Trade Liberalisation, Competitiveness and the Real Exchange Rate (RER): An Analysis of Developments in South Africa during the 1990s

Transcription

1 643 Trade Liberalisation, Copetitiveness and the Real Echange Rate (RER): An Analysis of Developents in South Africa during the 1990s L Rangasay International Econoics Research Unit, South African Reserve Bank C Harse Investent and Trade Policy Centre, University of Pretoria ABSTRACT This paper tests whether tariff liberalisation has lead to increased copetitiveness in the South African econoy. The 46 sectors of the South African econoy are classified as eportable, iportable, iportable and eportable and non-tradable. The ipact of trade liberalisation on doestic prices for iportables and eportables is then assessed by aking use of real echange rate calculations. It is concluded that while increased globalisation of production processes in South Africa ay have iproved the copetitiveness of the tradable sector, tariff liberalisation played a inial role in iproving copetitiveness in the anufacturing sector. JEL F13, 31 1 INTRODUCTION Etensive trade (tariff) liberalisation was ipleented in South Africa during the 1990s. The priary otivation for this liberalisation policy was to iprove copetitiveness. A hypothesis that warrants further testing in the South African contet is whether tariff liberalisation has led to increased copetitiveness? This hypothesis infors the analysis in this paper. One way of assessing the effects of trade liberalisation is to consider its ipact on the doestic prices for iportables and eportables (Dijkstra, 1997: 8). This paper uses real echange rate (RER) calculations based on the relative prices of eportables and iportables to non-tradables to analyse the ipact of tariff liberalisation on copetitiveness during the 1990s. Section Two gives an overview of soe of the theoretical issues relating to the RER. Section Three provides a brief review of the tariff liberalisation policy of the 1990s. The penultiate section undertakes RER calculations and tests the

2 644 above-entioned hypothesis for South Africa during the 1990s. Finally, soe conclusions are drawn in Section Five. SOME THEORETICAL CONSIDERATIONS: THE EFFECT OF TRADE LIBERALISATION ON THE RER The real echange rate (RER) provides an indication of the copetitiveness and profitability of producing tradable goods. However, there are different definitions of the real echange rate, which has led to soe confusion in the use of RERs in epirical analysis 1. The purchasing power parity definition of the real echange rate considers relative prices (doestic and international prices) ultiplied by the echange rate. This is given by: P * RER1 = e (1) P where e, P, P* refer to the echange rate, doestic prices and foreign prices respectively. As Holden (1988: 1-) points out, when consuer price indices (CPIs) are used as price easures, the RER captures the relative price of the baskets of consuption goods in the two countries. Siilarly, when producer price indices (PPIs) or gross doestic product (GDP) deflators are used, the relative price of a basket of production goods is easured. In ters of equation (1) a country's copetitiveness increases (decreases) if the relative price of its tradable goods decreases (increases). Changes in the RER in South Africa have attracted attention in econoic literature (Holden, 1988; Kahn, 1998; Walters & de Beer, 1999; Golub, 000; Edwards & Schoer, 000). The afore-entioned studies have considered different easures of the RER and have ostly argued there was an iproveent in South Africa's copetitiveness. However, none of these studies have eplicitly analysed the effects of trade liberalization on the RER copetitiveness indicator. The RER, easured as the ratio of the internal relative price of tradables (P t ) to the price of non-tradables ( P n ), is probably the ost popular analytical definition of copetitiveness (Edwards, 199: 7). This definition eanated fro the dependent econoy odel where the econoy consisted of two sectors, naely the tradables and non-tradables sectors (Corden, 1985; Frenkel and Mussa, 1984; Frenkel and Razin, 1987) 3. In this case the RER is given by: Pt RER = () where P t and P n refer to the price of tradables and non-tradables respectively.

