DISCUSSION PAPER MTI Global Practice No. 7 October 2018 Peter Draper Jakob Engel Heinrich Krogman Anna Ngarachu Lesley Wentworth This series is produced by the Macroeconomics, Trade, and Investment (MTI) Global Practice of the World Bank. The papers in this series aim to provide a vehicle for publishing preliminary results on MTI topics to encourage discussion and debate. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Citation and the use of material presented in this series should take into account this provisional character. For information regarding the MTI Discussion Paper Series, please contact the Editor, Ivailo Izvorski, at iizvorski@worldbank.org. © 2018 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 All rights reserved ii MTI DISCUSSION PAPER NO. 7 Abstract South Africa’s weak post-apartheid trade performance has been a significant factor in its inability to create more jobs and achieve higher growth and productivity. Exports and inbound foreign direct investment as a share of gross domestic product have lagged other middle- income countries and both have declined in absolute terms in the past five years. South Africa is losing market share in many of its core export products, both because it is being outcompeted by more dynamic economies in East Asia and owing to its own supply-side and institutional constraints. This loss of global competitiveness in manufacturing has meant that more South African firms have turned to the domestic economy and to less demanding export markets in the rest of sub-Saharan Africa. While South Africa can continue growing through a primarily regionally focused strategy, these markets are small, and defaulting to the lower levels of productivity required to compete in the rest of Africa could undermine South Africa’s competitiveness in the long term. This paper provides an overview of South Africa’s recent trade outcomes, as well as its trade policy framework, and assesses the causes of its disappointing performance. In turn, it suggests changes to trade-related policies as well as the governance and management of these policies. The paper focuses in depth on three specific trade-related constraints: transport costs, the institutional governance of trade tariffs and export promotion, and overall economic policy uncertainty. The paper proceeds to argue that the South African government would benefit from aligning its trade strategy, commercial and economic diplomacy and industrial policy with the dual objective of providing both the engine for a “Factory Southern Africa” that encompasses the rest of the SADC region, and of being the region’s gateway to the rest of the world. Since South African firms will not be able to drive this approach on their own, this necessarily means forging policies and institutions that encourage investments into South Africa and the SADC region, and working with neighbors to maximize the development of regional value chains that result from such investments. Corresponding authors: jengel@worldbank.org; JEL Classification: F10, F13, F62 Keywords: South Africa, Trade Policy, Trade Logistics, Global Value Chains, Regional Integration 3 Contents Abstract................................................................................................................................................................... 3 Abbreviations ......................................................................................................................................................... 6 1. Introduction ............................................................................................................................................... 7 2. The Recent Evolution of South Africa's Trade Competitiveness .............................................................. 8 2.1. South African Exports through the Global Financial Crisis and the Commodity Super-Cycle ........... 8 2.2. Export Growth and Orientation ......................................................................................................... 15 2.3. Export Diversification, Quality and Complexity ............................................................................... 22 2.4. Firm Characteristics, Value Chains and Export Competitiveness ..................................................... 27 3. Domestic Constraints to South Africa’s Export Competitiveness ........................................................... 33 3.1. Transport Costs and Management ..................................................................................................... 33 3.2. Trade Governance ............................................................................................................................. 39 3.2.1. Institutional Issues Pertaining to Tariff-Setting ............................................................................ 39 3.2.2. South Africa’s Commercial Diplomacy ........................................................................................ 44 3.2.3. South Africa’s Economic Diplomacy ........................................................................................... 50 3.3. Addressing Policy Uncertainty .......................................................................................................... 56 4. Conclusion and Recommendations.......................................................................................................... 62 4.1. The Gateway Model: Linking South African Firms to Global Markets while Supporting the Region’s Integration and Industrialization ....................................................................................................... 62 4.2. Trade Policy and Trade Management Recommendations ................................................................. 63 Bibliography ......................................................................................................................................................... 65 4 Figures Figure 1: Exports of Goods and Services (1993=100; left axis) and FDI as a Share of GDP (in %, Right Axis), South Africa vs MIC Average ................................................................................................................................ 9 Figure 2: Composition of South African Exports, 1993-2016 (in Current USD Million) ...................................... 9 Figure 3: South Africa’s Export Growth in Relation to World Exports, 2008Q2-2016Q2 .................................. 10 Figure 4: Trade Weighted Average of Applied Tariffs (in %), South Africa vs. Comparators ............................ 11 Figure 5: Quantity Exported and Price for Iron Ore and Chromium, 2006-2016 (2006-100) .............................. 13 Figure 6: Exports by Destination in 2006 and 2016 ............................................................................................. 17 Figure 7: Decomposition of South Africa’s Export Market Share into Push and Pull Factors (2008Q3-2016Q1) .............................................................................................................................................................................. 19 Figure 8: Decomposition of South Africa’s Export Market share into Product Groups (2008Q3-2016Q1) ........ 20 Figure 9: South Africa’s Services Trade in Million USD (2005-16) .................................................................... 21 Figure 10: Services Exports in Million USD (2005-16), South Africa vs Comparators....................................... 21 Figure 11: South Africa’s Composition of Services Exports (in million USD), 2005-16 .................................... 21 Figure 12: South Africa’s HHI for Exports to the Rest of SADC, East Asia Pacific, High-Income OECD Countries and the Whole World (2004, 2008, 2012 and 2016) ............................................................................ 23 Figure 13: Share of Medium and High-Tech Products in Total Exports .............................................................. 24 Figure 14: Export Sophistication Score EXPY (in log Form) in 2006 and 2016.................................................. 24 Figure 15: Results from IFC’s Country Opportunity Spotlight ............................................................................ 27 Figure 16: Distribution of Firms by Number of Employees in Firm, 2011/12-13/14 Average ............................ 29 Figure 17: South Africa’s Main Export Destinations by Firm Size ...................................................................... 32 Figure 18: Tariff Application and Decision Processes ......................................................................................... 40 Figure 19: South African External Missions and Economic Offices .................................................................... 49 Figure 20: SACCI Business Confidence Index, March 2010 - May 2018 ............................................................ 58 Figure 23: EU Investor Sentiment Towards Trading with South Africa .............................................................. 59 Tables Table 1: Compound Annual Growth Rate of Exports........................................................................................... 12 Table 2: Export Growth by Sector and as a Share of the Total............................................................................. 15 Table 3: South Africa’s Revealed Comparative Advantage by Sector (2006 and 2016) ...................................... 16 Table 4: Top 20 Export Destinations, 2007 and 2016 .......................................................................................... 17 Table 5: Compound Annual Growth Rate of Services Exports ............................................................................ 22 Table 6: South Africa’s HHI in Exports by Sector (2005, 2009 and 2014) .......................................................... 23 Table 7: Selected South African Products Above 2 s.d. Average Density ........................................................... 26 Table 8: South African Competitiveness Grid ...................................................................................................... 31 Table 9: Public and Private Sector Market Share for Major Service Categories .................................................. 35 Table 10: Export Councils in Operation ............................................................................................................... 45 Boxes Box 1: Assessing the Relationship Between South Africa’s Exports and Exchange Rate Dynamics .................. 14 Box 2: A Different Model - The Australian Productivity Commission ................................................................ 43 5 Abbreviations AGOA African Growth and Opportunities Act AIEC Automotive Industry Export Council BCI Business Confidence Index BEPEC Built Environment Professions Export Council BIT Bilateral Investment Treaty CFTA Continental Free Trade Area CIF Cost, Insurance and Freight CECOSA Cosmetic Export Council of South Africa DAFF Department of Agriculture, Forestry, and Fisheries DIRCO Department of International Relations and Cooperation DTI Department of Trade and Industry EAC East African Community EDD Economic Development Department EMIA Export Marketing and Assistance EPA Economic Partnership Agreement FDI Foreign Direct Investment FOB Free on Board GDP Gross Domestic Product GSP Generalized System of Preferences GVC Global Value Chain HHI Hirschman-Herfindahl Index ICT Information and Communication Technology ITC International Trade Centre IDPDD Industrial Development Policy Development Division IPAP Industrial Policy Action Plan ITAC International Trade Administration Commission ITLC International Trade Logistics Costs MIC Middle-Income Country MNC Multi-National Corporation NIPF National Industrial Policy Framework NTBs Non-tariff barriers OSS One-Stop Shop PFMA Public Finance Management Act PIPA Provincial Investment Promotion Agency PUI Policy Uncertainty Index RCA Revealed Comparative Advantage REER Real Effective Exchange Rate RISDP Regional Indicative Strategic Development Plan RIT Removal in Transit RRA Rail Road Association SACU Southern African Customs Union SADC Southern African Development Community SARS South African Revenue Services SCD Systematic Country Diagnostic SDI Spatial Development Initiative SME Small and Medium Enterprise STER Single Transport Economic Regulator SOP Stages of Processing TDCA Trade, Development and Cooperation Agreement TESA Team Export South Africa TFP Total Factor Productivity TFTA Tripartite Free Trade Area TISA Trade and Investment South Africa TNPA Transnet National Ports Authority TPT Transnet Port Terminals WTO World Trade Organization ZIMRA Zimbabwe Revenue Authority 6 Between Gatekeeper and Gateway: Taking Advantage of Regional and Global Value Chains by Addressing Barriers to South Africa’s Trade Competitiveness Peter Draper, Jakob Engel, Heinrich Krogman, Anna Ngarachu, Lesley Wentworth1 1. Introduction “Over the longer term, South Africa has to do more to enhance competitiveness in areas of comparative advantage that can draw more people into work.”2 Following the 1994 political transition, South Africa found itself in a challenging position. It had opportunities to take advantage of a rapidly globalizing economy but was also severely constrained by the legacy of apartheid. While the years of sanctions, disinvestment, and import substitution had allowed for the development of major industrial conglomerates in intermediate sectors that had in turn been nurtured to provide strategic inputs, these were largely uncompetitive and in need of major structural reforms. There was substantial goodwill engendered by the peaceful transition and the ascendency of Nelson Mandela to the presidency, with many of the world’s economic powers eager to support the country’s re-integration into the global economy. However, the legacies of the “Bantu” education system and apartheid era labor regimes had systematically destroyed quality education for non-whites and resulted in a two-tier labor force, with a white population that had levels of education and skills comparable to many developed countries, and the black majority, whose educational opportunities had been neglected for decades. While the past two decades have been characterized by significant reforms, the country has not been able to use trade as a driver of growth and development. Despite a recent large depreciation of the real effective exchange rate (REER) and a recovery in global growth, South African goods exports have barely expanded—despite firms identifying lack of demand as a key reason for high capacity underutilization in South Africa. Service exports, too, hold high potential and South Africa could more effectively seize opportunities that derive from exports in these sectors. Finally, there is a question whether South African policy is optimal in allowing the country to import the goods and services it needs to enhance its production processes. This background paper informs the World Bank Group’s South Africa Systematic Country Diagnostic. The paper makes three central claims: firstly, that South Africa’s lackluster trade performance has been a significant factor in its inability to create more jobs and achieve higher growth. Secondly, that there are several domestic institutional and policy factors behind the country’s competitiveness decline. Thirdly, that South Africa would benefit from aligning its trade strategy, commercial and economic diplomacy and industrial policy with the dual objective of providing both the engine for a “Factory Southern Africa” that encompasses the 1 This paper was produced as part of the World Bank Group’s Systematic Country Diagnostic for South Africa and financed through this process. It was written by Peter Draper, Heinrich Krogman, Anna Ngarachu, Lesley Wentworth (all Tutwa Consulting Group) and Jakob Engel (World Bank Group; corresponding author, jengel@worldbank.org). We thank Marek Hanusch for comments, advice and guidance throughout this process and Sébastien Dessus, Thomas Farole and Claire Hollweg for detailed comments on a previous draft. 2 National Planning Commission. (2012). National Development Plan 2030: Our Future – Make it Work. National Planning Commission, Government of South Africa, p. 20. 7 rest of the SADC region, and of being the region’s gateway to the rest of the world. It proceeds as follows: Section 2 assesses the recent evolution of South Africa’s export competitiveness and examines, relative to comparators, the evolution of export diversification and sophistication dynamics. Section 3 identifies some of the most significant constraints to greater export competitiveness in the areas of transport, economic and trade governance, and policy uncertainty. The paper concludes by outlining a series of reforms (Section 4) that will increase the country’s trade competitiveness, help South African firms link to global and regional markets and support productivity growth and job creation in the South African economy.3 2. The Recent Evolution of South Africa's Trade Competitiveness This section examines some of the dynamics underlying South Africa’s declining market share and its relatively anemic trade performance. It focuses on the recent evolution of South Africa’s export competitiveness and examines, relative to comparators, the evolution of export diversification and sophistication dynamics. It moreover balances this with a firm-level perspective, examining the integration of both large firms and SMEs into regional and global value chains. 2.1.South African Exports through the Global Financial Crisis and the Commodity Super-Cycle South Africa’s anemic trade performance has been a significant factor in its inability to create more jobs and achieve higher growth and productivity. Exports and inbound foreign direct investment (FDI) as a share of gross domestic product (GDP) has lagged other middle-income countries (MICs) and both have declined in recent years. (Figure 1). In fact, only in two years – 2001 and 2009 – did South Africa exceed the MIC average for FDI inflows.4 Exports5 have been concentrated in only a few sectors, with fuels and minerals as well as stone, glass and metals goods making up a cumulative 38.6% of exports in 2016, compared to 21.5% in 1993 (Figure 2).6 Meanwhile high- and medium-tech manufacturing exports declined from 39.8% of total exports in 1993 to 21.3% in 2016. 3 The SCD is an analytical product preceding the preparation of its Country Partnership Frameworks (laying out the intervention areas for WBG programs. It is being prepared in collaboration with the National Planning Commission/Department of Monitoring and Evaluation in the Presidency and National Treasury. 4 That said, trade for larger economies (such as South Africa) tends to inherently be smaller as a share of GDP, relative to smaller countries. 5 In terms of value; the evolution of export volumes for indicative key products will be discussed later in Section 2.1. 6 However, this is slightly misleading as between 1993 and 1996, the largest goods export sector was a special code (HS 99) that was aggregated under machinery, electronics and manufacturing. At a more disaggregated level, top export goods have remained remarkably consistent. The largest 5 HS 2-digit level goods exported in 1993 were, in descending order, UN Special Code (misc. goods – HS code 99) natural and cultured pearls and precious stones (71); iron and steel (72), oil minerals fuels and products of these (27); ores, slag and ash (26); and nuclear reactors (84). In 2016 these were natural and cultured pearls and precious stones (71); vehicles other than railways and tramways (87); ores, slag and ash (26); oil minerals fuels and products of these (27); and iron and steel (72). At the six-digit HS level, the five largest goods exported in 2016 were non-agglomerated bituminous coal, gold in semi-manufactured forms, ferro-chromium, diesel-powered trucks and agglomerated iron ores and concentrates. In 1993, these were non-industrial unworked diamonds, non-agglomerated bituminous coal, unsorted diamonds, ferro-chromium agglomerated iron ores and concentrates. As such, the share of fuels and minerals as well as stone, glass and metals goods make up 40.0% in 1996, with high-tech manufacturing exports making up 17.4%. 8 Figure 1: Exports of Goods and Services (1993=100; left axis) and FDI as a Share of GDP (in %, Right Axis), South Africa vs MIC Average 400 7 350 6 300 5 250 4 200 3 150 100 2 50 1 0 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Middle income countries South Africa Source: IMF BoP Yearbook from World Bank World Development Indicators Figure 2: Composition of South African Exports, 1993-2016 (in Current USD Million) 140,000 Million USD 120,000 100,000 80,000 60,000 40,000 20,000 0 1997 1993 1994 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Food, agriculture and livestock Fuels and minerals Chemicals, plastics and rubber Hides, skin, wood Textiles and footwear Stone, glass and metals Machinery, electronics, transport and other mfg. Services Source: Own calculations based on Comtrade data. Overall South Africa’s global market share in goods has declined in recent years, particularly after the global financial crisis and the end of the commodity boom in 2012 (Figure 3). It has become increasingly apparent that China and other East Asian economies are leaving South Africa behind in many areas of manufacturing, with their success in the past two decades further complicating South Africa’s prospects as value chains have matured and the barriers to attracting investment from multinational corporations (MNCs) have increased. 9 Figure 3: South Africa’s Export Growth in Relation to World Exports, 2008Q2-2016Q2 Source: World Bank Measuring Export Competitiveness Database using CEPII-BACI trade data. Note: Indicators are expressed in log-difference form, which allows for additivity across indicators. South Africa has substantially reduced many trade barriers in recent years. Applied tariffs have come down substantially, from a trade-weighted average of 16% in 2000 to under 7% in 2015. Overall, tariff levels however remain above the sample of comparator middle-income countries7 (except for Brazil; see Figure 4). They are significantly above those set by most high-income countries and there is significant heterogeneity depending on product type. For example, for consumer goods, only Brazil, Colombia and Egypt have higher trade-weighted applied tariffs among this group of comparator countries. However, as shown in the far right set of columns, since joining the Southern African Development Community (SADC) free trade area, applied import tariffs for other SADC members are almost at zero. 7 The set of comparators were selected based on the World Bank’s FindFriends tool based on similarity on the following structural indicators: Geography/natural endowments: Population density, share of natural resource exports in total exports; Demography: population size, age dependency ratio, population growth; Institutions: Ease of Doing Business rank, credit rating; Technology: GDP per capita (in US$). 