Analyse the negative impact of administered prices on the economy​

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Explanation:

This should result in an influx of foreign exchange, keeping our current account in rude health. Unfortunately, the picture is complicated and the outlook bleaker.

The cost of electricity is effectively killing South Africa’s mining and manufacturing capacity, causing us to forfeit the export opportunities a weak currency offers.

Another issue is that investors are withdrawing their money. We have seen a 43.6 percent decline in foreign direct investment over the last two years while Chile has seen an uptick of 82 percent over the same period. This lack of confidence is a further blow to mining and manufacturing.

The contributing variables are adequately captured by the recent credit ratings downgrades. Political risk is among the strongest explanatory factors for the downgrades, vehemently denied by Finance Minister Pravin Gordhan. A weak rand also fuels import-driven inflation, which will likely lead to higher interest rates, further militating against investment in productive manufacturing capacity. The cumulative effect is that our economy is likely to grow by only 2.2 percent this year, while comparable emerging economies are growing at rates of 6 percent to 8 percent.

If economic stagflation is to be diverted, the negative impact of administered pricing must be understood and reversed.

The economic theory of administered prices hypothesises that, in comparison with competitive or market-determined prices, administered prices are relatively inflexible and set at the discretion of sellers according to some rule or judgement, mostly on a cost plus mark-up basis. Inefficient consequences result because these costs are artificially inflationary.