3 645 An increase (decrease) in RER iplies that the opportunity cost of producing tradables, easured in ters of foregone output of non-tradables has decreased (increased). This in effect eans that the production of tradables is encouraged (discouraged). Stated differently, an increase (decrease) in RER depicts a decline (iproveent) in copetitiveness. Viewed in this way, RER changes reflect changes in the internal copetitiveness of tradable goods vis-à-vis nontradable goods. Aggregating eportables and iportables into a single category iplies that relative prices reain unchanged (Holden, 1988). However, the ipact of trade liberalisation is not unifor across iport and eport prices. Liberalisation does not ove the prices of eports and iports in the sae direction, nor at the sae pace. Thus, the use of a coposite tradable price inde in the calculation of the RER ay not accurately indicate oveents in copetitiveness during periods of trade liberalization. Here, soe of the iportant aspects in this regard are outlined, but readers are referred to Milner and McKay (1996) for a ore elaborate eposition 4. The price of tradeables is a geoetric average of the price of eportables ( P ) and iportables ( P ), that is: P (3) β ( 1 β ) t = P P where β refers to the share of iportables in tradables. Substituting equation (3) into equation () and considering the proportionate change in the variables gives: ˆ RER = ˆ β ˆ ˆ β P + (1 ) P (4) where Pˆ, Pˆ and Pˆ n refer to the proportionate change in the price of iportables, eportables and non-tradables respectively. Further, if it is assued that the doestic price for eportables and iportables is equal to the corresponding foreign prices ultiplied by e ( 1+ t) and that foreign prices are constant ( P ˆ * = 0) then, equation 4 can be epressed as: ˆ RER = eˆ + β ˆ β dt+ (1 ) dt (5) where e = echange rate; t = trade easure; dt = 1+ ˆ t ) ; i=, i ( i

4 646 For siplicity a fied echange rate ( e ˆ = 0 ) and eogenously deterined nontradeables prices ( P ˆ n = 0 ) are assued, then iport liberalisation ( dt < 0) would ean that in ters of equation 7 there is a real depreciation ( RER < 0 ). If the price of non-tradeables is endogenously deterined - say a positive relationship between n P and the price of tradeables (i.e. P ˆ > 0 when dt > 0) - then with iport liberalisation ( dt < 0) RER 0 when Pˆ n > dt and RER 0 when > n < Pˆ n < dt. Thus, the ipact of trade liberalisation on RER is abiguous and depends on the change in the price of non-tradables (Milner & McKay, 1996: 78). The relationship between non-tradable and tradable goods prices has an iportant bearing on the definition of the RER. It is iportant to recognise that the incoe and substitution effects eanating fro tariff liberalisation could also influence the price of non-tradables. To restore equilibriu in the econoy, the proportionate change in the price of non-tradables ( Pˆ n ) is given by: Pˆ = w Pˆ + w Pˆ + uyˆ (6) n ηni ε ni where w i = ε nn ηnn y ηn µ = ε η nn nn η ni and ε ni are the elasticities of deand and supply for non-tradables with y respect to the price of i ( i =, ). η n represents the incoe elasticity of deand for non-tradables. The first two ters on the right hand side reflect the substitution effects while the last ter captures the incoe effects 5. Assuing hoogeneity of degree zero in prices iplies that w i > 0 and the su of wi is unity. Equation (6) can thus be rewritten as follows: P ˆ n = w Pˆ + (1 w ) Pˆ + uyˆ (7) Substituting (7) into (5) and for siplicity assuing no incoe effects ( y ˆ = 0) gives:

5 647 ˆ RER = eˆ + β ˆ ˆ β dt+ (1 ) dt wp + ( w 1) P (8) This translates into: ˆ = eˆ + ( β w ) dt + ( w β dt (9) R ER ) with ˆ dt ; P ˆ = dt P = Further, if it is assued that an echange rate adjustent is equivalent to a unifor tariff on iports ( e ) and a subsidy on eports ( e ) then the echange rate effects could be represented as: e ˆ = dt e + dt e (10) substituting (10) into equation (9) gives: ˆ R ER = ( β w )( dt + e ) + ( w β )( dt + e ) (11) In suary the effects would be as follows: With no change in trade policy, the echange rate effects are neutral. Trade liberalization ( dt < 0; dt > 0) accopanied by an echange rate depreciation ( e > 0; e > 0) would cause the price of eportables to increase (since dt > 0 ; e > 0 ) but the oveent in the price of iportables is uncertain (since dt < 0 ; e > 0 ) i.e. iport liberalization causes the prices of iports to decrease whilst the echange rate depreciation causes iportable prices to increase 6. In addition, the substitution effects (w ) are iportant since they also influence the oveent in the price of both eportables and iportables. There are a nuber of factors influencing the price of tradables and nontradables. The theoretical analysis presented above has considered four factors, naely, trade policy changes, echange rate changes, the substitution and incoe effects. The analysis has shown that under certain conditions trade liberalization could have abiguous effects on the price of iportables. It is for this reason, that if the intention is to analyse the likely effects of trade liberalization, then the RER easure should distinguish between the eportables and iportables sectors (Milner and McKay, 1996: 79). Defining the RER in ters of the price of eportables ( P ) and iportables ( P ) and replacing ( P t ) with ( P ) and ( P ) in equation () gives two definitions of the RER naely 7,