10 Figure 4: Trade Weighted Average of Applied Tariffs (in %), South Africa vs. Comparators 18 16 14 12 10 8 6 4 2 0 Brazil Chile Colombia Ecuador Egypt Indonesia Mexico South South Africa Africa (SADC only) 2000 2005 2010 2015 Source: UN Comtrade TRAINS database It is worth revisiting how South Africa has found itself in this challenging situation. The country has experienced declining total factor productivity (TFP) since 2008 costing the equivalent of 0.7 percentage points of foregone GDP growth every year since then and is struggling to increase its share of exports in the most technologically sophisticated sectors.8 There is some consensus that South Africa’s lagging trade competitiveness is at least in part a story of two external shocks that had a substantial and mutually reinforcing effect: the emergence of China in the early 2000s as the world’s leading manufacturer, and the global economic crisis that started in 2008. This compounded many of the domestic supply-side and policy-related issues that are addressed in more depth in the rest of this paper. China’s WTO accession and its emergence as an economic superpower has had a profound effect on manufacturing sectors throughout the world.9 While some developing countries in Southeast Asia benefitted from being part of global value chains linked to China, many of these countries, and developing countries in Africa, experienced particularly large displacement from China in labor-intensive sectors like apparel. South Africa was no exception: Chinese imports increased rapidly from about 2000 onwards displacing imports from other countries and local production, becoming the largest source of imports to South Africa both in aggregate and in 27 8 World Bank Group (2017). South Africa Economic Update: Innovation for Productivity and Inclusiveness. SAEU No. 10, September. 9 Acemoglu, D., Autor, D., Dorn, D., Hanson, G.H. & Price, B. (2016). “Import Competition and the Great US Employment Sag of the 2000s.” Journal of Labor Economics 34(S1): S141-S198. Autor, D.H., Dorn, D. & Hanson, G.H. (2016). “The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade.” Annual Review of Economics 8: 205-240. 11 out of 45 manufacturing industries.10 This had a profound impact on previously competitive labor-intensive export sectors.11 The impact of the global financial crisis on South Africa’s exports was slightly more complex and manifested itself differently than in other parts of the developed world. Overall South Africa’s exports grew during the initial crisis years at a similar rate as comparators: more slowly than Egypt, Mexico and Indonesia but more rapidly than the South American comparators Chile, Colombia, Ecuador and Brazil (see Table 1). However, in the years after the crisis and as the commodity super-cycle ended (2011-16), exports declined at 7.3% per annum. From the group of comparators, many of which are also commodity exporters, only Colombia performed worse during this period, though the trends described above are relatively consistent among comparator countries. South Africa’s decline was most pronounced in the raw materials and the intermediate goods sectors. Table 1: Compound Annual Growth Rate of Exports Country 2006-16 2006-11 2011-16 Brazil 3.1% 13.2% -6.1% Chile 0.1% 6.5% -6.0% Colombia 2.4% 18.5% -11.4% Ecuador 2.8% 11.9% -5.5% Egypt, Arab Rep. 6.3% 21.1% -6.7% Indonesia 3.7% 15.1% -6.6% Mexico 4.0% 6.8% 1.2% South Africa (all goods) 3.5% 15.5% -7.3% South Africa (Raw materials – SOP1) 4.7% 20.3% -8.9% South Africa (Intermediate goods – SOP2) 1.0% 13.2% -9.9% South Africa (Consumer goods – SOP3) 7.2% 17.8% -2.4% South Africa (Capital goods – SOP 4) 3.2% 11.3% -4.3% Source: Own calculations based on Comtrade data Division into goods sub-categories follows UNCTAD Stages of Processing (SOP) classification As for many other commodity producers, declining exports can in part also be explained by the end of the commodity boom. Historically, South Africa’s manufacturing sector was developed through the mining economy and the decline of South Africa’s relatively dynamic minerals sector had substantial knock-on effects on the many linked up- and downstream industries.12 However, in examining two of South Africa’s leading commodity exports, iron 10 Edwards, L. & Jenkins, R. (2015). “The Impact of Chinese Import Penetration on the South African Manufacturing Sector.” The Journal of Development Studies 51(4): 447-463. The authors estimate that Chinese import penetration during the decade of the 2000s came to around R30 billion and that the displacement of South African manufacturing over the full 1992 to 2010 period caused output in 2010 to be about 5% lower than it otherwise would have been. The effects of this were disproportionately strong and rapid in labor-intensive industries. The authors do, however, note that Chinese import penetration also had some positive impacts in terms of raising productivity in surviving firms and lowering producer price inflation. 11 Cali, M. & Hollweg, C. (2017). How Much Labor Do South African Exports Contain?. Policy Research Working Paper No. 8037. Washington, DC: World Bank. 12 As noted by Cali & Hollweg (2017), the number of jobs indirectly supported by mining and energy exports exceeds those in the sector itself. However, among the 11 sectors examined, only real estate has a lower job content in exports (per $1 million of gross exports) than mining and energy. In this context, it is also noteworthy that McKinsey Global Institute, in its recent report on South Africa’s leading growth sectors did not include mining in its “big five” growth sectors due to its projected negative employment outlook. 12 ore and chromium, it is striking that producers have continued to increase export volumes despite declining prices (though some drop off occurred for both products in 2014/15, most likely in the context of recent strikes in the mining industry). Thus, these seem to be primarily cyclical dynamics rather than impacted by supply-side constraints (Figure 5). Figure 5: Quantity Exported and Price for Iron Ore and Chromium, 2006-2016 (2006-100) Iron ore (HS 2601) Chromium (HS 2610) 300 400 300 200 200 100 100 0 0 Quantity exported World price Quantity exported Unit Value Source: UN Comtrade data for quantity and unit value data; iron price data from World Bank CMO annual series. Nonetheless, there are trade-related dynamics at play that are more counterintuitive and most likely specific to South Africa, most notably the very limited export response to the declining exchange rate. If South African goods are cheaper relative to its competitors, it is puzzling that there hasn’t been more external demand for them. A recent IMF paper13 looks at this issue in depth through a unique database of export performance at the firm level to gauge the impact of structural factors on export performance and controlling for firm- and sector-specific characteristics. The authors find that electricity bottlenecks, limited product market competition, and the frequency of strikes have reduced the responsiveness of firms’ exports to the rand’s depreciation. Thus, despite the opportunity to expand exports that the depreciation of the rand has offered, these rigidities have held back firms’ capacity to benefit from this competitiveness-boost. Exporting SMEs and firms with more diversified production structures, on the other hand, have also benefitted more from the depreciation. These firms are most responsive to exchange rate changes and have seen a 0.6% increase in manufacturing exports for each 1% decrease in the REER. and firms with more diversified production structures have also benefitted more from the depreciation. Larger firms, especially in mining, were strongly affected by strikes and have a higher level of firm concentration as well as a more rigid cost structure that would offset the external competitiveness of those sectors in the short term. There is an additional dimension to be considered here that the aforementioned IMF paper seems to neglect, namely that firms trading within global value chains (GVCs) need to source inputs that are more expensive to import given the rand’s depreciation, or – given import parity pricing in many sectors14 – even if inputs are sourced locally (see Box 1). 13 Anand, R., Perrelli, R. & Zhang, B. (2016). South Africa’s Exports Performance: Any Role for Structural Factors?. IMF Working Papers WP/16/24. 14 Bonakele, T. (2014). Import Parity Pricing and Competition Policy. PCTI/20140826/CoB/Competitioncommission/31 13 Box 1: Assessing the Relationship Between South Africa’s Exports and Exchange Rate Dynamics15 South Africa’s real effective exchange rate has depreciated by 28.5% between 2010 and 2016, but in this time South Africa saw export values decline from their peak of $108 billion in 2011 to $74 billion in 2016 (-31.5%). While all things being equal, a declining REER would result in increased trade competitiveness and in turn a substantial export response, there are a few potential complementary explanations further to those stated above as to why this may have not been the case for South Africa. 1. Reduced demand for South Africa’s leading commodity exports: This decline coincided with the end of the commodity boom and if one exempts fuels and minerals (HS chapter 25-27) from South Africa’s exports, the decline was less severe, from $81.6 billion in 2011 to $58.9 billion ( -28.1%), while further excluding stone, glass and metals (HS chapters 68-83) results in an 18.3% decline. Moreover, as demonstrated in Figure 5 above, an analysis of export volumes rather than values could additionally complicate this issue. Finally, this period coincided with one of global stagnation following the economic crisis, especially in many emerging economies. As exports tend to be more sensitive to world income than the REER, assessing the role of changes in global demand could provide a more helpful explanation. 2. Global Value Chains: As discussed above, greater fragmentation in production and trade also can help explain low elasticity of exports to the exchange rate. Firstly, the REER depreciation boosts the domestic value added in exports. Therefore, in countries with higher GVC integration (and therefore with higher foreign value added in exports), domestic value added would be lower than if production was integrated domestically. Secondly, firms in GVCs tend to be more price-inelastic in their demand for inputs due to customization and longer-term contractual relationships and small changes in REERs don’t induce large changes in their input sourcing decisions. This would dampen the effect of a depreciating exchange rate on exports. However, given the low integration into global value chains, it is unlikely that this played a very significant role. 3. Balance sheet effects: In cases where firms are indebted in foreign currency, currency depreciations increased their export competitiveness on the one hand, but on the other increased the domestic-currency value of their liabilities. If firms were exclusively exporters, then they were naturally leveraged, but if firms were also supplying to the domestic market, then they had to adjust in the case of a negative domestic shock. Moreover, if the banking sector in turn suffers due to this negative balance sheet effect on firms, non-performing loans increase, and export finance shrinks. 4. Import parity pricing: In the early 2000s there were widespread concerns in South Africa over uses of import parity pricing (i.e. charging the higher import price for a cheaper domestically available good) by some of South Africa’s entrenched dominant firms in strategic capital -intensive industries. There is some evidence of this occurring again in recent years with the Competition Commission pursuing cases for anticompetitive import parity pricing against Arcelor Mittal and Sasol. Thus, in addition to the analysis in the previously cited IMF paper, there is scope to explore in greater depth and at a more disaggregated level what may be driving these dynamics. 15 The authors gratefully acknowledge insights from Gonzalo Varela in formulating this textbox. 14 2.2. Export Growth and Orientation As discussed in the previous section, while tariffs have come down and overall exports have stagnated with South Africa’s market share declining, there is considerable sectoral variation (see Table 2). Except for minerals, the largest sectors have overall not been among the fastest growing ones. Over a period of just 10 years, manufacturing exports (HS chapters 28-99) have declined from 76.8% to 68.2% of total export value. Agriculture and agribusiness has increased from 7.6% to 12% and there is dynamism in certain sectors such as vegetables (11% growth from 2006-16), animal products (7.8% growth), footwear (18.9% growth, albeit from a very low baseline) and minerals (8.7%). While the performance during the 2011-16 period was worst in the commodity-related sectors (minerals, fuels, stone/glass production and metals processing), it was not confined to these sectors, with only transport, and hides and skins, growing during this time. In terms of its overall significance as an export sector, stone and glass (which includes platinum, gold and several other precious minerals) remained the most important contributor to overall exports but lost substantial share in South Africa’s export basket (from 22.9% in 2011 to 16.9% in 2016). Transport equipment became the second-most significant sector during this time that coincided with the end of the commodity boom (4th in 2006). Table 2: Export Growth by Sector and as a Share of the Total Compound Annual Growth Share of total Rank Rate Products (HS chapters) 2006- 2006-11 2011-16 2006 2011 2016 2006 2016 16 Animals (01-05) 7.8% 16.4% -0.2% 0.9% 1.0% 1.4% 14 14 Vegetables (06-15) 11.0% 23.8% -0.6% 3.0% 4.3% 6.1% 9 7 Food Products (16-24) 5.9% 14.8% -2.4% 3.6% 3.5% 4.5% 8 8 Minerals (25-26) 8.7% 33.8% -11.6% 6.7% 13.9% 10.9% 6 4 Fuels (27) 3.5% 17.8% -9.0% 9.6% 10.6% 9.6% 5 5 Chemicals (28-38) 2.8% 12.3% -5.9% 6.5% 5.7% 6.1% 7 9 Plastics & Rubber (39-40) 5.9% 18.2% -5.1% 1.8% 2.0% 2.2% 12 12 Hides & Skin (41-43) 4.6% 9.2% 0.2% 0.4% 0.3% 0.5% 15 15 Wood (44-49) 3.2% 11.3% -4.2% 2.9% 2.4% 2.8% 10 10 Textiles & Clothing (50- 5.6% 15.4% -3.4% 1.2% 1.2% 1.5% 13 13 63) Footwear (64-67) 18.9% 46.8% -3.8% 0.1% 0.2% 0.3% 16 16 Stone & Glass (68-71) 1.0% 17.1% -12.8% 21.4% 22.9% 16.9% 1 1 Metals (72-83) -0.8% 7.1% -8.2% 18.9% 12.9% 12.3% 2 3 Machinery & Electronics 1.9% 10.7% -6.3% 11.1% 9.0% 9.5% 3 6 (84-85) Transport (86-89) 6.3% 11.7% 1.0% 10.5% 8.9% 13.7% 4 2 Miscellaneous (90-99) 5.2% 11.5% -0.7% 2.0% 1.7% 2.4% 11 11 ALL 3.5% 15.5% -7.3% Source: Own calculations based on Comtrade This evolution is reflected in South Africa’s revealed comparative advantage (RCA) over time (Table 3). The RCA is a measure of how significant a given product or sector is in South Africa’s exports to the world compared to that product’s significance in global trade in general. The RCA is greater than 1 if South Africa has a disproportionately large market share in a 15 given product or sector compared to its total global market share. South Africa has improved its RCA in most sectors except stone and glass, where it saw a significant drop-off that drove the overall decline in global market share. The largest improvements were in minerals, vegetables and fuels and South Africa now has a revealed comparative advantage (i.e. RCA greater than 1) in vegetables, food products, minerals, fuels, wood products, stone and glass, metals and transport. However, in employment-intensive low-skill manufacturing sectors (especially textiles/clothing and footwear) it has a RCA far below 1. It is important to note that these results reflect where South Africa currently seems to have a comparative advantage – where it may develop one in the medium term is discussed later in Section 2.3. in reviewing the results of viable products within South Africa’s product space. Table 3: South Africa’s Revealed Comparative Advantage by Sector (2006 and 2016) Products (HS chapters) 2006 2016 Change: 2006-16 Animals (01-05) 0.58 0.69 0.11 Vegetables (06-15) 1.26 1.79 0.53 Food Products (16-24) 1.17 1.34 0.17 Minerals (25-26) 6.67 9.02 2.35 Fuels (27) 0.83 1.09 0.26 Chemicals (28-38) 0.68 0.67 -0.01 Plastics & Rubber (39-40) 0.36 0.49 0.13 Hides & Skin (41-43) 0.65 0.69 0.04 Wood (44-49) 1.01 1.2 0.19 Textiles & Clothing (50-63) 0.25 0.34 0.09 Footwear (64-67) 0.09 0.3 0.21 Stone & Glass (68-71) 6.7 3.24 -3.46 Metals (72-83) 2.29 1.96 -0.33 Machinery & Electronics (84-85) 0.44 0.36 -0.08 Transport (86-89) 0.84 1.23 0.39 Miscellaneous (90-99) 0.19 0.22 0.03 Source: Own calculations based on Comtrade There has also been a clear shift in terms of South Africa’s primary export destinations (Figure 6). While in 2006, 70% of all exports went to the OECD and only 10% to SADC, by 2016 only 40% went to the OECD, and 25% to SADC. This shift was even more pronounced in some sectors: for capital goods, SADC’s share increased from 19% to 40% while that of the OECD declined from 64% to 44% in ten years. There was also a substantial shift towards non-OECD members outside of Africa (from 16% to 32% in 10 years). This is reflected in Table 4: between 2007 and 2016, China became South Africa’s largest export destination (previously 4th). The two largest export markets in 2007, the United States and Japan, slipped to 2nd and 7th respectively. Among the largest sources of imports, China went from 10.7% to over 18% share of total imports between 2007 and 2016. And the top 10 now includes five South and East Asian countries (only 3 in 2007). This reflects the dynamics discussed in Section 2.1 regarding China’s unprecedented increase in export competitiveness. In combination with Table 4, it also 16 highlights the scope for two-way trade between these two countries, though South Africa mostly exports primary goods and imports manufactured goods.16 Figure 6: Exports by Destination in 2006 and 2016 SSA 2006 without 2016 SSA SADC without 4% SADC Rest of 3% world Rest of 16% world 32% OECD SADC 40% 10% OECD SADC 70% 25% Source: Own calculations based on Comtrade Table 4: Top 20 Export Destinations, 2007 and 2016 2007 2016 Country Exports in % of Country Exports in % of US$1000 Total US$1000 Total United States 7,528,705.01 11.76 China 6,812,080.88 9.19 Japan 7,039,332.24 10.99 United States 5,473,767.81 7.39 Germany 5,106,030.24 7.97 Germany 5,259,696.98 7.1 United 4,907,274.71 7.66 Unspecified 4,149,055.38 5.6 Kingdom China 4,169,608.03 6.51 Botswana 3,712,233.38 5.01 Netherlands 2,880,664.81 4.5 Namibia 3,530,667.23 4.76 Spain 1,757,717.44 2.75 Japan 3,450,199.52 4.66 Belgium 1,748,812.88 2.73 United Kingdom 3,158,231.91 4.26 Italy 1,429,789.59 2.23 India 3,150,929.68 4.25 Zambia 1,421,242.31 2.22 Belgium 2,288,236.64 3.09 France 1,382,922.84 2.16 Mozambique 2,263,065.23 3.05 Switzerland 1,370,502.11 2.14 Zambia 2,079,920.12 2.81 India 1,349,482.45 2.11 Zimbabwe 1,997,559.40 2.7 Australia 1,278,395.90 2 Netherlands 1,988,354.91 2.68 Mozambique 1,267,187.18 1.98 Hong Kong, China 1,766,413.65 2.38 Zimbabwe 1,194,814.40 1.87 United Arab 1,327,708.69 1.79 Emirates Korea, Rep. 1,161,626.95 1.81 Korea, Rep. 1,312,496.46 1.77 Other Asia, nes 890,892.68 1.39 Swaziland 1,154,066.79 1.56 Israel 785,310.28 1.23 Lesotho 1,139,464.13 1.54 Canada 779,032.30 1.22 Italy 1,092,706.03 1.47 Source: Own calculations based on Comtrade 16 This is particularly pronounced in the Chinese case. In fact, China’s rise has prompted a substantial response in terms of export strategy, in terms of a focus on minerals exports to China and imports of labor-intensive goods. Value added exports have increasingly gone into Africa and OECD markets. This has important implications for trade diplomacy, which are briefly explored in chapter 4. 17 It is worth revisiting what lies behind South Africa’s declining export competitiveness. Returning to Figure 4 in Section 2.1, illustrating South Africa’s exports relative to global exports (and thus its share of global exports), Figure 7 decomposes changes in South Africa’s export market share into “push” and “pull” factors using the World Bank’s “Measuring Export Competitiveness” database which allows decomposing growth of global trade into demand- side changes, supply-side changes, and changes in the extensive margin, i.e. compositional effects due to market orientation and product specialization.17 “Push” factors describe a country’s own supply-side capacity to expand export market shares, assuming equal market and sectoral export composition across all countries. These relate to changes in South Africa’s export competitiveness either caused by changes in production costs, for example due to exchange rate fluctuations or greater efficiency (dark blue in the 2nd graph) or overall production capacity in terms of volumes (light blue). Pull factors relate to global demand for the products South Africa specialized in (light and dark green) and overall import demand in key markets (yellow/beige). It appears that the shift in late 2012, when South Africa lost global market shares, was particularly driven by “push” factors (most likely an overall decline in productivity and international competitiveness), while “pull” factors (South Africa’s sectoral specialization aligning with global demand and general demand for South African import’s in key markets) remained positive in aggregate. Taking this one step further, and looking at these “push” factors (Figure 8), this was particularly driven by primary and intermediate products due to a supply shock, such as those discussed earlier to explain why many South African firms were unable to take advantage of the depreciation of the rand (such as a lack of reliable access to electricity and frequent strikes in the leading export sectors). With respect to pull factors, it appears that on the product side the decline caused in metals and minerals prices was in part offset by gains in volumes from “other products” and on the export markets side, China and the rest of sub-Saharan Africa seems to have offset a lot of the decline (caused by relative price changes) from the Eurozone. 17 Gaulier, G.G., Santoni, D., Taglioni, D. & Zignago, S. (2013). Market Shares in the Wake of the Global Crisis: The Quarterly Export Competitiveness Database. Banque de France Working Paper No. 472, Paris. 18 Figure 7: Decomposition of South Africa’s Export Market Share into Push and Pull Factors (2008Q3-2016Q1) Source: Measuring Export Competitiveness Database The numbers reported in the tables are log first differences. They represent an approximation of the percentage change in the variable of interest. 19 Figure 8: Decomposition of South Africa’s Export Market share into Product Groups (2008Q3-2016Q1) Source: Measuring Export Competitiveness Database The numbers reported in the tables are log first differences. They represent an approximation of the percentage change in the variable of interest. Services have increasingly become an area of export growth for South Africa. Services now make up almost 50% of the country’s value-added and are becoming far more significant exports, both in their own right as exports, and as inputs into production.18 As shown in Figure 9, South Africa has consistently had a slightly negative balance of trade in services, though both exports and imports increased steadily from 2005 to 2011, before decreasing again through 2016. In this regard, South Africa is similar to some comparators (especially Ecuador, Chile and Egypt), which also saw only modest increases (Figure 10). However, Colombia, Mexico, Brazil and Indonesia all saw substantial year-on-year increases. 