Bec 321 Assignment 1 Group 15

ECO 321 ASSIGNMENT 1 : GROUP 15
NAME (S) STUDENT NUMBER (S)

NDLOVU. S 201924638
GENSTANE. S 201910327
SIGWILI. Y 201927147
MPHAHLENI. S 201823402
KASI. L 201806121
LATONI. N 201927787
SOKHASI. N A 201927622
Assignment question.
Question 2
a) In light of the above, you are required to review literature (both theoretical and empirical) on
the impact of international trade on economic growth in South Africa.
b) Based on the findings from the literature reviewed in (2a), recommend relevant policies to the
South African policy makers.
Table of Contents
1.0. Introduction.........................................................................................................................1
2.0. Literature review.................................................................................................................1
2.1. Theoretical framework....................................................................................................1
2.1.1. Classical economist: International trade and economic growth...............................2
2.1.2. Neoclassical economist: International trade and economic growth..........................2
2.1.3. Post-classical growth before Solow..........................................................................2
2.2.0. Empirical review: South African Literature.................................................................3
3.0. Summary.............................................................................................................................4
4.0. Policy recommendations.....................................................................................................4
5.0. Reference list.......................................................................................................................6

1.0. Introduction
The nexus between international trade and economic growth is one of the topical issues
around the globe. Krugman (1994) defines international trade as when two or more countries
engage in the exchange of goods and services, whereby the exchange takes the form of
imports and exports. It’s also been argued that, for a country to engage in a beneficial
exchange with other nations it needs to have a competitive advantage over countries in that
space. In this regard, international trade can foster economic growth from the supply side
(Malefane,2018).
In the South African context, it can be noted that during the Apartheid era, it was a closed
economy with very limited trade that was taking place with the rest of the world. The end of
the Apartheid era in 1994 brought a new chapter to the economic performance of South
Africa as the economy started engaging in trade agreements with the international space
(Ziramnba,2011). However, with trade agreements brought to life after the Apartheid era
South Africa experiences underperforming exports in the international space due to lack of
competitiveness. In this regard, several economics experts asserted the need for South Africa
to engage in an export promotion program so that it can realise the fruits of engaging in
exchange on the international profile (Angomoko, 2017). This study will investigate both the
theoretical and empirical review on the impact of international trade on the economic growth
of South Africa and further instigate the relevant policies on trade for the South African
policy makers.
2.0. Literature review
The purpose of this section is to assess the impact of international trade on economic growth
based on a literature review. With the theoretical review being evaluated first, followed by
the empirical research on the nexus of international trade and economic growth particularly
on the South African economy.
2.1. Theoretical framework

The theoretical perspective on international trade and economic growth presented in this
section provides a background to the empirical investigation. Literature has drawn a great
deal of attention to the theoretical associations between trade and economic growth, despite
the controversy surrounding the actual effects they have on welfare. There has always been
1
an argument in support of trade dating back to classical school of economic thoughts, which
supports free trade and specialization (Medina-Smith, 2000).
2.1.1. Classical economist: International trade and economic growth

In the realm of international trade, the classical economists notably Smith and Ricardo
established the fundamental principles of absolute and comparative advantages respectively
which stressed specialisation and division of labour depending on what the country is good at
and exporting the surplus. According to the classical theory assertion this would enable
mutual advantages between countries and contribute to better economic growth
(Krugman,1994). Classical theory added that through international trade, the internal market
was able to overcome its small size, and the external market's reach was expanded. In this
way, international trade serves as a dynamic force capable of enhancing the technical skills
and abilities of workers and enabling each participating country to enjoy economic growth
(Afonso,2001). As specified by Mills (1848), cited in Afonso (2001), international trade is
viewed as a direct consequence of production that drives economic growth.
2.1.2. Neoclassical economist: International trade and economic growth

Neoclassical theory built on classical thought to advance the connection between
international trade and economic growth. In the context of the neoclassical theory of
international trade, the Heckscher-Ohlin model pointed out that as countries open up to free
trade, mutual gains, as well as a spur to global economic growth, go hand in hand. It was
Heckscher-Ohlin's belief that the most important factor that determines trade between nations
is the differences in factor endowments and factor prices. Based on the model, it is
recommended that developing countries that are labour abounding specialize in primary as
allowed by their factor endowment (Usman, 2011).
2.1.3. Post-classical economist: International trade and economic growth