6 648 RER = P a (1) RER = P b (13) Since the priary concern here is the effects of tariff liberalisation during the 1990s, the effects of liberalisation on the two RER easures reflected in (1) and (13) need to be considered. With tariff liberalisation (and no change in the echange rate), it can be epected that both RER ˆ and a RER ˆ would depreciate b (i.e. be <0); the depreciation in RER a probably being less than that of RER 8 b. However, tariff liberalisation accopanied by a depreciation in the currency, would cause RER a to depreciate. The likely effects of this on RER b would now be abiguous depending on whether tariff liberalisation eceeds the depreciation in the echange rate and the likely incoe and substitution effects eanating fro the ipleentation of tariff liberalisation. In the latter case, it is thus possible that, with large depreciations in the currency, iport prices would not decrease with tariff liberalization in relative ters. However, it is iportant to realize that separate relative price indices provide an indication of how acro-econoic and other econoic policies affect overall incentives in the econoy (Edwards, 1997), and as such one should be careful not to assign the priary iportance to trade policy effects without due consideration to other factors that could have precipitated the change in the RER 9. The epirical work to date has not always given due consideration to this aspect. Further, with iperfect copetition, doestic prices ay not change in the epected direction with trade liberalisation. A possible reason for this ay be due to lower iport prices at the border not being passed on consuers (Dijkstra, 1997: 8). This could result if there are a few iporters doinating the arket, or alternatively, if the retail network is doinated by a few sellers 10. Another reason could be the prevalence of "pricing to arket" behaviour on the part of foreign suppliers. In this case, profit argins are reduced to absorb the tariff so as to aintain arket share. In such cases, tariff liberalisation ay not necessarily lead to reduced iport prices 11.

7 649 3 A BRIEF REVIEW OF SOUTH AFRICA'S TARIFF LIBERALIZATION POLICY DURING THE 1990S 1 By the beginning of the 1990s South Africa's official policy stance was one of eport-oriented industrialisation. The General Eport Incentive Schee (GEIS) was introduced on 1 April 1990, with the objective of encouraging the production of value added eports. However, while eport subsidies were used to reduce the anti eport bias in the econoy, the view that the path to eport production should entail trade (and ore specifically tariff) liberalisation began to gain ground. This is evident in the recoendations ade by an official investigation into South Africa s tariff protection policy: Progress to greater eport orientation, requires the responsible adjustent of the copetitiveness of the eisting industrial structure, which has been built up through iport replaceent, so as to enable it to deliver products at prices ore in line with world prices. A generally accepted ethod of achieving this is to reduce tariffs and in addition, to follow a realistic echange rate policy. The reduction of iport tariffs is therefore an integral part of a process of progress towards eport orientation (IDC, 1990: i ii) 13. This view was based on the evidence that South Africa: had the ost tariff lines (ore than 13000), ost tariff rates (00 ad valore rates), the widest range of tariffs and the second highest level of dispersion (as easured by the coefficient of variation) aong developing countries (IMF, 000: 54). For policy akers in South Africa, the lowering of tariffs will, however, serve first and foreost to strengthen the eport orientation of South Africa s trade policy (IDC, 1990: v). There was thus a fir belief that the tariff protection policies (of the previous decades) created an anti eport bias and hence did not proote copetitiveness and econoic growth. At the beginning of 1990, the protection syste consisted ainly of quantitative restrictions, custos duties and iport surcharges. In addition, the protection policy was subject to frequent changes, biased against eports and fairly cople (Fallon and Pereira de Silva, 1994: 81) 14. The overall statutory tariff while not too high (approiately 8 per cent) by international standards, nevertheless had a wide dispersion. Within the anufacturing sector, consuer goods enjoyed the highest protection. With the election of a deocratic governent in 1994, the econoic policy bias towards eports as a ajor stiulant of econoic growth was further entrenched. This is clearly borne out in the Growth, Eployent and Redistribution (GEAR) strategy, which has since becoe a cornerstone of governent policy. GEAR is aied at strengthening the copetitive

