1. Infrastructure conference, May 06 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

2. Structure Background Background Trade policy reform Trade policy reform Export performance Export performance Export performance and infrastructure Export performance and infrastructure Firm level analysis Firm level analysis Export functions Export functions PSS bounds tests PSS bounds tests Conclusions 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 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” Adopted GEAR (1996): transform SA into “competitive, outward oriented economy” Significant tariff liberalisation occurred in 1990s: Significant tariff liberalisation occurred in 1990s: Average manufacturing tariffs fell from 23% to 8.6% between 1993- 2004 Average manufacturing tariffs fell from 23% to 8.6% between 1993- 2004 Adoption of various export export incentive and supply-side export promotion programmes Adoption of various export export incentive and supply-side export promotion programmes Rebates, refunds and drawbacks of import duties on goods produced for exports 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 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 Bilateral trade agreements, most noticeably the SADC Free Trade Protocol and SA-EU TDCA

4. Background: Export performance South Africa Total Trade2% Primary products-1% Total Manufacturing7% - Resource-based4% - Low technology6% - Medium technology10% - High technology12% Number of countries Lower middle Upper middle Resource GroupEAP 7% 5%7% 3%5%3% 10%9%8%7% 8% 4% 9%7%8%7% 12%8% 10% 19%12%13%17% 22172511 Source: Edwards and Alves (2005) World 5% 2% 8% 7% 8% 12% 98 Table: Annual average growth rates by broad technology category, 1988-2002 (%) Have seen some diversification away from primary products, but export growth is low relative to other middle-income and resource based economies Have seen some diversification away from primary products, but export growth is low relative to other middle-income and resource based economies

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

6. Sub-conclusion Positive manufacturing export growth has not been sufficient to generate an export-led boom as in East Asia 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. 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. 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 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 Shift from mining to manufacturing trade suggests that infrastructure constraints will differ over time, sector and according to infrastructure measure

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

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). 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) 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 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 In SA infrastructure largely geared towards export of primary products, not manufacturing goods Infrastructure investment is both a cause and effect of export growth Infrastructure investment is both a cause and effect of export growth

9. Empirical Methodology 1 Use three approaches: 1. Cross tabulations using Firm Surveys (Edwards & Alves, 2005) National enterprise survey (1998/99) consisting of 941 manufacturing firms National enterprise survey (1998/99) consisting of 941 manufacturing firms 2. Estimate export functions (Edwards & Alves, 2005) Panel of data for 28 manufacturing industries over 1970- 2002. Data: Quantech, UNIDO INSTAT, SSA, IMF IFS Panel of data for 28 manufacturing industries over 1970- 2002. Data: Quantech, UNIDO INSTAT, SSA, IMF IFS 3. Pesaran, Shin and Smith (1996, 2001) Bounds Test for evidence of level relationship Panel of export data, 1962-2000. Data: Feenstra & Perkins Panel of export data, 1962-2000. Data: Feenstra & Perkins

10. Results: NES Firm survey (1998/9) Exporters 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 Export demand SA exporters of manufactures are price takers in international market SA exporters of manufactures are price takers in international market Export volumes are determined by the profitability of export supply Export volumes are determined by the profitability of export supply Relative prices and competitiveness of manufacturing Relative prices and competitiveness of manufacturing Real effective exchange rate has significant impact on average manufacturing exports Real effective exchange rate has significant impact on average manufacturing exports 1% depreciation → 1.8% to 2.5% increase in long run 1% depreciation → 1.8% to 2.5% increase in long run Tariffs and export support measures Tariffs and export support measures Significant negative impact of nominal and effective protection on export orientation (  tariff = -1.55,  ERP = -0.2) 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 Rising import penetration raises aggregate manufacturing exports by 0.37% to 0.55% in long run

13. Results: Export functions 2 Infrastructure Infrastructure

14. (Provisional) Results: PSS bounds tests Fixed capital stock of Infrastruct (1995 P) Carrying capacity of goods stock (tonnes) Elect (gigawatt hours) Paved distance (km) Fixed phone Lines (no.) Total exports v*x x Primary agriculture v*x V***x Primary minerals v*x? x High-skill manuf v*x Low-skill manuf v*?V***v*x Bounds tests suggest that export volumes are forcing variables in most cases 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. 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 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 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 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. 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. 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 Future research will explore the non-homogeneous effect of infrastructure on exports across sectors