Annual Forum Papers

In economics, the effects of tariff protection and tariff reform remain a contentious, fervently debated issue.1 In South Africa, decades of high tariff protection, of which domestic manufacturing sectors primarily benefited, are being followed by a period of substantial tariff reform. To this end, endorsement by the South African government of the Uruguay Round of the GATT, in 1994, has manifested itself in the phasing-in of lower tariffs on imported goods, at times at rates accelerated beyond the commitment to GATT (Swanepoel et al., 1997).2 In international economic theory, the principal of comparative advantage implies that barriers to trade, for example tariffs, lower the welfare of the protected nation (Mohr et al., 1995: 458).

Nevertheless, the 1950s and 1960s saw many developing countries, particularly in Africa, adopt import substitution as a development strategy. But in the period post World War 2, the outward-oriented East Asian economies rapidly outperformed the inwardly focused African countries, a record that sustained through the 1990s, albeit dented by the emerging market crisis of 1997. Indeed, the theoretical literature has increasingly supported the view that countries exhibiting small domestic markets will suffer constrained growth in a closed economy structure (see Ray, 1998). This view recognises the failings of the conventional international economics assumption that imported and domestic goods, in a given sector, are perfect substitutes. When, as Armington (1969: 159) argues, imports and domestic goods are not perfect substitutes in consumption or production, the effects of tariffs, and thus of either an import substitution strategy or subsequent tariff reduction programme, depend critically on the magnitudes of the substitution elasticities estimated (Naude et al., 1999: 42).3 Using economic models to evaluate changes in trade policy generally requires, amongst other things, the conversion of policy changes into price effects. Trade policy models use these price shifts to determine how the policy under review is expected to affect output, employment, trade flows, economic welfare and other variables of interest. The direction and magnitude of a trade policy change on individual variables depends on the size of the shock, as well as the behavioural relationships present in the economy (Gallaway et al., 2001: 1). When evaluating policy shifts in an economic model, these behavioural relationships largely take the form of elasticities, which reflect the responsiveness of one set of variables to a change in a second set. For example, trade liberalisation reduces the relative price of imported to domestic goods. This leads to substitution towards imported products, the extent to which is dependent on the degree of substitutability. Subsequently, a key relationship for model analysis is the degree of substitution between imported and domestically produced goods as the relative price of those two goods changes, i.e. the Armington elasticity. This elasticity estimate is derived from the assumption that preferences are well behaved over a weakly separable product category that comprises similar, but not identical products. Crucially, these products are considered imperfect substitutes due to their differing countries of origin (Armington, 1969: 159). In the context of this study, this implies that even though goods produced in South Africa and the rest of the world may fall within the same product category, they are not perfectly substitutable for each other. With this in mind, it is useful, often critical, to ascertain the degree of substitution between foreign and domestically produced goods.

In general, knowledge of elasticities is important for aggregate issues, such as changes in tariffs or taxes. Policy changes of these kinds will effect a country's trade balance, level of income, and employment, the magnitude of the effects depending on the elasticity magnitudes (McDaniel and Balistreri, 2001: 1). Thus, the Armington elasticity forms an essential component of modelling the effects of international trade policy. Furthermore, applied partial and general equilibrium models employed to examine trade policy are almost all sensitive to trade elasticities (McDaniel and Balistreri, 2001: 12). Indeed, the Armington elasticity is a key parameter determining the quantitative, and in some cases qualitative results that policy makers use.4 Set against this backdrop, our study attempts to estimate Armington elasticities, at the industry level, for South Africa.
At this stage it is pertinent to establish a framework of model and elasticity estimateassessment. To this end, the analysis that follows has three objectives. First, to determine asuitable method that will, depending on the time series characteristics of the data, allow for the extraction of both short- and long-run Armington elasticity estimates. Second, to apply the method to each of the forty-five sectors under review to estimate the short-run and, where possible, the long-run estimates. Third, in light of the elasticity estimates generated, analyse possible policy effects for South Africa.

