The trade specialization of SANE: evidence from manufacturing industries.

• Author: Alessandrini, Michele
• Position: South Africa, Algeria, Nigeria and Egypt - Report

1. Introduction

   Africa is a continent of 53 countries, with a vast area of nearly 30 millions square kilometres and is the second most populated region in the world with about 930 million inhabitants. Within this region, the four biggest economies, South Africa, Algeria, Nigeria and Egypt, the so-called SANE, could become an engine of the economic growth in the continent in the same way that the emerging market giant economies of BRIC (Brazil, Russia, India and China) (3) are for the rest of developing world. According to Oshikoya (2007) and Kasekende, Oshikoya, Ondiege and Danash (2007), SANE economies account for almost a fifth and a third of Africa's land mass and population respectively, more than half of its total GDP in both nominal and purchasing power parity terms and more than half of its export, total trade, foreign direct investment and foreign reserves (see Table 1).

   The SANE countries benefit by different comparative advantage factors such as geographical location, resource endowment, market size and large participation of the private sector in the economy, which make these economies a growth pole for the regional economic prosperity and integration into the international market. If one considers geographical location, all of the SANE economies are situated in strategic positions within Africa. They are all coastal states and therefore enjoy a comparative advantage with respect to landlocked African countries, which facilitates the access to international market and reduces the trade costs. Moreover, their economies are blessed with huge natural resources: Nigeria, Algeria and Egypt are among the greatest producers of petroleum products and natural gas, while South Africa is one of the world leading exporters of minerals. Finally, these economies enjoy a market size relatively developed due to their higher GDP per capita and higher population compared to the rest of the continent, which can stimulate the internal market. Furthermore, the higher active participation of the private sector in the economy, such as the greater amount of FDI, makes the structure of SANE better diversified relative to the rest of the continent.

   These countries have experienced a changing policy towards an open-market economy and a number of attempts of privatization and trade liberalization reforms have been implemented since the early 1990s, after decades in which industrialization, viewed as the engine of long run growth (Kaldor, 1967), was thought to be attainable through import substitution strategies (Prebisch, 1962). However, the failure of the domestic market oriented development policy in Africa, as well as in other developing countries, opened a debate with many authors such as Bhagwati (1978), Krueger (1974 and 1978) and Balassa (1978, 1981 and 1982) pointing out that the development policies that protected the domestic market from foreign competition could not support sustainable growth. Furthermore, the new growth theory, since the contributions by Romer (1986), Krugman (1987) and Lucas (1988), stresses the importance of R&D, learning-by doing and human capital as critical factors in sustaining high growth rates in the long run: therefore, it follows that specialization plays a key role in the growth process of a country. These factors become crucial when an economy decides to open to the international market, in order to benefit from the gains of foreign trade: the scale and the reallocation effects of the international integration can be better achieved and exploited when a country is specialized in increasing returns to scale sectors (see, for example, Rivera-Batiz and Romer, 1991, Grossman and Helpman, 1991 and Young 1991). Moreover, foreign trade specialization is important not only for triggering the growth rate but also for the distribution of the advantages generated by the growth process: for example, Buccellato and Mickiewicz (2007) demonstrate that the regional oil and gas abundance in Russia is associated with high within-region inequality.

   The aim of this research is to study the pattern of foreign trade specialization in the countries of SANE. To capture the effects of the policies that have been implemented in these countries from the import substitution to the liberalization strategies, we concentrate our attention on the three digits industries in the manufacturing sectors covering the period from 1975 to 2005. Our main findings reveal that Algeria, Egypt, Nigeria and South Africa, although with some differences, have experienced few changes in their trade patterns and they are still far from a specialization model characterized by a comparative advantage in the most dynamic products. The persistence of natural resource based items among the most specialized sectors, and the absence of a significant shift towards categories with the highest technological content and the fastest growth in the world demand, reduce the potential gains derived from the economic integration of the SANE area with the rest of the world, with possible negative consequences not only for the four countries themselves but also for the rest of the continent.

   The structure of the paper is as follows. We start with section 2 by describing the process of economic growth and policy reforms implemented in the last decades in Africa and in the SANE economies. Section 3 examines the pattern of trade specialization of the countries by using the Lafay index (Lafay, 1992) with particular attention to the technological content of the products. Section 4 explores the specialization dynamics with different econometric instruments, in order to assess whether some changes have occurred in the pattern during the last three decades. Section 5 studies the evolution of the comparative advantages of the four economies in relation with the world demand. Finally, we summarize the main conclusions in Section 6.

2. Growth and economic reforms in Africa and SANE

   Most African countries, after gaining their independence during the 1960s, used import substitution policy as a strategy for the economic development and in order to maintain their political, economic, and social autonomy from the former colonial powers. This strategy was implemented using restrictive external trade policy and considerable protection for the new growing internal market in order to stimulate industries to move up from agriculture towards intermediate and capital goods. The main result of the reforms is evident by the improvement of the African manufacturing sector and the development of final goods industries. During the 1960s, the industrial sector grew significantly, with about a 8% annual growth in the added value (WTO 2005) and by 1965 the sector contributed about 15% or more of GDP in 15 countries (4) in the continent. As a consequence, the positive performance of the manufacturing sector enabled African countries to achieve an average annual growth of the GDP of about 5.5% during the period.

   However, at the beginning of the 1970s, the import substitution strategy started to show its failure in Africa as elsewhere in the developing world. The annual GDP per capita growth in Africa recorded a negative rate of about -0.2% between the second half of the 1970s and the first half of the 1990s (Table 2). The reasons of this collapse are several. First of all, Elbadawi (1996) noted that the role of the state was too much emphasized and the bad management of the governments belittled the role of the private sector and reduced the market discipline in the development process. Second, most African countries were involved in continuous wars, ethnic divisions and political instability (Easterly and Levine, 1997), which reversed the growth process and slowed down the economic development. (5) Third, the failure of the import substitution policies was driven by the weakness of the internal market and by the uneven distribution of income, with the wealthiest population concentrated in urban areas and with the rural areas, the most populated zones, characterised by a very low level of income, low agricultural productivity, and exclusion from modern consumption patterns (Nel, 2003). Finally, their difficulties were exacerbated by the debt crisis in the mid 1980s due to the aggravation of the terms of trade, which reduced the prices of African raw material exports, decreased the availability of financing resource and worsened trade balances (Kirkpatrick and Weiss, 1995).

   As a result of these failures, African countries sought help from international institutions that in exchange required the implementation of economic reforms towards privatization and liberalization. Between late 1980s and early 1990s, they started to implement structural adjustment programs in order to reduce the short-term imbalance between the supply and demand, and promote external market orientation policy through trade liberalization (see Engberg-Pedersen et al, 1996, Ebrill et al, 1999 and Ackah and Morrissey, 2005). As a result of the new growth strategy, Africa recovered from the long-run recession with an annual GDP per capita growth rate of 1.7% in the second half of the 1990s, which jumped to 2.3% between 2000 and 2004. Furthermore, the contribution of manufacturing on GDP increased to 26% in the 1990s and the import-export average growth rate increased from -1.2% per year in the 1980s to 2.8% during the 1990s (UNCTAD, 2005). However, although there is some evidence that growth has been higher in more open African economies (Onafowora and Owoye, 1998), (6) the change in the development model fell below expectations. First, the new growth pattern was sharply below the seven percent annual rate expected in order to halve poverty by 2015 (UN, 2007). Furthermore, the improvement in industry seems to have affected just a few countries such as Tunisia, South Africa, Egypt, and Morocco (UNECA, 2004a,b), that have succeeded also in diversifying their economies and that have benefited from the...