South Africa's International Cost Competitiveness and Exports in Manufacturing

World Development Vol. 32, No. 8, pp. 1323–1339, 2004� 2004 Elsevier Ltd. All rights reserved

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lddev.2004.03.005
doi:10.1016/j.worwww.elsevier.com/locate/worlddev
South Africa’s International Cost Competitiveness

and Exports in Manufacturing

LAWRENCE EDWARDSThe University of Cape Town, South Africa

and

STEPHEN S. GOLUB *

Swarthmore College, Swarthmore, PA, USA
Available online
Summary. — The new South African government has embraced globalization, with mixed results todate. Controversies center on South Africa’s international cost competitiveness and whether SouthAfrican exports respond to changes in competitiveness. We measure competitiveness by relativeunit labor costs. We find that South African relative unit labor costs declined in the 1990s, but arestill high relative to other developing countries. Econometric analysis reveals a strong effect ofrelative unit labor costs on exports.� 2004 Elsevier Ltd. All rights reserved.

Key words — Africa, South Africa, relative unit labor costs, international competitiveness,

globalization, export-led growth

*This article is based in part on research conducted for

the South African National Treasury, with funding from

USAID and Nathan Associates. For the complete ver-

sion of this report (Edwards & Golub, 2003), contact the

authors. We would like to thank Matthew Stern and

Chris Loewald for their support and encouragement. All

the views expressed are personal. Final revision accep-

ted: 23 March 2004.

1. INTRODUCTION

Upon assuming power in 1994, the newdemocratically-elected South African govern-ment made an important break with its ownprior ideology as well as previous South Afri-can economic policies. In place of the inward-looking and interventionist policies of theApartheid era and the views of many sup-porters of the African National Congress, theMandela administration embraced globaliza-tion and neoclassical––some would say neolib-eral––economic policies. The new governmentcommitted itself to liberalization and privati-zation, reprioritized public expenditure towardpublic goods and income distribution, all whilemaintaining prudent macroeconomic policies.The restrained fiscal policies meant that thegovernment placed its bets on exports andthe private sector as the engine of growth.The liberalization of international trade anddomestic markets is intended to spur outputand employment through export-led growthand higher foreign direct investment (GEAR,

132

1996). Given the emphasis on exports andforeign investment, international competitive-ness became an important component of thestrategy. Clearly, South African policymakershoped to emulate the successful experience ofsome developing countries in East Asia andelsewhere in integrating into the global eco-nomy.Needless to say, these policies have been

highly controversial, even within the govern-ment itself. Trade union federations such as theCongress of South African Labor Unions(COSATU) have protested vigorously aboutthe perceived pro-business tilt of the policies. 1

3

WORLD DEVELOPMENT1324

Much is at stake. The legacy of Apartheidincludes a large pool of unemployed racialminorities and massive social inequalities. Theresulting social tensions are a potential threatto stability. Increased opportunities and jobcreation are of critical importance.So far, the growth rates of exports and of

foreign direct investment, while substantial,have been less than policymakers had hopedfor. Exports of manufactures have increasedbut not by enough to generate an export-ledgrowth boom similar to those of East Asia anda few other dynamic emerging economies.Moreover, South African manufacturedexports are relatively capital intensive andimports of manufactured goods have increasedmarkedly. 2 Moderate economic growth of theorder of 2–3% has been accompanied by fallingformal sector employment of unskilled work-ers. Unemployment has consequently worsenedfrom already high levels, and some estimates ofthe unemployment rate are as high as 40%,which is almost entirely borne by low-skilledworkers. Real wages have continued to rise inthe face of this very high unemployment(Lewis, 2001).One explanation of the limited success of the

reforms centers on labor market rigidities,which some studies have identified as importantin South Africa (World Economic Forumcompetitiveness rankings, for example). 3 Eco-nomic theory suggests that trade liberalizationcan increase unemployment if real wages arerigid. 4 If this is so, one might expect to findthat South African labor costs are high relativeto other countries, impairing internationalcompetitiveness and adjustment to trade liber-alization. Alternatively, others argue that thepolicies themselves cater to business interestsand fail to address the inequalities and struc-tural rigidities of the South African economy

World Middle income

0

2

4

6

8

10

1980-89 199

Figure 1. Growth rates of exports of goods

(Habib & Padayachee, 2000; Hayter, Reinecke,& Torres, 1999). To shed light on some aspectsof these controversies, this paper assesses SouthAfrica’s international price and cost competi-tiveness in manufacturing, particularly withregard to labor costs, and examines the quan-titative relationships between South Africancost competitiveness and exports of manufac-tured goods at an industry level. The keyquestions are whether South Africa is interna-tionally competitive in manufacturing andwhether South African exports respond tochanges in international cost competitiveness.Section 2 presents an overview of South

Africa’s recent international trade perfor-mance. Section 3 develops the framework forthe analysis of international competitivenessbased on relative unit labor costs. Section 4presents estimates of South Africa’s relativecost competitiveness. Section 5 relates thecompetitiveness indicators to exports. Section 6concludes with policy implications.

2. OVERVIEW OF SOUTH AFRICANINTEGRATION IN THE WORLD

ECONOMY

Figure 1 provides a summary comparativeview of South Africa’s integration into theglobal economy.Figure 1(a) shows South African growth of

exports of goods and services, in constant US$,in comparison with other middle-incomedeveloping countries and the world as a whole,for various periods. 5 Prior to 1995, SouthAfrica’s exports grew much more slowly thanthose of the rest of the world. In the 1980s andearly 1990s, South Africa’s exports in constantdollars increased by 1–2% annually, whileworld trade was increasing by about 5%. Some

countries South Africa

0-94 1995-2000

and services, annual average, in percent.

0102030405060708090

1980 1990 2000

World Middle income countries South Africa

Figure 2. Share of manufactured exports as a percentage of total merchandise exports.

