease in investment spending, or, a decrease in investment spending leads to the need for external debt, or when an economic recession occurs, it affects one, the other, or both , or these factors cause economic recession. South Africa differs in one harmful factor. In 2002, it was one of the largest populations infected with HIVAIDS. This is directly related to gross domestic product, as the country also relies heavily on agriculture, mining, and the transportation sector. The commitment of workers in these environments causes further contagion of the disease. The infection is causing enormous deadweight spending, as human capital is less productive or unable to work and other human aspects, as well as the quantitative effects of large demographic and labor market costs, worsening economic activity and causing the government needs more funding for revenue-producing projects to offset dead costs. [OECD, 2002] The above describes South Africa as facing a debt trap: the debt-to-GDP ratio is rising while both investment and savings remain at an overall level, showing no signs of dramatic change. This indicates that South Africa is not injecting borrowed funds productively. Raising VAT to 15% will give the government an additional source of revenue, but this may only help debt payments and not serve the economy. Despite the economic conditions of all BRICS countries, especially Brazil and Russia, South Africa has the highest unemployment rate of all BRICS countries and, as of 2017, the highest unemployment rate of all European Union countries , including Greece, the United States, and Japan. These factors, as well as the corruption reported in relation to the firing of Jacob Zuma, former president, of the Guptas, as well as the firing of Pravin Gordhan. The disorganized nature of the economy, with a depreciating currency, is not conducive to foreign investors. Their trust has been undermined and may take decades to resolve. The surge in foreign debt couldbe linked to the increase in investors' risk premium and the depreciation of the currency, which would cause an increase in the budget deficit as interest rates on debt rise. If South Africa were to default, investor confidence and future lending could be damaged dramatically, possibly permanently. This theory states that any change in government borrowing will be offset by a simultaneous change in private saving, so government deficits may have no direct effect on investment. This is due to the decline in the deficit, which causes lower interest rates and consumers find it more advantageous to hold cash, savings decrease and when the government deficit increases, interest rates increase and savings increase. The chart above shows that this is possible, which could mean that the state of the economy in terms of savings and investment, which are the main factors that stimulate economic growth, may not be affected by external debt and could not send the economy in recession, directly. [Rice University, open textbook: Chapter 31.] Stock of External Debt (% of GDP): Appendix 5: In 2002, all 4 countries increased their external debt. This is in line with the global recession. Since these are all developing countries, this could be due to their internal debt through taxes which they would suffer if they were to increase taxation. In addition to this, domestic government debt would be scarce in a declining economy, especially because government fragility or the possibility of default is high. The government would need to receive funds from first world foreign debtors. Therefore external debt would grow in all 4 countries, whereas in a first world country external debt may not be as harmful as they would generally be able to afford the consequences later than developing countries. Ghana experienced a very significant decline in external debt following the recession as economies recovered, only to stabilize during the subsequent economic recession in 2008. Kenya showed similar patterns, in a much less extreme manner, and Botswana and South Africa appear to have had similar patterns, until the onset of the recent economic crisis and the decline in foreign investor confidence starting in 2014, where they have a more inverse relationship, as Botswana appears to borrow less external revenue, and South Africa and Ghana going into more debt. It seems that Kenya is on the verge of reducing its external debt, however their progress is not predictable. An interesting finding is that tax increases that may be the result of increased interest payments are associated with more creditworthy borrowers. From 1998 until the global recession, tax rates increased from 4% and continued to increase to 14% in 2006 in resource extraction. The negative effects of a tax increase may seem harsh, however, these countries' recovery from recession appeared to have been much greater than that of those that had maintained low tax rates and had relied more on revenues from oil or mining mining. Kenya is one of these countries. South Africa has just increased taxation to 15%, this could potentially help the economy, as an increase seems harmful in the short term, but may be necessary in the long term, as seen in Kenya, especially in restoring confidence in foreign investors and in credit ratings. Botswana has been cast in a positive light as "Citi's David Cowan suggests sovereign debt borrowers could learn from.