Nov 3, 2015 - I have obtained an ethical clearance certificate from the University of Fort ..... Many developing countries felt that trade was not a form of growth for them ... received trade policy related World Bank loans during 1980 to 1987 ...
The impact of Trade Liberalisation on export growth in South Africa for the period 1994-2014
By Ashantae Pringle 201206278
A Mini dissertation submitted in partial fulfilment of the requirements of the Bachelor of Commerce Degree in Economics (Financial Markets)
Department of Economics Faculty of Management and Commerce University of Fort Hare
Supervisor: Professor Asrat Tsegaye
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Acknowledgements The first thank you goes to God for carrying me through this year of research to complete my dissertation I couldn’t have done it by myself but God has been my pillar of strength, my support and has never left me by myself. I would also like to thank my supervisor, Professor A. Tsegaye for his patience, understanding, guidance and support during the period of compiling my research. Thank you to my mother who stayed up late at night to be my support while I was completing my dissertation. Thank you to Mr Khumalo who assisted me with my estimation model in this dissertation and went out of his way to help. Thank you to Dean Eastrace who has supported me through this time and helped with proofreading. A special thank you to my brother Tristan Pringle who has also assisted in prayers, support, proofreading and giving advice where necessary, your contributions are much appreciated. Thank you to Neelan Comerasamy who has motivated me when I felt like giving up and when I was stuck with concepts I could always count on you to help me understand and if you didn’t to give me the support I needed. Thank you very much. Thank you to the rest of the Honours Economics class who were always willing to help whenever I didn’t understand something and the word “I don’t know” never existed in your vocabulary but everyone went out of their way to help. Thank you to everyone who has made a small and big contribution in assisting with my dissertation it is all much appreciated.
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Abstract This study looks at and analyses the effect of trade liberalisation on export growth in South Africa. The period of this study is from 1994 to 2014 and monthly data is used for the following macroeconomic variables: the level of exports (EXP), real exchange rate (EXCH), gross national income (GNI) and trade liberalisation dummy variable (libdum). An Ordinary Least Square (OLS) model is used where EXP is the dependent variable while EXCH, GNI and libdum are independent variables. The study found that EXCH, GNI and libdum all affect the export levels in South Africa. Trade liberalisation is very important in affecting the export levels in South Africa therefore it can be said that trade liberalisation should continue to be used in South Africa.
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Table of Contents Declarations
2
DECLARATION ON COPY RIGHT
2
DECLARATION ON PLAGIARISM
2
DECLARATION ON RESEARCH ETHICS
2
Acknowledgements
3
Abstract
4
Chapter 1
8
Introduction to the impact of trade liberalisation on export growth in South Africa for the period 1994-2014
8
1.1
Introduction
8
1.2.
Statement of the problem
9
1.3.
Objectives of the study:
10
1.4.
Hypothesis
11
1.5.
Significance of the study
11
1.6.
Organisation of the study
11
Chapter 2
13
Overview of the impact of trade liberalisation on export growth in South Africa Introduction
13
2.1.
13
History of Trade liberalization in South Africa
2.2.
Trade Policies in South Africa in 1990
14
2.2.1.
Multilateral trade liberalization
14
2.2.2.
Unilateral trade liberalization
14
2.3.
Process of trade liberalization
15
2.4.
Export growth
15
2.4.1.
Trends in Exports
15
2.5.
Export growth pre and post liberalization
17
2.6.
Conclusion
18
Chapter 3 5 | Page
19
Theoretical and empirical literature review
19
3.1. Introduction
19
3.2.
19
Theoretical literature review
3.2.1.
Exports as a determinant of growth as portrayed by classical and neoclassical trade
theories 19 3.2.2.
Limitations of the Classical and Neoclassical Theories
20
3.2.3.
Import-Substitution versus Export Promotion Strategies
21
3.3.
Empirical literature review
23
3.4.
Conclusion
25
Chapter 4
26
Methodology
26
4.1. Introduction
26
4.2. Specified Model
26
4.3. Definitions of variables
27
4.4. Priori expectations
28
4.5. Data Source
28
4.6
29
Estimation Techniques
4.6.1
Unit Root Analysis
29
4.6.1.1. Informal stationarity tests
29
4.6.1.2. Formal stationarity test
31
4.6.1.2. Augmented Dickey-Fuller test.
31
4.6.1.2. Phillips Peron (PP) tests
32
4.7. Empirical results
32
4.8. Ordinary Least Squares
34
4.9. Ordinary least square model
35
4.10. Conclusion
36
Chapter 5
37
5. Conclusions, policy implications and recommendations
37
5.1
37
Introduction
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5.2
Summary and conclusion
37
5.3
Policy recommendations
38
5.4. Delimitations of the study
39
6.