The assertion of Marshall (1890) cited in Afonso (2001) indicates that international trade
drives economic growth in the sense that it expands the market and leads to greater global
production and an increase in internal and external economies, which contribute to increased
income for the economy as a whole. As with Smith, he regarded the market as the constraint
on the level of labour division and productivity, when considering economic growth. As a
result, he examined the interaction between industries in the process of economic growth, the
development of new industries due to specialization caused by market extension, and the
influence of these factors on technological advancement.
2
As expounded throughout the history of economic thought, from mercantilism to classical
and modern theories of trade have argued the case for a world of commerce. It is believed by
many international economists that the Heckscher-Ohlin theory is an improvement over
Ricardo's theory of comparative advantage, since trade is the result of differences in
comparative cost, which is also the result of differences in relative factor endowments
between countries. Heckscher Ohlin theory is relevant since it links international economic
structure to global trade patterns beginning with comparative advantage. Based on this model,
we can explain how global trade affects the growth of economies (Ratombo,2019).
Based on the foregoing theoretical framework, all of the theories indicate that international
trade is beneficial for the trade partners, and it is recommended that each country should
specialize in a commodity that it is good at so as to reap the mutual benefits in the
international space. It is important that countries cooperate in order to meet the demands of
their citizens and to promote economic growth. As Angomoko (2017) points out, it is from
these theories that nations are able to identify the commodities they should produce to
increase their foreign exchange reserves in order to acquire foreign goods and boost their
economic growth. The theories state that any country can benefit from trading, provided it
chooses the right kind of commodity and trading partners.
2.2.0. Empirical review: South African Literature

There has been a growing body of empirical research on the relationship between
international trade and economic growth over the past few years. A great deal has been
written about the impact of international trade on economic growth in South Africa, as
evidenced by this literature. The empirical evidence supports Sun and Heshmati (2010)'s
contention that international trade promotes economic growth by increasing capital
accumulation, upgrading industrial structure, and facilitating technological and institutional
advancement.
Ziramba (2011) utilized the Toda and Yamamoto technique of the Granger causality test to
assess the impact of South Africa’s export variables namely merchandise exports, gold and
service exports on the real gross domestic product which is an indicator of economic growth.
It has been found that exports have a greater impact on economic growth than imports,
despite trade playing a significant role (Osei-Assibey and Dikgang,2020).
Likewise, Greis et al. (2009), conducted a study to test how far does the financial deepening,
and trade openness are causally linked to economic development in 16 sub-Saharan African
3
countries. The results of the Hsiao-Granger causality method indicate that trade opens up the
possibility of economic growth. Based on these findings, it has been found that South Africa's
economic growth and its trade opening are strongly linked (Malefane, 2018).
From an empirical standpoint, it has been found that South Africa’s international trade is
greatly reversed by international competition, its trade policy, and real exchange rates. In this
regard, Angomoko (2017) cited United States International Trade Commission 2008 as
evidence of strong foreign competition for South African exporters where it reported that
South African and Chinese exports became stiff between 2002-2006.
3.0. Summary
From the foregoing, the theoretical and empirical literature was examined regarding
international trade's impacts on economic growth. The empirical findings reveal that South
Africa’s economic growth is positively related to the export variable of international trade.
This means that with international trade, South Africa's economy can be better off than it
would be without trade.
4.0. Policy recommendations

