World Bank Group: Africa Regional Poverty Reduction and Economic Management | February 2014 | Issue No. 5 South Africa Economic Update Focus on Export Competitiveness 84369 South Africa Economic Update Focus on Export Competitiveness © 2014 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved This report was prepared by the staff of the Africa Region Poverty Reduction and Economic Management. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Direc- tors or the countries they represent. Front cover photo: Getty Images/Federico Rostagno. The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC. Contents Foreword   v Acknowledgments   vi Executive Summary   1 Section 1 Recent Economic Developments   5 Global economic developments and prospects    5 Recent trends in South Africa    7 Labor markets   10 Fiscal policy   12 Inflation and monetary policy    13 External sector   13 Economic outlook for South Africa    15 Risk to the outlook    15 Notes   16 Section 2 Export Competitiveness   17 South Africa’s exports—five stylized facts    18 Three opportunities for unlocking South Africa’s export potential    30 Conclusion   38 Notes   40 References   43 Boxes 2.1 Methodology and limitations   18 2.2 Exports, comparative advantage, and jobs    26 2.3 Exports to countries in the Southern African Customs Union    28 2.4 Beyond super-exporters: promoting entry of small and medium-size enterprises or the survival and growth of established exporters?    33 2.5 Input costs and minerals beneficiation    35 Figures 1.1 Real GDP growth rates by region    6 1.2 Commodity prices are declining as demand in China eases    6 1.3 Capital flows to select countries    7 iii S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S 1.4 Nominal effective exchange rates and current account balances in select countries    7 1.5 Growth in South Africa disappoints against that in other BRICS (excluding China)    8 1.6 Volatility is rising in the components of real GDP growth    8 1.7 Unemployment remains high   10 1.8 It would take four years to bring employment back to precrisis levels while absorbing new labor force entrants    11 1.9 Manufacturing employment has hit a new postcrisis low    11 1.10 The probability of remaining in unemployment appears to have peaked but remains high   12 iv 1.11 Consumer price inflation decelerates, but core inflation is rising    13 1.12 The current account deficit widens    14 1.13 South Africa’s exchange rate has weakened amid nonresident portfolio capital outflows   14 2.1 Export performance is failing to keep pace    18 2.2 Minerals are driving South Africa’s export growth, with price growth and virtually flat volumes since 2001 across sectors    19 2.3 South Africa’s nonmineral goods and services exports are falling behind those of its peers   20 2.4 The top 5 percent of exporters dominate the rest (2004–08 average)    21 2.5 Both the experimentation and competitiveness of South Africa’s super-exporters are falling sharply   22 2.6 “Big hit” exports are not being replaced, and key markets are underexploited    23 2.7 Exports are concentrated in sophisticated sectors beyond South Africa’s endowment base   25 2.8 Sub-Saharan Africa is displacing Europe as South Africa’s nonmineral export destination of choice   29 2.9 South Africa’s total factor productivity is high at the firm level but low in the aggregate   31 2.10 South Africa has solid transport infrastructure—but gaps in information and communications technologies and electricity remain    34 2.11 South Africa rates high among its peers on the Global Value Chain Participation Index, 2008   37 2.12 South Africa: a regional hub but still somewhat peripheral    39 Tables 1.1 Real GDP growth and economic performance, 2010–13    9 1.2 Gross domestic spending, 2010–13    9 1.3 Medium-term economic outlook   15 2.1 Export measures at the firm level for selected countries in 2006–08 and South Africa in 2012   22 2.2 Exporters to Sub-Saharan Africa differ in many ways, but not all    30 2.3 Comparing port tariffs: South Africa against the global average    34 Foreword In its National Development Plan 2030 and With this Economic Update, we hope to its New Growth Path (2011), South Africa enrich the ongoing debate on growing a identifies the export sector as an engine sector critical for South Africa’s economic for faster, more inclusive, and job-intensive growth. As with previous editions, this report growth. The National Development Plan is is intended not to be prescriptive but to offer targeting export volume growth of 6 percent evidence-based analysis that will help bring a year—to achieve an annual increase in real South Africa’s policymakers, researchers, and GDP growth of about 5.5 percent and to help export stakeholders closer to finding innova- generate 11 million new jobs by 2030. Despite tive and sustainable ways to grow the sector. successes in some subsectors, South Africa The report highlights opportunities for will need to greatly improve its export per- growth, particularly with Sub-Saharan Africa formance to meet these targets. being the largest market for nonmineral This report, South Africa Economic Update 5: exports. It also explores strategic directions Focus on Export Competitiveness, examines the that can ignite export growth and help South performance of South Africa’s export firms Africa realize its goals of creating jobs and against that of peers in other emerging mar- reducing poverty and inequality. kets—and analyzes the challenges. It assesses South Africa’s economic prospects in the Asad Alam context of the global economic environment Country Director for South Africa and prospects. World Bank v Acknowledgments This edition was prepared by a core team The team is grateful for comments from comprising Catriona Mary Purfield, Thomas Chunlin Zhang (AFTFE) and Roberto Per- Farole, and Fernando Im (Co–Task Team Lead- relli and Magnus Saxegaard (International ers, AFTP1), based on analytical inputs from Monetary Fund). Finally, the team appreci- Elizabeth Bulmer, Ian Gillson, Claire Hollweg, ates the input received from government Daria Taglioni, Swarnim Waglé, and Deborah counterparts, nongovernmental agencies, Winkler (PRMTR); Allen Dennis (DECPG); researchers, and the private sector, includ- and Taye Mengistae (AFTFE). Thomas Farole ing: from Josephilda Nhlape-Hlope (The (AFTP1) was a coauthor, leading the work on Presidency); Landon McMillan, Martin export performance, the focus of this issue. Odendaal, and Duncan Pieterse (National Peer reviewers were Wolfgang Fengler (Lead Treasury); Daniel Bradlow, Chris Loewald, Economist and Country Sector Coordinator, and Johan Van Den Heever (South African ECSPF), Kamer Karakurum-Ozdemir (Senior Reserve Bank); Xavier Carim and Phemelo Country Economist, ECSP1), Neil Rankin Marishane (Department of Trade and (Associate Professor, Stellenbosch Univer- Industry); Bobby Godsell and Thero Seti- sity), and Mark Pearson (Programme Direc- loane (Business Leadership South Africa); tor, TradeMark Southern Africa). The report Coenraad Bezuidenhout (Manufacturing was prepared under the overall guidance and Circle); Trudi Hartzenberg (Trade Law supervision of Asad Alam (Country Director, Centre for Southern A frica); Lawrence AFCS1) and John Panzer (Sector Manager, Edwards and Mike Morris (University of AFTP1). Cecilia Moyo (AFCS1) helped process Cape Town); and Wilma Viviers (North the report at various stages. West University). vi Executive Summary Recent economic developments Largely owing to the impact of labor unrest Global GDP growth is projected to acceler- on exports from the automotive sector and ate gradually, from 2.4  percent in 2013 to rising imports related to public investment, 3.5 percent in 2016, mainly reflecting a slow net exports continued to weigh on headline but steady improvement in outturns among growth. As a result, by the end of 2013q3 real high-income economies. Growth in high- GDP growth was still below potential, and the income economies is expected to rise from output gap had widened. 1.3 percent in 2013 to 2.2 percent in 2014 and Lead indicators of economic activity sug- 2.4 percent in 2016. The recovery in Europe gest that while headline growth in 2013q4 and the United States is expected to be sup- should recover from the q3 lows, it will not ported by still very loose monetary policy, reach the July 2013 growth forecast of 2013 a diminished drag on growth from govern- real GDP growth. In manufacturing the ment and household budget consolidation Purchasing Managers’ Index fell to 49.9 efforts, and pent-up demand for consumer (seasonally adjusted) in December, halt- durables and investment goods. The base- ing the tepid recovery that started in Octo- line projection assumes a timely resolution to ber. The business activity subindex (output the debt ceiling debate in the United States, conditions) receded 4.7 points, whereas the steady progress in economic rebalancing in new sales orders subindex (demand condi- the Eurozone, and some additional fiscal tions) improved marginally. In addition, the stimulus in Japan to help offset a drag from employment index fell below the neutral higher consumption taxes in 2014. threshold of 50 (from 50.8 to 45.8), a stark Sustained improvement in economic activ- reminder of the fragile labor market for ity proved elusive in South Africa in 2013, as manufacturing. As a result, real GDP growth domestic factors continued to weigh on the is projected to have reached 1.9  percent in recovery and offset the benefit of improving 2013, a downward revision of 0.6 percentage external conditions. Growth, already weak- points from the July 2013 Economic Update. ened substantially in 2012, continued to falter The medium-term budget policy state- in 2013, as further labor unrest compounded ment, released in October 2013, recalibrated long-standing structural constraints and the timeline for fiscal consolidation. With reduced confidence. Growth in both con- the economy weaker than anticipated at the sumer spending and private investment time of the 2013/14 budget, the policy state- continued to moderate, reaching just 2.3 per- ment had to balance the need to extend cent and 2.6 percent, respectively, in 2013q3 countercyclical support to growth while (quarter-on-quarter, seasonally adjusted and maintaining the commitment to consolida- annualized), reflecting low confidence amid tion over the longer term. For 2013/14 spend- increasing uncertainty, tighter credit condi- ing is expected to remain at the nominal tions, and persistently high unemployment. level set in the original budget, helping offset 1 S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S weak private sector growth, while revenues South Africa’s real GDP growth is projected will be allowed to change with economic to remain well below the average of 5.4 per- developments. But due to the fairly robust cent projected for Sub-Saharan Africa for revenue collection through the first half of 2014–16. Reflecting the subdued growth over the fiscal year, as well as the transition to the the forecast horizon, the negative output gap Government Finance Statistics 2001 interna- that had opened in recent years (estimated at tional reporting standard, the overall budget 2 percent of GDP in 2013) will not fully close deficit is now forecast at 4.2 percent of GDP, over the forecast horizon. unchanged from the 2012/13 outturn. Under the baseline forecast the recovery 2 Over the medium term the budget defi- in growth is expected to be led by stronger cit is expected to reach the target of 3 per- exports, as the recovery in high-income cent of GDP in 2016/17, one year later than economies gains pace and export capacity originally planned. The budget deficit in the expands thanks to addressing local power intervening years is also higher than previ- constraints. Domestic demand is expected ously forecast. As a result, government net to improve gradually, but less strongly than debt will continue to rise and stabilize at in previous forecasts, reflecting low domestic about 44 percent of GDP only in 2016/17. confidence. Consumption growth remains In the current environment of low growth fairly subdued, owing to persistently high and reduced fiscal space, South Africa is vul- unemployment, high household debt, and nerable to potential spillovers from disrup- decelerating growth in government con- tions in international capital flows as U.S. sumption as fiscal consolidation proceeds. monetary policy shifts gears and interna- But the easing of some key structural impedi- tional financial conditions tighten. ments over the course of the forecast—for South Africa’s f lexible exchange rate instance, new power generation is expected should help cushion its adjustments. By end- to come on-stream in the second half of 2013 the rand had depreciated about 20 per- 2014—combined with favorable real inter- cent. But the overall trade deficit has so far est rates over the medium term is expected been slow to respond. This in part reflects to spur a recovery in private investment. The the large share of U.S. dollar–priced com- outlook has downside risks, however, relat- modities in South Africa’s export basket, the ing to shifting global growth patterns that likely erosion of benefits of a more depre- could lead to disorderly shocks in interna- ciated exchange rate by higher wage and tional capital and commodity markets and input costs, and the role of supply-side con- in domestic labor relations. Resolving the straints related to infrastructure bottlenecks tensions in labor relations would boost confi- and industrial action. As highlighted in this dence and improve growth prospects. update’s special focus on export competitive- ness, South Africa needs to address the con- Export competitiveness straints that have kept export growth low in Policymakers are aware of the need to reig- order to rejuvenate exports and create jobs nite export growth. The New Growth Path to reduce the gap between domestic savings (2011), the National Development Plan 2030, and investments—so that it can lower exter- the Industrial Policy Action Plan, and recent nal vulnerabilities. Monetary Policy Committee statements The medium-term outlook is for growth (2013) all identify export growth as a prior- to improve gradually but for the recovery to ity. Restarting the export engine is critical to be more subdued than previously forecast. reinvigorating growth—and to developing a Real GDP growth is projected to recover to more diversified export base to help reduce 2.7  percent in 2014—from the estimated growth volatility. The National Develop- 1.9 percent in 2013—and reach 3.4 percent ment Plan aims to increase annual real GDP in 2015. The main reason for the downward growth to about 5.5 percent, well above the growth projection for 2014 of about 0.5 per- 3.5 percent average in the decade preceding centage point relative to the July 2013 Eco- the crisis. Exports are expected to be a key nomic Update forecast is the decline in driver of the faster growth, with the National domestic confidence amid fragile labor rela- Development Plan targeting export volume tions and persistently high unemployment. growth of 6 percent a year. A stronger export sector also drives job competitiveness in regional markets is allow- creation. Increasing exports, particularly ing the less efficient firms to enter and exit in manufacturing, may be crucial for the opportunistically. This poses challenges in low-skilled job creation needed to sub- considering how best to support emerging stantially reduce high overall and youth exports. unemployment. And exports are especially Three areas present opportunities to critical amid South Africa’s widening current promote the competitiveness and spur the account deficit—and the external vulnerabil- growth in South Africa’s export sector: ity arising from its reliance on volatile capital • Boosting domestic competition would increase flows to fund the deficit. efficiency and productivity. By opening 3 Over the past decade South Africa’s local markets to domestic and foreign exports have underperformed. Export entry, South Africa would enable new, growth in real terms has stagnated, and more productive firms to enter and place South Africa’s exporters have made only downward pressure on high markups. This limited inroads into global markets. Be it in would lower input costs and tip incentives minerals, nonminerals, or services, South in favor of exporting by reducing excess Africa’s exports have lagged behind those of returns in domestic markets. Competition peers and not lived up to their potential. would also stimulate investment in innova- A few super-exporters dominate South tion and, over time, condition the market Africa’s export sector in both minerals and to ensure that firms entering competitive nonminerals, coexisting with a large pool global markets have reached the produc- of small, occasional exporters. But despite tivity threshold to support their survival their dominance, the super-exporters have and growth. been losing dynamism and competitiveness. • Alleviating infrastructure bottlenecks, especially Over the last decade some important prod- in power, and removing distortions in access to ucts in South Africa’s export basket have and pricing of trade logistics in rail, port, and died out—a natural process. But new, high- information and communication tech- value products have not emerged at the scale nologies would reduce overall domestic