The discussion proceeds as follows. Section 2 reviews the literature content of Paul Armington's (1969) original contribution to trade policy analysis, and continues with a synopsis of industry level Armington elasticities estimated over the subsequent three decades, in both the international and domestic context. Next, Section 3 provides the mathematical counterpart to the review of Armington's (1969) exposition, and derives the base equation to be used in estimation. Section 4 examines the four data series required for the estimation procedure, while Section 5 explains the econometric implementation of the method outlined in Section 3. The results obtained from the econometric processes applied are summarised in Section 6. These results are then compared to previous South African and United States industry estimates. In addition, Section 6 highlights problems encountered during estimation that may impair the reliability of results. This relates specifically to weaknesses in data availability, as well as the use of a single equation approach to estimation. Section 7 concludes the study, summarising key results obtained.

  • Year 2003
  • Organisation TIPS
  • Publication Author(s) Kathy Gibson
  • Countries and Regions South Africa
Published in SADC Trade Development

This paper discusses changes in the regulation of citrus exports from South Africa. It traces the changes from state regulation of the citrus chain to very recent forms of private regulation in the context of highly competitive global markets. The paper argues that while these forms of private regulation are positive in that they are encouraging the industry to shift its focus from volume to quality - in line with overseas market demands - there are also limits and problems with private market regulation. The evidence thus far suggests that private regulation is limited to certain export chains associated with specific overseas markets and that it serves particular private interests.

  • Year 2003
  • Organisation School of Geography, Archaeology and Environmental Studies University of the Witwatersrand
  • Publication Author(s) Charles Mather
  • Countries and Regions South Africa
Published in SADC Trade Development

The overriding objectives of the Nepad programme are economic growth and sustainable development. If it is accepted that trade contributes positively to these objectives, the next question that arises is how to improve African countries' export performance. The ability to improve export performance requires a broader discussion of trade, industrial and agricultural policies, and in particular how to enhance African economies' supply capacity and competitiveness by increasing production and investment. To understand the determinants of investment, it is vital that the appropriate regulatory environment and reform programme, along with a macroeconomic framework and policy, are determined. In this light, trade policy must be understood as only one element of a wider development strategy to promote sustainable economic development.
The key foci of trade policy are to advance the reform and restructuring of the economy, to enhance economic competitiveness, and to increase the capacity of firms to compete in an increasingly integrated world economy, thereby creating sustainable economic growth and employment opportunities.
Sustainable trade policy reform requires a political and institutional framework to ensure that key constituencies and stakeholders bearing the burden of adjustment actively participate in the evolution of economic policy so there is ownership around its vision and objective. As the outcome of adjustments invariably produces winners and losers, a sustainable development strategy must include measures that provide for safety nets and the ability to re-skill labour appropriately to shift into sectors of the economy that are growing. In this sense, trade policy reform is a political process that needs to be managed carefully. Such a complex set of factors requires appropriate expertise, training and institutional development. At the same time, it is important to that we take into account changed and changing global economic dynamics, such as globalisation, liberalisation and regionalism that underlie growing competitive pressures in the world economy and the changed basis for competing in the global market.
This paper focuses mainly on globalisation's economic policy dimensions to identify:

  1. The key features of globalisation; and
  2. Some aspects of a strategic policy response for development in the globalising world economy.

  • Year 2003
  • Organisation TIPS
  • Publication Author(s) Xavier Carim
  • Countries and Regions South Africa
Published in SADC Trade Development

The first section sketches the well-known argument that there is a potential clash between trade policy reform, employment creation and poverty alleviation in the context of economic integration in Southern Africa. The argument is developed in the wider context of the endowments and accumulation of key resources in Sub Saharan Africa since 1960 and the consequences for the pattern of trade and growth. Unilateral and multilateral approaches to trade policy liberalisation are then discussed in the context of some macro structural characteristics of Southern Africa. The known wide disparities in the level of development between countries sharpen the potentially uneven distribution of benefits of trade policy liberalisation, whether unilateral or multilateral.

