Analysing South Africa's export diversification and sustainability : a country comparison

Abstract

There is a well-established link between exports and economic growth, which is why many countries have adopted export-oriented growth strategies. South Africa regards exports as one of the keys to unlocking the economy's potential and ensuring stronger growth. However, various studies conducted over the years provide evidence that South Africa's export growth has been lagging behind that of several of its peer countries at similar levels of economic development. While these studies involved doing a decomposition of South Africa's export growth, there has been a dearth of recent analyses and country comparisons. Clearly, a more contemporary view of South Africa's export growth trajectory, opportunities and challenges is necessary. The purpose of this study was to conduct a decomposition of South Africa's export performance and sustainability and to compare the findings with those for a selected group of peer countries, namely Colombia, Ecuador, Egypt and Peru. This was intended to reveal where South Africa's export growth is concentrated within the intensive margin of trade and why it is not keeping pace with that of its peers. The literature shows that export growth - especially growth along the intensive margin - is very important for developing countries. Growing exports along the intensive margin means exporting more existing products to traditional markets, while growing exports along the extensive margin means exporting new products or establishing new trading relationships. Growing exports through the intensive margin is better suited to developing countries which often lack the expertise and resources to develop new products and/or make inroads into new export markets. Nevertheless, an overemphasis on export growth through the intensive margin is usually a sign that a country is finding it difficult to diversity its exports, which could adversely affect export volumes and economic growth prospects. In this study, South Africa's export growth was decomposed along the intensive margin by first grouping South Africa's and the selected peer countries' export relationships into three dimensions within the intensive margin, namely increases, decreases and extinctions. The countries' export products were then grouped into six product categories according to their technology and skill intensity to determine the countries' export growth in terms of these categories. It was then established if the aggregate

export value in each of the product categories had increased, decreased or become extinct over the period 2007-2019. Thereafter, the sustainability of these exports was determined by analysing the factor endowments (human and physical capital capabilities) of South Africa and the selected peer countries, using the physical capital intensity index and the revealed human capital intensity index. This was to determine whether each country's factor endowments were sufficient to produce the export products on an ongoing basis, which is a hallmark of export growth through the intensive margin. Using data from the World Bank, South Africa's and the selected peer countries' current human and physical capital endowment points were determined and then compared with the human and physical capital intensity required to sustainably produce the export products in question. Finally, correlation analysis was performed to determine if there was a significant relationship between the dynamics within the countries' intensive margin and the 'distance' between the countries' human and physical capital and the products' factor intensities and endowments. Among the key results of the study are that while South Africa has a more diversified export profile than that of the selected peer countries, the average aggregate value of its export relationships is lower than that of its peers. Also worrying is the fact that South Africa's largest decrease has been in the medium-skill and technology-intensive manufactures product category, suggesting that the country has been unable to drive more value-added production and exports. Another important finding is that South Africa's human (in particular) and physical capital endowments are insufficient to support its current export basket - contrary to the findings for the selected peer countries. Two key recommendations flowing from the study are that South Africa should direct its productive resources at expanding exports of products it already specialises in, such as vehicles and iron and steel, and invest much more strategically in the development of effective human and physical capital, using an enhanced education system as the main vehicle for encouraging a transition away from primary and resource-based export dependency.