The fall of the morally repugnant Apartheid regime allowed South Africa to once again join the international community. This led to the undertaking of rapid liberalization policies that allowed for significant and sustained increases in international trade. To put the success of these policies into perspective, South Africa’s overall trade with the rest world increased from $102 billion in 2005 to around $149 billion in 2015. The country’s trade with Africa conforms to this trend and has become an increasingly important market for South African exports and imports. This post aims to apply economic trade theory in order to quantify, summarize and understand the underlying reasons for increased trade across the continent. This will be done in two parts. Firstly, it will highlight some data depicting pertinent trends. Thereafter, it will elaborate on the results obtained from an econometric model. Finally, it will use the results from the aforementioned econometric model to synthesize the trends and suggest various policy recommendations. This provides us with a robust framework to think about and formulate unified policies aimed at improving economic growth and trade across the continent. For the sake of simplicity, a lot of the detail regarding the estimation techniques and the associated nuances will not be discussed.
1) The trends in South Africa’s trade with Africa
Trade with Africa as a percentage of South Africa’s GDP is increasing continuously. Moreover, an analysis of data sourced from further shows that South Africa’s trade with the 41 African countries has increased from 10% of trade in 2005 to 22% of total trade in 2015 As mentioned in the introduction, the importance of South Africa’s trade with the continent is summarized below:
Deepdiving into this trade data even further highlights an important point. That is, eight of South Africa’s top ten African trading partners are from South African Development Community (SADC) region. The ninth and tenth countries are both Nigeria Kenya which are two of the biggest economies in Africa. This will be analyzed a bit more in the following section.
Figure 2: Total trade with Africa
2) An application of the gravity model
The gravity model is often described a “workhorse for empirical studies of regional integration to the virtual exclusion of other approaches”. Basically, this model is used to understand the underlying drivers for trade. In order to analyze and understand the question of African trade and highlight the various drivers and their impact on trade, an econometrics model was estimated using data from UN Comtrade and the World Bank. The variables used in the model are in line with economic theory and a description of their impact are highlighted below:
1.Gross domestic Product (GDP)
GDP is often used as a proxy for economic market size. In other words, the higher the GDP, the more goods a country produces and/or consume. Taking this a step further, it would be safe to assume that this increases both the demand and supply for imports and exports. Moreover, it is expected that business will want to do business in a bigger market because it offers more profit opportunities. That said the results from my econometric model highlight the following. A 100% increase in GDP from the African state leads to a 78% increase in trade. Moreover, a 100% increase in GDP from South Africa leads to a 153% increase in trade. The latter is an important result because it highlights the importance of South Africa as a regional hegemon. Moreover, it highlights the significant impact a successful South Africa can have on economic growth across the continent.
2. Exchange rates
Exchange rates are an important part of international trade. That is, an appreciation of the South African Rand for example, would decrease the cost of African exports to the country. The opposite is true for a deprecation of the rand. The results from my model highlight that a 1 Rand increase in exchange rate leads to a 5% decrease in trade. Given the afore the importance of South Africa across the country, a stable, free floating currency is important in defining trade flows across the continent.
3. Distance between the two countries
The distance parameter is a proxy for the ease at which countries can trade with one another. Put another way, the further away a country, the higher the expected costs of transportation and access to markets. This is expected to significantly deter trade. This is especially important determinant of trade in Africa given the level of infrastructure and access to supply chains across the continent. A 100% increase in distance from the African state leads to an 85% decrease in trade. Synthesizing this into practical policy recommendations, it is important for the continent to dedicate resources towards promoting infrastructure and supply chain networks across the continent. Moreover, it is important to decrease other costs of doing business such as tariffs and other trade restrictions. This is expected to significantly increase intra- African trade.
4. Colonial heritage dummy variable
This variable is significant especially in Africa given the history revolving former British colonies. It is expected that South Africa would trade more with other former British colonies given the historical, language and cultural similarities which makes doing business easy. On average, a former British colony trade is approximately 56% higher than a non-British colony. This is intuitive as it is always easier to do business with people who speak the same language and who have similar cultural nuances.
5. SADC dummy variable
The last dummy variable represents the political and economic relationship with countries belonging to the Southern African Development Community (SADC) bloc. The SADC bloc of countries is considered to have a significant impact on the economic and international status of the region and more specifically South Africa. It was found that a SADC country’s trade with South Africa is, on average approximately 104% higher than a non SADC country. This was evident in figure 2 highlighted above and was subsequently confirmed by the model. This could be used as an effective and robust argument for more integration and preferential trade agreements across the continent based on the SADC model.
Synthesis and conclusion
The underlying rationale for estimating the gravity model is 1) predict market opportunities with which South Africa can explore and 2) understand mechanisms that the continent and South Africa can use to increase trade and economic growth.
1) This blog post found that South Africa has developed robust trade networks with Mozambique, Botswana and Namibia. That is, South Africa currently overtrades with these countries by the amounts highlighted below. Moreover, the model predicts that South Africa can significantly increase trade with Angola, Sudan and Nigeria, which are all largely oil-producing nations. These results are summarized graphically below:
Figure 3: Predicted total trade with Africa
2) Given the results from the research, various potential policy recommendations are available to South Africa and other African countries in order to increase intra-African trade. They are:
- South Africa should promote pro-growth policies across the continent. These include the development of robust institutions, skills development and technological advancement. South Africa’s robust institutions should be used as a model promoted across the continent.
- Promote domestic trade policy aimed at diversifying and improving the quality of the basket of export goods produced across the continent.
- Create the underlying conditions for a stable and flexible free floating exchange rate. Improving economic conditions and the autonomy of monetary policies and fiscal policies can assist in this regard.
- Invest in infrastructure and supply chains that can decrease the transportation costs.
- Investigate the potential for preferential trade agreements and the free movement of goods across the continent. These include a continent wide customs union modelled upon the success of SADC.
- Promote cooperation and access to information to businesses across the continent. This can be done in tandem with the promotion of institutions and non- state actors such as NGO’s. These include understanding and promoting markets where businesses are underrepresented and comparative advantages exist.
South Africa’s role in the rise of intra African trade cannot be understated and should be taken seriously. A South Africa that promotes cooperation, institutions and economic growth will have significant ripple effects on the continent as a whole. It is up to all youth leaders to hold our leaders and policy makers to task when we do not achieve these pertinent objectives. African solutions to African problems is noble policy. It is time to start implementing this idea through action and leading from the front. That is, to create a prosperous Africa.