40
Reference list
Table of Figures Figure 1: The export increase from 1976-1980
15
Figure 2: Export increase from 1980-2014
16
Figure 3: Graphs of macroeconomic variables for informal level series stationarity test
29
Figure 4: Graphs of macroeconomic variables for informal first differenced stationarity test
30
Table 1: Import Surcharge removed between the period 1994-1995
14
Table 2: Export growth before and after liberalization for 9 African countries
16
Table 3: Unit root tests (level series)
31
Table 4: Unit root tests (first difference) Table 5: Unit root tests (second difference)
32 32
Table 6: OLS regression model
34
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Chapter 1 Introduction to the impact of trade liberalisation on export growth in South Africa for the period 1994-2014 1.1
Introduction
The concept of trade liberalization was initiated in some countries such as Bangladesh, Burundi, Guinea, Guinea-Bissau, Haiti, Madagascar, Malawi, Niger, Togo and Zaire in the early 1980’s however for other countries, South Africa being one of them, it began around the mid 1980’s and even later than that (Shafaeddin, 1994, P.2). According to Bienen (1990) trade liberalization, is the relaxation or elimination of tariffs and removal of duties and/or quotas on exports; alteration in non-tariff barriers such as important quotas and quantitative restrictions; changes in licensing and direct allocation of foreign exchange and in specific regulations for products; and removal or relaxation of export subsidies. The main purpose of trade liberalization over the mid 1980’s was to promote economic growth by capturing the gains from trade by allocating resources more efficiently; having greater competition; having an increase in the flow of knowledge and investment and lastly having a faster rate of capital accumulation and technical progress (Babatunde, 2009, P. 68). If a country has a good economic growth rate it benefits the country and it can have a better flow of imports and exports. It was believed that trade liberalization and anti-export bias would reduce export growth below potential. As a result, the adoption of trade liberalization measures would reduce anti-export bias and make exports more competitive in international markets, mainly by reducing trade policy barriers, exchange rate distortions and export duties (Santos-Paulino & Thirlwall, 2004). Trade liberalization had different effects after it was introduced and affected various variables. If exports are made more competitive in international markets that meant that trade liberalization could possibly increase export growth in South Africa.
Although the details, mode and pace of trade liberalization measures vary across the countries,
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it has some common features. Trade liberalization is the core of a more comprehensive set of structural changes which have been adopted from financial institutions, in particular the World Bank and IMF. “Generally incentives for exports and imports at low levels have been neutralized through the removal of import quotas and other quantitative restriction or their conversion into tariffs; reduction of the level and the dispersion of import tariff rates compensatory devaluation of the national currency and removal or reduction of export taxes” (Shafaeddin, 1994, P.2).Since trade liberalization methods and details vary across the countries it is not possible to compare trade liberalization across the countries and because it is not comparable; conclusions of trade liberalization that has been made are not always certain.
1.2.
Statement of the problem
The problem of this study is wehether trade liberalization would make exports fall or rise. South Africa has an increasing export rate and this study is done to further examine whether the export rate has continued to increase during the trade liberalization period (Kassim, 2013). However Babatunde (2009, P.70) states that the adoption of trade liberalization measures would reduce anti-export bias and make exports more competitive in international markets, mainly by reducing trade policy barriers, exchange rate distortions and export duties. Foreign trade was introduced by reducing tariffs and non-tariff barriers and reducing import duties applied to imports in more Sub-Saharan African countries. Currencies value was reduced to encourage exporters. This was done with the aim of increasing exports and growth (Babatunde, 2009, P.70). If the currency depreciates for an international country, this would encourage South Africa to export more and therefore the export growth rate can increase. The overall South African economy had a poor performance during the years leading to trade liberalization. This assumption is made based on the findings presented between the periods of 1985-1993. The first finding between this period is that the gross domestic product (GDP) grew at just over one percent per annum. The second finding is that investment fell during this period as a result of political instability and a decrease in foreign investment. The third finding is that labour employment and total factor productivity (TFP) were inactive during this period. Agriculture, mining and manufacturing either grew slowly or decreased even though exports 9 | Page
were subsidized (Babatunde, 2009, P. 70). However during the trade liberalization period the economy had a much better performance. Trade liberalization therefore seems to have been the cause for the positive growth of the 1990s. This assumption is made as both imports and exports increased rapidly during the liberalization period. The empirical evidence suggests that higher export growth was due to changes in trade policies (Babatunde, 2009, P.70). Finally, investment grew strongly during the liberalization period compared to the fall that happened in the years leading to trade liberalization. This is due to foreign investment after political and economic stability has been reinforced (Babatunde, 2009, P.70). The argument is based on whether trade liberalization can lead to an improved export growth. While some studies have found a positive association between trade liberalization and export growth, some other studies have found little empirical evidence to support this. Due to the contradictory findings it is worthwhile to study the evidence of the effects of trade liberalization on export growth in South Africa.
1.3.
Objectives of the study:
The main objective of the study is to determine the impact trade liberalization has on export growth in South Africa. The sub-objectives are to: ⦁
To review the trade liberalization process and export trend in South Africa.
⦁
Empirically investigate the effect of trade liberalisation on export growth in South Africa.
⦁
Make conclusions and recommendations based on the findings of the study.
1.4.
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Hypothesis
Ho: Trade liberalization does not have a significant impact on export growth in South Africa. H1: Trade liberalization does have a significant impact on export growth in South Africa.
1.5.
Significance of the study
This study is necessitated by the apparent contradiction of the results in studies that have been done on in this area. This includes assessing whether a country has had better export growth during the years leading up to trade liberalization or the years during trade liberalization. This is an interesting topic to investigate as there are many contradictory findings in the literature and the end result could be in favour of both the null or alternate hypothesis mentioned above in section 1.4.
1.6.