Section 2 looks at some of the early research on the employment impact of economic integration in Southern Africa, the Southern African Development Community Free Trade Area. The early datasets used to estimate the employment and later, welfare response to different strategies towards economic integration, highlighted many of the issues that have been subsequently researched using better data and better economic policy models. Principally, the early results showed wide variability of the distribution of gains from a SADC FTA both within and between countries. However, because of data gaps and unreliability and the use of simpler models, the particular findings were always subject to strong qualification.

In section 3, the 1997 dataset from the Global Trade Analysis Project (GTAP) was used to develop the general arguments about resource endowments for Sub Saharan Africa discussed in section 1 in the context of a detailed analysis of the structural characteristics of seven SADC countries. The argument was further developed using the GTAP standard Computable General Equilibrium (CGE) model to explore the poverty and employment impact of unilateral, regional and global trade policy reform packages. Detailed calculations of poverty impacts were only possible for Zambia. It was found that the unilateral trade policy reforms in Southern Africa had powerful welfare and employment benefits, as did global reforms. Regional reforms such as the SADC FTA had useful but much smaller benefits. Typically, the country results were polarised with the weaker countries benefiting least from the reform packages

  • Year 2003
  • Publication Author(s) David Evans
  • Countries and Regions Southern African Development Community (SADC), Zambia

In this short report we examine South African trade with Brazil for decade up to 2001. First we look at the absolute values, trends, patterns at the aggregate level and somehow disaggregated level of 22 commodities clusters. The aim of this section is to provide a first round analysis of those commodities that feature prominently in trade flows between South Africa and Brazil. It provides a descriptive analysis of trade between two countries, this includes imports and total trade defined as the sum of imports and exports) of merchandise, and a measure of changes in trade patterns. In the last two tables of this note we will look into the finer details of the trade flows at the HS4 level. Our analysis takes a gradual approach from the aggregated to the more detailed level and it is based on the annual data from Customs and Exercise at current

  • Year 2003
  • Organisation TIPS
  • Publication Author(s) Carol Molate; Dirk Ernst van Seventer
  • Countries and Regions Brazil, South Africa
Published in SADC Trade Development

South Africa has experienced significant liberalisation during the 1990s on the political as well as economic front. Starting with the first democratic elections in 1994, the economy has undergone liberalisation of internal and external financial markets, labour markets and trade regime. Major changes have also taken place in terms of monetary and fiscal policy, where discipline and sustainability have become the guiding principles, while industrial policy saw a shift from demand-side to supply-side measures. Whether these policy choices have resulted in higher levels of efficiency and more importantly better economic performance and equity will remain the subject of economic research for years to come, notably because the structure of any economy does not change overnight. While some of the liberalisation efforts started before the 1990s, a number of them took place during the middle of the decade. Although perhaps still somewhat premature, an examination of the South African economy during both halves of the decade is perhaps a worthwhile exercise.

  • Year 2003
  • Organisation TIPS
  • Publication Author(s) TIPS
  • Countries and Regions South Africa

This paper will begin by outlining the policy framework that informs EU trade policies and will set out a development perspective that informs the evaluation of EU trade policies. The paper then discusses the issue of adjustment in the EU and evaluates the EU track record in key industries of interest to developing countries. In the next section, the paper evaluates the EU commitment to environmentally sustainable policies. The paper then reviews the various EU technical regulations or social policies against the above two perspectives. The next section reflects on some of the dynamic forces for change in the EU and the positive role they can play in advancing trade liberalization and development. Finally, the paper then attempts to draw out some implications for the CEE countries of the above analyses.

