The Determinants of Intra-Regional Trade in Southern Africa with Specific Reference to South Africa and the Rest of the Region

The paper puts forward a case for more attention to be paid to fundamental structural factors that will determine the scope and success of any regional integration initiative in the Southern African Development Community (SADC). The paper provides a review of current estimates of trade potential in the region and contrasts this with the author's own estimates of intra-regional trade. A gravity model is used. The model examines how the reduction of trade transaction costs, the level of development and the size of an economy influences trade potential amongst countries. A major finding is that fundamental structural and economic factors such as the transaction costs of trading, the growth paths of economies and changes in per capita income should be the focus of regional integration rather than trade policy in its own right. The empirical results show that intra-regional trade in SADC is not low by international standards. When compared to regions such as the Southern African Customs Union (SACU) or Mercosur, actual South African exports are higher than estimated potential exports. However, the model indicates low trade volumes for combinations of countries in the SADC region. In particular, there is increasing scope for non-SACU countries to increase their exports to South Africa. These arguments have to be seen in the context of the impending Free Trade Agreement (FTA) in the SADC region. There is no question about the fact that an FTA will enhance the prospects for increasing intra-regional trade. However, it is important not to exaggerate the impact of a regional agreement. In other words, there is no substitute for national economic policies that are conducive to growth.