The need for exports

Consider that in an economy there are really three distinct ‘players’ that take the stage to help produce national income, namely private consumers, local businesses and government. The total productive activities of these three role players combine to generate a nation’s gross domestic product (GDP), a measure of the total market value of all final goods and services produced within a given country in a given period of time. Private consumption spending is measured by ‘C’ (referred to as consumption expenditure), while business expenditure is measured by ‘I’ (referred to as investment expenditure) and is embodied in spending on capital equipment (and in this regard, the construction of a new home is also considered to be a capital investment). At the same time, all government expenditure is measured by ‘G’ (standing for government expenditure). These three items all contribute positively to increasing the GDP figure.

There is one further key component of GDP and that is the international or global activities of these three role players. Individuals, businesses and governments can and do trade with other individuals, businesses and governments from around the world and these trading activities have a significant impact on a nation’s GDP. If these trading activities result in a net inflow of income to the country (that is, if exports > imports), then the influence is positive and the effect is to increase GDP. On the other hand, if these activities result in a net outflow of income from the country (that is, if exports < imports), then the influence is negative and the result is to shrink GDP.

The total relationship of all of these factors is embodied in the equation:
GDP = C + I + G + (X-M)

This simple economic equation highlights the importance of exports in a country’s economy. It is thus not surprising that most nations take extraordinary steps to encourage and promote exports.

Unfortunately, South Africa has been in a deficit situation in respect of the country’s international trade since 2002 with imports outstripping exports by a significant margin. In fact, this deficit has been growing every year and in 2007 the deficit was -R145 billion (representing 7.5% of GDP).

Hard-earned cash is thus being drained from the local economy and paid over to our trading partners in exchange for the goods they supply us. Of course we need these imported goods to fuel the growing local economy, but the local boom cannot last for ever. Unfortunately, our exports (especially of non-commodity goods) have not kept up. Instead, local firms have rather focused their attention on the booming (and easier to serve) local market at the expense of exports.

We should add that a trade deficit per se is not always a bad thing and many successful countries (such as the US and Australia) have and continue to run trade deficits, with imports being used to stimulate the local economy. But these countries have had relatively large and/or strong domestic economies (notwithstanding the recent events in the US), that have served as the powerhouse behind the growth in their respective economies.

The South African economy has been experiencing good times and we have enjoyed a long stretch of positive growth in our GDP, exceeding 5% in 2007. This growth has been driven mainly by domestic demand as the economy takes up the challenge offered by the post-apartheid environment and because of a burgeoning black middle class. But two questions come to mind; how long can this boom last and why should we not grow our exports at the same time?

Already, the clouds appear to be forming on the economic horizon. The inflation rate and interest rates have been climbing, largely as a result of the impact of the massive hike in the oil price and also because of continued and unstemmed consumer spending (mainly on credit terms). The financial crisis in the US and the slowdown in global trade is likely to impact on South Africa’s economy negatively.

We need to grow our economy faster and we therefore need more exports

The Government has emphasised the need to generate jobs and improve the lot of its citizens and to this end, the economy needs to grow. One way of achieving this growth, as we have pointed out above, is by increasing our exports. While we do not adhere to the argument that it should be exports at the cost of everything else, there is no reason why we cannot grow our exports at the same time as giving much needed attention to other key areas of our economy.

Firstly, the latest WTO figures (in US dollar terms) show that South Africa’s total exports (and merchandise exports) have fallen as a share of total world exports (or merchandise exports) to less than 0.47% (or 0.48%) in 2006, down from 0.51% (or (0.54%) in 1996.¹ Indeed, if one goes back to 1945, South Africa’s share of world exports then was more than 2%. We have clearly lost ground and appear to be continuing to do so.

This does not mean that our exports are not growing. In fact, in 2006 South Africa’s merchandise exports grew by 13.1% over the previous year. However, they are simply not growing at the same pace as the rest of the world - in 2006, for example, world merchandise exports grew by 15.4%. Asia, in particular, is outpacing the rest of the world.

The growth in South Africa’s merchandise exports appears to be continuing with 2007 showing a 23.3% rise in exports in rand terms over 2006 (Reserve Bank figures ² ). If we delve deeper into South Africa’s trade figures, we find that the growth in service exports has been declining in US dollar terms since 2003 (from 67% growth in 2003 down to 7.5% growth in 2006). Nevertheless, South Africa’s share of world service exports has generally been on the increase since 1996, rising from 0.38% in 1996 to 0.43% in 2006. While this is a positive trend, service exports are only a small component of total South African exports – about 17% – and have not been able to stop the decline in South Africa’s share of total world exports (down from 0.51% in 1996 to 0.47% in 2006).

Another concern we have is when we examine the composition of South Africa’s exports, we find that only about 16% of our exports can be considered to be high value-added products.³ The rest are either minerals, agricultural products, or low-level manufactured goods (such as foodstuffs, yarns and fabrics, base chemicals, wire cable, raw skins, formed metal plates, etc.). We are thus feeding the high-tech factories in other parts of the world. This does not bode well for the future.

On the import side, South Africa has been booming, with South Africa’s growth in merchandise imports increasing from 9.3% in 1997 to 24% in 2006. Service imports and total imports have also grown at a similar pace. Furthermore, our share of world imports has also grown over this period. The reason for this is clear; it has been to drive domestic growth. A growing import account is also not necessarily a ‘bad thing’ especially if these imports are of a capital nature. Happily, our imports appear to be more capital goods rather than consumption goods and this bodes well for the future. These capital goods can be used to produce additional products domestically.

South Africa’s terms of trade

On the positive side, South Africa’s terms of trade have improved steadily since 2000. This suggests that the relative price of exports is outpacing the relative price of our imports. This implies an increase in the real purchasing power of domestic production which can be seen to be equivalent to a transfer of income into the country from the rest of the world. Unfortunately the major driver behind the growth in the relative price of exports has been the booming world demand for commodities of late. This demand for commodity goods is also reflected in the composition of South Africa’s merchandise exports. While this may be positive for South Africa in the short term, it represents an unstable situation where we tend to be dependent on highly dynamic commodity markets, instead of building brands and long-term markets.

International Trade Statistics, 2007: World Trade Organisation

SARB Quarterly Bulletin, September 2008: SA Reserve Bank

This was a somewhat rough estimation done quickly and cannot be considered to be exact or scientific, but it does provide some indication of the low value-add nature of South Africa’s exports.

3. This was a somewhat rough estimation done quickly and cannot be considered to be exact or scientific, but it does provide some indication of the low value-add nature of South Africa’s exports.