Regional integration can be a key force for sustainable development. It can promote economic growth, reduce poverty, foster social development or protect the environment. But it can also have negative economic and social impacts, especially when the domestic regulatory framework is inadequate or not implemented effectively.
TIPS economist Mmatlou Kalaba prepares a quarterly snapshot of South Africa's trade with particular trade blocs around the world.
Graphical representation of World trade and South African Trade, at a glance
The South African government and the Department of Trade and Industry (the dti) in particular have embarked on a policy framework to ensure that the SA economy becomes competitive. In an increasingly traded global economy, it is recognised that national economic welfare will be enhanced by both greater efficiency, brought about by liberalisation, and SA's exports in the world economy. The State of Trade Policy in South Africa 2003 aims to develop a rigorous approach to the analysis of trade reform and the impact it has had on aspects of SA's economy - the overall macro-economy, export behaviour, labour markets, resource allocation and growth. The report consists of a synthesis of existing research in SA, as well as specifically commissioned research, and is intended to be a reference point for government, academia, the private sector and others. Building on the 2003 report, which contained much relevant qualitative and quantitative material on the evolution of South Africa's trade policy, TIPS has appointed an external Reference Group and has compiled an updated and more comprehensive State of Trade Policy, to be published in 2007.
The past two decades have witnessed an unprecedented globalisation of trade in goods and services. This process has been driven, inter alia, by technology, ideology and the availability of relatively cheap energy. By extrapolating this trend, one may expect further integration of world markets and increasingly unhindered international trade. However, there is mounting evidence of significant risks to the globalisation of free trade, at least in goods and possibly in certain services as well. Three main risk areas are identified: (1) fossil fuel depletion, in particular a possible peak in world oil production within the next five to ten years; (2) climate change, and especially its effect on agricultural production; (3) and instability in the world financial system caused primarily by the US's unsustainable twin deficits. The paper explores some possible implications of these risks for the South African economy and its foreign trade in particular. It argues that South Africa's trade policy should take due cognizance of these threats to global trade, and advocates adaptation and mitigation strategies designed to improve self-sufficiency and to protect the poor in sensitive areas, especially food and energy security.
The study applies an augmented gravity equation to South Africa's exports of motor vehicles, parts & accessories (SIC 381-383) to 76 countries over the period 1994 to 2003. The study employs a dynamic panel data model to estimate long-run and short-run coefficients. First, it is shown that it takes about 16 months for exports to adjust. Second, a number of variables, namely, importer income, population, exchange rate, distance, free trade agreements are important determinants of bilateral trade flows for motor vehicles, parts & accessories. Third, the gravity model is solved stochastically to determine South Africa's optimistic, pessimistic and average potential exports to the 76 countries. Finally, estimates of the degree of variability of average potential exports are provided, which show that South Africa's trade with Germany, the United Kingdom and the United States have low variability.
This paper investigates whether African manufacturing exporters are more productive than non-exporters and whether these productivity differences precede entry into the export market. We find at expoters are more productive but that productivity does not matter for entry into t export market - suggesting that learning by exporting is important. We investigate the nature this relationship and find that exporters donot have higher rates of productiity growth than non-exporters.
This paper examines the characteristics of short-term fluctuations/volatility of the South African exchange rate and investigates whether this volatility has affected the South Africa's exports flows. In particular the paper investigates the impact of exchange rate volatility on aggregate South African exports flows to the rest of the world, as well as on South African goods, services and gold exports. The ARDL bounds testing procedures developed by Pesaran et al. (2001) were employed on quarterly data for the period 1984 to 2004. The results suggest that, depending on the measure of volatility used, either there exist no statistically significant relationship between South African exports flows and exchange rate volatility or when a significant relationship exists, it is positive. No evidence of a long run gold and services exports demand relations were found. These results are however not robust as they show great amount of sensitivity to different definitions of variables used.
Pricing tradable goods in the domestic market at import parity is evaluated to determine whether it can be characterized as a competitive constraint on pricing, or as a source of market power. The policy of import parity pricing (IPP) is also assessed in terms of the South African Competition Act. Because IPP depends on so many variables, its effects are uneven across sectors and it so is difficult to condemn outright or to address via a policy measure.
Trade and industrial policies are generally viewed from the vantage point of national government. Hence the emphasis on the type of trade regime that should be pursued (tariffs, subsidies, etc), the state of the current account, the exchange rate and geo-political factors (globalisation, power blocs and regional associations). While the overwhelming importance of these factors should not be underestimated there is some questioning about shifting the emphasis slightly to include the role that local governments can (and do) play in promoting trade.
