Trade, trade policy and growth in South Africa

1. Trade, trade policy and growth in South Africa Lawrence Edwards School of Economics UCT

2. 2 Nedbank-Old Mutual Budget Speech Competition Web site: http://www.budgetspeechcompetition.co.za/ Essay question The recipe for success in many countries, especially in Asia, has been their ability to increase exports. South Africa's performance in this regard has not been stellar. What macroeconomic and microeconomic policy changes would you recommend to increase South Africa's export potential? � The closing date for this Competition is Friday 15 May 2009

3. 3 Nedbank-Old Mutual Budget Speech Competition Who May Enter? Full-time or part-time students. Postgraduate or undergraduate students. Students registered for an economics course at any recognised South African institution for higher learning (including the Military Academy). Entrants must be South African citizens or be a citizen of any of the SADC countries (Angola, Botswana, Democratic Republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, Swaziland, Tanzania, Zambia, Zimbabwe) or hold permanent resident status. Undergraduate Prizes1st Prize: R30 0002nd Prize: R15 0003rd Prize: R10 000

4. 4 Growth Policy initiatives in SA Accelerated and Shared Growth Initiative in SA Identifies key constraints to economic growth in South Africa (a) currency volatility; (b) infrastructure; (c) skilled labor and settlement patterns; (d) barriers to entry, (c) the regulatory environment and SMMEs; and (e) deficiencies in state organization. Employ Harvard Economists (led by Ricardo Hausman and Dani Rodrik) to advise on growth strategy with local academics Results presented to President and cabinet This lecture I will present some of the main insights from the trade team

5. 5 What Role does Trade Play in SA Policy Debate? Accelerated and Shared Growth Initiative in SA? Trade performance not emphasized as major constraint to growth Trade policy not given key role as policy instrument DTI Industrial Strategy �No major changes to tariff structure are anticipated� Industrial policy must lead Trade Policy Retain tariffs on final goods and reduce on inputs

6. 6 Main Message: Trade matters! An external constraint may inhibit growth without sustained/improved export growth Trade Policy is a major factor in South African Trade Performance. Trade policy is a major factor influencing South African productivity growth

7. 7 External constraint We live in a global environment Globalized consumers: Look at what you are wearing Globalized producers: Approximately 70% of imports are made up of intermediate inputs and capital goods Growth and investment requires foreign currency to purchase essential imported inputs in production Where is this foreign currency going to come from? Financial inflows EXPORTS !!! Lack of foreign currency can choke economic growth �External constraint�

8. 8 External Constraint? Not an idle concern for SA?

9. 9 ASGISA? Investment-Led growth is very import intensive.

10. 10 Key message 1 An external constraint may inhibit growth without sustained/improved export growth ASGISA growth strategy requires an export strategy

11. 11 Trade Policy Matters: A Tale of Two Periods

12. 12 But SA Export Growth Relatively Slow Compared to Comparator Countries

13. 13 What is the link between trade policy and exports growth?

14. 14 But market access is not even half the story To boost exports, we need to make export production more profitable HOW? Real depreciation of Rand Tariff liberalisation Lerner symmetry theorem: �A tax on imports is a tax on exports� Tariffs protect production for the domestic market, but raise production costs for all firms including exporters. Tariff liberalisation shifts firms from import substitution production to export production

15. 15 Exports and costs, profits, tariffs and REER

16. 16 Key Message 2 Real depreciation is associated with improved export growth Trade Policy is a major factor in South African Trade Performance. Trade Policy Restricted Exports and Imports in 70s and 80s and Boosted Non-commodity exports and imports in the 90s. Trade policy is also partly responsible for South Africa�s dependence on capital-intensive, commodity-based exports.