  • Year 2003
  • Organisation TIPS
  • Publication Author(s) Faizel Ismail
  • Countries and Regions European Union (EU)
Published in SADC Trade Development

The SADC Free Trade Agreement (FTA) came into effect recently. Periodic examination of intra-SADC trade flows is an important element of monitoring the impact of the FTA.

  • Year 2003
  • Organisation TIPS
  • Publication Author(s) Ximena Gonzalez-Nunez
  • Countries and Regions Southern African Development Community (SADC)
Published in SADC Trade Development

Of concern to domestic policy makers is that trade between Finland and South Africa is very much biased in favour of the former country. Set against this backdrop, Trade and Investment South Africa (TISA) of the South African Department of Trade and Industry (DTI), together with the Finnish Embassy in South Africa, the Finnish South African Trade Guild and Nordea Bank, commissioned Trade and Industrial Policy Strategies (TIPS) to investigate trade and investment relations between South Africa and Finland.
The objective of the study was to: 1) identify commodities and groups of commodities that could begin to reverse this bias, and 2) evaluate what reasonable growth rates of trade between the two countries can be expected in order to close South Africa's gap in trade with Finland. Indeed, the completed document is an analysis of industrial structure and bilateral trade and tariffs between the two countries.
In a three part publication we extract key findings out of the Finland-South Africa trade report, particularly relating to recent and potential South Africa-Finland trade patterns. More formally, Part 1 reviews the structure of bilateral trade between South Africa and Finland, Part 2 identifies sectors at the HS4 and HS6 level that exhibit strong export potential for South Africa into the Finnish market, and Part 3 considers barriers to trade for South African products in Finland.

In an effort to increasingly progress the complexity of our analysis, we begin this review on Finland-South Africa trade by offering a simple analysis of recent bilateral trade patterns between these two countries. Our analysis takes a gradual approach from the aggregate to the more detailed level and is based on annual data from Customs and Excise at current prices and covers the period between 1991 -2001. First, we look at absolute values, trends and patterns at the aggregate level and at a somewhat disaggregated level of 22 commodities clusters. In the last two tables of this section, we will look into the finer details of the trade flows at the HS4 level.

  • Year 2003
  • Organisation TIPS
  • Publication Author(s) TIPS
  • Countries and Regions European Union (EU), South Africa
Published in SADC Trade Development

The Trade Performance Index (TPI) is a tool developed by the International Trade Centre (ITC) for assessing and monitoring the multi-faceted dimensions of export performance and competitiveness of countries and their principal export sectors. At present, the TPI covers 184 countries and 14 different sectors. It reveals how competitive and diversified a particular export sector is in comparison to those of other countries. The TPI covers basic performance characteristics. It brings out gains and losses in world market shares and sheds light on the factors behind these changes. Moreover, it monitors the diversification of export products and markets. The TPI provides a systematic overview of sectoral export performance and comparative and competitive advantages.

  • Year 2003
  • Organisation TIPS
  • Publication Author(s) Carol Molate and Dirk van Seventer
  • Countries and Regions South Africa
Published in SADC Trade Development

This paper is essentially a scoping exercise to explore the type of issues that might arise for South Africa in WTO energy service negotiations. The background to the current round of negotiations in energy services is explained, including the uncertainties that remain in classifying energy services.

The extent and diversity of the energy industry (coal, oil, gas, electricity, nuclear and renewable energy) is described in order to develop an understanding of the issues that will arise around trade in energy services in South Africa or by South African companies. Current and potential energy service exports are mapped. The regulatory framework and liberalisation process in each energy sector is also described.

While there are some market access issues in the petroleum industry, the main questions will arise in the electricity sector. This is the fastest growing area for exports of South African energy services. It is also the sector that faces the most fundamental market restructuring and liberalisation.