Several policy implications can be drawn from the study's empirical findings. From the
empirical analysis, exports in South Africa have been seen to have an impact on economic
growth. It is therefore recommended that policymakers focus on policies that promote
exports. Exports and competitiveness must be the driving forces behind such initiatives. In
this way, strategic trade agreements with distinct partners may assist South Africa in
increasing its exports to different markets without compromising the use of the tariff policy.
As a way of increasing South Africa's competitiveness, it should move up the ladder of
traditional comparative advantage to export high technology manufactured goods. For this to
occur, the government must take steps to promote the industrial sector through, inter alia, IT,
education, and skills development.
As a second recommendation, South African policy makers should consider liberalization

trade policies as an instrument to promote economic growth, diversify exports, create
employment, and reduce poverty. As a result, expanding liberalization in the service sector
and other industries where nominal and effective protection are still high makes sense. This
results from the fact that tariff liberalization is capable of boosting productivity, export
performance, and diversification.
4
There are and can be other aspects of trade policy that the policy makers might consider:
provision of sound infrastructure, education, a competitive exchange rate, a tax credit for
investment in research and development, a reduction in levels of anti-export bias, and the
implementation of international trade shows.
5
5.0. Reference list
Afonso, O. (2001). The Impact of International Trade on Economic Growth. Vol. 6. FEP
Working Papers, 2001
Angomoko, B. B. (2017). The effect of Chinese economic growth on South Africa's exports to

China (Doctoral dissertation, University of South Africa).
Feddersen, M., Nel, H., & Botha, F. (2017). Exports, capital formation and economic growth
in South Africa. African Review of Economics and Finance, 9(1), 213-244.
Gries, T., Kraft, M., & Meierrieks, D. (2009). Linkages between financial deepening, trade
openness, and economic development: causality evidence from Sub-Saharan Africa. World
development, 37(12), 1849-1860.
Krugman, P. R. (1994). Rethinking international trade. MIT press.
Malefane, M. R. (2018). Impact of trade openness on economic growth: Empirical evidence

from South Africa.
Marshall, A. (1890). Principles of Economics. Macmillan, 8th ed.
Medina-Smith, E. J. (2000). Is the export-led growth hypothesis valid for developing

countries? A case study of Costa Rica. Policy Issues in International Trade and
Commodities, 7.
Mills, J. S. (1848). Principles of Political Economy, with some of their Applications to Social
Policy. London: John Parker and West Strand.
Ratombo, N. E. (2019). The effects of international trade on economic growth in South

Africa (2000Q1 to 2017Q2) and econometric view (Doctoral dissertation).
Osei-Assibey, K., & Dikgang, O. (2020). International Trade and Economic Growth: The
Nexus, the Evidence, and the Policy Implications for South Africa. The International Trade
Journal, 34(6), 572-598.
Sun, P., & Heshmati, A. (2010). International trade and its effects on economic growth in
China.
Usman, O. A. (2011). Performance evaluation of foreign trade and economic growth in

Nigeria. Research Journal of finance and accounting, 2(2), 4-13.
6
Ziramba, E. (2011). Export-led growth in South Africa: Evidence from the components of
exports. Studies in Economics and Econometrics, 35(1), 1-13.

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ECO 321 ASSIGNMENT 1 : GROUP 15

NAME (S) STUDENT NUMBER (S)

2.1. Theoretical framework....................................................................................................1

2.1.1. Classical economist: International trade and economic growth...............................2

2.1.2. Neoclassical economist: International trade and economic growth..........................2

2.1.3. Post-classical growth before Solow..........................................................................2

2.2.0. Empirical review: South African Literature.................................................................3

4.0. Policy recommendations.....................................................................................................4

5.0. Reference list.......................................................................................................................6

2.0. Literature review

2.1. Theoretical framework

2.1.1. Classical economist: International trade and economic growth

2.1.2. Neoclassical economist: International trade and economic growth

2.1.3. Post-classical economist: International trade and economic growth

2.2.0. Empirical review: South African Literature

4.0. Policy recommendations

As a second recommendation, South African policy makers should consider liberalization

Angomoko, B. B. (2017). The effect of Chinese economic growth on South Africa's exports to

Krugman, P. R. (1994). Rethinking international trade. MIT press.

Malefane, M. R. (2018). Impact of trade openness on economic growth: Empirical evidence

Marshall, A. (1890). Principles of Economics. Macmillan, 8th ed.

Medina-Smith, E. J. (2000). Is the export-led growth hypothesis valid for developing

Ratombo, N. E. (2019). The effects of international trade on economic growth in South

Usman, O. A. (2011). Performance evaluation of foreign trade and economic growth in

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