18 Cali, M. & Hollweg, C. (2017). How much Labor do South African Exports Contain?. World Bank Policy Research Working Paper No. 8037 20 Figure 9: South Africa’s Services Trade Figure 10: Services Exports in Million USD in Million USD (2005-16) (2005-16), South Africa vs Comparators 25000 50000 20000 40000 15000 30000 20000 10000 10000 5000 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 Brazil Chile Colombia Ecuador Egypt Indonesia Services exports Services imports Mexico South Africa Source: Authors’ calculation using UNCTAD data. The main driver of South Africa’s services exports is travel, followed by transport and other business services (Figure 11) 19. However, as shown in the bottom half of Table 5, the fastest growth among South Africa’s leading services export sectors was recorded in more sophisticated and high-skilled sectors such as financial services, information and communication technology (ICT), and telecoms and other business services. Nonetheless, these still only make up a relatively minor share of the country’s total services exports. Figure 11: South Africa’s Composition of Services Exports (in million USD), 2005-16 20000 15000 10000 5000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Goods-related services Transport Travel Construction Insurance and pension Financial services Charges for the use of IP Telecoms/ICT Other business services Personal/cultural/recreational Government goods and services 19 Other business services include i) legal, accounting, management consulting, and public relations services; ii) advertising, market research, and public opinion polling services; iii) architectural, engineering, scientific, and other technical services; iv) waste treatment and de-pollution, agricultural and mining services; v) leasing services and vi) trade-related services. 21 Table 5: Compound Annual Growth Rate of Services Exports Country 2005-16 2005-10 2010-16 Brazil 7.2% 14.8% 1.3% Chile 2.7% 9.2% -2.4% Colombia 9.1% 11.3% 7.3% Ecuador 6.8% 7.7% 6.1% Egypt, Arab Rep. -0.2% 10.2% -8.1% Indonesia 5.8% 5.4% 6.1% Mexico 4.0% -0.6% 7.9% 2005-16 2005-10 2010-16 Share of Share of total (2005) total (2016) South Africa (all Services) 1.8% 6.3% -1.9% SA: Transport 0.7% 8.9% -5.6% 17.1% 15.2% SA: Travel 0.5% 3.9% -2.3% 63.5% 55.1% SA: Financial services 3.8% 8.9% -0.3% 4.5% 5.6% SA: Telecoms/ICT 5.4% 7.6% 3.6% 2.7% 4.0% SA: Other business services 7.9% 14.5% 2.7% 7.1% 13.5% Source: Own calculations based on Comtrade data Division into goods sub-categories follows UNCTAD Stages of Processing (SOP) classification 2.3. Export Diversification, Quality and Complexity According to most measures, South Africa’s export basket remains relatively diversified and has become more so in some sectors (especially agribusiness, machinery and fuels). The Hirschman-Herfindahl Index (HHI) allows comparing export concentration across countries on a scale from 0 to 1, with 1 indicating that the country exports only 1 product in a given category. Table 6 below shows South Africa’s HHI score in 2005, 2009 and 2014. As can be seen, South Africa has a very low score (i.e. low concentration across all sectors with the exception of fuels). This has declined for the agricultural sectors and select manufacturing sectors (footwear, transport, machinery and miscellaneous manufacturing) but has increased marginally and generally from a very low baseline for other sectors. Figure 12 below shows that its concentration is lowest for SADC countries; i.e. exports to other SADC member states are most diversified. 22 Table 6: South Africa’s HHI in Exports by Sector (2005, 2009 and 2014) 2005 2009 2014 Change 2005-14 Animals (01-05) 0.07 0.04 0.03 -0.04 Vegetables (06-15) 0.08 0.08 0.05 -0.03 Food Products (16-24) 0.09 0.07 0.03 -0.06 Minerals (25-26) 0.17 0.25 0.19 0.03 Fuels (27) 0.49 0.47 0.37 -0.13 Chemicals (28-38) 0.03 0.02 0.02 -0.01 Plastics & Rubber (39-40) 0.05 0.06 0.05 0.01 Hides & Skin (41-43) 0.10 0.10 0.10 0.00 Wood (44-49) 0.10 0.10 0.12 0.02 Textiles & Clothing (50-63) 0.03 0.08 0.04 0.02 Footwear (64-67) 0.07 0.04 0.05 -0.01 Stone & Glass (68-71) 0.15 0.21 0.17 0.03 Metals (72-83) 0.05 0.07 0.08 0.04 Machinery & Electronics (84- 0.13 0.08 0.05 -0.08 85) Transport (86-89) 0.21 0.18 0.14 -0.07 Miscellaneous (90-99) 0.22 0.10 0.02 -0.20 Source: Own calculations based on Comtrade Figure 12: South Africa’s HHI for Exports to the Rest of SADC, East Asia Pacific, High- Income OECD Countries and the Whole World (2004, 2008, 2012 and 2016) 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2004 2008 2012 2016 SADC High-income OECD East Asia - Pacific World Source: Own calculations based on Comtrade In terms of its share of medium and high technology exports, South Africa performs well against comparators. While this share declined in other comparator countries, it increased between 2006 and 2016 for South Africa overall, though there was a slight decline in high-tech products (see Figure 13). This is also reflected in South Africa’s performance on the EXPY score (Figure 14).20 Here it leads comparators and has improved between 2006 and 2016, 20 The country’s expected GDP per capita, EXPY, is given by adding values of the PRODY (weighted average of per capita GDP of countries producing that product) for the products exported by the country, each weighted by the product’s share in total exports. 23 though not in terms of its exports to SADC countries, which have become less sophisticated since 2006. An implication of this South Africa’s overall export structure has maintained a focus on medium and high-technology goods, especially to the US and EU; as such, if a primary objective of policy is to promote value addition in manufactured exports, then there would be value in deepening trade relations with those two markets. The implications of this for the country’s trade and investment relations will be discussed in further Section 3. Figure 13: Share of Medium and High- Figure 14: Export Sophistication Score EXPY Tech Products in Total Exports (in log Form) in 2006 and 2016 South Africa - 2016 South Africa - World South Africa - 2006 South Africa - SADC Ecuador - 2016 Ecuador - 2006 Indonesia Colombia -2016 Egypt, Arab Rep. Colombia -2006 Ecuador Chile - 2016 Colombia Chile - 2006 Chile Brazil - 2016 Brazil Brazil - 2006 0% 10% 20% 30% 40% 9 9.2 9.4 9.6 9.8 10 Medium High 2016 2006 Source: Own calculations based on Comtrade This analysis has thus far been primarily backward-looking, but it is usefully complemented by an examination of products that South Africa could diversify into.21 We used the analytical tools proposed by Ricardo Hausmann and colleagues22 to scan the product space for opportunities to develop revealed comparative advantage in high potential export sectors for South Africa. The analysis is based on two important dimensions measured at the product level: sophistication (‘PRODY’) and proximity to the current productive structure (‘density’). The methodology allows for the construction of a list of products into which a particular country could expect to develop revealed comparative advantage more easily. The products are then aggregated at the industry level and weighted by their respective world trade share to provide a sense of which sectors are the most attractive in terms of world demand. The methodology provides a list of products/industries that: a) are easier for South Africa to develop revealed comparative advantage in; and b) represent attractive opportunities in terms of world trade.23 Following this methodology, we provide a list of products selected by two strategies: a “low hanging fruit” strategy that only involves products that are very close to South Africa’s current 21 This analysis draws on work by Guillermo Arenas and Monica Paganini. 22 Hausmann, R., Klinger, B., Roberto, J. & Lopez-Calix. (2010). Export Diversification in Algeria. Trade Competitiveness of the Middle East and North Africa. Washington, DC: World Bank: 63-102. 23 As a first step, we calculate the distance (‘density’) from each non -occupied product to South Africa’s current productive structure as represented by its pattern of revealed comparative advantage. We define non-occupied products as those products in which Lesotho does not have revealed comparative advantage in 2015 and might or might not currently export. Conversely, occupied products are those in which South Africa has revealed comparative advantage in 2015. The density of each non-occupied product measures how easy it is to develop revealed comparative advantage in that product given that the country has develop it in other products. Intuitively, products with higher density are easier to ‘move to’ (develop a RCA) as they use similar capabilities than those sectors that South Africa has already mastered (i.e. has developed RCA). 24 productive structure, and another strategy -that can be thought of as more aggressive or a medium-term strategy - and includes products that are farther from South Africa’s current productive capabilities. The two strategies would result in different sectoral focus. The list of selected products with the 2 standard deviation threshold (‘low hanging fruit’) is presented below with products arranged in descending order by density, so ‘closer’ products appear at the top (see Table 7: Selected South African Products Above 2 s.d. Average Density). It is worth noting, that this list includes no complex manufactured goods, demonstrating the challenge of diversifying into these products in the near term. 25 Table 7: Selected South African Products Above 2 s.d. Average Density Exports in SITC Product name 2015 PRODY Leamer Group Density (US$ thou.) Meat of sheep and goats, fresh, chilled 112 4,888 15162 Animal Products 0.08863 or frozen Cotton (other than linters),not carded or 2631 55,302 1500 Cereals 0.08285 combed 2517 Chemical wood pulp,soda or sulphate 127,064 12212 Forest Products 0.083002 Groundnuts (peanuts),green,whether or 2221 27,176 2739 Cereals 0.083108 not shelled 4234 Groundnut (peanut) oil 1,465 1767 Cereals 0.084508 Copper ores & concentrates;copper 2871 186,806 3861 Raw Materials 0.085396 matte/cement Aluminium and aluminium 6841 953,995 9077 Raw Materials 0.086526 alloys,unwrought 411 Durum wheat,unmilled 63,029 6191 Cereals 0.087253 Petroleum gases and other gaseous 3413 258,025 4958 Raw Materials 0.087378 hydrocarbons 452 Oats,unmilled 1,553 22656 Cereals 0.087811 Goat & kid skins,raw 2114 0 1217 Animal Products 0.088999 (fresh,salted,dried,pickled) 811 Hay and fodder,green or dry 34,927 14691 Cereals 0.089536 2874 Lead ores and concentrates 76,886 6772 Raw Materials 0.091153 Petrol.oils & crude oils obt.from 3330 128,519 5316 Petroleum 0.09258 bitumin.minerals Aluminium ores and concentrates 2873 1,354 3393 Raw Materials 0.093117 (includ.alumina) 5241 Fissile chemical elements and isotopes 99,404 1978 Chemical 0.093482 Petroleum gases and other gaseous 3414 1,990 6232 Raw Materials 0.093522 hydrocarbons nes Flours & meals,of meat/fish,unfit for 814 90,915 10748 Cereals 0.096217 human food Nickel & nickel alloys,unwrought 6831 393,047 10397 Raw Materials 0.096819 (ingots,pigs,etc) 2683 Fine animal hair,not carded or combed 5,174 843 Cereals 0.098687 Copper and copper alloys,refined or 6821 448,518 4900 Raw Materials 0.09932 not,unwrought Base metals,n.e.s.and 6899 107,216 3279 Raw Materials 0.099625 cermets,unwrought 2741 Sulphur of all kinds 55,871 11637 Raw Materials 0.100067 Sheep's or lambs'wool,degreased,in the 2682 13,388 13203 Cereals 0.102082 mass Sisal & other fibres of agave 2654 0 875 Cereals 0.103292 family,raw or proce. 2876 Tin ores and concentrates 1,167 1685 Raw Materials 0.121195 2784 Asbestos 1,592 3243 Raw Materials 0.127352 Tropical 742 Mate 320 7830 0.129933 Agriculture Ores and concentrates of uranium and 2860 14 13865 Raw Materials 0.137916 thorium Source: Authors’ elaboration using Comtrade data. Finally, a Country Opportunity Spotlight24 shows that South Africa could raise its overall competitiveness by further developing the complex sectors in which it performs fairly well globally such as chemicals, machinery, and transportation equipment (Figure 15). In services, similar opportunities exist in technology, knowledge activities (design and publishing), and maintenance. 24 This analysis draws on work by Vincent Floreani. 26 Figure 15: Results from IFC’s Country Opportunity Spotlight 2.4. Firm Characteristics, Value Chains and Export Competitiveness Firms export goods and services, not countries, and thus it is worth taking a deeper look at firm-level dynamics. This can help elucidate about what characterizes firms that become exporters or increase exports at the extensive or intensive margin. There is a plethora of recent analysis exploiting the availability of firm-level data provided by SARS and the National Treasury and matched with customs data. For example: • In examining so-called “high-growth firms”, Mamburu25 finds that whether a firm imports any intermediate goods or exports final goods is strongly associated with the likelihood of being a high-growth firm. • Kreuser and Newman26 find that firms involved in trade are significantly more productive than those that do not import or export. • Matthee et al27. add an interesting nuance to this by finding that single-product exporters or multi-product exporters who export only within Africa are no more productive than firms that produce only for the domestic market. Meanwhile, firms that export multiple products, at least some of which are exported outside Africa, have productivity levels approximately 6% higher than non-exporters. 25 Mamburu, M. (2017). Defining high-growth firms in South Africa (No. 107). World Institute for Development Economic Research (UNU-WIDER). 26 Kreuser, F. & Newman, C. (2016). Total factor productivity in South African manufacturing firms (No. 2016/41). WIDER Working Paper. 27 Matthee, M., Rankin, N., Webb, T. & Bezuidenhout, C. (2017). “Understanding Manufactured Exporters at the Firm‐Level: New Insights from Using SARS Administrative Data.” South African Journal of Economics 86: 96– 119. 27 • Edwards et al.28 find learning-by-importing effects for South African firms: importing from advanced economies is a relevant determinant of exporting, implying that superior technology in these imports enables firms to penetrate export markets. Therefore, integration of manufacturing firms into foreign markets can provide an opportunity for raising employment and aggregate productivity. • Matthee et al.29 examine the linkages between exporting, labor demand, and wages in South Africa and find that exports primarily increase employment of more experienced and better-paid workers and that this wage premium is greater for those firms exporting outside of Africa. Workers in South African exporting firms earn on average 21% more than those working for non-exporters. On the whole, these studies confirm several stylized facts about firm-level exporting behavior observed elsewhere, albeit primarily in developed country settings. They not only indicate the importance of exports on productivity and on employment outcomes but also the relevance of having access to imports. Multinational corporations based in South Africa are relatively modestly linked into global value chains, with limited use being made of globally competitive inputs barring high technology imports. MNCs choose to locate in areas that are favorable to carry out business operations; within Southern Africa South Africa is the most likely lead country. This is because it houses major business hubs like Johannesburg and Cape Town, port cities such as Durban, and the most developed transport infrastructure as well as logistics operations.30 This potential is explored in the 2016 World Bank Report Factory Southern Africa31. The report notes that South Africa exhibits modest levels of GVC integration, with very limited backward links in terms of sourcing inputs from the world as the share of foreign inputs in exports typically accounted for one third to one half of the global average, although substantial use is made of imported high-technology inputs. The relative lack of sourcing foreign inputs acts as a drag on productivity, as revealed in survey findings.32 Concerning regional value chains, the report identifies substantial potential for South Africa to act as a hub to its neighbor’s spokes. Moreover, while relative labor-intensity in South African manufacturing (such as automobiles) may be declining as skill-intensity increases, more indirect jobs are being created through backward linkages, particularly in services.33 This finding reinforces the fact that high-growth firms are mostly found in the services sector in South Africa, the growth of which is symbiotic with manufacturing growth. The debate over whether small or large firms are the drivers of job creation has been continuously contested. SMEs contribute roughly 50% of total output, with 2,251,821 28 Edwards, L., Sanfilippo, M. & Sundaram, A. (2017). “Importing and Firm Export Performance: New Evidence from South Africa.” South African Journal of Economics. 29 Matthee, M., Rankin, N. & Bezuidenhout, C. (2017). Labour Demand and the Distribution of Wages in South African Manufacturing Exporters (No. 2017/11). WIDER Working Paper. 30 Ngarachu, A., Draper, P. & Owino, K. ( 2017). Are Private Sustainability Standards obstacles to or enablers of SME participation in value chains? Insights from South Africa and Kenya. Pretoria: GEG Africa. 31 Farole, T. (2016). Factory Southern Africa? : SACU in global value chains - summary report (English). Washington, D.C.: World Bank Group. Available from: http://documents.worldbank.org/curated/en/973351468195001238/Factory-Southern-Africa-SACU-in-global- value-chains-summary-report. 32 Ibid. 33 Ibid. 28 documented SMEs, where 667,433 operate in the formal sector and 1,497,860 in the informal sector. Looking at the distribution of firms by size, most South African firms are small, with 70% having less than 20 employees. However, formal firms with over 100 employees (those that pay tax and are captured in administrative data) provide 70% of employment. Even though the share of small firms overall is high, they contribute a smaller share of employment. 34 Incumbent firms (i.e. those that have operated for 10 years or more and employ 20 or more people) are considered to be the main drivers of employment, meaning that firm entry and exit is negligible in the South African job creation context.35 SMEs are important as they create employment opportunities mainly for the unemployed and act as a form of passage for employees into larger firms. Of great relevance, and as explored later in the paper, SMEs in South Africa are likely to grow alongside the growth of large firms, expanding with aggregate demand. A notable OECD finding is that most SMEs operate within the services sector, where there is greater potential for unlocking regional export opportunities through non-mineral and services exports.36 As shown below in Figure 16 smaller firms, those with less than 50 employees, are more prevalent in the business services sector as compared to those in manufacturing or construction. They are not as competitive in terms of employment or turnover, where larger firms account for over half of employment and turnover.37 Figure 16: Distribution of Firms by Number of Employees in Firm, 2011/12-13/14 Average38 Source: OECD (2017) Firm size is said to be less significant, with the main determinant of job creation being the pace of growth that characterizes firms, with high growth firms (HGFs) being of most interest.39 34 Aterido, R., Hlatshwayo, A., Pieterse, D., & Steenkamp, A. (2017). Firm Level Dynamics, Job Flows and Productivity: South Africa 2009-2014. Pretoria: National Treasury. 35 Ibid. 36 OECD. (2017). OECD Economic Surveys: South Africa 2017. Paris: OECD Publishing. Available from: http://dx.doi.org/10.1787/eco_surveys-zaf-2017-en 37 Ibid. 38 Note: Business services exclude the financial sector. Data are for employing firms registered for company income tax; see Pieterse, D., C. Kreuser, F. & Gavin, E. (2016). Introduction to the South African Revenue Service and National Treasury Firm-Level Panel, WIDER Working Papers, No. 42/2016, UNU-WIDER, Helsinki. 39 Mulalo, M. (2017). Defining high-growth firms in South Africa (No. 2017/107). WIDER Working Paper. 29 HGFs can be defined as the “fastest growing firms in an economy”40, among the most productive and innovative, contributing significantly to economic growth. In many countries, smaller firms are more important for employment growth than larger firms, largely because young firms are those most likely to grow fast and thus create jobs, and young firms tend to be small. Yet in the South African case, there are relatively few young firms, at least in the formal sector, and this may explain the unusually small contribution of small firms to employment.41 In the South African context, however, identifying HGFs is highly sensitive to the measure of firm growth, where different firm growth measures will return samples of firms with significantly different demographic characteristics42, implying a uniform definition may not be fitting. From recent work by the South African National Treasury, however, it is confirmed that, contrary to many other countries, high growth firms in South Africa tend to be large firms and hence are the main drivers of job creation.43 HGFs are more likely produced within the wholesale and retail trade sectors, compared to manufacturing, while the other service sectors are far less likely to do so in general. Moreover, HGF status is highly associated with the fact that a firm imports some intermediate goods, and/or exports final goods, and thus is involved in international trade.44 Export success is not merely determined by trade-related issues such as tariffs and non-tariff barriers, export promotion activities and trade facilitation. It also includes micro and macroeconomic factors notably firm-level dynamics, the business environment, and the support given by the national government.45 The International Trade Centre (ITC) measures competitiveness through three pillars, being a country’s capacity to compete, to connect and to change, as detailed further in Table 8.46 As shown, small businesses are weak in connectivity as compared to medium and large firms. South African SMEs tend to perform relatively well when dealing with permits and licensing and in accessing an educated workforce but underperform in having managerial experience and access to ICT networks, both of which are essential to gaining exporting advantages.47 40 Ibid. 41 Aterido, R., Hlatshwayo, A., Pieterse, D. & Steenkamp, A. (2017). Firm Level Dynamics, Job Flows and Productivity: South Africa 2009-2014. Pretoria: National Treasury. 42 Mulalo, M, op cit. 43 Aterido, R., Hlatshwayo, A., Pieterse, D. & Steenkamp, A, op. cit. 44 Mulalo, M, op cit. 45 International Trade Centre. (2017). SME Competitiveness Outlook 2017 The region: A door to global trade. Geneva: International Trade Centre. 