EFFICIENCY AND TECHNICAL CHANGE IN MANUFACTURING

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INTRODUCTION AND BACKGROUND

This chapter provides an overview of the issues that are analysed in the rest of the study. It starts with brief introductory remarks on the debate regarding the links between productivity, labour demand and trade in Section 1.2. Section 1.2 also provides the key hypotheses that are investigated. The problem statement, the underlying motivations for the study and the point of departure from existing work are presented in Section 1.3. Section 1.4 details the concluding remarks that suggest that the jury is still out on the theoretical and empirical underpinnings of the trade, productivity and labour demand nexus, providing justification for further empirical analysis to inform the debate. Section 1.5 provides an outline for the remainder of the thesis.

An overview of the debate.

Trade liberalisation results from policies that remove restrictions on the free movement of goods and services. The policies include the removal of import quotas, the lowering of import tariffs, the diminishing of export restrictions and the lowering of export taxes. The end result of these measures should be a decrease in the price of imports, and an increase in the price of exports if markets are working and strong supply elasticities obtain (Djikstra, 2000:1568). In sum, these measures should lead to an increase in imports and exports as outcomes1. There are a number of suggestions as to why the impact of increased trade on manufacturing in South Africa should be a matter of concern. One suggestion is that productivity growth and technical change are more robust in manufacturing industries than in other sectors of the economy, which implies that technological spillovers from industry to the rest of the economy may be critical for economic growth. In addition, the growth of manufactured exports is considered to be an indicator of dynamic efficiency, which is important for overall sustained growth of the economy (Dijkstra, 2000:1567). Trade expansion is also important, because it affects the efficiency with which factors of production, such as labour, are used in industries, and it has implications for the level of employment in the manufacturing sector. More specifically, the debate regarding the effect of trade expansion on manufacturing concerns two interrelated issues.
The first relates to the relationship between trade and manufacturing productivity2 and the second relates to the effect of trade on derived labour demand. These issues remain largely contested (Deraniyagala and Fine, 2001:4). For instance, in the neoclassical growth model, trade does not affect the steady state rate of output growth, because growth is determined exogenously given technological progress (Funke and Ruhwedel 2001:226). However, because of imperfections, a number of possibilities can occur as a result of trade policies. In some models, trade policy affects the steady state level of savings and capital accumulation. The impact on growth can, therefore, be positive or negative depending on how capital accumulation and savings respond. The effects of trade in the neoclassical model are only transitional, changes that occur only while the economy converges towards the steady state (Gunnar and Subramanian, 2000:4). Models following Solow (1957) explain output growth by the accumulation of factor inputs and the growth of total factor productivity3. Trade literature also differentiates between the static4 and dynamic gains from trade expansion (Dijkstra, 2000:1568).
The static effects can arise from an improvement in either allocative or technical efficiency. An improvement in technical efficiency occurs when the same output is produced with fewer resources or more output is produced with the same amount of resources. Allocative efficiency improvement occurs if resources are better allocated over the whole economy. Improvements in technical and allocative efficiency are one off changes resulting from the change in relative prices, which follow trade expansion. Dynamic gains tend to be long term and evolve from the elimination of rent seeking and gains from technical efficiency and entrepreneurial effort. When markets are characterized by entry barriers, the absence of foreign competition allows domestic producers to enjoy monopoly power and excess profits, making dynamic gains unattainable (Tybout et al 1991; 231). Increasing returns to scale are also cited as an important source of dynamic gains from trade. These gains result because firms operating in more open trade regimes operate at lower average costs due to higher levels of output available through participating in world markets. An improvement in dynamic efficiency is expected to lead to a permanently higher growth rate. The higher growth rate results from more investment, research, innovation, learning and productivity (Dijkstra 2000:1568).
While traditional trade theory makes the static effects of trade expansion clear cut, the contention regarding the relationship between trade and productivity arises because there are no clear and general presumptions regarding the dynamic benefits of trade (Deraniyagala and Fine, 2001:4). There have been few rigorous theoretical models designed to show how trade and growth could be dynamically linked. Some traditional arguments have emphasised the export channel as a possible dynamic link. In this framework, trade enhances total factor productivity performance by promoting innovation, cost-cutting and acquisition of new technology. Though these arguments are appealing, the analytical underpinnings are regarded as insufficient. The trade and productivity debate also relates to whether policy can influence productivity growth, as is suggested in the endogenous growth literature (Funke and Ruhwedel, 2001:226). Models of endogenous growth first isolate technical development and then look for possible mechanisms through which improvements in productivity (notably due to innovation, imitation, product variety, human capital and public infrastructure via the sphere of policy) are important for ongoing economic growth. Endogenous5 growth models allow for the impact of trade on output growth to be either positive or negative. Even in these improved approaches, scepticism persists. Scepticism continues because any possible trade and growth outcomes can be rationalised by changing analytical assumptions6. The second issue regards the effect of increases in trade volumes on the level of derived labour demand in manufacturing.
Opponents of expanded trade argue that foreign firms may out-compete domestic producers leading to fewer domestic jobs in the manufacturing sector, because lower domestic output is the end result of higher import competition. Trade proponents, on the other hand, posit that free trade expands export markets, resulting in greater demand for manufactured products, greater domestic production and, hence, more jobs. The consensus, however, appears to be that trade volumes do affect, in some way, the efficiency with which firms use labour as well as the distribution of output within sectors between the more and less efficient firms. However, since the issue of labour demand in the manufacturing sector is of critical importance, the direct investigation of the impact of international competition on manufacturing employment remains of vital importance both to academia, policy makers and entrepreneurs.

