Infrastructure conference, May 06

South Africa’s Export South Africa’s Export Performance: Performance:

Determinants of Determinants of Export supplyExport supply

Lawrence Edwards and Bongani Lawrence Edwards and Bongani Johnny Johnny

Based on Based on Edwards and Alves Edwards and Alves (2005)(2005)

Plus new researchPlus new researchSchool of EconomicsSchool of Economics

University of Cape TownUniversity of Cape Town

StructureStructure

BackgroundBackground Trade policy reformTrade policy reform Export performanceExport performance

Export performance and Export performance and infrastructureinfrastructure Firm level analysisFirm level analysis Export functionsExport functions PSS bounds testsPSS bounds tests

ConclusionsConclusions

Background: Trade reform Background: Trade reform in 1990sin 1990s

South Africa’s trade policy regime shifted in the South Africa’s trade policy regime shifted in the 1990s from one of import substitution towards one 1990s from one of import substitution towards one of export orientationof export orientation

Adopted GEAR (1996): transform SA into Adopted GEAR (1996): transform SA into ““competitive, outward oriented economycompetitive, outward oriented economy””

Significant tariff liberalisation occurred in 1990s: Significant tariff liberalisation occurred in 1990s: Average manufacturing tariffs fell from 23% to 8.6% Average manufacturing tariffs fell from 23% to 8.6%

between 1993-2004between 1993-2004 Adoption of various export Adoption of various export export incentive and export incentive and

supply-side export promotion programmessupply-side export promotion programmes Rebates, refunds and drawbacks of import duties on goods Rebates, refunds and drawbacks of import duties on goods

produced for exportsproduced for exports Marketing and Investment Assistance Schemes (EMIAs), Marketing and Investment Assistance Schemes (EMIAs),

Export Credit and Foreign Investment Reinsurance scheme, Export Credit and Foreign Investment Reinsurance scheme, Export Guarantee scheme, Short-Term Export Finance Export Guarantee scheme, Short-Term Export Finance Guarantee Facility, Small/Medium Manufacturing Guarantee Facility, Small/Medium Manufacturing Development Programme Development Programme

Bilateral trade agreements, most noticeably the Bilateral trade agreements, most noticeably the SADC Free Trade Protocol and SA-EU TDCASADC Free Trade Protocol and SA-EU TDCA

Background: Export Background: Export performanceperformance

South

Africa

Total Trade 2%

Primary products -1%

Total Manufacturing 7%

- Resource-based 4%

- Low technology 6%

- Medium technology 10%

- High technology 12%

Number of countries  

Lower

middle

Upper middle

Resource

Group EAP

7% 7% 5% 7%

3% 5% 3% 3%

10% 9% 8% 7%

8% 8% 8% 4%

9% 7% 8% 7%

12% 8% 8% 10%

19% 12% 13% 17%

22 17 25 11Source: Edwards and Alves (2005)

World

5%

2%

8%

7%

8%

8%

12%

98

Table: Annual average growth rates by broad technology category, 1988-2002 (%)

Have seen some diversification away from primary products, but export Have seen some diversification away from primary products, but export growth is low relative to other middle-income and resource based economiesgrowth is low relative to other middle-income and resource based economies

Background: Export Background: Export performanceperformance Infrastructure failed to keep pace with export growthInfrastructure failed to keep pace with export growth

Total exports, excl gold (US$) per infrastructure measure (1962=100)

0

200

400

600

800

1000

1200

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

1962

= 1

00

Fixed capital stockinfrastructure

Carrying capacity of goodsstock

Paved roads

Fixed phone lines

Trade value (US$) per Fixed Capital Stock Infrastructure (1962=100)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

1962

= 1

00

Agriculture

Minerals, excl gold

High-skill manufactures

Low-skill manufactures

Total, excl gold

Particularly manufacturing exportsParticularly manufacturing exports

Sub-conclusionSub-conclusion Positive manufacturing export growth has not been Positive manufacturing export growth has not been

sufficient to generate an export-led boom as in East sufficient to generate an export-led boom as in East AsiaAsia

One reason is the concentration of exports in natural-One reason is the concentration of exports in natural-resource-based products, which experienced relative resource-based products, which experienced relative low growth in world markets. low growth in world markets.

However, South Africa’s export performance was However, South Africa’s export performance was weak even in natural resource-based products. weak even in natural resource-based products. Further, export growth and diversification into high Further, export growth and diversification into high technology products was poor compared to a range of technology products was poor compared to a range of similar resource-based exporters.similar resource-based exporters.