INTERNATIONAL COMPETITIVENESS AND EXPORTS 1325

developing and newly-industrialized countrieshad export volume growth rates of 10% ormore during part or all of this period. In 1995–2000, South Africa’s annual export growth rateincreased to 6%, but this was still well below theworld average and even further below theaverage for other middle-income countries.Some dynamic emerging countries continued toexperience export growth rates of as much as10–15%, notwithstanding the slowdown asso-ciated with the Asian crisis.Figure 2 presents the share of manufactured

exports in total merchandise exports. As is wellknown, a number of developing countries,particularly in Asia, have dramatically alteredthe composition of their exports away fromprimary products toward manufactured goods.The expansion of manufactured exports isgenerally viewed as an important factor in theeconomic development of a number of emerg-ing countries and one of the defining features ofcontemporary ‘‘globalization.’’ Figure 2 showsthe much greater rise in the manufacturedexport share of middle income countries com-pared to the world as a whole in the 1980s and1990s, although the average level of this sharefor middle-income countries still remainedbelow that of the world as a whole in 2000. Inthe 1980s, South Africa’s manufactured exportshare grew, but much more slowly than forother middle-income countries, and manufac-turing accounted for only about one quarter oftotal exports in 1990. Mining, especially gold,dominated South Africa’s exports in the 1980s(Tsikata, 1999). In contrast, in the 1990s thecomposition of South African exports shiftedsharply toward manufactures away from min-ing, and by the end of the decade manufacturesconstituted more than half of South Africa’sexports. The declining share of mining partly

reflected the decline in the world price of gold,but also resulted from an impressive averageannual growth rate of manufactures in realterms of 12%. The increasing share of manu-factures in South African exports in the 1990swas abetted by a substantial increase in suchexports to other developing countries, notablyin Africa. 6

This encouraging performance of manufac-tured exports in the 1990s was accompaniedby some less favorable developments. Importpenetration rose, particularly within labor-intensive sectors (Edwards, 2001b). Moreover,employment in manufacturing dropped, not somuch because of import penetration (Fedderke& Vase, 2001), but because of capital-laborsubstitution (Edwards & Golub, 2003). Exportsof manufactures also became more capital-intensive and high-skill-intensive rather thanlabor-intensive (Edwards, 2001a; Edwards &Sch€oer, 2002).Inflows of foreign direct investment (FDI)

into South Africa have increased in recentyears, but their level also remains somewhatunimpressive compared to other countries.Figure 3 displays comparisons of foreign directinvestment inflows, as a share of GDP. Despitethe recent increases, South African FDI inflowsas a ratio of GDP remain very low compared tosuch countries as Chile, China, Malaysia andMexico.In summary, South African exports, export

diversification, and FDI increased in the 1990srelative to the 1980s but not by enough tothrust South Africa onto a path of rapidexport-led growth. South Africa continues tolag behind other middle-income countries instandard measures of integration into the worldeconomy. On balance, the new government’sstrategy of reliance on globalization as the

0

0.5

1

1.5

2

2.5

3

1990-94 1995-2000

World Middle income countries South Africa

Figure 3. Foreign direct investment, inflows as a percentage of GDP.


engine of growth has had moderate success.Consequently, South African economic growthhas been positive but tepid, and certainlyinsufficient so far to raise living standards andemployment rapidly. While disappointing rela-tive to the high hopes of the new government,this performance is quite respectable in view ofthe massive structural problems the govern-ment inherited and its self-imposed fiscalrestraint.In the remainder of this paper we analyze the

determinants of manufactured exports forSouth Africa. We focus on manufacturedexports because of their central role in theSouth African government’s strategy for spur-ring growth and employment and because theseexports have been a key stepping-stone in thesuccess of some other developing countries.

3. UNIT LABOR COSTS AS A MEASUREOF INTERNATIONALCOMPETITIVENESS 7

We articulate a framework based on inter-national comparisons of unit labor costs foranalyzing international competitiveness, draw-ing on previous work (Golub, 1994; Golub &Hsieh, 2000). This framework is particularlyuseful in the South African context where laborcosts have been a central point of contention.Unit labor cost is the cost of labor per unit of

output, i.e., the ratio of wages to productivity.In addition to its clear intuitive appeal, relativeunit labor cost is the key relative price in aRicardian model of trade. Furthermore, in aworld where capital is mobile and production is

footloose between countries, it is the relativeprice of nontradable inputs, notably labor,rather than outputs that matters. Technologicaladvancements have also enabled the fragmen-tation of the production process into smallerdistinct steps, the physical location of whichcan be spread around the globe without losingcontrol of the production process (Jones, 2000;Gourevitch, Bohn, & McKendrick, 2000). Inthis milieu, labor costs have become animportant determinant in the location of theseproduction processes. For example, much ofthe assembly of consumer electronics has shif-ted to low wage, labor-intensive economieswithin the South East Asian region.It is therefore of interest to compare both

levels and rates of change of labor costs andlabor productivity between countries. For thesereasons and others, the Turner and Van’t Dack(1993) and Turner and Golub (1997) surveys ofthe literature conclude that relative unit laborcosts in manufacturing are the best singleindicator of competitiveness. Where data areavailable, Hinkle and Nsengiyumba (1999) alsoendorse the use of unit labor costs, both foranalysis of levels and rates of change of com-petitiveness.At a disaggregated level, the Ricardian model

provides an appealing framework for theanalysis of trade flows (see Golub, 1994; Golub& Hsieh, 2000; Carlin, Glyn, & Van Reenen,2001 for further discussion). This model pro-vides an integrated framework for under-standing the macro- and microeconomicfactors determining trade flows, as most ele-gantly shown in Dornbusch, Fischer, andSamuelson (1977) (DFS). The basic idea is that


relative unit labor cost is influenced both bysector-specific variables (productivity andwages) as well as the real exchange rate. 8

Let ai represent the unit labor requirement(the inverse of productivity), for sector i:

ai ¼Li

Qi; ð1Þ

where Q is value-added, and L is laboremployment. Marginal productivity and henceai are assumed to be constant with respect tovariations in Li.Let w denote the wage and e the exchange

rate between home and foreign currencies. Iflabor is the only factor of production (or thatother factor costs do not differ across coun-tries), home (South African) average costs ofproduction are equal to unit labor costs wi � ai.Expressed in domestic currency, foreign unitlabor costs are e � w�

i � a�i . International com-petitiveness in sector i then depends on relativeunit labor cost (RULC) ci:

ci ¼aiwi

a�i w�i e: ð2Þ

Alternatively, Eqn. (2) can be written as

ci ¼aia�i

� wi

w�i e: ð3Þ

Eqn. (3) illustrates the decomposition of rela-tive unit labor costs into relative productivityand relative wages converted into a commoncurrency. Thus South Africa’s competitivenessvis-�a-vis other countries could improve whensome combination of the following conditionshold: (a) labor productivity in South Africarises relative to other countries, (b) SouthAfrica’s relative wages fall, or (c) the randdepreciates. As South African cost competi-tiveness improves, exports are predicted toincrease and imports to decline for the affectedsectors. 9 Notice that the exchange rate affectsall sectors simultaneously, while the competi-tiveness of each individual sector also dependson wages and productivity in that sector vis-�a-vis other countries.The home country will have an absolute