8 650 capacity of the econoy in the long ter (Governent of South Africa, 1996: 7). Further; copetitiveness in the tradable goods sector is to be achieved through: a reduction in tariffs to contain input prices (ibid., 1996: 4) 15. Governent policy is thus preised on the assuption that eports are vital for econoic growth. Further, reduced input costs iprove cost copetitiveness, which in turn facilitates increased eport production. By the id 1990s, it was clearly evident that the governent was coitted to abolishing GEIS, partly as a result of its incopatibility with GATT rules and partly because of a policy shift that entailed tariff liberalisation as a eans of reducing the anti-eport bias in the econoy. The governent's tariff liberalisation policy culinated in South Africa s offer to the GATT in 1994 and ipleented in January In ters of the GATT offer, South Africa agreed to bind 98 per cent of all tariff lines and to cut tariffs by a third (Holden, 001). The country also offered to convert all quantitative restrictions on agricultural iports to ad-valore rates and to liberalise sensitive industries over an eightyear period (IMF, 000: 54). The offer to GATT clearly displayed a coitent to opening up the econoy to foreign copetition 16. In ters of the offer, industrial protection was to be substantially reduced over a five-year period fro an average tariff of around 1 per cent in 1994 to approiately 5 per cent in 001. The average iport weighted tariff rates were to be reduced to well within the WTO bound rates; fro 34 per cent to 17 per cent for consuption goods, fro 8 per cent to 4 per cent for interediate goods and fro 11 per cent to 5 per cent for capital goods (TIPS, 00: 11) 17. South Africa's coitent to liberalisation offer is borne out by an analysis of the applied rates over the latter half of the 1990s. The average iport weighted tariffs since the GATT offer were significantly reduced fro 8 per cent in 1990 to 10 per cent in 1998 (IMF, 000: 55). For agricultural products the rate was lowered fro 9.3 per cent (1996) to 1.4 per cent (000) while for industrial products it was reduced fro 11.4 (1996) per cent to 8.6 per cent (000). The average for the econoy as a whole has seen applied rates coe down fro 11.3 per cent in 1996 to 7.3 per cent in 000 (TIPS, 00: 14). Thus, the relevant question is whether the significant tariff liberalisation undertaken during the 1990s favourably ipacted on copetitiveness. This hypothesis will be tested for South Africa in the net section. 4 TRADE LIBERALIZATION AND CHANGES IN THE RER IN SOUTH AFRICA DURING THE 1990S Section highlighted the influence of trade liberalization on the prices of tradable goods. The first step in calculating RER easures of copetitiveness

9 651 is to develop separate price series for iportables, eportables and non-tradable goods. This is the focus of the net section. 4.1 Developing price easures for the tradable and non-tradable sectors In order to establish the disaggregated price series it is necessary to distinguish between the tradable and non-tradable sectors. While the distinction between tradable and non-tradable sectors is central to any econoic theories and odels, uch of the epirical work has relied on crude estiates to distinguish between the sectors. One such approach relies on a-priori assuptions about sectors. For eaple, Goldstein and Officer (1979) suggest that since eports and iports doinate in the agriculture, ining and anufacturing sectors; these sectors could be regarded as tradable sectors. This distinction was used in a study for Australia (Shann, 198 cited in Knight & Johnson, 1997), Mauritius (Milner & McKay, 1996) and South Africa (Holden, 1988). However, a ajor disadvantage of this classification is that it is perfored at a fairly aggregate level and as such ay lead to inaccuracies in easureent. This ay be due to soe sub-sectors or industries (for eaple, in anufacturing) being wrongly classified as tradable when they ay not be engaging in trade or vice versa. In addition, this classification does not allow for a shift between the tradable and non-tradable sectors. Knight and Johnson, (1997) suggest an industry based approach to distinguish between the tradable (eportables and iportables) and non-tradable sectors. In this approach an industry is classified as eportable if it displays a significant degree of eport orientation, iportable if it is significantly involved in iportsubstitution and otherwise non-tradable. For the classification of industries, the threshold values are iportant. Dwyer (199), Balassa and Associates (198) and Knight and Johnson (1997) suggest a threshold value of 10 per cent to distinguish between sectors. The distinction between sectors is done on the following basis: Eportable (E) sectors have an eport orientation (eports as a ratio of doestic production) eceeding 10 per cent. Iportable (I) sectors are those in which iports as a ratio of doestic deand eceeds 10 per cent. Non-tradable (NT) sectors are all other sectors in the econoy. Tradable sectors include the eportable and iportable sectors.

