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Recent World Bank Discussion Papers
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No. 272 Adolescent Health: Reassessing the Passage to Adulthood. Judith Senderowitz
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No. 274 Social Action Programs and Social Funds: A Review of Design and Implementation in Sub-Saharan Africa. AlexandreMarc, Carol Graham, Mark Schacter, and Mary Schmidt
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No. 277 Energy Demand in Five Major Asian Developing Countries: Structure and Prospects. Masayasu Ishiguro andTakamasa Akiyama
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No. 279 Restructuring Banks and Enterprises: Recent Lessonsfrom Transition Countries. Michael S. Borish,Millard F. Long,and Michel Noel
No. 280 Agriculture, Poverty, and Policy Reform in Sub-Saharan Africa. Kevin M. Cleaver and W. Graeme Donovan
No. 281 The Diffusion of Information Technology: Experience of Industrial Countries and Lessonsfor Developing Countries.Nagy Hanna, Ken Guy, and Erik Amold
No. 282 Trade Laws and Institutions: Good Practices and the World Trade Organization. Bernard M. Hoekman
No. 283 Meeting the Challenge of Chinese Enterprise Reform. Harry G. Broadman
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No. 287 East Asia's Environment: Principles and Prioritiesfor Action. Jeffrey S. Hammer and Sudhir Shetty
No. 288 Africa's Experience with Structural Adjustnment: Proceedings of the Harare Seminar, May 23-24, 1994. Edited by KapilKapoor
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No. 290 Decentralizing Infrastructure: Advantages and Limitations. Edited by Antonio Estache
No. 291 Transforming Payment Systems: Meeting the Needs of Emerging Market Economies. Setsuya Sato and David BurrasHumphrey
No. 292 Regulated Deregulation of the Financial System in Korea. Ismail Dalla and Deena Khatkhate
No. 293 Design Issues in Rural Finance. Orlando J. Sacay and Bikki K. Randhawa
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No. 295 The Participation of Nongovernmental Organizations in Poverty Alleviation: The Case Study of the Honduras SocialInvestment Fund Project. Anna Kathryn Vandever Webb, Kye Woo Lee, and Anna Maria Sant'Anna
No. 296 Reforming the Energy Sector in Transition Economies: Selected Experience and Lessons. Dale Gray
No. 297 Assessing Sector Institutions: Lessons of Experiencefrom Zambia's Education Sector. Rogerio E Pinto and Angelous J.Mrope
No. 298 Uganda's AIDS Crisis: Its Implicationsfor Development. Jill Armstrong
No. 299 Towards a Payments System Lawfor Developing and Transition Economies. Raj Bhala
No. 300 Africa Can Compete! Export Opportunities and Challengesfor Garments and Home Products in the European Market.Tyler Biggs, Margaret Miller, Caroline Otto, and Gerald Tyler
No. 301 Review and Outlookfor the World Oil Market. Shane S. Streifel
No. 302 The Broad Sector Approach to Investment Lending: Sector Investment Programs. Peter Harrold and Associates
No. 303 Institutional Adjustment and Adjusting to Institutions. Robert Klitgaard
No. 304 Putting Institutional Economics to Work: From Participation to Governance. Robert Picciotto
No. 305 Pakistan's Public Agricultural Enterprises: Inefficiencies, Market Distortions, and Proposalsfor Reform. RashidFaruqee, Ridwan Ali, and Yusuf Choudhry
No. 306 Grameen Bank: Performance and Stability. Shahidur R. Khandker, Baqui Khalily, and Zahed Khan
(Continued on the inside back cover)
WORLD BANK DISCUSSION PAPER NO. 342
Economic Integrationand Trade Liberalizationin Southern Africa
Is There a Role for South Africa?
Merle Holden
The World BankWashington, D. C
Copyright © 1996The International Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.
All rights reservedManufactured in the United States of AmericaFirst printing October 1996
Discussion Papers present results of colntry analysis or research that are circulated to encouragediscussion and comment within the development community. To present these results with the leastpossible delay, the typescript of this paper has not been prepared in accordance with the proceduresappropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sourcescited in this paper may be informal documents that are not readily available.
The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s)and should not be attributed in any manner to the World Bank, to its affiliated organizations, or tomembers of its Board of Executive Directors or the countries they represent. The World Bank does notguarantee the accuracy of the data included in this publication and accepts no responsibility whatsoeverfor any consequence of their use. The boundaries, colors, denominations, and other information shown onany map in this volume do not imply on the part of the World Bank Group any judgment on the legalstatus of any territory or the endorsement or acceptance of such boundaries.
The material in this publication is copyrighted. Requests for permission to reproduce portions of itshould be sent to the Office of the Publisher at the address shown in the copyright notice above. TheWorld Bank encourages dissemination of its work and will normally give permission promptly and,when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions forclassroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive,Danvers, Massachusetts 01923, U.S.A.
The complete backlist of publications from the World Bank is shown in the annual Index ofPublications, which contains an alphabetical title list (with full ordering information) and indexes ofsubjects, authors, and countries and regions. The latest edition is available free of charge from
the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C.20433, U.S.A., or from Publications, The World Bank, 66, avenue d'I6na, 75116 Paris, France.
ISSN: 0259-210X
Merle Holden is a consultant to the World Bank's International Economics Department.
Library of Congress Cataloging-in-Publication Data
Holden, Merle.Economic integration and trade liberalization in Southern Africa:
Is there a role for South Africa? / Merle Holden.p. cm. - (World Bank discussion paper ; 342)
Includes bibliographical references (p. ).ISBN 0-8213-3742-41. Africa, Southern-Commerce-South Africa. 2. South Africa-
Commerce-Africa, Southern. 3. Africa, Southern-Economicintegration. 4. Tariff preferences-Africa, Southern. 1. Title.II. Series: World Bank discussion papers ; 342.HF3900.Z7S614 1996382'.096-dc2O 96-30836
CIP
iii
CONTENTS
Foreword vAbstract viExecutive Summary vii
1. Introduction 1
2. Regional Trading Arrangements 3Introduction 3Forms of Economic Integration 3Other Trade Agreements in South Africa 9South Africa and the Regional Groupings 10Conclusion 12
Appendix A 13
3. Trade Patterns in the Region: South Africa,SADC and PTA 15
Introduction 15The Composition of South African Trade 15Direction of Trade 17South Africa's Trade with the Regional
Groupings 21The Composition of Trade with Southern Africa 25Unofficial Trade 25
4. A Quantitative Analysis of the South AfricanDirection of Trade within a Regional Context 26
Introduction 26The Empirical Model 26Conclusion 35
Appendix B 40
5. Multilateral Trade Liberalization 41Introduction 41Trade Liberalization under Uruguay Round 41South African Exports and Imports in
Southern Africa with Multilateral Liberalization 47
Appendix C 49
6. Integration and Polarization 51Introduction 5 1
iv
Trade Diversion and Redistributive Effects 51Polarization Effects 54South Africa in the Southern African Region:
Similarities and Divergences 56Trade Diversion and Polarization Effects:
The Empirical Evidence 60
7. Conclusion 63
Bibliography 65
v
Foreword
There appears to be a worldwide trend in international economic relationships todaytowards greater regional integration between countries. Since such regionalism is basedon discrimination against non members, the liberalization of trade on a multilateral basishas often suffered. Sub-Saharan Africa is no exception to this trend, and indeed, inAfrica, regionalism is sometimes viewed as a panacea to the ails of the subcontinent.
The main objective of this study was to examine the impact of post apartheid SouthAfrica on regionalism in the subcontinent. South Africa is shown in the study to be adominant economy in the region with growing trade and investment links. Despite thisgrowth in trade, the study concludes that free trade agreements to incorporate SouthAfrica into the existing regional groupings, are not in the best interests of the region.Regional activity should rather be directed at promoting economic cooperation betweenSouth Africa and other countries in the subcontinent. It is hoped that this study proves tobe a useful source of data and analysis to those working on Southern African economicissues.
Masood AhmedDirector
International Economics Department
vi
Abstract
The aim of this study is to examine South Africa's trading position in the SouthernAfrican region with a view to establishing whether South Africa should participate in anyof the existing regional groups and establish preferential trading arrangements within thevarious groups.
South Africa's trade with the region and the world is documented drawing on datapreviously unavailable during the years of sanctions against South Africa. The studyestablishes that South Africa trades mainly with countries in Europe, North America andmore latterly Asia. Aside from Zimbabwe, trade with countries in Africa accounts for asmall proportion of total trade in South Africa. The study shows that although exportsexceed imports from Africa, nevertheless they only account for 12 per cent of exportsexcluding gold from South Africa. If gold is included these exports amount to 7 per centof total exports. Africa predominantly exports natural resource products to South Africain exchange for manufactures.
An analysis of the determinants of South Africa's direction of trade establishes thatSouth Africa's direction of trade during the period 1989 to 1993 has not been undulyinfluenced by the various regional groupings. Controlling for economic and geographicfactors, the regional groups have not biased South Africa's trade in favor or againstAfrica even during the years of goods sanctions. Furthermore, preferential tradingarrangements with Zimbabwe, Malawi and Mozambique also failed to affect the volumeof trade significantly, and the lifting of sanctions only marginally improved the volume ofSouth African exports.
The study concludes that preferential trading arrangements are no substitute formultilateral trade liberalization particularly when the preferences are given to a moredominant economy. Trade diversion is more likely to occur and the costs ofredistribution of the tariff revenue significant. The costs to the smaller economies arelarge and the benefits to the larger economy minimal. The proliferation of tradingarrangements in the region in a climate of uncertainty surrounding their membership androles should be carefully examined by all participants in the light of whether they aregood substitutes for multilateral trade liberalization given the likely costs of tradeintegration on a regional basis.
vii
EXECUTIVE SUMMARY
The aim of this study was to examine South Africa's trading position in the SouthernAfrican region with a view to establishing whether South Africa should participate in anyof the existing regional groups and establish preferential trading arrangements within thevarious groups.
The existing regional institutional arrangements were described focusing on their aims,objectives and country membership. For the purposes of this study the region includedboth Eastern as well as Southern Africa. Therefore, the Preferential Trading Area (PTAor COMESA) was included in the study, as well as the members of the Southern AfricanDevelopment Community (SADC).
At present South Africa has joined and is contemplating joining regional groupings thatdiscriminate against non - members. For example, the SADC grouping of countries ofwhich South Africa is now a member is considering reducing tariffs between members inmuch the same manner as is planned by the PTA and the Cross Border Initiative (CBI) ofwhich South Africa is not a member. Unfortunately the situation is even more complexas the regional groupings are also in a state of disarray. In particular, SADC's intentionto split off from COMESA is heightening the confusion. The SACU agreement betweenSouth Africa, Botswana, Lesotho, Narnibia and Swaziland is also in the process of beingrenegotiated. Given that Namibia and Swaziland are members of SACU and at the sametime members of the CBI and COMESA and Lesotho is a member of COMESA, theuncertainty surrounding the development of regional groupings has grown.
South Africa's trade with the region and the world was documented in the study, drawingon data previously unavailable during the years of sanctions against South Africa. Thestudy established that South Africa trades mainly with countries in Europe, NorthAmerica and more latterly Asia. Aside from Zimbabwe, trade with countries in Africaaccounts for a small proportion of total trade in South Africa. The study shows thatalthough exports exceed imports from Africa, nevertheless they only account for 12 percent of exports excluding gold from South Africa. If South African gold exports areincluded in total exports, these exports amount to 7 per cent of total exports. Tradebetween South Africa and the rest of Africa comprises the export of natural resourceproducts to South Africa in exchange for manufactures.
An analysis of the determinants of South Africa's direction of trade established thatSouth Africa's direction of trade during the period 1989 to 1993 had not been undulyinfluenced by the various regional groupings. Controlling for economic and geographicfactors, the regional groups have not biased South Africa's trade in favor or againstAfrica even during the years of goods sanctions. Furthermore, preferential tradingarrangements with Zimbabwe, Malawi and Mozambique also failed to affect the volumeof trade significantly, and the lifting of sanctions only marginally improved the volume ofSouth African exports.
viii
The economic implications for South Africa and the region of the South African offerunder the Uruguay Round was analyzed. Emerging from decades of isolationism thisoffer has been viewed as a watershed in the formation of trade policy in South Africa.Unlike other countries in the region, the binding and rationalization of tariffs represents areduction in the level of protection and reduces the complexity and lack of transparencyin the tariff schedule. The study concluded that although the offer is viewed as a majorstep in the direction of liberalization, particularly when compared with other countries inAfrica, the impact of the offer on trade in the region is likely to be small. Theelimination of the General Export Incentive Scheme (GEIS) in South Africa is howeverlikely to limit certain South African exports to the region. The analysis suggests that theintended tariff liberalization is insufficient to reduce the bias against exports in general,and with the phasing out of the GEIS the bias against exports will actually increasedespite the planned reduction in tariffs.
The issues of trade diversion and polarization in the region was examined in the study.An analysis of productive structures between countries in the region and South Africaclearly demonstrate that the South African economy is at a different level of industrialdevelopment to other countries in the region. In addition, the intensity of South Africa'strade with countries in the region was calculated. The analysis suggests that given thecomposition of trade, trade diversion is more likely to occur and that the adverseredistributive effects arising from a free trade agreement between South Africa and othercountries in the region, would be large for the poorer countries. The recent SADCdecision to confine activities at the present time to cooperative projects recognizes thedangers of a free trade agreement with South Africa.
The theory underlying polarization of economic activity was discussed. Whether greaterintegration of the South African economy into the region will result in such polarizationis not clear, and as a result the study recommends further comparative research into theindustrial structures of countries in the region.
The study concluded that preferential trading arrangements were no substitute formultilateral trade liberalization particularly when the preferences are given to a moredominant economy. Trade diversion is more likely to occur and the costs ofredistribution of the tariff revenue significant. The costs to the smaller economies arelarge and the benefits to the larger economy minimal. The proliferation of tradingarrangements in the region in a climate of uncertainty surrounding their membership androles should be carefully examined by all participants in the light of whether they aregood substitutes for multilateral trade liberalization given the likely costs of tradeintegration on a regional basis.
South Africa has played an important part in the development of Southern Africa. Itstransport and system of communications has aided the surrounding countries in the regionby facilitating their trade outside of Africa as well as with South Africa. These countriesare heavily dependent on imports from South Africa, and South Africa has considerable
ix
investment interests in several countries in the region. In addition, labor has migratedlegally and illegally, to work on the mines, industry and agriculture in South Africa.Hence, a high level of integration exists between the national economies of the regionwith a South African core. However, although South African trade with the region hasincreased in recent years the volume of such trade remains a low proportion of total tradein South Africa. South Africa's major trading partners are the high income, developedcountries of the world.
Although the principle of 'variable geometry' has always operated in the region andchange has occurred incrementally in the past, this is not necessarily an argument for theachievement of broader levels of integration for all countries in the region and inparticular South Africa. The study concludes that the goal of global liberalization shouldnot be sacrificed in order to achieve the more limited form of liberalization representedby regional integration that seeks to maximize intra - regional trade.
Chapter 1. Introduction
The aim of this study is to examine South Africa's trading position in the SouthernAfrican region with a view to establishing whether South Africa should participate in anyof the existing regional groups and establish preferential trading arrangements within thevarious groups.
South Africa is a member of the Organization of African Unity, the Southern AfricanDevelopment Community and the Southern African Customs Union, the longestsurviving customs union on the continent. During 1995, South Africa and the othermembers of the customs union are examining the agreement with a view to renegotiatingit for the future. As most forms of economic cooperation generate gains that are notalways equally spread between the members, in Southern Africa there are both fears andexpectations surrounding the future role which South Africa can and will play in theregion as a member of any of the regional groupings.
On the one hand, less economically powerful countries in the region fear that closerintegration with the larger South African economy will swamp their smaller economies.Investment will be attracted to South Africa with relocation and location of industry inthe larger market. On the other hand, there is the view that the spread effects fromintegration with the South African economy will act as an engine of growth in the region.Aside from a few notable exceptions, growth in Southern Africa is low and per capitaincomes remain low in international terms. In an attempt to find a solution to this lowgrowth, countries are reacting to the general world trend towards the proliferation ofregional trading blocks, such as NAFTA, by considering and implementing similararrangements in Southern Africa. Given South Africa's dominance, its role and the effectof its incorporation is likely to be fundamental.
Chapter 2 examines the existing regional institutional arrangements describing their aims,objectives and country membership. For the purposes of this study the region includesboth Eastern as well as Southern Africa. Therefore, the Preferential Trading Area isincluded in the study, as well as the members of the Southern African DevelopmentCommunity.
