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Trade (tariff) liberalisation and the ERP: the case of South Africa during the 1990s
Effective protection captures the net protection accorded to an industry by taking into account the protection imposed on both output and intermediate inputs used in the production process. Various studies have used ERP analysis to appraise South Africa’s protection policy during the 1990s (IDC, 1996a, 1996b; Fedderke and Vaze, 2001; TIPS, 2002). Recently, Fedderke and Vaze (2001) – hereafter referred to as the FV study – have explicitly questioned the extent of tariff liberalisation in the 1990s.20 The study claims that « more of South Africa’s output is protected by tariffs in 1998 than in 1988 » and hence concludes that: « …the much-hyped liberalisation of the South African economy in the 1990’s has not been fully realised » (Fedderke and Vaze, 2001: 447). Using a similar methodology, this chapter will appraise this result of the FV study.
The FV study analyses the protection accorded to 38 economic sectors. Average EPRs (based on tariff duties collected) were calculated for the period 1988-93 and 1994-98. Sectors were classified as more protected (P) if the EPR increased by more than 1 percent, liberalised (L) if it decreased by more than 1 percent and moderately protected (M) otherwise. In terms of these criteria, 8 sectors were classified as more protected, 16 as moderately protected and 14 as liberalised. The FV study claims that the 8 protected sectors accounted for more that 50 percent of the GDP in 1998.
A defining characteristic of this study relates to the use of collected customs duties to estimate the tariff rates rather than the use of statutory tariff rates in the calculations of ERPs. There are a couple of points that can be made in this regard. The first relates to high or prohibitive tariff rates not being reflected in the customs revenues collected. Secondly, it is important to recognise that in the case of South Africa, imports are recorded when they land in the country while import duties are only paid when goods leave the warehouses at the port. Thus, it is possible that in some cases, importers only pay the customs duties after the year in which the imports were reflected in customs records. In these cases, tariff calculations based on revenue collections will understate the « actual » tariff rates applicable to the products. It is unclear to what extent this issue has been addressed in the FV study.
Table 6 captures the ERP calculations for the different sectors of the South African economy. The 38 sectors considered in the FV study are reflected in rows 1 to 38, while rows 39 to 46 reflect the sectors that are omitted in this study.22 In addition, the contributions to value added are captured for all the sectors for the years 1988, 1998 and 2001 under columns 2 to 4. The ERP calculations (averages for period 1988-93 and 1994-98) are reflected in columns 5 and 6. Some derivations from the ERP calculations and trade policy classifications are depicted in columns 7 to 10.
Since the FV study considers only 38 sectors, it is important to ascertain the relative importance of these sectors in the economy. The 38 sectors considered in the FV study made up 72 percent (62 percent) of total GDP in 1988 (1998).23 The first point to bear in mind is that the relative importance of the 38 sectors has decreased over the period. Thus, the conclusions in the FV study are based on an analysis of only around two-thirds of the South African economy. The question therefore is whether the results of the FV study still hold if the analysis (calculations) is (are) done with reference to the whole economy?.
As pointed out above, FV classify the sectors on the basis of the change in the average ERP between the two periods (1988-93 and 1994-98). The calculations and classifications are reflected in columns 7 and 9 respectively. As per the FV study, column 9 depicts the 14 sectors that were liberalised (L), 16 sectors that were moderately (M) protected and 8 sectors that enjoyed increased levels of protection (P) between the two periods. The relative importance of the sectors to the GDP of the 38 sectors considered in the FV study and the overall economy are reflected under column 9 (rows 47 to 52).24 As an illustration consider column 9, row 47. The 14 liberalised sectors made up 23 percent (in 1988 and 1998) and 22 percent (in 2001) of the GDP of the 38 sectors considered in the FV study. This contribution is higher than that recorded in the FV study.25 However, in terms of the overall significance of the tariff liberalisation, column 9 (row 50), indicates that these 14 sectors’ contribution to the total GDP of South Africa decreased from 16 percent (1988) to 14 percent (13 percent) in 1998 (2001). Similarly, the 16 moderately protected sectors’ contribution to the GDP of the 38 sectors increased from 43 percent (1988) to 46 (1998) to 45 percent (2001) while the contribution to the overall economy decreased from 30 percent (1988) to 29 percent (1998) to 28 percent (2001).26 The sectors enjoying more protection decreased their contribution to the GDP of 38 sectors from 34 percent in 1988 to 30 percent in 1998 before increasing to 33 percent in 2001. These sectors’ contribution to the economy decreased from 25 percent in 1988 to 19 percent (20 percent) in 1998 (2001). These results refute the claim made in the FV study that:
« …more of South Africa’s output is protected by tariffs in 1998 than in 1988 » (Fedderke and Vaze, 2001: 447). By 2001, liberalised (protected) sectors accounted for 13 percent (20 percent) of total GDP in 2001. Whereas the percentage of output enjoying tariff protection was higher than that subject to tariff liberalisation, the protected sectors did not make up the major proportion of the country’s GDP.