10 65 Table 1 Classification of sectors [1] Lib. sect. [] 1990 [3] 1991 [4] 199 [5] 1993 [6] Agr, forestry & fishing E E E,I E E E E E E E E E Coal ining E E E E E E E E E E E E,I Gold and uraniu ining E E E E E E E E E E E E Other ining L E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Food NT NT NT NT NT NT E I E,I E E,I E,I Beverages NT NT NT NT NT NT E E NT E E E Tobacco NT NT NT NT NT NT NT NT E E E E Tetiles E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Wearing apparel L NT NT NT NT NT NT NT I I E,I E,I E,I Leather I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Footwear L NT NT I I I I I I I I I I Wood & wood prod L NT NT NT E,I E,I E,I E,I E,I E,I E,I E,I E,I Paper & paper prod L E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Print, pub & recording I I I I I I I I I I I I Coke and ref petrol L E E E E E E E,I E,I E,I E,I E,I E,I Basic cheicals L E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Other che & an fibres L I I I I I I I I I I I I Rubber I I I I I E,I E,I E,I E,I E,I E,I E,I Plastic prod L NT NT NT NT NT NT I I I I I I Glass & glass product L I I I E,I I I E,I E,I E,I E,I E,I E,I Non etallic inerals NT NT NT NT I I I I I E,I I E,I Basic iron & steel L E E E,I E E,I E,I E,I E,I E,I E,I E,I E,I Basic non ferrous et. L E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Metal prod ecl ach. NT NT NT I I E,I E,I E,I E,I E,I E,I E,I Machinery & equip L I I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Electrical achinery L I I I I I E,I E,I E,I E,I E,I E,I E,I TV radio and equip L I I I I I E,I E,I E,I E,I E,I E,I E,I Professional & scientific L E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Motor vehicles parts L I I I I I I I E,I E,I E,I E,I E,I Other transport L I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Furniture L NT NT NT NT E E E E E,I E,I E,I E,I Other anufact. L E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I E,I Electricity, gas & stea L NT NT NT NT NT NT NT NT NT NT NT NT Water supply NT NT NT NT NT NT NT NT NT NT NT NT Building construction NT NT NT NT NT NT NT NT NT NT NT NT Civil eng. & other constr. NT NT NT NT NT NT NT NT NT NT NT NT Wholesale and retail trade NT NT NT NT NT NT NT NT NT NT NT NT Catering & acco. serv. E,I E,I I I E,I E,I E,I E,I E,I E,I E,I E,I Transport & storage E E NT NT E E E E E E E E Counication NT NT NT NT NT NT NT NT NT NT NT NT Finance & insurance NT NT NT NT NT NT NT NT NT NT NT NT Business services NT NT NT NT NT NT NT NT NT NT NT NT Medical, dental and vet. serv. NT NT NT NT NT NT NT NT NT NT NT NT Ecl edical, dental & vet. serv. NT NT NT NT NT NT NT NT NT NT NT NT Other producers NT NT NT NT NT NT NT NT NT NT NT NT General govt. services NT NT NT NT NT NT NT NT NT NT NT NT Source: Data fro Tips, own calculations 1994 [7] 1995 [8] 1996 [9] 1997 [10] 1998 [11] 1999 [1] 000 [ [15]

11 653 Table 1 (see previous page) classifies the 46 sectors of the South African econoy into either eportable (E), iportable (I), iportable and eportable (I,E) or non-tradable (NT). The dynaic nature of the classification procedure is clearly evident fro the table as in the case of the food sector, which was classified as non-tradable up until 1995, eportable for 1996 and 1999 and iportable for 1997 and both eportable and iportable for 1998, 000 and 001. The nuber of non-tradable sectors has decreased fro (1990) to 1 (001) during the period under analysis. Of interest is that the nuber of sectors that are classified as iportable and eportable (I,E) has increased fro 8 in 1990 to 5 in This indicates that a larger nuber of sectors have been subject to increased copetition in both the doestic and international arkets. The question at this point is, what has been the role of tariff liberalisation on the copetitiveness of these sectors? Table 1 (colun ) also reflects those sectors that becae ore liberalised during the 1990s. This classification is based on the relative change in the average effective rate of protection (ERP) easures between the period and A iniu 10 per cent reduction qualifies the sector for classification as liberalised. The ERP easures used in the classification of the sectors are contained in Table (see later page). Using this industry classification, the price series at the disaggregated sector level are established. Trade liberalisation easures are eant to influence the prices received by doestic producers for their output. Table 3 reflects the respective price series. The price of iportables ( P ) is the weighted su of the GDP deflators for the iportable sectors 18. Siilarly the price of non-tradables is given by the weighted su of GDP deflators for the non-tradable sectors. Three different calculations are undertaken for the price of eportables. 1 P is an eport weighted su of GDP deflators for the eportable sectors 19. P is an eportweighted su of the price of eports of the respective industries 0 3. P is the eport price series calculated by the South African Reserve Bank (SARB) 1. It 1 is interesting to note that there is very little difference between P and P which iplies that there is very little difference between the prices charged for doestic goods and siilar goods that are eported. However, the price series 3 of the SARB ( P ) shows a significant upward divergence after This ay be priarily due to the SARB inde being doinated by resource intensive coodities and as such the depreciation of the currency, coupled with the increases in coodity prices during the latter part of the 1990s, ay have biased the price inde upwards. P t is a weighted su of P and P 3.