South Africa's trade with the region and the world is documented in Chapter 3. Thisanalysis draws on data previously unavailable during the years of sanctions against SouthAfrica. These data are used in an econometric analysis of the determinants of SouthAfrica's direction of trade in Chapter 4. This analysis examines whether the direction oftrade had been influenced by the various groupings and preferential arrangements thatexisted during the period 1989 to 1993. Both South African exports and imports areanalyzed in these chapters.
2
Chapter 5 outlines the economic implications for South Africa and the region of theSouth African offer under the Uruguay Round. Emerging from decades of isolationismthis offer is viewed as a watershed in the formation of trade policy in South Africa.Unlike other countries in the region, the binding and rationalization of tariffs represents areduction in the level of protection and reduces the complexity and lack of transparencyin the tariff schedule. This offer is viewed as heralding a new era by shifting theeconomy away from outmoded import substitution policies.
Chapter 6 explores the issues of trade diversion and polarization in the region. Firstly,the theory of trade diversion and polarization is provided. The similarities and differencesin the productive structures between countries in the region and South Africa are shown.In addition, the intensity of South Africa's trade with countries in the region is calculated.An estimate is then made of the possible redistributive effects arising from possible SouthAfrican membership of the Preferential Trade Area. The chapter concludes with anassessment of the likelihood of economic activity being polarized to the more advancedSouth African center away from the more peripheral and poorer countries if South Africaintegrates into the region.
The final chapter provides an overview of the study and suggests a course of action forthe future. It is recognized that the principle of 'variable geometry' has always operatedin the region and change has occurred incrementally in the past, yet this is not necessarilyan argument for finally achieving broader levels of integration for all countries in theregion and in particular South Africa. This chapter examines whether the goal of globalliberalization should be sacrificed to achieve the more limited form of liberalizationrepresented by regional integration that seeks to maximize intra - regional trade.
3
Chapter 2. Regional Trading Arrangements
Introduction
This chapter examines the existing trading arrangements in Southern Africa in order toestablish the extent to which South Africa is integrated into the subcontinent through theinstitutional structures which govern trade and the financing of trade. The chapterexamines the factors that have shaped regional integration in the past, and highlights therole played by South Africa.
Forms of Economic Integration
Four forms of integration can be distinguished: free trade areas which eliminate tradebarriers between their members; customs unions which in addition to enjoying duty freeaccess to members' markets adopt a common external tariff; common markets whichextend the customs union to freeing the movement of capital and labor betweenmembers; and economic unions which aim to coordinate members' economic policies.
Since independence, many institutions for regional cooperation in Africa have been inplace. The Organization of African Unity's Lagos Plan of Action in 1980 envisageddividing Africa into four common markets which would merge in the year 2000. Underthe plan each subregion was to pass through the three stages of free trade area, customsunion and finally economic union. The original plan will not be realized and it is clearthat the commitment on the part of governments to regional institutions and change isnow tempered. More recently, the Abuja Treaty of 1991 set a target date for theestablishment of a continental common market by 2020, to be followed five years later bya Pan - African monetary and economic union.
Regional Groupings in Southern Africa
There are five major economic groupings in the Southern and East African region. Theseare the Southern Africa Customs Union (SACU), the Common Monetary Area (CMA),the Southern African Development Community (SADC), the Preferential Trade Areawhich has been replaced by the Common Market for Eastern and Southern Africa(COMESA) and the Cross Border Initiative (CBI). Table 2.1 shows the countrymembership of the various groupings.
4
Table 2.1. Membership of Regional Grou ingsSouthern Southern Preferential Common CrossAfrican African Trade Monetary Border
Country Customs Development Agreement Area InitiativeUnion Community (PTA or
(SACU) (SADC) COMESA) (CMA) (CBI)Angola##Botswana #_ _
Burundi #_#Comoros #_#Djibouti #Ethiopia #EiritreaKenya #_#Lesotho # #_____#Madagascar #_#Malawi |_|_#_|_#_Mauritius T _______|___
MozambiqueNamibia l _________
Rwanda ! !_! __ __
SeychellesSomalia I_I_XT______South Africa |_ #_T___I__
Sudan l_l_|_#Swaziland #_#_#_#_#Tanzania l__XX____#__Uganda # #Zaire #Zambia L_#
Zimbabwe # #_#Source: Membership lists supplied by regional groupings.
The Southern African Customs Union (SACU)
The present SACU agreement had its genesis in 1910 when South Africa, Botswana,Lesotho and Swaziland agreed to form a customs union. On reaching independence inthe late sixties, Botswana, Lesotho and Swaziland renegotiated the agreement forimplementation in 1969. South Africa administered Namibia as part of the customsunion until independence in 1990. Namibia's membership of the union was formalized in1990 resulting in a union between South Africa and the smaller four countries nowknown as the BLSN.
5
The SACU agreement allows for the duty free movement of goods among members andestablishes a common external tariff. Agricultural goods are not permitted to move freelybetween members of the union. The agricultural marketing boards in South Africa usedto impose quantitative controls on these goods. Excise taxes are also harmonizedbetween members and together with import tariffs form part of the common revenue pool.
The common revenue pool is administered by the South African Reserve Bank andallocated to members according to a formula which enhances the revenue share going tothe smaller countries by 42 per cent. The enhancement factor is designed to compensatethe smaller members for the disadvantages of forming a customs union with South Africa.This includes a loss of fiscal discretion, increased prices which arose from South Africanquantitative restrictions and polarization of economic activity (Lennart and Petersson,1991).
As revenues fluctuated for the smaller countries and comprised such an important part ofgovernment receipts, in 1976 the agreement was amended to introduce a stabilizationfactor to constrain revenues to an average rate of 20 per cent of the duty - inclusive valueof imports and excisable production. Appendix A gives the details of the revenue sharingformula.
In terms of the agreement the smaller countries are permitted to:
(1) protect new industries for a period of up to eight years,
(2) specify strategic industries for assistance,
(3) prohibit the importation of goods for economic, cultural and social reasons, and
(4) import goods for domestic use duty free from outside the customs union.
Nevertheless despite these exceptions to the agreement, the BLSN countries have notalways taken advantage of the exemptions (Maasdorp and Whiteside, 1992).
The present SACU agreement is in the process of being renegotiated. Concerns revolvearound whether the BLSN countries should continue membership of SACU (Maasdorp,Robson and Hudson, 1995 and Maxwell Stamp, 1995). The South Africans favor a cleanformula without the 42 per cent compensation rate and the exclusion of excise duties(MacCarthy, 1985). The issue of polarization of industrial development, wherebyindustry gravitates towards South Africa, remains high on the agenda. Negotiators areseeking for an effective mechanism to provide assistance and counter the adverse effectsof such polarization.
6
The Common Monetary Area
Prior to 1974 a defacto monetary union existed between South Africa, Botswana,Lesotho and Swaziland. In 1974 in line with the formation of the Southern AfricanCustoms Union the monetary union was formalized in an agreement which recognizedthe Rand Monetary Area (RMA) between South Africa, Lesotho and Swaziland.Declining to join the union, Botswana established its own central bank and currency in1976.
The RMA agreement allowed members to circulate their own currencies along with theSouth African rand. It also provided for the free movement of funds between membercountries and ready access to the South African money market. The South AfricanReserve Bank took the responsibility for managing the rand and gold and foreignexchange reserves for the union. These conditions effectively ensured that neitherLesotho nor Swaziland could alter the union money supply (Lundahl and Petersson,1991). South Africa undertook to pay compensation to Lesotho and Swaziland for thisloss of seignorage. Seignorage is calculated by estimating the number of rands incirculation and assuming that interest had been lost on two thirds of them. An estimate ofthe rands in circulation is made each year based on the amount agreed to in theAgreement in December 31, 1973. Each year these amounts are corrected by 1.2 per centof the increase, or by 0.8 per cent of the decrease of the notes in circulation of the SouthAfrican Reserve Bank and the coin liabilities of the Treasury. The initial rand amountcalculated for Lesotho in 1973 was R12.5 million.
In 1986 the Trilateral Monetary Agreement (TMA) replaced the Rand Monetary Areawith the Common Monetary Area (CMA). Swaziland introduced its own currency anddelinked from the rand. The rand was no longer legal tender in Swaziland as it was inLesotho. In terms of the TMA Swaziland and Lesotho agree to back fully their issuedcurrency with rand deposits at the South African Reserve Bank and Republic of SouthAfrica government stock (Maasdorp and Whiteside, 1992). In addition, in terms of theagreement, Swaziland and Lesotho manage their gold and foreign exchange reserves andholding 35 per cent of these reserves in currencies other than rands. Lesotho andSwaziland are compensated for any loss in seignorage.
Namibia's independence in 1991 led to a revision of the agreement in 1992. TheMultilateral Monetary Agreement (MMA) replaces the TMA and incorporates Namibiainto the CMA. In September 1993, the Namibian dollar was introduced. It is issued atparity with the South African rand which is legal tender in Namibia. It is planned tophase out rand notes and coins on a voluntary basis reducing the payments that are madefor loss of sovereignty.
7
The Southern African Development Community (SADC)
The Southern African Development Community had its genesis during the apartheidyears in South Africa. The original members of the community were Angola, Botswana,Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia and Zimbabwe. On itsindependence in 1990 Namibia joined the community and became the tenth member ofthe Southern African Development Coordination Conference (SADCC). It was hopedthat the formation of SADCC would reduce the so-called front-line states' dependence onSouth Africa and promote regional cooperation in regional projects (Maasdorp andWhiteside, 1993:35). At this stage of its inception SADCC was not concerned withmatters relating to trade integration. Initially the organization concentrated ontransportation and communications projects. Issues of food security, energy, industry andtrade followed.
The political changes that occurred in South Africa in the early nineties spurred themembers of SADCC to reassess the role of the community. In August 1992, thepromotion of trade integration topped the agenda of the Treaty governing the newSouthern African Development Community (SADC). The community plans to integratetrade by reducing tariff and non-tariff barriers between members, coordinate externaltariffs and promote the mobility of capital and labor in the region. The treaty does notcontain any scheduled reductions of tariffs. In 1994 South Africa elected to join theSADC. Whether South Africa's membership will have any bearing on the speed ofliberalization remains to be seen. In August 1994 SADC decided that its members maywithdraw from the Preferential Trade Area (PTA) and that the trade functions of the PTAshould be taken over by SADC. However, the decision to withdraw from the PTA is tobe finally decided upon in January 1996.
At the August 1995 meeting of SADC Mauritius joined the community. In addition twokey agreements were signed. Firstly, it was agreed to share river basins for the diversionof water in times of drought crises and secondly, to form a regional market to facilitatethe buying and selling of hydroelectric power. The anticipated free trade agreement didnot materialize largely because South Africa convinced other members that tradeintegration may lead to trade being diverted to South Africa.
The Preferential Trade Area and The Common Market for Eastern and AfricanStates
The Preferential Trade Area for Eastern and Southern African States (PTA) was formedin 1983. There are twenty three members at present: Angola, Burundi, Comoros,Djibouti, Ethiopia, Eritrea, Kenya, Lesotho, Madagascar, Malawi, Mauritius,Mozambique, Namibia, Rwanda, Seychelles, Somalia, Sudan, Swaziland, Tanzania,Uganda, Zaire, Zambia and Zimbabwe.
8
The PTA is regarded as the major vehicle for the promotion of trade integration in theregion. It plans to eliminate all tariffs on intra-PTA trade by the year 2000.Unfortunately, the PTA's efforts in reducing tariffs and non-tariff barriers are constrainedprimarily by the lack of alternate sources of revenue. In December 1994 the CommonMarket for Eastern and Southern African States (COMESA) replaced the PTA. This newtreaty signed by twenty countries,' seeks to establish a common market with a commonexternal tariff. It also aims to promote cooperation on transport, communications,agriculture, industry, education and investment policies. Lesotho, Swaziland andNamibia are unable to cut tariffs independently of South Africa. Members of SACU areunable to independently determine trade policy without South African approval.
The PTA introduced several new institutions to encourage greater trade betweenmembers. Firstly, it established a Clearing House in 1984 to facilitate the settling ofaccounts between members. The main aim of the Clearing House is to overcome the lackof convertible currencies and address the shortages of foreign exchange experienced bythe members. In 1986 the PTA established the PTA Bank for Trade and Development toprovide short term trade and development project finance. Then in 1988 the PTAintroduced checks denominated in PTA Units of Account (UAPTA) to assist theconservation of hard currency. Finally, in 1990 the PTA adopted a monetaryharmonization program aimed at establishing a monetary union by the year 2020. Theprogram stresses consultation on possible exchange rate realignments and suggests theadoption of credible fiscal and monetary policies facilitating harmonization. However,recent movements towards current account convertibility are likely to change the roleplayed by the Clearing House.
Following on the August 1994 SADC meeting it is unclear whether the nine SADCcountries that are also members of COMESA will withdraw from the wider groupingsplitting COMESA into two groups, Eastern African on the one hand and SouthernAfrica on the other.
The Cross Border Initiative
The Cross Border Initiative (CBI) is a recent move in the promotion of cross border tradeand investment in Eastern and Southern Africa. The CBI was proposed at the MaastrichtConference on Africa in 1990 and is sponsored by the World Bank, IMF, EU and theAfrican Development Bank. The fourteen participating countries are Burundi, Comoros,Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Swaziland,Tanzania, Uganda, Zambia and Zimbabwe. Both Narnibia and Swaziland are alsomembers of SACU. This dual membership creates the potential for complicating thecontrol of goods across national boundaries. At the present time South Africa has notindicated an interest in joining the grouping.
iDjibouti, Seychelles and Somalia have yet to sign.
9
Despite reservations from some members the Second Ministerial Meeting of the CBI inMarch 1995 adopted a 'road map' for trade reform. The plan is to eliminate tariffs onintra - regional trade and converge the external tariffs of the participating countries to atrade-weighted average of 15 per cent with a maximum of 25 per cent by 1998. Thosecountries which have undertaken extensive reforms, namely Uganda, Malawi, Zambia,Mauritius and Zimbabwe will have little difficulty with compliance. The remainingcountries, including Namibia and Swaziland, are particularly concerned about the revenueimplications of such large cuts in tariffs.
More specifically the road map incorporates the following features:
* convergence to an external tariff structure with 2 to 3 non zero rates and an averagetrade weighted tariff of 15 per cent with a maximum of 20 to 25 per cent by 1998
* the elimination of tariffs on intra-regional trade by 1998* aim for an maximum absolute margin of preference between imports from CBI
countries and non-COMESA countries of 15 per cent by 1998* harmonization of definitions of goods bearing similar tariffs and permitted NTBs* adoption of simplified rules of origin based on tariff headings and value - added rules
Other Trade Agreements in South Africa
Besides the Southern African Customs Union, South Africa has participated inpreferential trade agreements with other countries in the region. The effect of the tariffagreements is to give South Africa a small margin of preference in the importing countryin return for reasonably favorable access to the South African market.
The agreement with Zimbabwe dates from 1964 and was negotiated with the Smithgovernment under UDI. The agreement is so complicated it has been difficult to assessits impact on Zimbabwean imports into South Africa. Nevertheless, it is estimated thatthe level of preference given by Zimbabwe to South African exporters ranges between 2.5and 20 per cent and South Africa grants preferential access to Zimbabwean goodsamounting to 25 to 30 per cent (African Development Bank 1994, p 23)
South Africa also grants unilateral tariff concessions on some imports from Mozambiqueand Turkey. The required level of local content in imports from Mozambique is 35 percent. These goods range from fish through to textiles and tiles. In some instances thesegoods are subject to import quotas. The agreement reduces South Africa's tariffs onimports from Mozambique to 3 per cent on a certain range of goods that are also subjectto quotas. Goods qualifying for preferential access can only be consumed in South Africaor Botswana. South Africa is not given any tariff concessions by Mozambique in return.
The agreement with Turkey is very similar. Certain goods are admitted duty free if them.f.n. rate is 3 per cent or less, or at a ceiling rate of 3 per cent if the m.f.n. rate is more
10
than 3 per cent. Turkish imports on the other hand had to contain at least 50 per centlocal content. The agreement with Turkey expired in 1993 and has not been renewed.
The agreement with Malawi is more generous. It allows duty-free imports of all goodsgrown, produced or manufactured in Malawi with a required minimum in local content of25 per cent. ( GATT, 1993, p 50). With respect to agricultural products, import permitsare required, although for a narrow range of these products minimum quantities arespecified for which import quotas do not apply.
In 1991 trade agreements existed with Hungary, Poland, Romania and Czechoslovakiaexempting these imports from the import surcharge. This exemption represented aconsiderable margin of preference as the surcharge ranged as high as 40 per cent oncertain luxury imports. However, during 1995 the South African government abolishedthe import surcharge on all imports.