46 Ibid. 47 Ibid. 30 Table 8: South African Competitiveness Grid Source: ITC (2017) 48 The dynamism and competitiveness of South Africa’s large firms, according to recent World Bank research, has stagnated, raising the prospect of the baton being passed to smaller firms.49 Yet, small firms struggle to grow and do not emerge fast enough as sustainable exporters to offset the declines in the traditional and large firm export sector or to drive aggregate growth.50 South African SMEs rank above their African peers in terms of competitiveness, though they lag top performers in other regions.51 The ITC also analyses South Africa’s export potential by examining two dimensions: “the ability to increase exports of existing products, and the ability to diversify exports into new products”.52 To judge from this data there is substantial scope for increasing exports although not all identified products (e.g. platinum) are amenable to SME production. Furthermore, given the dominance of African markets in South Africa’s SME export profile, the ITC also evaluates some main products that have the highest unrealized export potential per continent. Per their calculations South Africa has an unrealized export potential in motor cars and non-industrial diamonds.53 Multiproduct firms that export outside Africa exhibit higher export premiums compared to those exporting within Africa. They are 10% more productive than those that serve the domestic market, with those exporting into Africa only being 4% more productive than domestic firms.54 SMEs’ share of total exports, in a study detailed in the OECD economic surveys (Figure 17), is small, where the sample amounted to only 6.7% of the total good exports.55 Most South African SME exporters in their sample focus on Sub-Saharan Africa, 48 Full country profile available at: http://www.intracen.org/uploadedFiles/intracenorg/Content/Redesign/Projects/SME_Competitiveness/SMECO- 2017-web-Country%20Profiles.pdf Methodology available at: http://www.intracen.org/uploadedFiles/intracenorg/Content/Redesign/Projects/SME_Competitiveness/Online% 20Technical%20Annexes_final_2.pdf 49 Purfield, CM; Farole, T; Im, F . (2014). South Africa economic update: focus on export competitiveness. South Africa economic update; issue no. 5. Washington, DC: World Bank Group. 50 Ibid. 51 International Trade Centre. (2017). SME Competitiveness Outlook 2017 The region: A door to global trade, Geneva: International Trade Centre. 52 The focus is on the export potential of goods, due to the limited data available for service data. 53 International Trade Centre, op.cit. 54 Matthee, M., Rankin, N., Naughtin, T., & Bezuidenhout, C, op.cit. 55 OECD, op. cit. 31 where exports constituted about 91% of total SME exports.56 Also, 85% of new South African exporters to Africa have no experience outside the region.57 Larger firm’s exports were spread around major non-African markets.58 Figure 17: South Africa’s Main Export Destinations by Firm Size59 Source: Anand., et al, 2016 As indicated by the broader trends identified in Section 2.2., there has been a rise in the number of firms exporting into Africa, despite the low survival rate of these export relationships60. The interpretation in the recent World Bank South Africa Economic Update is that South African firms use the African market in an ad hoc manner, reacting to opportunities as they arise rather than seeking them out in a sustainable way.61 Exporting in this fashion cannot assure rapid sustainable growth and therefore the emphasis on leveraging value chains often created by MNCs, with already established exporting abilities, moves into frame. SMEs however face significant barriers to exporting, especially if these are young firms that must undergo a learning-by-exporting phase. The prevalence of these barriers reinforces the importance of being competitive in exporting. However, these formal barriers are only part of the story when it comes to exporting to African markets. Since most South African SMEs export into Sub-Saharan Africa, it is important to appreciate the nature of those market contexts and the non-formal barriers they throw up. First, sub-Saharan Africa consists of emerging markets often characterized by ‘institutional voids’62, or the absence of formal intermediaries, regulators, contract-enforcers and correction mechanisms. In this space, informal institutions step in to fill the gap. This means that personal 56 Ibid. 57 Purfield, C.M., Farole, T. & Im, F. (2014). South Africa economic update: focus on export competitiveness. South Africa economic update; issue no. 5. Washington, DC: World Bank Group. Available from: http://documents.worldbank.org/curated/en/453211468101954705/South-Africa-economic-update-focus-on- export-competitiveness. 58 OECD, op. cit 59 Data on monthly exports were provided by the South African Revenues Service, from January 2010 to December 2014, and including a total of sixty thousand reporting firms in 2013. Taken from Nand, R., Perrelli, R., & Zhang, B. (2016). South Africa's Exports Performance: Any Role for Structural Factors?. IMF Working Paper WP/16/24. 60 Purfield, C.M., Farole, T. & Im, F, op. cit. 61 Ibid. 62 Khanna, T. & Palepu, K. (2010). Wining in emerging markets: A roadmap for strategy and execution . Boston: Harvard Business Press. 32 connections, opaque power arrangements, tacit understandings, culture, and more, loom large. Furthermore, with a few exceptions sub-Saharan African countries are also ‘frontier’ markets63, characterized by different combinations of risk – which could include corruption, arbitrary rules, and faltering democratic rule and economic prosperity. For firms accustomed to industrialized countries, where the rules of the game are clear and enforceable, this may be challenging. Large South African firms are relatively well placed to invest the resources required to overcome these barriers. South African SMEs, beyond the ”incumbents”, are not so well placed, and this may go some way to explaining high attrition rates in respect of sustaining exports into Africa. 3. Domestic Constraints to South Africa’s Export Competitiveness As laid out in the previous section South Africa is losing market share in many of its core export products. This is both because it is being outcompeted by more dynamic economies in East Asia, particularly China, and owing to its own supply-side as well as market structure constraints. These factors have combined to reduce the responsiveness of many South African firms’ exports to the rand’s depreciation and have also acted to limit diversification out of primary industries into higher value-added manufactures. Moreover, MNCs based in South Africa are relatively modestly linked into global value chains, with limited use being made of globally competitive inputs barring high technology imports. This acts as a further drag on productivity. There are several domestic institutional and policy factors behind the country’s competitiveness decline. This section focuses on three domestic constraints where policy can have an important role in improving South Africa’s competitiveness.64 These are i) significant transport bottlenecks, including poor quality of rail transport infrastructure and corresponding high trade costs as well as inefficiencies in ports management, particularly with respect to cargo dwell times; ii) trade governance, including institutional problems at the heart of tariff-setting, duplications in the institutions supporting commercial diplomacy and a trade negotiations strategy is defensive and largely confined to “at the border” concession; and iii) increasing levels of economic policy uncertainty. 3.1. Transport Costs and Management Transport and logistical efficiency is critical for competitiveness of the South African economy. Numerous studies have highlighted high logistics costs as one of the factors constraining South Africa’s competitive advantage. 65 This not only impacts the 63 Mussachio, A. & Werker. E. (2016). “Mapping Frontier Economies.” Harvard Business Review 94(12): 40-48. 64 The prioritization of these issues emerged through both a review of the most binding constraints in the literature and consultations and to ensure value added relative to issues not covered in other SCD background papers. As such, it reflects the authors’ assessment of three important priorities that need to be addressed related to the country’s declining competitiveness. 65 Botes, F. (2005). Impact of Transport Pricing practices in South Africa on Freight Transport Costs . HRSC, Pretoria. Pieterse, D., Farole, T., Odendaal, M. & Steenkamp, A. (2016). Supporting export competitiveness through port and rail network reforms: A case study of South Africa. s.l.: World Bank Group. Havenga, J., Simpson, Z. & Goedhals-Gerber, L. (2017). “International Trade Logistics Costs in South Africa: Informing the Port Reform Agenda.” Research in Transportation Business & Management 22: 263-275. 33 competitiveness of companies trading across the world but also acts as a strong barrier to entry into domestic markets, perpetuating low levels of competition. The relatively high cost of domestic and regional transport services in South Africa and Southern Africa has impacted suppliers’ cost-competitiveness, and restricted economic growth and job creation. While South Africa faces a geographical disadvantage, regarding the distance from major trading markets which negatively impacts the import and export price of goods, domestic factors contribute to South Africa’s relatively high freight costs. According to Botes66, the main contributors to the “cost gap”67 of domestic transportation are the distance between areas with major industrial capacity and consuming markets (distance from Gauteng to the Coast), high cost and inefficiency of ports, the poor quality of rail in the transportation of general freight, insufficient intermodal facilities, high pipeline transport costs, and high road freight costs. In line with Botes’ assessment this section reviews the domestic modes of transportation (road, rail and port) providing insights from qualitative as well as quantitative studies. Ports Ownership of South Africa’s ports is highly concentrated. Transnet, via the Transnet National Ports Authority (TNPA) entity, provides landlord68 services, and via the Transnet Port Terminals (TPT) entity, provides operational69 services to the eight South African commercial seaports70. South Africa promotes a complementary port operating model while system-wide pricing is applied between differentiated cargo types across ports71. This ports management doctrine72; where port users pay for all ports investments, all ports costs, and for the TNPA to make a profit; is fairly unique, and according to Gumede and Chasomeris73 this “method guarantees TNPA a profit regardless of whether TNPA is efficient or productive”. The country’s port system, including both public and private sector operators under a publicly owned and regulated ports system (see Table 9), are causing discontent among private sector operators as they must compete with public terminals for market share in the handling of lower- value bulk cargoes under the scrutiny of the public Ports Regulator of South Africa. 74 Gumede and Chasomeris75 further note that “there is no simple relationship between port performance and adherence to standard landlord or operating port structures.” Port users however, believe the institutional structure, port governance and policy in South Africa contribute inter alia to import substitution, skewed pricing, cross-subsidization (both between ports and modes) and insufficient investment76. Pretorius, J. (1997). The effect of conditions in the transport sector on the competitiveness of South African industries in foreign markets. (Doctoral dissertation, Stellenbosch: Stellenbosch University). 66 Botes, F, op. cit. 67 The “cost gap” is defined as the difference between actual prices and economically efficient prices. 68 Port infrastructure and marine services 69 Freight transport and handling services 70 Namely: Richards Bay, Durban, East London, Ngqura, Port Elizabeth, Mossel Bay, Cape Town and Saldanha. 71 Havenga, J., Simpson, Z. & Goedhals-Gerber, L. (2017). “International Trade Logistics Costs in South Africa: Informing the Port Reform Agenda.” Research in Transportation Business & Management 22:. 263-275. 72 Containing a concurrent mixture of elements from the European, Anglo-Saxon or Asian port doctrines, meaning the vision, financing and management seems to be a mix of the Asian and European doctrines with pricing methodology more in-line with the Anglo-Saxon doctrine. 73 Gumede, S. & Chasomeris, M. (2015). “Maritime Port Pricing and Governance in South Africa: T rends and Stakeholder Comments.” Journal of Economic and Financial Sciences 8(1): 52. 74 Gumede, S. & Chasomeris, M, op. cit., pp. 47-62. 75 Ibid. 76 Havenga, J., Simpson, Z. & Goedhals-Gerber, L, op. cit., pp. 263-275. 34 Table 9: Public and Private Sector Market Share for Major Service Categories Port Operations Services TNPA SOE – TPT Private Sector Marine Services 100% Bulk Cargo Handling 52% 48% Break-bulk cargo handling 69% 31% Container handling 98% 2% Car (on-wheels) handling 100% Source: Havenga, et al.77 Chronic underinvestment in the rail and ports network is a long-standing issue with multiple causes. As noted by Pieterse, et al.78 the South African rail and port system has a legacy of underinvestment due to strict past regulation and protection from competition. There’s also a preference for maintenance of infrastructure as compared to upgrading; “In an environment where there is little private sector participation in the freight rail sector and upgrading assets is more expensive than refurbishment, financing for these assets can be inhibited by the strength of Transnet’s balance sheet as well as the ability of customers to absorb higher rail tariffs that may be required to finance replacement assets.” 79Pieterse, et al.80 also noted that infrastructure investments face a structural challenge with regards to financing. Large port and rail infrastructure investments compete for finance against other projects across the various divisions of Transnet, and once approved have to comply with Section 54(2) of the Public Finance Management Act (PFMA), which requires submitting information about the transaction to the Treasury and the Minister of Public Enterprises, before they are approved. On the other hand, Transnet considers challenges in South Africa’s broader freight system as more relevant to its role as the custodian of ports, rail and pipelines. These challenges include skills shortages, increased congestion, poor regional integration, weak maritime connectivity and the carbon intensity of the current system. In addition to Transnet’s developmental strategy, to expand the utility, connectivity and capacity of its integrated infrastructure network, the state-owned enterprise argues that the current institutional structure makes it possible for Transnet to tackle these challenges and is consistent with the concept of a democratic developmental state. Resultantly the port reform narrative in South Africa has shifted form potential concession of port terminals to discussions on public-private partnerships81. Studies82 measuring the impact of international trade logistics costs (ITLC) on national logistics costs for South Africa show that port charges contribute only 10% to international trade logistics costs. Based on this relatively low contribution to South Africa’s international trade logistics costs Havenga, et al.83 (p. 263) postulates that “collaboratively confronting port 77 Ibid. 78 Pieterse, D., Farole, T., Odendaal, M. & Steenkamp, A, op. cit. 79 Pieterse, D., Farole, T., Odendaal, M. & Steenkamp, A, op. cit., p. 16. 80 Pieterse, D., Farole, T., Odendaal, M. & Steenkamp, A., op. cit. 81 Gumede, S. & Chasomeris, M, op. cit., pp. 47-62. 82 Havenga, J., Simpson, Z. & Goedhals-Gerber, L., op. cit., pp. 263-275. Havenga, J.H., Simpson, Z.P., King, D., de Bod, A. & Braun, M. (2016). Logistics Barometer South Africa 2016. Stellenbosch: Stellenbosch University. 83 Havenga, J., Simpson, Z. & Goedhals-Gerber, L., op. cit., pp. 263-275. 35 congestion, bureaucratic import/export requirements and the hinterland feeder system could unlock much more value for stakeholders in the short to medium term, instead of allocating scarce resources to the administrative task of port reform per se, without a clear understanding of the role of ports in the total national logistics system”. According to the Ports Regulator of South Africa84 over 90% of trade is facilitated through ports (imports/exports). As different commodities are handled via different types of terminals it is important to distinguish between the various cargo terminals. Fortunately, South Africa’s ports handle all 5 types of cargo: • Container terminals: Facilities where cargo containers (twenty or forty foot (6 or 12m) standard length) are transshipped between different transport vehicles for onward transportation. For example, between container ships and trains or trucks. • (Dry) Bulk Terminals: Refers to terminals where bulk cargo is handled. Bulk cargo is commodity cargo that is transported unpackaged in large quantities for example; grain, coal, or gravel. Bulk cargo is usually dropped or poured into a bulk carrier ship's hold, railroad car/railway wagon, or truck/trailer/semi-trailer body. • Breakbulk and multi-purpose cargo terminals: Refers to terminals where Breakbulk or general cargo is handled. Break bulk cargo are goods that must be loaded individually, and not in intermodal containers nor in bulk as with oil or grain. Break bulk cargo is transported in bags, boxes, crates, drums, or barrels. • Liquid Bulk Terminals: Similar to (dry) bulk terminals, Liquid Bulk Terminals handle large unpackaged quantities of liquids. • Ro-ro Terminals: Or Roll-on/roll-off terminals accommodate Ro-ro ships which are designed to carry wheeled cargo, such as cars, trucks, semi-trailer trucks, trailers, and railroad cars, that are driven on and off the ship on their own wheels or using a platform vehicle, such as a self-propelled modular transporter. Overall South Africa’s ports have varying degrees of spare (or latent) capacity85 for each type of cargo handling terminal. On average Ro-ro and Dry-bulk terminals have 20% and 18% latent capacity, respectively whilst liquid bulk terminals have the highest reported latent capacity (61%), followed by breakbulk (47%), and container terminals (40%). In terms of operational efficiency South African ports’ performance is below the sample global average on most indicators, barring utilization of container ports and cargo dwell times, while South Africa’s total port costs are higher than the sample global average. Automotive (Ro-Ro) and container cargo owners face comparatively high cargo dues in South Africa while bulk cargo owners’ (coal and iron ore) cargo dues are below the sample global average, meaning value-added producers effectively subsidize resource exporters. Vessel owners, on the other 84 As a key component of South Africa’s ports regulatory a rchitecture, the Ports Regulator of South Africa is responsible for the economic regulation of the ports system which includes pricing, promotion of equity of access to ports facilities and services, monitoring the industry’s compliance with the regulatory framework and hearing any complaints and appeals lodged with it. As part of its mandate the Ports Regulator of South Africa performs global port price and operational benchmarking exercises as well as research into the ports capacity utilization and regulatory reviews. This section considers the results of their studies. 85 Port capacity refers to the maximum traffic a terminal can handle in a given scenario. whereas capacity utilization is the actual terminal traffic (production output) as a percentage of the potential maximum terminal traffic (port capacity). (Ports Regulator of South Africa, 2016, p. 6) Latent, or excess capacity, is the difference between design and installed capacity, and represents the additional capacity that can be made available to handle cargo. Design capacity is the maximum throughput that can be achieved in a terminal, based on existing infrastructure, and installed capacity refers to optimal amount of throughput achievable given resources deployed in terminal at a given time, based on other performance factor like labor and installed superstructure. (Ports Regulator of South Africa, 2015) 36 hand, face costs below the global sample average across all cargo types. Given the annual application of port prices in Rand, and the comparatively rapid depreciation of the Rand, domestic port users (majority cargo owners) also face relatively higher port costs compared to foreign port users (all vessels are foreign owned and operated) whose contracts and payments are usually denominated in US Dollars. Under this pricing regime cargo owners are subsidizing vessel owners and tenants; commodity exporters are favored over manufacturing firms; and cargo dues pricing discriminates between imports (primarily container cargo) in favor of resource exports despite having an identical cost base. This unbalanced port pricing regime is the main source of high port charges in South Africa. It also lowers the competitiveness of manufacturers in direct contrast to domestic policies meant to promote industrialization and penalizes local firms who use imported inputs. Land Transport, Road and Rail Similar to South Africa’s ports system, South Africa’s monopolized freight rail system struggles with imbalances and cross-subsidization of transport modes. The economics of freight rail transport relies on lower unit costs, which in turn requires a moderate unfragmented volume base and consistent flow of goods, to cover its fixed costs. This is ideal for bulk users like coal and iron ore, but not for general freight rail services with more sporadic flow of goods and a fragmented volume base. Transnet Freight Rail (TFR), the only freight rail operator in South Africa, offers general freight transport (using the national rail network) and two specialized transport lines for coal and iron ore; but the prices of these services are subject to negotiations with TFR. Where the specialized coal and iron ore lines can realize large economies of scale and economies of distance, the general freight rail service has to compete with road transport operators and is further subject to increasing unit costs, leading to under- utilization, which then causes increased unit costs in a negative circular cause and effect loop. Beyond the cost of general freight rail services efficiency of the rail system is also of concern. Intermodal operations at the end terminals – port and inland container depots –contribute to the inefficiency of the rail system, even though the mainline track infrastructure reportedly has spare capacity. These inefficiencies further drive up costs and decrease competitiveness of South African exporters. Unlike ports, rail and air transport, road transport has low market entry and exit barriers which translates into little scope for monopolistic price setting, although inputs like fuel are subject to institutional and monopolistic price setting. Due to South Africa’s size and widely dispersed economic centers, South Africa is a terrestrial transport intensive economy. One of the largest contributors to road transport costs, and key risks associated with national competitiveness, is the oil price and related fuel price inflation. In the face of excessive dependence on road freight transport, this largely exogenous factor negatively affects South Africa’s transport competitiveness. The price gap between South African domestic road transport Rand per ton-kilometer (0.65 R/ton-km) and the best practice Rand per ton-kilometer (0.57 R/ton-km) is relatively small, but, owing to road transportation’s large share in total mode utilization the price gap has a substantial impact on total freight costs. 