17. 17 Why Export? Trade and Growth

18. 18 Rich countries produce rich-country goods, but countries �become� what they export

19. 19 Key message 3 Trade can be good for growth But what you trade matters And trade is not sufficient for growth Institutions and complementary policies also matter

20. 20 What Micro Factors are Associated with Export Growth in SA? How do you increase exports? Increase exports of existing firms 70% of SA exporters export less than 20% of output Increase number of firms exporting 60-70% SA manufacturing firms export What makes firm�s start to export? Size matters: Large firms export Input costs matter: Exporters rely on imported intermediate goods Infrastructure and Business Climate matters: Reduce costs of getting into export market

21. 21 Business Climate

22. 22 What Other Factors are Associated with Export Growth in SA? Who exports? Large firms

23. 23 Most Exporters only Export a Low Proportion of their Production

24. 24 Exporters are Highly Dependent on Imported Intermediate Inputs

25. 25 Questions You Should Answer What goods does SA export and how good has its export performance been? Why should SA export more? What should SA export? Should it diversify into manufactures or export natural resources? What are the constraints to export performance in South Africa? What are the role of macroeconomic factors such as the exchange rate, inflation and the balance of payments? What are the role of microeconomic factors such as: infrastructure (road, rail, port delays, port costs), tariff protection (South African and foreign tariffs), resource constraints, business climate (regulations. What constraints are identified by South African firms in entering the export market? What are the appropriate policy recommendations for government to improve export performance?

26. 26 Readings (1)���������� Edwards, L. and Lawrence, R. 2008. South African Trade Policy Matters: Trade Performance & Trade Policy, Economics of Transition, 16(4): 585-608. Also NBER Working Paper No. 12760. This paper contributed towards the Harvard-led Growth project on SA. It highlights the dangers of a balance of payments constraint unless exports improve, and recommends further liberalisation of tariffs as a means of stimulating export growth and diversification. (2)���������� Edwards, L. and Alves, P. 2006. South Africa's export performance: Determinants of export supply. South African Journal of Economics, 74, 3: 473-500. This paper provides a detailed econometric analysis of export determinants in SA. It finds that the real exchange rate and infrastructure are important determinants of export performance in SA. (3)���������� Edwards, L. and Golub, L. 2004. South Africa�s International Cost Competitiveness and Productivity in Manufacturing. World Development, 32, 8: 1323-1339. This paper analyses the effect of labour cost competitiveness on SA export performance. It finds that labour productivity and labour costs are important determinants of SA manufacturing export performance. (4)���������� Edwards, L., Rankin, N. and Schoer, V. 2008. South Africa's exporting firms: what do we know and what should we know? Journal of Development Perspectives, 4(1): 67-92. This paper provides an overview of the firm level determinants of export performance in SA. (5)���������� Balchin, N. and Edwards, L. 2008. Trade related business climate and manufacturing export performance in Africa: A Firm Level Analysis. Journal of Development Perspectives, 4(1): 32-66. This paper looks at the role of the business climate on export performance in African countries, including SA.� (6)���������� "South Africa's Export Predicament" by Ricardo Hausmann and Bailey Klinger. This paper formed part of the Harvard Group papers emphasising the need to increase exports in SA. http://www.cid.harvard.edu/southafrica/ (7)���������� Rankin, N.A., S�derbom, M., Teal, F. (2006). 'Exporting from manufacturing firms in Sub-Saharan Africa' Journal of African Economies, 15. Excellent paper looking at firm-level determinants of exports in SA. (See also Neil Rankin�s home page: http://uamp.wits.ac.za/sebs/staff_individual.php?id=217 )

27. 27 Other Useful Sites Competition home page: http://www.budgetspeechcompetition.co.za/research_centre/useful_links/ ) � Centre for the Study of African Economies http://www.csae.ox.ac.uk Trade and Industry Policy Secretariat: research on trade and industrial policy for South Africa and the SADC region. http://www.tips.org.za Other useful websites: http://www.doingbusiness.org (good data on constraints to exporting and importing in various countries) http://www.worldbank.org Economic Commission for Africa: http://www.uneca.org SA Reserve Bank, Quarterly Bulletin of Statistics for data on exports and imports in SA. UNComtrade (follow data link via UCT library) for data on SA exports by product and other countries. World Bank Enterprise surveys: http://www.enterprisesurveys.org . Detailed information on manufacturing firms in SA, including constraints to exporting. (see table below for example)