advantage in good i when ci < 1, i.e., SouthAfrican unit labor costs are below those of itstrading partners, or equivalently when SouthAfrican relative productivity exceeds SouthAfrican relative wage, measured in a commoncurrency:

a�iai

>wi

w�i e: ð4Þ

This model implies both cross-section and time-series relations between RULC and trade flows.Declines in RULC over time are predicted toraise export volumes and lower import vol-umes. We can also assess South African com-parative advantage by comparing RULCacross industries. Those industries with lowestRULC are predicted to have the largest exportshares and net exports.Although unit labor costs capture an

important dimension of competitiveness, otherdeterminants of competitiveness and tradeflows are ignored. Market access agreements,direct and indirect export subsidies and tariffprotection create biases in favor of export orimport-competing production. Because thesebiases are not accounted for in this study, rel-ative unit labor costs may either overestimateor underestimate South Africa’s relative com-petitiveness for particular sectors. The modelalso ignores the effects of relative factorendowments on comparative advantage, asemphasized in the Heckscher-Ohlin-Samuelsonmodel. For example, for South Africa, theabundance of natural resources such as gold,platinum, coal, iron ore and diamonds con-tribute toward the high share of miningproducts and natural resource-intensive manu-factures in total South African exports. But,changes in commodity prices, particularly goldand platinum prices, trade policies and othermacroeconomic variables are likely to affect theexchange rate, and therefore unit labor costs(see Eqn. (3)), and to that extent are indirectlytaken into account.Our empirical analysis will examine both

levels and changes over time in relative pro-ductivity, relative wages, and unit labor costsand their effects on the composition and timepattern of trade flows. But, the caveats dis-cussed in this section must be taken into con-sideration when interpreting the results.

4. SOUTH AFRICAN UNIT LABOR COSTSIN MANUFACTURING

We calculated relative wages, productivityand unit labor costs for South Africa vis-�a-vis alarge number of developed, developing andtransition partner countries for 24 manufactur-ing sectors over 1970–98. The developed coun-tries are the United States, the UnitedKingdom,France, Italy, Canada, the Netherlands,Japan and Spain. The developing countries areZimbabwe, Mauritius, Korea, Hong Kong,


Singapore, India, Chile, Turkey, Hungary andPoland. These countries account for 55% oftotal South African exports and 55% of totalSouth African imports. 10 Due to the largevolume of data, it is impossible to present all thecountry detail here. We show weighted averagesby sector, separating the sample into developedand developing, for 24 sectors and an un-weighted average of these sectors. 11

As noted above, unit labor cost is equal tothe ratio of wages to labor productivity. Pro-ductivity is calculated as real value added peremployee, converted to a common currencyusing a purchasing-power-parity (PPP) orequilibrium exchange rate. Wages are definedas total remuneration of labor, divided bynumber of employees, converted to a commoncurrency using the market exchange rate. Notethen that by construction, movements inexchange rates affect relative wages, but notrelative productivity, as is appropriate––fluc-tuations in market exchange rates do not affectthe physical productivity of labor but do affectlabor costs in a common currency. Methodsand data sources are explained in more detail inAppendix A.Figure 4 shows average (unweighted) South

African relative productivity, wages and unitlabor costs for manufacturing in the periods1970–79, 1980–89, 1990–94 and 1995–98.

Against Develop

00.20.40.60.8

11.21.4

1970-79 1980-89

wages product

Against Develop

00.5

11.5

22.5

33.5

1970-79 1980-89

wages product

(a)

(b)

Figure 4. South African relative wages, producti

Tables 1 and 2 show relative unit labor costs forthe same time periods, and an average for the1990s, at the industry level. We also showcompetitiveness ranking by sector in descend-ing order (i.e., 1 indicates most competitive orlowest relative unit labor cost).Relative unit labor costs (RULC) are the

‘‘bottom line’’ here so we focus on these. Bothlevels and rates of change are of interest. Asexplained in Section 3, overall levels of RULCindicate absolute advantage whereas sectoralrankings are measures of comparative advan-tage. A South African sector is ‘‘competitive’’in absolute terms if its RULC is less than 1.0. Itis competitive in relative terms if the sector hasa favorable ranking. Given the uncertaintyabout absolute PPPs and consistency of dataconcepts across countries, considerable cautionis in order in assessing the overall level ofcompetitiveness. Rates of change and sectoralcomparisons are less subject to these concernssince all of them are likely to be affected simi-larly by any such country-specific biases.Relative to developed countries (Table 1),

South Africa shows a general improvement incompetitiveness, i.e., a decline in RULC formost sectors, throughout the sample period. Inthe 1970s and 1980s, most sectors’ RULC wereabove 1.0, whereas they fell below 1.0 in almostall cases by the late 1990s. Figure 4(b) indicates

ed Countries

1990-94 1995-98

ivity unit labor cost

ing Countries

1990-94 1995-98

ivity unit labor cost

vity and unit labor costs, total manufacturing.

Table 1. South African relative unit labor cost against developed countries, weighted averages of countries, ranking inparentheses

1970–79 1980–89 1990–98 1990–94 1995–98

Food products 1.08 (6) 1.11 (10) 0.97 (19) 0.99 (16) 0.94 (20)

Beverages 1.65 (21) 1.27 (19) 1.01 (20) 1.11 (22) 0.89 (18)

Textiles 1.22 (12) 1.04 (8) 0.88 (13) 0.92 (11) 0.83 (15)

Wearing apparel, except

footwear

1.99 (23) 1.32 (22) 1.04 (21) 1.07 (20) 1 (21)

Leather products 1.6 (19) 0.94 (6) 0.57 (2) 0.65 (2) 0.46 (2)

Footwear, except rubber

or plastic

1.64 (20) 1.27 (20) 0.67 (4) 0.8 (7) 0.51 (3)

Wood products, except

furniture

1.25 (14) 1.07 (9) 0.96 (18) 1.04 (19) 0.86 (17)

Furniture, except metal 2.12 (24) 1.39 (24) 0.90 (15) 1.02 (18) 0.76 (9)

Paper and products 1.06 (4) 0.87 (4) 0.78 (6) 0.79 (6) 0.76 (11)

Printing and publishing 1.58 (18) 1.31 (21) 1.17 (23) 1.27 (24) 1.04 (22)

Industrial chemicals 1.14 (9) 1.14 (13) 0.85 (11) 0.92 (12) 0.77 (12)

Other chemicals 1.27 (15) 1.25 (18) 1.12 (22) 1.14 (23) 1.09 (23)

