## 1. Duration and Intensity of Depreciation Spells, 2010–14

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### Background and macro context
- South Africa’s real effective exchange rate (REER) weakened by around 25 percent during January 2011–July 2014.
- South African exports grew about 4 percent over this period.
- Exports growth averaged about 82 percent of its trading partners’ imports growth during 2011–14.
- South Africa’s share of global exports fell by nearly 15 percent over the period.
- The current account deficit widened to levels close to 6 percent of GDP (from about 2 percent of GDP at the beginning of the period).

### Research question and contribution
- Main question: Why were South African exports insensitive to substantial REER depreciation in the post-global financial crisis years?
- Novelty: Use of firm-level monthly export data (January 2010–December 2014) to identify how supply-side structural constraints affect firms’ responsiveness to REER movements and external demand growth.
- Structural constraints examined: electricity gaps, labor-market regulation, and product-market rigidities.

### Micro-data highlights
- Data span: January 2010 to December 2014; sixty thousand reporting firms in 2013.
- SMEs are manufacturing-intensive: more than 85 percent of the goods exported by SMEs are manufactured products.
- SMEs’ export destinations: over 90 percent of SMEs’ exports are shipped to Sub-Saharan Africa (SSA).
- Large firms’ composition: almost half of large companies’ exports are mining products.
- Export share concentration: large firms account for more than 90 percent of export sales in the sample period.
- Transition dynamics:
  - nearly one quarter of active small firms in a given period are likely to become inactive in the following period;
  - the probability that a small firm will grow to become large in the following period is minuscule.

### Structural indicators construction (as used in analysis)
- Electricity gap: ratio of electricity consumption to production multiplied by sectoral electricity intensity (examples: agricultural intensity 0.316; mining intensity 0.634). Demand-to-supply ratio examples: 2010Q1 = 96.7; 2010Q2 = 100.8.
- Product market concentration: Herfindahl index (range 0 to 1); example: organic chemicals sector Herfindahl index = 0.64.
- Labor market rigidity: number of strike days per thousand workers multiplied by the unionization rate.
- Sector-specific external demand: computed using IMF WEO data.
- Relative prices and other macro variables: from South African Reserve Bank (SARB).

### Econometric approach
- Two-part empirical strategy:
  - Dynamic heterogeneous panel (panel ARDL / panel error-correction) to estimate short- and long-run responses of export sales to REER changes across heterogeneous sub-groups (aggregated up to two-digit sectors).
  - Fixed-effects panel regression at the firm level to quantify the impact of structural rigidities by interacting REER with structural indicators. Structural indicators normalized to zero mean and unit standard deviation.
- Time frequency: monthly (for some analyses) and quarterly (for firm-level regressions where applicable).

### Key empirical findings — sectoral long-run effects (Table 3)
- Long-run REER coefficients (expected negative sign) and external demand effects (expected positive sign) by group:
  - Top 50 Sectors: REER = -0.24; Demand = 0.19*** (REER (0.17); Demand (0.07))
  - Agriculture: REER = -0.40***; Demand = 0.20* (REER (0.15); Demand (0.11))
  - Mining & Metals: REER = -0.12; Demand = 0.41*** (REER (0.69); Demand (0.19))
  - Manufacturing: REER = -0.58***; Demand = 0.38*** (REER (0.25); Demand (0.12))
- Interpretation:
  - A one-percent depreciation of the REER could boost export sales by around 0.6 percentage point in the case of manufacturing exporters;
  - REER effects are not statistically significant for commodity exporters (mining) in the sample.

### Key empirical findings — firm-level structural interactions (Table 4)
- Baseline and augmented firm-level regressions (Export Revenues; quarterly; Observations = 1,726,688):
  - External Demand: 0.02*** (baseline) and 0.02*** (augmented)
  - Herfindahl Index: -9.77* (baseline) and -9.03* (augmented)
  - Diversification: 14.56*** (baseline) and 14.59*** (augmented)
  - Electricity Gap: -0.26 (baseline) and -0.43 (augmented)
  - Labor Condition: -1.66 (baseline) and -1.94 (augmented)
  - REER*Herfindahl Index (augmented): 0.48*
  - REER*Diversification (augmented): -0.25***
  - REER*Electricity Gap (augmented): 0.24**
  - REER*Labor Condition (augmented): 0.22***
- Interpretation of interactions:
  - All interactive terms are statistically significant and have the expected signs in the augmented specification.
  - Electricity-intensive sectors experienced lower export growth because of power shortages ("load shedding"), which limited firms’ ability to expand exports.
  - Labor market rigidities limited firms’ capacity to exploit depreciation-driven competitiveness gains.
  - Firms in more concentrated product markets showed lower responsiveness to REER depreciation, consistent with rigid cost structures.
  - Firms with greater product diversification benefitted more from depreciation (economies of scale in production and lower average trade costs).

