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Trade barriers to growth in South Africa: Endogenous investment-productivity-trade interaction

The relationship between foreign trade openness and growth is a challenge for economic analysis. Econometric approaches struggle with endogeneity of foreign trade and trade policy and endogenous interaction between investment and productivity. We offer an alternative route to identification and quantification of channels of effects based on calibration of a Ramsey growth model. The model is designed to reproduce the changing openness in South Africa 1960-2005. Productivity growth is assumed generated by innovation and adoption, and trade openness affects international productivity spillovers and catching up to the world technology frontier. International sanctions and protectionism are represented by a calibrated tariff equivalent, and the counterfactual elimination of the tariff equivalent shows large potential for GDP growth. According to our preferred parameterization increased trade share by 10% points raises GDP level over time by about 15%. Separating the effects of openness between investment and productivity we find that about 2/3 of the increase in GDP is due to increased productivity, working either directly or indirectly via investment profitability.