Recognising the role of tradable service exports in the South African economy – An untapped resource?

ABSTRACT

The contribution of services embedded in manufactured products in world trade has greatly increased since the 1980s. So too has services as a direct export. South Africa is an interesting case of an emerging economy that has struggled to diversify its export basket beyond basic commodities, despite having a robust domestic service sector. The article assesses the contribution of service exports to international trade in South Africa. Balance of payments data confirm that services trade is modest compared to merchandise trade. Exports in higher-value services show strong growth, although off a low base. Yet certain kinds of international linkages are not counted in official trade statistics. These service firms are also more productive, report higher output and usually pay better wages than those focused on the domestic market – as mirrored in studies of manufacturing exports. We advocate for further research and greater recognition of tradable service exports in trade policy.

KEYWORDS:

• Tradable services
• services exports
• AfCFTA
• South Africa
• services trade policy

Acknowledgements

The authors gratefully acknowledge research funding from the World Bank Group as part of a research programme ‘Leveraging Trade for South Africa's Recovery and for Inclusive Long-Term Growth’.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 World Bank, World Bank Open Data Portal (Washington DC: World Bank Group, 2023) https://data.worldbank.org

2 Prakash Loungani et al. ‘World Trade in Services: Evidence from A New Dataset’ (IMF working papers 17(77), International Monetary Fund, Washington DC, 2017) https://doi.org/10.5089/9781475589887.001.

3 World Trade Organisation (WTO), World Trade Report 2019: The Future of Services Trade, (Geneva: WTO, 2019).

4 WTO, World Trade Report 2019.

5 Gaurav Nayyar, The Service Sector in India's Development, (Cambridge: Cambridge University Press, 2014); and Loungani, ‘World Trade in Services’; and Richard Baldwin and Rikard Forslid, ‘Globotics and Development: When Manufacturing is Jobless and Services are Tradable’ (NBER working papers No. 26731, National Bureau of Economic Research, Cambridge, 2020), https://doi.org/10.2139/ssrn.3535321).

6 OECD, Services Trade Policies and the Global Economy (Paris: OECD Publishing, 2017) https://doi.org/10.1787/9789264275232-en; and WTO, World Trade Report 2019; and Nayyar, Gaurav, Mary Hallward-Driemeier and Elwyn Davies, At Your Service? The Promise of Services-Led Development (Washington, DC: World Bank, 2021); and United Nations Economic Commission for Africa (UN-ECA), Cities: Gateways for Africa’s Regional Economic Integration (Addis Ababa: UN-ECA, 2022); and United Nations Conference on Trade and Development (UNCTAD), Economic Development in Africa Report 2022: Rethinking the Foundations of Export Diversification in Africa – The Catalytic Role of Business and Financial Services (Geneva: UNCTAD, 2022).

7 Jens Matthias Arnold, Aaditya Mattoo and Gaia Narciso, ‘Services Inputs and Firm Productivity in Sub-Saharan Africa: Evidence from Firm-Level Data,’ Journal of African Economics 17 (2008): 578–99, https://doi.org/10.1093/jae/ejm042; and Bernard Hoekman and Ben Shepherd, ‘Services Productivity, Trade Policy and Manufacturing Exports,’ The World Economy 40, no. 3 (2017): 499–516, https://doi.org/10.1111/twec.12333; and Nayyar, Hallward-Driemeier and Davies, At Your Service.

8 Cecilia Heuser and Aaditya Mattoo, ‘Services Trade and Global Value Chains,’ (Policy Research Working Paper 8126, World Bank, Washington, DC: World Bank, 2017).

9 Andrew Bernard, J. Bradford Jensen, Stephen Redding and Peter Schott, ‘Firms in International Trade,’ Journal of Economic perspectives 21, no. 3 (2007): 105–30; and Marc Melitz and Stephen Redding, ‘Chapter 1 Heterogeneous Firms and Trade,’ Handbook of International Economics 4 (2014): 1–54, https://doi.org/10.1016/b978-0-444-54314-1.00001-x

10 Joachim Wagner, ‘Exports, Foreign Direct Investments and Productivity: Are Services Firms Different?’ The Service Industries Journal 34, no. 1 (2014): 24–37; and Martin Falk and Eva Hagsten, ‘Exporter Productivity Premium for European SMEs,’ Applied Economics Letters 22, no. 12, (2015): 930–3.

11 Anthony Black, ‘Industrial Policy in South Africa,’ in The Oxford Handbook of the South African Economy, eds. Arkebe Oqubay, Fiona Tregenna and Imraan Valodia (Oxford: Oxford University Press, 2022).