### Magnitude and economic significance
- A one-standard deviation improvement in a structural indicator is associated with an increase in export elasticity by about fifty percent.
- An improvement in all four structural variables by half of a standard deviation would be associated with a doubling of exports’ responsiveness to REER depreciation.

### Synthesis of findings
- Supply-side structural constraints—electricity bottlenecks, limited competition in product markets, and binding labor-market rigidities—reduced the responsiveness of South African exporting firms to exchange rate depreciation during 2010–14.
- Manufacturing exporters were generally more responsive to REER changes than commodity-intensive exporters.
- SMEs, though accounting for a tiny share of total exports, were more sensitive to the rand depreciation because of their manufacturing orientation and regional trade (SSA).
- Large mining exporters, being energy-intensive and exposed to prolonged strikes, were unable to capitalize on depreciation to expand exports.

### Policy implications and conclusions
- Structural reforms in electricity, product market competition, and labor markets are macro-critical to enable full transmission of competitiveness gains from REER depreciation.
- In the presence of binding structural constraints, macroeconomic policy alone may have to compensate (e.g., by lowering domestic absorption) to reduce the current account deficit when external financial conditions tighten.
- Addressing structural constraints is essential to generate more growth and jobs, improve the external position, facilitate economic rebalancing, and allow macroeconomic policies to work more effectively.

### Suggested extensions (from the paper)
- Replicate the exercise using sector-specific ULC-based REER (unit labor costs), data permitting.
- Investigate the impact of the level, persistence, and volatility of REER on export performance.
- A cross-country firm-level analysis would be a valuable further contribution, data permitting.

*Source: IMF working paper content unit "1. Duration and Intensity of Depreciation Spells, 2010–14".*

### 1. Duration and Intensity of Depreciation Spells, 2010–14  __________________________4

### 1. Duration and Intensity of Depreciation Spells, 2010–14

### Background and macro context
- South Africa’s real effective exchange rate (REER) weakened by around 25 percent during January 2011–July 2014.
- South African exports grew about 4 percent over this period.
- Exports growth averaged about 82 percent of its trading partners’ imports growth during 2011–14.
- South Africa’s share of global exports fell by nearly 15 percent over the period.
- The current account deficit widened to levels close to 6 percent of GDP (from about 2 percent of GDP at the beginning of the period).

### Research question and contribution
- Main question: Why were South African exports insensitive to substantial REER depreciation in the post-global financial crisis years?
- Novelty: Use of firm-level monthly export data (January 2010–December 2014) to identify how supply-side structural constraints affect firms’ responsiveness to REER movements and external demand growth.
- Structural constraints examined: electricity gaps, labor-market regulation, and product-market rigidities.

### Micro-data highlights
- Data span: January 2010 to December 2014; sixty thousand reporting firms in 2013.
- SMEs are manufacturing-intensive: more than 85 percent of the goods exported by SMEs are manufactured products.
- SMEs’ export destinations: over 90 percent of SMEs’ exports are shipped to Sub-Saharan Africa (SSA).
- Large firms’ composition: almost half of large companies’ exports are mining products.
- Export share concentration: large firms account for more than 90 percent of export sales in the sample period.
- Transition dynamics: nearly one quarter of active small firms in a given period are likely to become inactive in the following period; the probability that a small firm will grow to become large in the following period is minuscule.

### Structural indicators construction (as used in analysis)
- Electricity gap: ratio of electricity consumption to production multiplied by sectoral electricity intensity (examples: agricultural intensity 0.316; mining intensity 0.634). Demand-to-supply ratio examples: 2010Q1 = 96.7; 2010Q2 = 100.8.
- Product market concentration: Herfindahl index (range 0 to 1); example: organic chemicals sector Herfindahl index = 0.64.
- Labor market rigidity: number of strike days per thousand workers multiplied by the unionization rate.
- Sector-specific external demand: computed using IMF WEO data.
- Relative prices and other macro variables: from South African Reserve Bank (SARB).

