Implications of trade liberalisation and economic growth for South African agricultural industries
Teweldemedhin, Mogos Yakob
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The main aim of this study is to examine the impact of trade liberalisation on agriculture’s ability to contribute to economic growth and poverty reduction in South Africa. Several secondary objectives were examined that address: (i) the impact of trade liberalisation on the South African agricultural international trade performance; (ii) the relationship between trade liberalisation and poverty alleviation; (iii) the impact of trade liberalisation on Total Factor Productivity (TFP) in agricultural industries, and (iv) the short-term source of agricultural adjustments. Different methodologies were applied to achieve the specified sub-objectives, including calculation of the Intra-Industrial Trade (IIT) coefficients’ (with its key determinants) Gravity model, the Error Correction Vector Model and the Exact Maximum Likelihood method. The Gini coefficient of exports and imports was calculated as 0.55 and 0.62, respectively. The aggregate, with respect to the South African agricultural IIT, was higher than the average attributed to advanced countries. This shows that South Africa needs to reinforce the position of a bilateral agreement, which should be accompanied by regional or even multilateral liberalisation. The econometric analysis conducted on determinants of high IIT, gives a more magnified effect of the coefficients of export to import ratios and the TIMB (trade balance). If the South African industries implement and increase trade liberalisation on the diversified level of industrial specialisation, the IIT level would remain high, and significant economic gain might be achieved. The gravity model finding shows that all variables were significant at one percent, and carried the expected sign. Only the EU dummy variable had an inverse relationship, implying that the EU trade agreement creates a negative impact on export capacity for South African farmers. Essentially, South African farmers are not in a position to compete with the subsidised farmers of the development involved. These results have several important policy implications for South Africa. Firstly, trade agreements, whether implemented unilaterally or bilaterally, will enhance potential trade flows between South Africa and other countries or regions. Secondly, from an export promotion standpoint, the distance variable in the model’s results shows that importing countries’ per capita income is elastic and significant in determining export. Therefore, it is important for South Africa to maintain trade links and, in order to realise export potential, to extend these to high per capita income countries or regions. On the other hand, to avoid vulnerability and potential crises in EU regions or countries where the largest proportion of South Africa’s export is directed, it is important that South Africa continues to concentrate its export promotion efforts in other regions of the world. The study has also tested the impact of trade liberalisation using both the cross-sectional and time series approach, covering nine agricultural commodities; the cross-sectional approach covered the period of 1995-2007, and the time-series covered the period of 1970- 2007. Both approaches validate the above proposition with a high degree of statistical reliability. Finally, the study identified the main sources of agricultural economic growth by categorising the variables into five main areas: cyclical reversion, structural policies and institutions, stabilisation policies, cyclical volatility and external conditions. The components of the structural policies and institutions category were found to be statistically significant, and were positive at the specified significance level (only RDGDP was related negatively). This implies that the growth was achieved with improved education, financial depth and trade openness. However, the negative relationship of RDGDP shows that the sector is suffering from debt crisis. Subsequently, farmers need to follow an effective debt management system.