12 Justin Barnes, Anthony Black and Kriengkrai Techakanont, ‘Industrial Policy, Multinational Strategy and Domestic Capability: A Comparative Analysis of the Development of South Africa’s and Thailand’s Automotive Industries,’ The European Journal of Development Research 29, no. 1 (2017): 37–53, https://doi.org/10.1057/ejdr.2015.63

13 Antonio Andreoni et al., ‘Framing Structural Transformation in South Africa and Beyond’ in Structural Transformation in South Africa, eds. Antonio Andreoni et al. (Oxford: Oxford University Press, 2021), 1–27, https://doi.org/10.1093/oso/9780192894311.003.0001

14 Haroon Bhorat, Christopher Rooney and Francois Steenkamp, ‘Understanding and Characterizing the Services Sector in South Africa’ in Industries Without Smokestacks: Industrialization in Africa, eds. Richard Newfarmer et al. (Oxford: Oxford Scholarship Online, 2018); and Justin Visagie and Ivan Turok, ‘Firing on all cylinders: Decomposing regional growth dynamics in South Africa,’ South African Journal of Economics 90, no. 1 (2022): 57–74, https://doi.org/10.1111/saje.12303; and Philippe Burger, ‘The Macroeconomics of South African Economic Growth’ in The Oxford Handbook of the South African Economy, eds. Arkebe Oqubay, Fiona Tregenna and Imraan Valodia (Oxford: Oxford University Press, 2022).

15 Susara Jansen van Rensburg et al., ‘A Strategic Framework to Expand South Africa’s Services Trade,’ South African Journal of International Affairs 27, no. 3 (2020): 1–23, https://doi.org/10.1080/10220461.2020.1825231

16 Nimrod Zalk, ‘What is the Role of Manufacturing in Boosting Economic Growth and Employment in South Africa?’, Econ 3×3 Article, February 2014, www.econ3×3.org; and Haroon Bhorat et al., ‘Understanding and Characterizing the Services Sector in South Africa’ (Development Policy Research Unit Working Paper 2018: 3, DPRU, Cape Town, 2018).

17 Jansen van Rensburg et al., ‘A Strategic Framework’.

18 World Bank, Enterprise Surveys: South Africa 2020 Country Profile (Washington DC: World Bank Group, 2020) www.enterprisesurveys.org.

19 Ejaz Ghani and Stephen O’Connell, ‘Can Service Growth be a Growth Escalator in Low Income Countries?’ (World Bank Policy Research Working Paper 6971, World Bank, Washington DC, 2014). http://hdl.handle.net/10986/19352; and Joseph Stiglitz, ‘From Manufacturing-Led Export Growth to a Twenty-First Century Inclusive Growth Strategy: Explaining the Demise of a Successful Growth Model and What to Do about It’, in Inequality in the Developing World, eds. Carlos Gradín, Murray Leibbrandt and Finn Tarp (Oxford University Press Online: 2021), https://doi.org/10.1093/oso/9780198863960.003.0012; and Nayyar, Hallward-Driemeier and Davies, At Your Service.

20 Dani Rodrik, ‘Premature Deindustrialization,’ Journal of Economic Growth 21, no. 1 (2016): 1–33; and Mary Hallward-Driemeier and Gaurav Nayyar, ‘Beyond Production: The Role of Services,’ in Trouble in the Making? The Future of Manufacturing-led development, ed. Mary Hallward-Driemeier and Gaurav Nayyar (Washington, DC: World Bank, 2021); and Karl Aiginger and Dani Rodrik, ‘Rebirth of Industrial Policy and an Agenda for the Twenty-First Century,’ Journal of Industry, Competition and Trade 20, no. 2 (2020): 189–207, https://doi.org/10.1007/s10842-019-00322-3

21 OECD, Trade in Value Added: South Africa: OECD TiVA Country Notes (Paris: OECD Publishing, 2022), http://oe.cd/tiva

22 Hallward-Driemeier and Nayyar, ‘Beyond Production’; and Nayyar, Hallward-Driemeier and Davies, At Your Service.

23 Bernard Hoekman and Dirk Willem te Velde, Trade in Services and Economic Transformation, (London: Overseas Development Institute; 2017); and Judith Fessehaie, Leveraging the services sector for inclusive value chains in developing countries, (Geneva: International Centre for Trade and Sustainable Development, 2017); and OECD, Services Trade Policies.

24 Baldwin and Forslid, ‘Globotics and Development’; and Nayyar, Hallward-Driemeier and Davies, At Your Service.

25 Baldwin and Forslid, ‘Globotics and Development’; and Ivan Turok and Justin Visagie, ‘Building Malls or Metros? South Africa’s Exports of Tradable Urban Services to the Rest of Africa,’ (WIDER Working Paper 2020/94, United Nations World Institute for Development Economics Research, Helsinki, 2020).

26 Reena das Nair, ‘The Internationalisation of Supermarkets and the Nature of Competitive Rivalry in Retailing in Southern Africa,’ Development Southern Africa 35, no. 3 (2018): 315–33.