### Econometric approach
- Two-part empirical strategy:
  - Dynamic heterogeneous panel (panel ARDL / panel error-correction) to estimate short- and long-run responses of export sales to REER changes across heterogeneous sub-groups (aggregated up to two-digit sectors).
  - Fixed-effects panel regression at the firm level to quantify the impact of structural rigidities by interacting REER with structural indicators. Structural indicators normalized to zero mean and unit standard deviation.
- Time frequency: monthly (for some analyses) and quarterly (for firm-level regressions where applicable).

### Key empirical findings — sectoral long-run effects (Table 3)
- Long-run REER coefficients (expected negative sign) and external demand effects (expected positive sign) by group:
  - Top 50 Sectors: REER = -0.24; Demand = 0.19*** (standard errors in parentheses: REER (0.17); Demand (0.07))
  - Agriculture: REER = -0.40***; Demand = 0.20* (REER (0.15); Demand (0.11))
  - Mining & Metals: REER = -0.12; Demand = 0.41*** (REER (0.69); Demand (0.19))
  - Manufacturing: REER = -0.58***; Demand = 0.38*** (REER (0.25); Demand (0.12))
- Interpretation: A one-percent depreciation of the REER could boost export sales by around 0.6 percentage point in the case of manufacturing exporters; REER effects are not statistically significant for commodity exporters (mining) in the sample.

### Key empirical findings — firm-level structural interactions (Table 4)
- Baseline and augmented firm-level regressions (Export Revenues; quarterly; Observations = 1,726,688):
  - External Demand: 0.02*** (baseline) and 0.02*** (augmented)
  - Herfindahl Index: -9.77* (baseline) and -9.03* (augmented)
  - Diversification: 14.56*** (baseline) and 14.59*** (augmented)
  - Electricity Gap: -0.26 (baseline) and -0.43 (augmented)
  - Labor Condition: -1.66 (baseline) and -1.94 (augmented)
  - REER*Herfindahl Index (augmented): 0.48*
  - REER*Diversification (augmented): -0.25***
  - REER*Electricity Gap (augmented): 0.24**
  - REER*Labor Condition (augmented): 0.22***
- Interpretation of interactions:
  - All interactive terms are statistically significant and have the expected signs in the augmented specification.
  - Electricity-intensive sectors experienced lower export growth because of power shortages ("load shedding"), which limited firms’ ability to expand exports.
  - Labor market rigidities limited firms’ capacity to exploit depreciation-driven competitiveness gains.
  - Firms in more concentrated product markets showed lower responsiveness to REER depreciation, consistent with rigid cost structures.
  - Firms with greater product diversification benefitted more from depreciation (economies of scale in production and lower average trade costs).

### Magnitude and economic significance
- A one-standard deviation improvement in a structural indicator is associated with an increase in export elasticity by about fifty percent.
- An improvement in all four structural variables by half of a standard deviation would be associated with a doubling of exports’ responsiveness to REER depreciation.

### Synthesis of findings
- Supply-side structural constraints—electricity bottlenecks, limited competition in product markets, and binding labor-market rigidities—reduced the responsiveness of South African exporting firms to exchange rate depreciation during 2010–14.
- Manufacturing exporters were generally more responsive to REER changes than commodity-intensive exporters.
- SMEs, though accounting for a tiny share of total exports, were more sensitive to the rand depreciation because of their manufacturing orientation and regional trade (SSA).
- Large mining exporters, being energy-intensive and exposed to prolonged strikes, were unable to capitalize on depreciation to expand exports.

### Policy implications and conclusions
- Structural reforms in electricity, product market competition, and labor markets are macro-critical to enable full transmission of competitiveness gains from REER depreciation.
- In the presence of binding structural constraints, macroeconomic policy alone may have to compensate (e.g., by lowering domestic absorption) to reduce the current account deficit when external financial conditions tighten.
- Addressing structural constraints is essential to generate more growth and jobs, improve the external position, facilitate economic rebalancing, and allow macroeconomic policies to work more effectively.