TABLE OF CONTENTS :

• ACKNOWLEDGEMENTS
• LIST OF TABLES
• LIST OF FIGURES
• CHAPTER TRADE AND MANUFACTURING: AN OVERVIEW
  • 1.1 INTRODUCTION AND BACKGROUND
    • 1.1.2 An overview of the debate
    • 1.1.3 Linking trade, productivity and labour demand in industry
    • 1.1.4 Problem statement, motivation and point of departure
      • 1.1.3.1 Panel data application
      • 1.1.3.2 Components of total factor productivity
      • 1.1.3.3 Determinants of total factor productivity
      • 1.1.3.4 Understanding derived labour demand in manufacturing
• 1.2 HYPOTHESES INVESTIGATED
• 1.3 TRADE POLICY IN SOUTH AFRICA
• 1.4 EMPLOYMENT ISSUES IN MANUFACTURING
• 1.5 STRUCTURE OF THE THESIS
• 1.6 CONCLUDING REMARKS
• CHAPTER EFFICIENCY AND TECHNICAL CHANGE IN MANUFACTURING
  • 2.1 INTRODUCTION
  • 2.2 MEASURING EFFICIENCY AND TECHNICAL CHANGE
    • 2.2.1 Importance of decomposing total factor productivity
    • 2.2.2 The stochastic frontier production function
      • 2.2.2.1 Measuring technical efficiency
      • 2.2.2.2 Measuring technical change
    • 2.2.2.3 Panel data production frontier models
  • 2.3 ECONOMETRIC SPECIFICATION
  • 2.4 THE DATA AND SAMPLE CHARACTERISTICS
  • 2.5 ECONOMETRIC RESULTS
    • 2.5.1 Univariate data analysis
      • 2.5.1.1 Summary statistics
      • 2.5.1.2 Correlation analysis
      • 2.5.1.3 Intuition behind panel unit root tests
      • 2.5.1.4 Testing for cointegration in the production function
    • 2.5.2 Multivariate model results: production functions
      • 2.5.2.1 A time invariant inefficiency model
      • 2.5.2.2 A time varying inefficiency decay model
    • 2.5.3 Technical change in South African manufacturing
    • 2.5.4 Technical efficiency in South African manufacturing
    • 2.5.5 The relationship between trade and manufacturing efficiency
      • 2.5.5.1 Causality between trade and manufacturing efficiency
    • 2.5.6 Some determinants of manufacturing efficiency
  • 2.6 CONCLUDING REMARKS
• CHAPTER TRADE AND TOTAL FACTOR PRODUCTIVTY IN MANUFACTURING
  • 3.1 INTRODUCTION
  • 3.2 TRADE AND MANUFACTURING PRODUCTIVITY
    • 3.2.1 Foreign input push
    • 3.2.2 Competitive push and the elimination of X-inefficiency
    • 3.2.3 Competitive elimination
    • 3.2.4 Higher incentives for technological innovation
    • 3.2.5 Economies of scale
  • 3.3 APPROACHES TO THE STUDY OF TRADE AND PRODUCTIVITY
    • 3.3.1 The macro- level approach
    • 3.3.2 The industry-level approach
    • 3.3.3 The micro-level approach
  • 3.4 MEASURING TOTAL FACTOR PRODUCTIVITY
  • 3.5 ECONOMETRIC SPECIFICATION
  • 3.6 THE DATA AND VARIABLES
  • 3.7 ECONOMETRIC RESULTS
    • 3.7.2 Estimating TFP determinants using static panel data estimators
  • 3.8 CONCLUDING REMARKS
• CHAPTER TRADE AND LABOUR DEMAND IN MANUFACTURING
  • 4.1 INTRODUCTION
  • 4.2 TRADE AND LABOUR DEMAND
    • 4.2.1 Approaches to the study of effects of trade on employment
      • 4.2.1.1 The factor content approach
      • 4.2.1.2 The growth accounting approach
      • 4.2.1.3 Labour demand in a regression framework
• 4.3 ECONOMETRIC SPECIFICATION
  • 4.3.1 The analytical framework
  • 4.3.2 The estimating equation
    • 4.3.2.1 The moment conditions
• 4.4 DATA AND DESCRIPTIVE STATISTICS
• 4.5 ECONOMETRIC RESULTS
  • 4.5.2 Labour demand equation results
    • 4.5.2.2 Role of product and time specific effects
    • 4.5.2.3 Interpretation of the overall results
• 4.6 CONCLUDING REMARKS
• CHAPTER SUMMARY AND POLICY IMPLICATIONS
  • 5.1 INTRODUCTION
  • 5.2 CONCLUSION: OVERALL POLICY IMPLICATIONS
    • 5.2.1 Trade and industrial productivity policies
    • 5.2.2 Trade and labour market policies
  • 5.3. AREAS FOR FURTHER RESEARCH
  • REFERENCES
  • APPENDIX
  • Appendix A1: Technical efficiency in panel frontier models
  • Appendix A2: The Battese and Coelli (1992) specification
  • Appendix A3: Variable definitions

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