37 Regional Transport and Border Efficiency South African road freight operator’s costs are also affected by regional administrative inefficiencies affecting transport, relating to regulation, market structure, and efficiency with border procedures. Vilakazi and Paelo86, take a regional approach to terrestrial transport costs as South African road freight operator’s costs are affected by regional transport inefficiencies. Improving border efficiency plays an integral part in reducing costs related to regional transportation. According to Vilakazi & Paelo87 border delays add around $20/ton to delay costs per day for a bulk load and have a larger impact on time-sensitive goods such as perishable foods. Furthermore, delays at the border reduce the number of trips per month that can be completed. Such costs, both in monetary terms and time, reduce the scope of mutually beneficial regional trade flows. South Africa’s regional partner also don’t have the same level of demand for road transport services and as a result, transporters would have empty return hauls. This imposes costs on South African exporters as the full cost of the return trip must be allocated to the outbound leg. In a regional context variable transport costs in southern Africa plays a large role in cost competitiveness. Fuel and tire costs are the largest components of variable costs in southern Africa and make up about 90% of vehicle operating costs. The relatively high prices of these components in the region is driven by high taxes on fuel and tires88. While operational costs are not necessarily higher than those in Europe, key constraints to freight efficiency in Africa (largely driven by administrative inefficiencies which relate to regulation, market structure, and efficiency in border procedures) increase prices on cross-border routes by 10–30%89. Additional costs parameters include toll and permit fees, as noted by Vilakazi and Paelo90, however these contribute proportionally less to total transport costs. SADC-recommended toll fees are $10 per 100 km, although a number of SADC countries exceed this level. There are also road taxes, in the case of Zimbabwe the Zimbabwe Revenue Authority (ZIMRA) charges a tax on every liter of fuel, road permit fees, again specific to Zimbabwe are $150 per annum, parking fees, in Zimbabwe reaching approximately $5 per 12 hours/per night91, and a Removal in Transit (RIT) fee, charged at $120 per leg92. 86 Vilakazi, T. & Paelo, A. (2017). Understanding intra-regional transport: Competition in road transportation between Malawi, Mozambique, South Africa, Zambia, and Zimbabwe . s.l.: United Nations University World Institute for Development Economics Research. 87 Ibid. 88 Teravaninthorn, S. & Raballand, G. (2009). Transport prices and costs in Africa: a review of the main international corridors. s.l.: World Bank Publications. 89 Foster, V. & Briceño-Garmendia, C. (2010). Africa's infrastructure: a time for transformation. Washington, DC: World Bank. 90 Vilakazi, T. & Paelo, A, op. cit. 91 Curtis, B. (2014). Africa Road Corridors Handbook. s.l.:3S Media. 92 Vilakazi, T. & Paelo, A, op. cit. 38 3.2. Trade Governance 3.2.1. Institutional Issues Pertaining to Tariff-Setting Import tariffs are a crucial component of trade policy, particularly in relation to manufacturing. In every country there is a tension between import-competing interests, that seek higher levels of protection through import tariffs, inter alia, and export interests, some of which rely on imported intermediate goods in order to fabricate and export, and therefore seek lower import tariffs on those imported goods. South Africa is no different but has its own peculiarities when it comes to the setting of import duties. Before exploring the institutional dimensions of tariff policy setting in South Africa, it is important to note two things that we have not been able to explore in detail. First, since South Africa is part of the Southern African Customs Union (SACU), and consequently shares a common external import tariff with its partners to the SACU arrangement, it must take those interests into account. Second, many import duties are subject to both duty drawbacks and duty rebate arrangements, so that the nominal tariffs appearing in the tariff book are not necessarily the duties that finally apply. These arrangements apply particularly to companies that manufacture for export, with the express purpose of providing relief to those companies so as not to penalize their exports. In the course of various conversations in preparing this report, many respondents felt that these relief mechanisms are working, though administration of them could be substantially enhanced. The focus here is on the institutional mechanisms pertaining to tariff policy setting in South Africa. These mainly fall under six government entities – the International Trade Administration Commission (ITAC), the Department of Trade and Industry (DTI), the Economic Development Department (EDD), National Treasury, the South African Revenue Services (SARS) and the Department of Agriculture, Forestry, and Fisheries (DAFF). Each department has a role to play in the determination of particular import tariffs, depending on the nature of the application being adjudicated. Administratively, ITAC falls under the Minister and Department of Economic Development, and gets its budget from EDD.93 However, the mandate around trade policy and any changes therein derives from the Minister of Trade and Industry, with such changes being communicated through Economic Development, and with the Minister of Trade and Industry having the power to take final decisions on tariffs.94 This makes for a complex procedure, and can give rise to ambiguities, with too many actors in the process creating uncertainty in the private sector as to who is in charge of tariff decision, as well as delays. Formally ITAC’s decision making process is conveyed in Figure 18. Several things are worth noting. First, ITAC does not publish draft reports for public comment, nor does it organize public sessions for any concerned stakeholders to provide input into, and critique of, the draft report’s findings. While inserting such steps could delay the processes further, and present efficiency problems, the substantial benefit this would convey would be to increase the legitimacy of the outcomes. As things currently stand the process is insider-driven, with ITAC determining who is invited to respond, and hearings as well as decisions being conducted behind closed doors. This serves to heighten public concerns, particularly concerning high profile cases with major consumer welfare impacts, such as the 93 In terms of the International Trade Administration Act of 2002, ITAC reports to the DTI. However, when EDD was created, ITAC moved its reporting to EDD but the Act has never been amended to account for this shift. As a result, ITAC still needs the Minister of the Trade and industry to approve its decisions. 94 Tregenna, F. & Kwaramba, M. (2014). “An Institutional Analysis of the International Trade Administration Commission of South Africa.” Journal of Economic and Financial Sciences 7(S): 641-660. 39 recent poultry and steel investigations. It also stands in stark contrast to the Competition Authorities’ processes, which are very transparent and highly regarded. Figure 18: Tariff Application and Decision Processes Source: ITAC, available at http://www.itac.org.za/pages/services/tariff-investigations, accessed 8th December, 2017 Serious questions are also being asked about how ITAC conducts its investigations. This relates particularly to the balance accorded to cross-cutting, societal, concerns, versus those of narrow interest groups (producers, trade unions, workers) directly affected by tariff decisions. As reflected on the ITAC website, the criteria by which tariff applications are judged are as follows:95 The following assessment criteria are central although each application is evaluated on its own merits and specific circumstances: a) The domestic industry’s production capacity and potential; b) Employment; c) Investment; d) Price differentials between the domestic manufactured product and the imported product e) Market shares; f) Import and export data; g) Demand and supply conditions; h) The financial state of the domestic industry, including profitability and return on investment ratios; i) Price and cost structures; and, j) The rate of effective protection. The list of factors is not exhaustive, nor can one or several of these factors necessarily give decisive guidance. Different countries weigh these interests differently, but the way the ITAC process is currently constructed it appears to come down fairly decisively on the side of narrow interests, rather than societal concerns. Consumer welfare is notably absent from the ITAC list, as well as 95 ITAC. Available from: http://www.itac.org.za/pages/services/tariff-investigations, accessed 8th December, 2017. 40 competition concerns and value chain dynamics (e.g. impact of tariff changes on upstream/downstream producers). These legitimacy dynamics also point to another potential problem: the composition of the Commission that makes recommendations on tariff policy, as well as its autonomy. It is notable that neither consumer interests nor competition concerns are formally represented at the level of the Commission. In the case of the former, it should be relatively easy to appoint a representative from a consumer body, preferably a private body, to the Commission. In the same vein, the Competition Commission should be formally represented since companies or associations bringing tariff increase applications to ITAC are motivated, fundamentally, by the desire to limit competition in the domestic market – which could well be to the detriment of consumers and producer groups. Furthermore, whereas the National Treasury is represented in the Commission, it is not clear that its economy-wide concerns and approach are adequately reflected in decision making on tariffs. If those views were adequately reflected, this could point towards a possible streamlining of the approvals and implementation processes regarding tariff applications, a problem area highlighted in two of the focus group discussions and more formally by the Manufacturing Circle in its formal policy proposals. Furthermore, the current investigating time frames are reportedly too long – from investigation to the decision of the ministers. The ITAC investigative procedures by their nature are very long in that they require a lot of accountability and verification of information. Apparently, there is a lot of vacillating between ITAC and the parties to obtain information and verify that information.96 Thus, the investigations can take more than a year, which is way too long for seriously distressed industries. Accordingly, some stakeholders have suggested that ITAC’s capacity be enhanced to speed up investigations. It could take the form of increasing the number of staff in specific ‘bottle-neck’ areas that may be delaying or prolonging the pace of the investigations. It could also take the form of up-skilling of existing staff to increase productivity and thence the speed of investigations. The complexity and dichotomy of ITAC falling under two line departments has been criticized as being cumbersome. While the DTI and EDD work independently, their objectives are supposed to be interdependent. ITAC is central to South Africa’s trade policy, which falls squarely under the DTI, while the EDD is responsible for other economic regulators, whose close co-ordination with ITAC is important, as well as the broader development and co- ordination of economic policy within which ITAC operates.97 When it comes to international trade-related taxes, the decision falls under the department of Trade and Industry with the approval of the Minister of Finance. In practice, when ITAC completes an investigation98 it makes a recommendation to the Minister of Trade and Industry to impose a duty. The Minister has to accept the recommendation and in turn make a recommendation to the Minister of Finance to instruct SARs to apply/ change the duties. The Minister of Trade and Industry can reject ITAC’s recommendation and send it back to ITAC with recommendations. However, rejections are minimal. The process after the Minister of Trade and Industry has approved a decision is automatic as the Minister of Finance apparently rarely declines a recommendation 96 This insight was sourced from discussions with various companies and industry groups in the course of compiling this report. 97 Tregenna, F. & Kwaramba, M, op. cit., pp. 619-640. 98 The final decision is published in the government gazette and the full report is published on the ITAC website. Each stage of the investigation is published in the government gazette. Depending on the matter being investigated, for example anti-dumping is only targeted at interested parties and safeguard investigations have open hearings open to the public. 41 from the Minister of Trade, although that has not always been the case. It is important to note that final duties that are to be applied need to be approved by the Minister of Finance on the advice of Treasury. The Minister of Finance has the power to veto decisions made by the Minister of Trade and Industry, which effectively gives National Treasury two ‘bites at the cherry’, since they are represented on the Commission – albeit their voice seems to be a distinctly minority one. To streamline the process and ensure better coordination, some stakeholders have suggested that a closer relationship between ITAC, the EDD, the DTI, National Treasury and SARS be fostered to speed up the decision-making process. This would assist industries that require urgent decisions to protect their industries. Currently the main challenge of streamlining this process is that each department has its own mandate and thus cannot bypass that mandate without infringing on the mandate of another department. For example, ITAC cannot bypass the DTI to go directly to SARS. They will need the approval of the two ministers. Thus, the mandate needs to be changed for effective streamlining. An alternative approach would be to properly empower the Commission to take decisions that are not subject to Ministerial vetoes. This is the approach followed by the Australian Productivity Commission (see Box 2). This should make for a more streamlined process but could also heighten political jostling around tariff decisions. However, if the process of formulating those decisions were to be appropriately transparent and publicly ventilated, then much of the political heat should be removed from the final decision. 42 Box 2: A Different Model - The Australian Productivity Commission The Productivity Commission is an independent from other government agencies. In terms of the Productivity Commission Act of 1998, the Commission operates under the Australian Treasury. It reports formally through the Treasurer to the Australian Parliament, where the Commission inquiry report is tabled within 25 days of the government receiving the report. Due to transparency obligations in terms of the statutory requirement to promote public understanding of policy issues, its reports and other communications activities are also directed at the wider community. Thus, all the work conducted by the Commission is subject to public scrutiny. Its processes provide for extensive public input and feedback through hearings, workshops and other consultative forums, and through the release of draft reports and preliminary findings. Its processes work as follows: 1. “The Australian Government initiates an inquiry (often in consultation with other governments and community groups). 2. Then the Treasurer/ Minister sends a 'reference' to the Commission. The terms of reference outline in writing what the inquiry covers and how long the Commission has to report. 3. The Commission advertises the enquiry to allow interested parties to register their concerns e.g. online 4. The Commission visits interested parties, distributes an issues paper to focus attention on the matters it considers relevant and invites written submissions. 5. Depending on the reference, hearings or other consultative forums will be held. 6. The Commission publishes a draft report or position paper and invites further submissions. 7. Hearings are usually held on this preliminary report. 8. A final report is sent to the Government. Briefings consultations are held, and the report is considered by relevant Ministers. 9. The Treasurer tables the report in Parliament. The Government may announce its decisions on the report at that time or at a later date.” Oftentimes, the Commission is required to provide the Government with policy options representing alternative means of addressing the issues, as well as a preferred option. This also extends to making recommendations on any matters it considers relevant to the inquiry, consistent with its statutory policy guidelines. 43 3.2.2. South Africa’s Commercial Diplomacy Commercial diplomacy concerns the carving out of economic opportunities for the country concerned, through securing projects abroad and/or investments into the home market. The responsibility for and administration of South Africa’s national commercial diplomacy effort lies primarily with the DTI and its constituent councils, associations, and agencies. The Department of International Relations and Cooperation (DIRCO) plays an important role via the network of embassies and High Commissions it controls. In addition, various provinces and larger cities have their own commercial diplomacy-oriented institutions. Overall, the landscape is crowded, and can be confusing for businesses wishing to access state support to target foreign markets. Each is considered in turn, with the emphasis on the DTI and its agencies. Specifically, the DTI’s commercial diplomacy effort encompasses four structures: The South African Export Council model, Team Export South Africa (TESA), Trade and Investment South Africa (TISA)99, and InvestSA. The DTI, its Agencies and Associated Institutions The export council model was created by the DTI to centralize communication between the department and each industrial sector, to facilitate co-operation between companies within each sector to ensure that coherent strategies regarding the penetration of South African exports into international markets are created. These are established as public-private partnerships, with the DTI provided matching funding through the Export Marketing and Assistance (EMIA) program, and each council charging a membership fee. This is a relevant consideration with regards to the sustainability of these councils. Each export council consists of the leading companies within the relevant sector, with 19 export councils currently in operation (Table 10).100 99 Mention should also be made of Trade Invest Africa, a new “initiative” focused solely on investment and export promotion vis a vis Africa. This is reportedly an autonomous structure, about which relatively little is known. For further information, see http://www.thedti.gov.za/trade_investment/trade_investment_Africa.jsp 100 Department of Trade and Industry. Available from: http://www.dti.gov.za/trade_investment/export_organisations.jsp [Accessed 08/01/2018] 44 Table 10: Export Councils in Operation Export Council Sector Automotive Industry Export Council (AIEC) Machinery, electronics and transport Built Environment Professions Export Services Council (BEPEC) SA Boatbuilders' Export Council Machinery, electronics and transport SA Capital Equipment Export Council Machinery, electronics and transport SA Electrotechnical Export Council Machinery, electronics and transport Fresh Produce Exporters Forum / Fruit South Food, agriculture, and livestock Africa Farmed Abalone Export Council Food, agriculture, and livestock Cosmetic Export Council of South Africa Cosmetics (CECOSA) SA Flower Export Council (ASSO Flowers) Horticulture SA Footwear & Leather Export Council Textiles and footwear SA International Steel Fabricators Metals South African Wire Business Council Metals Wines of South Africa Food, agriculture, and livestock Steel Tube Export Council Metals SA Equine Trade Council Food, agriculture, and livestock SA Fruit & Vegetable Canners' Export Food, agriculture, and livestock Council SA African Ostrich Business Chamber Food, agriculture, and livestock Rail Road Association (RRA) Machinery, electronics and transport SA Aerospace Maritime & Defence Machinery, electronics and transport Industries Association Whether the creation and continued operation of these export councils has had a positive impact on the South African current account is unclear. While total exports have grown (see Section 2), there is no evidence to suggest that export councils played a role in this regard. Rather, as Vickers and Ajulu stated in their report on South Africa’s economic diplomacy: The DTI has made attempts to foster greater industry coherence on trade and investment issues through the establishment of Export Councils. How effectively they are working to articulate industry views and concerns with respect to negotiations are not, however, very clear.101 This view is supported by a report published by Kaiser and Associates in 2011, in which they found that the Export council structure faced a variety of challenges, including “a lack of financial sustainability”, “inadequate communication”, “weak co-ordination”, and “insufficient governance reporting”. Considering that the primary function of export councils is to facilitate coordination, the report seems particularly damning. However, due to the nature of export councils to facilitate coordination, it is exceptionally difficult to quantify the role that they play in ensuring that companies are able to penetrate international markets. Furthermore, we understand that the DTI is reviewing the export councils, per the Integrated National Export Strategy, although we could not find the strategy online and therefore could not verify this. 101 Vickers, B. & Ajulu, C. (2008). South Africa’s economic diplomacy: trade and investment promotion. Institute for Global Dialogue. 