### Suggested extensions (from the paper)
- Replicate the exercise using sector-specific ULC-based REER (unit labor costs), data permitting.
- Investigate the impact of the level, persistence, and volatility of REER on export performance.
- A cross-country firm-level analysis would be a valuable further contribution, data permitting.

*Source: IMF working paper content unit "1. Duration and Intensity of Depreciation Spells, 2010–14".*

### References

### References

### Academic articles and journal papers
- Behar, Alberto, and Lawrence Edwards, 2004, “Estimating Elasticities of Demand and Supply for South African Manufactured Exports Using A Vector Error Correction Model,” Centre for the Study of African Economies Series WPS/2004-04. England: University of Oxford.
- Bahmani-Oskooee, M., and Ratha, A, 2004, “The J-curve: A Literature Review,” Applied Economics, 36(13), 1377-1398.
- Berman, N., and Martin, P, 2012, “The Vulnerability of Sub-Saharan Africa to Financial Crises: The Case of Trade,” IMF Economic Review, 60(3), 329-364.
- Chor, D., and Manova, K, 2012, “Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis,” Journal of International Economics, 87(1), 117-133.
- Cuñat, A., and Melitz, M. J, 2012, “Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage,” Journal of the European Economic Association, Vol. 10, No. 2, pp. 225-254.
- Edwards, L., and Schoer, V., 2002, “Measures of Competitiveness: A Dynamic Approach to South Africa’s Trade Performance in the 1990s,” South African Journal of Economics, Vol. 70, No. 6, pp. 1008 –1046
- Edwards, L., and Golub, S., 2004, “South Africa’s International Cost Competitiveness and Exports in Manufacturing,” World Development, Vol. 32, No. 8, pp. 1323 – 1339.
- Edwards, L., and Lawrence, R., 2006, “South African Trade Policy Matters: Trade Performance and Trade Policy,” NBER Working Paper No. 12760 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Edwards, L., and Garlick, R., 2008, “Trade Flows and the Exchange Rate in South Africa,” MPRA Paper No. 36666.
- Golub, S., and Ceglowski, J., 2002, "South African Real Exchange Rates and Manufacturing Competitiveness," South African Journal of Economics, Vol. 70, No. 6, pp. 1047-1075.
- Narayan, Seema, and Paresh Kumar Narayan, 2010, “Estimating Import and Export Demand Elasticities for Mauritius and South Africa,” Australian Economic Papers, 49:3, 241-252.
- Pesaran, M. H., 2006, “Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, 74(4), 967-1012.
- Pesaran, M. H., and R. Smith, 1995, “Estimating Long-Run Relationships from Dynamic Heterogeneous Panels,” Journal of Econometrics, 68(1), 79-113.
- Pesaran, M. H., and Y. Shin, 1998, “An Autoregressive Distributed-lag Modelling Approach to Cointegration Analysis,” Econometric Society Monographs, 31, 371-413.
- Pesaran, M. H., Y. Shin, and R. P. Smith, 1999, “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels,” Journal of the American Statistical Association, 94(446), 621-634.
- Saint-Paul, Gilles, 1997, “Is Labour Rigidity Harming Europe's Competitiveness? The Effect of Job Protection on the Pattern of Trade and Welfare” European Economic Review, 41(3), 499-506.
- Sekkat, K., and Varoudakis, A, 2000, “Exchange Rate Management and Manufactured Exports in Sub-Saharan Africa,” Journal of Development Economics, 61(1), 237-253.

### Working papers, toolkits, and books
- Chudik, A., Mohaddes, K., Pesaran, M. H., and M. Raissi, 2013, “Debt, Inflation and Growth-Robust Estimation of Long-Run Effects in Dynamic Panel Data Models,” CESifo Working Paper No. 4508.
- Purfield, Catriona, and Thomas Farole, 2014, South Africa Economic Update: Focus on Export Competitiveness. Washington, DC: The World Bank Group.
- Reis, José Guilherme, and Thomas Farole, 2012, Trade Competitiveness Diagnostic Toolkit. Washington, DC: The World Bank Group.

### Institutional reports and national publications
- South Africa Department of Labour, 2015, Industrial Action Annual Report, September. (Pretoria: South Africa Department of Labour)
- South African Reserve Bank, 2014, Quarterly Bulletin No. 273, September. (Pretoria: South African Reserve Bank)

*Source: _wp1624 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1624.pdf_