Organisation of the study
In the study of Trade liberalization and its impact on export growth in South Africa, the following chapters will be covered: ⦁
Chapter 1- Introduction and background of the effect of trade liberalisation on export growth in South Africa
⦁
Chapter 2 – An overview of trade liberalisation and export growth in South Africa
⦁
Chapter 3 – Literature review (Theoretical and empirical evidence of the study)
⦁
Chapter 4 – Research methodology and empirical analysis
⦁
Chapter 5 – Conclusions, policy implications and recommendations
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Chapter 2 Overview of the impact of trade liberalisation on export growth in South Africa Introduction This chapter is set to provide a complete overview of trade liberalisation and export growth performance in South Africa for the period between 1994 to 2014. This overview will include the history of trade liberalisation in South Africa which will facilitate the understanding of what happened before and after the trade liberalization period in South Africa with regards to export growth. This further emphasises the importance of understanding trade liberalization in South Africa and how it has affected export growth not only in South Africa but in the surrounding African countries. This chapter will be split into four distinct sections. The first section will be comprised of literature that focuses on the background of trade liberalization in South Africa. The second section will be comprised of literature explaining 3 trade policies that South Africa uses. The third section will explain export growth trends as well as export growth in the pre and post-period of liberalization. The last section will provide a conclusion on trade liberalisation and export growth.
2.1. History of Trade liberalization in South Africa South Africa has participated in trade liberalization since the early 1980s. The trade liberalization, however, gained momentum in the 1990s.During the 1990s the country adopted the policy by dividing it into two, through multilateral trade liberalization and a unilateral trade liberalization which will be explained below. The result after implementing these 2 strategies at the end of the 1990s was that most restrictions of trade had been eliminated, the tariff regime had been rationalized and simplified, and the tariff rates drastically reduced for many sub-sectors (Kusi, 2002).
2.2.
Trade Policies in South Africa in 1990
2.2.1.
Multilateral trade liberalization
Multilateral trade liberalization can be explained as a reduction of tariffs or nontariff barriers by
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one or more countries, on imports from all countries (Kusi, 2002). South Africa offered a 5-year phased-in tariff reduction with effect from January 1995 (Kusi, 2002). This means that over a period of five years from 1995 South Africa slowly reduced tariffs until it reached a minimal level or was completely removed. The aim of implementing the tariff reduction was to reduce export subsidies. An export subsidy is a government policy that will discourage the export of goods. An export subsidy reduces the price that an importer pays for a good so domestic consumers end up paying more for the good than the foreigner (Kusi, 2002). The intention of reducing the tariff reduction was to reduce export subsidies so the opposite should apply. With the decrease in the export subsidies the price that the importer pays for a good would be more expensive and the domestic consumer will pay less than the foreigner. The Government saw it fit in 1995 to initiate a three-year program to eliminate the GEIS. The GEIS is the General Export Incentive Scheme. In June 1995, the GEIS benefits became taxable and the different export categories which qualified for a subsidy was reduced, as well as the level of the subsidy. In March 1996, a program to accelerate the phasing out of the GEIS was announced and in July 1997, the GEIS was abolished (Kusi, 2002).
2.2.2. Unilateral trade liberalization Unilateral trade liberalization can be defined as: “the country that applies unilateral trade liberalization will abolish protectionist tariffs on imports” (Kusi, 2002). Reducing the imported goods prices gives a gain to the value of the exports in the trade balance. Since June 1994 the Government began the dismantling of the system of import surcharges on various goods. These import surcharges are summarized in Table 1 below. Table 1: Import Surcharge removed between the period 1994-1995
Date
Product
June 1994
Intermediate goods
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Import Surcharge % removed and
Capital 5%
September 1995
Motor Vehicles
15%
October 1995
Home electronics and luxury 40% products
Source: Table compiled from values received from TIPS 2002
2.3. Process of trade liberalization The process of trade liberalization involves a shift towards neutrality this is done by reducing tariffs and removing quantitative restrictions progressively (Bell, 1993, p.82). Neutrality refers to effective exchange rates of imports equaling effective exchange rates of exports. Trade liberalization does not only create barriers to imports, but also promotes exports. If export-promoting efforts are successful, then the degree of incentive given to produce for the export market exceeds the incentive given to produce for the domestic market (Holden, 1990, p.261).
2.4. Export growth 2.4.1. Trends in Exports In nominal terms, exports increased steadily throughout the 1980s and 1990s. Exports in South Africa have increased by 39% from 1976 to 1980, and again increased by 30% from 1980 to 1990. There has been a steady and consistent increase between the period 1976-1980 in exports as well as the period 1980-1990 (SARB, 2015). These increases can be shown on the graphs below.
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Figure 1: The export increase from 1976-1980
th, 2015
Figure 2: Export increase from 1980-2014
, 2015
2.5.
Export growth pre and post liberalization Table 2 illustrates export growth before and after liberalization for nine African countries. Table 2: Export growth before and after liberalization for 9 African countries
Country 16 | Page
Liberalization year
Before liberalization
After liberalization (%)
Increase/decrease
Botswana Ghana Kenya Lesotho Namibia Nigeria South Africa Zambia Zimbabwe
1994 1983 1993 1994 1994 1986 1994 1991 1990
(%) 8.84 -46.70 4.07 6.30 2.82 -6.72 2.20 -3.39 5.31
2.85 10.43 4.35 9.67 0.57 3.45 3.90 14.99 -1.76
Decrease Increase Increase Increase Decrease Increase Increase Increase Decrease
Sources: WTO policy reviews for various countries
From table 2 the findings are that in six countries, export growth increased after liberalization while in three countries export growth decreased. South Africa shows a distinct 1.70% increase in export growth after liberalization.
