The new economic geography of SADC free trade area

The current implementation of a free trade area in SADC has given rise to concerns that the present location of industry in the region will be adversely affected. Specifically, many of the smaller and less-developed countries fear that this change will result in a loss of their industry towards the more developed members, and particularly towards South Africa. This study uses the framework of the new economic geography to address these concerns. The new economic geography is a body of theory that has arisen in the last decade and allows for a dynamic analysis of the process of regional integration. Studies of such dynamic effects in the developing country context are exceedingly scarce, and particularly so in southern Africa. Another area of little research is in the comparison of the evolving industrial structure of different regional blocs. Thus, in response to this gap in the literature and in order to address the concerns of polarisation of industry within the SADC region, a two-pronged empirical approach is taken. The study first conducts a review of the spatial distribution of industry within SADC from 1970 to 1999. This is achieved through the calculation and examination of industrial locational Gini coefficients, measuring the relative degree of concentration of 28 ISIC (rev 2) industries for the years 1970, 1980, 1985, 1990, 1995 and 1999. Secondly, an empirical comparison is conducted with other blocs that are in the process of deepening regional integration, namely the European Union and Mercosur. Again, this is done through the calculation of locational Gini coefficients for individual industries for all three blocs at five year intervals from 1980 to 1995, and then for 1999. The average level of concentration within SADC is found to increase steadily from 1970 to 1990. Between 1990 and 1995, the level of concentration increases further, but at a lower rate, and, by 1999 industry begins to disperse. The Gini coefficient is a relative measure, and thus does not measure the absolute level of concentration. Thus, much of the increase in concentration seen is towards peripheral countries. To further interpret the Gini, the changes in concentration are compared to the absolute changes in manufacturing employment in South Africa. From this analysis, eight of the 28 industries analysed show particular tendencies to concentrate in the periphery. These are beverages, textiles, wearing apparel, paper and products, rubber products, other non-metallic mineral products, transport equipment, and professional and scientific equipment. Likewise, another six industries become more concentrated in South Africa over this time, namely food products, printing and publishing, industrial chemicals, petroleum refineries, miscellaneous petroleum and coal products, and electrical machinery. According to the Gini coefficient, the tobacco industry is by far the most concentrated, while the wood products industry is the most dispersed. It is also found that scale-intensive industries tend to be among the most concentrated. In the cross-bloc comparison, Mercosur has the lowest level of aggregate concentration with an average Gini of 0.08 in 1999. This compares with Ginis of 0.28 for the EU, and 0.22 for SADC. The EU has the largest increase in concentration over the period, while the concentration in Mercosur falls during the 1980s, increases in the mid 1990s and then falls again by 1999. A common theme, however, between all three blocs is a trend towards dispersion in the late 1990s. This is particularly apparent in SADC and Mercosur where the Gini decreases in value, while in the EU, the Gini only increases marginally in this period. Other studies of the EU have indicated that industry was starting to disperse at this time. This finding would be more apparent at a greater level of industrial disaggregation. The following industries are found to be agglomerated above the average level in all three blocs: tobacco, miscellaneous petroleum and coal products, and pottery china and earthenware. Conversely, transport equipment, paper and products, machinery except electrical, plastic products, rubber products, and fabricated metal products tend to be more dispersed across all three. Perhaps more interesting is that there appears to be some commonality between industries that become more agglomerated across all three blocs, while industries that dispersed tend to be region specific. The industries that show universal agglomeration tendencies are the highly sensitive wearing apparel and textiles industries, in addition to industrial chemicals, printing and publishing, iron and steel, and plastic products. In relation to SADC, the first two of these industries show an increased concentration in the periphery, as in the EU, while the remaining industries show tendencies to concentrate in the core. The new economic geography predicts that, as the presently high levels of transport costs begin to fall in SADC, industry will tend to concentrate in the core. However, the results of this study indicate that the effect on manufacturing is, to a large extent, sector specific, with some manufacturing industries concentrating in the core and others in the periphery. The study therefore concludes that the mass polarization of industry from the smaller countries in SADC towards South Africa is unlikely to occur with the further reduction in trade costs. Although certain industries may be attracted towards the core, the high degree of wage disparity in the region and present trade concessions from developed markets overseas towards the peripheral countries, will make these countries an attractive location, particularly for export orientated firms. Two main policy recommendations result from the study. Firstly, individual countries in SADC need to promote those industries that show concentration tendencies in their country. Secondly, in order for the periphery to maximize their gain from the free trade area, transport costs within the region need to be reduced rapidly and effectively