12 654 Table Effective rate of protection for sectors of the South African econoy Sector ERP88 ERP89 ERP90 ERP91 ERP9 ERP93 ERP94 ERP95 ERP96 ERP97 ERP98 ERP88-93 EPR94-98 Agr, Forestry & fishing Coal ining Gold & uraniu ining Other ining Food Beverages Tobacco Tetiles Wearing apparel Leather Footwear Wood & wood prod Paper & paper prod Print, pub &recording Coke & ref petrol Basic cheicals Other che & an fibres Rubber Plastic prod Glass & glass prod Non etallic inerals

13 655 Table continued Sector ERP88 ERP89 ERP90 ERP91 ERP9 ERP93 ERP94 ERP95 ERP96 ERP97 ERP98 ERP88-93 EPR94-98 Basic iron &steel Basic non ferrous et Metal prod ecl ach Machinery & equip Electrical achinery TV radio & equip Profess. &scientific Motor vehicles parts Other transport Furniture Other industries Elect gas and stea Building const Wholesale & ret. trade Transport &storage Finance and ins Med, dent, health & vet Source: Fedderke & Vase, 001, own calculations

14 656 Figure 1 Price of eportables, iportables and non-tradables Price inde 110 P P Year

15 657 Figure Growth rates of eportable, iportable and non-tradable price P P

16 658 Figure 1 graphically depicts the price indees for the iportable, eportable and non-tradables sectors 4. In general the trend is the sae for all the price series. However, during the early 1990s, eportables and iportables prices increased faster than those of non-tradables. Between 1996 and 000, non-tradable prices increased faster than those of eportable and iportable prices with a relative oderation in the price of tradables being particularly evident between 1995 and The oderation in prices is analysed by considering the annual rate of increase in the price of eportables, iportables and non-tradables sectors (Figure ). This is inforative as it gives an indication of the trend in the rate of price increases. The three price series have the sae trend. Throughout the period under analysis there has been a continuous deceleration in the price of nontradables, to the etent that, by the end of the period under analysis, the annual rate of increase in prices was lower than that of the eportable and iportable coodities. The price of iportables shows a oderation in its rate of increase fro 1995 to 1998 and the price of eportables fro 1993 to However, the price increases of iportables (since 1998) and eportables (since 1997) have accelerated quite rapidly. It is iportant to realise that the copetitiveness of an industry does not depend on absolute but relative prices. This aspect is eplored in ore detail in the net section. 4. Trade liberalisation and its effect on prices during the 1990s l P (in Table 3) reflects the price series for the iportable sectors that were liberalised and P nl the iportable sectors that were not liberalised 5. The liberalised sectors are those reflected in colun, Table 1. One advantage of distinguishing between the liberalising and non-liberalising sectors is that it provides an indication of the likely ipact of trade liberalisation on prices. In other words, if all other effects (e.g. echange rate changes, substitution and incoe effects, cost influences, etc.) are assued to be unifor across the iportables sector, then any divergence between l nl P and P would be due to trade liberalisation easures 6 l nl. P and P show very little divergence fro each other iplying that the price of iportables that were liberalised increased at the sae pace as those that were not liberalised. This suggests that the liberalisation ipleented during the 1990s ay not have had the intended (epected) effect of reducing the prices of iportables. Tsikata (1999: 10) argues that tariffs had a reduced ipact on prices during the 1990s. Figure provides soe iplicit support for this, in the sense that there is a oderation in increase in all tradable (eportables, iportables and tradables) prices during the period of trade liberalisation (particularly between 1995 to