Rubber products 1.13 (8) 0.97 (7) 0.89 (14) 0.87 (9) 0.92 (19)

Plastic products 1.7 (22) 1.21 (16) 0.82 (9) 0.87 (8) 0.75 (8)

Pottery, china,

earthenware

1.05 (3) 0.94 (5) 0.78 (6) 0.91 (10) 0.61 (4)

Glass products 1.06 (5) 0.84 (2) 0.66 (3) 0.67 (3) 0.65 (6)

Other nonmetallic

mineral products

1.34 (16) 1.13 (12) 0.92 (16) 0.96 (15) 0.86 (16)

Iron and steel 0.74 (1) 0.85 (3) 0.78 (8) 0.78 (5) 0.78 (13)

Nonferrous metals 0.77 (2) 0.56 (1) 0.40 (1) 0.44 (1) 0.35 (1)

Fabricated metal

products

1.15 (10) 1.15 (14) 0.84 (10) 0.96 (14) 0.69 (7)

Machinery, except

electrical

1.23 (13) 1.24 (17) 0.86 (12) 0.94 (13) 0.76 (10)

Machinery, electric 1.36 (17) 1.16 (15) 1.17 (24) 1.09 (21) 1.27 (24)

Transport equipment 1.2 (11) 1.12 (11) 0.93 (17) 1.02 (17) 0.82 (14)

Professional and

scientific equipment

1.09 (7) 1.34 (23) 0.69 (5) 0.73 (4) 0.65 (5)

Average (unweighted) 1.31 1.1 0.86 0.91 0.79


that this improvement derives mostly fromdeclining South African relative wages, ratherthan improving South African relative pro-ductivity, until the late 1990s. In the 1995–98period, however, most of the improvementderived from higher South African relativelabor productivity. Much of the decline in rel-ative wages is due to depreciation of theexchange rate and consequently this improve-ment is shared by almost all sectors. Labor-intensive sectors had large improvements,particularly leather and footwear. Other sectorswith particularly large declines in RULCinclude industrial chemicals, nonferrous metalsand professional equipment.RULC competitiveness rankings in Table 1

show a decline for some natural resource based

sectors, including food, paper, and iron andsteel. Nonferrous metal remains the mostcompetitive industry for most of the period,however. Metal products and machinery do notdisplay a clear pattern with some sectorsimproving in rank and others declining. Labor-intensive sectors are also mixed with leatherand footwear improving sharply but otherslosing ground.Relative to developing countries (Figure 4(b)

and Table 2), South African absolute advan-tage is less favorable. Figure 4(b) shows thatSouth African wages exceed other developingcountry wages. Although South African laborproductivity is also higher than that of otherdeveloping countries, in most industries therelative wage exceeds relative productivity,

Table 2. South African relative unit labor cost against developing countries, weighted averages of countries, ranking inparentheses

1970–79 1980–89 1990–98 1990–94 1995–98

Food products 1.01 (3) 1.14 (7) 1.41 (13) 1.61 (14) 1.17 (14)

Beverages 2.71 (24) 1.72 (21) 1.89 (21) 2.10 (23) 1.62 (21)

Textiles 1.39 (7) 1.11 (5) 1.28 (9) 1.44 (9) 1.08 (10)

Wearing apparel, except

footwear

2.07 (22) 1.72 (20) 1.46 (14) 1.62 (15) 1.27 (15)

Leather products 1.60 (10) 0.97 (3) 0.95 (5) 1.10 (5) 0.77 (6)

Footwear, except rubber or

plastic

1.93 (18) 1.54 (17) 0.70 (1) 0.89 (1) 0.47 (1)

Wood products, except

furniture

1.84 (15) 1.46 (13) 1.32 (10) 1.56 (11) 1.02 (9)

Furniture, except metal 1.98 (20) 1.49 (14) 1.01 (6) 1.26 (6) 0.69 (3)

Paper and products 1.69 (12) 1.13 (6) 1.26 (8) 1.46 (10) 1.02 (8)

Printing and publishing 0.59 (1) 1.04 (4) 1.58 (18) 1.60 (13) 1.55 (20)

Industrial chemicals 1.54 (9) 1.45 (12) 1.35 (11) 1.73 (16) 0.88 (7)

Other chemicals 1.89 (17) 1.53 (16) 1.93 (23) 2.03 (21) 1.81 (23)

Rubber products 2.03 (21) 1.60 (19) 1.53 (16) 1.59 (12) 1.46 (17)

Plastic products 2.24 (23) 1.99 (24) 1.78 (20) 2.02 (20) 1.49 (18)

Pottery, china, earthenware 1.34 (6) 1.26 (10) 1.76 (19) 1.96 (19) 1.50 (19)

Glass products 1.34 (5) 0.92 (2) 1.22 (7) 1.27 (7) 1.15 (12)

Other nonmetallic mineral

products

1.78 (14) 1.24 (9) 1.91 (22) 2.15 (24) 1.62 (22)

Iron and steel 1.32 (4) 1.19 (8) 1.40 (12) 1.43 (8) 1.37 (16)

Nonferrous metals 1.72 (13) 0.84 (1) 0.85 (3) 0.94 (2) 0.74 (5)

Fabricated metal products 1.39 (8) 1.51 (15) 1.55 (17) 1.87 (18) 1.16 (13)

Machinery, except electrical 1.63 (11) 1.54 (18) 1.51 (15) 1.84 (17) 1.10 (11)

Machinery, electric 1.96 (19) 1.86 (23) 2.05 (24) 2.10 (22) 1.99 (24)

Transport equipment 0.92 (2) 1.40 (11) 0.82 (2) 0.99 (3) 0.60 (2)

Professional and scientific

equipment

1.86 (16) 1.79 (22) 0.91 (4) 1.05 (4) 0.73 (4)

Average (unweighted) 1.65 1.38 1.39 1.59 1.20


yielding RULC values in excess of 1.0, asshown in Table 2. During the 1970s and 1980sSouth African RULC improved vis-�a-visdeveloping economies, again largely due to adepreciation of the rand. The decline in RULCtemporarily halted during the early 1990s in theface of a firmer South African currency relativeto the range of developing countries used in thisstudy. Toward the end of the 1990s SouthAfrican RULC against developing countriescontinued to fall in response to declining rela-tive wages combined with improved relativeproductivity growth. But, the average RULCremained above 1.0 for most sectors.Although South Africa trades primarily with

developed economies, it competes with otherdeveloping countries for developed countrymarkets. High RULC vis-�a-vis developingeconomies may thus partially explain SouthAfrica’s mediocre export growth relative to

other middle-income countries and, as a con-sequence, the failure to generate the export-ledemployment growth foreseen in the govern-ment’s macroeconomic strategy.The sectoral rankings of South African

industries tend to be similar vis-�a-vis developedand developing countries as is reflected inSpearman’s rank correlation coefficients ofmore than 0.5 for all periods. There are someexceptions. South Africa is more competitive inrelative terms against developing countries thandeveloped countries in transport equipment,but less so in textiles and apparel. Overall,however, South Africa’s pattern of comparativeadvantage does not differ markedly betweendeveloped versus less developed countries.A closer look at the rankings and levels of