South Africa might wish to make a number of requests for the removal of limitations on market access and national treatment in services related to electricity transmission and distribution, in marketing and supply, facilities management and other related services including installation, repair and maintenance. It may also wish to make additional requests in terms of more transparent and justiciable regulatory systems that would not disadvantage South African companies. The immediate potential market is Africa, but it is feasible for some of South Africa's energy service companies to make headway in other emerging markets.

With regard to the liberalization of South Africa's electricity market, the creation of a power exchange and electricity trading market would create new opportunities for foreign providers of energy services. A new regulatory framework would need to be put in place. Transmission, distribution and supply for small consumers are likely to remain monopolies until significant progress has been made towards universal access to electricity.

The paper provides an introduction to the South African energy sector for those involved in trade issues, and an introduction to WTO trade negotiation opportunities for those involved in energy services.

  • Year 2002
  • Organisation TIPS
  • Publication Author(s) Anton Eberhard
  • Countries and Regions South Africa

The new international financial architecture has its roots in the financial crises that shook emerging-market economies in the l990s Mexico in 1994-5, and East Asia in 1997-8. The problems there, as well as in Russia in 1998, in Brazil in 1998-9, and more recently in Turkey and Argentina, underscored the importance of strengthening the international financial architecture.

These crises generated a broad consensus that fundamental reforms were required in the international financial system.

The international community has launched a series of initiatives referred to collectively as the new international financial architecture to strengthen the operation of the global financial system. A focal point of this architecture is the prevention of crises.

Work on strengthening the international financial architecture is being undertaken on several fronts simultaneously. The major building blocks of this undertaking are transparency and accountability, international standards and codes, the strengthening of financial systems, capital account issues, sustainable exchange rate regimes, the detection and monitoring of external vulnerability, private sector involvement in forestalling and resolving crises, and IMF facilities.

This paper focuses on one of these building blocks: the strengthening of financial systems. In the search for increased international financial stability and possible measures to prevent future periods of systemic risk, concerns have grown that international financial markets themselves may be increasingly important sources of financial instability.

The implementation of the proposed Basel Accord on capital adequacy is another important initiative of the new financial architecture. By more closely aligning regulatory capital charges and banks' risk profiles, the adoption of the proposed Accord could substantially strengthen banking systems, thereby increasing the overall stability of the financial system. In the current environment of globalisation and increasing competition in the financial services industry, risks are larger in scope and scale than ever before. Keeping pace with the changes in the risk environment, as well as with the newest developments in risk-management practices, poses significant challenges to regulators and banks alike. For supervisors, the most important challenge involves developing an approach to capital regulation that works in a world of diversity and near-constant change. Financial institutions face the challenge of implementing advances in risk modelling in a coherent and systematic fashion, and of coping with conceptual difficulties regarding model specification and data limitations The new capital adequacy framework proposed by the Basel Committee is an attempt to address these challenges. However, implementing the proposed Accord creates additional challenges, especially in an emerging-market context.

This paper gives a perspective on the new financial architecture from the viewpoint of banks, and concentrates on the effect of the implementation of the Basel Accord on the South African banking system. A secondary aim of the paper is to identify the challenges posed by the implementation of the proposed capital adequacy framework to South African banks and bank supervisors and to see how prepared they are for these challenges.

Although a review of annual reports of South African banks suggests a relatively sophisticated approach to credit risk management and the use of internal credit risk ratings, it is likely that the rating systems of South African banks do not meet all the requirements set out by the Basel Committee for the internal ratings-based approach to setting regulatory capital requirements. Recent problems at Saambou and Unifer also point to potential shortcomings in the credit risk management processes of certain South African banks.

Against the background of South Africa's sophisticated and efficient financial markets and yet its vulnerability as an emerging market∩┐╜ï∩┐╜¿∩┐╜½∩┐╜Ã∩┐╜┬é∩┐╜ï∩┐╜¿∩┐╜½∩┐╜Â∩┐╜  an overview is given of the structure of the South African banking sector. This includes quantitative indicators of financial system soundness, like various indicators of credit risk and capital adequacy. An overview is given of the risk management practices of South African banks, as well as of the supervisory approach of the South African Reserve Bank. All of this is compared to international best practice policy guidelines.

