South Africa’s Export Performance: Determinants of Export supply

1. South Africa’s Export Performance: Determinants of Export supply Lawrence Edwards and Bongani Johnny Based on Edwards and Alves (2005) Plus new research School of Economics University of Cape Town Infrastructure conference, May 06

2. Structure • Background • Trade policy reform • Export performance • Export performance and infrastructure • Firm level analysis • Export functions • PSS bounds tests • Conclusions

3. Background: Trade reform in 1990s • South Africa’s trade policy regime shifted in the 1990s from one of import substitution towards one of export orientation • Adopted GEAR (1996): transform SA into “competitive, outward oriented economy” • Significant tariff liberalisation occurred in 1990s: • Average manufacturing tariffs fell from 23% to 8.6% between 1993-2004 • Adoption of various export export incentive and supply-side export promotion programmes • Rebates, refunds and drawbacks of import duties on goods produced for exports • Marketing and Investment Assistance Schemes (EMIAs), Export Credit and Foreign Investment Reinsurance scheme, Export Guarantee scheme, Short-Term Export Finance Guarantee Facility, Small/Medium Manufacturing Development Programme • Bilateral trade agreements, most noticeably the SADC Free Trade Protocol and SA-EU TDCA

4. Background: Export performance • Have seen some diversification away from primary products, but export growth is low relative to other middle-income and resource based economies Table: Annual average growth rates by broad technology category, 1988-2002 (%) Source: Edwards and Alves (2005)

5. Particularly manufacturing exports Background: Export performance • Infrastructure failed to keep pace with export growth

6. Sub-conclusion • Positive manufacturing export growth has not been sufficient to generate an export-led boom as in East Asia • One reason is the concentration of exports in natural-resource-based products, which experienced relative low growth in world markets. • However, South Africa’s export performance was weak even in natural resource-based products. Further, export growth and diversification into high technology products was poor compared to a range of similar resource-based exporters. • This suggests that there were important domestic constraints to export growth during the 1990s • Shift from mining to manufacturing trade suggests that infrastructure constraints will differ over time, sector and according to infrastructure measure

7. SA manufacturing export performance: Role of infrastructure Infrastructure conference, May 06

8. Hypotheses • Infrastructure lowers the transaction costs associated with exporting, facilitates diversification of export production (Elbadawi, 1999; Collier, 2002), gives rise to powerful forces for agglomeration (Redding and Venables, 2004) and contributes towards the development of international production networks in world trade (Mayer, 2003). • Export growth, during the 1990s, particularly manufactures, constrained by declining infrastructure capital stock (ports & rail) • Different types of infrastructure have non-uniform effects on export growth across sectors • In SA infrastructure largely geared towards export of primary products, not manufacturing goods • Infrastructure investment is both a cause and effect of export growth

9. Empirical Methodology 1 Use three approaches: • Cross tabulations using Firm Surveys (Edwards & Alves, 2005) • National enterprise survey (1998/99) consisting of 941 manufacturing firms • Estimate export functions (Edwards & Alves, 2005) • Panel of data for 28 manufacturing industries over 1970-2002. Data: Quantech, UNIDO INSTAT, SSA, IMF IFS • Pesaran, Shin and Smith (1996, 2001) Bounds Test for evidence of level relationship • Panel of export data, 1962-2000. Data: Feenstra & Perkins

10. A. Reliability and speed of freight handling 45 40 35 30 % firms experiencing obstacles to operation 25 Non-exporters Exporters 20 15 10 5 0 Harbours Airports Airlines Railways Road transport B. Cost of freight or freight handling 50 45 40 35 30 % firms experiencing obstacles to operation Non-exporters 25 Exporters 20 15 10 5 0 Handling services Sea freight Airlines Railways Road transport at harbours Results: NES Firm survey (1998/9) Figure: Percentage firms finding transport services an obstacle to their operation

11. Results: NES Firm survey (1998/9) Figure: Percentage firms finding telecommunications and postal services an obstacle to their operation

12. Results: Export functions 1 • Export demand • SA exporters of manufactures are price takers in international market • Export volumes are determined by the profitability of export supply • Relative prices and competitiveness of manufacturing • Real effective exchange rate has significant impact on average manufacturing exports • 1% depreciation → 1.8% to 2.5% increase in long run • Tariffs and export support measures • Significant negative impact of nominal and effective protection on export orientation (tariff = -1.55, ERP = -0.2) • Rising import penetration raises aggregate manufacturing exports by 0.37% to 0.55% in long run

13. Results: Export functions 2 • Infrastructure

14. (Provisional) Results: PSS bounds tests • Bounds tests suggest that export volumes are forcing variables in most cases

15. Conclusion • South African export growth during the 1990s is mediocre compared to middle-income economies and other similar natural resource abundant economies. • The constraint to growth lies on the side of export supply • The real depreciation of the Rand and tariff liberalisation from the mid-1980s boosted exports, particularly manufacturing • Relatively high proportion of exporters find infrastructure a constraint to operations • Declining infrastructure investment, particularly in transport infrastructure (ports, railways and roads), has dampened the response of manufacturing exports to the more favourable trade environment in the 1990s. • Although, historically, exports are found to drive infrastructure investment, rather than visa-versa. • Future research will explore the non-homogeneous effect of infrastructure on exports across sectors