RULC in Tables 1 and 2 shows substantialdiversity in competitiveness across sectors overtime. Few sectors show a consistent improve-


ment or deterioration in competitiveness overall periods. This is reflected in a very weakcorrelation between the level and rank ofRULC across sectors over the aggregated timeperiods. The Spearman’s rank correlationcoefficients, which capture the similarity in theranking of sectors, are extremely low (less than0.27) vis-�a-vis both developed and developingcountries for 1980–89 and 1995–98. Theinconsistency in growth of RULC across sec-tors implies that the ranking of sectorsaccording to the level of competitiveness haschanged substantially since the 1970s.Since 1990 the ranking of sectors according

to RULC levels has remained relatively con-stant. Spearman’s rank correlation coefficientsin excess of 0.8 were obtained when comparingthe average ordering of sectors according to thelevel of RULC in 1990–94 and 1995–98. Elec-trical machinery and rubber products wereamongst the worst five performing sectors (asdetermined by growth in RULC) in during1990–94 and 1995–98. Other chemicals andpaper and paper products were among the 10worst performing sectors in both periods. Sec-tors that have consistently been in the top fiveperforming sectors (reduction in RULC) areleather products and nonferrous metals. Thecompetitiveness of fabricated metal productsand industrial chemicals has also improvedsubstantially during the 1990s.

5. UNIT LABOR COSTS AND TRADE

As noted in Section 2, our theoreticalframework predicts both a time series and across-sectional relationship between relativeunit labor costs and trade flows. Given the

1980-89

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.80 1.00 1.20 1.40 1.60 1.80

RULC average

expo

rts/

outp

ut

Figure 5. Relative unit labor costs and export

large data sets involved here, these relation-ships are best examined using econometricmethods. To get some sense of the strength ofthese relationships we begin with graphicalanalysis before proceeding to the econometrics.

(a) Cross-sectional relationship

Figure 5 displays the cross-sectional rela-tionship between RULC and export-to-outputratios for annual averages over the 1980s and1990s, using the weighted averages for allpartner countries. A negative correlationbetween RULC and exports is clear for bothdecades, as theory predicts. 12 That is, thosesectors with relatively high RULC tend to havelower exports.To test the relationship more formally, we

used an econometric approach similar to thatof Golub and Hsieh (2000). 13 The equations tobe estimated are of the form

X i ¼ h0 þ h1RULCi þ �ei ð5Þ

and

X i ¼ h0 þ h1Rel Prodi þ h2Rel Wagei þ �ei; ð6Þ

where X , Rel Prod and Rel Wage denote thenatural log of export volume, relative produc-tivity and relative wage, respectively, and sub-script i denotes sectors. An overbar denotes anaverage over a specified time period. Eqn. (5)makes exports a function of relative unit laborcosts while Eqn. (6) breaks down RULC intorelative wages and productivity. These equa-tions were estimated both for weighted averageRULC against total South African exports andfor bilateral RULC against bilateral SouthAfrican exports. Here we report only on the

1990-98

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.60 0.80 1.00 1.20 1.40 1.60 1.80

RULC average

expo

rts/

outp

ut

-to-output ratios, cross-section relationship.

Table 3. Labor cost competitiveness and the structure of South African real exports

1970–98

Coef.

1970–79

Coef.

1980–89

Coef.

1990–98

Coef.

1990–94

Coef.

1995–98

Coef.

Relative unit labor costs

RULC )4.66�� )5.74�� )3.71� 0.42 0.20 0.47

2.00 1.13 2.18 1.07 1.24 0.87

Constant 20.87�� 21.85�� 20.36�� 20.17�� 19.90�� 20.54��

0.72 0.66 0.80 0.29 0.33 0.27

R2 0.20 0.54 0.12 0.01 0.00 0.01

Obs. 696

F ð1; 22Þ 5.42�� 25.72�� 2.89� 0.15 0.03 0.30

Relative productivity and wages

Rel Prod 11.53�� 5.59�� 9.88�� )0.63 )0.12 )0.442.77 1.21 3.49 1.38 1.92 1.00

Rel Wage )10.44�� )5.00�� )10.49�� 3.62� 1.44 2.67�

3.91 1.76 5.07 2.09 2.45 1.44

Constant 14.81 17.16�� 22.81� 6.71 13.91� 10.56��

9.49 6.84 11.89 6.86 7.72 4.67

R2 0.51 0.51 0.30 0.16 0.03 0.19

Obs. 240

F ð2; 21Þ 10.74�� 10.76�� 4.55�� 2.03 0.31 2.45

Note: Dependent variable is log total real exports. All variables are in logs. The standard errors are in italics below

the estimated coefficients.* Significant at the 10% level.** Significant at the 5% level.*** Significant at the 1% level.


former. Other variants of the dependent vari-able were also explored.The results are shown in Table 3. Looking

first at the 1970–98 results, it is evident thatRULC is significant in explaining the structureof South African real exports. 19.8% of thevariation between sectors is explained byRULC and this rises to 50.6% when RULC isbroken up into relative productivity and rela-tive wages. The RULC coefficient is negativeand significant indicating that sectors with highRULC export less than sectors with lowRULC. 14 The coefficient is very large, sug-gesting that on average a 1% rise in RULCreduces real exports by 4.7% in the long run.The coefficients for relative wages and rela-

tive productivity are of the expected sign andare both significant. Sectors with low relativewages and/or high relative labor productivityexport more. The absolute value of these coef-ficients are not significantly different from eachother and a percentage rise in relative produc-tivity or a percentage decline in relative wageshave the same impact on exports. This isexpected as these variables affect RULC sym-metrically.