  • Year 2002
  • Publication Author(s) Jessie de Beer
  • Countries and Regions South Africa

This paper examines the response of South African manufacturing production to changes in prices and exchange rates. A restricted profit function is used to model the behaviour of the manufacturing sector, as well as a number of manufacturing sub-sectors, and of the agricultural and coal mining sectors. Labour and intermediate imports are treated as variable inputs into the productions process. Capital is treated as a fixed input. Outputs of the production process are goods for the domestic market and exports. Using estimates derived from the restricted profit function, both price and exchange rate elasticities are calculated.


There are a number of key findings:

  • For the manufacturing sector as a whole, prices do determine output supply and input demand. This is the case for most manufacturing sub-sectors and agricultural production.
  • Manufacturing export supply is very inelastic with respect to export prices, as well as domestic prices and import prices and wages. This means that price changes have a very small impact on the amount of exports supplied.
  • Changes in the price of intermediate imports or the price of domestic goods have a larger impact on the quantity of exports supplied than do changes in the price of exports.
  • Like export supply, domestic output supply is also very inelastic.
  • In most sectors exports and domestic output are compliments. This suggests that an increase in domestic price increases export supply and vice versa.
  • Both domestic supply and exports respond negatively to an exchange rate devaluation. We suggest that this is the result of the increase in the price of intermediate imports caused by a devaluation. The magnitude of this reaction has decreased since 1994.
  • A 25% devaluation in the nominal effective exchange rate of the Rand (a devaluation similar to that experienced at the end of 2001) causes a 2 percent decrease in total manufactured exports and a 5 percent contraction in domestic supply. However, a number of sectors benefit from this depreciation. The electrical, radio and TV and transport sectors expand exports by between 4 and 5 percent in response to this devaluation. Domestic supply falls in all these sectors.


The results of our estimations suggest three areas particularly relevant for policies designed to increase export supply and labour demand (and consequently decrease unemployment):

  • Firstly, domestic prices (the price the producer receives in the domestic market) are one of the most important determinants of both export supply and labour demand. Policies which increase these prices will boost exports and the demand for labour. Policies which aim to increase firm efficiency, stimulate domestic demand, or decrease taxes should do this.
  • Secondly, the price of intermediate imports has the largest effect on the quantity of exports produced. A decrease in this price through a reduction in tariffs would increase the quantity of exports and domestic goods produced. It would also increase labour demand.

  • Year 2002
  • Publication Author(s) Neil Rankin
  • Countries and Regions South Africa

In 1996 the maize market was liberalised and the maize marketing board was abolished. This has meant that prices and production decisions now respond to market forces. At the same time there has been a restructuring of agents at different levels of the maize supply chain and there are relatively high levels of concentration. Maize is of particular importance given its nature as a staple for the majority of the population. The paper provides an overview of the maize supply-chain and assesses the evolution of production and distribution arrangements at different levels, from farmers through to maize millers since liberalisation. It assesses concentration at the levels of production, storage and milling of maize. It examines trade flows and the relationships with domestic demand and supply. Based on this, the research evaluates the determinants of prices and assesses possible competition concerns, before making brief recommendations.

  • Year 2002
  • Publication Author(s) Neo Chabane

The paper extends simple trade analysis techniques used to evaluate barriers to goods trade to identify opportunities and barriers to South African trade in services. Using available services trade data from four of South Africa's major trading partners, under-traded service imports are identified and compared to trade restrictions listed in the WTO services schedule of these four countries.