45 Team Export South Africa (TESA) is a public-private partnership consisting of five export councils (The Built Environment Professions Export Council, the Capital Equipment Export Council, the SA Electrotechnical Export Council, the South African Wire Business Council, the Steel Tube Export Council), four associations (The Rail Road Association, the Aluminium Federation of South Africa, the South African Federation of Civil Engineering Contractors, the South African Stainless-Steel Development Association), and the DTI. It was created to facilitate cooperation between these related export councils and associations, allowing an approach by interested parties to be quickly referred to the relevant organization. Thus, TESA can be viewed as a multi-industry export council, coordinating export activities between the metals, machinery, and electronics industries and the professional services groups they draw upon. TESA’s quantitative impact on the export capacities of its constituent export council and associate members is unclear. However, what is clear is that the TESA’s structure facilitates co-ordination amongst related industries more effectively than unitary export councils operating in isolation. This has prompted the Director of export promotion within the DTI to call for export councils to be replaced with “sector councils”102, which would mirror the organizational structure of TESA. Trade and Investment South Africa (TISA) is a division of the DTI that is responsible for managing the Department’s network of foreign trade offices, facilitating inward investment, and growing South African export capacity generally. TISA consists of four units, namely Investment Promotion and Facilitation, Export Promotion and Marketing, Export Development and Support, and Foreign Service Management. The Investment Promotion and Facilitation unit is responsible for attracting both inward direct investment, as well as local direct investment. It does so through targeted investment recruitment campaigns in the form of outward trade missions, and the hosting of international trade delegations. The Export Promotion and Marketing unit is designed to implement export strategies, and to provide both knowledge-based and financial support to existing exporters, the latter through the Export Marketing and Investment Assistance program (EMIA). EMIA’s function is the provision of financial assistance in the final stages of the export process, by partially subsidizing companies’ internal marketing and investment-seeking related costs103. The Export Development and Support unit compliments the Export Promotion unit by growing the number of exporting companies within South Africa through the creation of an export-inclined industrial culture. It also aims to assist in the growth of existing exporting companies. The Foreign Service Management unit is responsible for the administration of all 46 of the DTI’s foreign economic offices, which are present in 36 countries, which it uses to promote South African exports and 102 Southern African stainless steel association. Available from: http://sassda.co.za/tesa-team-export-south-africa- meeting-25-26th-october-2016/ [Accessed 08/01/2018] 103 Department of Trade and Industry. Available from: http://www.dti.gov.za/trade_investment/Evaluations.jsp. [Accessed 10/01/2018] A 2015 survey conducted by DNA Economics indicated that the EMIA process has been positively perceived by participating firms, and that historically disadvantaged individuals have benefitted. However, the EMIA was found to have three areas of concern. First, post-subsidy “follow-up” support has been poor, compounded by poor communication between the EMIA and the dti. Second, many firms utilising the EMIA programme are not export ready, and reported no export sales post-utilization, demonstrating a clear failure of the EMIA’s criteria used for qualifying firms. Last, most participants in the EMIA programme are repeat users (with 43% of firms participating more than 11 times), leading to overutilization of EMIA resources, severely hampering the growth of South Africa’s export base. 46 entice foreign investment104. TISA has identified four sectors that it has prioritized for investment: Manufacturing, Advanced manufacturing, Services, and the Green Economy. Presumably this prioritization is based on the Industrial Policy Action Plans. Each sector has also been divided into specific industries that are deemed to be the most globally competitive, and thus most likely to benefit from investment:105. It is unclear whether TISA functions as effectively as it could. While FDI outcomes are positive in an absolute sense (South Africa is the largest recipient of FDI in Africa)106, TISA cannot be wholly credited for this. Furthermore, as noted in Section 2, South Africa lags other middle- income countries in terms of FDI attraction. Nonetheless, a 2013 review of South Africa’s export strategy found that “there appears to be weak co-ordination between the Export Councils, TISA, and the IDPDD (Industrial Development Policy Development Division)”, and that although TISA was capable of innovative strategy, they lacked sufficient resources needed for effective implementation. The review also found that as South Africa’s primary export- related institution, TISA should be responsible for the unification and simplification of all export-related programs, something which it has failed at achieving: “TISA needs to establish a framework to ensure better coordination and consultation occurs on export development and export promotion programs in South Africa”; “To date TISA has neither a trade portal nor a national exporter database. There is considerable fragmentation between the private sector, Export Councils, Provinces, Metros etc.”107 The one stop shop (OSS) initiative was launched by the Inter-Ministerial Committee on Investment Promotion in 2015, prompting the creation of a specific division within the DTI (InvestSA) that would be responsible for the creation and administration of 9 provincial OSS, as well as a national OSS. The National OSS oversees the operation of the provincial OSS system, and provides each provincial OSS with relevant information and applications through an integrated system108. To this end, the national OSS was launched in March 2017, while their Western Cape and Kwa-Zulu Natal’s OSS’s were launched in September and November 2017 respectively, with the remainder of the provincial OSS’s expected to be launched throughout 2018. Worth noting is that the Gauteng Provincial government’s own OSS predates the establishment of InvestSA’s OSS initiative. Each OSS serves to function as a centralized investment portal, where all investment related government departments are represented in a singular space to streamline the investment process, specifically regarding permits, licensing, and registration.109 Each provincial OSS also includes representation from the relevant 104 Department of Trade and Industry. Available from: https://www.thedti.gov.za/about_dti/tisa.jsp [Accessed 08/01/2018] 105 Department of Trade and Industry. Available from: http://www.dti.gov.za/economic_empowerment/docs/TISA.pdf [Accessed 08/01/2018] 106 Africa Outlook. (2017). Available: http://www.africaoutlookmag.com/news/fdi-fragility?topStory [Accessed 08/01/2018] 107 Department of Trade and Industry. Available from: http://www.thedti.gov.za/invitations/SA_Exports2013.pdf [Accessed 08/01/2018] 108 Trade and Investment Kwa-Zulu Natal. Available from: http://www.tikzn.co.za/investsa/ [Accessed 09/01/2018] 109 Currently, the participating departments are the DTI, the Department of Agriculture, Forestry and Fisheries, the Department of Cooperative Governance and Traditional Affairs, the Department of Economic Development, the Department of Energy, the Department of Environmental Affairs, the Department of Health, the Department of Home Affairs, the Department of Labour, the Department of Mineral Resources, the Department of Public Enterprises, the Department of Rural Development and Land Reform, the Department of Science and Technology, the Department of Water and Sanitation, the Department of Small Business Development, and the National Treasury. 47 provincial investment promotion agency.110 This seems confusing to outsiders, since it is not clear, to us, where the national initiative ends and provincial initiatives begin. It is difficult to establish what impact the OSS initiative has had on the facilitation of investment into South Africa, owing to its very recent establishment. However, the OSS structure present in Hong Kong and Singapore (which was a major contributor to Invest Hong Kong’s victory in the 2017 FDI strategy awards111) suggests that it should make an increasingly positive contribution to FDI attraction. It is important to note that the potential success of the OSS initiative also relies on InvestSA’s ability to facilitate collaboration between the public and private sector in ensuring that no issues arise post-investment, something which the DTI has apparently had limited success in achieving.112 Furthermore, it is not clear how much power the DTI has to ensure coordination among all the required government departments for a OSS to be successful? South African Missions Abroad Through DIRCO South Africa has an established diplomatic presence in 140 countries.113 At face value the geographic reach of this diplomatic structure is impressive. It is also important to note that where the DTI does not operate an economic office (via TISA), the mission is likely to employ a local “marketing officer” who would assist South African companies wishing to access the market concerned. Overall, and on paper, this gives South African businesses potentially a large international network to access to support export development activities. 110 Invest SA. Available from: http://www.investsa.gov.za/one-stop-shop/ [Accessed 09/01/2018] 111 Mullan, C. (2018). Strategy Awards 2017 Winners. Available from: https://www.fdiintelligence.com/Rankings/fDi-Strategy-Awards-2017-Invest-Hong-Kong-leads-the-way. [Accessed 09/01/2018] 112 Newman, D & Hewson, M. 2017. How global success of one-stop shops for investors can lift SA. Available from: https://www.businesslive.co.za/bd/opinion/2017-10-12-how-global-success-of-one-stop-shops-for- investors-can-lift-sa/ [Accessed 09/01/2018] 113 Department of International Relations and Cooperation. Available from: https://www.google.co.za/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjl wJrd_- PYAhWlLMAKHY2kDzMQFggoMAA&url=http%3A%2F%2Fwww.dirco.gov.za%2Fforeign%2Fsa_abroad% 2Findex.htm&usg=AOvVaw3s_fSj8GEE06zsvwz5ofLF 48 Figure 19: South African External Missions and Economic Offices Source: Own diagram, using https://mapchart.net/world.html & https://www.thedti.gov.za/contacts/international.jsp [Accessed 10/01/2018] Agencies at Lower Levels of Government While the DTI is responsible for trade and FDI nationally, each province has its own export and investment promotion agency (PIPA).114 Each agency seeks to promote trade by offering exporter support, and investment through specialized investment promotion units, who seek to attract local and foreign direct investment to their respective provinces. The success of these agencies depends to a large degree on their ability to co-operate with the DTI in two ways. First, in relation to the DTI’s export incentive schemes, as individual PIPAs do not run their own schemes. WESGRO has been particularly successful in this regard, something which other PIPAs should look to emulate. Second, in relation to attracting FDI, as the 46 foreign economic offices managed by TISA all contain extensive knowledge of the business environments of their host countries, which could prove to be invaluable to PIPA’s. However, PIPAs have generally lacked co-ordination with these foreign economic offices and embassies when engaging in trade-centric dialogue with other countries, which often has the side-effect of diminishing TISA’s own FDI seeking efforts115. 114 These include the North West Development Corporation (NWDC), Trade & Investment Kwa-Zulu Natal (TIK), Eastern Cape Development Corporation (ECDC), The Western Cape Investment and Trade Promotion Agency (WESGRO), Gauteng Growth and Development Agency (GGDA), Mpumalanga Economic Growth Agency (MEGA), and Free State Investment Promotion Agency (FIPA). 115 Peter, D., Qobo, M. & Krogman, H. (2015). An African International Relations Strategy for Gauteng Province, Part 1: Core Elements. Tutwa Consulting. 49 3.2.3. South Africa’s Economic Diplomacy Economic diplomacy concerns setting the “rules of the game” under which companies from the country concerned can operate. South Africa’s economic diplomacy, as is the case with most countries, comprises many different dimensions, from trade, to finance, to investment. Here we focus only on trade and investment agreements. With regards to trade, South Africa’s trade diplomats operate on three levels: multilateral (the World Trade Organization, WTO); regional (Africa and its sub-regions); and bilateral (the world beyond Africa). Investment rules are set partly through bilateral investment treaties (BITs), the Investment Protection Act, the SADC Finance and Investment Protocol, and through those treaties under the WTO that have a bearing on the treatment of investments. These different layers are discussed briefly below. In all cases the approach South Africa’s trade negotiators, principally in the DTI, take into trade and investment negotiations is broadly consistent. It is premised on the notion that trade policy is subservient to industrial policy, meaning that policy tools such as import tariffs are not viewed as trade policy tools per se, but rather as instruments for protecting key industries. Underpinning this approach is a deep-rooted skepticism of the purported benefits of import and investment liberalization, which plays out in senior South African trade diplomats’ perspectives on what they call the “GVCs narrative”. As a result, trade agreements with countries that have stronger economies than South Africa, particularly in relation to manufacturing, are approached with a great deal of caution, although this caution extends to trade agreements in general. It is echoed in certain business circles, particularly those with a preponderance of “defensive” concerns, as well as by trade unions and civil society. Besides a small set of government officials in the Treasury and National Planning Commission, a small group of academic economists, and some companies with export interests beyond resources, there is little support for import liberalization. This greatly limits the scope for reciprocal trade- offs in trade negotiations and reinforces the DTI’s skeptical approach. Overall, the DTI’s orientation to both trade and investment negotiations constitutes a “restrictive” approach to the operations of MNCs in the South African market. In this approach, the state must be free to pursue domestic policy and regulatory imperatives consistent with extracting maximum concessions from MNCs to align their investments with domestic priorities, and to preserve “policy space” for the future. It follows that “behind the border” policy and regulatory issues are not put up for negotiation by the DTI, at least with more advanced economies, and the focus is kept firmly on “at the border” negotiating issues, notably tariffs, non-tariff barriers, and customs procedures. A partial exception is made for trade negotiations involving Africa, wherein a limited set of services is put up for negotiation (covering SADC, the tripartite FTA, and soon the Continental FTA); but these are markets that South African services suppliers are expected to dominate. Furthermore, import tariff liberalization is not entertained outside of a very limited circle of trading partners, currently encompassing the EU (for historical reasons), EFTA, Mercosur, India (negotiations have been underway for some years), and African partners. In all cases South Africa adopts a defensive posture, playing out in the case of developed country partners in tariff offers that carve out around 15% of total imports from the liberalization basket, whereas for Mercosur and India far less liberalization was yielded in the former case and a similarly light deal is expected in the latter case, while more is on the table for African partners but South Africa’s own import liberalization, while generous on paper, is hedged through strict, product-specific rules of origin. Regional Trade Agreements 50 All South Africa’s import tariff offers must be mediated through the Southern African Customs Union (SACU). This adds an additional layer of complexity to the political economy of trade negotiations, since each country has its own export and defensive interests that must be accommodated in trade agreements. In practice this applies to “at the border” trade negotiations only, since these need to be coordinated in a customs union arrangement. The other four SACU members (Botswana, Lesotho, Namibia, Swaziland) do not produce much themselves, meaning they are not by default opposed to import liberalization, but they do depend to varying degrees on the tariff revenues derived from the common external tariff to fund their fiscus. In addition, they export principally commodities, which generally receive duty free access in key markets – especially the EU – and in all cases a very limited set of such commodities. As a result, they do not have strong “offensive” interests, but do have a collective interest in maintaining the tariff regime in order to maximize revenues. One offsetting factor is their willingness to open their markets to non-South African imports given the dominance of South African goods and companies in these countries, but only if this does not harm nascent industrial development prospects. As a result, the DTI’s cautious approach to trade negotiations is reinforced, in some measure, by its SACU partners. Furthermore, the DTI advocates a “developmental integration” 116 approach in all African regional economic integration initiatives, including: • Market integration • Industrial development; and • Infrastructure development. As stated, the market integration (reciprocal trade liberalization) component is de-emphasized in this approach. This means that South Africa’s negotiating partners, while being expected to open their markets to South African exports, are accorded substantial leeway to “claw back” their commitments to liberalization. This is generally delivered through a combination of slower phase-downs mediated though “sensitive products” lists, as well as exclusions. In return South Africa offers near complete import tariff liberalization, but in the full knowledge that its partners are generally not able to reciprocate since they have very limited industrial capacities. Furthermore, those tariff concessions are clawed back through strict, product-specific, rules of origin, raising the bar for its neighbors still further. Overall, therefore, export opportunities opened up through these FTAs (SADC, the Tripartite FTA, and the Continental FTA) are limited, while no meaningful import liberalization takes place either. This fits with the “developmental integration” and “restrictive” approach to MNCs and developed countries more broadly. The most important regional trade agreement South Africa is party to is the SADC Free Trade Agreement, concluded in 2008. Thirteen) out of 16117 Member States have acceded to the SADC Trade Protocol – Angola and the Democratic Republic of the Congo remain outside the FTA. South Africa and the other SACU countries grant duty free status to 99% of products under the agreement. Prior to apartheid South Africa joining SADC, there were few opportunities to design and implement integrated regional policies that included South Africa. With the political obstacles removed pursuant to the advent of South Africa's democracy, there 116 McCarthy, C. (2014). “Industrial Policy in Southern African regional integration and development. ” Tralac Working Paper No. S14WP02/2014, May 2014. 117 Comoros became the 16th SADC Member State during the August 2017 Heads of State Summit. 51 was increased emphasis from all members of SADC to move towards greater regional integration. Since inception of the SADC free trade area in 2008, several derogations have been granted under Article 3(c) of the Trade Protocol. 118 " That Member States which consider they may be or have been adversely affected, by removal of tariffs and non-tariff barriers (NTBs) to trade may, upon application to CMT, be granted a grace period to afford them additional time for the elimination of tariffs and (NTBs). CMT shall elaborate appropriate criteria for the consideration of such applications."119 Mozambique negotiated to complete its reduction of tariffs to imports from South Africa by 2015. Zimbabwe was granted derogation (in terms of Article 3(c) of the Protocol) to suspend tariff elimination commitments on sensitive products until 2012 and to be completed by 2014. Tanzania applied for derogation to levy a 25 % import duty on sugar until 2015 to allow for domestic industries to adjust. A further request for derogation was for Tanzania to apply a 25% tariff for industrial packaging grades. Malawi confirmed being on schedule with respect to its tariff phase down offer to the rest of SADC except to South Africa where it stood at around 86 %. Another provision with potential for promoting protectionism is found in Article 21 (1) of the Trade Protocol which allows for temporary measures for promotion of infant industries by suspending trade liberalization objectives. However, the provision fails to define an infant industry and it does not specify the maximum time for which such protection should be in place. "... upon the application by a Member State, the CMT may as a temporary measure in order to promote an infant industry, and subject to WTO provisions, authorize a Member State to suspend certain obligations of this Protocol in respect of like goods imported from the other Member States."120 Furthermore, non-tariff barriers121 remain high and regional integration is only progressing slowly in other areas. The SADC Trade in Services Protocol was approved by Summit in 2012 and negotiations started in 2012 on specific commitments in priority sectors.122 South Africa has a well- 118 Southern Africa Trade Hub. (2012). Technical Report: 2012 Audit of the Implementation of the SADC Protocol on Trade: USAID Southern Africa. Available from: http://www.sadc.int/files/5413/7415/0039/Customs_Audit_2011.pdf; http://satradehub.org/images/stories/downloads/pdf/technical_reports/tech20120531_sadc_trade_audit_report.pd f 119 SADC (2014). Consolidated Protocol on Trade, Version July 2014. 120 Ibid 121 Non-tariff barriers (NTBs) are policy measures other than ordinary customs tariffs that potentially affects the international trade in goods, changing quantities traded, or prices or both, and they include: ▪ Costly and burdensome customs procedures, ▪ Regulatory red-tape, ▪ Bribery and corruption among customs and immigration officials, ▪ Health and safety standards applied to protect local industry, Inadequate transport and trade infrastructure (geared towards export of commodities from the point of extraction, rather than to facilitating trade amongst regional economies). 122 Finance; energy; transport; logistics; construction, and tourism. 