17 ). However, on closer eaination, it should be noted that the oderation in prices began in the early 1990s - soe tie before the ipleentation of tariff refor in Thus the deceleration in prices suggests that there ay be other factors (for eaple, the abolition of sanctions) that could have played a greater role in iproving copetitiveness than tariff liberalisation per se. In addition, Tsikata's (ibid.) conclusions are drawn by coparing the local currency value of anufactures (MUVLC) and the doestic iport price of anufactures (PPIM). MUVLC is proied by "the product of the US dollarbased international anufactures unit value and the noinal echange rate visà-vis the US dollar" (ibid.: 10) and this is taken to represent the epected rate of increase in doestic prices. A coparison (of MUVLC and PPIM) is taken to reveal whether iport prices (PPIM) have in fact decreased faster than what would have been epected (MUVLC). However, soe reservations can be epressed about the proies used in the analysis. Firstly, the anner in which MUVLC is calculated does not give due recognition to the ajor differences between the structure of the US anufacturing sector vis-à-vis that of South Africa 7. Secondly, PPIM represents the price of iports and not necessarily iportables; and in analysing the effects of liberalisation we are concerned with the ipact of trade liberalisation on the price of iportables 8. Table 3 Price series of eportables, iportables, tradables and nontradables l nl 1 3 Year P P P P n P P P P t Source: Authors' calculations with data fro Quantec As entioned earlier in the theoretical section, a easure of the internal copetitiveness of a sector is obtained by considering the price indees for the iportables, eportables and tradable sectors relative to the price inde for non-

18 660 tradables (Dwyer, 199: 451). An increase (decrease) in any of these relative prices represents a decline (iproveent) in copetitiveness. The price indices are reflected in Table 4. Table 4 Relative prices of eportables, iportables, tradables and non-tradables l nl Year Pt P P P P Source: Table 3, authors' calculations The RER easures recorded in Table 4 reveal soe interesting characteristics of the tradable sectors. All indices depict a declining trend (iproved copetitiveness) for ost of the period 9. Once again it is evident that the iproveent in copetitiveness during the ajor part of the 1990s, started before the ipleentation of tariff refor. In addition, the fact that the nl P copetitiveness of the non-liberalised sectors ( ) differs very little fro the l P liberalised sectors ( ) also calls into question the etent to which tariff liberalisation ay have increased copetitiveness during the 1990s. 5 CONCLUSIONS In this paper we have analysed the copetitiveness of tradable sectors vis-à-vis non-tradable sectors using a variant of the conventional RER easure. While increased globalisation of production could have contributed to the iproved copetitiveness of the tradable sector, the evidence presented in this paper suggests that tariff liberalisation (which essentially began in 1995) ay have

19 661 played a inial role in iproving the level of copetitiveness of South Africa's anufacturing sector. It could be the case that factors such as the abolition of sanctions, pricing to arket behaviour on the part of foreign suppliers, doestic and international cost factors, etc. could have been ore iportant deterinants of copetitiveness. These aspects warrant further epirical analysis. ENDNOTES 1 See Edwards (1989) for a discussion of the abiguities related to the different definitions of the RER The evidence suggests that indicators based on real effective echange rate calculations have overstated the etent of the iproveent in South Africa's copetitiveness. These studies have in the ain ephasized the different theoretical and easureent issues pertaining to the calculation of the RER. 3 Tradables are classified as those goods whose prices are deterined on the world arket; they include both eportables and iportables. Nontrabables on the other hand are classified as those goods whose prices are deterined doestically. 4 Milner and Mackay (1996) provide an elegant theoretical justification for the use of disaggregated tradable (i.e. eportables and iportables) price indices in the calculation of the RER. They use the RER calculations to date the liberalisation episode in Mauritius. However, in this paper we use the RER calculations to analyse the ipact of trade liberalisation on copetitiveness. 5 See Milner and McKay (1996) for a ore elaborate eposition of these concepts. 6 This occurs even if iport liberalization eceeds the depreciation in the currency (i.e. dt + e < 0), RER >0 when β > w 7 Following, Edwards (199), the RER for the econoy as a whole can be epressed as: RER = α RER a + ( 1 α) RER b where α and ( 1 α) represent the respective trade weights. 8 The depreciation in RER a depending on the share of iported inputs used in production. For siplicity the incoe and substitution effects are ignored. 9 An attept is ade to address this issue by distinguishing between the price oveents in the price of liberalised and non-liberalised iportables. 10 This was the case for food prices in Nicaragua (see Dijkstra,1996).