The analysis of subperiods suggests that theinfluence of relative unit labor costs on thestructure of exports has diminished over time.During 1970–79 and 1980–89 RULC, relativewages, and relative labor productivity weresignificant in explaining the structure ofexports. During the 1990s, however, thesevariables are incorrectly signed and fail toexplain the structure of trade, as shown by thelow F -statistic. As suggested in Figure 5, how-ever, when using exports as a share of output asthe dependent variable, a strong negative rela-tionship still emerges during the 1990s. Cross-sector regressions using this dependent variablefind a significant relationship for 1990–94 and1995–98, but only when using RULC. 15 Thecoefficients on relative productivity and relativewage are insignificantly different from zero.The weaker results during the 1990s suggest

that other factors not related to labor costs arebecoming more important in influencing thesectoral composition of South African exports.The 1990s were a period characterized by sig-nificant structural breaks such as the ending ofsanctions, the election of a new government, anew macroeconomic policy, new labor legisla-


tion and the initiation of tariff liberalization.The impact of these structural breaks mayaffect exports in a way that is not necessarilyrelated to RULC. For example, the reintegra-tion of South Africa into the world economysince 1994 led to rapid increases in exports tovarious regions. Some of this export growth isdue to increased market access and not changesin labor cost competitiveness. Structural chan-ges in the economy have also affected RULCacross sectors. This has been shown by thepoor Spearman’s rank correlation coefficientsbetween the 1980s and 1990s. These changes inthe sectoral structure of exports and RULCmay obscure the long-run relationship betweenthe two.

(b) Time series

Figure 6 displays the time series relationshipbetween the weighted average RULC (for allcountries) and the export-to-output ratio forselected industries. For ease of visual compar-ison, RULC is inverted so that an increase isnow an improvement in competitiveness, and apositive correlation is now expected with theexport-to-output ratio.For most industries, a positive relationship

between competitiveness and exports is evident.Those sectors where RULC appears to have theexpected effect on gross exports include non-electrical machinery, transport equipment,paper, industrial chemicals, fabricated metals,textiles, apparel, leather and iron, some ofwhich are shown in Figure 6. 16 Food, nonfer-rous metals and machinery do not display theexpected relationship between exports as ashare of output and RULC, although a positivecorrelation is found for the latter when usingthe net exports to output ratio. For a numberof sectors, exports grow more rapidly in the1990s than trends in RULC imply.To examine this relationship more systemat-

ically we employed panel data estimationtechniques to estimate 17

Xit ¼ ai þ kiXi;t�1 þ c1iRULCit þ c2iY�it

þ c3iSanctionst þ eit; ð7Þ

where X is again exports, Y � is a measure ofglobal demand for South African products,Sanctions is a dummy variable for the sanctionsperiod, 1986–93, and subscripts it denote sectori in period t. A lagged dependent variable isincluded, which allows for a determination ofshort and long-run elasticities.

As in the cross-sectional analysis, we focuson weighted averages across countries underthe assumption of homogeneity of coefficientsacross sectors. Alternative specifications arepresented in Edwards and Golub (2003) withvery similar results.As shown in Table 4, the coefficients for

RULC, relative wage, relative productivity andworld manufacturing GDP are statisticallysignificant and of the correct sign. A 1% rise inRULC reduces real exports by approximately0.4% in the short run, but by approximately2.5% in the long run. This reflects a far greaterresponsiveness to RULC changes than is foundby Golub and Ceglowski (2002) for aggregatemanufacturing.The results of export demand equations using

relative wages and relative productivity asexplanatory variables are shown in column (2).A 1% rise in relative productivity raises realexports by 0.3% in the short run and by 1.9% inthe long run. Relative wages appear to have amore significant impact with a 1% rise in rela-tive wages resulting in a negative impact ofabout 0.5% in the short run and 3.2 in the longrun. Other variables are also correctly signedand statistically significant.In summary, both the time-series and cross-

section analyses suggest strong effects of rela-tive unit labor costs on trade flows by sector. Inaddition, the rapid export growth in the 1990sfor a number of sectors appears to exceed theeffects of improved competitiveness, and is dueto the end of sanctions and perhaps the changein economic policies. 18

6. SUMMARY AND CONCLUSIONS

Our findings provide some justification forthe South African government’s emphasis onraising international competitiveness.

(a) South Africa’s international competitiveness

Our measure of international competitive-ness, relative unit labor costs––the ratio ofwages to labor productivity––reveals a strongimprovement over the 1970–98 sample periodfor most sectors, with particularly largeimprovements in the late 1990s. This improve-ment is much larger vis-�a-vis developed thandeveloping countries, however. Level compari-sons, although they must be treated with morecaution, also suggest that South Africa was stillnot competitive in most sectors in the late 1990s

Transport Equipment

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1970 1974 1978 1982 1986 1990 1994 1998

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

Textiles

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1970 1974 1978 1982 1986 1990 1994 1998

0.00

0.05

0.10

0.15

0.20

0.25

inverted RULC average exports/output

Non-Electric Machinery

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1970 1974 1978 1982 1986 1990 1994 1998

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Apparel

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1970 1974 1978 1982 1986 1990 1994 1998

0.00

0.02

0.04

0.06

0.08

0.10

0.12

inverted RULC average exports/output

Figure 6. Relative unit labor costs and export-to-output ratios, selected industries.


against other developing countries, despitesome gains.Most of the improvement in international

competitiveness during the 1970s, 1980s andearly 1990s reflects relative wage movementsrather than relative productivity. More specifi-cally, South African productivity relative toother countries declined, but South Africanrelative wages measured in a common currencydeclined even more. The relative wage declinesubstantially reflects the large depreciation ofthe rand against other currencies. In the late1990s, however, improvements in RULC werefostered by improved productivity growth.We have also evaluated sector competitiveness

rankings and their evolution over time. No clearpattern emerges as to the nature of South Afri-

can comparative advantage. Those sectors withthe highest levels and improvements of com-petitiveness include a variety of labor-intensive,capital-intensive, and natural resource-intensivegoods. Moreover, sectoral competitivenessrankings have changed substantially over time inan unpredictable fashion. This suggests thatpicking ‘‘winners’’ through active industrialpolicy is likely to be difficult.

(b) Exports and competitiveness

Both simple charts and econometric methodsshow that South African exports respondstrongly to relative unit labor costs, althoughthe evidence for the 1990s is more ambiguous.Export growth in the 1990s has been far super-

Table 4. Panel data estimations of real export function

RULC Coef. Rel Prod & Rel Wage Coef.