This paper will look at how local governments either promote or retard trade through the policies they adopt, especially with regard to tariffs for water and electricity consumption but also the provision of infrastructure such as roads and serviced sites. Using the case study of Drakenstein Municipality in the Western Cape and a large textile company, the paper will examine the possible factors that have contributed to the decline of an industry and resulting job losses. While acknowledging the devastating impact that imports from China has had on textiles in general, the paper will probe the policy options that were available to the municipality to counteract the fierce competition from the Far East. Was the appreciation of the Rand the only possible explanation for the drop in demand for locally manufactured garments or were their other contributing factors?
This paper advances on previous work on the effects of trade and technical change on labour markets within the framework of Heckscher-Ohlin trade theory. First, we employ dynamic heterogeneous panel estimation techniques not previously used in this
context, which separate Heckscher-Ohlin-based long run relationships from short run dynamics that are heterogeneous across sectors. Second, we provide evidence for an unskilled labor abundant developing country that allows comparison of the results
against developed country evidence. Third, we consider the appropriateness of alternative approaches and examine endogeneity issues in the impact of technology and price changes on factor returns. For South African manufacturing we find that output prices
increase most strongly in sectors that are labor intensive. Our results further suggest that trade-mandated earnings increases are positive for labor, and negative for capital.
By contrast technology has mandated negative earnings increases for both factors. We also find that separation of different demand side factors collectively constituting globalization is useful in understanding the impact of trade, and taking account of
endogeneity is important in isolating factor and sector bias of technological change.
Computable general equilibrium (CGE) models are widely used for policy-analysis in many countries. In the past a number of CGE models have been developed for South Africa, and used to assess a broad range of policy issues. However, the perceived complexity of this analytical approach, and the concentration of capacity within a small number of academic or related institutions, have generally led policy-makers, analysts and other researchers to avoid directly using CGE models in their analysis or decision-making. Since CGE modelling provides both an economy-wide assessment of policies and a framework in which the workings of policies can be more easily understood, it is the objective of this paper to present a core South African model that reduces the initial cost of undertaking CGE analysis. The core model can then be adapted according to the interests of individual researchers or policy-makers. Furthermore, since the strength of the model is dependent on its ability to reflect the specific structure and workings of the South African economy, it is hoped that the core model will be developed further as more supporting evidence and research becomes available.
The model presented in this paper has at its core the static model used by the International Food Policy Research Institute (IFPRI) as described in Lofgren et al. (2002). The model is recursive dynamic and is therefore an extension of the IFPRI model and the earlier static South African model presented in Thurlow and van Seventer (2002).
The construction of the South African model takes place in two stages. At the first stage the structure and interactions of the economy within and across time periods is specified in a set of mathematical equations. Section 2 describes the specification and limitations of the South African model without the aid of mathematics. Since the underlying static South African model is essentially that of the IFPRI standard model, Appendix A first presents the differences in the mathematical equations between these two models, before describing the mathematics of the model's dynamic specification.
The second stage of constructing the model involves the compilation of a database that describes the South African economy and is used to assign values to the parameters of the mathematical equations. This process is called the 'calibration' of the model. The most important database for CGE model calibration is a social accounting matrix (SAM). Two SAMs are compiled for South Africa for the years 1993 and 2000, thus allowing the model to assess the impact of both past and future policies. Section 3 describes the South African economy as it is represented in the SAMs and other relevant data sources. Appendix B describes the SAM construction process, and Appendix C presents a series of disaggregated SAM tables that inform the discussion in Section 3.
Finally, Section 4 concludes the paper by describing existing applications of the models and identifying areas where further research is needed to address the limitations of the model.
Today in South Africa we are witnessing changes that are remaking the country. These changes are in the social, economic and political spheres. Under its democratic government, South Africa committed itself to the principles of free-market economy nearly a decade ago. Yet, these commitments have not borne their expected fruits. This paper analyses one aspect of this experience, the link (or lack there of) between productivity, economic growth, and employment in South Africa. It begins with a review of the expected theoretical relationship between these variables. Evidence of South Africa's productivity, economic growth, and employment experience since 1994 then follows. In evaluating these areas, nuances that emerge because of alternative definitions are sought and placed within a comparative context. The final section focuses on South Africa's jobless growth experience and formulates policy recommendations to make this relationship more favourable. First, some parallel international experiences and theoretical insights are reviewed for policy guidance. Policy recommendations to alleviate potentially problematic areas in the relationship between productivity and employment in South Africa then follow. Finally, policy recommendations are made over action that can be undertaken to enhance positive aspects of the relationship between productivity and employment in South Africa.
