Export diversification in South Africa

The National Industrial Policy Action Plans (IPAP) released in 2007, 2011, 2012 and 2013 serve to identify and develop the sectors that South Africa should focus on in achieving faster growth and employment. The choice of these sectors in the various IPAP reports is not based on any substantive analysis as to where South Africa’s export potential lies. The ‘product space’ is an easy to use and comprehend analytical instrument which could be used to fill this gap.This blog serves to illustrate how this technique works and what it reveals. Fouche Venter

April 23, 2013

The four Industrial Policy Action Plans were released in 2007, 2011, 2012 and 2013 respectively. These documents were formed for the purpose of describing the implementation of the NIPF, each one scaling up on its predecessor. A large part of these action plans serve to identify and develop the sectors that South Africa should focus on in achieving the aforementioned objectives. Many of these sectors are already exporting products efficiently, others are not. Most are selected by virtue of their large employment and income multipliers. The choice of these sectors in the various IPAP reports is not based on any substantive analysis as to where South Africa’s export potential lies. The ‘product space’ is an easy to use and comprehend analytical instrument which could be used to fill this gap. This method is based on the assumption that if two products are “often” produced by the same country, it is possible that the underlying productive factors necessary for the efficient production of these goods are similar. This level of relatedness between two products is calculated as the conditional probability of a country having a Revealed Comparative Advantage (RCA) in good i given that it has an RCA in good j. The value of this probability is termed the ‘proximity’ and is a value between 0 and 1. The product space is constructed as a 5050 x 5050 matrix with each cell representing the proximity between two products (disaggregated according to the Harmonized Commodity Description Coding System at a 6-digit level). In order to find potential export products, it is first important to identify the products that South Africa is already producing efficiently (measured in terms of RCA). Once these products have been identified, the product space can be used in order to highlight products that South Africa might be able to diversify into. Using this methodology and strict criteria, we were able to come up with an initial list of products for priority attention, as shown in the table below.

Products South Africa is already exporting (description)	Current RCA (South Africa)	Products South African could be exporting (description)	Current RCA (South Africa)	Proximity (Global)
Platinum, in semi-manufactured forms	100.18	Ferro-vanadium, in granular/powder form	59.79	0.75
Dust & powder of other natural/synthetic precious/semi-precious stones (excl. diamonds)	81.25	Mixtures containing hydrobromofluorocarbons (HBFCs)	13.93	0.67
		Hand-operated spanners & wrenches, adjustable	1.20	0.67
Rhodium, unwrought/in powder form	61.05	Hexachlorobenzene & DDT (1,1,1-trichloro-2,2-bis(p-chlorophenyl)ethane)	5.64	0.80
		Iridium, osmium & ruthenium, unwrought/in powder form	38.89	0.80
		Imides & their derivatives other than saccharin & glutethimide (INN); salts thereof	0.02	0.67
		Photographic plates & film in the flat (excl. film for X-rays, instant print film), sensitised, unexposed, of any material other than paper/paperboard/textiles, with any side >255mm	0.03	0.67
		Wood sawn/chipped lengthwise, sliced/peeled, whether/not planed, sanded/end-jointed, of a thickness >6mm, of Sapelli	0.00	0.67
Ferro-vanadium, in granular/powder form	59.79	Platinum, in semi-manufactured forms	100.18	0.75
		Molybdenum wire	0.03	0.75
Iridium, osmium & ruthenium, in semi-manufactured forms	55.87	Watch movements, complete & assembled, electrically operated, n.e.s. in 91.08	0.04	0.75
Briquettes, ovoids & similar solid fuels manufactured from coal	54.21	Salts of oxometallic/peroxometallic acids (excl. of 2841.30-2841.80)	1.20	0.67
Palladium, in semi-manufactured forms	47.47	Aircraft launching gear & parts thereof deck-arrestor/similar gear & parts thereof	0.49	0.75
		Men’s/boys’ trousers, bib & brace overalls, breeches & shorts (excl. swimwear; excl. knitted/crocheted), of cotton	0.04	0.71
		Women’s/girls’ nightdresses & pyjamas, knitted/crocheted, of textile materials other than cotton/man-made fibres	0.02	0.71
		Scissors, tailors’ shears & similar shears, & blades therefor	0.04	0.71
		Processing units other than those of sub-heading 8471.41/8471.49, whether/not containing in the same housing one/two of the following types of unit : storage units, input units, output units	0.03	0.71
4-Methylpentan-2-one (methyl isobutyl ketone)	46.28	Babies’ garments & clothing accessories, knitted/crocheted, of cotton	0.03	0.71
Vanadium oxides & hydroxides	44.41	Machinery for the extraction/preparation of animal/fixed vegetable fats/oils having individual functions, n.e.s. in Ch.84	0.06	0.80
Apricots, prepared/preserved, whether/not containing added sugar/other sweetening matter/spirit, n.e.s.	43.25	Flat-rolled products of stainless steel, of a width of 600mm/more, not further worked than hot-rolled, not in coils, of a thickness >10mm	8.38	0.85
Platinum, unwrought/in powder form	42.07	Garments, n.e.s., knitted/crocheted, of man-made fibres	0.01	0.71
Iridium, osmium & ruthenium, unwrought/in powder form	38.89	Orange juice, frozen, unfermented & not containing added spirit, whether/not containing added sugar/other sweetening matter	1.05	0.80
		Tents, Of other textile materials, other than of synthetic fibres	0.69	0.80
		Woven fabrics of cotton, containing 85%/more by weight of cotton, of yarns of different colours, 3-/4-thread twill, incl. cross twill, weighing not >200g/m2	0.02	0.67
Unsaturated acyclic hydrocarbons (excl. of 2901.21-2901.24)	32.67	Wheat other than durum wheat; meslin	0.04	0.67
		Cathine (INN) & its salts	0.00	0.67
Palladium, unwrought/in powder form	30.06	Narrow woven fabrics (excl. of 5806.10-5806.32), other than goods of 58.07, of other textile materials	0.22	0.71

The first column shows goods in which South Africa currently shows a very high revealed comparative advantage (more than 30). The third column shows those goods that have a ‘proximity’ of at least 0.65 to these products (if a country has an RCA of more than 30 in good i, then at least 65% of the countries in the sample also had an RCA of greater than 1 in good j). It is these goods that South Africa should also be looking to export. The above list contains 27 products, some of which already are being exported quite extensively (as shown by the relatively high ‘current RCA’ in column 4), while others not at all. It is important to remember that the product space is based on probabilities, and by virtue of the nature of statistics, statistical anomalies will occur. There will be products in the list above that have no economic relationship even though the statistical relationship might suggest this is the case. Each of these products should therefore be independently evaluated in order to assess whether the analysis might hold in a South African context.