Trade incentives
The general case for trade strategy as the main determinant of industrial success is based on the assumption that incentives are an important determinant of performance (Lall, 1990:119). However, it is important to recognise that while trade policy is an important element of industrial policy, other important elements include, tax policy, employment policies, competition policies, research and development (R&D), policies influencing technology transfer and growth of domestic markets.1 The process of industrialisation is to a large extent determined by the interplay between these different elements. Trade incentives that encourage export production, for example, may not be successful if it is not complemented by policies that ensure favourable access to credit (to finance construction of production facilities) and/or policies that promote R&D activity. Technology is an important factor underpinning the gains from trade. (Posner, 1961; Hufbauer, 1966; Vernon, 1966; Krugman, 1979a). Measuring trade incentives has been one of the major challenges confronting the empirical analyst. This is usually due to the non-availability of reliable statistics, which in turn is due to either deficiencies in statistical records or information being deliberately excluded from official statistics. Information could be excluded from official records in order to keep domestic lobby pressures in check and/or to prevent falling foul of WTO rules.
Trade incentives could include direct measures like tariffs, quotas and export subsidies and indirect measures like special tax incentives to promote production (as in the case of export processing zones) and expenditures on R&D and skills development. Information on imports (e.g. tariffs) and import quotas are usually more readily available and these have mainly been used in the appraisal of trade policy. These have usually been incorporated in effective protection analysis.2 However, if export and import substituting incentives were simultaneously used to stimulate production, then a critical analysis of trade policy has to analyse both sets of incentives. Between 1990 and 1997, both tariff protection and export subsidies (under the General Export Incentive Scheme- GEIS) were given to sectors. Given this scenario, the issue of relevance is what effect these incentives had on bias of the trade regime during the 1990s.
Even if a realistic measure of trade incentives exists or can be derived, it is still necessary to define the criteria determining the trade policy stance. In other words, what are the level of trade incentives that bias the regime towards either export or import competing production? Krueger (1978) defines the overall stance or “bias” of trade policy as the ratio of the internal relative price of exports and imports (internal terms of trade) to the world price ratio (external terms of trade).
Chapter 1 Introduction and justification for the study
1.1 Background
1.2 The rationale for trade liberalisation in South Africa
1.3 A brief review of the empirical work on the effects of tariff liberalisation during the 1990s
1.4 The main and sub-hypotheses of the study
1.5 Methodology
1.6 Structure of the study
Chapter 2 Trade theory and its implications for competitiveness
2.1 Introduction
2.2 Brief overview of traditional trade theories
2.3 New trade theory
2.4 Conclusion
Chapter 3 Protection and its implication for competitiveness
3.1 Introduction
3.2 Trade incentives and industrialisation: some theoretical considerations
3.3 Trade policy and economic growth: the empirical evidence
3.4 Trade policy and economic growth: a brief review of the empirical evidence
3.5 The concept of competitiveness
3.6 Conclusion
Chapter 4 The extent of tariff liberalisation during the 1990s
4.1 Introduction
4.2 South Africa’s protection policy
4.3 Effective tariff analysis of protection
4.4 Trade (tariff) liberalisation and the ERP: the case of South Africa during the 1990s
4.5 Conclusion
Chapter 5 Trade incentives, trade regime bias and South African manufacturing production during the 1990s
5.1 Introduction
5.2 Trade incentives
5.3 Trade regime bias
5.4 Sectoral orientation of manufacturing production
5.5 Conclusion
Chapter 6 Trade liberalisation, competitiveness and the real exchange rate (RER): an analysis of developments in South Africa during the 1990s
6.1 Introduction
6.2 Some theoretical considerations: the effect of trade liberalisation on the RER
6.3 Trade liberalisation and changes in the RER in South Africa during The 1990s
6.4 Conclusion
Chapter 7 Tariff liberalisation and price competitiveness: an econometric analysis
7.1 Introduction
7.2 Changes in import prices
7.3 Modelling the relationship between tariff changes and the prices of Imports, importables and input costs
7.4 Data and methodology used in the analysis
7.5 Estimation results
7.6 Conclusion
Chapter 8 Competitiveness and sectoral production
8.1 Introduction
8.2 Some theoretical issues
8.3 Tariff liberalisation and manufacturing sector production during The 1990s
8.4 Tariff liberalisation and imports
8.5 Conclusion
Chapter 9 Summary and policy implications
9.1 Summary
9.2 Policy implications
Bibliography