During 1994 South Africa negotiated GSP agreements with the US, EU, Canada andNorway. The GSP program with the EU applies to about 2000 products and increasesduty free exports to the EU by 3 per cent. The benefit to South African exporters in termsof redistributed tariff revenue is estimated at R55 million, accounting for 0.02 per cent ofGDP and 0.2 per cent of total exports to the EU (Holden, 1995). The GSP program iscriticized as it fails to benefit many labor intensive and lower technology products such asclothing, textiles and agricultural products and it incorporates upper limits on duty freeimports into the EU. The agreement is however being renegotiated.
South Africa and the Regional Groupings
South Africa is a founding member of SACU and has recently joined SADC. WhetherSouth Africa will join either the PTA or the CBI is still open to speculation. In any eventwhen and if South Africa is included in any grouping Table 2.2 shows that in manyrespects it is the dominant economic partner.
Table 2.1 shows that the land area of South Africa amounts to 11 .1 per cent of the PTA,21.4 per cent of SADC, 63.5 per cent of SACU and 27.2 per cent of CBI land areas.Similarly the population of South Africa ranges from 16.3 per cent of the PTA populationto 87.8 per cent of the SACU population.
On the other hand South African GNP and GNP per capita provide a very differentpicture of economic power. In 1993 South African GNP is more than 4 times greater thantotal of remaining SADC GNP. It is two and half times greater than the CBI total GNP,and one and half times greater than total GNP in the PTA. Similar picture emerges whenGNP per capita comparisons are drawn. South African GNP per capita is twice the sizeof per capita GNP in the CBI, ten times larger than the PTA per capita income and seventimes greater than per capita GNP in SADC countries.
11
Table 2.2. Characteristics of Southern African Countries and Regional Groupingsfor 1993
Area (m Km2) Population Total GNP US GNP per(ml) $m Capita
Angola 1.25 9.5 6175 650Botswana 0.58 1.3 3289 2530Kenya 0.6 25.4 6743 270Lesotho 0.03 1.8 1044 580Malawi 0.12 8.8 2024 230Mozambique 0.8 16.1 1288 80Namibia 0.82 1.5 2190 1460Swaziland 0.02 0.8 840 1050Tanzania 0.95 25.2 3486 420Uganda 0.2 18 3486 190Zambia 0.75 8.3 3486 420Zimbabwe 0.39 10.1 6565 650
SADC(ex SA) 5.71 83.4 29421 350PTA 11.0 239 58486 245SACU(ex SA) 1.92 5.4 7363 1364SACU 3.14 44.3 106947 2414CBI 4.49 125.95 38485 1167
South Africa 1.22 38.9 99584 2560
SA % PTA 11.1 16.3 170.3 1044.9SA % SADC 21.4 46.6 438.4 731.4SA % SACU 38.9 87.8 93.1 106.0SA %SACU(ex SA) 63.5 720.4 1352.5 187.7SA % CBI 27.2 30.9 258.8 219.4Source: The World Bank Atlas, 1995, Maxwell Stamp, 1995.
12
Conclusion
The deepest form of integration in Southern and Eastern Africa has occurred in thesouthern tip between the members of the Southern African Customs Union and theCommon Monetary Area. Botswana is the only member of SACU that is not in theCMA. When faced with the possibility of disengaging from these arrangements,Botswana alone left the CMA. The renegotiation of the SACU agreement also appears tobe centering on the terms of the agreement rather than its dissolution. The Lundahl andPetersson 1991 study for Lesotho concludes that the choices for Lesotho are essentiallypragmatic determined by its proximity and dependence on South Africa.
Reaching northwards, regional initiatives appear to be in a state of uncertainty. Therelationship between the Southern African Development Community, COMESA and theCBI are all in sore need of clarification. Botswana and South Africa both members ofSADC and SACU are not part of COMESA nor the CBI. On the other hand Swazilandand Namibia have both joined the COMESA and the CBI whilst retaining theirmembership of SADC and SACU.
The future relationship between the PTA /COMESA and SADC requires clarification inthe face of increasing duplication of their functions with respect to project aid(Maasdorp,1992). The relationship between the CBI, COMESA and SACU also requiresclarification given the overlapping membership of these groupings and the obligationsarising from differing levels of planned tariff cuts as well as time periods.2
South Africa is rapidly normalizing its relationships with the rest of Africa. Althoughmembership of SADC is leading to cooperative agreements these have not encompassedtrade agreements. At present South Africa maintains observer status with the PTA andCBI and has joined the African Development Bank with a limited commitment, seekingto assess the costs and benefits of further integration in the region. Meanwhile thosemembers of SADC that are also members of COMESA/PTA continue to debate theircontinued membership of this body.
2 Every member of the CBI is a member of the PTA but not vice versa.
13
Appendix A
The formula used in the Southern African Customs Union apportioning the revenuebetween the members is unique in the history of customs unions. It aims to compensatethe smaller members for the disadvantages of being in the union with a larger moredominant partner. Therefore the formula compensates for the costs of trade diversion,polarization and loss of fiscal sovereignty.
All customs, excise and related duties such as import surcharges are paid into a commonrevenue pool. General sales taxes and value added taxes are not included in the pool.The revenue accruing to each of Botswana, Lesotho Swaziland and Namibia (BLSN) wasin the first instance determined by the following formula:
JRj = 1.42 mi +Si ]RU
where
Rj= revenue received by Botswana, Lesotho, Swaziland or Namibia
R.= total customs union revenue pool comprising customs, excise and sales duties
Mj = total cif value (including duties) at border of all imports into Botswana, Lesotho,Swaziland or Namibia
S,= total value (including excise and sales duties paid) of dutiable and excisable goodsproduced and consumed in Botswana, Lesotho, Swaziland or Namibia
M" = cif value (including all customs and sales duties paid) of imports into the customsunion from the rest of the world
S"= total value (including excise and sales duties paid) of dutiable and excisable goodsproduced and consumed in the customs union.
14
The payments made to Botswana, Lesotho Swaziland and Namibia in anyparticular year are not the same as the revenue which has accrued for that year. Lags inthe available statistics have led to payments being two years behind. Maasdorp et al(1995) show that the estimator used in forecasting revenues is biased towardsunderestimating revenue. Even though the formula has been amended the estimates ofrevenue are necessary in order to arrive at the BLSN share of the pool.
The formula also excludes South Africa's imports from BLSN, while it includes BLNSimports from South Africa. The inclusion of South African imports has the effect ofincreasing the denominator in the formula and reducing the share going to BLSN.However, as South African imports from BLSN are rather small, the effect of theirinclusion on the revenue share is insignificant.
The above describes the revenue sharing formula which had been agreed to in 1969. Theformula was revised in 1976 to stabilize the revenue paid to Botswana, Lesotho andSwaziland. In order to avoid revenue instability for these countries, members of theunion agreed to amend the formula with the overlay of a stabilization factor. Applicationof the stabilization factor has the effect of averaging revenue out at 20 per cent of theduty inclusive value of imports and excisable production. Each of the BLSN countriescan receives a share which lies between a minimum rate of revenue of 17 per cent and amaximum rate of 23 per cent. South Africa retains the remainder of the common customspool after payment to the other members.
The stabilization factor is calculated in the following manner. If revenue for the BLSNcountries calculated using the original 1969 formula is not equal to 20 per cent of theduty-inclusive value of imports and exisable production, the stabilization factor isapplied. This factor is equal to 50 per cent of the difference between the 20 per cent shareand the amount calculated using the 1969 formula. When the difference is positive, it isadded to the 1969 calculation. When the difference is negative, it is subtracted.Therefore, any divergence is halved. Nevertheless, the amounts actually paid areconstrained by the lower limit of 17 per cent and the upper limit of 23 per cent. In recentyears BLSN countries have received the lower limit of 17 percent.
15
Chapter 3. Trade Patterns in the Region: South Africa, SADC and PTA
Introduction
As the severity of sanctions imposed on South Africa increased so the publication of tradestatistics was circumscribed by the South African government. A ban on the publicationof all detailed trade statistics in 1986 followed on censorship of all trade data on oil andarms. Many countries refused to acknowledge any trade with the pariah state, whileothers traded through third countries. These third countries gained from the role ofmiddlemen and enjoyed the benefits from countertrade deals. Although South Africaagreed to publish trade statistics relating to composition and trading partners from 1992onwards, oil and arms trade still remains secret. Through a leak to the press, statistics forthe earlier sanctions' period are available. These statistics and the official statistics arethe basis for the analysis of this chapter.
In addition to the data limitations arising from the era of sanctions, unrecorded tradecreates further difficulties with the trade data. This trade is difficult to quantify as it ariseslargely from the need to circumvent rules, regulations and the law, The extent of suchtrade is addressed in Section 3.6 below.
A further limitation of South African trade statistics is the treatment of intra - SACUtrade statistics, The South African Department of Customs and Excise is only able topresent a partial picture of the extent of trade between South Africa and the partners inthe customs union. The Department of Customs and Exise is more concerned with thecollection of import duties on goods imported through South Africa. As part of the re-negotiation of the SACU agreement complete estimates will be available shortly.
The Composition of South African Trade
Table 3.1 provides the composition of trade by two digit SIC for 1991, Imports as apercentage of domestic demand and exports as a percentage of production are providedfor 1990.
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Table 3.1. Exports and Imports by Economic SectorSector Exports Imports Exports as % Imports as %
1991 1991 of production of domestic(R bn) (R bn) 1990 demand 1990
Agriculture 2.3 0.6 10 2Mining 13.8 0 89 0Manufacturing: 22.6 40.8 13 22Food 2.7 1.5 8 5Beverages 0.3 0.4 4 4Tobacco 0.0 0.0 7 6Textiles 1.2 2.0 20 19Clothing 0.2 0.2 24 5Leather 0.2 0.2 17 28Footwear 0.0 0.2 9 15Wood 0.3 0.4 12 10Furniture 0.1 0.1 1 1 1Paper 1.6 0.9 1 1 10Printing 0.1 0.4 2 1 1Industrial Chemicals 2.6 5.0 12 23Other Chemicals 0.4 2.1 6 26Rubber 0.1 0.5 5 12Plastic 0.1 0.3 2 7Pottery 0.0 0.1 3 36Glass 0.1 0.3 17 29Other Nonmetallics 0.4 0.4 7 8Iron & Steel 5.9 0.6 37 9Non - ferrous 1.8 0.4 36 7Metal Products 1.4 1.6 6 13Machinery 1.2 9.6 10 57Electrical Machinery 0.4 4.1 4 33Motor Vehicles 0.9 4.9 5 34Other Transport 0.3 1.9 24 66Other Manuf 0.3 2.8 34 74Unclassified 26.2 5.4Source: Industrial Development Corporation Sectoral Data Series 1990 and GATT
Trade Review, 1993, Trade with BLSN treated as imports and exports.
South Africa presents a diversified profile of exports. Mining accounts for 21 per cent ofexports and agricultural exports only account for 3.6 per cent. Just under 35 per cent ofexports consist of manufactures. Within manufacturing, the iron and steel, industrialchemicals and textile sectors are significant exporters. Unclassified exports consisting ofgold, diamonds and arms account for a significant 40 per cent share.
17
A comparison between 1989 and 1993 of the changes that occurred in the ranking ofSouth Africa's trading partners demonstrates little effect after the lifting of sanctions.Table 3.2 shows the top 20 countries to which South Africa exported in 1989 and 1993.
Direction of Trade
The data which follow do not include gold, arms or oil. It is known that South Africa isboth an exporter and importer of arms, and despite the domestic production of oil fromcoal, a significant importer of oil. Although gold production is sold on the world marketis priced in dollars, it would not be appropriate to attribute all gold sales to US buyers.
Table 3.2. South African Exports 1989 and 1993 (R millions)Country Exports Country Exports
1989 1993Japan 3704.4 Switzerland 7606.1Germany 2237.7 United Kingdom 3943.2Netherlands 2158.9 United States 3480.4United Kingdom 2145.0 Japan 3132.1United States 2056.1 Germany 2724.3Taiwan 1619.9 Belgium 2310.1Belgium 1618 Taiwan 2165.5Italy 1553.2 Netherlands 2076.9Korea 1163.3 Zimbabwe 1745.2Hong Kon 1081.9 Hong Kong 1701.2Switzerland 1059.7 Israel 1680.2Zimbabwe 991.5 Italy 1431.7Spain 857.2 Zambia 1305.9Israel 751 Korea 1274.7Turkey 725 Mozambique 961.6France 715.8 Spain 938.8Norway 550.9 France 758.9Zambia 446.3 China 597.4Malawi 434.9 Malawi 591.7Mozambique 372 Norway 568.9Source: Department of Customs and Excise and Industrial Development Corporation
Data Base.
In the two years 1989 and 1993, the OECD countries remained the major recipients ofexports from South Africa, Within Africa the major consumers of South African goodsare Zimbabwe, Zambia, Mozambique and Malawi.
18
South Africa does not record intra - SACU imports. It is generally recognised that intra -SACU trade is underestimated. As part of the renegotiation of the SACU agreementcomprehensive statistics on intra - SACU trade are in the process of being compiled.This underestimation of intra - SACU trade is confirmed in the regression analysis whichfollows. The regression analysis also casts some light on whether trade to the variousregional groupings changed significantly after the lifting of sanctions against SouthAfrica.
Table 3.3 shows imports into South Africa in 1989 and 1993.
Table 3.3. South African Imports 1989 and 1993 (R million)Country Imports Country Imports
1989 1993Germany 8771.3 Germany 9240.1Japan 5240.0 USA 7735.3USA 5190.0 Japan 7435.0United Kingdom 4730.7 United Kingdom 6487.8Italy 1877.2 France 2087.5Taiwan 1576.1 Italy 2079.9France 1415.4 Taiwan 2033.1Switzerland 1091.9 Netherlands 1383.1Belgium 1020.7 Switzerland 1298.1Netherlands 869.1 Belgium 1269.4Hong Kong 624.2 Hong Kong 1105.2Korea 513.0 China 1002.8Brazil 506.6 Korea 880.2Zimbabwe 457.4 Singapore 781.9Australia 448.5 Australia 692.6Israel 436.7 Zimbabwe 659.0Singapore 430.7 Malaysia 581.7Canada 335.1 Brazil 550.3Spain 320.4 Israel 495.2China 265.6 Canada 488.7Source: Department of Customs and Excise and Industrial Development Corporation
Data Base.
Once again a similar pattern of trading partners with respect to imports emerges betweenthe two years. Zimbabwe is the only African country which ranks in the top twentytrading partners, South Africa sources its imports largely from OECD countries and EastAsia.
19
The composition of trade by selected country shows some interesting differencesdepending on whether trade is with an OECD country or an African country such asZimbabwe, Tables 3.4, 3.5 and 3.6 show the more important exports to and imports fromthe USA, Germany and Zimbabwe.
Table 3.4. South African Exports and Imports: USA: 1993 (R million)Imports 2 HS R Exports 2 HS R
million million84 Boilers, Machinery and 2097.8 72 Iron and Steel 835.6Mechanical Appliances88 Aircraft, and Parts 857.7 28 Products of Chemical 476.1
Industry10 Cereals 682.6 26 Ores, Slag and Ash 305.785 Electrical Machinery 655.5 84 Boilers,Machinery and 194.3including sound equipment Mechanical Appliancesand television90 Optical and 514.9 71 Precious and semi 186.5Photographic Equipment precious stones29 Organic Chemicals 329.7 86 Railway Locomotives, 166.0
Rolling Stock and FixturesSource: Industrial Development Corporation Data Base.
The top six imports from the USA accounted for 66 per cent of South African importsfrom the USA. The top six exports accounted for 55 per cent of South African exports tothe USA. The import of cereals into South Africa in 1993 from the USA is a reflection ofthe drought that necessitated large imports of maize. Other than these imports SouthAfrica imports primarily machinery, optical and photographic equipment and chemicals,South African exports mainly iron and steel and ores to the USA.
Table 3.5 shows that South Africa imports machinery from Germany as well as motorvehicle parts, and, despite their high levels of protection, chemicals and plastics. Theseimports account for 74 per cent of South Africa's imports from Germany. In return SouthAfrica exports motor vehicles and parts and some machinery, coal, copper and fruit. Thetop six exports account for 57 per cent of South Africa's exports to Germany.