2.6. Conclusion This chapter provides background information on the trade liberalisation and export trends in South Africa. Specifically the chapter considered the different trade policies that South Africa uses. It also showed that trade liberalization has increased export growth by 1.70% for South Africa. As table 2 has shown after trade liberalization 6 out of 9 countries had an increase in export growth and only 3 out of 9 had a decrease in export growth. The assumption can then be made that for most countries looked at specifically in this study trade liberalisation impacts export growth positively. This chapter has given a full overview on the content of this study whilst maintaining that various tests still need to be executed and these will be done in further chapters, namely Chapter 4 after reviewing the theoretical and empirical literature.
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Chapter 3 Theoretical and empirical literature review 3.1. Introduction This chapter is intended to provide both a theoretical and empirical literature review which correlates with trade liberalisation and its effect on export growth in South Africa. There is much debate on whether there is in fact a direct effect on export growth since the implementation of trade liberalisation. Hence, the question beckons, whether export growth was higher before or after liberalisation. The main outcome and objective of this study is to determine the effect of trade liberalisation, on export growth in South Africa. This chapter is split into two sections; the first section will explain the theoretical view examining exports as a determinant of growth as portrayed by traditional theories, the limitations of the classical growth theory and the import substitution strategies versus the export promotion strategies. The second section explains the empirical literature of export growth and trade liberalisation.
3.2. Theoretical literature review 3.2.1. Exports as a determinant of growth as portrayed by classical and neoclassical trade theories 18 | Page
There are many different international trade theories that explain a positive relationship that exists between economic growth and trade. The international trade theories show that the positive relationship among trade and economic growth results in an improvement in the output and welfare. Economics is based on gaining from trades based on this individuals will not trade if no gains are made. Ricardo(1817) explains the gain from trade is based on the law of comparative advantage. The Ricardian classical model explains the gains to trade between two countries if a country can produce products at a cost lower than another country (Ricardo, 1817). If each country specialises in the specific goods that it produces at a relatively lower cost than its trading partners, the countries with no trade restrictions will increase the total amount of world output according to the comparative advantage theory. According to Ricardo (1817) each specific country will discover a good that it has a comparative advantage in, so every country should benefit from trading. Due to the comparative advantage of goods produced at a lower cost, countries will specialise in production but each country will specialise in different goods because all trading countries has the same relative prices. Since the relative prices are the same in countries, the difference in labour is what controls the products in which the country has a comparative advantage (Ricardo, 1817). One of the proponents of the post Ricardian classical model or Neoclassical trade theory is the Hecksher Ohlin trade theory (O-H trade theory). According to this theory countries export the goods that they can easily produce a lot of. The H-O model highlights how nations with comparative advantages should export goods that need factors of production that it has a lot of and importing goods that it cannot produce as efficiently (Investopedia, 2015). In summary the H-O model explains how countries must operate when the resources are not shared fairly around the world and further explains how nations can benefit by exporting resources of what they have a lot of.
3.2.2. Limitations of the Classical and Neoclassical Theories The classical and neoclassical theories are in agreement with the Ricardian classical model
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referred to above in that it forecasts that countries will specialise in producing goods that it has a comparative advantage in. The law of comparative advantage has caused doubts about the validity of the static comparative advantage. There is a strict loyalty that needs to be followed with regards to technology and this implies that the third world countries may still continue to produce primary products even if the general demand has fallen for these products. This flaw shows that classical and neoclassical theories are not able to clarify patterns of export diversification. The assumption that preferences and tastes are the same in the trading countries does not exist in the real world anymore. According to Appleyard,Field & Cobb(2006), each country can attach value to its goods in various ways as each country has different tastes and preferences of goods. According to Appleyard et al. (2006), it states that: “A commodity is always intensive in a given factor regardless of relative prices (the strong-factor-intensity assumption). The degree of substitution between the two factors (labour and capital) is sufficiently different between industries”. The study implies that it is hard to predict a flow of trades between two countries because of factor-intensity reversal. Factor intensity reversal takes place when a product has a variety of factor intensities that have various relative factor prices. The theory also is not able to explain the existence of export diversification. The theory recommends that technology transfers and spill overs cannot take place because there are no international differences in technology.
