The impact of deregulation on competitiveness and market integration : the case of South Africa’s potato exports

Abstract

This study relates market reforms to agricultural trade performance, in particular the export performance of South Africa’s potato industry. The market reform considered here is the deregulation of South Africa’s potato market. Changes in producer prices and volumes of exports and imports are the most important outflows of deregulation that the study focuses upon. In the first part, this study provides an overview of deregulation in the potato industry. The objective of this study is to analyse the impact of deregulation on the competitiveness and the level of integration of the South African potato industry in relation to potato markets in the SADC region. Competitiveness is perhaps the most fundamental idea in economics. Agricultural industries often fight to protect or increase their market share both domestically and internationally. The method used here to measure competitiveness is the Revealed Trade Advantage (RTA), a measure based on the share of a country’s net trade in a specific commodity relative to its total international trade. The impacts are investigated individually for the three sub-categories of potatoes: fresh/table, processed and seed. Comparisons are made between South Africa and selected countries in the Southern African region. Basic trend analysis illustrates that domestic potato production has increased significantly over the past decade. Exports as a percentage share of production have increased consistently from the late nineties to reach 8% of domestic production by 2003. However, from 2004 onwards exports have decreased as the domestic informal market for fresh potatoes expanded at a tremendous pace. The results of the Real Trade Advantage (RTA) analysis reveal that South Africa’s potato (fresh) exports are the most competitive in the SADC region. Yet, the competitiveness of the potato supply chain in South Africa was found to be marginal as far as regional competitiveness is concerned. Thus, the potato supply chain exhibits a negative trend in competitiveness when moving from the primary to the processed product. Another approach to gain a better understanding of the possible impact of deregulation on agricultural markets is to analyse the extent to which domestic commodity markets respond to changes in international prices. Hence, the level of price transmission between local and foreign markets can be analysed. The analysis consists of a set of econometric applications. Annual producer prices of various trading nations are analyzed by testing mostly for the existence of long run equilibrium between the price series of the various nations and the dynamics of the relation between the prices and their causality. The results of the price transmission analyses show that the South African potato market is not well integrated with other regional potato markets, despite some trade occurring. This can partly be explained by the fact that over the past decade on average only 6 percent of all potatoes in the local market were exported into the region. Further more one has to take the tradability of the good into consideration when analysing the level of price transmission and, therefore, the level of integration of markets, In other words; can the good be traded or not? Potatoes (fresh) are perishable and bulky and therefore not easy to transport. Export trade in fresh potatoes involves high transport and transaction costs which complicate the process of price transmission across markets. Even in the exceptional cases (Mozambique and Mauritius) where market integration was detected, price transmission was found to occur from South Africa to these countries and not vice versa. Hence, from the empirical evidence of this study it seems as if domestic prices are determined by domestic supply and demand dynamics and regional exports do not influence the formation of prices in the domestic market. Although the liberalization of the South African potato market has led to the lowering of tariffs and non-tariff trade barriers, only weak evidence was found that there is some level of market integration between South Africa and its main trading partners in the SADC region. Copyright