This suggests that there were This suggests that there were important domestic important domestic constraints to export growth during the 1990sconstraints to export growth during the 1990s

Shift from mining to manufacturing trade suggests Shift from mining to manufacturing trade suggests that infrastructure constraints will differ over time, that infrastructure constraints will differ over time, sector and according to infrastructure measuresector and according to infrastructure measure

Infrastructure conference, May 06

SA manufacturing SA manufacturing export export

performance: Role performance: Role of infrastructureof infrastructure

HypothesesHypotheses Infrastructure lowers the transaction costs Infrastructure lowers the transaction costs

associated with exporting, facilitates associated with exporting, facilitates diversification of export production (Elbadawi, diversification of export production (Elbadawi, 1999; Collier, 2002), 1999; Collier, 2002), gives rise to gives rise to powerful forces powerful forces for agglomeration (for agglomeration (Redding and Venables, 2004)Redding and Venables, 2004) and contributes towards the development of and contributes towards the development of international production networks in world trade international production networks in world trade (Mayer, 2003). (Mayer, 2003).

Export growth, during the 1990s, particularly Export growth, during the 1990s, particularly manufactures, constrained by declining manufactures, constrained by declining infrastructure capital stock (ports & rail)infrastructure capital stock (ports & rail)

Different types of infrastructure have non-uniform Different types of infrastructure have non-uniform effects on export growth across sectorseffects on export growth across sectors In SA infrastructure largely geared towards export of In SA infrastructure largely geared towards export of

primary products, not manufacturing goodsprimary products, not manufacturing goods Infrastructure investment is both a cause and Infrastructure investment is both a cause and

effect of export growtheffect of export growth

Empirical Methodology 1Empirical Methodology 1Use three approaches:Use three approaches:1.1. Cross tabulations using Firm Surveys (Edwards Cross tabulations using Firm Surveys (Edwards

& Alves, 2005)& Alves, 2005) National enterprise survey (1998/99) consisting of National enterprise survey (1998/99) consisting of

941 manufacturing firms941 manufacturing firms2.2. Estimate export functions (Edwards & Alves, Estimate export functions (Edwards & Alves,

2005)2005) Panel of data for 28 manufacturing industries over Panel of data for 28 manufacturing industries over

1970-2002. Data: Quantech, UNIDO INSTAT, SSA, 1970-2002. Data: Quantech, UNIDO INSTAT, SSA, IMF IFSIMF IFS

3.3. Pesaran, Shin and Smith (1996, 2001) Bounds Pesaran, Shin and Smith (1996, 2001) Bounds Test for evidence of level relationshipTest for evidence of level relationship

Panel of export data, 1962-2000. Data: Feenstra & Panel of export data, 1962-2000. Data: Feenstra & PerkinsPerkins

0,1

154320

1

iZRCYPPeX

A. Reliability and speed of freight handling

0

5

10

15

20

25

30

35

40

45

Harbours Airports Airlines Railways Road transport

% f

irm

s ex

peri

enci

ng o

bsta

cles

to o

pera

tion

Non-exporters

B. Cost of freight or freight handling

0

5

10

1520

25

30

35

40

45

50

Handling servicesat harbours

Sea freight Airlines Railways Road transport

% f

irm

s ex

peri

enci

ng o

bsta

cles

to o

pera

tion

Non-exporters

Results: NES Firm survey Results: NES Firm survey (1998/9)(1998/9)

Exporters

Exporters

Figure: Percentage firms finding transport Figure: Percentage firms finding transport services an obstacle to their operationservices an obstacle to their operation

Results: NES Firm survey Results: NES Firm survey (1998/9)(1998/9)

Figure: Percentage firms finding Figure: Percentage firms finding telecommunications and postal services an telecommunications and postal services an obstacle to their operation obstacle to their operation

Telecommunications, power and postal infrastructure constraints

0

10

20

30

40

50

60

70

Rel

iabi

lity

/spe

edof

pos

tal

serv

ices

Cos

t of p

osta

lse

rvic

es

Rel

iabi

lity

of

pow

er s

uppl

ies

Cos

t of p

ower

supp

lies

Cos

t of

loca

l/na

tion

alte

leph

one

call

s

Cos

t of

inte

rnat

iona

lte

leph

one

call

s

Rel

iabi

lity

/spe

edof

tele

phon

ese

rvic

es

Cos

t of i

nter

net

acce

ss

Rel

iabi

lity

/spe

edof

inte

rnet

acce

ss

% fi

rms

expe

rien

cing

obs

tacl

es to

ope

rati

on

Non-exporters

Exporters

Results: Export functions Results: Export functions 11 Export demandExport demand

SA exporters of manufactures are price takers in SA exporters of manufactures are price takers in international marketinternational market