Exportst� 1 0.85�� 0.83��

0.02 0.02

RULC )0.37��

0.05

Rel Prod 0.32��

0.06

Rel Wage )0.54��

0.06

Sanctions )0.04� )0.06��

0.03 0.03

World income 0.35�� 0.28��

0.05 0.05

Constant )5.92�� )2.80�

1.23 1.46

Long run

RULC )2.45Rel Prod 1.93

Rel Wage )3.18World income 2.35 1.67

F -test 1,503�� 1,211��

Obs. 672

Sectors 24

Note: 18 countries included in analysis. Variables are in logs. The standard errors are in italics below the estimated

coefficients.* Significant at the 10% level.** Significant at the 5% level.*** Significant at the 1% level.


ior to that of the Apartheid era, in large mea-sure because of improved relative unit laborcosts. The surge in exports in the 1990s isgreater than can be explained by relative unitlabor costs, however, probably reflecting thestructural changes associated with the end ofApartheid and the new outward-oriented eco-nomic policies. We also decompose the effectsof relative unit labor costs into relative pro-ductivity and relative wages. In general we findthat relative wages are more important deter-minants of trade than relative productivity, butboth matter.In short, there is considerable evidence that

South African exports respond to relative unitlabor costs and that export growth is, in part,influenced by some combination of moderatewage growth and improved productivity.Raising productivity is preferable to cuttingwages and is also beneficial in itself, as long asthe productivity growth is accompanied byincreased employment, rather than capital-labor substitution. This would be the case ifproductivity growth results from improved

efficiency or capital accumulation rather thanlabor-shedding. Attempts to raise wages with-out accompanying increases in productivitycould be highly detrimental to internationalcompetitiveness, exports, and employment.While a depreciation of the currency can offsetsuch wage growth, the sustainability of such apolicy is questionable, given the volatility ofexchange rates. This is most recently evidencedby the substantial appreciation of the SouthAfrican Rand in 2002–03, which has negatedmuch or all of the gains in competitivenessarising from the sharp depreciation in 2001.South Africa’s economic growth has been

respectable at about 2–3% annually, but wellbelow the original expectations of the newdemocratic government, and insufficient toexpand employment. Why have the improve-ment in international competitiveness andincreased exports of manufactured goods in the1990s seemingly had little effect on the seriousunemployment problem in South Africa? A fullanswer is beyond the scope of this paper,which has focused on trade flows rather than


employment. Some remarks are in order, how-ever. First, our results imply that improvementsin cost competitiveness during the 1990s posi-tively affected employment through exportgrowth. Clearly, however, these improvementshave not been sufficient to offset declines inemployment in most sectors. The 1990s was aperiod of substantial structural change arisingfrom the implementation of new domestic poli-cies (a new macroeconomic policy, new laborlegislation, an overhaul of all the discriminatorysocial and welfare policies), all of which willhave influenced employment growth. Second,

South African unit labor costs remain quite highrelative to other newly industrializing countries,which compete with South Africa in developedcountry markets, so further improvements incompetitiveness may be needed. Third, andperhaps most importantly, international cost-competitiveness by itself is a necessary but not asufficient condition for sustained export-ledgrowth. If export growth, and through thisexport-led employment growth, is to beenhanced, structural problems in labor andproduct markets connected in part to the legacyof Apartheid must also be addressed.

NOTES

1. See Habib and Padayachee (2000) for a discussion of

the political and economic forces that led to the

government’s choice of policies, and a critique of these

policies.

2. For further discussion see Bell, Farrell, and Cassim

(1999), Tsikata (1999), Edwards (2001a, 2001b),

Edwards and Sch€oer (2002) and Fedderke and Vase

(2001).

3. For more detailed discussions of South Africa’s

labor markets and the controversy over labor-market

rigidities, see Fallon and Lucas (1998) and Nattrass

(1998).

4. For example, Harry Johnson’s (1965) classic treat-

ment of international trade in the presence of factor-

market rigidities.

5. The data for Figures 1–3 are derived from World

Bank (2002).

6. For more on South African trade patterns in

manufactured goods see Edwards (2001b) and Golub

and Ceglowski (2002).

7. See Lall (2001) for a discussion of international

competitiveness. Lall rightly critiques broad approaches

such as The World Competitiveness Report as flawed.

Here competitiveness is defined more narrowly.

8. Most expositions of the Ricardian model assume

perfectly competitive labor markets and hence a uniform

wage rate across sectors. But this assumption is easily

relaxed in empirical work.

9. Strictly speaking, in a Ricardian setting, countries

will specialize completely in those sectors in which they

have comparative advantage, and an improvement in

RULC will only affect trade flows if it causes RULC to

fall from above 1.0 to below 1.0. In practice, however,

because of product differentiation and other discrepan-

cies from the model, countries do not specialize com-

pletely and the response to changes in RULC is likely to

be smoother. See Golub and Hsieh (2000) for further

discussion.

10. The selection of countries is determined by geo-

graphical location, importance of the country in South

African trade and, most importantly, the availability of

data. The nonrandom selection of the set of countries

may induce sample selection bias into the results.

Although the selected countries only account for 55%

of total South African trade, much of the missing trade

can be located within Europe where it is expected that

RULC will move concurrently with those of other

developed countries. The weighting procedure can also

induce biases into the estimates, although Golub and

Ceglowski (2002) show this not to be a significant

problem in the case of South Africa.

11. Weights for each country are determined by their

total trade (exports plus imports) to the world.

12. The large outlier in the export/output graphs in the

1980s is nonferrous metals.

13. For more details on econometric methodology and

further results see Edwards and Golub (2003).

14. The coefficients are significantly higher than those

found by Golub and Hsieh (2000).

15. A coefficient of )1.66 is obtained for the 1990s.

This is significant at the 5% level.


16. The full set of figures is in Edwards and Go-

lub (2003) and is available from the authors upon

request.

17. More precisely, we employed a partial adjustment

model using Dynamic Fixed Effects (DFE) and Mean

Group (MG) estimators. See Edwards and Golub (2003)

for more detail.

18. It is difficult to disentangle the removal of sanc-

tions and the implementation of new policies since they

occurred simultaneously.

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Edwards, L. (2001b). Trade and the structure of SouthAfrican production, 1984–97. Development SouthernAfrica, 18(4), 471–491.

Edwards, L., & Golub, S. S. (2003). South Africa’sinternational cost competitiveness and productivity:A sectoral analysis. Report prepared for the SouthAfrican National Treasury.

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Fedderke, J. W., & Vase, P. (2001). The nature of SouthAfrica’s trade patterns by economic sector, and theextent of trade liberalisation during the course of the1990s. South African Journal of Economics, 69(3),436–473.

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Golub, S. S., & Ceglowski, J. (2002). South African realexchange rates and manufacturing competitiveness.South African Journal of Economics, 70(6), 1047–1075.