52 developed services sector, with many of its firms already active in SADC and Africa and the Services Protocol is expected to consolidate this leading to: • Enhanced access for South African services providers; • South African firms can contribute to economic development in the region; • Liberalization will give South Africa an advantage over suppliers from outside the region; and • The Protocol will lay basis for wider services markets under the TFTA and CFTA in future. The Trade in Services Protocol will also be important for the efficiency and effectiveness of regional value chains – with ICT and financial services being vital for development of all the value chain sectors, as well as for trade facilitation. That said, it is not clear how much actual market opening the services negotiations will deliver, with South African negotiators again reportedly adopting a cautious approach. These dynamics in the SADC FTA are repeating in both the Tripartite FTA and the Continental FTA (CFTA), the two current big trade negotiations South African negotiators are involved in. It is to be expected, therefore, that while these negotiations will deliver limited market access opportunities to South African firms, they will not be transformative. Nor will South Africa liberalize its own market much, and in any case its African partners are generally not well- placed to take advantage of the opportunities that will arise. The SADC EPA Nonetheless, South Africa has concluded the SADC Economic Partnership Agreement (EPA), along with SACU and Mozambique, with the EU. The EPA provides asymmetric access to the partners in the SADC EPA group. They can shield sensitive products from full liberalization and safeguards may be used when imports are growing too quickly. A detailed development chapter identifies trade-related areas that can benefit from funding. The agreement also contains a chapter on sustainable development, covering social and environmental matters. South Africa will benefit from new market access additional to the Trade, Development and Cooperation Agreement (TDCA) between the EU and South Africa that currently governs the trade relations with the EU. The new access includes better trading terms mainly in agriculture and fisheries, including for wine, sugar, fisheries products, flowers and canned fruits; all areas of export growth as highlighted in chapter 2.1. The EU will obtain new market access into SACU, where products include wheat, barley, cheese, meat products and butter, and will have the security of a bilateral agreement with Mozambique, one of the LDCs in the region. The EPA includes a bilateral protocol between the EU and South Africa on the protection of geographical indications (GIs) and on trade in wines and spirits. The EU will protect names such as Rooibos, the famous infusion from South Africa, and numerous wine names like Stellenbosch and Paarl. In return, South Africa will protect more than 250 EU names spread over the categories food, wines and spirits. Clearly this is an important agreement. However, it is notable that, with the partial exception of the GIs chapter, “behind the border” regulations are excluded from the ambit of the EPA. Since EU companies are the dominant source of FDI into South Africa and are increasingly concerned about South Africa’s political stability and associated policy directions, this is a missed opportunity to lock in good regulatory practice and commit future governments to such. Naturally this is not a popular argument to make, but 53 bears careful consideration nonetheless, especially if FDI is to be prioritized as part of South Africa’s economic policy mix – which is evidently the case and we would advocate. The SADC Industrialization Strategy Finally, the 2015 SADC Industrialization Strategy and Roadmap emphasizes the importance of technological and economic transformation of the region. This is to be achieved through industrialization, modernization, skills development, science and technology development, financial strengthening and deeper regional integration. The Strategy is anchored on three pillars namely; “industrialization as champion of economic and technological transformation; competitiveness as an active process to move from comparative advantage to competitive advantage; and regional integration and geography as the context for industrial development and economic prosperity.”123 The Strategy and its Action Plan recognize the lead role of the private sector in industrial development. Efforts to create knowledge economies across the region also underscore the role of technological and scientific inputs. In approving the SADC Industrialization Strategy and Roadmap, the SADC Heads of States called for a costed Action Plan for its implementation to be submitted to the Council of Ministers by March 2016. The Action Plan outlines the role of an Industrial Development Forum, consisting of Member States, the private sector, think-tanks, and relevant stakeholders. The SADC Secretariat has assumed an elevated role with greater authority to undertake initiatives for the implementation of the SADC Industrialization Strategy and Roadmap. It is expected that the technical capacity of the Secretariat would be substantially enhanced to cope with the coordination and monitoring responsibilities. To this effect, the Action Plan strongly recommends the establishment of a new Industrial Development Directorate within the Secretariat to provide guidance to implementation. The focal point of the SADC Industrialization Strategy is participation in regional and global value chains, in particular: agro-processing, minerals beneficiation, and industry and service- driven value chains. These are intended to be mutually inclusive, encompassing downstream value addition and backward integration, intermediate goods, and capital equipment. Value chain selection will take account of competition policy considerations, as well as those relating to consumer welfare, especially in such consumer-facing sub-sectors as foodstuffs, beverages and pharmaceuticals. To date, engagements between public and private sector and the research community, presided over by the SADC Secretariat, have recommended the development and implementation of regional value chain and value -addition strategies that have the potential to stimulate efficiency gains through integrated regional markets built on comparative and dynamic competitive advantages. There has also been strong emphasis on the need for identification of training gaps and associated capacity development across the value chain. Some of the key discussion points across the three value chains sectors are as follows: For regional value chains to work optimally, the lead companies at their heart need to be able to move inputs around the region relatively smoothly. Therefore, the trade arrangements play an important role, encompassing both formal and informal barriers to trade. First, it is important to appreciate that intra-regional trade in SADC is relatively low, between 10 and 18% of total trade compared to about 25% in the ASEAN or 40% in the European Union. This implies that 80-90% of SADC trade is with external regions or countries. 124 In other words, and as is the 123 SADC. (2015). SADC Industrialization Strategy and Roadmap. SADC Secretariat, Gaborone, Botswana 124 OECD. (2017). OECD Economic Surveys. South Africa: OECD. 54 case with intra-African trade in general, the region does not trade much with itself. The character of existing intra-regional trade also reveals a lack of diversity in terms of products, and the dominance of South Africa which runs a large and persistent structural trade surplus with its neighbors, reflecting South Africa’s comparatively diversified economy and, particularly, its manufacturing strengths. This means not only that South Africa can benefit from the SADC Industrialization Strategy, but also has a crucial role to play in its successful implementation. South Africa has significant interests in the SADC region – accounting for 41% of SADC regional trade and about 63% of the region’s GDP. South Africa’s Department of Trade and Industry reports that “Africa is now [South Africa’s] single largest export market if both goods and services are included.” Hence, the establishment of Trade Invest Africa (TIA) aimed at shifting focus from exports to supporting capacity-building investments by South African companies and large global players in key value chains. TIA is “actively building relationships with … neighbours, particularly in the SADC region, around the industrialisation strategy where we are identifying concrete investment opportunities to support the diversification and modernisation of the region.”125 Notwithstanding the potential it presents, South Africa has not consistently supported regional economic integration efforts. Despite its undisputed role as economic “hegemon” in the region,126 South Africa is at once seen as reluctant regional leader, and by others as motivated more by self-interest than by “the good of all” approach.127 There is likely an element of truth in both these positions: South African government actors are careful about being perceived as “big brother” yet its cautious, categorical, approach to the trade arrangements that frame regional industrialization possibilities is viewed by SACU and SADC States as somewhat uncompromising.128 Missing from the List Increasingly South Africa also finds itself locked out of the growing number of regional trade agreements between the nations of Asia, Europe and the Americas. As noted above, this is largely by choice and is derived from the negotiating approach. It is moreover evident that South Africa does not have a trade strategy encompassing North America and East Asia, the two most important regions currently not covered through existing negotiations. Since these are relatively dynamic regions of the global economy, competing in which would require significant productivity upgrading on the part of South African firms, which in turn must be a long-term priority to retain current relative advantages in global markets, never mind build new ones, this seems to us to be a problem. 125 Citing Nigel Gwynne-Evans interviewed by Peter Fabricius in ‘Regional economic integration isn’t working and changing that should be a priority’ Institute of Security Studies (ISS) Today, 2 November 2017. 126 Schenoni, L.L. (2017). “The Southern African Unipolarity.” Journal of Contemporary African Studies, DOI: 10.1080/02589001.2017.1364355. 127 Siphamandla, Z. (2012). “South Africa in Southern Africa: A Perspective.” Frederich Ebert Stiftung Peace and Security Series. 128 This “developmental integration” approach is rooted within the 2007 National Industrial Policy Framework (NIPF) and the Industrial Policy Action Plan (IPAP) of 2008. The core objective being to address the structural weaknesses of the manufacturing sector. 55 In the North American case, and particularly that of the US, this may become a particularly pressing issue in the next 5 to 10 years. South African exports to the US depend quite substantially on non-reciprocal market access arrangements via the US Generalized System of Preferences (GSP), and the extended GSP in the form of the African Growth and Opportunities Act (AGOA). Both are coming under increasing scrutiny from US trade policy makers, Congressmen, and business groups, many of whom complain that the EU enjoys privileged access in the South African market, at their expense. South Africa could be “graduated” from access to these schemes at any time. The only way to secure long-term access to the US market is via a reciprocal trade agreement – admittedly a daunting undertaking, and one that was tried, and failed in the early 2000s. Nonetheless, South Africa is going to have to think seriously about these issues. The absence of East Asian economies from South Africa’s trade agreements negotiating list is an obvious gap. While negotiating an FTA with China is arguably too daunting, doing so with Japan, still a major trading partner and source of FDI, is far less so. Furthermore, opening to Japanese (and US for that matter) advanced manufactures would challenge EU firms in the South African marketplace, and offer other, and potentially cheaper, avenues for the industrial upgrading the DTI correctly promotes. Other East Asian economies compete more directly with South African manufacturers and so the political economy of market openings would be more challenging. Perhaps an entry point into this would be to conclude a PTA with Singapore and use that to learn about the region. 3.3. Addressing Policy Uncertainty It is well known that political and policy uncertainty affect investor confidence. Keynes was of the view that “animal spirits” of investors are central to understanding their investor decisions129, so when those animal spirits are deflated it is likely that investment will decrease, while at the same time their reward threshold, or profit expectations, will increase. Put differently, if political and policy uncertainty is rising in South Africa, then to retain investment levels at constant levels, economic growth has to rise too. Unfortunately, that has not been the case. This problem is widely recognized by South African economic policy elites, as reflected in this recent statement by the Reserve Bank governor: Setting out some investment-friendly ambitions for the economy and reducing political uncertainty would go a long way towards boosting confidence. As is often said, raising confidence is the cheapest form of stimulus”130 However, in recent years South Africa’s investment environment has palpably deteriorated. This has been accompanied by anemic economic growth, declining per capita GDP, and growing social problems. Since efficiency and market-seeking MNCs require a measure of predictability and longer-term certainty in the host countries into which they invest, it is important to ascertain how these dynamics have impacted on investor confidence; not just of foreign MNCs but also large South African firms engaged in exporting from the South African gateway. 129 Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: MacMillan: 161-162. 130 Statement made at the fifth SA Tomorrow Investor Conference in New York, cited in https://www.businesslive.co.za/bd/national/2017-11-10-policy-certainty-and-less-corruption-could-heal-the- economy-says-lesetja-kganyago/ 56 Therefore, it is important to get a better understanding of how uncertainty “shocks” affect the economy to understand their impacts on exports. Broadly, two potential impacts are conceivable. First, to the extent that political and policy uncertainty undermines investor confidence in the home market, leading to less investment and lower growth, it could paradoxically lead to an export increase as investors look for new growth markets – effectively abandoning the home market. In other words, there is a risk diversification effect. However, secondly, this could be countermanded by the negative effects of domestic economic stagnation on company performance, which could inhibit exports. Much would then depend on the extent to which the company in question depends on: the domestic market, sectoral and value chain dynamics, whether the company is successful in developing export markets, and the net effect of the risk diversification and depressed domestic demand drivers of export behavior. The focus here is on value-added exports since those are a core focus of the South African government’s industrial policy and export strategies, but also because commodity markets have peculiar dynamics that are arguably less hostage to domestic confidence issues, although perhaps more hostage to political and policy uncertainties. A thorough exploration of these matters is beyond the scope of this section. However, what we do is to chart the course of domestic investor confidence and relate this to the evolution of political and policy uncertainty. Our findings were then tested in a series of focus group meetings with South African business groups representing a cross-section of value-added export sectors, as well as large and smaller firms. An Overview of Domestic Economic Confidence by Indexes The SACCI Business Confidence Index (BCI) reflects the market-related business climate, identifying economic developments that have a bearing on the business mood in South Africa. It does not reflect business sentiment per se, but rather how businesses are reacting to the current business climate.131 The SACCI BCI is constituted by thirteen business climate indicators, broadly divided into real economy and financial indicators. It shows a clear downward trend in business confidence over the last 7 years (Figure 20), entering negative territory in September 2015, recovering from March 2016 to March 2017 and declining sharply during a time of cabinet reshuffles introduced by President Zuma, and particularly the changes of Finance Ministers. A clear recovery is visible with the change in ANC and then national leadership in late 2017 and early 2018. The recent change in government has created a more positive mood, but the continued volatility of the exchange rate meant that firms were continuously exposed to exchange rate risk, revenue fluctuations, and varying costs of inputs including higher import costs. The erosion of capacity in key government institutions, lack of transparency, ’State Capture’ and inconsistent policies had been identified as major concerns by the business community. While the change in government has created a more positive mood, a clear downward trend in business confidence is visible over the last decade which will take time to turn around. The continued volatility of the exchange rate meant that firms were continuously exposed to exchange rate risk, revenue fluctuations, and varying costs of inputs including higher import costs. The erosion of capacity in key government institutions, lack of transparency, ’State Capture’ and inconsistent policies had been identified as major concerns by the business 57 community. Despite the hope for reform, policy uncertainty lingers, and the new positions around land reform in agriculture and the third Mining Charter are creating concern among the investor community about the security of property rights. Figure 20: SACCI Business Confidence Index, March 2010 - May 2018 Source: SACCI Insights from Foreign Chambers’ Surveys and Reports and Other Business Sources The EU (28 members) is currently the largest source of FDI for South Africa, accounting for nearly 80% of total FDI.132 The European Business Climate Survey provides insights into the views of the EU and EU-associated companies on the business and investment landscape of South Africa. A total of 211 EU and EU-associated companies133 that operate within the country participated. Survey data from the EU and associated companies suggests that there remains a long-term investment commitment towards South Africa but the outlook for South Africa as an investment destination was negative, with twice as many firms reporting levels of dissatisfaction with the overall business climate, compared to the 2012 and 2014 surveys.134 Notwithstanding the long-term view, respondents main concerns were cited as: the prevalence of policy changes which leads to uncertainty, perceived non-tariff barriers to trade, particularly red tape around work permits, the Rand’s volatility, and, cost of compliance with B-BBEE legislation.135 The top three reported challenges were: rising prices, government corruption, and the lack of skilled labor, coupled with cumbersome B-BBEE legislation.136 The continued volatility of the exchange rate meant that firms were continuously exposed to exchange rate risk, revenue fluctuations, and varying costs of raw materials including higher import costs. Higher inflation contributed to this. The lack of adequately functioning government institutions, lack of transparency, and incidences of grand corruption and 132 Sakoschek, S., Fuesgen, I. & Bertra, C. C. (2017). Business Climate Survey 2016: EU Trade and Investment in South Africa, Johannesburg: EU Chamber of Industry and Commerce of Southern Africa (NPC). 133 The 2016 survey respondents were some 40% more than in the previous survey. The survey was conducted by the EU Chamber of Commerce and Industry of Southern Africa and represents an update of the 2014 survey which was carried out under the umbrella of the “EU -SA links” project. 134 Sakoschek, S., Fuesgen, I. & Bertra, C. C, op. cit 135 Ibid. 136 One interviewee, who wished to remain anonymous, noted that rising prices related to high energy costs (gas and electricity), in particular, which put a strain on business activities, and that the South African government’s mixed messaging over the possible pursuit of nuclear energy development could have serious political and economic consequences for the country, as well as creating uncertainty over the future of the independent power producer programmes (IPP), potentially impacting negatively on future European commercial interests. 58 inconsistent policies were also cited as major concerns.137 This reflects that policy uncertainty underpinned by political uncertainty is a negative contributor towards European investor sentiment. In the agriculture industry, specifically, investors are concerned that government cannot address infrastructure-related problems, exposing them to further risk. There is also the general understanding that labor-policies are detrimental to doing business, but the largest disincentive is the high cost of compliance with B-BBEE legislation, with investors questioning B-BBEE's focus on ownership instead of on job creation.138 Regarding trade regulations specifically, sentiments were mixed, as shown in Figure 21. Figure 21: EU Investor Sentiment Towards Trading with South Africa Source: Business Climate Survey 2016: EU Trade and Investment in South Africa, 2017. The JETRO survey139 reflects the views of Japanese companies in 24 targeted African countries, including South Africa, and reveals the following as the major investment risks in South Africa: “frequent labor strikes, increasing costs for expatriate staff, anxiety towards system changes e.g. mining charter, sudden regulation changes, shortage of specialized personnel, frequent changes of the automobile certification system.”140 The prevalence of anxiety due to frequent system changes and sudden regulation changes all point towards policy uncertainty, an encompassing view that it is a disincentive for investment. Nonetheless, for 137 Ibid. 138 Ibid. 139 Targeted Japanese Companies in 24 African countries including South Africa, Egypt, Kenya, Nigeria and Morocco. Conducted between September 29th to November 11, 2016. Response Rate: 299 valid responses. 140 Japan External Trade Organization(JETRO). (2017). 2016 JETRO Survey on Business Conditions of Japanese Companies in Africa, Tokyo: JETRO. 59 Japanese firms South Africa, remains an important future investment destination in Africa as it reportedly has well-established social capital, a manufacturing sector that has potential to develop, and there are expansion possibilities within infrastructure development including electrical power and mineral resources. Maintenance of a high standard of living is also an attractive factor.141 The recent report by the High-level Panel142 argues that implementation, governance and oversight of government policy by Parliament is crucial. It is stated that for parliament to be effective, oversight depends on Members of Parliament acting in the best interests of the people of South Africa rather than according to personal or party-political incentives. They should be able to act “without fear, favor or prejudice”.143 The Panel has also considered how the electoral system can be reformed to allow the public to hold their representatives accountable by having more direct linkages between Parliament members and their constituencies.144 A concerning issue that may be limiting investment in the country, that would contribute to exports, especially within the agrarian context, is related to land reform; specifically, on restitution, redistribution and security of tenure. The pace of land reform has been slow with gaps in the laws on tenure security creating uncertainty in that domain.145 The Agribusiness chamber was particularly concerned about the implications of current land reform proposals on the table on farm investments, with attendant consequences for processed agriculture exports – one of South Africa’s better performing export sectors as noted in section 2.2. This links to broader concerns over the future of property rights, an issue flagged by the EU Chamber of Commerce and Industry in Southern Africa in a recent report.146 Their report canvasses a broader regulatory terrain, encompassing recent bills and acts related to property rights and flagging various concerns with them. 141 Ibid. 142 Parliament of the Republic of South Africa. (2017). Report of the High Level Panel on The Assessment of Key Legislation and The Acceleration of Fundamental Change, Pretoria: Parliament of the Republic of South Africa. 