What Is the Impact of Imports by Stage of Production and the Manufacturing Sector Investment Growth?

Abstract

Do trade openness and import penetration regimes matter for the manufacturing sector output and employment growth in South Africa? Evidence indicates that both output and employment growth decline in response to positive trade openness and import penetration shocks. Trade openness and import penetration regimes matter for the manufacturing sector output and employment responses. The manufacturing sector output and employment decline sharply followed by a prolonged decline in the high trade openness and import penetration regimes compared to the low regimes. The high import penetration regime amplifies the adverse impact of the high trade openness regime. The import penetration ratio increases in response to positive shocks to the R/US$ appreciation, whereas it declines due to R/US$ exchange rate depreciation. The R/US$ exchange rate depreciation and appreciation shocks exert different effects on the manufacturing sector output and employment growth. The R/US$ exchange rate depreciation shocks amplify the impact of the low import penetration regimes shocks on the manufacturing sector output and employment growth. The policy implication is that there is case to lower the import penetration levels in order to support the manufacturing sector output and employment growth. Policymakers can pursue an exchange rate policy that facilitates the expenditure switching role of the exchange rate, the substitution between home and foreign traded goods and the adjustment of the trade account.