  • Year 2002
  • Publication Author(s) Nnzeni Netshitomboni; Matthew Stern

Most of the large tariff reductions achieved in multilateral trade negotiations have involved the use of tariff-cutting formulas, such as the "Swiss" formula. But the wide variations in initial tariff rates may create a demand for new approaches in the Doha Development Agenda. This paper surveys some options and examines the implications of a range of "flexible" formula approaches that target tariff escalation and peaks, and allow policy makers to directly target how far they will move towards free trade, while providing some flexibility for trading off reductions in peak tariffs against reductions in low-tariff sectors.

  • Year 2002
  • Publication Author(s) Joseph Francois; Will Martin

This paper is about changes in the regulation of citrus exports from South Africa. It traces the changes from state regulation of the citrus chain to very recent forms of private regulation in the context of highly competitive global markets. The paper argues that while these forms of private regulation are positive in that they are encouraging the industry to shift its focus from volume to quality in line with overseas market demands, there are also limits and problems with private market regulation. The evidence thus far suggests that private regulation is limited to certain export chains associated with particular overseas markets and that is serves particular private interests.

  • Year 2002
  • Publication Author(s) Charles Mather
  • Countries and Regions South Africa

The paper first outlines the history of industrial and trade policy in the industry. It highlights the significance of the transition from import-substitution policies to export promotion policies. It then provides an analytic exposition of the welfare costs and benefits of the current export complementation programme. We find that:

  • The current policy creates rents in the industry that are borne by South African motor vehicle consumers;
  • These rents accrue to vehicle assemblers, vehicle importers and components manufacturers;
  • The exact method of phasing down the programme will affect the size of these rents;
  • Some of the "new" exports of components under the MIDP may be uneconomic in the sense that they would not cover costs in the absence of the MIDP--this hurts welfare;
  • Whether or not components exports are economic, the programme encourages larger scales of production, thereby reducing costs. This last effect could be large enough to outweigh the welfare losses associated with any uneconomic exports of components.

  • Year 2002
  • Publication Author(s) Anthony Black; Shannon Mitchell
  • Countries and Regions South Africa

Over the past two decades, South Africa's agricultural sector has been extensively liberalised. As a result, a closer examination of the data shows some interesting trends in international trade in food and beverage products. First, exports of processed foods and beverages have shown strong growth. Despite the large increase in exports to South Africa's traditional trading partners, largely in Europe, exports of processed goods to the SADC region have shown stronger growth. Second, imports of 'non-traditional' commodities (i.e. unprocessed goods other than rice, coffee and tea) have also grown strongly. The purpose of this paper is to provide some explanations for these trends

  • Year 2002
  • Publication Author(s) Nicholas Vink; Norma Tregurtha
  • Countries and Regions South Africa

Economists seem to agree that the theory of comparative advantage can be extended to trade in services. Countries with relatively large endowments of skilled labour and capital and relatively few natural resources should export more services and less mining or agricultural goods than those relatively rich in land or resources.

Although some econometric work has been done on the determinants of trade in services, the results are inconclusive. This paper improves on these studies, applying similar methodologies but using better and more comprehensive data that are now available.

One important spin-off from the econometric analysis is that the models can be used to identify and quantify the most important determinants of trade in services in each sector. The resulting coefficients can also be used to predict South African trade in services.

In total, four different models are presented for each of the eight service sectors. First, a simple two-factor Heckscher-Ohlin model is tested against two different dependent variables. A further two models are developed by incorporating and testing a much wider selection of explanatory variables.

The results are encouraging and offer some empirical support to the application of comparative advantage to trade in services. They show that human capital and economic development are important determinants of competitiveness in the service industry. On the other hand, countries with abundant land or labour are less likely to specialise in services.

South Africa is not predicted to specialise in any of the eight service sectors. In all but one sector (tourism), South African service exports are predicted at less than 1% of merchandise trade. Moreover, in all eight sectors the predicted ratio of South African service trade to merchandise exports is lower than the actual trade ratios for more than half of the countries included in the sample.

  • Year 2002
  • Publication Author(s) Matthew Stern
  • Countries and Regions South Africa
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