3.2.3. Import-Substitution versus Export Promotion Strategies In the mid 1900’s there was a debate that the existence of market in adequacies as well as the terms of trade of basic goods decreasing made it hard for the countries still developing to compete with the already developed countries, and this resulted in these countries applying for
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protection. To address this most developing countries adopted import substitution policies which assisted in reducing “domestic unemployment and protect its local industries through instruments such as; quotas, tariffs, subsidies, administered wages and prices as well as multiple exchange rates” (Nouira, Plane, & Sekkat, 2009). This resulted in countries becoming “export pessimistic”. Many developing countries felt that trade was not a form of growth for them but was rather damaging to them. The primary aim of the import-substitution strategy was to put a boundary to the amount of imports allowed this would help to establish control over the balance of payments. When examining import substitution, exports are observed as having no effect on economic growth in the long term. The core of inward-orientated trade policy is to guard the domestic trading industry. Import substitution was viewed as a viable strategy to eliminate the import gap through production done domestically. The import substitution strategy is not able to back the content on the role of export diversification on economic growth especially in South Africa which is still a country developing. In many developing economies, the import substitution strategy has not been able to endorse the industrialization process. This resulted in export diversification not being able to occur, as was anticipated, even though the productive systems suffered from high trade barriers as well as biased prices (Nouira, et al., 2009). South Africa grounded its economic development on the import substitution industrialisation strategy in the 1900’s. Carrying out this strategy involved the hassle of high tariffs. When apartheid ended in South Africa it no longer used the import substitution industrialization strategy but instead followed the export promotion strategy. This new strategy viewed a rise in the production of manufactured goods in South Africa (Du Plessis & Smith, 2005). Export promotion was implemented by most developing countries rather than import substitution strategy this is because export promotion was viewed as an instrument to attain the economic development goals. Developing countries then changed their view from being “export pessimistic” to becoming “export optimistic”. When comparing the import substitution strategies and the export promotion strategies it has been noted that the export promotion strategies targeted both goals of supporting and building up the manufacturing sectors in order to make and 21 | Page
discover prospective comparative advantages. The developing countries government interceded to promote the growth of exports by giving their support in different ways one being; providing information about current opportunities in the world market. The governments also try to achieve export growth by producing new goods and entering new markets that they were not able to enter previously. Export growth is considered essential in some countries as it widens the export base of countries that a previously narrow export base.
3.3. Empirical literature review The empirical evidence looks at trade policy and growth. The empirical evidence shows changes in growth performance which is associated with liberalization and protection. The empirical evidence also shows that improving openness, and supporting it with efficient and reliable domestic policies, will lead to faster growth. Detailed studies of trade liberalization suggest that the benefits are far more than the costs (Edwards, 1989; Matusz &Tarr, 1999).Thomas & Nash (1992) did a study of 40 countries who received trade policy related World Bank loans during 1980 to 1987 and during the studies they found small gains from liberalization which was based on the link between exports and growth. Harrison, Rutherford& Tarr (1997) & Whalley (2000) do not agree with this study as they say most of the gains went to countries that offered the most reductions in tariff and non-tariff barriers. They further stated that due to changes in technology not everyone gains from trade liberalization: the reason is that countries use their comparative advantage on sectors that were previously protected which have now decreased in size and the workers of these sectors suffer. The empirical studies on the impact of trade liberalisation on export performance have produced mixed results. World Bank studies of Michealy, Papageorgiou &Cholski (1991) and Thomas, Nash& Edwards(1991), Joshi &Little’s (1996) evaluation of the economic reforms in India, Bleaney’s(1999) panel data study of manufactured exports for ten Latin American countries, Ahmed’s (2000) co-integration analysis of Bangladesh’s merchandise export, Pacheco-Lopez’s (2005) study of the impact of trade liberalisation in Mexico, and Santos-Paulino’s (2002 and 2007) panel data analysis of trade liberalisation in developing and least developed countries all found a significant positive relationship between trade liberalisation and export performance 22 | Page
while other studies found little or no evidence of any favourable impact of trade liberalisation on export performance. The study by Roberts (2000) found that liberalization of trade in South Africa did not get the gains from the benefits to export during 1992-1997 period as anticipated. What rather transpired was that while manufacturing exports, imports increased, output growth decreased in most sub-sectors and there were big decreases in the employment levels. Fedderke & Vaze (2001) investigated the impact of the new trade regime on the capacity of South Africa firms to penetrate world markets. The study done came up with the results that, effective protection remained constant or sometimes increased even though there is evidence to make the assumption that trade liberalization started for some economic sectors. Fedderke & Vaze (2001) found that trade liberalization appeared to have improved export performance in many sectors of the South African economy. The United Nations Conference on Trade and Development (2008) conducted a study on the post liberalisation export performance of 34 African countries. Using a liberalisation dummy in accordance with the Wacziarg & Welch (2008) classification and applying the Generalised Methods of Moment (GMM) estimator, they found that trade liberalisation increased the ratio of exports-to-GDP by 0.09 percentage points. This is a very small impact and also it is surprising that the exports-to-GDP ratio is used as the dependent variable in contrast to the growth of exports. Babatunde (2009) examined the impact of trade liberalisation on export performance across 20 SSA countries from 1980 to 2005. Using fixed and random effects estimation techniques, he found no significant relationship between trade liberalisation and export performance. This finding is not unexpected as Babatunde used average tariff rates (which do not directly affect exports) as the indicator of trade liberalisation in his export equation. In addition, Babatunde (2009) examined the price and income elasticities of Sub-Saharan African exports from 1980 to 2003. Applying a fixed effects estimation technique on a panel 23 | Page
dataset of 20 countries, they found that the calculated long run income elasticity of demand for exports ranges between 0.94 and 1.33 while the estimated long-run price elasticity of demand varies from -0.01 to - 0.17. They also found that the real income of trading partners and price competitiveness of exporting countries are significant determinants of SSA exports. From the empirical results obtained, one can see that trade liberalisation has significantly raised the growth of exports in Sub-Saharan Africa. This finding is robust to the different estimation techniques adopted and also consistent with other studies on developing countries (Santos-Paulino & Thirlwall, 2004) and least developed countries (Santos-Paulino, 2007). In addition, the price elasticity of demand for exports is low in Sub-Saharan Africa, suggesting that exports in the region still consist mainly of agricultural commodities (Santos-Paulino, 2007). Export duties have not been found to have a significantly negative impact on export growth.