143 Ibid. 144 Ibid. 145 Ibid. 146 EU Chamber of Commerce and Industry in Southern Africa. (2016) Discussion Paper 1: Property Rights, March. 60 Insights from Focus Group Meetings Clearly South African business is suffering from combined, and deteriorating, business confidence and policy uncertainty problems. These have played a role, perhaps a decisive role, in curtailing economic growth prospects through investment decisions. Yet many other factors are in play, from macroeconomics, to commodity prices, and the performance of key trading partners, and it is not possible in this paper to disentangle those various causes. Nonetheless, in our focus group discussions we sought to sample exporters and business associations’ views on this subject, inter alia, with an eye on the possible net effects on export decisions. A major recurrent theme was the ineffectiveness of government policy coordination and its lack of engagement with business. According to the Agribusiness Chamber, there has been an agglomeration and multiplication of government departments further encircling the web of disorder. The Manufacturing Circle considered a super ministry structure, like the Japanese ‘MITI’, as a solution to ‘co-ordination failure’. Another prominent business group argued that such coordination should take place in NEDLAC, and that business needs to properly engage in that forum, noting that business itself is sometimes the source of coordination failures. Therefore, further study of how business and government can openly communicate and coordinate to promote a more conducive investment environment could be worth further study. 61 4. Conclusion and Recommendations 4.1. The Gateway Model: Linking South African Firms to Global Markets while Supporting the Region’s Integration and Industrialization The issues outlined in Section 3 demonstrate that South Africa’s competitiveness and the country’s overall investment environment has deteriorated in recent years. It is evident that South Africa’s export engine is not firing on all cylinders, and that there are many reasons for this. High transport costs not only impact the competitiveness of South Africa’s companies attempting to export and import, but also acts as a strong barrier to entry into the domestic market, in turn perpetuating low levels of competition (which itself contributes to the low export responsiveness to the rand’s depreciation). Furthermore, while the institutions supporting commercial diplomacy look appropriate on paper, less is known about their effectiveness, and the extent to which South African business values them. There appear to be significant overlaps and duplications in the system, requiring investigation to establish how they could be improved and rendered more effective. South Africa’s trade negotiations strategy is defensive and largely confined to “at the border” concessions (principally tariffs), limiting options for productivity-enhancing reciprocal liberalization with more advanced trading partners to whom South Africa’s most advanced manufactures are primarily exported. Currently the government remains reluctant to rethink this strategy. The domestic political economy concerning trade arrangements reinforces the defensive approach and is buttressed by South Africa’s membership of the Southern African Customs Union (SACU), whose members have a strong interest in retaining import tariffs to secure fiscal revenues associated with these. Nonetheless, trade agreements are needed not only in Africa but also with emerging markets. In the medium-term, firms will only be able to compete in Africa on lower value- added goods as most African economies remain relatively protected markets. South Africa can continue to access these, owing to a combination of a relative lack of prioritization by major economies and proximity, but this is unlikely to be a significant driver of employment or productivity gains. South Africa’s export performance is lagging owing to relatively declining productivity in manufacturing, the flip side of which is lagging competitiveness. In part this arises from a refocusing of exports towards relatively uncompetitive and unsophisticated African markets, away from developed country markets that are amongst the most difficult in the world to succeed in, and in part from a host of supply side bottlenecks and inefficiencies. It follows that for this relative shift to be reversed, the trade policy focus must return to productivity enhancement, combining a mix of domestic policies and institutional arrangements vis-a-vis more sophisticated external markets. Such an approach should be situated within an attitude to the Southern African region that both leverages the region for South African exports and the South African market for its neighbors’ exports, while at the same time building the region for global integration and competitiveness. Since South African firms will not be able to drive this approach on their own147, this necessarily means forging policies and institutions that encourage investments into South Africa and the SADC region, and working with SADC neighbors to maximize the regional value chains developments that results from such investments. 147 Draper, P., Freytag, A., Scholvin, S & Tran L.T. (2014). “Is a Factory Southern Africa Feasible? Harnessing Flying Geese to the Southern African Gateway.” Working Paper. 62 Meanwhile policy uncertainty disincentivizes MNCs to establish in South Africa, but also negatively impacts large South African firms. Taken together, the large, most productive, and export intensive firms based in South Africa have been curtailing their expansion plans as uncertainty over the future of their investments has increased. Therefore, the South African government needs to act urgently to address these increasing levels of uncertainty and to restore South Africa’s “gateway role” in the region. Business has a crucial role to play in supporting this process; collaboration between these two partners is the essential fulcrum on which the investment environment hinges. Greater trade integration can act as a powerful driver of productivity growth and job creation for the South African economy. South Africa is a ‘gateway’ market, connecting the Southern African region to the world and the world to the region, by acting as an infrastructure, services and goods node. This is attractive for MNCs that choose to locate here and local MNCs that see expansion opportunities, creating an opportunity to leverage these regional and global value chains connected to these RVCs to drive export generation and job creation through FDI.148 This has important linkage implications, particularly the prospect of linking SMEs based in South Africa to export markets via MNC value chains. In this context, pivoting back to global markets is critical. The South African government would benefit from aligning its trade strategy, commercial and economic diplomacy and industrial policy with the dual objective of providing both the engine for a “Factory Southern Africa” that encompasses the rest of the SADC region, and of being the region’s gateway to the rest of the world. Since South African firms will not be able to drive this approach on their own, this necessarily means forging policies and institutions that encourage investments into South Africa and the SADC region, and working with SADC neighbors to maximize the regional value chains developments that results from such investments. 4.2. Trade Policy and Trade Management Recommendations Overall, this paper argues for South Africa adopting a “Factory Southern Africa” framework, using South Africa as the regional “gateway”149. For a gateway to function optimally, it needs to connect the world to Southern Africa (via South Africa), and Southern Africa to the world (via South Africa). This can support South Africa’s aim to promote industrialization within the SADC region, with South Africa being the gateway that can take regional value chains global. Such an orientation has profound implications for South Africa that can be grouped into two broad categories: those pertaining to trade policy, and those retaining to trade management. While the analysis above does not address all issues, several key recommendations do emerge from it, notably: 1. Eliminating the anti-manufactures export bias in domestic transport policies practiced by Transnet, in both port and rail operations, and introducing more competition into key components of the transport logistics chain, both with a view to driving down the costs of importing (for fabrication) and exporting manufactured goods. Consideration should also be given to changing the approach to the regulated price of fuel, specifically 148 Ngarachu, A., Draper, P. & Owino, K, op. cit. World Bank Group. (2015). “Factory Southern Africa? SACU in Global Value Chains. ” Summary Report, 149 November. 63 whether it unnecessarily penalizes terrestrial transport operators given that most South African goods are moved by land and not by rail. 2. Refocusing the tariff-setting institutional arrangements, away from the current privileging of import-competing interests towards economy-wide considerations, including export interests negatively affected by rising import tariffs. This also needs to accommodate the interests of other SACU states. 3. Formulating a trade diplomacy strategy that prioritizes trade openings with advanced economies, including in East Asia, to secure inputs of high technology goods and services, while opening those markets to South African goods and services. 4. Aggressively promoting a business environment favorable to MNC investment into South Africa, with an eye on establishing regional value chains. This necessarily means reducing domestic policy uncertainty, lowering transactions costs particularly in key network services that support manufacturing industries, and working with neighbors to reduce frictional barriers to trade and investments. Here policy-makers can leverage the SADC Industrialization Strategy, to support the establishment of competitive regional value chains. These policy approaches need to be buttressed by substantial improvements in several trade management areas: 1. Improving efficiencies in all South Africa’s container ports, particularly in relation to container dwell-time and ship turnaround time. To achieve this, serious consideration needs to be given to concessioning key port operations. 2. Working with neighbors to improve border management practices, within a broader regional trade facilitation framing. The core objective should be to improve the productivity of border management processes while also reducing transactions costs where possible. 3. Reconfiguring the institutional arrangements pertaining to import tariff setting, to improve decision times as well as the transparency of the decision-making process. Serious consideration needs to be given to ITAC’s mandate and decision-making role, in respect of which alternative models such as the Australian Productivity Commission need to be considered. 4. A thorough review of the various institutional arrangements pertaining to export and investment promotion, at national, provincial, and local government levels, needs to be undertaken. The ultimate objective should be to streamline the existing structures to improve the focus of effort, while at the same time elevating commercial diplomacy up the national agenda to achieve more buy-in from both policy makers and business. 64 Bibliography Acemoglu, D., Autor, D., Dorn, D., Hanson, G.H. and Price, B. (2016). “Import Competition and the Great US Employment Sag of the 2000s.” Journal of Labor Economics 34(S1): S141- S198. doi:10.1086/682384. Africa Outlook. (2017). Available: http://www.africaoutlookmag.com/news/fdi- fragility?topStory [Accessed 08/01/2018] Anand, R., Perrelli, R. and Zhang, B. (2016). South Africa’s Exports Performance: Any Role for Structural Factors?. IMF Working Papers WP/16/24. Washington, DC: International Monetary Fund. Aterido, R., Hlatshwayo, A., Pieterse, D. and Steenkamp, A. (2017). Firm Level Dynamics, Job Flows and Productivity: South Africa 2009-2014. Pretoria: National Treasury. Autor, D.H., Dorn, D. and Hanson, G.H. (2016). “The China Shock: Learning from Labor- Market Adjustment to Large Changes in Trade.” Annual Review of Economics 8(1): 205-240. doi:10.1146/annurev-economics-080315-015041. Bonakele, T. (2014). Import Parity Pricing and Competition Policy. Presentation 26 August 2014 (PCTI/20140826/CoB/Competitioncommission/31) Botes, F. (2005). Impact of Transport Pricing practices in South Africa on Freight Transport Costs. Pretoria: HRSC. Bureau for Economic Research. (2017). RMB/BER Business Confidence Index. [Online] Available from: https://www.ber.ac.za/BER%20Documents/RMB/BER-Business- Confidence-Index/?doctypeid=1050 [Accessed 23 October 2017]. Cali, M. and Hollweg, C. (2017). How much Labor do South African Exports Contain?. World Bank Policy Research Working Paper No. 8037. Washington, DC: World Bank. Citing Nigel Gwynne-Evans interviewed by Peter Fabricius in ‘Regional Economic Integration isn’t Working and Changing that Should be a Priority’ Institute of Security Studies (ISS) Today, 2 November 2017. Curtis, B. (2014). Africa Road Corridors Handbook. s.l.:3S Media. Department of International Relations and Cooperation. Available from: https://www.google.co.za/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8 &ved=0ahUKEwjlwJrd_- PYAhWlLMAKHY2kDzMQFggoMAA&url=http%3A%2F%2Fwww.dirco.gov.za%2Fforei gn%2Fsa_abroad%2Findex.htm&usg=AOvVaw3s_fSj8GEE06zsvwz5ofLF Department of Trade and Industry. Available from: http://www.dti.gov.za/trade_investment/export_organisations.jsp [Accessed 08/01/2018] Department of Trade and Industry. Available from: http://www.dti.gov.za/trade_investment/Evaluations.jsp. [Accessed 10/01/2018] 65 Department of Trade and Industry. Available from: http://www.dti.gov.za/economic_empowerment/docs/TISA.pdf [Accessed 08/01/2018] Department of Trade and Industry. Available from: http://www.thedti.gov.za/invitations/SA_Exports2013.pdf [Accessed 08/01/2018] Department of Trade and Industry. Available from: https://www.thedti.gov.za/about_dti/tisa.jsp [Accessed 08/01/2018] Draper, P., Freytag, A., Scholvin, S and Tran L.T. (2014). “Is a Factory Southern Africa Feasible? Harnessing Flying Geese to the Southern African Gateway.” Working Paper. Edwards, L. and Jenkins, R. (2015). “The Impact of Chinese Import Penetration on the South African Manufacturing Sector.” The Journal of Development Studies 51(4): 447-463. doi:10.1080/00220388.2014.983912. Edwards, L., Sanfilippo, M. and Sundaram, A. (2017). “Importing and Firm Export Performance: New Evidence from South Africa.” South African Journal of Economics 86: 79-95. doi:10.1111/saje.12154. EU Chamber of Commerce and Industry in Southern Africa. (2016) Discussion Paper 1: Property Rights, March. Farole, T. (2016). Factory Southern Africa?: SACU in Global Value Chains - Summary Report (English). Washington, D.C.: World Bank Group. Available from: http://documents.worldbank.org/curated/en/973351468195001238/Factory-Southern-Africa- SACU-in-global-value-chains-summary-report. Foster, V. and Briceño-Garmendia, C. (2010). Africa's Infrastructure: A Time for Transformation. s.l.: World Bank. Gaulier, G.G., Santoni, D., Taglioni, D. and Zignago, S. (2013). Market Shares in the Wake of the Global Crisis: The Quarterly Export Competitiveness Database. Banque de France Working Paper No. 472. Paris: Banque de France. Gumede, S. and Chasomeris, M. (2015). “Maritime Port Pricing and Governance in South Africa: Trends and Stakeholder Comments.” Journal of Economic and Financial Sciences 8(1): 52. Hausmann, R., Klinger, B., Roberto, J. and Lopez-Calix, J. (2010). Export Diversification in Algeria. Trade Competitiveness of the Middle East and North Africa. Washington, DC: World Bank: 63-102. Havenga, J., Simpson, Z. and Goedhals-Gerber, L. (2017). “International Trade Logistics Costs in South Africa: Informing the Port Reform Agenda.” Research in Transportation Business & Management 22: 263-275. doi:10.1016/j.rtbm.2016.08.006. Havenga, J.H., Simpson, Z.P., King, D., de Bod, A. and Braun, M. (2016). Logistics Barometer South Africa 2016. Stellenbosch: Stellenbosch University. 66 International Trade Centre. (2017). SME Competitiveness Outlook 2017 The Region: A Door to Global Trade. Geneva: International Trade Centre. Invest SA. Available from: http://www.investsa.gov.za/one-stop-shop/ [Accessed 09/01/2018] ITAC. Available from: http://www.itac.org.za/pages/services/tariff-investigations, accessed 8th December, 2017. Japan External Trade Organization(JETRO). (2017). 2016 JETRO Survey on Business Conditions of Japanese Companies in Africa. Tokyo: JETRO. Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: MacMillan: 161-162. Khanna, T. and Palepu, K. (2010). Winning in Emerging Markets: A Roadmap for Strategy and Execution. Boston: Harvard Business Press. Kreuser, F. and Newman, C. (2016). Total Factor Productivity in South African Manufacturing Firms (No. 2016/41). WIDER Working Paper. Mamburu, M. (2017). Defining High-Growth Firms in South Africa (No. 107). World Institute for Development Economic Research (UNU-WIDER). Matthee, M., Rankin, N. and Bezuidenhout, C. (2017). Labour Demand and the Distribution of Wages in South African Manufacturing Exporters (No. 2017/11). WIDER Working Paper. Matthee, M., Rankin, N., Webb, T. and Bezuidenhout, C. (2017). “Understanding Manufactured Exporters at the Firm‐Level: New Insights from Using SARS Administrative Data.” South African Journal of Economics 86: 96–119. doi:10.1111/saje.12158. McCarthy, C. (2014). “Industrial Policy in Southern African regional integration and development.” Tralac Working Paper No. S14WP02/2014, May 2014. Mulalo, M. (2017). Defining High-Growth Firms in South Africa (No. 2017/107). WIDER Working Paper. Mullan, C. (2018). Strategy Awards 2017 Winners. Available from: https://www.fdiintelligence.com/Rankings/fDi-Strategy-Awards-2017-Invest-Hong-Kong- leads-the-way. [Accessed 09/01/2018] Mussachio, A. and Werker. E. (2016). “Mapping Frontier Economies.” Harvard Business Review 94(12): 40-48. National Planning Commission. (2012). National Development Plan 2030: Our Future – Make it Work. National Planning Commission, Government of South Africa: 20. Newman, D. and Hewson, M. (2017). How Global Success of One-Stop Shops for Investors can Lift SA. Available from: https://www.businesslive.co.za/bd/opinion/2017-10-12-how- global-success-of-one-stop-shops-for-investors-can-lift-sa/ [Accessed 09/01/2018] 67 Ngarachu, A., Draper, P. and Owino, K. (2017). Are Private Sustainability Standards Obstacles to or Enablers of SME Participation in Value Chains? Insights from South Africa and Kenya. Pretoria: GEG Africa. NWU School of Business and Governance. (2017). Policy Uncertainty Index. [Online]. Available from: http://commerce.nwu.ac.za/files/files/TRADE/Media/News%20Print/PUI%20- %202Q2017%20-%20Final.pdf [Accessed 23 October 2017]. OECD. (2017). OECD Economic Surveys. South Africa: OECD. OECD. (2017). OECD Economic Surveys: South Africa 2017. Paris: OECD Publishing. Available from: http://dx.doi.org/10.1787/eco_surveys-zaf-2017-en Parliament of the Republic of South Africa. (2017). Report of the High Level Panel on The Assessment of Key Legislation and The Acceleration of Fundamental Change, Pretoria: Parliament of the Republic of South Africa. Peter, D., Qobo, M. and Krogman, H. (2015). An African International Relations Strategy for Gauteng Province, Part 1: Core Elements. Tutwa Consulting. Pieterse, D., C. Kreuser, F. and Gavin, E. (2016). Introduction to the South African Revenue Service and National Treasury Firm-Level Panel, WIDER Working Papers, No. 42/2016, UNU-WIDER, Helsinki. Pieterse, D., Farole, T., Odendaal, M. and Steenkamp, A. (2016). Supporting Export Competitiveness through Port and Rail Network Reforms: A Case Study of South Africa. Washington, DC: World Bank Group. Pretorius, J. (1997). The Effect of Conditions in the Transport Sector on the Competitiveness of South African Industries in Foreign Markets. (Doctoral dissertation, Stellenbosch: Stellenbosch University). Purfield, C.M., Farole, T. and Im, F. (2014). South Africa Economic Update: Focus on Export Competitiveness. South Africa economic update; issue no. 5. Washington, DC; World Bank Group. Available from: http://documents.worldbank.org/curated/en/453211468101954705/South-Africa-economic- update-focus-on-export-competitiveness. SADC. (2014). Consolidated Protocol on Trade, Version July 2014. SADC. (2015). SADC Industrialization Strategy and Roadmap. SADC Secretariat. Gaborone: Botswana. Sakoschek, S., Fuesgen, I. and Bertra, C. C. (2017). Business Climate Survey 2016: EU Trade and Investment in South Africa. Johannesburg: EU Chamber of Industry and Commerce of Southern Africa (NPC). 68 Schenoni, L.L. (2017). “The Southern African Unipolarity.” Journal of Contemporary African Studies 36(2): 207-228. doi:10.1080/02589001.2017.1364355. Siphamandla, Z. (2012). “South Africa in Southern Africa: A Perspective.” Frederich Ebert Stiftung Peace and Security Series. Southern Africa Trade Hub. (2012). Technical Report: 2012 Audit of the Implementation of the SADC Protocol on Trade: USAID Southern Africa. Available from: http://www.sadc.int/files/5413/7415/0039/Customs_Audit_2011.pdf; http://satradehub.org/images/stories/downloads/pdf/technical_reports/tech20120531_sadc_tra de_audit_report.pdf Southern African Stainless Steel Association. Available from: http://sassda.co.za/tesa-team- export-south-africa-meeting-25-26th-october-2016/ [Accessed 08/01/2018] Statement Made at the Fifth SA Tomorrow Investor Conference in New York, Cited in https://www.businesslive.co.za/bd/national/2017-11-10-policy-certainty-and-less-corruption- could-heal-the-economy-says-lesetja-kganyago/ Teravaninthorn, S. and Raballand, G. (2009). Transport Prices and Costs in Africa: A Review of the Main International Corridors. Washington, DC: World Bank. Trade and Investment Kwa-Zulu Natal. Available from: http://www.tikzn.co.za/investsa/ [Accessed 09/01/2018] Tregenna, F. and Kwaramba, M. (2014). “An Institutional Analysis of the International Trade Administration Commission of South Africa.” Journal of Economic and Financial Sciences 7(S): 641-660. Vickers, B. and Ajulu, C. (2008). South Africa’s Economic Diplomacy: Trade and Investment Promotion. Institute for Global Dialogue. Vilakazi, T. and Paelo, A. (2017). Understanding Intra-Regional Transport: Competition in Road Transportation between Malawi, Mozambique, South Africa, Zambia, and Zimbabwe. United Nations University World Institute for Development Economics Research. World Bank Group. (2015). Factory Southern Africa? SACU in Global Value Chains. Summary Report, November. World Bank Group (2017). South Africa Economic Update: Innovation for Productivity and Inclusiveness. SAEU No. 10, September. 69