27 Nayyar, Hallward-Driemeier and Davies, At Your Service.

28 Nayyar, Hallward-Driemeier and Davies, At Your Service.

29 Bhorat et al., ‘Understanding and Characterizing the Services Sector’; and Jansen van Rensburg et al., ‘A Strategic Framework’.

30 Department of Trade, Industry and Competition (DTIC), Integrated National Export Strategy (Export 2030) – Excellence into Emerging and Traditional Markets, (Pretoria: DTIC, 2015); and DTIC, Industrial Policy Action Plan 2018/19–2020/21, (Pretoria: DTIC, 2018); and National Treasury, Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa, (NT: Pretoria, 2019).

31 DTIC, Annual Incentive Report 2019/20, (Pretoria: DTIC Industrial Financing Branch, 2020).

32 Jansen van Rensburg et al., ‘A Strategic Framework’.

33 Alan Hirsch, Brain Levy and Musa Nxele, ‘Politics and Economic Policymaking in South Africa since 1994,’ in The Oxford Handbook of the South African Economy, ed. Arkebe Oqubay, Fiona Tregenna and Imraan Valodia, (Oxford: Oxford University Press, 2022).

34 Turok and Visagie, ‘Building Malls or Metros?’

35 United Nations, Manual on Statistics of International Trade in Services 2010 (New York: United Nations Department of Economic and Social Affairs, 2010).

36 WTO, World Trade Report 2019.

37 For a detailed account of the BaTIS methodology see Antonella Liberatore and Steen Wettstein, The OECD-WTO balanced trade in services dataset (BMP6 edition) (Paris: WTO and OECD, 2021). This approach leverages all available official data, and combines these with derivations, backcasting techniques, interpolation, predictions derived from regression models, and cross-checking of mirror data in records of exports and imports between countries

38 See World Bank, ‘Enterprise Surveys: South Africa 2020’ for a review of survey methodology and overview.

39 Marianne Matthee et al., ‘Understanding Manufactured Exporters at the Firm-Level: New Insights from Using SARS Administrative Data,’ South African Journal of Economics 86, no. S1 (2018): 96–119, https://doi.org/10.1111/saje.12158

40 The World Bank do provide estimates of TFP from their enterprise surveys but only for firms in manufacturing where more detailed balance sheet information is collected.

41 See Lawrence Edwards, Neil Rankin and Volker Schoer, ‘South African Exporting Firms: What do we Know and What should we Know?’ Journal of Development Perspectives 4 (2008): 67–92; and Friedrich Kreuser and Carol Newman, ‘Total Factor Productivity in South African Manufacturing Firms,’ South African Journal of Economics 86, no. S1 (2018): 40–78, https://doi.org/10.1111/saje.12179; and Matthee et al., ‘Understanding Manufactured Exporters’; and Caio Mazzi, Gideon Ndubuisi and Elvis Avenyo, ‘Exporters and Global Value Chain Participation: Firm-level Evidence from South Africa,’ (WIDER Working Paper 145/2020, United Nations World Institute for Development Economics Research, Helsinki, 2020), https://doi.org/10.35188/unu-wider/2020/902-0

42 Kreuser and Newman, ‘Total Factor Productivity’; and Matthee et al., ‘Understanding Manufactured Exporters’.

43 Matthee et al., ‘Understanding Manufactured Exporters’.

44 Other business services would include: (i) research and development services; (ii) professional and management consulting services; (iii) trade-related services; (iv) operating leasing services; and (v) technical and other business services.

45 Turok and Visagie, ‘Building Malls or Metros?’.

46 The consumption of services by African tourists visiting South Africa should be captured under ‘travel’ in balance of payments records (ie, mode 2). However these transactions might also be understated and the different types of service activities (e.g. health tourism) are not available in official records.

47 Daniel Graham and Stephen Gibbons, ‘Quantifying Wider Economic Impacts of agglomeration for transport appraisal: Existing evidence and future directions,’ Economics of Transportation 19 (2019): 100121, https://doi.org/10.1016/j.ecotra.2019.100121

48 The downside is that the sample sizes are now much smaller (particularly for logistics and digital services) which leads to unavoidably large standard errors.

49 See Edwards, Rankin and Schoer, ‘South African Exporting Firms’; Kreuser and Newman, ‘Total Factor Productivity’; and Matthee et al, ‘Understanding Manufactured Exporters’.

Additional information

Funding

This work was supported by World Bank Group.

Notes on contributors

Justin Visagie

Justin Visagie is a Senior Research Specialist at the Human Sciences Research Council (HSRC), South Africa, and a Senior Lecturer in the Department of Economics and Finance, University of the Free State, Bloemfontein, South Africa.

Ivan Turok

Ivan Turok is a Distinguished Research Fellow at the HSRC, and a NRF Research Professor in the Department of Economics and Finance at the University of the Free State, Bloemfontein, South Africa.