Asias Export Performance

1. INTRODUCTION The election of a new democratic government in 1994 led to a number of major economic policy reforms. Following an era of macroeconomic mishandling by the apartheid regime, the country was left in an economic turmoil and things had to take a turn (Abedian, 2005). The new government was of the view that in the long run, sustained economic growth at higher levels would entail transforming the country into a competitive outward economy (Gear, 1996). In April 1996 the government unveiled the Growth, Employment and Redistribution macroeconomic policy (GEAR) strategy.

???In addition to encouraging growth and employment, this strategy aimed to transform South Africa into a competitive, outward orientated economy ???(Alves & Edwards, 2006 ). However, it is more than a decade since GEAR??™s inception, and its success and the successes of other policies that followed still remain vague, especially in addressing the issues of international trade, and particularly export performance. Exports of manufactures have increased but not sufficiently to ignite an export-propelled economy as is the case with East Asian countries (Edwards, 2006).

Alves and Kaplan (2004) further argue that South Africa??™s exports are resource based and the country has failed to diversify into new and fast growing export sectors. This essay will firstly present a comparative overview of South Africa??™s export performance to that of its Asian counterparts. Thereafter, based on theoretical and empirical evidence, macroeconomic (exchange rates and inflation) and microeconomic (unit labour costs and domestic competition) policy recommendations will be made. The final section concludes. 2. SOUTH AFRICA??™S EXPORT PERFORMANCE: A COMPARATIVE OVERVIEW. The 1980s and 1990s were characterized by declines in exports as a share of gross domestic product. As a share of nominal gross domestic product (GDP), exports showed a sharp decline from 33 percent in 1980 to 22 percent in 1990 followed by a slight inclination to 25 percent in 2000 (SARB, 2001).

Consequently on a global scale, South Africa??™s exports encountered a steady decline throughout the 1980s and 1990s. Exports declined from 1.3 percent of world??™s total exports in 1980 to 0.5 percent in 1999 (UNCTAD, 2001). Likewise, in an even more recent study, Alves and Kaplan (2004) confirmed that the country??™s world market share (WMS) of total exports suffered a decline from 0.

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89 percent to 0.53 percent between 1988 and 2002. The performance of manufacturing exports is also another striking feature of South Africa??™s exports. These exports experienced a swift growth in the 1980s and in the 1990s they were predominant with a 49 percent average share of South Africa??™s total exports (SARB, 2001). In a similar study, Alves and Edwards (2006) found that manufacturing exports as a portion of total exports increased from 27.7 percent in 1988 to 53.4 percent in 2004 owing much of this increase to the contraction of gold exports.

In Asia, the export patterns generally differed. The combined share of developing East Asia increased from 12.1% in 1992/3 to 13.7% in 2004/5. But, among East Asian developing countries only Singapore has recorded a decline in market share. China recorded a meteoric rise in exports. Exports rose from US$ 8 billion in 1978/1979 to US$ 1442 billion in 2004/2005.

In terms of share in world exports, this was an increase from 1 percent to a staggering 13.4 percent. In fact, by 2006 China became the second largest exporting nation after Germany. As is the case with South Africa, China??™s export performance is also characterized by a shift in commodity composition away from primary products to manufactures (Athukorala, 2007).

Having provided an overview of how South Africa compares to its Asian counterparts in terms of export performance, the focus now shifts to policy recommendations. The next section of the essay presents policy recommendations based on theory and lessons learned from Asia??™s successes. 3. POLICY RECOMMENDATIONS: The ability of Asian countries to transform into export-led economies and demonstrate exceptional export performance can be attributed to a multitude of factors. The following macroeconomic and microeconomic policy recommendations are derived from some of those underlying factors. 1. Macroecomic Recommendations 3.1.

1 Competitive Exchange Rate: First, as part of the reforms a reasonably competitive exchange rate should be established which will bring the official rate into line with the free market rate. This can be achieved through depreciation of the Rand. These reforms therefore will enhance the competitiveness and enable exporters to compete internationally. The general view is that currency depreciation enhances export competitiveness (Edwards, 2006). Edwards and Willcox (2003) suggest that in the long run, the most appropriate model for the analysis in South Africa is the small country model in which exchange rate depreciation improves the trade balance. In a small country model, export firms are price takers in the international market and the domestic currency price of exports rise by the full depreciation (Salvatore,2007). During the late 1990s when the real effective exchange rate showed a downward trend (characterized by much volatility), export growth improved and there is a consensus that the decline in the real effective exchange rate attributed to this (Golub, 2000).

In addition, the large depreciation in the currency towards the end of 2001 improved export competitiveness much of which was reversed as the currency appreciated during 2002 (Edwards & Willcox, 2003). In Vietnam, a sharp devaluation of its currency (the Dong) occurred in 1989, which brought the official rate into line with the free market rate. Previously, the two rates had differed enormously, with the free market rate frequently at least 20 times the official rateFforde, A. and de Vylder, S., 1996. From plan to market: the economic transition in Vietnam, Westview Press, . When Chinas economy gradually opened during the 1980s, the RMB (Renminbi) was devalued in order to reflect its true market price and to improve the competitiveness of Chinese export.