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Table 3.5. South African Exports and Imports: Germany: 1993Imports 2HS R Exports 2HS R
million million84 Boilers,Machinery and 2377.6 87 Motor Vehicles and Parts 512.0Mechanical Appliances87 Motor Vehicles and 2247.7 84 Boilers,Machinery and 273.9Parts Mechanical Appliances85 Electrical Machinery 1084.9 71 Precious and semi - 207.9and Equipment precious stones90 Optical and 471.5 27 Mineral Fuels and Coal 198.1Photographic Equipment39 Plastics and Articles 346.9 74 Copper and Articles 180.2thereof Ithereof29 Organic Chemicals | 294.3 08 Edible Fruit and Nuts 168.7Source: Industrial Development Corporation Data Base.
Table 3.6 shows that the pattern of trade with Zimbabwe is somewhat different in thatSouth Africa imports natural resource and agricultural type products from Zimbabwerather than the machinery. South African imports of footwear from Zimbabwe wherewages are lower, accord with the traditional explanations of trade. These imports amountto 40 per cent of total imports from Zimbabwe. South African exports to Zimbabwediffer only in that no major natural resource goods are exported to Zimbabwe. Theseexports account for 51 per cent of total exports to Zimbabwe.
Table 3.6. South African Exports and Imports: Zimbabwe: 1993
Imports 2HS R Exports 2 HS Rmillion million
24 Tobacco 60.5 84 Boilers,Machinery and 293.4Mechanical Appliances
52 Cotton 54.3 87 Motor Vehicles and Parts 166.625 Salt, Sulfur, Lime and 40.8 75 Nickel and Articles 132.3Cement thereof44 Wood and Wood 38.4 72 Iron and Steel 119.1Charcoal12 Seeds and Grain 36.8 39 Plastics and Articles 100.2
_thereof
64 Footwear 34.3 28 Products of Chemicals 84.7Source: Industrial Development Corporation Data Base.
21
South Africa's Trade with the Regional Groupings
Tables 3.7 and 3.8 show South African exports and imports to and from SADC countries.SACU trade is not shown separately as this trade is understated. Table 3.7 shows thatsince 1989 South African exports to SADC countries as a proportion of total exports,increased from 7.4 per cent to 9.9 per cent. This increase indicates the greater willingnesson the part of SADC countries to trade with South Africa.
Table 3.7. South African Exports to SADC, 1989 - 1993 (R million)Country 1989 1990 1991 1992 1993Angola 18.8 53.2 137.8 368.7 262.4Botswana 0.1 0.04 0.5 1.3 0.5Lesotho 0.02 0.01 0.04 0.7 0.002Malawi 434.9 419.2 576.5 695.5 591.7Mozambique 371.9 462.9 689.3 676.7 961.6Namibia 0.04 0 0.1 0.3 0.06Swaziland 2.1 0.1 0.1 2.4 0.2Tanzania 3.0 11.1 10.0 25.7 57.7Zambia 446.3 530.4 663.4 1111.7 1305.9Zimbabwe 991.5 1158.7 1600.7 1548.7 1745.2Total SADC 2268.66 2635.7 3678.44 4431.7 4925.28Total RSA 30830.5 32445.8 36849.3 42425.3 49517.1SADC % 7.4 8.1 10.0 10.4 9.9RSA ISource: Industrial Development Corporation Data Base.
22
The calculations in Table 3.8 show that imports into South Africa as a proportion of totalimports grew to 2.36 per cent by 1992, In 1989 SADC imports accounted for 1.4 per centof total imports. SADC imports decline from 2.36 per cent in 1992 to 1.75 per cent in1993. Although SADC is trading in larger volume with South Africa, nevertheless it stillonly accounts for a small proportion of total trade.
Table 3.8. South African Imports from SADC, 1989 - 1993(R million)
Country 1989 1990 1991 1992 1993Angola 9.9 0.06 0.02 0.5 1.1Botswana 6.6 13.9 1.8 5.7 5.7Lesotho 0.3 0.2 0.3 0.06 0.02Malawi 58.5 81.0 91.0 131.5 159.5Mozambique 17.5 30.4 37.4 47.4 60.3Namibia 0.07 0.6 0.7 0.59 0.5Swaziland 0.2 0.06 0.4 0.9 1.3Tanzania 1.6 2.5 0.95 10.3 21.8Zambia 5.7 6.3 14.5 40.5 75.5Zimbabwe 457.4 440.7 471.6 810.6 659Total SADC 557.77 575.72 618.67 1048.05 984.7Total RSA 38682.7 38013.4 42054 46319.6 56124.8SADC % 1.4 1.5 1.47 2.36 1.75RSASource: Industrial Development Corporation Data Base.
23
South African exports to the Preferential Trade Area are shown in Table 3.9 for theperiod 1989 to 1993, Exports as a proportion of total South African exports grew largelyas a result of the growth in exports to those members of the PTA that are also membersof SADC. The proportion of exports accounted for to the other members remainsapproximately 2.5 per cent.
Table 3.9. South African Exports to PTA: 1989- 1993 (R million)Country 1989 1990 1991 1992 1993Angola 18.8 53.2 138 369 263Burundi 5.2 5.9 10.9 12.0 13.2Comoros 23.6 21.8 33.1 31.6 36.9Djibouti 0 0 0 0.4 0.2Ethiopia 0 1.1 2.2 0.7 3.8Kenya 10.3 24.3 30 147 205Lesotho 0.02 0.01 0.04 0.7 0.002Madagascar 24.1 53.3 42.9 52.8 60.9Malawi 434.9 419.2 576.5 695.5 591.7Mauritius 273 315 380 388 471Mozambique 371.9 462.9 689.3 676.7 961.6Namibia 0.04 0 0.1 0.3 0.06Rwanda 0.7 0.4 0.6 7.2 4.8Seychelles 41.8 45.7 49.4 60.8 78.5Somalia 2.7 5.3 2.2 0 1.5Sudan 10 26.9 6.2 21.3 31Swaziland 2.1 0.1 0.1 2.4 0.2Tanzania 3.0 11.1 10.0 25.7 57.7Uganda 0.9 2.2 0.7 2.9 9.2Zaire 363 467 307 290 131Zambia 446.3 530.4 663.4 1111.7 1305.9Zimbabwe 991.5 1158.7 1600.7 1548.7 1745.2Total PTA 3020 3580 4540 5450 6150Total RSA 30800 32400 36800 42400 49500PTA % Total 9.8 11.0 12.3 12.8 12.4Source: Industrial Development Corporation Data Base.
24
Imports into South Africa from the PTA grew over the five year period. Table 3.10shows that in 1989 they accounted for 1.6 per cent of South African imports and rose to2.3 per cent in 1993.
Table 3.10. South African Impofrom PTA: 1989 - 1993 (R million)Country 1989 1990 1991 1992 1993Angola 9.9 0.06 0.02 0.5 1.1Burundi 0 0.01 0.4 0.03 0.1Comoros 0.2 0.2 1.0 0.3 0.3Djibouti 0 0 0.02 0 0Ethiopia 0.5 0.2 0.3 0.1 0.3Kenya 17.1 10.5 17.5 23.2 30.2Lesotho 0.3 0.2 0.3 0.06 0.02Madagascar 0.4 1.3 2.7 6.6 4.1Malawi 58.5 81.0 91.0 131.5 159.5Mauritius 10.8 14.2 14.0 12.8 19.2Mozambique 17.5 30.4 37.4 47.4 60.3Namibia 0.07 0.6 0.7 0.59 0.5Rwanda 0.01 0.9 1.5 0.1 0.4Seychelles 0.5 0.3 1.1 0.7 1.0Somalia 0 0.07 0.02 0 0.01Sudan 0.4 0.2 0.6 0.3 6.3Swaziland 0.2 0.06 0.4 0.9 1.3Tanzania 1.6 2.5 0.95 10.3 21.8Uganda 0.3 0.08 0.1 0.05 1.1Zaire 47.6 21.8 12.9 11.0 262Zambia 5.7 6.3 14.5 40.5 75.5Zimbabwe 457.4 440.7 471.6 810.6 659.0Total PTA 629 612 669 1100 1304Total RSA 38682.7 38013.4 42054 46319.6 56124.8PTA % Total 1.6 1.6 1.6 2.4 2.3Source: Industrial Development Corporation Data Base.
Despite the increases in trade that occurred between South Africa and Southern Africa,SADC or PTA countries remain relatively unimportant trading partners, AlthoughZimbabwe is the exception, the trading blocks of the Southern African region onlyaccount for small proportions of South African trade. Excluding gold, arms and oil,SADC accounts for 10 per cent of exports and 2 per cent of imports. The inclusion of thePTA increases these proportions to 12 and 2.3 per cent respectively.
25
The Composition of Trade with Southern Africa
The balance of merchandise trade with both SADC and PTA countries has always been infavor of South Africa in the sense that South African exports have exceeded imports fromthese countries, Extracting the balance of trade statistics Table 3. 1 1 shows that the tradingblocks continued to run merchandise trade deficits with South Africa through out theperiod. It is likely that when the trade in services is included that South Africa providesmany of the services in the region. Unfortunately the trade in services cannot beextracted on a country basis from the balance of payments statistics.
Table 3.11. Merchandise Trade Balance of Regional Groupingswith South Africa (R million)
Grouping 1989 1990 1991 1992 1993SADC 1811 2060 3060 3383 3940PTA 2391 2968 3871 4350 4856Source: Industrial Development Corporation Data Base.
Aside from Zimbabwe it has been shown that the majority of trade occurs with OECDcountries and to an increasing extent with East Asian countries, Trade with Africa on theother hand, while comprising a small proportion of South Africa's trade, is centered onthe exchange of natural resource products from Southern Africa for a range of othercommodities. These commodities include processed foods, pharmaceuticals, beverages,fertilizers, explosives, chemicals, plastics, textiles, footwear, articles of iron and steel,machinery, motor vehicles and their parts.
Unofficial Trade
It is felt that unofficial or unrecorded trade within Southern Africa is growing (Maasdorpand Whiteside, 1992). The reasons for such trade are war, goods shortages encouraged bygovernment policies and trade in illegal goods such as stolen vehicles, drugs and arms.
As Southern African economies liberalize, the incentives to avoid exchange controls,quantitative restrictions and the payment of tariffs will diminish. Official trade in legalgoods is therefore likely to increase and unofficial trade to decrease. Maasdorp andWhiteside (1992) calculate that in 1990 the amount of unofficial trade on the part ofZimbabwean day shoppers into South Africa amounted to 15 per cent of Zimbabwe'simports from South Africa.
26
Chapter 4. A Quantitative Analysis of the South African Direction of Tradewithin a Regional Context
Introduction
This chapter attempts to assess whether regional groupings in Africa have had any impacton the direction of trade for South Africa. Given that the available data span the period1989 to 1993, a by product of the research is to ascertain whether the lifting of sanctionsin the early 1990s had any discernible effect on the direction of trade.
One way to investigate these issues would be to establish a model explaining the directionof trade on the basis of trading partners' size, location and income. Controlling for thesefactors would then establish whether South Africa's trade is significantly different fromthe predictions of the model. There is a body of research that partly explains thecomposition of trade in South Africa (Holden 1983, Roque, 1984). However, due tolimited data there exists little research that casts any light on the direction of trade and itsdeterminants.
In relation to regional integration arrangements, the gravity model has been used toanswer these questions. Aitken (1973) was one of the first to test for the effects ofregional trading arrangements on the volume of trade by the introduction of dummyvariables for the partners in the same trade grouping. More recently, work by Frankel(1993) and Dhar and Panagariya (1994) focussed on whether a trading block in East Asiaexists and whether there are differences in the openness between trade groupings.
This chapter proposes a variant of the gravity model to test for the determinants of thedirection of trade for South Africa. Using pooled cross-sectional time series data, themodel tests for the effects of trade groupings and the lifting of sanctions.
The Empirical Model
Determinants of the Direction of Trade for Exports
Gravity models typically propose that countries are likely to trade in greater volume witheach other if they are closer together and if markets are large in terms of gross domesticproduct. These models have also found that size of population lowers the volume oftrade. Dummies representing membership in different regional groupings and commonborders or languages are introduced, and in some cases variables representing trade andexchange rate policy (Thursby and Thursby 1987).
27
The question addressed in this study is the influence of regional groupings and the liftingof sanctions on South Africa's trading relationships. It is proposed that the value ofexports from South Africa can be represented by the following relationship:
InTi = 0f + f1 ln(GDPi,)+ 0 2 ln(POP1,)+J03 ln(DIST7,)+P4 (IMPOPE1 , ) +
0 5 (PTA.) + i6 (SACUt) + P7(SADC1 ,) + 08 (PREFi,) + 09(EUi,) + 0I,(USj,) + PI (TYPTA;J)
+012 (TSACUid + PI3(TYSADCjt ) + P,4 (TYPREFI ) + ,15 (TYEUj, ) + 016(TYUSi, )
+017(D89) + fi8 (D90) + J19 (D9 1) + f 2 0(D92) + gi,
i = I...... n ;
t = 1989 .1993
where i is the ith trading partner and t represents the year. The equation is estimated inlogarithmic form. The dependent variable, T7, is South African exports to each tradingpartner in constant US dollars. GDP is gross domestic product in constant US dollars,and population is represented by POP. The correlation coefficient between populationand gross domestic product of 0.23 is sufficiently low to rule out the problem ofmulticollinearity between these two variables.
DIST represents the traditional distance variable, measured as the distance between theport of Durban and the main port of entry in the trading partner. IMPOPE is a variablerepresenting the openness of each trading partner's economy. The construction of thisvariable is discussed below. The dummy variables for regional groupings incorporate thePreferential Trading Area (PTA), the South African Customs Union (SACU), theSouthern African Development Community (SADC), preferential bilateral tradingagreements (PREF), the European Union (EU) and the United States/Canada NAFTAagreement (US) all groupings which may well play an important part in South Africa'sdirection of trade.
The changing influence of the regional groupings is measured by the creation ofadditional dummies. These are represented by TYPTA, TYSACU, TYSADC, TYPREF,TYUS and TYEU calculated as the product of regional dummies with a linear time trend
28
for 1989 through to 1993.1 General time dummies to measure the changing effects ofsanctions are represented by D89, D90, D91 and D92. The data sources and countriesincluded in the sample are given in Appendix B.
IMPOPE is used to capture differences in trade and exchange rate policy on the part ofthe trading partners towards imports in general. The variable is constructed by regressingeach country's share of imports from all sources in the gross domestic product for thatcountry on time dummies, and the natural logarithms of their gross domestic products andpopulations. The index of openness is the sum of the time shifts weighted by theestimated coefficients and the residuals. Openness of each trading partner is thereforemeasured by the extent to which each country deviates from what would have beenexpected given its level of per capita income and size of population. This measurecaptures the combined effect of both trade and exchange rate policy on a country's importshare.
To measure openness, the following equations were estimated by ordinary least squares.
ln(MGDP;,) = ac +a, (D89) + a2 (D90) + cC3(D91) + (X4(D92) +
(t 5 ln(GDPPC,, ) + X6 ln(POP, ) + ei,
then
IMPOPE, = aO + a, (D89) + a2 (D90) + a3 (D9 1) + U4 (D92) + £,,
This measure was calculated for all the countries in the sample ensuring comparabilityacross countries. Measures such as the Leamer and Dollar indices are unavailable for allthe countries in this study.
Estimation
The model is estimated using South African exports, excluding gold and armaments, toone hundred and thirty-six countries over the five year period 1989 to 1993. Theavailability of data on the essential variables - GDP, exports and imports - determinedwhether a country is included in the sample.
I A linear time trend is used to simplify the interpretation of the effects of the regional groupings over time.Experiments with dummies interactive between regional groupings and discrete time yielded results whichare insignificant.
29
Since exports from South Africa for a number of countries were zero for some years, ornonexistent in the case of two countries, ordinary least squares estimates are biasedtowards zero and inconsistent (Greene, 1981). Therefore, Tobit maximum likelihoodestimation is used in place of ordinary least squares.
The estimating equation was run for 680 observations on pooled time series cross sectiondata. The results are shown in Table 4.1. In addition to the t-statistics, beta coeffcientsare shown. The beta-coefficients can be used as a measure of the relative strength ofregressors in affecting the dependent variable. These results show the importance of therole of geographic and economic influences. Merchandise exports are positively relatedto gross domestic product, negatively related to population and distance. South Africa'slocation at the tip of Africa results in transport costs being an important determinant ofthe direction of trade. Furthermore, more open economies are shown to absorb moreexports from South Africa. The dummy variables play a minor role in the determinationof the direction of exports. Apart from the SACU dummy and the D92 dummy all theother dummies are insignificant indicating that regional groupings had not influenced thedirection of exports. In addition, the impact of the regional groupings on purchases ofSouth African goods did not significantly change, despite the raising of sanctions. Thegradual lifting of sanctions in the early 1990s is marginally reflected in the positive signand level of significance of the D92 dummy variable for 1992. As this dummy ismeasured relative to 1993, the drought in 1993 that reduced some agricultural exportscould also account for the positive effect. The introduction of the General ExportIncentive Scheme in early April 1990 failed to significantly affect the 1990 dummyindicating that the GEIS was not immediately reflected in exporters' behaviour.
