HOW EXPOSED IS THE SOUTH AFRICAN ECONOMY TO INTERNATIONAL TRADE?

• Author: L. RANGASAMY,Z. BLIGNAUT
• Published date: 01 September 2005
• DOI: http://doi.org/10.1111/j.1813-6982.2005.00025.x
• Date: 01 September 2005

South African Journal of Economics Vol. 73:3 September 2005©

© 2005 Economic Society of South Africa. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4

2DQ, UK and 350 Main Street, Malden, MA 02148, USA on behalf of ESSA.

366

HOW EXPOSED IS THE SOUTH AFRICAN ECONOMY TO

INTERNATIONAL TRADE?

L. RANGASAMY AND Z. BLIGNAUT1

Abstract

Following the policies implemented during the 1990s, the South African economy has become

more globalised. This is particularly the case as far as international trade is concerned. The

implementation of trade reforms, in some cases faster than WTO commitments, has increased

the exposure of the South African economy to international trade. Trade in intermediate inputs

increases the external orientation of an industry and hence increases the economy’s exposure to

trade. This in effect means that the economy is more open to external trade shocks than is

conveyed by the traditional openness measure which considers only the trade in final products.

This paper uses a measure proposed by Campa and Goldberg (1997) to estimate the exposure to

trade and finds that around 79 per cent of output in 2000 was accounted for by industries that

became more exposed to international trade. Further, domestic production has become more

reliant on imported inputs with around 60 per cent of South Africa’s GDP being accounted for

by industries with a negative external orientation (i.e. industries where imported input costs

exceeded export revenue). In addition, it was also found that those sectors that became more

externally oriented had lower inflation rates and higher growth rates than the other sectors in the

economy for the period under analysis. The extent to which the increased exposure to

international trade facilitated these developments remains topical for further research.

1. INTRODUCTION

This paper analyses South Africa's exposure to international trade, concentrating on the

period after 1990. The economy’s exposure to international trade is measured by

considering its sales (exports) in foreign markets, its competition with foreign products

(imports) in domestic markets and the use of imported inputs in domestic production.

There is little doubt that the South African economy has become more exposed to

international trade during the 1990s.2 However, the analysis to date has generally not

considered the trade in intermediate inputs and as a result the full extent of the

exposure to trade at the sectoral level has not been measured. In this paper trade in

intermediate inputs is also taken into account in order to derive a more comprehensive

measure of the exposure to international trade on a sectoral basis. The paper attempts

to answer the following two questions:

• What has been the extent of the exposure to trade of the South African economy

after 1990?

• What has been the nature of the trade exposure?

1 Research Department, South African Reserve Bank. We are grateful to an anonymous referee

and Herman Smith of the SARB for useful comments on an earlier draft. Gerhard Bouwer of

Statistics South Africa provided valuable suggestions on the methodological aspects of this

paper. The usual disclaimer applies.

2 For example, Loots (2001) analyses the extent of the globalisation of the South African

economy by considering both investment and trade flows. South Africa is classified as a

moderate globaliser with an economic growth rate of 2,7 per cent - one per cent below the

average for all countries in the same category.

South African Journal of Economics Vol. 73:3 September 2005©

© 2005 Economic Society of South Africa. 367

In the next section the concept of external orientation is highlighted. T he following

two sections then addresses the two questions directly. The penultimate section

appraises the significance of the results. Some concluding remarks are made in the last

section.

2. EXPOSURE TO INTERNATIONAL TRADE: SOME THEORETICAL

CONSIDERATIONS

The empirical literature has traditionally used the "trade openness" measure - calculated

as the sum of final goods imports and exports as a ratio of production - to reflect the

exposure to international trade. This is usually termed the "openness" indicator and is

also often used in empirical analysis to depict the extent of globalisation of an industry.

However, the term globalisation is multi-dimensional and incorporates trans-boundary

flows of goods and services, capital, people, technology, ideas and cultures (Dawson,

2003). The term is thus very broad and any attempt to evaluate whether a country has

become more globalised or not has to consider all these elements. There is however

consensus that the process of economic globalisation incorporates the dismantling and

lowering of tariffs or non tariff barriers, growth in international trade, increased

international financial flows and the exchange of knowledge and technology across

boundaries. For statistical convenience, the economic interpretation of the concept is

usually emphasised in the empirical literature on globalisation. In addition, very often

the problem of data constraints is circumvented by making the assumption that

international trade flows are an appropriate proxy for economic globalisation.3

However, in this paper the emphasis is on the issue of trade openness and not

globalisation per se.

Rodrik (2000) highlights the importance of distinguishing between a "policy

measure" and an "outcome measure" in trade policy analysis. A policy measure refers to

government regulations and policies while an outcome measure, conversely, uses actual

economic outcomes (e.g. international trade flows) to ascertain the degree of economic

openness.4 There is the need to distinguish between policy intentions and actual

outcomes since policy intentions may not match actual outcomes. For example, a policy

of trade liberalisation may have been implemented but prevailing economic conditions

(e.g. imperfect competition) may result in import volumes not increasing to the extent

suggested by the liberalisation measures. On the other hand, there could be an increase

in imports which is not related to the liberalisation programme. The essence of the

argument is that an outcome measure (such as trade flows) may not necessarily reflect

the policy bias of a trade regime (Rodrik, 2000).

In the context of the above argument it is important to highlight the primary

concern of this paper, namely, the economy’s exposure to international trade. The

extent to which the exposure has been shaped by economic policy is not directly

addressed in this paper. The trade openness indicator for the economy can be

expressed as:

3 This is usually the case for research on developing countries where data constraints abound.

4 See for example Sachs, J. and Warner, A. (1995) and Skipton, C. (2002). Bhagwati (1988) argues

that outward orientation is incentive neutral, that is, it does not discriminate against exports.