World Bank suggests trade policy reforms for SA – report

The World Bank suggests key trade policy reforms for South Africa in a new report, saying international trade can be a powerful force for economic growth and poverty reduction, while also strengthening the economy’s resilience to shocks.

In a report titled Unlocking South Africa’s Potential: Leveraging Trade for Inclusive Growth and Resilience, the World Bank says the report aims to support trade policy dialogue with the government.

It explores reforms to promote trade that can support robust, inclusive, and green economic growth after years of unprecedented supply-chain disruptions during the Covid-19 pandemic and ongoing uncertainties related to increasing geopolitical tensions and climate change.

Over the past 15 years, South Africa has lost its economic growth momentum, systematically underperforming other middle-income economies, according to the World Bank. The bank says trade can play a key role in supporting higher and more inclusive growth as South Africa needs to raise its economic potential.

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Key findings from the World Bank

The researchers from the World Bank identified seven key findings, including South Africa’s export performance and areas for increased export potential:

• Firstly, South African exports declined in value, becoming less diversified and more focused on regional markets. The post-2010 period was characterised by declining diversification of manufactured exports, with exports increasingly dominated by resource-based manufactures and automotive products.
• Exports to African markets grew in significance but remain constrained by high barriers. While the African market is attractive as a destination as they are close and have future growth potential, trade barriers present a significant obstacle. Reducing barriers in Africa through the African Continental Free Trade Area (AfCFTA) therefore has significant potential to increase South Africa’s exports.
• While the services sector is the leading source of employment, services exports have been relatively stagnant and are still heavily concentrated in traditional transport and tourism sectors. South Africa’s services exports have been far smaller relative to the total merchandise trade, fluctuating between 10% and 20%. Between 2005 and 2019, knowledge-intensive services such as financial services, IT and telecommunications, grew most rapidly among services sub-sectors, signalling their potential.
• Exporter entry and survival rates deteriorated, while firms’ concentration levels increased, pointing to a “missing middle”. South African goods exports are dominated by a few firms. Export participation, which is measured by the number of exporters and export transactions, appears to be a key factor explaining South Africa’s post-2010 aggregate export performance.
• Trade costs increased, hurting the competitiveness of South African firms. Despite longstanding efforts to address transport and logistics constraints, these remain significant impediments to South Africa’s competitive advantage.
• Export growth can lead to significant improvements in jobs and wages but has mixed distributional impacts. An increase in firms’ export growth causes an increase in firms’ sales, real capital stock and total payroll growth.
• Finally, the economy-wide impact analysis of local content requirements and import tariffs on South Africa’s gross domestic product (GDP) and trade, as well as on that of its close trading partners in the region, cautions against using these instruments as the first best options. Instead of distorting industry purchasing decisions, the World Bank says South Africa should focus on the capabilities and competitiveness of domestic industries, both as exporters and

How to implement an ambitious reform agenda

The report also contains pointers on how to implement an ambitious reform agenda, emphasising that achieving better results will require a willingness to do things differently and support experimentation.

The researchers point out that In recent years, the DTIC (Department of Trade, Industry and Competition), and, in turn, trade policy, increasingly focused on localisation and increased domestic value addition. However, the report and other recent studies indicate the potential net gains from localisation remain limited in the context of low growth and especially constrained domestic demand over the medium term in South Africa and other SACU members and of the costs on consumers associated with restricting competitive imports.

According to the report, South Africa can increase its regional and global exports by modernising the policy framework, reviewing the appropriateness of the current institutional structure and identifying cross-government priorities for integration into Operation Vulindlela.

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Modernizing the trade policy framework

The researchers say there is an urgent need to review the overall trade policy framework dating from 2010, incorporating the state of the art in evidence, analysis and international best practices. The global political, economic and trade landscape has changed significantly over the past four years and needs an anchoring document to inform policies.

For example, they say, the current trade policy hardly touches on trade in services, let alone issues such as climate change. Moreover, most policymaking was done through sectoral master plans, while export constraints are often not sector-specific and require an institutional framework to address crosscutting issues that affect firms.

Reviewing the appropriateness of the current institutional structure

The definition of priorities through a new trade strategy in turn can inform an assessment of potential institutional changes and reforms that could improve outcomes, the researchers say. For example, there may be merit in broadening the National Trade Facilitation Committee and more actively integrating the private sector.

Another example is to strengthen the DTIC export promotion division and the industry export councils to identify market opportunities and to identify and mobilise to remove export constraints.

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Identifying cross-government priorities for integration into Operation Vulindlela

The researchers argue that major targeted interventions could be spearheaded within the context of Operation Vulindlela, which would provide additional visibility and ensure a cross-government mechanism with top-level government support.

The researchers concluded by saying as shown in the report, the foundations for trade to drive inclusive growth are in place. “South Africa has enormous potential to drive Africa’s integration and industrialisation forward, but the cost of inaction is high. Realising this potential will require a shared and coordinated effort by the country’s leadership, government departments and agencies, the private sector and workers.”