The negative sign on the SACU dummy suggests a significant understatement of exportsto the SACU countries given their levels of per capita income and population. Chapter 3points to difficulties with the recording of intra SACU trade, and this result confirms thisproblem.
As the SACU data is understated, the SACU dummy is excluded and the Tobit analysisapplied without Lesotho, Swaziland, Namibia and Botswana in the sample of countries.The exclusion of SACU and the SACU countries has little effect on the overall result.Given that all the SACU countries are contiguous to South Africa, it is interesting that thelevel of significance of the distance variable is increased and the coefficient decreases inabsolute size (Table 4.2).
To investigate the nature of the adjustment process, the lagged dependent variable wasintroduced into the equation. Table 4.3 shows the results which include SACU. The timedummies which provide some measure of the overall effect of sanctions play a moresignificant role for the years 1991 and 1992 when sanctions gradually relaxed. However,relative to 1993 the positive signs on the dummies reflect the drought of 1993. The timedummy for 1989 falls away with the inclusion of the lagged dependent variable. The oneyear lag proves to be significant and indicates that the adjustment process is only partiallycompleted within a year.
30
Table 4.1. Tobit Estimates for Export Equation 4.1Variable Estimate Beta Coefficient Standard Error t-statistic
Constant 6.08 3.77 1.61
InGDP 2.14** 0.08 0.13 17.13In POP -0.60** -0.02 0.14 -4.40InDIST -4.45** -0.66 0.49 -9.01IMPOPE 1.89** 0.16 0.28 6.81
PTA 1.15 0.47 1.37 0.84SACU -14.64** -14.73 3.37 -4.35SADC -0.95 -0.81 2.82 -0.34PREF 1.77 1.54 2.91 0.61EU -0.65 -0.27 1.40 -0.46Us -1.77 -2.2 4.15 -0.43
TYPTA -0.16 -0.02 0.39 0.39TYSACU 0.78 0.23 0.98 0.79TYSADC 0.09 0.02 0.85 0.11TYPREF -0.58 -0.15 0.88 -0.66TYEU 0.01 0.002 0.41 0.02TYUS 0.03 0.01 1.24 0.03
D89 -0.03 -0.004 0.53 -0.54D90 -0.14 -0.02 0.51 -0.27D91 0.35 0.05 0.49 0.71D92 0.75* 0.11 0.48 1.56** Significant at 1% level* Significant at 10% level No of Observations = 680
Note: Exports, the dependent variable, are estimated in logs for values greater than zero.Source: Regression results.
31
Table 4.2. Tobit Estimates for Export Equation 4.1. Excluding SACUVariable Estimate Beta Coefficient Standard Error t-statistic
Constant 5.48 3.93 1.39
InGDP 2.04** 0.08 0.13 16.16In POP -0.45** -0.02 0.14 -3.29InDIST -3.76** -0.58 0.51 -7.42IMPOPE 1.95** 0.17 0.29 6.79
PTA 1.91 0.84 1.46 1.31SADC -3.62 -2.87 2.62 -1.38PREF 3.80 3.27 2.84 1.34EU -0.53 -0.23 1.44 -0.37US -1.80 -2.32 4.25 -0.42
TYPTA -0.16 -0.02 0.42 -0.38TYSADC 0.06 0.01 0.77 0.08TYPREF -0.57 -0.15 0.86 -0.66TYEU 0.10 0.01 0.42 0.02TYUS 0.03 0.01 1.27 0.02
D89 -0.33 -0.05 0.54 -0.60D90 -0.64 -0.10 0.52 -0.12D91 0.33 0.05 0.51 0.64D92 0.73* 0.11 0.50 1.46** Significant at the 1 % level
* Significant at the 10 % levelSource: Regression results.
32
Table 4.3. Tobit Estimates for Exports Incorporating the Lagged DependentVariable
Variable Estimate Beta Coefficient Standand Error t-statistic
Constant 3.21 3.33 0.96
InGDP 0.89** 0.03 0.13 6.80InPOP -0.14 -0.005 0.12 -1.15InDIST -1.85** -0.25 0.45 -4.08IMPOPE 0.99** 0.07 0.25 3.95
PTA 1.55 0.75 1.62 0.96SACU -9.92** -12.02 4.05 -2.45SADC -0.84 -0.85 3.41 -0.25PREF 0.41 0.44 3.52 0.12EU -1.33 -0.66 1.67 -0.80Us -2.35 -3.51 4.99 -0.47
TYPTA -0.40 0.05 0.43 -0.92TYSACU 1.42 0.45 1.08 1.32TYSADC 0.16 0.05 0.92 0.18TYPREF -0.21 -0.06 0.96 -0.22TYEU 0.31 0.04 0.45 0.69TYUS 0.46 0.19 1.35 0.34
D90 0.51 0.06 0.41 1.24D91 0.86** 0.10 0.39 2.21D92 0.98** 0.11 0.37 2.64
InEXPORT(-1) 0.55** 0.01 0.04 15.36** Significant at 1% levelSource: Regression results.
33
Determinants of the Direction of Trade for Imports
Two related approaches to estimating the determninants of the the direction of trade forimports are used bearing in mind the need to determine the influence of the regionalgroupings.
Model I
The following relationship is used to explain the trading partner's level of imports intoSouth Africa:
In TMt = 8 + 62 ln(GDPJ,)+ 8 3 ln(POPi, ) + 8 4 ln(DIST,,)
+85(PTA1,)+ 86(SACUi,)+ 67(SADC,,) + 68(PREFJ,) + 89(EU,) + 51(USJ,)
+ 811(TYPTAi, ) + 5,2 (TYSACUi,) + 613 (TYSADC11) + 814(TYPREF;,)
+851(TYEUi, )+ 816(TYUSi,) + 8o7(D89) + 81(D90) + 819(D91) + 820(D92) + i,
(4.3)
where i represents the n trading partners and t represents the year. The equation is alsoestimated in logarithmic form. TM are the imports from the ith trading partner into SouthAfrica measured in 1989 US dollars. GDP is the gross domestic product in 1989 USdollars and POP is population. DIST is the distance variable and the remaining variablesare the regional groupings, shift and time dummies.
South African imports consist largely of intermediate and capital goods. Therefore wewould expect the exports of those countries with higher GDP to be higher. The role oflarger populations is ambiguous. We would also expect that greater distances from SouthAfrica would decrease the imports from those trading partners.
Model II
As an adjunct to using levels of imports in the import equation, a country's share ofimports in total South African imports is used as the dependent variable. This modelignores specific South African country effects and concentrates on influences originatingin the supplying country.
34
Note that
Mj, = sitMt
and
In Mi, = ln s;, + In M,
(4.4)
Mit represents a country's imports into South Africa. Mt, total imports into South Africaare influenced by a vector of variables specific to South Africa. These variablesspecifically include the time shift dummies D89 etc in Model I. Si, a country's importshare, on the other hand, is influenced by country specific variables. This suggests anestimating equation of the following form:
ln Si, = Col + °02 ln(GDPSHi,)+ (03 ln(POPSH,i)+C34 In(DISTj,)
+0)5 (PTAI, ) + o0( SACUIj ) + (07 (SADCU, ) + O)8 (PRE; ,) + co (EUi,) + co (US1,)
+CO, I(TYPTAi,) + ° 12 (7YSACU, ) + (013 (TYSADC1, ) + [d 4 (TYPREF,,)
+C015 (TYEUit) + o°16 (TYUS,, )+rnit
(4.5)
where Si is the ith country's share of imports in total South African imports. GDPSH isthe ith country's share of GDP in world GDP, and POPSH is the ith country's share ofpopulation in world population. Other variables are defined previously. We wouldexpect that (Si) is positively influenced by a rising share of GDP and negatively relatedto distance.
Estimation
Both models are estimated using South African imports, excluding oil and arms, for onehundred and thirty-six countries over the five year period 1989 to 1993. Once againimports have a lower bound of zero so Tobit analysis is used to estimate the parameters.
The first model as represented in Equation 4.3 is run for the same 680 observations. Theresults are shown in Table 4.4. Geographic and economic factors are importantdeterminants of the supply of imports into South Africa. The exporting country's grossdomestic product impacted positively on the level of imports into South Africa. Importsare also lower the more distant the location of suppliers. None of the dummy variables
35
are significant determinants of the level of imports. This result accords with the resultsfor the export equation in that the regional groupings are not important determinants ofthe level of trade for South Africa. The sign and significance of the 1990 time dummyindicates that in relation to 1993, imports into South Africa were significantly reduced.Given that 1990 was the second year of the recession this finding is not surprising.
The lagged dependent variable is introduced to investigate the process of adjustment.Table 4.5 give these results. Once again the time dummy for 1990 shows a significantlynegative effect, reflecting the depressed state of the South African economy for that year.The lagged dependent variable is significant and indicates that the adjustment process isonly partially completed within the year.
Estimation of the second model as given in Equation 4.5 is shown in Table 4.6. The twomodels yield very similar results. A country's share in world GDP is positively related toits share of imports in total South African imports, and the share of populationsignificantly reduces a country's import share. However, the distance variable is not assignificant a determinant as in Model 1. Aside from the EU, the regional dummies areinsignificant. The positive sign on the EU dummy is an indication of the importance ofEU countries as suppliers of capital and intermediate goods to South Africa. When thelagged dependent variable is included, it shows that the adjustment process is onlypartially completed within the year.
The LR statistic is computed from the log likelihood ratio from import shares equationsincluding and excluding the time dummies d89, d90, d91 and d92. The inclusion of thetime dummies failed to significantly affect the coefficients in the two import sharesequations. Therefore, the marginal differences in the coefficients between Model 1 andModel 2 can only be explained by the aggregate (or level) relationship defining thecoefficients in the estimating equation for Model 1.
Conclusion
The empirical results indicate that the direction of trade for South Africa is influenced bygeographic, as well as economic variables such as the gross domestic product andpopulation of trading partners. The data provides no evidence that the regional groupingshad any bearing on the direction of trade. However, given the reservations surroundingthe intra-SACU trade data it is possible that SACU could have played a more significantrole than shown in the study. The effect of the lifting of sanctions and the drought isfound to have affected South African exports marginally. Imports of goods, other thanarms and oil, are found to be influenced by the state of the South African economy ratherthan sanctions.
36
Table 4.4. Tobit Estimates for Import Levels Equation 4.3Variable Estimate Beta Coefficient Standard Error t - statistic
Constant -18.56** 1.76 -10.57
InGDP 1.87** 0.05 0.11 16.42InPOP -0.22* -0.01 0.12 -1.79InDIST -3.26** -0.38 0.45 -7.25
PTA -1.73 -0.56 1.25 -1.38SACU -4.62 -3.65 3.06 -1.51SADC 0.93 0.62 2.57 0.36PREF 1.42 0.98 2.66 0.54EU 1.73 0.57 1.27 1.36US -0.57 -0.55 3.79 -0.15
TYPTA 0.30 0.03 0.36 0.83TYSACU -0.71 -0.16 0.90 -0.79TYSADC 0.21 0.04 0.77 0.21TYPREF -0.35 -0.07 0.80 -0.43TYEU -0.20 -0.02 0.37 -0.53TYUS -0.14 -0.04 1.13 -0.12
D89 -0.40 -0.05 0.48 -0.83D90 -0.89** -0.11 0.46 -1.94D91 -0.23 -0.03 0.45 -0.52D92 -0.40 -0.05 0.44 -0.92
** Significant at the 1% level* Significant at the 5% level
No of Observations = 680Source: Regression results.
37
Table 4.5. Tobit Estimates for Import Levels with Lagged Dependent VariableVariable Estimate Beta Coefficient Standard Error t - statistic
Constant -5.04 1.51 -.33
InGDP 0.44** 0.01 0.11 4.10InPOP 0.06 0.002 0.10 0.65InDIST -1.05** -0.10 0.37 -2.82
PTA 0.15 0.05 1.37 0.11SACU -0.13 -0.12 3.39 -0.04SADC -0.54 -0.40 2.88 -0.19PREF 0.91 0.70 2.98 0.31EU 0.90 0.33 1.41 0.64US 0.36 0.40 4.23 0.09
TYPTA -0.06 0.01 0.36 -0.18TYSACU -0.58 -0.14 0.91 -0.64TYSADC 0.22 0.04 0.78 0.28TYPREF -0.34 -0.07 0.81 -0.41TYEU -0.18 -0.02 0.38 -0.48TYUS -0.23 -0.07 1.15 -0.20
D90 -0.94** -0.08 0.35 -2.71D91 -0.01 -0.001 0.33 -0.03D92 -0.55* -0.05 0.32 -1.75
InIMPORTS 0.75 0.01 0.03 22.66(-1)
* Significant at the 1% level*Significant at the 5% level
No of Observations = 680Source: Regression results.
38
Table 4.6. Tobit Estimates for Import Shares Equation 4.5Variable Estimate Beta Coefficient Standard Error t - statistic
Constant -15.51** 1.84 -8.45
InGDPSH 0.73** 0.03 0.13 5.39InPOPSH -0.30** -0.01 0.15 -2.06InDIST 0.10 0.01 0.53 0.18
PTA -2.18 -0.81 1.43 -1.52SACU -1.89 -1.77 3.62 -0.52SADC 2.29 1.80 3.05 0.75PREF 2.86 2.32 3.15 0.91EU 2.51 * 0.94 1.45 1.73
TYPTA 0.37 3.62 0.41 0.91TYSACU -0.50 0.04 1.06 -0.47TYSADC 0.15 -0.14 0.92 0.17TYPREF -0.23 0.04 0.95 -0.25TYEU -0.11 -0.06 0.42 -0.03TYUS 0.02 -0.01 1.34 0.01
** Significant at the 1% level* Significant at the 5% level
No of Observations = 680LR statistic = 0.0003, computed by including time dummies d89, d90, d91 and d92.Source: Regression results.
39
Table 4.7. Import Shares with Lagged Dependent VariableVariable Estimate Beta Standard Error t-statistic
Coefficient
Constant -7.03** 2.00 -3.51
InGDPSH 0.25* 0.01 0.14 1.78InPOPSH -0.11 -0.004 0.15 -0.74InDIST 0.04 0.01 0.54 0.08
PTA 0.97 0.50 2.01 0.48SACU 0.30 0.40 5.13 0.06SADC -1.75 -1.97 4.37 -0.40PREF 2.03 2.36 4.51 -0.45EU 1.47 1.12 2.05 0.71US 2.28 3.75 6.39 0.36
TYPTA -0.47 -0.06 0.53 -0.89TYSACU -0.72 -0.25 1.38 -0.52TYSADC 0.89 0.27 1.19 0.75TYPREF -0.27 -0.09 1.23 -0.22TYEU 0.03 0.004 0.55 0.05TYUS -0.04 -0.02 1.73 -0.02
InIMPORTSH 0.44** 0.005 0.04 10.32(-1)
** Significant at the 1% level* Significant at the 5% level
No of Observations= 680Source: Regression results.
40
Appendix B
The variables and data sources for the analysis are as follows:
Exports: f.o.b. in millions of US dollars. World Tables 1995, World Bank
Imports: c.i.f. in millions of US dollars. World Tables 1995. World Bank
Gross Domestic Product. in millions of US dollars. World Tables 1995. World Bank.
Population: millions. World Tables 1995. World Bank.
Distance: The straight line distance between ports of entry and Durban, South Africa.
South African Exports and Imports by Country: Dept of Customs and Excise andIndustrial Development Corporation.