needed to replace them. Since the global prices and further enhance competitive- financial crisis the super-exporters have ness. It would be especially beneficial for become less experimental in both markets small and medium-size exporters and and products, underexploiting large emerg- nontraditional export sectors, which these ing markets in both Africa and the BRICs. costs tend to hit harder. Super-exporters trade products that are tech- • Promoting deeper regional integration in goods nologically sophisticated and highly capital- and services within Africa would generate intensive. This has positive implications for the right conditions for the emergence of competitiveness but underutilizes South Afri- Factory Southern Africa, a regional value ca’s large pool of low-skilled labor, thus fail- chain that could feed into global produc- ing to create enough jobs to make the export tion networks. South Africa could play a sector a major direct contributor to employ- central role in such a chain, leveraging the ment growth and poverty reduction. scale of the regional market, exploiting As trade patterns have shifted, particu- sources of comparative advantage across larly following the crisis, Sub-Saharan Africa Africa to reduce production costs, and has emerged as the key destination for South providing other countries in the region a Africa’s nonmineral exports. This has cre- platform for reaching global markets. ated greater market opportunities for newer Progress on all three fronts would help and smaller exporters. So far, exports to catapult South Africa toward faster-growing Sub-Saharan Africa have remained some- exports, allowing it to realize the higher, what smaller and shorter lived than exports more inclusive, job-intensive growth articu- to traditional markets, suggesting that lower lated in the National Development Plan. SECTION 1 Recent Economic Developments Global economic developments Developing countries have sustained their and prospects growth momentum, as strengthening exports to high-income countries has High-income economies are finally turning compensated for slower growth in China the corner on the global financial crisis Growth in developing countries stabilized at After several years of extreme weakness, an estimated 4.8 percent in 2013, similar to high-income economies appear to be finally 2012. Following a weak start to the year, and turning the corner on the global financial financial market volatility mid-year, activity in crisis—and a fragile recovery is taking hold developing countries strengthened in 2013q2 (figure 1.1). The recovery is most advanced and q3, led by rebounds in China and India. in the United States, where GDP has grown In China growth accelerated to 9.3 percent for 10 consecutive quarters, reflecting solid (seasonally adjusted annual rate, or saar) in private demand, resilient business senti- q3, helped by a “mini-fiscal stimulus” ear- ment, and robust job creation. By the end lier in the year. While this should have been of 2013q3 real GDP was 5.6 percent higher sufficient to sustain average growth around than in the precrisis period (though only 7.7  percent in 2013, it was a marked drop 1.0  percent higher per capita). Japan’s from 2010 levels. economy has responded to strong fiscal and Strengthening activity in high-income monetary stimulus, and for a second year economies in 2013 helped support growth in a row it is expected to grow nearly 2 per- in developing countries, which faced weaker cent. As a result, output has reached 98 per- prices for metal and agriculture exports cent of precrisis levels. In the Eurozone (figure 1.2). In the three months ending in growth finally turned positive in 2013q2— November 2013 growth in developing coun- after six straight quarters of decline. Three try export volumes accelerated to an annual of the five economies at the heart of the cri- rate of 17.7  percent, up from a 9.2  percent sis (Ireland, Portugal, and Spain) have now contraction in q2. The support from exter- exited recession, helped by strong export nal demand has spilled into overall activity. growth, while in the other two (Italy and Developing countries’ GDP growth strength- Greece) the recession is easing. But the ened to 6.5  percent in 2013q3, up from recovery remains fragile. Headline Euro- 5.4 percent in q2. Business sentiment indica- zone growth slowed again in 2013q3, out- tors for q4 signal that the strengthening of put remains well below precrisis levels, and developing country real activity has likely long-term and youth unemployment remain been sustained. (Purchasing Managers’ high. Indexes for developing countries in q4 were 5 S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S Figure Real GDP growth rates by region 1.1 China Developing countries (excluding China) High-income countries South Africa 15 10 5 6 Percent 0 –5 –10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: World Bank DEC Prospects Group. Gross capital flows to developing countries Figure Commodity prices are declining as demand in China eases 1.2 Agriculture Energy Metal fell by half between 200 Commodity Price Index, 2010 = 100 June and August 2013, 150 and the currencies and stock markets 100 of several major developing economies 50 declined as much 0 as 15 percent Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: World Bank DEC Prospects Group. higher than in q2 and q3 and remain above Indonesia, Brazil, and Malaysia (figure 1.3), the neutral 50-mark.) thanks to market concern about growing external and domestic imbalances (including Capital flows to developing countries current account deficits, government deficits, remain volatile as international and slowing growth; figure 1.4). Financial financial conditions tighten market conditions improved, buoyed by the Speculation over when the U.S. Federal delay in the Fed’s tapering until January 2014. Reserve would begin to withdraw its extraor- Nonetheless, as U.S. monetary policy changes dinary measures to support growth triggered further, an increase in yields on 10-year U.S. a temporary but major reversal in capital Treasuries can be expected, which should flows from developing countries. On a cumu- reduce capital flows to developing countries. lative basis investors withdrew a net $64 bil- lion from developing country mutual funds Prospects are for a gradual strengthening between June and August 2013. Gross capi- in global GDP growth over the tal flows to developing countries fell by half, medium term, driven by recovering and the currencies and stock markets of sev- activity in high-income countries eral major developing economies declined Global GDP growth is projected to accelerate as much as 15 percent. The impact was most gradually, from 2.4 percent in 2013 to 3.5 per- pronounced among middle-income econo- cent in 2016, mainly reflecting a slow but steady mies, including India, Turkey, South Africa, improvement in outturns among high-income Figure Capital flows to select countries 1.3 India Turkey South Africa Indonesia Brazil Malaysia 15 10 $ billions 7 5 0 January February March April May June July August September October November 2013 Source: World Bank DEC Prospects Group. Developing country GDP is expected to Figure Nominal effective exchange rates and current account balances in select countries accelerate modestly, 1.4 Percentage change in nominal effective exchange rate (May 21–Sept. 1, 2013) Percentage change in nominal effective exchange rate (Sept. 1, 2013–Jan. 3, 2014) as weaker capital Current account balance, 2012 (percentage of GDP) 10 flows will somewhat offset better import 0 demand from Percent high‑income countries -10 Nominal effective exchange rate depreciation -20 Brazil Chile India Indonesia Malaysia Mexico South Africa Turkey Source: World Bank DEC Prospects Group. economies. Growth in high-income economies from high-income countries. Growth is is expected to rise from 1.3 percent in 2013 to expected to rise from an estimated 4.8 per- 2.2  percent in 2014 and 2.4  percent in 2016. cent in 2013 to 5.3 percent in 2014 and about The recovery in Europe and the United States 5.7 percent in 2016. Although broadly in line is expected to be supported by still very loose with potential, this growth would be nearly monetary policy, a diminished drag on growth 2 percentage points lower than the 7.3 per- from government and household budget con- cent average during the precrisis boom years. solidation, and pent-up demand for consumer durables and investment goods. The baseline Recent trends in South Africa projection assumes a timely resolution to the debt ceiling debate in the United States, steady Labor unrest continued to progress in economic rebalancing in the Euro- impede growth in 2013 zone, and some additional fiscal stimulus in Sustained improvement in economic activ- Japan to help offset a drag from higher con- ity proved elusive in South Africa in 2013, as sumption taxes in 2014. domestic factors continued to weigh on the Developing country GDP is expected to recovery and offset the benefit of improv- accelerate modestly, as weaker capital flows ing external conditions. Growth, already will somewhat offset better import demand weakened substantially in 2012, continued S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S to falter in 2013, as further labor unrest manufacturing activity contracted 6.6  per- compounded long-standing structural con- cent in q3, on the back of labor unrest in straints and reduced confidence. As a result, the motor vehicles and auto parts sectors. by the end of 2013q3 real GDP growth was According to Statistics South Africa, the still below potential, and the output gap had labor strikes in August and September 2013 widened. South Africa’s growth performance translated to a 47.3 percent and 69.9 percent since the crisis has generally been weaker year-on-year decline in motor vehicle manu- than that of other BRICS (except for the Rus- facturing and a 3.9 percent and 46.0 percent sian Federation; figure 1.5). year-on-year decline in parts and accessories 8 Growth fluctuated considerably in 2013, production, respectively. Such declines more mainly reflecting the timing and impact of than offset the improvement in growth in labor unrest. After a weak outturn in 2013q1, the primary sector, where mining activity real GDP growth rebounded in q2 to reach had rebounded in 2013q3 from the impact of 3.2  percent quarter-on-quarter (q/q) saar, work stoppages in q2. Alongside these stop- only to slow to 0.7 percent in q3 (table 1.1). pages, growth in the tertiary sector contin- Growth in the primary and manufactur- ued to moderate, reaching a 16-quarter low South Africa’s growth ing sectors has been even more volatile of 1.3 percent q/q saar in 2013q3. Although than in headline GDP (figure 1.6). Follow- growth in transport, storage, and communi- performance since the ing an 11.7 percent q/q increase in 2013q2, cations rose to 2.6 percent q/q saar, it proved crisis has generally been weaker than Figure Growth in South Africa disappoints against that in other BRICS (excluding China) that of other BRICS 1.5 Brazil Russian Federation India South Africa 30 seasonally adjusted and annualized) GDP growth (quarter-on-quarter, 20 10 0 –10 –20 2008 2009 2010 2011 2012 2013 Source: Federal Reserve Economic Data (database); staff calculations. Figure Volatility is rising in the components of real GDP growth 1.6 Agriculture, forestry, and shing Mining and quarrying Manufacturing GDP (market prices) 16 20-quarter standard deviation rolling moving average of quarterly GDP 12 8 4 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Statistics South Africa (database); staff calculations. Table Real GDP growth and economic performance, 2010 –13 1.1 Percentage change, seasonally adjusted and annualized Sector 2010 2011 2012q1 2012q2 2012q3 2012q4 2012 2013q1 2013q2 2013q3 GDP at market prices 3.1 3.6 2.4 2.6 1.3 2.3 2.5 0.8 3.2 0.7 Primary sector 4.0 0.2 –7.9 20.2 –4.5 –2.6 –2.0 7.5 –4.7 8.9 Agriculture, forestry, and fishing 0.4 –0.1 4.4 9.0 7.1 9.9 2.0 –4.4 –3.0 3.6 Mining and quarrying 5.7 0.3 –12.8 25.4 –9.1 –7.7 –3.6 13.4 -5.4 11.4 Secondary sector 4.5 2.7 5.3 –1.2 1.2 3.8 1.8 –5.9 9.6 –4.5 Manufacturing 5.5 3.3 6.1 –1.1 0.9 4.4 2.1 –7.9 11.7 –6.6 Electricity, gas, and water 2.5 1.5 –2.1 –5.2 0.6 –2.6 –1.6 –2.8 5.1 3.8 9 Construction 0.7 0.3 5.7 0.3 3.4 4.6 2.3 2.5 2.3 2.1 Tertiary sector 2.5 4.1 3.0 2.1 2.0 2.7 3.2 2.0 2.2 1.3 Wholesale and retail trade, catering, and accommodations 3.8 4.4 4.0 2.9 2.1 1.8 3.8 2.1 3.1 1.3 Transport, storage, and communications 2.0 3.1 2.7 2.4 1.4 2.0 2.4 2.1 1.5 2.6 Finance, real estate, and business services 2.2 4.7 4.4 2.0 1.1 2.3 3.7 3.3 3.5 1.3 General government services 3.1 4.2 1.0 1.4 3.5 4.6 2.8 0.1 0.2 0.4 Personal services 0.4 2.3 1.7 2.2 2.4 2.4 2.1 1.2 1.6 1.6 Source: Statistics South Africa (database); South African Reserve Bank 2013. insufficient to fully offset the deceleration headline real GDP growth in 2013q3 and is in growth in trade (mainly motor vehicle likely to have been the main driver of growth trade) and finance, real estate, and business in q4. services. Growth in real gross fixed capital forma- From the demand side, gross domes- tion picked up in 2013q3, driven mainly by tic spending growth continued to deceler- a substantial uptick in public investment. ate (table 1.2). Low consumer confidence, Private investment continued to moderate, tighter credit market conditions reflected in reaching just 2.6 percent q/q saar in 2013q3, the slowdown in unsecured lending to house- reflecting low business confidence, increas- holds, high indebtedness, and persistently ing labor costs, and uncertain external high unemployment all contributed to a demand in key trading partners. Overall, further deceleration in household consump- gross fixed capital formation contributed tion spending. Nonetheless, reflecting its 0.6 percentage point to headline growth in weight in overall GDP, household consump- q3. But largely owing to the impact of labor tion still contributed 1.5 percentage points to unrest on exports from the automotive Table Gross domestic spending, 2010 –13 1.2 Percentage change, seasonally adjusted and annualized, unless otherwise noted Component 2010 2011 2012q1 2012q2 2012q3 2012q4 2012 2013q1 2013q2 2013q3 Total final consumption 4.4 4.7 3.1 3.4 4.2 1.9 3.7 2.6 2.6 2.1 Final consumption expenditure by household (PCE) 4.4 4.9 3.6 3.4 2.9 2.8 3.5 2.6 2.8 2.3 Durable goods 18.8 16.1 7.9 9.1 7.3 5.4 11.1 5.1 12.5 9.3 Semidurable goods 3.6 5.9 6.1 6.8 5.9 5.5 6.2 7.0 8.5 7.1 Nondurable goods 1.8 3.1 2.5 2.2 2.3 3.1 2.7 2.7 2.8 0.1 Services 4.0 3.6 2.7 1.9 1.4 1.2 1.7 0.6 –1.2 1.0 Final consumption expenditure by general government 4.4 4.3 1.7 3.6 8.3 –1.0 4.0 2.7 1.7 1.5 Gross fixed capital formation (investment) –2.1 4.2 3.1 3.2 4.7 4.5 4.4 1.7 2.1 3.1 General government –9.2 9.7 –0.1 4.3 5.3 0.2 6.2 2.7 2.5 9.7 Public corporations –1.5 –0.6 7.4 4.1 10.4 10.3 4.9 –1.2 –0.8 0.1 Private business enterprises –0.5 4.6 2.5 2.7 2.8 3.8 3.9 2.5 3.0 2.6 Domestic final demand 3.2 4.6 3.1 3.4 4.3 2.4 3.8 2.4 2.5 2.3 Change in inventories (R millions) –1,988 7,865 15,123 14,647 13,703 –4,073 9,850 13,999 8,871 9,411 Gross domestic expenditure 3.9 4.6 4.6 3.7 4.2 –0.6 4.0 5.0 2.7 1.9 PCE is personal consumption expenditure. Source: South African Reserve Bank 2013. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S sector and rising imports related to public have reached an estimated 1.9  percent for investment, net exports continued to weigh 2013, a downward revision of 0.6 percentage on headline growth, subtracting 1.3 percent- point from the July 2013 Economic Update age points from headline GDP growth in estimate but in line with updated estimates 2013q3. released in the November 2013 Monetary Policy Review. Real GDP growth is projected to have reached 1.9 percent for 2013, a downward Labor markets revision of 0.6 percentage point from the 10 July 2013 Economic Update forecast Over the next four years South Africa Lead indicators of economic activity sug- needs to create almost 1 million jobs to gest that while headline growth in 2013q4 restore precrisis employment rates and should recover from the q3 lows, it will not employ new entrants to the workforce suffice to reach the July 2013 growth forecast Unemployment remains high amid weak of 2013 real GDP growth. In manufacturing growth and pressure from new entrants the Purchasing Managers’ Index fell to 49.9 (figure 1.7). Even though the economy cre- Even though the (seasonally adjusted) in December, halt- ated 384,000 jobs over the last year, the ing the tepid recovery that started in Octo- unemployment rate remained stubbornly economy created ber. The business activity subindex (output high, at 24.7  percent in 2013q3 (32.8  per- 384,000 jobs over conditions) receded 4.7 points, whereas the cent when including discouraged work- new sales orders subindex (demand condi- ers). Moreover, the absorption rate (the the last year, the tions) improved marginally. In addition, the employment to working-age population unemployment employment index fell below the neutral ratio) remains well below its precrisis peak threshold of 50 (from 50.8 to 45.8), a stark of 44.8  percent, despite recovering to a rate remained reminder of the fragile labor market for 17-quarter high of 41.9 percent in 2013q3. stubbornly high manufacturing. Job prospects remain weak If the economy continues to generate jobs for the manufacturing sector, which has shed at its recent pace, it would still take four some 250,000 jobs since the global financial more years to close the “ jobs gap” (esti- crisis began. mated at about 967,000 jobs in 2013q3) and Domestic demand conditions, mirrored by restore even the modest precrisis employ- weak consumer confidence, are not condu- ment rate while absorbing new labor mar- cive to employment generation. The 2013q4 ket entrants (figure 1.8).1 Faster, more First National Bank/Bureau of Economic job-intensive growth is needed to make a Research Consumer Confidence Index shows larger dent in unemployment. that consumers expect the domestic outlook In terms of employment, the agriculture to weaken further over the next 12 months. and manufacturing sectors were hurt the As a result, real GDP growth is projected to most by the crisis—and have yet to recover. Figure Unemployment remains high 1.7 Unemployment rate (narrow) Labor force participation rate Unemployment rate (broad) Employed/population ratio (absorption) 40 70 30 60 Percent Percent 20 50 10 40 0 30 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1 Source: Quarterly Labour Force Survey (2008–13); staff calculations. It would take four years to bring employment back to precrisis levels while Figure absorbing new labor force entrants 1.8 Jobs gap Fast job creation (working-age population growth = 1.4 percent) Average job creation (working-age population growth = 1.4 percent) 150 100 50 Millions 0 11 –50 –100 2009q1 2010q1 2011q1 2012q1 2013q1 2014 2015 2016 2017 2018 2019 2020 Source: Quarterly Labour Force Survey (2008–13); staff calculations. In terms of Figure Manufacturing employment has hit a new postcrisis low employment, 1.9 Changes in employment, all sectors agriculture and 2013q3 Crisis trough 130 manufacturing 120 were hurt the most Index (precrisis peak = 100) 110 by the crisis 2009q1 100 2010q3 2009q2 2010q4 90 2011q2 2012q1 2013q1 80 2013q3 2011q2 2010q1 70 Total employed Agriculture Mining Manufacturing Utilities Construction Trade Transport Finance Community and social services Changes in employment, manufacturing 2013q3 Crisis trough 125 Index (precrisis peak = 100) 100 2009q3 2010q3 75 2013q3 2013q2 2011q2 2012q2 2013q3 2013q2 50 2011q3 2010q3 25 2011q2 0 Manufacturing Food, Textilesa Wood and Petroleumc Glass and Basic iron Electrical Radio, Motor Furniture beverages, wood productsb nonmetallic and steeld machinery television, and vehiclese and other and tobacco mineral products communication manufacturing apparatus and professional equipment Note: The blue circle represents the lowest level of employment achieved relative to the precrisis peak value of employment in 2008. The teal bar shows the level reached in 2013q3 relative to the precrisis peak in 2008, so a level greater than 100 implies that employment has surpassed its precrisis peak. a. Includes clothing, leather, and footwear. b. Includes paper, publishing, and printing. c. Includes chemical products, rubber, and plastic products. d. Includes nonferrous metal products, metal products, and machinery. e. Includes parts and accessories and other transport equipment. Source: Quarterly Labour Force Survey (2008–13); staff calculations. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S In fact, manufacturing employment hit a Fiscal policy new postcrisis low in 2013q3 (figure 1.9). Aside from food and beverages and electrical Amid a weaker growth outlook, the machinery, no manufacturing subsector has timeline for fiscal consolidation was recovered to surpass its precrisis employment extended, resulting in a more gradual levels. With excess capacity in most manufac- decline in the overall budget deficit and turing subsectors still high—for example, at debt burden over the medium term 27.0 percent in the motor vehicles, parts and The medium-term budget policy statement, accessories, and other transport equipment released in October 2013, recalibrated the 12 sectors—job creation will remain subdued timeline for fiscal consolidation. With the for some time. economy weaker than anticipated at the time Nevertheless, some recent developments of the 2013/14 budget, the policy statement in the labor market have been encouraging. had to balance the need to extend counter- The share of long-term unemployed in the cyclical support to growth while maintain- labor force inched down in 2013—by 1 per- ing the commitment to consolidation over centage point, to just over 16 percent—but the longer term. For 2013/14 spending is The overall budget the share of unemployed without a job for expected to remain at the nominal level set more than a year remains high, at 65.2 per- in the original budget, helping offset weak deficit for 2013/14 cent. Recent labor force survey data suggest private sector growth, while revenues will be is now forecast at that the probability of remaining in unem- allowed to change with economic develop- ployment or the discouraged worker cate- ments. But due to the fairly robust level of rev- 4.2 percent of GDP, gory after six months is slowly coming down enue collection through the first half of the unchanged from the from crisis peaks. The crisis made it more fiscal year, as well as the transition to the Gov- difficult to transition from unemployed or ernment Finance Statistics 2001 international 2012/13 outturn discouraged worker status into employed reporting standard, the overall budget deficit status, but the situation is slowly improv- for 2013/14 is now forecast at 4.2 percent of ing, at least for unemployed workers (figure GDP, unchanged from the 2012/13 outturn. 1.10). The share of discouraged workers Over the medium term the budget deficit in the broader labor force has continued is expected to reach the target of 3 percent of to rise relative to the precrisis period, and GDP in 2016/17, one year later than originally once in this category workers are unlikely planned. The budget deficit in the interven- to return to the job search. Against this ing years is also higher than previously fore- backdrop of high levels of long-term unem- cast. As a result, government net debt will ployment and discouraged workers, the new continue to rise and stabilize at about 44 per- youth employment tax incentive is a wel- cent of GDP only in 2016/17. The consolida- come step that will provide a greater incen- tion in the budget deficit relies largely on tive for employers to hire new entrants and the gradual recovery in growth to generate the unemployed. combined savings of about 1 percent of GDP The probability of remaining in unemployment appears to have peaked but Figure remains high 1.10 75 UU: probability of remaining unemployed in the next six months DD: probability of remaining a discouraged worker 50 Percent UE: probability of transitioning from unemployment to employment 25 DE: probability of transitioning from discouraged worker status to employment UD: probability of transitioning from unemployment to discouraged worker status 0 2008q1–q3 2009q1–q3 2010q1–q3 2011q1–q3 2012q1–q3 2013q1–q3 Source: Quarterly Labour Force Survey (2008–13); staff calculations. on outlays on the wage bill, goods and ser- in November fell to its lowest level in 2013. vices, and transfers. However, this will require This trend was interrupted in December, that strict control be maintained over hir- when the subindex rose 2.3 index points. ing. Growth in noninterest spending is to be Although underlying inflation pressures contained in real terms at about 2.2 percent appear to have been contained so far, recent a year, a major deceleration from the aver- wage settlements in excess of inflation and age seen in recent years, to create space for further weakness in the rand pose upside higher growth in capital outlays in line with risks to the inflation outlook. The fact that the National Development Plan priorities. there has been limited exchange rate pass- through to consumer prices so far likely 13 Inflation and monetary policy reflects both the level of excess capacity and the fragile domestic economic outlook. Inflation pressures have receded in recent With the weakening of the rand, the capital months, aided by lower food- and fuel- outflows, and the worsening of the current price increases, but rand depreciation account balance in recent months—factors and wage increases pose upside risks that could be subject to further deterioration Annual headline Consumer Price Index as monetary policy in advanced countries The current account inf lation has receded in recent months gradually continues to normalize—the Mon- deficit widened to (figure 1.11). After breaching the upper etary Policy Committee increased the repur- 6  percent threshold of the target band in chase rate from 5.0 to 5.5 in January. The a postcrisis high of July and August 2013, it fell to 5.4  percent Reserve Bank also signaled its willingness in December, helped by lower food prices to take further action if inflation pressures 6.8 percent in 2013q3, (from 6.0  percent year-on-year in Septem- were to rise, especially as a result of stronger as imports continued ber to 3.5 percent in December) and petrol second-round effects from exchange rate prices (from 12.8  percent to 10.0  percent). pass-through to wages and other input costs. to outpace exports Consumer Price Index inflation averaged 5.7  percent in 2013, a decline of 0.1  per- External sector centage point from 2012. By contrast, core inflation has trended up since 2011. Pro- The current account deficit has continued ducer price pressures have also eased from to widen, leaving South Africa vulnerable mid-year highs. The Producer Price Index to shifts in global market sentiment for final manufactured goods, intermedi- The current account deficit widened to a post- ate manufactured goods, mining and quar- crisis high of 6.8 percent in 2013q3, as imports rying, and agriculture, forestry, and fishing continued to outpace exports (figure 1.12). all moderated from mid-year highs. Similar Despite revisions to South Africa’s interna- trends are observed in the Kagiso Purchas- tional trade statistics to incorporate increased ing Managers’ Index price subindex, which trade flows with Botswana, Lesotho, Namibia, Figure Consumer price inflation decelerates, but core inflation is rising 1.11 Headline Core Petrol 8 40 6 30 Target in ation band Percent Percent 4 20 2 10 0 0 Jan. July Jan. July Jan. July Jan. July 2010 2010 2011 2011 2012 2012 2013 2013 Source: Statistics South Africa (database). S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S Figure The current account deficit widens 1.12 Trade balance Service balance Net income receipts Current account balance Net current transfers receipts 5 0 14 Percent –5 –10 March March March March March March September 2007 2008 2009 2010 2011 2012 2013 Source: South African Reserve Bank 2013. High demand for and Swaziland (see box 2.4 in section 2), the South Africa’s current account deficit capital inputs trade deficit widened to 3.2 percent of GDP. continues to pose a serious macroeconomic related to the public High demand for capital inputs related to the vulnerability, especially given the role of public investment program, higher oil prices, short-term capital inflows in financing it. investment program, and the impact of the depreciating rand lifted Nonresident activity in the domestic bond higher oil prices, import costs substantially, with imports rising and equity markets was subject to large 7.7 percent q/q saar in 2013q3. Exports ben- swings in 2013 in anticipation of the Fed’s and the impact of efited from recovering demand in the United tapering of quantitative easing (figure 1.13). the depreciating States and Europe and rising volumes of min- By end-2013 nonresident purchases of bonds eral exports, but the impact of labor unrest on and equity 2 totaled just over $110  million, rand lifted import manufacturing exports, among other things, compared with total inflows of $10.2  bil- costs substantially left export growth at 6.1 percent q/q saar in lion in 2012, though other flows like foreign value terms in 2013q3, trailing import growth. direct investment and bank-related inflows The impact of these trends on the overall cur- compensated. In the current environment rent account was compounded by rising net of low growth and reduced fiscal space, dividend and interest payments to the rest of South Africa is vulnerable to potential the world. This contributed to a widening in spillovers from disruptions in international the deficit on the net services, income, and capital flows as U.S. monetary policy shifts current transfer account to 3.7 percent of GDP gears and international financial conditions in 2013q3. tighten. South Africa’s exchange rate has weakened amid nonresident portfolio capital Figure outflows 1.13 Bonds and equities Rand/$ exchange rate 200 11 100 10 Exchange rate $ millions 0 9 –100 8 –200 7 Jan. July Jan. July Jan. 2012 2012 2013 2013 2014 Source: Johannesburg Stock Exchange; Citigroup; South African Reserve Bank (database). South Africa’s f lexible exchange rate projected to remain well below the average of should help cushion its adjustments. By end- 5.4 percent projected for Sub-Saharan Africa 2013 the rand had depreciated about 20 per- for 2014–16. Reflecting the subdued growth cent. But the overall trade deficit has so far over the forecast horizon, the negative out- been slow to respond. This in part reflects put gap that had opened in recent years (esti- the large share of U.S. dollar–priced com- mated at 2 percent of GDP in 2013) will not modities in South Africa’s export basket, the fully close over the forecast horizon. likely erosion of benefits of a more depre- Under the baseline forecast the recovery ciated exchange rate by higher wage and in growth is expected to be led by stronger input costs, and the role of supply-side con- exports, as the recovery in high-income 15 straints related to infrastructure bottlenecks economies gains pace and export capacity and industrial action. As highlighted in this expands thanks to addressing local power update’s special focus on export competitive- constraints. Domestic demand is expected ness, South Africa needs to address the con- to improve gradually, but less strongly than straints that have kept export growth low in in previous forecasts, reflecting low domestic order to rejuvenate exports and create jobs confidence. Consumption growth remains to reduce the gap between domestic savings fairly subdued, owing to persistently high The easing of some and investments—so that it can lower exter- unemployment, high household debt, and key structural nal vulnerabilities. decelerating growth in government con- sumption as fiscal consolidation proceeds. impediments combined Economic outlook for South Africa But the easing of some key structural impedi- ments over the course of the forecast—for with favorable real Growth is projected at 2.7 percent for instance, new power generation is expected interest rates over 2014, and medium-term growth prospects to come on-stream in the second half of have been revised down, with the lack of 2014—combined with favorable real interest the medium term domestic confidence impeding a stronger rates over the medium term is expected to is expected to recovery in consumption and investment spur a recovery in private investment. The medium-term outlook is for growth to spur a recovery in improve gradually but for the recovery to Risk to the outlook private investment be more subdued than previously forecast. Real GDP growth is projected to recover to The major downside risks to the outlook are 2.7  percent in 2014—from the estimated tied to the external environment, as shifting 1.9 percent in 2013—and reach 3.4 percent global growth patterns have the potential in 2015 (table 1.3). The main reason for the to lead to disorderly shocks in international downward growth projection for 2014 of capital and commodity markets about 0.5  percentage point relative to the International capital flows will be sensitive July 2013 Economic Update forecast is the to how fast high-income countries with- decline in domestic confidence amid fragile draw their extraordinary monetary support labor relations and persistently high unem- measures. The baseline projection assumes ployment. South Africa’s real GDP growth is that the United States will withdraw its Table Medium-term economic outlook 1.3 Percent, unless otherwise noted Indicator 2011 2012 2013 2014 2015 Household consumption 4.9 3.5 2.8 3.2 3.8 Government consumption 4.3 4.0 2.1 1.6 1.0 Gross fixed capital formation 4.2 4.4 3.2 4.5 5.5 Exports 6.8 0.4 3.3 4.7 5.2 Imports 10.0 6.0 6.1 5.7 5.4 GDP 3.6 2.5 1.9 2.7 3.4 Headline inflation 5.0 5.6 5.7 5.7 5.5 Current account deficit (percent of GDP) 2.3 5.2 5.9 6.3 6.4 Source: National Treasury of South Africa; South African Reserve Bank (database); staff calculations. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S quantitative easing fairly slowly. But markets medium-term plan for bringing the debt-to- could react sharply, as they did when specula- GDP ratio under control. In the baseline a tion on tapering first emerged in May 2013, continued muddling through without signifi- and such a scenario could be quite disrup- cant additional brinksmanship or excessive tive. World Bank analysis shows that in a sce- tightening is assumed. nario where markets react sharply, with rates rising by 200 basis points, capital flows to Domestic developments continue to developing countries could weaken 80  per- represent a major risk, especially cent or more for several months. Given its if labor relations do not improve, 16 external imbalances, South Africa has the making it imperative to resolve these potential to be one of the countries hardest tensions to boost growth prospects hit in such a scenario. Such a sudden capi- As stated in previous Economic Updates, tal outflow would require a sharp downward domest ic development s, part icularly adjustment in domestic absorption, causing increased tension in labor relations, represent growth and investment to contract. a major downside risk to the outlook. As wit- Lower commodity prices present another nessed in 2013, if labor disputes spread and If Chinese demand downside risk. If Chinese demand remains become protracted, output would be at risk of weaker than in recent years and supply con- contracting and business and consumer confi- remains weaker than tinues to grow robustly, the commodity price dence would fall, negatively impacting invest- in recent years and drops seen over the past two years could ment, hiring decisions, and worker spending. extend further. Estimates of the impact of At the same time, an effort to resolve these supply continues to lower commodity prices—comparing aver- tensions has the potential to increase inves- grow robustly, the age prices in 2013 with average prices in tor and domestic confidence, which in turn 2012—suggest that since 2012 South Africa could spur more robust growth. commodity price has suffered a net export earnings loss of drops seen over the between 0.4 and 0.6  percent of GDP. With Notes GDP growth already subdued, the downward 1. This follows the “ jobs gap” methodol- past two years could pressure on metal prices could thus serve as ogy used by the Brookings Institution extend further an additional drag on the moderate recovery in the Hamilton Project. The jobs gap projected over the forecast horizon. estimate here includes those who have The baseline forecast anticipates contin- stopped looking for work. Two scenarios ued recovery in high-income countries. But are used to estimate how long it would if the recovery fails to materialize, growth take to close this gap. The first scenario would be much weaker. In the Eurozone, one assumes fast job creation (about 384,000 of South Africa’s main trading partners, the a year); the second assumes more moder- banking sector is still weak, and pervasive ate job creation (about 246,000 a year), youth and long-term unemployment are rais- in line with the 2011–13 average. The ing concerns about a permanent deteriora- working-age population is assumed to tion in job skills and the employability of the grow 1.4 percent a year. Under the sec- jobless. At the same time, continued sharp ond scenario the jobs gap will not have credit contractions raise the specter of defla- fully closed by 2020. tion, which could exacerbate debt-overhang 2. Total dollar nonresident flows are com- problems and result in a much more muted puted using the total cumulative rand recovery. The U.S. federal deficit has also values for the calendar year and the come down—mainly due to heavy spending average $/rand nominal exchange rate cuts imposed by sequestration and rising tax ( Johannesburg Stock Exchange; Citi- revenues as the economy recovers. Neverthe- group; South African Reserve Bank less, little progress has been made toward a database). SECTION 2 Export Competitiveness South Africa’s exports have featured promi- Exports are expected to be a key driver of nently in recent headlines, and the widening the faster growth, with the National Develop- of the current account deficit over the last ment Plan targeting export volume growth of two years has brought the secular slowdown 6 percent a year. in export growth into sharp relief. Even as A stronger export sector also drives job advanced economies are emerging from creation. Increasing exports, particularly recession, South Africa’s export growth con- in manufacturing, may be crucial for the tinues to disappoint. low-skilled job creation needed to sub- Following the lifting of sanctions in the stantially reduce high overall and youth early 1990s, exports expanded rapidly, unemployment. And exports are especially but by the mid-1990s the pace of growth critical amid South Africa’s widening cur- had begun to slow. This slowdown acceler- rent account deficit—and the external ated quickly in the first half of the 2000s, vulnerability arising from its reliance on and more quickly still after 2005, with real volatile capital flows to fund the deficit. export growth (in U.S. dollars) falling to This section aims to move beyond the just 0.6 percent annually between 2005 and headlines and assess the facts behind South 2011,1 compared with the middle-income Africa’s export performance and competi- country average of 6.4  percent. The result tiveness, by drawing not only on aggregate is that South Africa’s share in global export trade figures but also on a unique dataset markets stagnated at a time when other containing information on the exports of emerging markets like China, India, and the some 20,000 South African firms spanning Russian Federation were seeing major gains 2001–12. In so doing, the section places (figure 2.1). South Africa’s export performance in a Policymakers are aware of the need to broader context, stripping out the impact reignite export growth. The New Growth of the large minerals sector 6 where relevant Path (2011), 2 the National Development and comparing the performance of goods Plan 2030,3 the Industrial Policy Action Plan exports with that of emerging market peers. 2012/13–2014/15,4 and recent Monetary Pol- This peer group includes South Africa’s icy Committee statements (2013)5 all identify BRICS partners (Brazil, the Russian Federa- export growth as a priority. Restarting the tion, India, and China) and Chile,7 Colom- export engine is critical to reinvigorating bia, Thailand, and Turkey (countries with growth—and to developing a more diversi- similar populations, incomes, and export fied export base to help reduce growth’s baskets). The section also examines the per- volatility. The National Development Plan formance of services exports. See box 2.1 for aims to increase annual real GDP growth to an overview of the section’s methodology, about 5.5 percent, well above the 3.5 percent along with an acknowledgement of some average in the decade preceding the crisis. limitations. 17 S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S Figure Export performance is failing to keep pace 2.1 South Africa’s global export market share, 1992–2012 South Africa Overall Minerals, metals, and fuels Noncommodity BRICs 2.0 20 1.5 15 Percent Percent 18 1.0 10 0.5 5 0.0 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 The fuels, minerals, Source: UN Comtrade (database) via World Integrated Trade Solution. and metals sectors Box Methodology and limitations make up around 2.1 In analyzing export performance it is important to keep in mind that countries do not export—firms do. So understanding half of all exports the dynamics of firms in export markets is critical for considering policy responses. This assessment’s methodology is based on the World Bank’s Trade Competitiveness Diagnostic Toolkit, which complements traditional aggregate trade analysis with firm- and accounted for level techniques. The aggregate analysis draws data mainly from the United Nations Commodity Trade Statistics Database (UN almost 90 percent of Comtrade, via the World Integrated Trade Solution platform), supplemented by the International Monetary Fund, the United ­ Nations Conference on Trade and Development, the International Trade Centre, the World Bank, and several South African sources South Africa’s export (Statistics South Africa, the South African Revenue Service [SARS], and the South African Reserve Bank). The firm-level analysis draws on detailed customs transaction data received from SARS as part of the World Bank’s Exporter Dynamics Database. The growth over 2007–12 SARS data cover more than 20,000 exporters over 2001–12 and include data on individual export transactions (value and volume) by product and destination. The analysis has a few limitations. First, it depends on the coverage and quality of the data available from UN Comtrade and SARS. In both cases key data (such as on exports to Southern African Customs Union member countries) are largely missing (see box 2.3 below). There may well be other data limitations—systematic or otherwise, such as on export unit values—that will impact the robustness of the findings. Second, while the customs transactions data provide valuable insights into how individual firms enter and exit export markets, expand, and diversify, these data provide no information on firms’ other char- acteristics, including size, ownership, investment levels, and productivity. This update thus describes export performance and patterns but cannot test the determinants of the performance. South Africa’s exports—five stylized facts South Africa’s nonminerals sector is underperforming and lagging behind that Fact 1. South Africa’s exports—mineral, of its peers. Driven by chemicals, metal nonmineral, and services—are underperforming manufactures, and automotive and indus- South Africa’s 20,000 exporters sell nearly trial machinery, with the latter aided by 5,000 different products—covering more government support through the Automo- than 90 percent of all possible goods classi- tive Production and Development Program fied for trade.8 Yet just a small subset of these, (formerly the Motor Industry Development encompassing the fuels, minerals, and metals Program), nonmineral exports have grown sectors, make up around half of all exports more than 8  percent annually in nominal by value and accounted for almost 90 percent terms since 1999–2000 and have recovered of South Africa’s export growth over 2007– from the crisis fairly well. But as with min- 12 (figure 2.2, top panel). But this growth erals, nonmineral volumes are flat, perhaps resulted mainly from the pull of high global resulting from links to commodity prices commodity prices. In fact, mineral export in some sectors (metal manufactures and volumes have been virtually flat since 2001 chemicals). But prices of differentiated goods (figure 2.2, bottom panel). have risen, which may reflect rising quality Minerals are driving South Africa’s export growth, with price growth and Figure virtually flat volumes since 2001 across sectors 2.2 Index of merchandise export growth, 1994–2012 Minerals Agriculture Manufacturing 600 500 Index (2001 = 100) 400 300 19 200 100 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Decomposition of export growth, 2001–12 As with minerals, Minerals Value Volume 500 nonmineral volumes 400 are flat, perhaps resulting from links to Index (2001 = 100) 300 commodity prices in 200 metal manufactures 100 and chemicals 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Metal manufactures Value Volume 250 200 Index (2001 = 100) 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Nonminerals Value Volume 300 Index (2001 = 100) 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: UN Comtrade (database) via World Integrated Trade Solution. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S in others. Even so, since 1994 South Africa’s (figure  2.3, bottom panel), particularly nonmineral export growth has been far in modern services like communications, slower than that of its peers (figure 2.3, top finance and business, remote access services, panel). A simple cross-country model that call centers, and education. This weak perfor- controls for country characteristics like per mance seems surprising, given the prolifera- capita income, population, and the cost of tion of South Africa’s services brands across exporting suggests that South Africa under- Africa over the past decade. One explanation exported nonmineral goods by about 9 per- is that South Africa’s outward foreign direct centage points of GDP, around $34 billion, in investment, most of which is in services, is 20 2011–12.9 acting as a substitute for direct exports— Services exports are also falling short and that the data are not capturing the true of potential. South Africa is top among its extent of internationalization of South Afri- peers in the contribution of services to the ca’s services exports. domestic economy. Over 2000–11 services accounted for 66 percent of GDP and 75 per- Fact 2. Exporters are highly cent of growth—and were the main source concentrated—a few super-exporters South Africa’s of formal employment. Yet the country’s ser- dominate 20,000 minnows vices exports are far below what its level of The top 5 percent of South Africa’s export- services exports are development would predict and have grown ing firms account for more than 90  per- far below what its slowest among those of its peers since 2005 cent of its exports. Among its peers, South level of development South Africa’s nonmineral goods and services exports are falling behind those of Figure its peers would predict 2.3 Index of nominal nonmineral merchandise exports, 1994–2012 China Russian Federation India Turkey Colombia Brazil Thailand South Africa 1,250 1,000 Index (1994 = 100) 750 500 250 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Services export growth, 2005–12 China Russian Federation India Turkey Colombia Brazil Thailand South Africa 400 300 Index (2005 = 100) 200 100 0 2005 2006 2007 2008 2009 2010 2011 2012 Note: Graphs refer to the index of nominal export growth in U.S. dollars. Source: Top panel, UN Comtrade (database) via World Integrated Trade Solution; bottom panel, World Development Indicators (database). Africa’s structure is more concentrated than This concentrated firm export structure all but Chile’s (figure 2.4, top panel). And is persistent. Over 2002–12 concentration this applies to more than just minerals. Com- increased slightly, with the share of the top pared with Brazil, Turkey, and Colombia, 5 percent of exporters growing from 90 per- South Africa’s apparel and electronics sectors cent (85 percent for nonminerals) to 92 per- appear fairly diversified in their firm export cent (87 percent for nonminerals). There was structures (figure 2.4, bottom panel). also limited movement across size catego- South Africa stands out for not only the ries—over the decade only around 100 of the concentration at the upper end of its export nearly 7,000 exporters active in both 2002 sector but also the long tail at the back. The and 2012 moved from the bottom 80 percent 21 vast majority of the more than 21,000 South to the top 5 percent. South Africa has one of African firms that exported in 2012 did so on the lowest new firm entry rates into export- a very small scale, with the median exporter ing among its peers (table 2.1). earning just $29,000 from exports, by far the lowest among the peer countries. While the Fact 3. Super-exporters are losing dynamism average exporter among all incumbent firms and competitiveness, but smaller, more has annual export earnings of around $5 mil- dynamic exporters are not yet large South Africa stands lion, serving 5 destinations with 20–25 prod- enough to drive aggregate exports out for not only the ucts, the average firm in the top 1 percent of The fairly strong experimentation, in the South Africa’s exporters has annual export form of new product introductions and concentration at the earnings of around $400  million, serving entry into new markets, that characterized more than 25 markets with 75–100 products. South Africa’s export sector before the crisis upper end of its export sector but also the Figure The top 5 percent of exporters dominate the rest (2004 – 08 average) long tail at the back 2.4 Share of export value accounted for by top exporters Top 5 percent Top 1 percent 100 75 Percent 50 25 0 Brazil Chile Colombia Turkey South Africa Distribution of South African exports by exporter size (across sectors) Top 5 percent Bottom 95 percent 100 75 Percent 50 25 0 Food and Agricultural Fuel, ores, Metal Chemicals Textiles, Other metal Industrial Electronics Transport Apparel, Other beverages raw materials metals manufacturing leather manufacturing machinery equipment footwear manufacturing Source: Exporter Dynamics Database, based on data from the South African Revenue Service. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S Export measures at the firm level for selected countries in 2006 – 08 and South Table Africa in 2012 2.1 Number of Median Ratio: mean Share of top exporters Mean exports exports per exports 5 percent Number of Number of Number of per million per exporter exporter to median of exporters products per destinations Entry rate Survival rate Country exporters people ($ thousands) ($ thousands) exports (percent) exporter per exporter (percent) (percent) Brazil 19,375 161 8,539 233 37 82 22 54 Chile 7,314 430 8,317 49 170 94 4.5 3.4 38 35 Colombia 9,768 244 1,957 58 34 81 4.9 2.8 32 42 Turkey 44,570 586 2,204 105 21 80 9.6 3.9 32 55 South 22 Africa 21,721 453 2,699 29 93 92 15 3.6 28 49 Note: Blue shading denotes where South Africa is among the two highest countries on that indicator; red shading denotes where South Africa is among the two lowest countries on that indicator. The entry rate is the number of new entrants as a share of the number of total exporters (new and existing); the survival rate is the number of entrants that did not exit the export market. Source: Exporter Dynamics Database, based on data from the South African Revenue Service. appears to have suffered more recently. As or more products has fallen from 73  per- The largest exporters a result, the so-called intensive margin, cent to just 64 percent. By contrast, smaller which ref lects the expansion of existing exporters are expanding in both products have grown the products into already-established markets, and markets. However, the high concentra- slowest, and some has become an even larger contributor to tion in South Africa’s export sector means export growth, its share rising from 79 per- that the net impact of increased dynamism have declined cent in 2006–08 to 88 percent in 2010–12. at the bottom end of the market fades into While the top 1  percent of exporters grew insignificance against the super-exporters’ fastest across all regions in the precrisis retreat from experimentation. years, the situation has since reversed. The Declining dynamism is also evident in largest exporters have grown the slowest, the size and reach of South Africa’s export and some have declined, reflecting losses products. Over the last decade a number in existing products and markets and less of high-value products that were exported success (or less ambition) with new product to multiple markets—in many cases 20 or introduction. The top 1  percent of firms more markets—disappeared from the export has seen a sharp drop in the contribution basket (blue dots in figure 2.6, top panel). of new products to their markets in recent These include, for example, multi‑ply paper years (figure  2.5). Since 2010 the share of and paperboard (HS480522 and HS482359) total exports (among the top 1  percent of and bovine leather (HS410422). At the same exporters) coming from firms selling 10 time many new products entered the export Both the experimentation and competitiveness of South Africa’s super-exporters Figure are falling sharply 2.5 Average growth contribution from new product and market entry 2005/06–2007/08 2009/10–2011/12 25 20 15 Percent 10 5 0 Top 1 percent Bottom 80 percent Top 1 percent Bottom 80 percent (entry) (entry) (entry) (entry) Products Markets Source: Exporter Dynamics Database, based on data from the South African Revenue Service. Figure “Big hit” exports are not being replaced, and key markets are underexploited 2.6 Value and reach of nonmineral exports, 2001/02a 10 8 Nonmineral export value, 6 $ millions (log) 4 2 23 0 –2 –4 0 25 50 75 100 Number of markets Value and reach of nonmineral exports, 2011/12a Declining dynamism is 10 evident in the size and 8 reach of South Africa’s Nonmineral export value, 6 export products $ millions (log) 4 2 0 –2 –4 0 25 50 75 100 125 150 Number of markets Gravity prediction of nonmineral exports, 2011/12b 16 United Mozambique Kingdom United States Brazil India Zimbabwe Nigeria Zambia 14 France Italy Germany Russian Canada Australia China Argentina Federation Spain Kenya Japan Ethiopia Predicted exports Indonesia 12 Colombia Chile Egypt Mauritius Turkey Ghana Korea, Rep. Thailand Malaysia Vietnam Côte d’Ivoire 10 8 6 6 8 10 12 14 16 Actual exports a. Data are at the HS six-digit level for exports with a value of at least $10,000. Blue dots are exports active in 2001/02 (but not in 2011/12); teal dots are exports active in 2011/12 (but not in 2001/02); gray dots are exports active in both periods. b. Regression results control for country selection bias and firm heterogeneity bias. Nonmineral exports are averaged between 2011 and 2012; values less than $1,000 are treated as zero. Source: UN Comtrade (database) via World Integrated Trade Solution. basket (teal dots in figure 2.6, middle panel), Africa’s large nonmineral exporters into new but they were fewer than the products exit- global markets. The most successful global ing, were lower in value, and reached sub- exporters (like China and Germany) exploit stantially fewer markets. up to 70  percent of their potential export Declining dynamism can also be revealed relationships,10 but South Africa reached through the tepid expansion of South just 20 percent of its potential in 2012. South S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S Africa’s level is increasing (up from 15 per- least well in manufacturing sectors that are cent in 2000) but much slower than that of labor- and (in some cases) material-intensive. most of its peers. A gravity model of bilateral The factor content of South Africa’s exports trade can show how export levels compare reveals that exports are concentrated in with expectations, given location, size, sector products with human capital and especially structure, language, trade agreements, and physical capital intensity far beyond those in other predictors. In a graphical representa- South Africa’s endowments (figure 2.7, bot- tion of this model (figure 2.6, bottom panel), tom panel).12 For example, South Africa’s countries to which South Africa underex- export basket is associated with products 24 ports appear above the 45-degree line, and produced by countries in which 67  percent those to which it overexports appear below of the employed labor force has postsecond- the line. The results for nonmineral exports ary education, but less than 21 percent of the indicate that South Africa exports more employed South African labor force has at than would be predicted with neighbors like least some tertiary education.13 Zimbab­ we and Mozambique, as well as with The good news is that South Africa is not small European countries like Belgium and trapped in low-technology exports, giving it South Africa is not the Netherlands and East Asian countries substantial scope for further upgrading and like the Republic of Korea, Japan, and Malay- for competing on quality and price. The bad trapped in low- sia. South Africa appears to export almost news is that the mismatch with endowments technology exports, as much as predicted with China and the suggests that this positioning reflects a stra- United States. However, it underexports to tegic response to domestic constraints rather giving it substantial Brazil, India, and populous African coun- than a strategy following comparative advan- scope for further tries like Nigeria, Ethiopia, and Egypt. tage. This raises concerns about the sustain- ability of South Africa’s competitiveness upgrading and Fact 4. Super-exporters’ sophisticated, in nonmineral exports, especially over the for competing on technology-intensive exports play against longer term, and whether the export sector South Africa’s comparative advantage in low- (under its current model of competitiveness) quality and price skilled labor—with implications for jobs can contribute much to inclusive growth Unlike many resource-rich countries, (box 2.2). South Africa has a strong base in manu- facturing, requiring strong technologi- Fact 5. Sub-Saharan Africa has emerged cal knowledge. A common measure of the as the dominant market for South technological sophistication of exports— Africa’s nonmineral exports EXPY—shows that while South Africa’s At the beginning of the 2000s nearly 60 per- overall exports are slightly less sophisticated cent of South Africa’s merchandise exports than what its income would predict, the story went to Organisation for Economic Co-­ reverses when looking only at nonmineral operation and Development (OECD) coun- exports (figure 2.7, top and middle pan- tries, most of that to Europe. But over the els).11 South Africa’s nonmineral exports are next decade exports to EU and OECD mar- more sophisticated than those of all its peers kets stagnated, while exports to BRICs, most except Turkey; services exports are also more notably China, exploded on the back of the sophisticated than would be expected. commodities boom. By 2011/12 the EU’s Over time, exports have been shifting share of South Africa’s exports had fallen to increasingly toward medium- and high-tech- just 21 percent, while the BRICs’ share had nology sectors, with corresponding demand grown from less than 5 percent to more than for high skills and capital investment. In fact, 19 percent. the only two sectors in which South Africa has But stripping out mineral ores, met- gained in both revealed comparative advan- als, and fuels reveals that the Sub-Saharan tage and global market share since 2000 African market is where South Africa’s real are among the most sophisticated—indus- export dynamism lies. In nonmineral sec- trial machinery and transport equipment. tors the BRICs’ share of exports has grown In these sectors South Africa is competing only from 5 percent to 9 percent since 2000. largely on quality rather than price in global By contrast, Africa’s14 share has grown from markets. By contrast, exports have performed 19 percent to almost 29 percent, overtaking Exports are concentrated in sophisticated sectors beyond South Africa’s Figure endowment base 2.7 Export sophisticationa 20,000 China 15,000 Turkey Thailand India EXPY 10,000 Brazil South Africa 25 Chile 5,000 Colombia Russian Federation 0 7 8 9 10 Log of GDP per capita, 2012 20,000 The Sub-Saharan China Chile India Thailand South Africa Turkey African market Russian Federation 15,000 Brazil is where South Nonmineral EXPY Colombia 10,000 Africa’s real export dynamism lies 5,000 0 7 8 9 10 Log of GDP per capita, 2012 Revealed factor intensity, 2012b 12 10 8 Human capital 6 4 2 0 0 60,000 120,000 180,000 Physical capital a. Export productivity and nonmineral export productivity are in current dollars based on PRODY values averaged for 2009–11. Only 66 low- and middle-income countries with more than 1,000 exports at the HS six-digit level and with per capita income of greater than $1,000 in 2011/12 are included in this regression. b. Bold lines are estimates of national capital endowments; dashed lines represent the factor content of median export. Source: Top and middle panels, UN Comtrade (database) via World Integrated Trade Solution; World Development Indicators (database). Bottom panel, Shirotori, Tumurchudur, and Cadot (2010). the European Union, which has fallen from exports (box 2.3). The African market is also more than 41  percent to just 28  percent, by far the most important destination for as South Africa’s most important market. South Africa’s services exports, with close to Indeed, including Southern African Cus- 60 percent going there. toms Union exports, Africa now accounts for The growth of Africa relative to Europe around half of South Africa’s nonmineral as a market for South Africa’s nonmineral S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S Box Exports, comparative advantage, and jobs 2.2 How does the mismatch between South Africa’s revealed comparative advantage and its factor endowments shape the prospects for exports to contribute to employment growth? The mismatch suggests that overall export growth is unlikely to have an especially large multiplier effect on employment and that demand would skew toward higher skilled employment. To assess this more specifically, this box tests two situations to see the potential implications on employment: competing with China in global markets; and shifting exports to Africa. Competing with China in global markets While South Africa’s export basket is more physical capital– and human capital–intensive than that of most of its peers, China’s 26 has overtaken it on both counts (box figure 1). China’s export basket is associated with products that pay lower wages but employ higher skills, more years of schooling, and greater physical capital. South Africa’s inability to compete with China on wages means that it must move into higher quality products to achieve greater value added. Box figure 1. Human capital (education) and capital stock per worker of exports: South Africa and its BRICS peers, 2000–12 China Russian Federation India Brazil South Africa 8.5 The African market Export productivity: human capital is by far the most 8.0 important destination (years of school) for South Africa’s 7.5 services exports 7.0 6.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Export productivity: capital stock per worker 100 90 80 ($ thousands) 70 60 50 40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Average years of schooling are from Barro and Lee (2010), and capital stock is constructed following the perpetual inventory method using investment series from version 6.2 of the Penn World Table (Heston, Summers, and Aten 2006). Shifting exports to Africa Despite being associated with a higher skills ratio, the recent rise in exports to Sub-Saharan Africa is associated with slightly lower wages, value added, and human capital (in years of schooling) than exports to traditional Organisation for Economic Co-operation and Development markets like the European Union and the United States (box figure 2), suggesting that the rise was accompanied by a relative increase in labor demand for lower wage workers. On the other hand the physical capital of goods destined for Africa is higher than those destined for the European Union, and is roughly on par with the capital intensity of exports to the United States. This suggests for goods destined to Sub-­ Saharan Africa a potential decline in overall labor demand in relative terms. Thus, the net labor impact of the relative increase in exports to Sub-Saharan Africa is unclear. (continued) Box Exports, comparative advantage, and jobs (continued) 2.2 Box figure 2. Human capital (education) and capital stock per worker for South Africa’s exports to regional markets, 2000–12 United States European Union Sub-Saharan Africa Rest of world World China 8.5 Export productivity: Human capital 8.0 27 (years of school) 7.5 7.0 6.5 The shift to Africa 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 has diversified Export productivity: Capital stock per worker 100 markets, reducing 90 aggregate risk from 80 adverse shocks ($ thousands) 70 60 50 40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Average years of schooling are from Barro and Lee (2010), and capital stock is constructed following the perpetual inventory method using investment series from version 6.2 of the Penn World Table (Heston, Summers, and Aten 2006). exports is important because these markets (figure 2.8, bottom panel). A new exporter is are in many ways substitutes for each other. now more than three times as likely to start The mix of South African exports by sub- in Africa as in Europe. sector is very similar across the two markets, The shift to Africa is a positive story for with African markets more important for several reasons. It has diversified markets, machinery and chemicals exports and Euro- reducing aggregate risk from adverse shocks; pean markets more important for material- it cushioned the impact of the decline in based manufactures. Africa has grown more Europe; and Africa’s rapidly growing con- than Europe since 2002, but the 2008–09 cri- sumer class and infrastructure needs have sis brought a substantial shift—exports to the provided ample opportunities for South European Union fell 39 percent, but exports Africa’s exporters and investors. But the to Africa fell only 16  percent. And exports European market is still 30 times larger than to Africa (53 percent) have recovered much the African market, and South Africa’s mar- more than those to Europe (22 percent) since ket share in much of Africa is already higher the crisis (figure 2.8, top panel). As a nearby than its share in Europe across most sectors. market, Africa is also a natural entry point So even with a large market share there are for new exporters. While new firm entry into some limits to the scale of growth possible in European markets is down some 40 percent Africa relative to traditional markets. since 2004–06 (three-year average), entry The structure of South Africa’s export- into African markets has remained robust ers to Africa differs substantially from the S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S Box Exports to countries in the Southern African Customs Union 2.3 In November 2013 the South African Revenue Service revised its reporting of trade data to include exports and imports with its Southern African Customs Union (SACU) partners: Botswana, Lesotho, Namibia, and Swaziland. (Prior to this date, official bal- ance of payments statistics included estimates of bilateral trade with Southern African Customs Union partners.) The effect was a deep cut into South Africa’s reported trade deficit. The reason for the revision is that trade data reported by South African customs a­uthorities—including both to the United Nations (through Comtrade, its Commodity Trade Statistics Database) and through the Exporter Dynamics Database, the two principal sources used for this analysis—grossly underreport trade with SACU partners (by between 96.0 percent and 99.7 percent across years compared with the figures reported in the SACU Statistical Database). So, most analytical work on South Africa’s trade, including the analysis in this report, ignores trade with SACU part- 28 ners. What is the nature of South Africa’s exports with its SACU partners, and how does it affect the broader story outlined in this update? In 2011/12 the total value of South Africa’s exports to SACU partners was close to $12.7 billion, with Botswana and Namibia together accounting for more than 72 percent (box figure). Including exports to SACU countries has major implications for the export storyline: • It nearly doubles the value of exports to Africa, making