Export volumes are determined by the profitability of Export volumes are determined by the profitability of export supplyexport supply

Relative prices and competitiveness of Relative prices and competitiveness of manufacturingmanufacturing Real effective exchange rate has significant impact on Real effective exchange rate has significant impact on

average manufacturing exportsaverage manufacturing exports 1% depreciation 1% depreciation → 1.8% to 2.5% increase in long run→ 1.8% to 2.5% increase in long run

Tariffs and export support measuresTariffs and export support measures Significant negative impact of nominal and effective Significant negative impact of nominal and effective

protection on export orientation (protection on export orientation (tarifftariff = -1.55, = -1.55, ERPERP = - = -0.2)0.2)

Rising import penetration raises aggregate Rising import penetration raises aggregate manufacturing exports by 0.37% to 0.55% in long runmanufacturing exports by 0.37% to 0.55% in long run

Results: Export functions Results: Export functions 22 InfrastructureInfrastructure

Level Infrastructure variables 1980 1990 2000 Coefficient Rail carrying capacity (tonnes) 67.7 65.1 52.1 Long-run 1.95 * Short-run 1.78 ** Public-sector infrastructure fixed capital stock/GDP (1995 prices)

3.8 4.1 3.9

Long-run 2.37 ** Short-run 1.89 *** Roads paved (km)/GDP 0.5 0.5 0.5 Long-run 1.62 ns Short-run 1.70 *** Electricity, gas and steam capital stock/GDP (1995 prices)

0.6 0.9 0.6

Long-run 0.75 * Short-run 1.27 *** Telephone mainlines (Unit: per 1,000 people)

55.2 93.4 113.6

Long-run 0.12 ns Short-run 0.36 ns

(Provisional) Results: PSS (Provisional) Results: PSS bounds testsbounds tests

Fixed capitalstock of

Infrastruct (1995 P)

Carryingcapacity ofgoods stock

(tonnes)

Elect(gigawatt hours)

Paved distance

(km)

Fixed phoneLines(no.)

Total exports v* x v* v* x

Primary agriculture v* x v* V*** x

Primary minerals v* x ? v* x

High-skill manuf v* x v* v* v*

Low-skill manuf v* ? V*** v* x

Bounds tests suggest that export Bounds tests suggest that export volumes are forcing variables in volumes are forcing variables in most casesmost cases

ConclusionConclusion South African export growth during the 1990s is South African export growth during the 1990s is

mediocre compared to middle-income economies and mediocre compared to middle-income economies and other similar natural resource abundant economies. other similar natural resource abundant economies.

The constraint to growth lies on the side of export The constraint to growth lies on the side of export supply supply The real depreciation of the Rand and tariff liberalisation The real depreciation of the Rand and tariff liberalisation

from the mid-1980s boosted exports, particularly from the mid-1980s boosted exports, particularly manufacturingmanufacturing

Relatively high proportion of exporters find infrastructure a Relatively high proportion of exporters find infrastructure a constraint to operationsconstraint to operations

Declining infrastructure investment, particularly in transport Declining infrastructure investment, particularly in transport infrastructure (ports, railways and roads), has dampened the infrastructure (ports, railways and roads), has dampened the response of manufacturing exports to the more favourable response of manufacturing exports to the more favourable trade environment in the 1990s.trade environment in the 1990s.

Although, historically, exports are found to drive Although, historically, exports are found to drive infrastructure investment, rather than visa-versa. infrastructure investment, rather than visa-versa.

Future research will explore the non-homogeneous Future research will explore the non-homogeneous effect of infrastructure on exports across sectorseffect of infrastructure on exports across sectors

Sector breakdown of Wood and Mayer BPA Agric raw mat BPA Food & tobacco nes nes BPM Fuels BPM Gold BPM Non-metallic min (largely diamonds) BPM Ores, minerals & metals NMH Aircraft and associated equipment NMH Chemicals and pharmaceutical products NMH Communication equipment and semiconductors NMH Computers and office equipment NMH Electrical machinery NMH Non-electrical machinery NMH Road motor vehicles NMH Scientific instruments, watches and photographic equipment

NML Commodities and manufactures not classified elsewhere other than live animals and non-monetary gold

NML Cork and wood manufactures, paper and paperboard NML Fabricated metal products NML Furniture and parts thereof NML Iron and steel NML Leather and leather manufactures NML Miscellaneous manufactured articles NML Non-metallic mineral products, excluding precious stones NML Rubber articles NML Sanitary and plumbing equipment NML Textiles, clothing, travel goods and footwear NML Transport equipment other than road motor vehicles and aircraft