Countries included in the sample: Algeria, Antigus and Barbuda, Argentina, Australia,Austria, Bahrain, Bangladesh, Barbados, Belgium, Belize, Benin, Bolivia, Botswana,Brazil, Bulgaria, Burkina Faso, Burundi, Cambodia, Cameroon, Canada, Cape Verde,Central African Republic, Chad, Chile, China, Colombia, Comoros, Congo, Costa Rica,Cote d'Ivoire, Cyprus, Czechoslavakia, Denmark, Djibouti, Dominican Republic,Ecuador, Egypt, El Salvador, Equatorial Guinea, Fiji, Finland, France, Gabon, Gambia,Germany, Ghana, Greece, Grenada, Guatemala, Guinea, Guyana, Haiti, Honduras, HongKong, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Jamaica, Japan,Jordan, Kenya, Kiribati, Kuwait, Laos, Lesotho, Luxembourg, Madagascar, Malaysia,Maldives, Mali, Malta, Mauritania, Mauritius, Mayanmar, Mexico, Mongolia, Morocco,Mozambique, Namibia, Netherlands, New Zealand, Nicaragua, Niger, Nigeria, Norway,Oman, Pakistan, Panama, Papua New Guinea. Paraguay, Peru, Philippines, Poland,Portugal, Qatar, Romania, Rwanda, Saudi Arabia, Senegal, Seychelles, Sierra Leone,Singapore, Solomon Islands, South Korea, Spain, Sri Lanka, St Lucia, Sudan, Suriname,Swaziland, Sweden, Switzerland, Syrian Arab Republic, Tanzania, Thailand, Togo,Trinidad, Tunisia, Turkey, Uganda, United Kingdom, United States of America, Uruguay,Vanuata, Venezuela, Vietnam, Zambia, and Zimbabwe.
41
Chapter 5. Multilateral Trade Liberalization
Introduction
In 1994 South Africa accepted and ratified tariff reductions taking place under theUruguay Round. The offer which has been gazetted includes a reduction of import tariffson manufactured goods; a final phase out of all quantitative restrictions; tariffication ofagriculture and the elimination of export subsidies. As South Africa is classified as adeveloped country, the phasing in of the tariff reductions is scheduled to occur over 5years, and the elimination of export subsidies over 3 years.
This chapter examines the broad implications of the GATT offer for the South Africaneconomy. Incidence analysis establishes whether the overall stance of the economytowards import substitution is altered by the liberalization agreed to under the UruguayRound. Some tentative conclusions are drawn as to the impact of this liberalization onSouth Africa's trade in the region.
Trade Liberalization under the Uruguay Round
Nominal Rates of Protection
Table 5.1 summarizes the essential features of the offer to the GATT. Nominal rates oftariff protection calculated for 1994 are compared with those incorporating the tariff cutsand bound rates under the Uruguay Round.
Table 5.1 shows that the manufacturing sector presently enjoys a weighted average rate ofnominal tariff protection of 16.6 per cent. In contrast, for the entire economy the rate is6.43 per cent. After the implementation of the GATT offer the rate of bound nominaltariff protection for manufacturing falls to 10.8 per cent and to 4 per cent for the entireeconomy. The sectors experiencing the greatest the changes in protection are tobacco(-64.79 per cent), clothing (- 38.35 per cent), motor vehicles (- 21.82 per cent), textiles (-18.3 per cent) and footwear (-14.93 per cent).
42
Table 5.1. Nominal Rates of Tariff Protection: 1994 and Post Urguay Round (%)Sector Nominal Nominal Percentage Point
Protection 1994 Protection Change(%) Uruguay Round (-ve)
(%) _ _ _ _ _
Agriculture 10.43 5.61 4.82Gold 0 0 0Other Mining 4.35 2.59 1.77Food 14.59 10.04 4.55Beverages 23.09 10.23 12.85Tobacco 84.23 19.44 64.79Textiles 40.75 22.44 18.31Clothing 75.62 37.27 38.59Leather 15.55 10.93 4.63Footwear 44.02 28.09 14.93Wood 13.71 9.86 3.85Furniture 24.31 9.87 4.44Paper 11.42 6.8 4.62Printing 9.85 6.38 3.47Industrial Chemicals 1.52 1.12 0.41Other Chemicals 14.16 8.25 5.91Rubber 19.83 13.03 6.81Plastic 20.68 15.91 4.77Pottery 19.39 19.39 0Glass 10.4 8.36 2.04Other Nonmetallics 9.66 7.38 2.28Iron and Steel 7.35 6.2 1.15Non Ferrous 10.17 4.67 5.5Metal Products 12.94 11.21 1.73Machinery 8.02 5.35 2.66Electrical Machinery 14.93 11.45 3.49Motor Vehicles 58.55 36.73 21.82Transport Equipment 6.14 4.07 2.07Other Manufacturing 13.59 10.38 3.21Water and Electricity 15.3 4.26 11.05Construction 0 0 0Trade 0 0 0Financial 0 0 0Other Services 0 0 0Government 0 0 0Total Manufacturing 16.6 10.81 5.8Total Economy 6.43 4.04 2.39Source: Industrial Development Corporation.
43
Prior to the GATT offer, an average of 31 per cent of industrial tariff lines are bound. Inthe offer the percentage of bound tariff lines rises to an average of 68 per cent. The SouthAfrican offer is characterized as representing a genuine reduction in tariffs (Harrold,1995). Furthermore, as the South African offer is made on the part of the SouthernAfrican Customs Union, it represents a considerable liberalization on the part of the otherfour members. In contrast many African countries chose to bind rates at levels abovethose that are being applied at present. Harrold concludes that unlike South Africa, SSAcountries have not taken advantage of the Uruguay Round to lock in trade reform with acredible international anchor (Harrold, p 32, 1995).
Incidence Analysis and the Uruguay Round
Liberalization under the Uruguay Round includes not only the reduction of tariffs and thetariffication of agriculture, but also a phasing out of the General Export Incentive Scheme(GEIS). To estimate the overall effect on the economy of the changing level of protectionand the elimination of the GEIS, incidence analysis is used (Greenaway and Milner, 1993and Sjaastad and Clements, 1981).
Import protection has the effect of raising the price of importables relative to the price ofexportables. The price of exportables is usually determined on world markets and thetariff protection raises the price of importables. The increase in the relative price ofimportables is termed 'anti-export bias'.
In addition to increasing the relative price of importables, import protection also increasesthe price of nontradables. When the price of importables increases, consumers switchexpenditure towards nontradables thereby increasing their prices. At the same timeproducers are encouraged to produce fewer nontradables when the price of importablesincreases. Both the demand and supply response in the market for nontradables to theincrease in the price of importables creates an excess demand for nontradables andincreases their prices.
The increase in the price of nontradables relative to exportables and importables makes itrelatively less attractive to produce exportables and importables. Similarly, producers ofimportables find that their incentive to produce relative to nontradables is reduced as theincrease in the price of nontradables reduces the price of importables relative tonontradables.
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Assuming that the market for nontradables clears, and that exportables, importables andnontradables are substitutes on both the demand and supply side of the market, the impactof protection, or the incidence of protection is measured in the following way (SeeSjaastad and Clements, 1981 for the derivation):
A A
Pn =(OPm+(I_()Px
A A A A
Pn-Px =((PmPx) (I)
A
Pn is the proportionate change in the price of nontradables. Pm is the proportionatechange in the price of importables and Px the relative change in the price of exportables.The shift parameter (w) is a measure of the response in the price of nontradables relativeto exportables to changes in the price of importables relative to exportables.
t- = A(P" / Pn ) (2)
and
s = A(PX/ IP) (3)
If we assume that free trade prices are normalized to unity then ad valorem tariffs onimports, and subsidies to exporters, raise the numerators in equations 2 and 3. Whetherthe true protection and subsidy rates diverge from their nominal rates depends on howthe price of nontradables changes. If d is the proportionate change in the price ofnontradables, then equations 2 and 3 become
t* = (I + t)/(1 + d) - 1 = (t - d)/(l + d) (4)
and
s* = (s -d)/(l + d) (5)
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The proportionate change in the price of nontradables is as follows:
A A A
Pn =d CP.Pm+(I_()PIr
=ot+(I -co)s (6)
where w is the shift parameter which is an index of the substitutability betweennontradables and importables in production and demand ( Greenaway and Milner, 1993).It can also be shown that w lies between one and zero.
Equation 1 is estimated in double logarithmic form using price data such that
ln(PNPX) = bo + blln(PIMX) + e (7)
PNPX is the price of nontradables relative to exportables and PIMX is the price ofimportables relative to exportables.
In South Africa data on GDP by industry origin are available in current and constant priceterms and published in the Quarterly Bulletin of Statistics by Central Statistical Services.Tradables comprise agriculture, fishing, mining and manufacturing sectors.Nontradables, encompassing primarily services, comprise the remaining sectors in theeconomy. Although some nontradables are traded internationally, the tradable categoriestrade a greater proportion of their output distinguishing them from nontradables.
The following approach was used to construct the price index for nontradables:
(i) GDP in nontradables at current prices was tabulated from the second of 1985 to thethird quarter of 1994;
(ii) GDP in nontradables in constant prices was tabulated on a quarterly basis for the sameperiod.
If GDP in nontradables at current prices is divided by GDP at constant prices, a proxy forthe price of nontradables is obtained in the form of an implicit price deflator. The pricesof exportables and importables are taken from the export and import price indicescomputed at the Reserve Bank of South Africa and published in the quarterly Bulletin ofStatistics.
Equation 7 is estimated for the second quarter of 1985 to the third quarter of 1994 andutilizes the two export price indices that include and exclude the price of gold.
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Table 5.2. Estimation of the Incidence Parameter *Equation Independent Variable Coefficient t - statistics
Exports excludinggold Constant -3.378** -419.94
lnPIMX 0.756** 13.38
Exports includinggold Constant -3.375** -237.80
lnPIMX 0.801** 6.07
*Cochrane Orcutt transformation used** Significant at the 1 % levelSource: Regression results.
The incidence or shift parameter w is larger when the price of gold is included in theexport price index. This indicates that exportables are implicitly more heavily taxedwhen the price of gold is included in the price of exportables.
The true rate of protection and subsidy namely t* and s* are shown in Table 5.3. Thesehave been calculated before and after the GATT offer.
Table 5.3. True Protection and Subsidy RatesTrade Regime Incidence 'd' Parameter t* s*
Parameter (%) (%)
Pre - GATT 0.76 0.1478 1.6 -5.03Post - GATT 0.76 0.0822 2.4 -7.5
Source: Regression results.
Average nominal rates of protection for manufacturing were used in conjunction withaverage rates of subsidy under the GEIS. Average rates rather than the uniform tariffequivalent is used as the uniform tariff equivalent is that tariff that would have the sameeffect on the price of nontradables and the balance of trade as the actual tariff structure.Incidence analysis and the estimation of the shift parameter measures the effect of thetariff and subsidy structure on the price of nontradables and therefore takes these effectsinto account in the estimation of the shift parameter.
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The GEIS could only be claimed by manufacturing industry and was not uniformlyapplied. Accordingly, the incidence parameter excluding gold (0.76) was used toestimate the true rates of protection and subsidy. Furthermore, it is important to usenominal rates of protection and not effective rates of protection as the thrust of incidenceanalysis is to analyze shifts in relative prices.
Assuming that the average import tariff before and after the GATT agreement are 16.6and 10.81 per cent respectively (See Table 5.1), and that the average rate of subsidy underthe GEIS is 9 per cent (See GATT Trade Review, 1993), the true rates can be calculated.Contrary to expectation, even though tariffs have been cut, because the GEIS is alsoeliminated, less pressure is placed on the price of nontradables and therefore the true rateof protection actually rises. As is to be expected, the bias against exports rises from -5.03to -7.5 per cent. Positive import protection combined with an increase in the price ofnontradables and the elimination of the subsidy, discourages the production of exports.
In conclusion, it is likely that phasing out the GEIS will have a deleterious effect onexport performance. Although the bias against exports is reduced by the lower tariffs,without the export subsidies exports are unlikely to expand unless the exchange ratedepreciates in real terms.
South African Exports and Imports in Southern Africa with MultilateralLiberalization
South African exports to Southern Africa grew in current rand terms at an average annualrate of 29 per cent to the SADC countries and 26 per cent to PTA countries over theperiod 1989 to 1993. Given that the manufacturing price deflator in South Africaincreased at an average annual rate of 17 per cent for the same period, exports increasedin real terms. Incidence analysis suggests that once the GEIS is eliminated, even thoughtariffs are lower, there is an increase in the bias against exports.
Although certain exports to Africa received low benefits under the GEIS namely,foodstuffs, chemicals, explosives, metal articles, pharmaceuticals and rubber articles (SeeTable 5.4), motor vehicles and their parts, perfumery products, soaps and toiletries,manufactured fertilizers, textiles, footwear, glassware and machinery have qualified forgreater benefits under the GEIS. These have amounted to 18.6 per cent of the exportvalue in the case of machinery (Table 5.4).
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Table 5.4. GEIS Categories, GEIS Payments and Nominal Protection on Exports toAfrica
GEIS GEIS Payments Nominal Change inExports to category % Exports 90/92 Protection ProtectionAfrica % Uruguay Round
Foodstuffs 2 3.7 10 -4.4Chemicals 2 5.1 7 -2.5Explosives 2 5.1 7 -2.5Metal Articles 2 3.0 12.9 -1.7Pharmaceuticals 2,3 5.1 7 -2.5Rubber Articles 3,4 7.4 19.8 -6.8Transport Equip 4 18.2 32 -12Perfumery 3,4 n/a 15 -5Soap/Toiletries 3,4 n/a 20 0Fertilizers 3 n/a 7 -2.5Textiles 4 n/a 40.7 -18.3Footwear 3,4 16.9 44 -15Glassware 3,4 n/a 10.4 -2Machinery 4 18.6 11 -3
Source: Industrial Development Corporation, Department of Trade and Industry, Reporton the Effectiveness of the GEIS.
Table 5.4 shows that the average rate of tariff reduction under the Uruguay Round isapproximately a third for most of the important exports to Africa. Comparing percentagepoint reductions in nominal tariffs and the percentage point reduction in the GEIS, thosesectors where the reduction in the GEIS is balanced against the tariff reduction arefootwear, textiles and to a lesser extent transport equipment. In other exports, aside fromfoodstuffs, the reduction in nominal tariffs is less than the reduction in the GEIS. Thissupports the incidence analysis which indicated that on average the bias against exports isincreased by the simultaneous reduction in the GEIS and tariff reduction.
In Appendix C we report the results of the South African computable general equilibriummodel, IDCGEM, that predicts substantial increases in the exports of textiles, clothing,rubber articles, plastics and motor vehicles. But as the model does not allow for theabolition of the GEIS, in the absence of the GEIS however, it is unlikely that increases inthese exports will be forthcoming.
Those sectors experiencing the greatest amount of liberalization under the GATT offerare tobacco, clothing, motor vehicles, textiles and footwear. The tariffication ofagriculture is aimed at replacing the import controls with equivalent tariffs. AlthoughSouth Africa imports significant quantities of fish, dairy products, fruit, coffee, tea, cottonand oil seeds from the region, imports of these products are unlikely to increase. Inaddition, stone and wood imported from Zimbabwe are unaffected by the reduction in
49
tariffs. The clothing industries in Malawi and Zimbabwe, and footwear in Zimbabwe willbenefit to the extent to which their trade is not subject to preferential access into SouthAfrica. The nominal tariff rate on articles of iron and steel that are imported fromZimbabwe only decreases by 1 per cent. Metals such as copper, nickel, aluminum, leadand zinc have duty free access.
In conclusion, given the composition of trade between South Africa and the region, theimpact of the GATT offer on trade in the region is likely to be marginal. The existence ofpreferential trading agreements between South Africa and certain other countries in theregion reduces the value of the offer on existing trade. On the other hand if theelimination of the GEIS is factored into the offer, there is the likelihood that certainexports from South Africa to the region will be adversely affected.
Appendix C
Computable General Equilibrium Estimates of the Tariff Reductions
The IDCGEM model, a computable general equilibrium model developed at theIndustrial Development Corporation in South Africa is utilized to estimate the impact ofthe tariff reduction proposals on the South African economy. Unfortunately, the GEISphase-out is not included in the simulation. These simulations were made available by theIndustrial Development Corporation.
The model suggests that the consumer price index declines by 1.8 per cent as a result ofthe lower tariff levels. GDP increases by 0.4 per cent and employment by 0.5 per cent.The average nominal wage is predicted to fall by 1.81 per cent. The trade balancedeclines marginally while the government deficit increases by 3 per cent in real terms.This analysis assumes that there are no spread effects from the liberalizations in othercountries under the Round and the static effects of the unilateral liberalization arerelatively small.
The sectoral results in percentage terms are shown in Table C5. 1. The manufacturingsectors which gain the most in volume of value-added are basic metals, machinery, non-gold mining and other manufacturing. The sectors experiencing the greatest losses invalue-added are transport equipment including motor vehicles and parts followed by goldmining, footwear, rubber and textiles. The largest increases in imports occur in footwear(24.3 per cent), clothing (24.3 per cent), transport equipment (17.1 per cent), textiles (5.9per cent), wood (4.3 per cent), beverages ( 3.1 per cent) and agriculture (2.3 per cent).
