Three Empirical Essays on Trade Reform in Post Apartheid South Africa

Abstract

This dissertation examines the trade reform experience in South Africa's (SA) manufacturing sector during the first post apartheid decade, from 1994 until 2004. During this period SA implemented an intensive trade reform policy particularly in the manufacturing sector. Average Nominal Tariff Rates and average Effective Tariff Rates decreased from pre-reform levels of 20% and 48% respectively in 1993 to 7% and 13% in 2004, with large dispersions across the different sub-industries. The core of this work explores the impact of this trade reform on the sector's labour and product market. In this dissertation We examine three novel questions regarding the impact of trade policy in SA. In Chapter 1 Do Unions Matter? Trade Reform and Manufacturing Wages in South Africa I investigate the effect of nominal tariff cuts on industry wage differentials using labor force data for the period from 1995 to 2004. This study extends the existing literature in two respects: firstly, we control for the potential effect of labor market institutions, such as collective bargaining power, in assessing the relationship between tariffs and industry wages. Secondly, we account for general equilibrium effects by controlling for the impact of changes in effective tariffs rates. We find that on the one hand, only wages in industries with levels of unionization beyond a certain threshold were adversely affected by tariff cuts. This negative effect is exacerbated by the extent of sectoral union power. The reported large magnitudes of the tariff impact on wages is in line with the considerably high markups documented for South Africa. On the other hand we find some evidence suggesting that wages in industries with union power below the threshold were positively affected by the tariff cuts. In Chapter 2 Efficiency Gains from Trade Reform: Foreign Input Technology or Import Competition? Evidence from South Africa we extend the empirical trade literature examining the effect of trade reform, proxied by the reductions in Nominal Tariff Rates (NTR), on productivity, the latter estimated as the production function residual. We examine the different channels by which tariff cuts affect productivity growth. In the context of the South African trade reform experience, using industry level data for the manufacturing sector and covering the reform period from 1994 to 2004, we disentangle the differential effect of increased foreign competition, proxied by reductions in NTR, and that of the imported technology, proxied by the reductions in Input Tariff Rates (ITR), on productivity growth. Our measure of efficiency growth controls for the effect of tariff reductions on markups. The results suggest that the efficiency difference between foreign and domestic inputs have the major effect on productivity gains. Declines in ITR significantly raise productivity growth compared to an insignificant effect for NTR. Additionally, we find that higher protection rates are associated with higher markups, albeit this finding is not robust across all specifications. In Chapter 3 Heterogenous Trade Barrier Effects: What Can We Learn From a Disaggregated Gravity Model? we relax the unrealistic assumption commonly imposed in gravity model estimations of equal elasticity of trade flows with respect to trade barriers across sectors and regions by using disaggregated industry level trade flows for South Africa's manufacturing sector and we test for heterogenous elasticities due to: (1) variations in the level of firm heterogeneity across sectors, and (2) differences in the size of trading partners. In line with theoretical predictions we find that the negative elasticity of exports to trade barriers increases for sectors with a higher level of firm homogeneity, supporting international trade models with heterogenous firms. Furthermore, we find that the negative elasticity of imports to trade barriers decreases for trading partners with larger export potential, emphasizing the objective of minimizing fixed costs of trading that is related to the number of countries with which South Africa, as an importer, trades.