3.4. Conclusion This chapter examines the theoretical and empirical literature relating to trade liberalization as well as the effect on export growth. Within the theoretical literature, the export growths, classical theories limitations and import substitution and export promotion strategies were examined and linked to trade liberalization and export growth. The other section of this chapter was based on the empirical review on various macroeconomic factors which affect export growth. Here, different studies were assessed and reviewed many of which utilized different variables, methods and tests to determine the effect of macroeconomic variables have on export growth as well as economic growth on a whole.
Chapter 4 Methodology 24 | Page
4.1. Introduction The study of the effect of trade liberalization on export growth in South Africa is based on the conventional export demand equation. The model mentioned above, relates to the level of exports to world real income and a measure of price competitiveness. This model assumes constant price and income elasticities of demand. The conventional export demand function used. The model has 3 variables namely the growth of real exports (EPG), the rate of change of the real exchange rate (RER), and the growth of world real income (WGDP). This equation will be slightly amended to accommodate the study and a dummy variable for trade liberalisation will be included as (libdum). The macroeconomic variables to be assessed in this study will be the level of exports (EXP), the real exchange rate (EXCH), the gross national income (GNI) and the dummy variable trade liberalisation (libdum). Instead of studying the level of exports to world real income the level of exports will be studied with dependence on trade liberalisation in South African hence, the model will be slightly altered to accommodate this study’s specifications.
4.2. Specified Model In order to investigate the effect of trade liberalisation on export growth in South Africa, this study altered the conventional export demand equation and is specified as follows: EXP= f (EXCH, GNI, libdum) Where: EXP is the level of exports EXCH is the real exchange rate. GNI is the gross national income. libdum is the trade liberalisation dummy variable f is the function of. 25 | Page
The entire model above represents the multiple regression analysis to find the long-run relationship between the above mentioned variables. The empirical model can be expressed as follows:
EXP = α + β1 EXCH+ β2 GNI +β3 libdum+ Ut Where: Ut is the error term. α represents Alpha. β represents Beta.
4.3. Definitions of variables Exports can be defined as selling products or services to an organization in another country. The level of exports assists in determining a country’s trade balance. If exports are greater than the number of imports, the country has then made a trade surplus. The opposite is then true that if imports are greater than exports the country has a trade deficit (du Toit, 2014). The real exchange rate is the nominal exchange rate which can be altered for relative prices among the countries for which the index is calculated. The nominal exchange rate is the rate at which currency can be exchanged. The real exchange rate specifies the amount of products and services in the domestic country can be exchanged for the products and services in a foreign country (du Toit, 2014,P.34). The gross national income is the sum of the domestic and foreign output which is requested for by the residents of a country including GDP, this can be calculated as factor incomes earned by foreign residents minus income earned in the domestic economy by non-residents (Diffen, 2015). The trade liberalisation dummy variable takes the value of 1 for a decrease in tariffs from one year to the next in South Africa and a zero for an increase in tariffs from one year to the next.
4.4. Priori expectations 26 | Page
There is a significant relationship between net exports and the real exchange rate within a country. “When the real exchange rate is high, the relative price of goods domestically is higher than the relative price of goods in foreign countries and when the real exchange rate is high, net exports fall, the opposite is true that when the real exchange rate is low, net exports increase” (International trade, 2015). So based on this the conclusion can be drawn that a negative relationship exists between net exports and real exchange rates. If GNI increases it will increases the level of exports in a country. Based on this the conclusion can be drawn that a positive relationship exist between GNI and exports (Diffen, 2015). Trade liberalisation decreases the degree of anti-export bias, so the trade liberalisation dummy variable is expected to have a positive relationship with real export growth (Kassim, 2013). This means that if the trade liberalisation dummy increases export growth should increase and vice versa.
4.5. Data Source For this particular study, monthly data will be used covering the periods of 1994 to 2014 for South Africa. The data will be collected from the South African Reserve Bank and the World bank.
4.6 Estimation Techniques 4.6.1 Unit Root Analysis The data obtained from various sources mentioned above is raw and as such it is not automatically suitable for immediate use in regression analysis. When analysing the regression, econometric analysis needs time-series data to be stationary. Gujarati (2002, P.52) explains stationarity to mean that the mean and variance remains steady over time. In order to meet the requirement of stationarity the following tests will be carried out. 4.6.1.1. Informal stationarity tests 27 | Page
The informal test was carried out by graphing all the macroeconomic variables used in the model found in figure 3 and 4. The results at level series in figure 3 indicate the variables are non-stationary but when it is first differenced it is stationary as shown in figure 4. Figure 3: Graphs of macroeconomic variables for informal level series stationarity test
28 | Page
Figure 4: Graphs of macroeconomic variables for informal first differenced stationarity test
4.6.1.2. Formal stationarity test
Formal stationarity tests include Augmented Dickey-Fuller test (ADF test) and the Phillips Peron test (PP test). These tests are further explained and tabled below. 4.6.1.2. Augmented Dickey-Fuller test.