The sectors that experience above average gains in employment are basic metals,agriculture, tobacco, non-gold mining and machinery. Employment is adversely affectedin transport equipment, rubber, footwear and textiles. The motor vehicle and textile
50
industries are significant employers of labor - the two industries together account for 10per cent of manufacturing employment. The predicted employment cuts arising from thetrade liberalization in these two industries amounts to 6256 workers.
Table C5.1. Sector Changes arisin from the GATT offer (% changes)Value ValueAdded Added Export Export Import Emplo
Sector Volume Price Volume Price Volume yVolum
1 IAgriculture 0.37 1-0.59 3.14 -0.63 2.28 1.242 Gold -1.73 0.02 -1.78 0.02 0.00 0.003 Other Mining 0.72 -0.14 0.76 -0.20 0.91 1.154 Food 0.50 -0.92 2.81 -0.56 1.33 0.985 Beverages 0.22 -0.76 2.63 -0.53 3.08 0.896 Tobacco 0.65 -0.96 2.91 -0.58 1.39 1.177 Textiles -1.16 -3.26 8.59 -1.72 5.95 -1,808 Clothing 0.46 -2.52 6.46 -1.29 24.29 0.579 Leather 0.43 -1.12 4.90 -0.98 1.65 0.7810 Footwear -1.43 -1.91 4.17 -0.83 33.16 -1.9111 Wood -0.13 -1.52 3.81 -0.76 4.31 -0.2212 Furniture 0.50 -1.57 4.20 -0.84 0.43 0.6413 Paper 0.45 -0.56 1.89 -0.38 1.82 1.0414 Printing 0.08 -1.25 3.23 -0.65 1.11 0.1115 Chemicals 0.39 -1.24 4.36 -0.87 0.66 0.9116 Rubber -1.35 -3.00 7.17 -1.43 2.25 -2.5417 Plastic -0.14 -1.99 4.88 -0.98 -0.66 -0.2918 Nonmetallics 0.22 -1.27 3.52 -0.71 -0.10 0.4919 Basic Metals 1.26 -0.56 3.39 -0.68 0.05 2.0120 Fab. Metals 0.44 -1.05 2.99 -0.60 -2.07 0.6221 Machinery 0.76 -1.00 3.09 -0.62 -0.30 1.0522 Electric Mach 0.12 -1.48 3.91 -0.78 0.16 0.2323 Transport -3.70 -5.65 21.01 -4.20 17.14 -6.41
Equip24 Other Manuf 0.71 -0.68 2.23 -0.45 0.09 1.43Source: Industrial Development Corporation GEMPACK model.
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Chapter 6. Integration and Polarization
Introduction
This chapter examines some of the theory relating to the problems that arise when a largermore dominant economy integrates with a number of smaller, less prosperous economies.In particular the questions of trade diversion, trade creation and the polarization ofeconomic activity are raised. In the light of the theory, the economic characteristics of theeconomies in the Southern African region is explored. Economic size, trade flows,similarities and divergences in trade intensity and industrial structure and levels ofimpediments to trade are highlighted.
The conclusions reached are somewhat at variance to the view that an opening of thelarger South African market will bring benefits to the economies of SADC and the PTA.Discriminatory liberalization that occurs in preferential or free trade areas incursredistributive effects as well as allocative welfare gains and losses, and the SouthernAfrican region is no exception.
Trade Diversion and Redistributive Effects
The analysis which follows deals with the static welfare effects of a proposed free tradearea incorporating South Africa into the PTA. Let us include three countries or economicentities in the trading world: SA, PTA and ROW. SA represents South Africa (notnecessarily SACU because Botswana is not a member of the PTA), PTA is thePreferential Tariff Area and ROW is the rest of the world. In Diagram 1, Dpta is theimport demand for a particular product on the part of the PTA.
The supply side of this partial equilibrium model assumes that the supply of the productfrom the rest of the world is produced with constant costs as in the Vinerian case and isshown as PwR. It is assumed that the rest of the world is a more efficient supplier of theproduct. On the other hand, supply from South Africa experiences rising costs ofproduction and is shown as Ssa. When the PTA tariff structure is imposed, the SouthAfrican supply curve shifts up to Ssat. Q1Q4 is imported from ROW and OQ1 fromSouth Africa. Tariff revenue of PwEDPt is collected by the PTA.
Suppose that the PTA decides unilaterally to remove the tariff on the product. The PTAnow loses the tariff revenue but gains an increase in consumer surplus equal to the areaPwFDPt. As it also loses the tariff revenue, the net gain to the PTA is the area DEF.
However, let's assume initially that the PTA forms a free trade area with South Africa bycompletely reducing the tariff on the product from South Africa. The supply curve forROW does not alter, but that from South Africa shifts back to Ssa. Imports from SouthAfrica replace imports from the rest of the world and rise to OQ2. Even though there istrade diversion, the gain to South African exporters amounts to PwBIPt. Noting that the
52
price in the PTA does not change, the PTA lose the tariff revenue which was levied onthe original South African goods and the replaced world imports. This loss amounts toPwKIPt. The PTA loss is greater than the South African gains, so the deadweight loss tothe world is BKI. This loss results from the diversion of trade from the more efficientrest of the world to South Africa.
The African Development Bank (1994) has suggested that access to the PTA should belimited to a 50 per cent reduction in tariffs on South African goods. This suggestion hasthe effect of reducing the amount of trade diversion and extent of redistribution to SouthAfrican exporters. In Diagram 1, the PTA now imports OQ3 from South Africa andQ3Q4 from ROW. The loss of tariff revenue to the PTA is PpLAPt and the loss to theworld in trade diversion is LHC which is less than BKI.
Free access to the South African market for PTA exports can be analyzed in a similarfashion. The volume of PTA exports is lower than South African exports however, andtherefore the redistributive effects are different. Although the African Development Bankdoes not make specific reference to the redistributive effects, the suggested 50 per centreduction in PTA tariffs against a 100 per cent reduction in South African tariffs is anattempt to ensure that South Africa, the wealthier country, does not benefit at the expenseof the poorer countries of the PTA. Panagariya (1995) raises the same issue in adiscussion of the benefits of NAFTA to Mexico.
If on the other hand South Africa replaces the Rest of the World as the most efficientproducer, then in Diagram 1 a free trade agreement between South Africa and the PTAreduces the price to OPw. While there are no gains to South Africa, the PTA's gain willbe the same as a nondiscriminatory liberalization because the PTA gains the area DEFand South African imports completely replace the rest of the world. In this case theredistributive effects as outlined in the trade diversion case do not obtain.
We have shown that when South Africa is the most efficient producer then the earlierargument is no longer applicable. Is this a likely scenario? The proximity of SouthAfrica to certain PTA countries has led to trade in some goods for which this may wellbe the case. Nevertheless, industry and agriculture in South Africa have beendemonstrated to be operating with rising costs of production under a regime of importsubstitution (Fallon and Pereira de Silva, 1994).
PTA exports to South Africa in 1993 amounted to R1304 million consisting largely ofnatural resource type products. The simple average tariff rate on these products isestimated to be 10 per cent. On the other hand PTA imports from South Africa amountedto R6150 million. The simple average import tariff rate on these goods amounts to 30per cent (African Development Bank, 1994). It must be borne in mind that trade in bothdirections has been subject to quantitative restrictions, so the full extent of the protective
53
Diagram 1: Trade Diversion and Redistributive Effects
Price, L Ssat
\~~~~~ Ssat
P, A,
P, Q' H I DO Qt
0) 1 Qi Q3 Q2 Q4 Qty
54
effects are underestimated by the tariff levels. Bearing this mind, and assuming that at avery minimum, trade remains at the same level that it is after the formation of a free tradearea, a very rough estimate of the redistributive effects can be made. Firstly, if the PTAgives South African goods full access, the transfer of income to South African producersamounts to R1845 million. Free access on the part of PTA exports into South Africa onlytransfers R130.4 million to PTA producers however. If, as has been suggested by theAfrican Development Bank, that South African goods entering the PTA are granted a 50per cent reduction in tariffs, the transfer of income to South African producers falls toR922.5 million. In order to ensure that the transfers of income are equivalent, the SouthAfrican preferential access to the PTA would have to be limited to a mere 2 per cent.
These calculations are supported theoretically by Schiff(1995) who concludes that acountry will benefit in net terms from the redistributive effects of a free trade agreementwith a partner with high trade barriers and with whom it has a large trade surplus.Conversely, a country loses in a free trade agreement if imports are large and importtariffs are high.
It must be emphasized that these estimates are very rough. Further research taking intoaccount possible production responses to the larger markets analyzed at a lower level ofdisaggregation is desirable.
If South Africa entered the PTA with a common external tariff, the redistributive effectscould be alleviated by means of a compensating formula. For example the SACUagreement allows Botswana, Lesotho, Swaziland and Namibia to include imports from allsources in the formula base. The inclusion of South African imports takes into accountthe revenue diverting effect to South Africa from the smaller partners. The enhancementfactor of 42 per cent is used to compensate the smaller members for the price raisingeffects of tariffs on consumers and the effects on the economy of polarization (SeeSection 6.3 below) South Africa's share of the common revenue pool is the residual.Nevertheless, the SACU agreement is being renegotiated as all members of SACU haveexpressed varying dissatisfaction with their receipts under the formula.
Polarization Effects
Many of the regional schemes in Africa that promote import substitution and maximizeintra-regional trade are described as singular failures. This poor record is attributed to theoriginal design of these schemes that placed the emphasis on import substitution as atrade strategy (Elbadawi, 1995 and Fine and Yeo, 1994).
Section 6.2 suggests that when a larger less efficient country joins a free trade area, tradeis often diverted from the rest of the world to the new partner. In addition to tradediversion, the smaller countries in the Southern African region fear that they may alsoexperience a form of deindustrialization, or polarization, as their industry is sucked intothe core of the larger South African economy (Robson, 1987). On the other hand,
55
uniform external tariffs have also been known to act as an engine of growth through thecreation of dynamic external economies. In addition, technology is diffused more rapidlythroughout the region if barriers to trade within the region are eliminated. Economicgrowth in the advanced center spills over to the peripheral areas through growth in theirexports. Improved infrastructural links decrease transport costs which are known to beparticularly high in Africa (Amjadi and Yeats, 1995). Despite these favorable dynamiceffects, the smaller countries fear that the unfavorable polarization effects may exceed thebenefits arising from the dynamic external economies of the larger market.
Krugman (1991), in his seminal book reintroduces geographical considerations intoeconomics, elegantly pointing to the role played in location decisions through acombination of economies of scale and transportation costs. Krugman demonstrates thatsufficiently low, but not too low, costs of transportation,i sufficiently strong economies ofscale and a large share of 'footloose' industries can account for the rise of conurbations ofmanufacturing activity. This concentration of manufacturing leads to developmentpatterns with cores and peripheries of economic activity. Furthermore, regions that havea head start are able to attract industry away from those regions which have a lessfavorable set of initial conditions.2
In the event of greater economic integration, how likely is it that industry in the smallercountries will be pulled into the larger cores of their more powerful neighbors? Krugmanargues that polarization is not inevitable depending on the size of the larger core, the levelof transport costs, economies of scale and the share of 'footloose' industries. Krugmanshows that in the event of polarization it is the immobile factors of production in theperiphery which suffer.
Krugman and Venables (1990) have also argued that as regions become more integrated,the possibility of perverse location effects arises. For example the more central nationwhere wages and production costs are higher but with access to a larger market, maywhen transport costs are reduced, paradoxically attract production away from a lowerwage country. '[his can occur they argue because a reduction of transport costs willfirstly, promote the location of production where it is cheapest, and secondly, promote afurther concentration of industry in order to enjoy the economies of scale.
Krugman and Venables provide a numerical example to demonstrate that when transportcosts are high production takes place in both countries. When transport costs are low,production takes place in the low wage country. Whereas, when transport costs are at anintermediate level, access to markets and the benefits of economies of scale outweigh thereduction in transport costs. Production therefore shifts to the high wage center. Theytherefore hypothesize that the relationship between transport costs and output in the low
ITransport costs can also be interpreted in the broader sense to include all barriers to trade.2 Many centers of manufacturing started as accidents of history. For example, the discovery of gold on theWitwatersrand spearheaded the concentration of manufacturing industry in the Gauteng region of SouthAfrica. Economies of scale in servicing a larger internal market and the fall in transport costs as theinfrastructure developed, provided an additional impetus to this concentration.
56
wage country is U-shaped. Unfortunately, the point at which the U-shape inverts isdifficult to establish.
Krugman and Venables (1995) in a later paper develop their argument mathematicallyand conclude that the world economy has to "achieve a certain critical level of integrationbefore the forces that cause differentiation into core and periphery take hold. When thatdifferentiation occurs, the rise in core income is partly at peripheral expense. Asintegration proceeds further, however, the advantages of the core are eroded, and theresulting rise in peripheral income may be partly at the core's expense" ( p 876). Theyalso point to the importance of empirical work to ascertain whether the forces describedin their model are likely to have explained the trends in world economic development.
We can conclude from this research that the level of integration is important ifpolarization effects are to be avoided. If barriers to trade in the form of tariffs,quantitative restrictions and transport costs are substantially reduced, peripheral countrieswhere wages are lower should not lose industry to the center. In practical terms it may bethe case that growing integration of other African countries with South Africa is unlikelyto impact adversely on these economies.
South Africa in the Southern African Region: Similarities and Divergences
Chapter 2 shows that South African GDP is more than four times greater than SADCaggregate GDP, and one and half times the total GDP for the PTA. The differences inGDP per capita between South Africa and other countries in the region are even greater.South African GDP per capita is ten times larger than PTA per capita income and seventimes SADC per capita income. Given its size relative to the other countries in theSouthern African region, does South Africa trade more or less intensely with thesecountries?
The intensity of trade between South Africa and other countries in the region is measuredby the indices of intensity of each country's exports to and imports from South Africa.The index of intensity of country i's export trade with South Africa (j) is defined in thefollowing manner (See Anderson and Norheim, 1994 for a discussion of the derivation ofthe index):
lij = XjjI Mj
whereXij = the share of country i's exports going to South Africa (j),Mj = South Africa's share in world imports (net of country i's imports),
The index will have a value of one if trade is not geographically biased i.e. the share of i'strade with South Africa is equal to South Africa's importance in world trade. The index
57
is calculated for import trade as well. The export and import intensity indices are shownin Table 6.1.
Table 6.1. Export and Import Intensity IndicesCountry Export Intensity Import IntensityAfrican TradingPartners:Angola 0.02 8.65Botswana 0.18 0.01Burundi 0.09 3.78Comoros 0.78 34.4Djibouti 0 0.02Ethiopia 0.07 0.21Kenya 1.65 5.88Lesotho 0.01 0Madagascar 0.76 5.52Malawi 28.1 87.9Mauritius 0.81 13.83Mozambique 25.1 50.4Namibia 0.02 0Rwanda 0.32 0.74Seychelles 2.49 17.2Somalia 0.01 0.33Sudan 1.62 1.75Swaziland 0.11 0.01Tanzania 2.91 2.11Uganda 0.32 0.68Zaire 6.72 3.9Zambia 4.36 82.5Zimbabwe 23.4 56.1Selected OECDTrading Partners:USA 0.80 0.22Germany 1.20 0.32Japan 1.01 0.55UK 19.6 0.82Source: World Tables 1995 and Industrial Development Corporation for
South African trade statistics.
Bearing in mind that the data for Botswana, Lesotho, Swaziland and Namibia areunderstated, it not surprising that the indices of both export and import intensity for thesecountries are less than one. The level of intensity of trade with Malawi, Mozambique,Zimbabwe and Zambia is high reflecting the proximity of their markets. These indices
58
provide an interesting picture of the importance of South Africa to these countries in theregion, but not the importance of these countries to South Africa. These measures alsoexplain the concern felt by smaller countries with integration of this larger economy intothe region. What these indices do not show is whether trade diversion and redistributiveeffects are likely to occur in the event of greater integration.
As a basis of comparison the indices are computed for selected OECD countries that areimportant trading partners. The United Kingdom, for historical and political reasons, isan important market for South African goods with an export intensity index of 19.6. Theintensity indices for the other countries do not demonstrate any strong geographical bias.
To measure the extent to which South Africa's production structure differs from that ofthe other countries in the region, indices of national divergence (Krugman, 1991) areconstructed. The index of national divergence is a way of quantifying these structuraldifferences and obtaining a picture of the extent of regional specialization.
The index of divergence, Dj, between South Africa and country j is as follows:
Dj =Sj -Sj'|
where Si is the share of industry i in total output and * refers to South Africa's share.