Africa easily the largest regional market for goods exports, at more than 25 percent of South Africa’s total. South Africa’s market • If fuels, ores, and metals are removed, SACU markets alone account for 19 percent of South Africa’s nonmineral exports, and Africa overall accounts for more than 50 percent. share in much of Africa • Manufacturing dominates the basket of goods exports to SACU markets, at more than 63 percent of the total, but it accounts for just 39 percent of exports to global markets. is already higher than its share in Europe Box figure. Manufacturing dominates South Africa’s exports to its Southern African Customs Union partners across most sectors Primary Fuels, ores, and metals Manufactures Other 3 2 $ billions 1 0 Botswana Lesotho Namibia Swaziland Primary Fuels, ores, and metals Manufactures Other 3 2 $ billions 1 0 Botswana Lesotho Namibia Swaziland Source: SACU Statistical Database. aggregate structure described in Fact 2. The 90 percent of exports to BRICS and 80 per- top 1 percent of exporters to Africa account cent to the European Union). Nearly 85 per- for just 46 percent of exports there (versus cent of new exporters to Africa have no Sub-Saharan Africa is displacing Europe as South Africa’s nonmineral export Figure destination of choice 2.8 Evolution of total exports to Africa and the European Union, 1995–2012 European Union Sub-Saharan Africa 25,000 Postcrisis: +22 percent 20,000 15,000 Crisis: $ millions –39 percent Postcrisis: 29 +53 percent 10,000 Crisis: –16 percent 5,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 The survival rates of Average annual new exporter entry by selected target market firms exporting to European Union Sub-Saharan Africa 3 Africa have risen well Average number of rms (thousands) above the overall 2 average in recent years 1 0 2004–06 2006–08 2008–10 2010–12 Source: Top panel, UN Comtrade (database) via World Integrated Trade Solution. Bottom panel, Exporter Dynamics Database, based on data from the South African Revenue Service. export experience outside the region. A new have risen well above the overall average in export relationship to Africa in its first year recent years.16 This finding, combined with is on average only around half the size of the more modest growth and expansion new export relationships overall. Moreover, trends for exporters to Africa, suggests that the average export spell is shorter in Africa many firms use the African market in an than elsewhere.15 And the average annual ad hoc way—reacting when opportunities growth rate of exporters to Africa surviving come rather than seeking them out. Given five or more years is lower than for export- the fixed costs of entering export markets, ers operating elsewhere (table 2.2). On the this approach would normally cost firms other hand, nearly a third of exporters that too much. But the lower competitiveness in started in Africa expand to a new region African markets may make this constraint within five years, comparable to the rate for less binding—even incurring higher costs firms that start elsewhere and later expand exporters can still profit17—and implies that into Africa. regional export markets are not as effective The data on survival rates give some inter- in ensuring that the most efficient (produc- esting insights into how exporters use the tive) South African firms enter. African African market. While the survival dura- markets are less likely than European mar- tion of individual product export spells is kets to demand higher standards and qual- lower in Africa than in other regions, the ity of exporters. In the short term this partly survival rates of firms exporting to Africa explains how easily South African exporters S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S Table Exporters to Sub-Saharan Africa differ in many ways, but not all 2.2 Average 2004–07 Number of firms in new export relationships 17,160 Number (percentage) of firms in new export relationships with Sub-Saharan Africa and other regions 11,157 (65.0) Number (percentage) of firms in new export relationships with Sub-Saharan Africa only 7,106 (41.4) Number (percentage) of firms in new export relationships everywhere that survive five years or more 2,121 (12.4) Number (percentage) of firms in new export relationships with Sub-Saharan Africa that survive five years or more 1,179 (10.6) Number (percentage) of firms that begin a new export relationship with Sub-Saharan Africa only that also export elsewhere 30 in the first five years 2,265 (31.9) Number (percentage) of firms that begin a new export relationship outside Sub-Saharan Africa only that also export to Sub- Saharan Africa in the first five years 1,881 (31.3) Weighted average annual growth rate (percentage) of export values in relationships that survive five years or more in: Sub-Saharan Africa 9.6 European Union 15.1 BRICs 18.1 Many causes shape United States 14.6 Other 11.9 firm and sector Source: Exporter Dynamics Database, based on data from the South African Revenue Service. competitiveness, including deep, have expanded in Africa. But over the lon- exports respond to real exchange rate economywide ger term it suggests that African markets movements.18 Indeed, addressing structural may not compel firms to invest in innovation factors will be the key to ensuring a more structural factors and productivity—and thus may not be an competitive real effective exchange rate, by that impact how ideal springboard for preparing South Afri- lowering domestic price levels and raising can exporters for highly competitive global productivity. exports respond markets. In this respect government policy has to real exchange an important role. The government’s main Three opportunities for unlocking policy documents, including the National rate movements South Africa’s export potential Development Plan, the New Growth Path, South Africa’s exports have a two-tier struc- and the Industrial Policy Action Plan, tar- ture along several dimensions: minerals ver- get competitiveness through a wide range sus nonminerals; super-exporters versus the of interventions. Under the Industrial Policy rest; global exporters operating on the tech- Action Plan, both cross-cutting and sector- nological frontier versus regional exporters specific programs and policies are designed competing less on quality (though still with to address some of the factors shaping high capital intensity). In the past South export underperformance. Sector-specific Africa’s top-tier exporters drove growth, but interventions have long featured promi- their competitiveness and dynamism appear nently in South Africa’s policy t ­oolkit— to have stagnated. Smaller firms are strug- with mixed results. They have been at the gling to grow, and new exporters are not heart of export growth in sectors like motor emerging enough to offset declines at the top vehicles while having less impact in stem- of the export sector, much less to drive aggre- ming decline in other sectors. The question gate growth. is not whether to have sector-specific pro- Overcoming these export dynamics is grams but about the relative investment in not simple. Export success is not deter- them and the specifics of how the programs mined solely by trade-specific issues, such are designed and implemented. But as the as tariffs and nontariff barriers, trade facili- Industrial Policy Action Plan recognizes, the tation costs, and export promotion. Nor is structural environment needs to be support- it determined solely by the real exchange ive for sector-specific interventions to be rate. Many causes shape firm and sector most effective. competitiveness, including deep, econo- This subsection looks at three opportuni- mywide structural factors that impact how ties that can help raise firm competitiveness at both ends of the export structure—and The concentration of South Africa’s unlock the potential for greater export exports, along with the lack of extensive growth. innovation, is consistent with the country’s higher concentration of export market share Opportunity 1. Domestic market than that of its peers, and the higher price– competition—to promote dynamism and cost margins associated with it.20 the incentive to commit to export markets Reducing industry concentration and While the total factor productivity (TFP) improving allocative efficiency will depend of South Africa’s individual manufacturing in part on increasing competition. As the firms places it among the leaders in a group pool of new entrants includes operators that 31 of peer countries, the manufacturing sector are potentially more productive than some performs poorly against these same peers in incumbents, entry barriers generally weaken aggregate TFP (figure 2.9). This suggests that the link between a firm’s market share and South Africa has low allocative efficiency in its productivity. This is why the promotion ­manufacturing—allocative efficiency is high- of productivity growth has been a concern est when the most productive firms in the driving South Africa’s competition policy sector have the highest market shares. But in reforms. Reducing industry South Africa the high domestic entry barri- Improving allocative efficiency also concentration and ers in the various sectors documented by the depends on trade and investment policy. South African Competition Authority and It is through trade policy reforms that the improving allocative protection from imports preserve the market South African government has probably share of less productive and innovative firms had the biggest influence on competition.21 efficiency will depend in some sectors.19 The trade and competition policy reforms of in part on increasing South Africa’s total factor productivity is high at the firm level but low in the competition Figure aggregate 2.9 Argentina South Africa (2003) Chile South Africa (2008) Brazil Thailand Malaysia Colombia Morocco China Mexico Zambia Kenya Nigeria 0 1 2 3 4 Average within- rm total factor productivity Brazil Malaysia China Thailand Morocco Chile Colombia Mexico South Africa (2003) South Africa (2008) Nigeria Kenya (2007) Zambia (2007) Argentina (2006) 0.00 0.25 0.50 0.75 1.00 Allocative ef ciency index (all industries) Note: Data are for 2008 unless otherwise noted. Source: World Bank 2010. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S the 1990s reduced industry concentration, of firms that choose to export. In efficient promoted greater competition, and drove markets only the most productive domestic growth in manufacturing TFP. 22 However, firms can absorb the fixed costs and greater progress on international trade liberaliza- competition in export markets. But if the tion has stalled while high nontariff barriers domestic market fails to condition firm com- remain. Recent research estimates that non- petitiveness (for example, by allowing higher tariff barriers, in the form of restrictive rules profits through protection or collusion) and of origin, import bans, and permit require- firms export only when their domestic mar- ments, cover about a fifth of Southern Afri- gins are threatened, the least productive 32 can Development Community trade, with firms, not the most productive, will turn to some of South Africa’s neighbors raising the export markets first. This bodes badly for highest barriers.23 There is now a need for a survival and growth in export markets. And second wave of reforms through multilateral though the lower competition in African and regional initiatives. markets may cushion South Africa’s export- How does insufficient competition under- ers in the short to medium term, this cushion mine export competitiveness? First, it reduces will not last forever. There is now a need the firms’ incentives to focus on export mar- Finally, because many large firms are kets, which may offer more growth potential upstream in the value chain (due in part for a second wave but at a lower margin. In protected markets to their starting as state-owned enterprises of reforms through successful corporates grow by opening a new linked to resource sectors), inflated margins business line domestically, where profits are hinder the competitiveness of downstream multilateral and higher, rather than by expanding an exist- (value-adding) industries that rely on these regional initiatives ing business globally and facing tougher large firms for inputs.25 This impact is com- competition. One result is the emergence of pounded by trade policies that reduce the conglomerates, which are prevalent in South profitability of exporting and tend to favor Africa’s export structure. Indeed, among the established industries and firms, raising the top 1 percent of South Africa’s exporters the cost of inputs (especially for downstream average number of products is 75. sectors). A second way that insufficient competi- The structure of export firms raises a tion hurts export competitiveness is by influ- question about how government can best encing the strategic commitment of firms to support an effective export market struc- exporting. Most South African firms export ture to balance efficiency with equity and at a very small scale, but whether these are short-term priorities with longer term ones. actually small firms or larger ones export- While greater consolidation by the largest ing a very small amount of their production and most productive firms is probably good is unclear. It is likely the latter—data from for efficiency and more conducive to raising the 2007 World Bank Enterprise Survey indi- export volume in the short term (which may cate that even for firms classified as export- be a priority for objectives like reducing the ers (firms that export at least 10 percent of current account deficit), the development output), the domestic market accounts for of sustainable medium-size exporters may an average of 72 percent of total sales, well be critical for longer term goals like diver- above the global average of just 46 percent. sification and innovation and may generate Anecdotes from industry provide numerous more jobs at home (per rand of export). examples of firms that export mainly as a Box 2.4 explores how the policy implications response to temporary declines in domes- of helping small and medium-size firms start tic demand or to the exchange rate impact exporting differ from those for enabling on domestic competition. 24 This reactive medium-size and larger firms to survive and approach to exporting is inefficient, as firms grow. must incur fixed costs each time they re- enter the market. It also undermines firms’ Opportunity 2. Competitive inputs— potential for becoming established as reli- to promote small and medium-size able suppliers. exporters and emerging sectors Perhaps more important is the impact of Reducing input and trade costs is a prior- insufficient competition on the distribution ity for South Africa to raise productivity Beyond super-exporters: promoting entry of small and medium-size enterprises Box or the survival and growth of established exporters? 2.4 Exporting comes at a cost—firms must establish customer and distributor relationships, learn about changing market trends and regulations, and pay for licensing, customs, and shipping. This is why the survival rate of new export entrants tends to be low, particularly in developing countries. It is also why there is a sensible argument for government support in overcoming fixed costs and information asymmetries that act as barriers to entry and survival in exporting. But it is important to establish some criteria on which firms to support amid multiple priorities and limited resources. The firm-level export data give some useful indications of the factors associated with the survival and growth of South African exporters. Two things seem to matter most: initial export value and experience (box figure): • Value of initial exports. Export spells that begin with an initial export value of more than $50,000 end up lasting 33 much longer than lower valued shipments. • Exporting experience. A firm having at least two years of experience more than doubles the chances that an export spell will survive at least two more years. This reflects the fact that firms and export relationships that have survived the first two years have overcome fixed costs, have proven themselves reliable and competitive, and are beginning to reap the benefits of learning by exporting. What does this suggest about policies to support exporters? While there are sound reasons for helping small and medium- size firms export for the first time, many of these firms lack the scale or quality to compete in domestic markets let alone take on the added costs and uncertainties of exporting. It may be more efficient to focus on ensuring that firms that have The structure of already taken on the costs of entering foreign markets do not exit so easily—and that they have the incentive to invest in growth. Initial export survival can be seen as a market signal of firms that have the capacity to be future drivers of export export firms raises growth and employment. a question about Box figure. Initial export size and experience matter most for firms’ growth and how government survival can best support Low High 0.99 an effective export market structure 0.66 Probability 0.33 0.00 0 1 2 3 4 5 6 7 8 9 10 11 Year No prior experience Prior experience 0.99 0.66 Probability 0.33 0.00 0 1 2 3 4 5 6 7 8 9 10 11 Year Source: Exporter Dynamics Database, based on data from the South African Revenue Service. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S and develop its export capacity. Three areas freight still reflects support for import sub- of infrastructure need improvements to stitution and cross-price subsidization, plac- enhance export competitiveness, particu- ing smaller, labor-intensive exporters at a larly of smaller firms and less established disadvantage.27 For example, port tariffs on sectors and products: transport, electric- containers were 360  percent of the global ity, and information and communications average in 2012, while on bulk commodities technologies (ICTs; figure 2.10). Research they were 19–43  percent below the global in OECD countries suggests that protecting average (table 2.3).28 Rail freight has simi- these crucial inputs places export-oriented lar price distortions—rail tariffs on iron ore 34 manufacturing sectors at a competitive are somewhat below U.S. prices, while those disadvantage.26 on general freight business are 4–7 times higher.29 Transport. While transport and logistics These price distortions discourage the infrastructure has the potential to become development of new mineral sectors (manga- an important source of competitive advan- nese, for example), agricultural exports, and tage for South Africa’s exporters, the related processed manufactures like steel (box 2.5). Three areas of access and pricing policies raise high bar- They also impose a heavy cost on small pro- riers to many export sectors. Transnet, a ducers. For example, smaller automotive pro- infrastructure need state-owned enterprise, operates and con- ducers do not qualify for volume discounts at improvements to trols South Africa’s freight infrastructure, ports. with a monopoly in several transport areas. The price distortions also are mirrored in enhance export Despite various reforms since the 2000s, the allocation of infrastructure investment. competitiveness: South Africa’s tariff pricing strategy for For example, the iron ore rail lines are world transport, electricity, South Africa has solid transport infrastructure—but gaps in information and Figure communications technologies and electricity remain and ICTs 2.10 Internet Fixed line Mobile phone Electricity Air transport Ports Rail Roads Overall rank 0 25 50 75 100 125 148 South Africa’s rank in key infrastructure on the 2013–14 Global Competitiveness Index Note: The vertical line represents South Africa’s overall rank (53rd of 148 countries). Source: World Economic Forum 2013. Table Comparing port tariffs: South Africa against the global average 2.3 Tariff Tariff South Africa’s premium or discount category Global average South Africa on the global average (percent) Container $62,414.90 $287,217.80 360.2 Container (with rebate) $62,414.90 $245,913.20 294.0 Automotive $92,682.80 $300,253.60 224.0 Automotive (with rebate) $92,682.80 $289,560.70 212.4 Iron ore $257,113.20 $208,489.90 –18.9 Coal $124,307.80 $71,049.60 –42.8 Note: Comparisons are based on a set of assumptions (standardized across ports included in the study) with regard to vessel size, load size, services, and the like. Source: Ports Regulator of South Africa 2012. Box Input costs and minerals beneficiation 2.5 As a major producer of minerals and exporter of metal-based manufactures, South Africa has opportunities for export expan- sion not only in processing more minerals and metals but also in raising the value of what is being processed. The average unit prices of metals exports vary widely, offering scope for countries to move to higher quality (and thus higher value) varieties, both across and within stages of production (Mandel 2011). Looking at the iron and steel value chain, however, South Africa’s exports seem to be moving in the opposite direction—toward basic production and lower quality (box figure). In 2000 level 1 products (iron ore and concentrates) accounted for just 18 percent of exports (by value), but by 2012 their share had more than tripled to 57 percent. By contrast, the share of level 2 products (ferro-alloys) and level 3 products (semifinished/finished steel) in exports declined dramatically, with level 3 products falling from a 44 percent share to just 13 percent. 35 One reason for the shift was the growth in prices for basic commodities like iron ore. Another is that while participating in higher value-added segments should deliver a more stable premium over time, it also has costs—it requires investment in research and skills, access to raw materials, reliable and cost-effective power, access to imported technologies, and cost- effective, flexible transport to reach global export markets. Amid high transport costs for noncommodities (see table 2.3 above), rising costs and declining reliability of power, and import parity pricing on key inputs, the economics of adding value do not add up. Price distortions Box figure. South Africa’s iron and steel exports are moving toward basic production and lower quality discourage the Distribution of exports in the iron and steel value chain by level of processing, 2000–12 development of new Level 1 Level 2 Level 3 mineral sectors, 100 agricultural exports, 75 and processed manufactures like steel Percent 50 25 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Quality ladder of ferro-alloy exports to German market, 2011a Republic Czech 6 Denmark 5 Japan United Kingdom Austria 4 Sweden Russian Federation Canada Venezuela, RB 3 Brazil Mexico Belgium Argentina United States China Netherlands 2 South Africa Norway Ukraine Australia France Turkey Italy Spain 1 India 0 0 10 20 30 a. The quality ladder compares South Africa with other exporters to the German market in 2011. The x-axis plots the position of each country’s exports from lowest to highest in quality (unit price), with the highest toward the right; the y-axis indicates the average unit value (dollar per kilogram). The ladder excludes countries with exports of less than $100,000. Source: UN Comtrade (database) via World Integrated Trade Solution. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S class, with handling volumes that meet or World Bank’s Knowledge Economy Index, surpass global benchmarks. But the rest of South Africa’s rank on ICT infrastructure the rail system is in relatively poor condition. slipped from 55th in 2000 to 98th in 2012, Likewise, the Port of Richards Bay (which due partly to low penetration. In 2011, for handles coal exports) and the Port of Sal- instance, South Africa had only 2 fixed danha (iron ore) are highly efficient, while broadband subscribers per 100 people, just the general terminal at Durban can handle one-sixth the level in China and the Russian just 17 containers (20-foot equivalent units) Federation. The slippage also reflects a lack an hour, less than half the international of access to key services, due partly to Tel- 36 norm of at least 35.30 kom’s monopoly in South Africa’s commu- nications industry. The telecommunications Electricity. Unreliable power supply has regulator is overburdened and restricted become a key constraint to growth and com- in its capabilities as handed down by the petitiveness. Even in 2007, 30  percent of Department of Communications. Telkom exporters identified electricity as a major has a monopoly on all international calls, constraint, 50 percent higher than reported excluding Voice over Internet Protocol, and South Africa’s major by nonexporters and by far the constraint all traffic over the SAT3 cable that provides noted most widely by exporters. 31 Yet the most of South Africa’s international band- growth in exports situation has since become much more width. South Africa ranks 88th (of 169 coun- to Africa over the problematic. tries) on fixed broadband prices, with prices Eskom, the state-owned power utility, (in nominal terms) almost twice the level of past decade came estimates that current electricity prices are those in Mauritius.35 in a region where two-thirds the level needed to cover costs, including capital. At just over $50 per mega- Opportunity 3. Deeper regional integration— the barriers to watt hour for industrial users, South Afri- to open export opportunities and trade are among the ca’s prices compare favorably with those of build supply-side competitiveness most middle-income and advanced coun- Regional integration also holds the potential world’s highest tries, 32 even though electricity prices have to unlock nonmineral and services exports. risen almost twice as fast as the overall Pro- South Africa’s major growth in exports to ducer Price Index since 2008. Still, follow- Africa over the past decade came in a region ing a major power crisis that year, Eskom where the barriers to trade are among the manages power supply tightly—including world’s highest. The cost of trading across by restricting supply to key industries— borders in Africa is more than twice the cost which has negative implications for export in East Asia and OECD countries,36 and data growth. A lack of municipal investment in from Doing Business show that in Sub-Saha- distribution maintenance and refurbish- ran Africa it takes an average of 38 days to ment has compounded the supply prob- import and 32 days to export goods across lems. 33 As a result of the constraints on borders, much higher than in other regions. power availability at multiple levels, South This is the result of inefficient transport, bor- Africa now ranks 150th of 189 economies der management, and logistics; cumbersome on the 2014 Doing Business indicator, “Get- fiscal arrangements; poorly designed tech- ting Electricity.”34 nical regulations and standards; and other nontariff barriers like import bans, permit Information and communications technologies. requirements, and licensing. 37 These barri- Efficient ICTs are an important prerequi- ers may actually have given South African site for developing modern services exports firms, with their relative proximity and local that provide skilled jobs (call centers, for knowledge, an edge over international firms. example). While South Africa’s telecom- But reducing trade costs would not just cre- munications network is one of Africa’s most ate opportunities to directly expand services advanced, regulatory constraints restrict- and goods exports. It would also promote ing competition have hampered the sector’s the development of competitive value chains growth. of production across Southern Africa that South Africa’s ICT availability now stands would plug the region into global production on the low end of that of its peers. On the networks. Expanding services exports. Services exports regulatory harmonization (for example, have perhaps the greatest potential to benefit developing common standards in profes- from deeper integration. Even more so than sional services activities and common criteria for goods, the “gravity” of trade costs means for professional qualifications). that most services are traded with regional neighbors rather than across the globe. Up to Building supply-side capacity for Factory South- 60 percent of South Africa’s services exports ern Africa. Exploiting the untapped potential are estimated to stay in Africa. Given this to develop a system of regional value chains, regional emphasis, Africa’s trade barriers a Factory Southern Africa, in a world trad- may explain why services export growth has ing system increasingly dominated by global 37 been fairly weak. Professional services are a value chains that break down production good example. South Africa has 48 accoun- processes and distribute them across coun- tants and 43 lawyers per 100,000 people; for tries in integrated production networks, may Mozambique and Rwanda these figures are offer South Africa an important route to less than 1 and 5, respectively. 38 These dif- export competitiveness. Exporting in global ferences, reflected in disparities in salaries value chains has been at the heart of East and training costs across countries, suggest Asia’s success. With wages quickly rising in Reducing trade costs substantial scope for large gains from trade. China, parts of these production networks would promote the Yet documented regional exports remain are moving out. Indeed, over the next gener- minimal, held up by barriers like education ation an estimated 85 million manufacturing development of and professional qualification requirements, jobs will leave coastal China.39 South Africa, restrictions on business structure and on with its abundant natural capital, large labor competitive value multidisciplinary activities, ownership lim- surplus, decent infrastructure, and high- chains of production its and restrictions on foreign presence, and quality institutions, should be well positioned restrictive policies on the labor mobility of to benefit. across Southern Africa skilled workers. Most African countries have In fact, South Africa is already moder- barriers in all these areas. For South Africa, ately integrated in global value chains. At unlocking these restrictions will require pur- 51 percent, South Africa is second among its suing more services trade and investment peers on the Global Value Chain Participa- agreements, including by concluding the tion Index,40 after Thailand (figure 2.11). extensive negotiating agenda underway in Some sectors have seen major increases in the Southern African Development Commu- the foreign content of their exports, includ- nity. It will also require supporting regional ing transport (from 22  percent in 1995 to South Africa rates high among its peers on the Global Value Chain Participation Figure Index, 2008 2.11 80 60 Percent 40 20 0 Korea, Rep. Japan Slovak Republic Belgium Czech Republic Estonia Sweden Finland Netherlands Ireland Austria Slovenia Portugal Poland Switzerland Israel Australia Chile France Greece Spain United Kingdom United States Mexico Canada New Zealand Taiwan, China Singapore Malaysia Cambodia Philippines Lithuania Bulgaria Malta Thailand Russian Federation Vietnam Latvia Brunei Romania Saudi Arabia South Africa Indonesia India China Brazil Argentina Luxembourg Norway Hungary Germany Italy Turkey Denmark OECD Non-OECD OECD is Organisation for Economic Co‑operation and Development. Source: OECD 2013. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S 38  percent in 2009), electrical equipment exporters have made only limited inroads (from 16 percent to 27 percent), and chemi- into global markets. Be it in minerals, non- cals and nonmetallic minerals (from 14 per- minerals, or services, South Africa’s exports cent to 27 percent). In agriculture, food and have lagged behind those of its peers and not beverages, and transport equipment, South lived up to their potential. Africa’s share of foreign content in exports is A few super-exporters dominate South near the highest among its peers. Africa’s export sector, in both minerals and But despite these increases South Africa nonminerals, coexisting with a large pool remains a minor player on a global scale. It of small, occasional exporters. But despite 38 also operates at a long distance from final their dominance the super-exporters have demand, not just geographically but also in been losing dynamism and competitiveness. production stages,41 suggesting that substan- Over the last decade some important prod- tial scope remains for upgrading South Afri- ucts in South Africa’s export basket have ca’s value chain (and value-added) position. died out—a natural process. But new, high- Figure  2.12, an auto sector global network value products have not emerged at the scale map, puts this in perspective. needed to replace them. Since the global Three areas present Taking South A frica’s participation financial crisis the super-exporters have in global value chains to the next level— become less experimental in both markets opportunities expanding its scope, increasing its scale, and products, underexploiting large emerg- to promote the and upgrading its position—will entail rais- ing markets in both Africa and the BRICs. ing competitiveness. Beyond domestic input Super-exporters trade products that are tech- competitiveness and costs, a key route to competitiveness can nologically sophisticated and highly capital- spur the growth come through leveraging regional scale and intensive. This has positive implications for exploiting the comparative advantages of competitiveness but underutilizes South Afri- in South Africa’s regional economies—in natural resources, ca’s large pool of low-skilled labor, thus fail- export ­sector: in key inputs, and in wages. This will not only ing to create enough jobs to make the export reduce production costs but also allow firms sector a major direct contributor to employ- to break up production processes and spe- ment growth and poverty reduction. cialize in the processes where they can create As trade patterns have shifted, particu- competitive advantage, most likely in activi- larly following the crisis, Sub-Saharan Africa ties with higher knowledge and technology has emerged as the key destination for South requirements and in facilitating services. Africa’s nonmineral exports. This has cre- Turning South Africa’s role as a regional ated greater market opportunities for newer hub from a one-way trade relationship into and smaller exporters. So far, exports to an integrated regional supply chain will Sub-Saharan Africa have remained some- require major improvements in the envi- what smaller and shorter lived than exports ronment for cross-border trade and in the to