The Dickey-Fuller test is implemented to establish if the series contains a unit root. The null hypothesis is that there is a unit root and thus, the series is non-stationary. A series of steps have to be followed when carrying out this test. There is a difference between the Dickey-Fuller
29 | Page
(DF) test and the augmented Dickey-Fuller (ADF) test in the sense that the DF test is conducted under the assumption that the error term, μt, is uncorrelated whereas the ADF test is used in the event that the error terms are correlated (Gujarati, 2008, P.827). Augmenting simply refers to adding lagged variables of the dependant variable. The fundamental shortcoming of these tests lies in their power and size (Gujarati, 2008, P.819). The DF test is delicate in the manner it is carried out and the size alteration could be due to excluding the moving average (MA) sections from the model. Thus wrong conclusions may be drawn. Regarding the power of the test, DF tests accept the null of unit root often (Gujarati, 2002, P.819). Brooks (2008, P.330) notes that another criticism is that they cannot be used to detect more than one unit root.
4.6.1.2. Phillips Peron (PP) tests
Phillips-Peron tests are in essence, similar to and more often than not, yield similar results to ADF tests mentioned above. The main distinguishing characteristic of these tests according to Brooks (2008, P.330) is that PP tests includes an automatic amendment to the DF procedure which makes room for autocorrelated residuals. According to Gujarati (2002, P.818), PP tests are exclusive in the sense that they use nonparametric statistical methods to protect the serial correlation without adding lagged difference terms. The similarity of these tests also extends to the fact that these tests also suffer from the same fundamental limitations.
4.7. Empirical results Table 3: Unit root tests (level series)
Augmented Dickey-Fuller
Intercept
Intercept
Phillips-Perron
& None
Intercept
Trend
Intercept
& None
Trend
LEXP
-2.341075
-3.362234*
1.880857
-1.543602
-3.129894
1.690291
LEXCH
-1.519343
-2.676736
-1.912408*
-1.516137
-2.510358
-2.166933**
LGNI
-0.693822
-2.222251
1.677595
-0.193965
-1.743893
6.211170
libdum
-3.068211**
-3.100890
-1.026397
-3.789904***
-4.010701***
-1.985281**
*
Statistically significant at 10% level
30 | Page
**
Statistically significant at 5% level
***
Statistically significant at 1% level
Source: Developed for this study using Eviews 8 Econometric Software Table 4: Unit root tests (first difference)
Augmented Dickey-Fuller
Intercept
Intercept
Phillips-Perron
& None
Intercept
Trend LEXP
-12.04386***
Intercept
& None
Trend
-12.10658***
-11.83027***
-16.69891***
-16.99143***
-16.28291***
-11.99133***
-11.74320***
LEXCH
-12.00298***
-11.99133***
-11.81147***
LGNI
-2.199708
-2.189776
-1.391535
-12.00298*** -18.80769***
-18.75472***
-15.77973***
libdum
-8.439106***
-8.449300***
-15.75375***
-15.72297***
-15.77973***
-8.446537***
*
Statistically significant at 10% level
**
Statistically significant at 5% level
***
Statistically significant at 1% level
Source: Developed for this study using Eviews 8 Econometric Software Table 5: Unit root tests (second difference)
Augmented Dickey-Fuller
Phillips-Perron
Intercept
Intercept
Intercept & None Trend
Intercept & None Trend
LEXP
-12.45695***
-12.42948***
LEXCH
-11.48586***
-11.46042***
-11.50971***
LGNI
-25.44255***
-25.38818***
-25.49737***
-249.7661***
-264.2344***
-250.4389***
-6.672199***
-27.22132***
-249.0834***
-27.27636***
libdum
-6.655379***
-6.635061***
-12.47819***
-124.1636*** -52.45400***
-123.8073*** -52.28284***
Source: Developed for this study using Eviews 8 Econometric Software 31 | Page
-124.4999*** -52.59794***
The interpretation of the results of the unit root tests is quite straight forward in nature. In Table 3, the tests were done at level and showed that the variables were all non-stationary as such. In table 4, the tests were done at first difference and the results are stationary except for LGNI which was non-stationary for ADF. All other variables were stationary for both the ADF and PP in the first difference. In table 5, the tests were done at second difference because LGNI was not stationary at first difference and the results for all the variables were stationary for both the ADF and PP tests.
4.8. Ordinary Least Squares The Ordinary least-squares (OLS) regression is defined by Hutcheson (2011) as a “generalized linear modelling technique that may be used to model a single response variable which has been recorded on at least an interval scale. The technique may be applied to single or multiple explanatory variables and also categorical explanatory variables that have been appropriately coded. The OLS method will be used as it is the optimal choice for this study. In order to best understand this method, the OLS principal must be reviewed. In OLS the sample regression line (SRL) is given by Y as follows: Yi = β1 + β2 Xi + Ui Where: Yi is the estimated value of Y.
Ui is the difference between the estimated and actual Y values. Hence it is important to determine the sample regression line in a way that the sum of the residuals is as small as possible. It is important to note that EXP, EXCH and GNI are logged variables. The reason behind this was to ensure the data was not spurious which would have meant that the data couldn’t be interpreted. As a result, logging the above mentioned variables decreases their size and allows them to be tested accordingly.
32 | Page
4.9. Ordinary least square model Table 6: OLS regression model
Dependent Variable: D(EXP) Method: Least Squares Date: 11/03/15 Time: 10:41 Sample (adjusted): 1994M02 2014M09 Included observa ons: 248 a er adjustments Variable
Coefficient Std. Error
D(LEXCH)
0.073287
0.061515
D(LGNI)
-0.011037
0.191962
D(LIBDUM)
0.009654
0.009665
C
0.002776
0.002070
R-squared
0.010637
Mean dependent var
Adjusted R-squared
-0.001527
S.D. dependent var
S.E. of regression
0.031381
Akaike info criterion
Sum squared resid
0.240282
Schwarz criterion
Log likelihood
508.5850
Hannan-Quinn criter.