The index ranges between the values zero and two. When country j has the sameindustrial structure as South Africa, the index is zero. When the industrial structures arecompletely different it takes the value two because the share of each country and SouthAfrica's share is fully counted.
The index is firstly calculated for agriculture, mining, manufacturing and services for allcountries in the PTA and is shown as Index 1. Where data are available by ISICgroupings 1 through 10, the index is shown as Index 2 in Table 6.2.
Index 1 which is computed over the entire economy by broad groupings of activity, showsthat the economies more closely resembling South Africa's structure are Mauritius,Namibia, Zimbabwe and Swaziland. Most of the other countries in Africa have a largerconcentration in agriculture that explains the difference in the index between thesecountries and South Africa. Agriculture in South Africa now accounts for 5 per cent ofGDP. Within manufacturing industry itself, Zimbabwe, Zambia and Kenya'smanufacturing sectors are more similar (Index 2). The data used for the construction ofIndex 2 is shown in Table 6.3.
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Table 6.2. Indices of National DivergenceCountry Index 1 Index 2Botswana 0.55 1.28Lesotho 0.40 1.26Malawi 0.68 0.68Mozambique 0.56 0.98Namibia 0.28 1.10Swaziland 0.36 0.95Tanzania 1.01 0.75Zambia 0.58 0.54Zimbabwe 0.34 0.51Burundi 1.04 NAComoros 0.69 NADjibouti 0.41 NAEthiopia 1.10 NAKenya 0.48 0.68Madagascar 0.58 NAMauritius 0.12 1.26Rwanda 0.72 NASeychelles 0.42 NASomalia 1.20 NASudan 0.57 NAUganda 0.32 NAZaire 0.63 NASource: African Development Indicators 1995
African Development Bank.
60
Table 6.3. Composition of Manufacturing Value Added by ISIC Grouping, 1987
Country |1 &2 3 4 5 6 7 8 9 10 11Botswana 54 9 - - 2 6 - 4 2 23Kenya 40 9 2 3 7 16 4 6 6 7Lesotho 71 12 1 2 1 6 2 3 - 2Malawi 34 14 3 2 7 24 7 3 3 3Mauritius 27 51 8 1 1 5 1 3 2 1Mozambique 41 23 ** 8 ** 11 4 11 ** 2Namibia 65 6 3 4 4 7 6 2 1 2Swaziland 58 2 ** 2 12 10 4 1 9 1Tanzania 34 17 4 3 8 13 1 7 11 2Zambia 35 8 3 4 4 15 8 12 10 1Zimbabwe 33 12 3 3 6 14 4 18 5 1
South Africa 14 7 2 3 9 22 5 18 19 1
** This sub-sector is spread over other sectorsISIC Groupings: 1. Foodstuffs 7. Nonmetallic minerals
2. Beverages 8. Chemicals & rubber3. Textiles & Clothing 9. Metals & metal products4. Leather & footwear 10. Machinery & transport5. Wood, wooden products & furniture 11. Other & unclassified6. Paper, printing & publishing
Source: African Development Bank, 1994.
The main differences between the South African manufacturing sector and the othercountries is their concentration in the food processing and beverage industries. SouthAfrica on the other hand has a greater concentration in metals, metal products, machineryand nonmetallic minerals.
Trade Diversion and Polarization Effects: The Empirical Evidence
Trade Diversion
The conclusions that can be drawn from Viner and Meade and Balassa's work on thecosts and benefits of customs unions are as follows:
(1) The more competitive the partners are, in the sense of producing similar goods, themore likely it is that trade creation will occur. A reorganization of production within thefree trade area provides welfare gains which increase with the initial differences inproduction costs between the members.
61
(2) The greater the share of intra-regional trade the more likely it is that trade creationoccurs. This forms the basis of the natural trading partner argument and does not takeinto account the redistributive effects mentioned above.
The Southern African Customs Union has been in existence since 1910 and hence it isdifficult to make any comparisons with the pre-union period i.e. it is difficult to establishthe antimonde, or what would have happened to trade in the absence of the customsunion. In 1989 Bourne estimated the costs of trade diversion to Lesotho by assuming thatall goods imported from South Africa had been diverted from the rest of the world. Healso relied upon estimates of the differences between South African ex factory prices andworld market prices to compute the total cost of diverted trade to Lesotho. Including thenet loss of consumer surplus the total cost to the economy amounts to 3 per cent of GDP.
Will trade be diverted if South Africa joins the PTA? We have suggested that it is morelikely that trade will be diverted rather than created. Using the Viner - Meade criteria wecan conclude as follows:
(1) The indices of national divergence between economic activity in South Africa and themembers of the PTA show considerable differences even in the case of Zimbabwe,Zambia and Kenya. The African economies and South Africa are at different levels ofincome and development producing different sets of goods. This complementarityimplies that the possibilities for trade creation are low.
(2) Trade between South Africa and the PTA has been shown to be more important to thePTA than it is to South Africa. Hence if trade diversion predominates, then theformation of a free trade area would redistribute income from those economies that canleast afford it to the wealthier South Africa. Furthermore, trade diversion in and of itselfimposes a deadweight loss on the world economy so that both the PTA and South Africacould lose.
Polarization
The extent of polarization within the Southern African region and it's likelihood if SouthAfrica joined the PTA is more uncertain. Lundahl and Petersson (1991) argue thatLesotho should be compensated for the negative effects of polarization within SACU.They attribute the lack of development in Lesotho to the 'stifling' effects of polarizationbut also recognize that the deleterious effects are mitigated if migrant mine workers remittheir earnings.
Although economic activity in South Africa is more industrialized and centralized than inthe rest of Africa, South Africa's decentralization policy has played a part in attractingindustry to the low wage areas and peripheries of the economy (Lundahl and Petersson,1991, African Development Bank, 1994 and Maasdorp, 1992). This has meant that inaddition to the gravity effects of the larger market Botswana, Lesotho and Swaziland are
62
more likely to have felt the competition for investment from the South Africanperipheries, but less from the South African core. On the other hand, during the sanctionsyears many firms were established with South African capital in the BLNS countries toavoid the imposition of sanctions. There is little research dealing with the locationaldecisions of firms in the BLNS countries for any strong conclusions to be drawn from theeffect of these opposing 'push' and 'pull' factors.
Aside from Zimbabwe, countries in the Southern African region are not as industrializedas South Africa. The indices of national divergence computed for the broaderclassification of economic activity (Table 6.2, Index 1) show that in terms ofproportional shares Mauritius, Namibia, Uganda and Zimbabwe more closelyapproximate the South African shares of economic activity. Nevertheless, the SouthAfrican manufacturing sector is considerably larger than that of any country in the region.In 1991 the manufacturing sector in South Africa amounted to US$ 22904 million, ascompared with US$1969 million in Zimbabwe, US$ 674 million in Kenya and US$ 167million in Lesotho.
Although there is no evidence of polarization within Europe as integration has proceeded,whether the same will occur in Southern Africa is difficult to determine. Although thesmaller countries of SACU certainly feel that polarization has occurred in their region,the determinants of industrialization in these countries is in need of further researchbefore any conclusions can be drawn.
The African Development Bank provides anecdotal evidence that suggests South Africanfirms are looking northwards for investment opportunities. This investment includesdirect investments and physical movement of plant and equipment to Zimbabwe, Zambia,Mozambique and Malawi. In addition there is no evidence of South African firmslocated in Lesotho, Swaziland and Botswana during the sanctions era relocating back toSouth Africa. Decreasing barriers to trade including transport costs in the SouthernAfrican region, may well encourage the location of firms in areas where wages are lowersuggesting that polarization of economic activity is not inevitable. As the basis ofcomparison however, should be between a MFN South Africa and not the status quo atthe present time. If South Africa and SACU were to enter into MFN relations with theCBI/COMESA/PTA countries polarization may not occur but rather regionalspecialization according to global comparative advantage.
63
Chapter 7. Conclusion
The study establishes that South Africa trades mainly with countries in Europe, NorthAmerica and more latterly Asia. Aside from Zimbabwe, trade with countries in Africaaccounts for a small proportion of total trade in South Africa. The study shows thatalthough exports exceed imports from Africa, nevertheless they only account for 12 percent of exports excluding gold from South Africa. If gold is included these exportsamount to 7 per cent of total exports. Africa predominantly exports natural resourceproducts to South Africa in exchange for manufactures.
Nevertheless, South Africa has joined and is contemplating joining regional groupingsthat discriminate against non - members. The SADC grouping of countries of whichSouth Africa is now a member is considering reducing tariffs between members in muchthe same manner as is planned by the PTA and the CBI of which South Africa is not amember. Unfortunately the situation is even more complex as the regional groupings arealso in a state of disarray. In particular SADC's intention to split off from COMESA isheightening the confusion. The SACU agreement is also in the process of beingrenegotiated and given that Namibia and Swaziland are members of SACU and at thesame time members of the CBI and COMESA (with Lesotho's membership in COMESAas well) has added to the uncertainty. The present SACU agreement does not permit thegranting of trade concessions to nonmembers of SACU unless all members agree.
The study also establishes that South Africa's direction of trade has not been undulyinfluenced by the various regional groupings. Controlling for economic and geographicfactors, the regional groups have not biased South Africa's trade in favor or againstAfrica even during the years of goods sanctions. Furthermore, preferential tradingarrangements with Zimbabwe, Malawi and Mozambique also failed to affect the volumeof trade significantly, and the lifting of sanctions only marginally improved the volume ofSouth African exports.
The impact of trade liberalization on the part of South Africa under the auspices of theUruguay round is examined. The study concludes that although the offer is viewed as amajor step in the direction of liberalization, particularly when compared with othercountries in Africa, the impact of the offer on trade in the region is likely to be small.The elimination of the General Export Incentive Scheme in South Africa is howeverlikely to limit certain of South Africa's exports to the region. Unfortunately the intendedtariff liberalization is insufficient to reduce the bias against exports in general and withthe phasing out of the GEIS the bias against exports actually increases despite thereduction in tariffs.
The study also examines the implications of South Africa joining the PTA with theadoption of a common external tariff. It suggests that given the composition of trade,trade diversion is more likely to occur and that adverse redistributive effects from theother countries in the region towards South Africa are large. South Africa would not be
64
able to enter into an agreement with these countries which would give South Africacomplete preferential access to their markets. The recent SADC decision to confine theiractivities at the present time to cooperative projects recognizes the dangers of a free tradeagreement with South Africa.
The theory underlying polarization of economic activity is discussed. Whether greaterintegration of the South African economy into the region will result in such polarizationis not clear. The study recommends further comparative research into the industrialstructures of countries in the region and suggests that the relocation of industry in Europebe examined in the light of the African structure of industry.
South Africa has played an important part in the development of Southern Africa. Itstransport and system of communications has aided the surrounding countries in the regionby facilitating their trade outside of Africa as well as with South Africa. These countriesare heavily dependent on imports from South Africa, and South Africa has considerableinvestment interests in several countries in the region. In addition, labor has migratedlegally and illegally, to work on the mines, industry and agriculture in South Africa.Hence, a high level of integration exists between the national economies of the regionwith a South African core. However, although South African trade with the region hasincreased in recent years this trade remains a low proportion of total trade in SouthAfrica. South Africa's major trading partners are the high income, developed countries ofthe world. Therefore, South Africa has little inducement to seek preferential treatment inthe region.
The study concludes that preferential trading arrangements are no substitute formultilateral trade liberalization particularly when the preferences are given to a moredominant economy. Trade diversion is more likely to occur and the costs ofredistribution of the tariff revenue significant. The costs to the smaller economies arelarge and the benefits to the larger economy minimal. The proliferation of tradingarrangements in the region in a climate of uncertainty surrounding their membership androles should be carefully examined by all participants in the light of whether they aregood substitutes for multilateral trade liberalization given the likely costs of tradeintegration on a regional basis.
65
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Recent World Bank Discussion Papers (continued)
No. 307 The Uruguay Round and the Developing Economies. Edited by Will Martin and L. Alan Winters
No. 308 Bank Governance Contracts: Establishing Goals and Accountability in Bank Restructuring. Richard P. Roulier
No. 309 Public and Private Secondary Education in Developing Countries: A Comparative Study. Emmanuel Jimenez andMarlaine E. Lockheed with contributions by Donald Cox, Eduardo Luna, Vicente Paqueo, M. L. de Vera, andNongnuch Wattanawaha
No. 310 Practical Lessonsfor Africafrom East Asia in Industrial and Trade Policies. Peter Harrold, Malathi Jayawickrama,and Deepak Bhattasali
No. 311 The Impact of the Uruguay Round on Africa. Peter Harrold
No. 312 Procurement and Disbursement Manualfor Projects with Community Participation. Gita Gopal
No. 313 Harnessing Information for Devlelopment: A Proposalfor a World Bank Group Strategy. Eduardo Talero and PhilipGaudette
No. 314 Colombia's Pension Reform: Fiscal and Macroeconomic Effects. Klaus Schmidt-Hebbel
No. 315 Land Quality Indicators. Christian Pieri, Julian Dumanski, Ann Hamblin, and Anthony Young
No. 316 Sustainability of a Government Targeted Credit Program: Evidencefrom Bangladesh. Shahidur R. Khandker, ZahedKhan, and Baqui Khalily
No. 317 Selected Social Safety Net Programs in the Philippines: Targeting, Cost-Effectiveness, and Optionsfor Reform.Kalanidhi Subbarao, Akhter U. Ahmed, and Tesfaye Teklu
No. 318 Private Sector Development During Transition: The Visegrad Countries. Michael S. Borish and Michel Noel
No. 319 Education Achievements and School Efficiency in Rural Bangladesh. Shahidur R. Khandker
No. 320 Household and Intrahousehold Impacts of the Grameen Bank and Similar Targeted Credit Programs in Bangladesh.Mark M. Pitt and Shahidur R. Khandker
No. 321 Clearance and Settlement Systems for Securities: Critical Design Choices in Emerging Market Economies. Jeff Stehm.
No. 322 Selecting Development Projectsfor the World Bank. Jean Baneth
No. 323 Evaluating Public Spending: A Frameworkfor Public Expenditure Reviews. Sanjay Pradhan
No. 324 The Bangladesh Rural Advancement Committee's Credit Programs: Performance and Sustainability. Shahidur R.Khandker and Baqui Khalily
No. 325 Institutional and Entrepreneurial Leadership in the Brazilian Science and Technology Sector:Setting a New Agenda.Edited by Lauritz Holm-Nielsen, Michael Crawford, and Alcyone Saliba
No. 326 The East Asian Miracle and Information Technology: Strategic Management of Technological Learning. Nagy Hanna,Sandor Boyson, and Shakuntala Gunaratne
No. 327 Agricultural Reform in Russia: A Viewfrom the Farm Level. Karen Brooks, Elmira Krylatykh, Zvi Lerman,Aleksandr Petrikov, and Vasilii Uzun
No. 328 Insuring Sovereign Debt Against Default. David F. Babbel
No. 329 Managing Transboundary Stocks of Small Pelagic Fish: Problems and Options. Max Agiiero and Exequiel Gonzalez
No. 330 China: Issues and Options in Greenhouse Gas Emissions Control. Edited by Todd M. Johnson, Junfeng Li,Zhongxiao Jiang, and Robert P. Taylor
No. 331 Case Studies in War-to-Peace Transition: The Demobilization and Reintegration of Ex-Combatants in Ethiopia,Namibia, and Uganda. Nat J. Colletta, Markus Kostner, Ingo Wiederhofer, with the assistance of EmilioMondo, Taimi Sitari, and Tadesse A. Woldu
No. 332 Power Supply in Developing Countries: Will Reform Work? Edited by John E. Besant-Jones
No. 333 Participation in Practice: The Experience of the World Bank and Other Stakeholders. Edited by Jennifer Rietbergen-McCracken
No. 334 Managing Price Risk in the Pakistan Wheat Market. Rashid Faruqee and Jonathan R. Coleman
No. 335 Policy Optionsfor Reform of Chinese State-Owned Enterprises. Edited by Harry G. Broadman
No. 336 Targeted Credit Programs and Rural Poverty in Bangladesh. Shahidur Khandker and Osman H. Chowdhury
No. 337 7he Role of Family Planning and Targeted Credit Programs in Demographic Change in Bangladesh. Shahidur R.Khandker and M. Abdul Latif
No. 338 Cost Sharing in the Social Sectors of Sub-Saharan Africa: Impact on the Poor. Arvil Van Adams andTeresa Hartnett
No. 339 Public and Private Roles in Health: Theory and Financing Patterns. Philip Musgrove
No. 341 Beyond Privatization: The Second Wave of Telecommunications Reforms in Mexico. Bjom Wellenius and GregoryStaple
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