Reevaluating South Africas export sophistication from a valueadded perspective

The new way of looking at international trade not by measuring the face value of a product but by where the production takes place has changed the way we understand international trade. It also changes the way we assess how sophisticated a countrys export basket is. This paper uses the latest OECD Trade in Value Added database to re-evaluate cross-country export sophistication as defined in Hausmann et al. (2007). It finds that the gap between the export sophistication of high-income and low-income countries is wider from a value-added perspective. The global financial crisis (GFC) marked a fundamental shift in the ability of low-income countries to catch up: before the GFC, the export sophistication gap between high-income and low-income countries narrowed, but after the GFC export sophistication in high-income countries outgrew export sophistication in low-income countries. A decomposition analysis shows that these trends are underpinned by the basket effect, which measures the extent to which changes in a countrys export sophistication are caused by changes in its own export basket. The paper also finds that higher export sophistication positively affects future economic growth, even more so when measuring export sophistication from a value-added perspective. In the early 2000s, South Africa performed relatively well in value-added export sophistication but started to lag behind its peers after the GFC, with the basket effect dragging on export sophistication growth. Nevertheless, South Africa's key strategic industries, such as motor vehicles and chemicals, appear relatively sophisticated.