F-sta s c
0.874445
Durbin-Watson stat
Prob(F-sta s c)
0.454924
t-Statistic
Prob.
1.191383
0.2347
-0.057497
0.9542
0.998872
0.3188
1.341054
0.1811 0.002410 0.031357 -4.069234 -4.012565 -4.046421 2.015534
After estimating the model with level of exports as the dependent variable the following conclusions can be made.
33 | Page
In the model exchange rate has a positive co-efficient of 0.073287. This indicates that a positive relationship exists between the real exchange rate and the level of exports. So as the real exchange rate increases the level of exports will increase. This doesn't meet the priori expectations made earlier. In the model gross national income has a negative co-efficient of -0.011037. This indicates that a negative relationship exists between the gross national income and level of exports. So as the gross national income increases the level of exports decreases. This doesn't meet the priori expectations made earlier. In the model the dummy variable for trade liberalisation has a positive co-efficient of 0.009654. This indicates that a positive relationship exists between trade liberalisation and the level of exports. So as the trade liberalisation increases the level of exports increase. This meets the priori expectations made earlier. From the model above one can depict that the R² is 0.010637 and the adjusted R² is -0.001527 which indicates that the model used to analyse the export growth in South Africa is adequate. The R² is 1% which doesn't show the goodness of the fit of the model.
4.10. Conclusion In this chapter, a model was used to determine and analyse the effect of EXCH, GNI and libdum on export growth. In the empirical analysis of the study, an analysis of the time series of the data found that all of the above mentioned variables were non-stationary at the level series. At the first difference, all the variables were tested and found to be stationary except for GNI. Second difference unit root tests were then carried out and all variables were found to be stationary. The simple OLS model was used to estimate whether the export growth was affected by trade liberalisation in South Africa. Empirical results indicated that all variables are significant. Based on this one can say that export growth affects trade liberalisation.
Chapter 5 34 | Page
5. Conclusions, policy implications and recommendations 5.1
Introduction
In this chapter, the conclusions about the research are explained and policy recommendations are suggested. This information can be utilized for future research on the topic of the effect of trade liberalization on export growth in South Africa. It is important to note that there is an ongoing debate about whether trade liberalisation has positively or negatively impacted export growth.
5.2
Summary and conclusion
The conducted study measured the effect of trade liberalization on export growth in South Africa over the period 1994-2014. The study used a number of previous theoretical works to investigate if trade liberalization was beneficial to export growth or not. The above study used the conventional export demand function as a basis to create the model to test the impact of trade liberalisation on export growth in South Africa. The model was altered to incorporate the following variables: level of exports (EXP), Real exchange rate (EXCH), gross national income (GNI) and trade liberalisation dummy variable (libdum). The model was then tested using simple ordinary least squares to check the relationship between the variables. It is important to note that before the model was specified, a unit root analysis consisting of two specific tests which check the time series of the data carefully were run. These tests are known as the Augmented Dickey-Fuller (ADF) and Philips Perron (PP) tests. The results of the abovementioned were that at level series, all variables were non-stationary. At first difference all variables were stationary in the PP tests while for the ADF, all variables were stationary except for LGNI which remained non-stationary. Therefore the second difference test was carried out and all variables were found to be stationary for both ADF and PP tests. An important aspect to consider is that three of the variables namely: EXP, EXCH and GNI are logged variables. The reason behind this was to ensure the data was not spurious which would have meant that the data could not be interpreted. As a result, logging the above mentioned 35 | Page
variables decreases their size and allows them to be tested accordingly. Once the time series properties of the data were determined, an OLS model was specified using the stationary variables. The empirical results of which indicated real exchange rate (EXCH), gross national income (GNI) and trade liberalisation (libdum) are significant variables in explaining the variation in level of exports.
5.3
Policy recommendations
The study suggests that South exports grew when trade liberalisation was implemented. If trade liberalisation is maintained and done correctly the South African exports will be growing. South Africa should promote trade liberalisation further. An increase in trade liberalisation will positively affect level of exports in South Africa. This can be based on the fact that after trade liberalisation was implemented in South Africa exports grew by 1.7% after 1994 which was when trade liberalisation was implemented. In the 1900’s after apartheid South Africa adopted the export promotion strategy and dropped the import substitution strategy. Further research should be devoted towards the impact of trade liberalisation on export growth as there are mainly studies on the effect on imports as well as how trade liberalisation is currently affecting South Africa. The results may depict a clearer picture of the effect of trade liberalisation on exports now rather than in previous years. South Africa should maintain the export promotion strategy as it has benefited them and should not go back to import substitution.
5.4. Delimitations of the study Data has been collected and compiled for each particular macroeconomic variable for each particular year. This was obtained through the World Bank website and the Reserve Bank of South Africa website. The estimation will cover the period from 1994-2014 and the data will be compiled monthly. The macroeconomic variables that will be focused on in this study are the export growth (EXP), real exchange rate (EXCH), gross national income (GNI) and trade
36 | Page
liberalisation dummy variable (libdum).
37 | Page
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