20 66 11 Therefore the analysis of the effects of pass-through effects of tariff changes to iport prices is iportant to ascertain if the envisaged benefits (reduced iport prices) are in fact realised. 1 See Bell, 1997 and Tips, 00 for a ore elaborate review of the protective easures during this period. 13 The inister of trade, industry and touris coissioned the Industrial Developent Corporation, in collaboration with the Board of Trade and Industry, to "investigate the efficacy of the eisting tariff protection policy". 14 Copleity was due to a variety of different tariff rates and eeptions granted on a fir-by-fir basis rather than a product-by- product basis. 15 It is interesting to note that the objective of striving for international copetitiveness is not eant to be isolated fro social objectives. In fact one of the stated intentions of econoic policy is to support a copetitive and ore labour-intensive growth path (GEAR, 1996: 7). 16 This section is ainly based on TIPS (00). 17 The bound rates are 6 per cent, 4 per cent and 15 per cent for consuption, interediate and capital goods respectively. 18 The Laspeyres price inde forula was used which is given by Pit P = wit where wit reflects the share of industry i contribution to the Pi0 total value of output of the iportables sector in tie period t. P it is the price inde of the coodities produced by industry i in period t and P i0 the price inde of the coodities produced by industry i in the base period. The price indices were proied by the GDP industry deflators which were obtained fro the TIPS standard industrial classification database. 19 The weight used in the calculation of the inde is the share that the respective industries contribute to the value of eports of the eportable sectors. 0 The inde was constructed fro the eport price series of the respective industries, which were obtained fro the TIPS standard industrial classification database. 1 The eport price series calculated by the SARB, is an etrapolation done fro unit values of soe of South Africa's ajor eport coodities. 3 The ajor difference between P and P is that the forer is derived fro the GDP deflators of all the eportable industries while the latter considers the eport unit values of soe of South Africa's ajor eport coodities. The noinal effective echange rate depreciated by 35 per cent between and by 43 per cent between The weights are ade up of eports and doestic deand for eportables and iportables respectively.

21 663 4 Eport prices used in the graph are given by P and iport prices by P in Table 3. 5 The weights used were the respective share of the industries to the value of output of the liberalised and non-liberalised iportable sectors. 6 With the eception of 199, 1997 and 1998, the price inde for liberalised sectors was either the sae (for ost of the years) or even higher (as in 1996, 000) than that for non-liberalised sectors. 7 The US anufacturing sector is coposed of ore technology intensive sectors. 8 As argued earlier on, it ay the case that due to lack of copetition between iporters the benefits of lower iport prices ay not be passed on to consuers. 9 During 000 and 001 there was a relative decline in the copetitiveness of the tradable sector. REFERENCES 1 BALASSA & ASSOCIATES (198) Developent Strategies in Sei- Industrial Econoies, World Bank: Washington DC. BELL, T. (1993) "Should South Africa further liberalise its foreign trade?" In Lipton, M. and Sipkins, C. (eds.) State and Market in Post- Apartheid South Africa, Witwatersrand University Press: Johannesburg. 3 BELL, T. (1997) "Trade policy" in Michie, J. and Padayachee, V (eds) The Political Econoy of South Africa's Transition, Dryden Press: London. 4 CORDEN, M. (1985) Inflation, Echange Rates and the World Econoy, Third edition, Claredon Press: Oford. 5 DIJKSTRA, A.G. (1997) "Trade liberalisation and industrial copetitiveeness: the case of anufactured eports fro Latin Aerica", Paper presented at the 1997 conference of the Latin Aerican Studies Association, Guadalajara, Meico, April. 6 DIJKSTRA, A.G. (1996) "The ipact of structural adjustent progras on anufacturing: lessons fro Nicaragua", in World Developent, 4(3): DWYER, J. (199) "The tradable non-tradable dichotoy: a practical approach", Australian Econoic Papers, (Deceber): EDWARDS, E. (199) "Real echange rates, copetitiveness and acroeconoic adjustent in Nicaragua", Report prepared for the USAID under contract No C University of California: Los Angeles.

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