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APPENDIX A

A.1. Relative unit labor costs

The calculation of RULC required sector-level data on wages and salaries, employmentand value-added. Price deflators are necessaryfor the conversion of nominal to real value-added. For the conversion of real value-addedand wages into comparable currencies data onnominal exchange rates and PPP exchangerates were also required. Depending on howvalue-added data are deflated, sector-specificdeflators or common manufacturing leveldeflators for each country are required.Manufacturing data according to sector by

country are generally available from two sour-ces: the UNIDO Industrial Statistics database(INSTAT) and the OECD STAN data set.These data sets contain, among other variables,values for employment, real and nominaloutput, value added and wages and salaries. Asthe OECD STAN data set does not have dataon many developing countries (other thanMexico and Korea) and data were at times notavailable during the 1970s it was decided tofocus on the UNIDO data set. A comparison ofRULC using the UNIDO and STAN data setsindicates that the UNIDO based values over-estimate RULC for South Africa compared tothe STAN based values by between 50 and100%.These differences arise from different meth-

ods of obtaining the data. In particular, theSTAN data set includes employer-paid fringebenefits which gives rise to lower estimates ofRULC. For most countries these differencesremained constant over time, although theUnited States and Japan show rising differencesin RULC. To test the robustness of theeconometric results, both the STAN andUNIDO based variables were used in the esti-mations. The sign and level of the coefficientswere similar, suggesting that the fixed effects inthe regressions capture much of the difference.When reporting levels, some efforts to adjustfor differences in data concepts across countrieswere attempted.

The UNIDO data for South Africa from1994 appeared to have been estimated, as formost sectors the share of wages and salaries intotal value added was constant. As a result,value added, employment and wage dataobtained from the Trade and Industrial PolicyStrategies (TIPS) were used.Relative wages were constructed by dividing

the total wage bill by employment. The wagebill was first converted into a common currencyusing nominal exchange rates obtained fromthe World Development Indicators.The relative productivity variable was con-

structed by dividing real value-added byemployment. As is accepted in the literatureon international labor productivity and unitlabor cost comparisons, PPP exchange ratesare used for international productivity com-parisons to eliminate the effects of exchange-rate volatility on measures of real output,which should be invariant to such exchange-rate fluctuations. But deviations of exchangerates from PPP do affect relative labor costs,so it is appropriate to use the market exchangerate in converting wages (see Hooper & Larin,1989). Currency depreciation consequentlytends to improve international competitivenessby reducing labor costs relative to labor pro-ductivity.PPP exchange rates for manufacturing were

not available for South Africa at the time ofwriting so we resorted to proxying them by theaverage real exchange rate over the sampleperiod using value-added deflators. RecentlyVan Dijk (2003) has calculated such PPPs, buthis results differ little from ours. Manufacturingvalue-added deflators calculated from nominaland real manufacturing value-added obtainedfrom the World Development Indicators(WDI) were used as the price indices. Ideally,one should utilize sector specific PPPs, but asthese were not available a common PPP formanufacturing as a whole was assumed. Whilethis may distort level comparisons at the sectorlevel, the trends in RULC will not be affected.In the econometric analysis level differences arecaptured by the inclusion of sector specificintercepts leaving the estimates of the slopecoefficients unaffected.Two approaches to deflating value-added

were pursued. In the first case sector, value-added was deflated to base year 1987 using acommon value-added deflator for each countryderived from the WDI. In the second case,sector value-added was deflated using sector-specific deflators calculated from the nominal


and real output values and indices in theUNIDO data set. This approach assumes thatthe output and value-added deflators are thesame. The sector-specific deflators were highlyvariable at times, and various procedures wereused to correct the data. The correlation coef-ficient between the common value-addeddeflator and the sector-specific deflator excee-ded 0.8 in most cases. The exception was Italywere the correlation coefficient was below 0.3for almost all sectors. Other exceptions wereElectrical machinery ()0.03) and Professionalgoods ()0.66) for Japan, Rubber products()0.86) for Netherlands and Miscellaneouspetroleum products ()0.01) for the UK. RULCvalues calculated using the value-added deflatorwere lower than those calculated using thesector-specific deflator prior to 1980, but higherduring the 1990s. The sector-specific deflatorbased RULC depict a greater decline in RULCand thus improvement in competitiveness overthe period.It was decided to utilize the sector-specific

deflators, despite their greater variability, as itwas felt that price trends at the sector leveldeviated substantially from the aggregate formanufacturing as a whole. Further, the esti-mated sign of RULC and relative productivityin the econometric analysis using both defla-tors were similar. The results were, therefore,robust to changes in the deflator used.

A.2. Exports

International trade data were required for theexport functions and as weights for the purposeof aggregating all countries into an aggregatedpanel data set. Trade data were obtained froma number of sources. Customs and excisebilateral trade data classified according to theeight-digit Harmonised System was down-loaded from the TIPS Online data site. Thiswas converted into the ISIC classification sys-

tem consistent with the UNIDO data set usinga concordance file obtainable from the samesite. Unfortunately, these data are only avail-able from 1988 precluding their use in anyeconometric analysis to estimate the long-runrelationship between exports and RULC. It isalso only available for the Southern AfricaCustoms Union (SACU) and not South Africaalone.Total country exports and bilateral trade

data between South Africa (essentially SACU)and each country were then obtained fromCanada World Trade Analyzer. These data areavailable from 1980–98. The Canadian WorldTrade Analyzer data are classified according toSITC and were converted to the UNIDO ISICclassification using a concordance file con-structed from one available on the Jon Have-man site (http://www.eiit.org/) (as used byEdwards & Sch€oer, 2002). Unfortunately thebilateral trade data were only complete for thedeveloped countries. A further problem is thatSouth Africa did not report any data between1974–91 (Tsikata, 1999). The data for thisperiod are then obtained from partner coun-tries.Total South African imports and exports

according to sector between 1970–98 wereobtained from TIPS and were used in theaggregate panel data set. The countries withinthe sample account for 55% of total SA exportsand 55% of total SA imports. Although thecountries sampled do not account for the entiretrade, much of the missing trade can be locatedwithin Europe where it is expected that RULCwill move concurrently with those of otherdeveloped countries.In cases where real South African exports

were used as the dependent variable, the nom-inal data were converted into real values usingoutput deflators. Export and import priceindices are not currently available for SouthAfrica over the entire period and for all sectors.

http://www.eiit.org/

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South Africa's International Cost Competitiveness and Exports in Manufacturing