traditional markets, suggesting that lower movement of capital and labor. East Asia’s competitiveness in regional markets is allow- tightly integrated regional production net- ing the less efficient firms to enter and exit works stand in stark contrast to the situation opportunistically. This poses challenges in in the Southern African Customs Union, considering how best to support emerging whose production chains are among the exports. world’s least integrated. Realizing a Factory Three areas present opportunities to Southern Africa will require much deeper promote the competitiveness and spur the and more effective integration arrangements growth in South Africa’s export s ­ ector: (encompassing both policy and infrastruc- • Boosting domestic competition would increase ture), so that production networks can oper- efficiency and productivity. By opening ate seamlessly across the region, minimizing local markets to domestic and foreign transaction costs and lead times. entry, South Africa would enable new, more productive firms to enter and place Conclusion downward pressure on high markups. This Over the past decade South Africa’s exports would lower input costs and tip incentives have underperformed. Export volume in favor of exporting by reducing excess growth has stagnated, and South Africa’s returns in domestic markets. Competition Figure South Africa: a regional hub but still somewhat peripheral 2.12 Global network map for road vehicles trade, 2010 COG SYC KHM UMI VGB ECU ANT ARG ABW ISR CHL MSR COL VEN GUY GTM BRA PAN SLV DOM MEX JAM SHN BRB HND 39 SLE CRI IOT KNA TCA LCA MUS CAN LBY ZAR CXR USA COK AGO NIC ISL ZWE BHS DNK NOR EST KWT BFA QAT MDV SWE TTO • Boosting domestic MLI PRY UGA VUT IRN DZA FSM OMN ARE KOR MDG competition ESH BHR PHL TUV BLZ BGD JPN DMA SAU BEN MOZ PLW VNM • Alleviating GIN BRN AZE BOL GNQ MYS FIN CHN TON CYM CPV TKL infrastructure STP SOM FJI AUS NPL BMU GNB KIR NZL WSM PRK MNP SGP bottlenecks, BTN NFK DJI HTI NRU THA ETH CIV GUM MWI especially in URY PYF TZA power, and GRD LAO IND IDN PNG SDN removing LKA ERI PER LBN IRQ BDI NER NIU SLB distortions in TGO GMB TMP BVT JOR AFG NGA access to and SEN PAK FLK SGS GHA pricing of trade BGR AIA PCN EGY CUB MKD HRV GBR IRL logistics AUT YUG GRL TKM CAF CHE DEU GRC CYP SPM SVK MRT ALB • Promoting ATF LTU ITA CCK HMD ROM NLD SVN VCT deeper regional CZE LVA RWA POL MDA ESPBIH integration in BLX KEN FRA ZAF PRT TUR SUR HUN MHL ZMB goods and services NCL AND MLT COM YEM ARM SYR ASM LBR TUN MMR CMR KGZ GEO UKR WLF MAR RUS UZB TCD TJK BLR MNG ATG GIB GAB KAZ Note: 01-09 SITC rev. 3 classification. Larger bilateral trade flows are portrayed by closer distances between nodes. Hubs, which represent the main trading partner for several countries, are shown in larger circles with darker colors. Peripheral countries are shown in lighter colors. Source: World Bank, International Trade Unit. S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S would also stimulate investment in innova- and 2012) on the following bilateral tion and, over time, condition the market characteristics with trading partners: to ensure that firms entering competitive distance, contiguity, common language, global markets have reached the produc- log of GDP, log of GDP per capita, and tivity threshold to support their survival log of the Remoteness Index (computed and growth. by summing each country’s distance with • Alleviating infrastructure bottlenecks, especially every other country, weighted by the lat- in power, and removing distortions in access to ter’s share in world GDP). We control for and pricing of trade logistics in rail, port, and zero trade flows with the Heckman sam- 40 ICTs would reduce overall domestic prices ple selection correction method. and further enhance competitiveness. It 10. As measured by the Index of Export would be especially beneficial for small Market Penetration. The index looks at and medium-size exporters and nontra- a country’s total number of exports and ditional export sectors, which these costs the number of markets that each export tend to hit harder. product reaches. Then, the number of • Promoting deeper regional integration in goods countries in the rest of the world that Progress on all and services within Africa would generate import each product that the country of the right conditions for the emergence of interest exports is counted. By pairing three fronts would Factory Southern Africa, a regional value products and countries this way, the max- help catapult South chain that could feed into global produc- imum potential number of export rela- tion networks. South Africa could play a tionships a country can establish given Africa toward faster- central role in such a chain, leveraging the its export portfolio can be obtained. The growing exports scale of the regional market, exploiting actual number of export relationships is sources of comparative advantage across then divided by the potential number to Africa to reduce production costs, and assess the proportion of export opportu- providing other countries in the region a nities a country is exploiting. platform for reaching global markets. 11. EXPY measures the export baskets of Progress on all three fronts would help countries by the incomes of all coun- catapult South Africa toward faster-growing tries that produce similar products, exports, allowing it to realize the faster, more weighted by the share of those exports inclusive, job-intensive growth articulated in in the national total. The concept is the National Development Plan. that more sophisticated products are, by and large, produced by richer countries. Notes Hausmann and Klinger (2007) show that 1. World Development Indicators (data- export sophistication is a good predictor base), accessed January 27, 2014. of future economic growth. 2. Republic of South Africa 2011. 12. This calculation uses a new United 3. National Planning Commission of South Nations Conference on Trade and Devel- Africa 2013. opment database on revealed factor 4. Department of Trade and Industry 2010. intensity for each good at the HS six- 5. South African Reserve Bank 2013. digit level (Shirotori, Tumurchudur, and 6. Minerals encompasses minerals, fuels, Cadot 2010). This assessment looks at and base metals. the underlying human capital (proxied 7. Chile is introduced in the firm-level by average years of schooling of the adult analysis given lack of comparable firm- population, as per Barro and Lee 2010) level data on a number of the peers. and physical capital (capital stock, which 8. Measured by the HS six-digit level is constructed following the perpetual classification. inventory method using investment 9. The gravity model of trade used here series from version 6.2 of the Penn World controls for country selection and firm Tables) of a country’s export basket. heterogeneity, following Helpman, 13. Quarterly Labour Force Surveys; data as Melitz, and Rubinstein (2008). We of 2013q3. regress the logged value of total non- 14. In this section “Africa” refers to Sub- mineral exports (averaged between 2011 Saharan Africa. 15. An export spell is a firm selling a spe- 22. Aghion, Braun, and Fedderke 2007. The cific product to a specific market. Over association among competition, trade, 2002–12 South African exporters were and productivity growth observed in involved in at least 1.7  million export South Africa and the role of allocative spells worth more than $1,000 each. efficiency gains line up with the patterns 16. For example, a firm starts selling apples documented for South Africa’s peers. to Nigeria. That export does not sur- Notable examples are Pavcnik (2002) vive, but the firm itself is still exporting, for Chile, Ferreira and Rossi (2003) for perhaps now selling apples to Ghana or Brazil, and Eslava and others (2004) for pears to Nigeria. Colombia. 41 17. Rankin 2013. 23. World Bank 2011. 18. See South African Reserve Bank (2013) 24. Interestingly, these firms do not describe for a comprehensive menu of factors the shifts to export markets as a response that impact the response of exports to to improved price competitiveness from exchange rate movements. a weaker rand. 19. The Competition Commission (2008) 25. Hirsch 2005. notes that most sectors of the economy 26. See, for example, Francois and Woerz remain highly concentrated, “with (2008). entrenched and dominant interests that 27. Gumede and Chasomeris 2013. are able to protect their position includ- 28. See Ports Regulator of South Africa ing by raising barriers to entry.” It also (2012). notes that “these barriers can be endoge- 29. OECD 2009. nous, that is the result of strategic behav- 30. OECD 2009. ior by dominant firms and of formal 31. World Bank and IFC 2007. and informal links between potential 32. OECD 2013. rivals,” and it reviews barriers to entry, 33. Steyn 2011. among other anticompetitive practices, 34. World Bank 2013. in the agriculture and agroprocessing, 35. International Telecommunications infrastructure, telecommunications, and Union 2013. intermediate industrial products and 36. Dihel, Fernandez, and Mattoo 2011. forestry sectors. 37. World Bank 2011. 20. The price–cost margin is the difference 38. Dihel, Fernandez, and Mattoo 2011. between price and marginal cost (a mea- 39. Lin 2011. sure of profitability). The high price– 40. Under this measure, developed by Koop- cost margins (or ”markups”) in South man and others (2011), the higher the Africa are well documented. See, for foreign value added in exports and the example, Roberts (2004), Fedderke and higher the value of domestic inputs Bogetic (2006), and Competition Com- exported to third countries and used mission of South Africa (2008). in their exports, the higher a country’s 21. Fedderke and Bogetic 2006; Harding global value chain participation. and Rattsø 2005. 41. See Antràs and others (2012). References Aghion, Philippe, Matias Braun, and Productivity and Profitability Enhancing Johannes W. Fedderke. 2008. “Competi- Reallocation: Evidence from Colombia.” tion and Productivity Growth in South Journal of Development Economics 75 (2): Africa.” Scholarly Articles 3350068, Har- 333–71. vard University Department of Economics, Exporter Dynamics Database. World Bank, Cambridge, MA. Washington, DC. http://data.worldbank. Antrás, Pol, Davin Chor, Thibault Fally, and org/data-catalog/exporter-dynamics Russell Hillberry. 2012. “Measuring the -database. Upstreamness of Production and Trade Fedderke, Johannes W., and Zeljko Bogetic. Flows.” NBER Working Paper 17819, 2006. “Infrastructure and Growth in South National Bureau of Economic Research, Africa: Direct and Indirect Productivity Cambridge, MA. Impacts of 19 Infrastructure Measures.” Barro, Robert J., and Jong-Wha Lee. 2010. “A Policy Research Working Paper 3989, New Data Set of Educational Attainment World Bank, Washington, DC. in the World, 1950–2010.” NBER Work- Federal Reserve Economic Data (database). ing Paper 15902, National Bureau of Eco- Federal Reserve Bank of St. Louis, MO. nomic Research, Cambridge, MA. http://research.stlouisfed.org/fred2/. Competition Commission of South Africa. Ferreira, Pedro C., and José L. Rossi. 2003. 2008. “Review of Changes in Industrial “New Evidence from Brazil on Trade Lib- Structure and Competition.” Input Paper eralization and Productivity Growth.” Inter- for 15 Year Review. Policy & Research Divi- national Economic Review 44 (4): 1385–1405. sion, Competition Commission, Pretoria, Francois, Joseph, and Julia Woerz. 2008. “Off- South Africa. shoring Services, Manufacturing Linkages, Department of Trade and Industry. 2010. and the Structure of Trade and Industry.” Industrial Policy Action Plan: Economic Sec- Paper presented at the ARTNeT Confer- tors and Employment Cluster—IPAP 2012/13– ence, “Reforming Services,” Bali, October 2014/15. Pretoria, South Africa. 10–12. Dihel, Nora, Ana M. Fernandez, and Aaditya Gumede, Sanele, and Mihalis Chasomeris. Mattoo. 2011. “Developing Professional 2013. “Assessing Stakeholders’ Perspec- Services in Africa: How Regional Integra- tives on Maritime Port Pricing in South tion Can Help.” In Defragmenting Africa: Africa.” Paper presented at the Biennial Deepening Regional Integration in Goods and Conference of the Economic Society of Services, ed. Paul Brenton and Gözde Isek, South Africa, Bloemfontein, South Africa, 131–43. Washington, DC: World Bank. September 25–27. Eslava, Marcela, John Haltiwanger, Adri- Harding, Torfinn, and Jørn Rattsø. 2005. ana Kugler, and Maurice Kugler. 2004. “The Barrier Model of Productivity “The Effects of Structural Reforms on Growth: South Africa.” Discussion Papers 43 S OUT H A FRICA ECONOM IC U P D AT E — F OC U S ON EX P O R T C O M P ET I T I V EN ES S 425, Research Department, Statistics Nor- Study—01/04/2012 Research Summary.” way, Oslo. Durban, South Africa. www.portsregulator. Hausmann, Ricardo, and Bailey Klinger. 2007. org/images/documents/GPPCS_2012_ “The Structure of the Product Space and Overview.pdf. the Evolution of Comparative Advantage.” Rankin, Neil. 2013. “Exporting and Export CID Working Paper 146, Center for Inter- Dynamics among South African Firms.” national Development, Harvard University, Occasional Paper 149, South African Insti- Cambridge, MA. tute of International Affairs, Cape Town, Heston, Alan, Robert Summers, and Bettina South Africa. 44 Aten. 2006. Penn World Table Version Reis, Jose G., and Thomas Farole. 2012. Trade 6.2. University of Pennsylvania, Center for Competitiveness Diagnostic Toolkit. Washing- International Comparisons of Production, ton, DC: World Bank. Income and Prices, Philadelphia, PA. Republic of South Africa. 2011. “The New Hirsch, Alan. 2005. Season of Hope: Economic Growth Path: Framework.” South Africa Reform under Mandela and Mbeki. Scottsville, Economic Development Department, Pre- South Africa: University of KwaZulu-Natal toria, South Africa. Press. Roberts, Simon. 2004. “The Role for Compe- International Telecommunications Union. tition Policy in Economic Development: 2013. Measuring the Information Society: The South African Experience.” Working 2013. Geneva. Paper 8–2004, Trade and Industrial Policy Koopman, Robert, William Powers, Zhi Wang, Strategies, Pretoria, South Africa. and Shang-Jin Wei. 2011. “Give Credit SACU Statistical Database. Southern Afri- Where It’s Due: Tracing Value Added in can Customs Union, Windhoek, Namibia. Global Production Chains.” NBER Work- http://stats.sacu.int/. ing Paper 16426, National Bureau of Eco- Shirotori, Miho, Bolormaa Tumurchudur, nomic Research, Cambridge, MA. and Olivier Cadot. 2010. “Revealed Fac- Lin, Justin. 2011. “How to Seize the 85  mil- tor Intensity Indices at the Product Level.” lion Jobs Bonanza.” Let’s Talk Develop- Policy Issues in International Trade and ment: A Blog Hosted by the World Bank’s Commodities Study Series 44, United Chief Economist. July 27. http://blogs. Nations, New York and Geneva. worldbank.org/developmenttalk/ South African Reserve Bank. 2013. “Monetary how-to-seize-the-85-million-jobs-bonanza. Policy Review: November 2013.” Pretoria, Mandel, Benjamin. 2011. “The Dynamics South Africa. and Differentiation of Latin American South African Reserve Bank Statistics Metal Exports.” Staff Report 508, Federal (database). http://www.resbank.co.za/ Reserve Bank of New York, New York. Research/Statistics/Pages/Statistics National Planning Commission of South -Home.aspx Africa. 2013. Our Future—Make it Work: Statistics South Africa (database). http:// National Development Plan 2030. Pretoria, beta2.statssa.gov.za/?page_id=593 South Africa. Statistics South Africa. Various issues. Quarterly OECD (Organisation for Economic Co-oper- Labour Force Survey. Pretoria, South Africa. ation and Development). 2009. “Railway Steyn, Grové. 2011. “The Impact of Economic and Ports Organization in the Republic Regulation on Management Performance of South Africa and Turkey: The Integra- of South Africa State Owned Enterprises.” tor’s Paradise?” Discussion Paper 2009–5. Prepared for the Presidential State Owned Paris. Enterprises Review Committee. Meridian ———. 2013. OECD Economic Surveys: South Economics, Cape Town, South Africa. Africa 2013. Paris. UN Comtrade (database). United Nations Sta- Pavcnik, Nina. 2002. “Trade Liberalization, tistics Division, New York. http://comtrade. Exit, and Productivity Improvements: Evi- un.org/db/. dence from Chilean Plants.” Review of Eco- World Bank. 2010. “South Africa: Second nomic Studies 69 (1): 245−76. Investment Climate Assessment Improving Ports Regulator of South Africa. 2012. the Business Environment for Job Creation “Global Port Pricing Comparator and Growth A Draft Summary.” Report No. 55699 – ZA. World Bank Africa Region, South Africa Country Profile 2007.” World Washington, DC. Bank, Washington, DC. ———. 2011. “Harnessing Regional Integra- World Development Indicators (database). tion for Trade and Growth in Southern World Bank, Washington, DC. http:// Africa.” Washington, DC. data.worldbank.org/data-catalog/world ———. 2013. Doing Business 2014: Understand- -development-indicators. ing Regulations for Small and Medium-Size World Economic Forum. 2013. The Global Enterprises. Washington, DC. Competitiveness Report 2013–2014: Full Data World Bank and IFC (International Finance Edition. Geneva. Corporation). 2007. “Enterprise Surveys: 45 The World Bank 442 Rodericks Road, Lynnwood, Pretoria 0081, Republic of South Africa Tel: +27 (0) 12 742 3100 Fax: +27 (0) 12 742 3135 www.worldbank.org/za www.facebook.com/WorldBankSouthAfrica