Evidence was found that the exchange rate reform is one of the most influential factors in China??™s long-run export expansion, inducing significant response of exports supply (Zhang, 2001). 3.1.2 Moderate rate of Inflation: In addition to establishing a competitive exchange rate, inflation should be targeted in such a way that it does not induce overvaluation of national currency in real terms. As discussed earlier, currency depreciation will tend increase export performance. However, it should be noted that this will only hold if domestic price increases (including wages) do not offset the relative price shifts that lead to increased export supply (Edwards, 2006). In addition, Edwards (2006) claims that rising costs erode the improved profitability of export supply or restrict the firms??™ ability to lower their foreign currency export prices, thus reducing exports.

South Africa has done well in this regard, at least in principle. The country has in place a moderate inflation target of 3 percent to 6 percent monitored on monthly basis. Nonetheless, its effectiveness and flexibility is still debatable (Garrow, 2009). In addition, Garrow (2009) points out that South Africa has not been able to bring down the inflation rate to its target range over the last 24 months. In a review by Gylfason (between 1985-1994), high inflation tended to be associated with low exports in proportion to GDP and also with slow growth in a large group of countries at all income levels (Gylfason, 1998).

2. Microeconomic Recommendations 3.2.1 Relative Unit Labour costs: A third policy recommendation to increase export performance is to maintain competitive relative unit labour costs. This is especially important today, in a world where ???capital is mobile and production is footloose between countries??? (Edwards & Golub, 2003). Unit labour cost is a ratio of wages to productivity and provides a useful benchmark for the analysis of international competitiveness (Edwards & Golub, 2003). A combination of improved labour productivity and wage moderation improves manufacturing export performance (Edwards & Golub, 2004). Evidence from both developed and developing countries suggests that export success depends on labour costs that have been adjusted to take productivity into account.

Government interventions such as minimum wages are detrimental to international cost competitiveness unless they are separated from productivity (IADB, 2001). Productivity linked wages are viewed as important determinants of export growth in South Africa (Edwards & Golub, 2003). Moreover, Edwards and Willcox (2003) find that high unit labour costs, without proportionate increase in productivity impede export supply. South Africa unit labour costs are low relative to developed economies but high relative to developing countries. To the extent that South Africa competes primarily against other developing countries, there is a serious labour cost problem. According to Edwards and Golub (2003), a 1 percent rise in South African wages relative to developing countries reduces total exports by 1.6 percent whereas a similar percent increase rise relative to developed countries??™ wages reduces total exports by 1.

7 percent. The rapid export growth in the 1990s can therefore be explained in large measure by improved relative unit labour costs. China is well endowed with labour, and the wage rates are lower relative to other East Asian countries, such as Indonesia, Thailand, Malaysia and the Philippines.

Therefore its manufacturing industries have international competitiveness in terms of labour costs (Liu, 2001). 3.2.1 Intense Domestic Competition A final policy recommendation to improve export performance is to encourage and promote competition within the domestic market. Here, the focus should not only lie on preventing establishments of monopolies but also on relenting the rules and regulations surrounding market entrance. The role of domestic rivalry in international competitiveness is highly relevant now at a time when the globalization of markets has raised questions about the appropriateness of domestic policy towards competition. The much-studied relationship between domestic competition and export performance comprises two contrasting schools of thought.

Some scholars support the national-champion rationale which favours collusions in the domestic industry and limited government intervention while others support a rivalry rationale (Zhang & Clougherty, 2008). However, vast literature and empirical evidence generally support domestic rivalry. Advocates of the rivalry rationale argue that domestic rivalry, geared by domestic market competition, provides national firms with real pressures to improve and innovate. These improvements allow firms to penetrate and earn large shares in export markets (Zhang & Clougherty, 2008).

Many scholars have commended the ability of Japanese firms to rigorously compete at home and have associated it with Japan??™s success abroad (Porter & Sakakibara, 2001). ???The achievements of economies of scale, as well as relentless quality improvement and cost reduction programs targeted first at local customers enabled them to penetrate the international market with high quality but low cost products??? (Ito & Pucik, 1993). According to Ito and Pucik (1993), evidence from a study on Japanese International Airline Markets highlights the positive impacts of intense domestic competition to the international market shares of airlines. Accordingly, airlines that experience substantial domestic rivalry tend to perform better in export markets. 4.

CONCLUSION: Based on the discussions in sections two and three, the following conclusions can be drawn: Firstly, South Africa has demonstrated poor export performance as shown by the negative trends in exports from the 1980s through the 1990s. Unlike East Asian economies, South Africa has failed to restructure its exports to dynamic high technology products which are on the rise in the share of world markets (Alves &Kaplan, 2004; Alves &Edwards, 2006). Secondly, South Africa??™s export performance has room for further improvement.

The fact that South Africa performs poorly even relative to other resource-based economies implies that it has not fully exhausted all opportunities to improve its export potential (Alves &Edwards, 2006). In order for its performance to be stellar as that of its Asian counterparts, South Africa should adapt to the policy recommendations put forward in section three which have proven to be the cornerstone of Asia??™s export success. Moreover, the policy recommendations should be assessed holistically.

In support of this argument, Edwards (2006) suggests that superior trade responses are possible and likely if policy makers focus on all fundamentals and not exchange rate alone. The absence of conclusive evidence of a single factor behind Asia??™s export potential implies dependency among the policies. This is to say that the proposed policy recommendations can be more effective when their implementation is concurrent. 5. REFERENCE LIST: Abedian, I.

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