Trade liberalisation has a significant impact on firm-market dynamics in a regional context. The purpose of this paper is to use an industrial organisation framework, focusing on the analytical units, the firm and the market, to assess the impact of trade liberalisation within the Southern African region, SADC. It is specifically the firm-level responses to various policies that will provide insight into changes in national industrial configurations, regional patterns of industrialisation and the potential for sustainable supply chain development in Southern Africa.
The purpose of intra-regional trade liberalisation is to facilitate trade within a regional economic space, and through enhanced trade opportunities to elicit firm-level decisions to expand productive capacity. Such expansion of productive capacity, through various modalities of investment, can have important implications for the development of markets and market processes, resulting in robust, sustainable regional development.
The poor performance of many African economies has been associated with low growth of exports in general and of manufacturing exports in particular. In this paper we draw on micro evidence of manufacturing firms in five African countries - Kenya, Ghana, Tanzania, South Africa and Nigeria - to investigate the causes of poor exporting performance.Micro empirical work on manufacturing firms has focused on the relationship between export participation and efficiency. The evidence for SSA shows that exporters tend to be larger, more capital intensive and produce more output per unit of labour than non exporters. Weshow that firm size is a robust determinant of the decision to export. It is not a proxy for efficiency, for capital intensity, for sector, for time-invariant unobservables or for the fixed cost of entry into exporting. The implication of these findings is that large firms are necessary for exporting. However larger firms are more capital intensive. Small firms may create jobs, they will not be able to export. We also find that efficiency only impacts on the decision to export regionally, defined as within Africa, not internationally. The implications of these findings are discussed.
We begin by presenting an overview of manufacturing in the Durban area and report on the GDMA survey, highlighting the methodology and key objectives and findings of the survey. We then focus on the international trade issues, reporting on how firms in the GDMA are responding to trade liberalisation. We report here on three sets of issues: the export orientation of firms, the effects of volatility in exchange rates, and on a set of trade policy issues. Finally, we present some concluding remarks.
This study finds that export trade widened rather than deepened as a result of the CER trade agreement with Australia. Trade has expanded in those products that were not heavily traded prior to the agreement as opposed to an expansion of traditional-exports that were traded at the start of the agreement.
This paper is an empirical analysis of the demand for Nigeria's non-oil export merchandise with a view to providing an answer to the question of how far the present product mix would go in the global market. The study employed the Johansen's test of co-integration and analysis of structural characteristics of the integrated stochastic variables in the error correction vector. The results of the study show that the present product mix of non-oil merchandize export, have low and negative long run income elasticity of demand, but high long run price elasticity of demand, such that prices rise and fall in response to the highly volatile global commodity market prices. This study has important implication for international trade policies in Nigeria and other Africa economies. Nigeria cannot maximize gains from global integration until the basic prerequisites for industrialization and modernization of the productive base have been properly established. Entering the global market prematurely is a deterrent to growth in export. Nigeria must do the first things first - invest on innovation and reduce the efforts towards global integration, since this will continue to be inimical to the Nigerian economy as long as the present mix of non-oil exports products remains.
As part of a wider investigation by the National Institute for Economic Policy, covering a range of economic policy issues, the main aim of this paper is to provide another view of how trade policy has evolved since democracy. We use standard quantities measures of trade policy analysis as an input into a discussion of the impact of the trade regime on the economy. The paper also undertakes some sensitivity analysis about how we think about some basic welfare concepts.
This paper estimates the impact of trade liberalisation on factor returns in South Africa between 1988 and 2002. A particular contribution of the paper is that tariff data are explicitly used in the analysis. In addition, the paper models trade-induced technological change. The paper finds that tariff liberalisation from 1988 to 2002 negatively affected wages of South African labour relative to the return to capital. However, the decline in demand for labour is concentrated amongst skilled labour. Tariff liberalisation mandated a decline in the wages of skilled labour relative to both capital and less-skilled labour. The paper also finds some evidence of trade-induced technological change. The results suggest that trade-induced technological change positively benefited skilled labour relative to capital and less-skilled labour and thus partly ameliorated the negative direct effect on skilled labour arising from a reduction in tariffs. The net effect for skilled labour, however, remains negative relative to less-skilled labour and capital.The results of the paper, therefore, suggest that factors other than trade liberalisation account for the decline in employment experienced during the 1990s.
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.