Evaluation of Competitiveness Indicators in Sudan During the Period ( )

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1 2011, Vol. 2, No. 3, pp ISSN Evaluation of Competitiveness Indicators in Sudan During the Period ( ) Omran Abbass Yousif Abdallah, University of Bakht Elruda, Sudan Abstract Comparativeness is the ability of a country or a company to proportionally generate more wealth than its competitors in world markets. The results show that there is cointegration relationship among trade balance, real exchange rate (), and real GDP (RGDP). The real GDP and real exchange rate affect competitiveness negatively. The implication of this result is that, real exchange rate got the right sign as is expected but real GDP was expected to have positive effect. According to this result, Sudan must improve the deficit of trade balance to adjust the Real Gross Domestic Product (RGDP). Key words: Competitiveness, RGDP,, Trade Balance, cointegration. Introduction Sudanese primary resources are agricultural, but oil production and export are taking an increasing importance since October Although the country is trying to diversify its economy crops, live stock and gum Arabic remain its major agricultural exports. Grain sorghum (dura) is the principal food crop, and wheat is grown for domestic consumption. Sesame seeds and peanuts are cultivated for domestic consumption and increasingly for export. Live stock production has vast potential, and many animals, particularly camels and sheep, are exported to Egypt, Saudi Arabia and other Arab countries. However, Sudan remains a net importer of food. Problems of irrigation and transportation remain the greatest constrains to a more dynamic agricultural economy. As a result of oil export total revenue generated from oil estimated around $ 500 million in , Sudan s current account entered surplus for the first time since independence. In 1993 currency controls were imposed, making it illegal to possess foreign exchange without approval. In 1999, liberalization of foreign exchange markets ameliorated this constraint somewhat. Export other than oil largely stagnant. Current the major economic problem is the severe shortage in foreign exchange caused mainly deterioration in the trade balance. This created sharp declines in industrial productivity as the production inputs practically stopped. These problems affected the standard of living and now many people are living below the poverty line. Joining the common market for Eastern and Southern Africa (COMESA), Sudan

2 Omran Abbass Yousif Abdallah economy has been faced with severe challenges with regard to competitiveness from member countries. In particular, agricultural and industrial products became less competitive with oil exportation and the Sudan currency appreciation. Furthermore the capital liberalization policies have increased the costs of production. As a result, Sudan s exports lost their competitiveness and profitability. So it may be useful to investigate: is this economic status lead to change in Sudan's trade balance? This research aims to fulfill the following objectives: 1 To examine the current state of Sudan economy competitiveness and to assess the relative importance of indicators used to measure competitiveness of Sudan economy. 2 To suggest some policies that would contribute towards the promotion of competitiveness of Sudan economy in the market. The hypotheses for this are: Hypothesis: 1 Real Effective Exchange Rate (), Trade balance, and Real Gross Domestic Product (RGDP), are indicators of competitiveness, and these indicators related with each others (i.e. co integration relationship). Hypothesis: 2 Trade Balance is useful indicators of economic performance, and depends positively on RGDP and negative on. Research Methodology This study uses both theoretical and empirical literature on competitiveness indicators, to examine different measurement of it and to determine the indicators that relevant with Sudan economy. In order to test the competitiveness indicators in Sudan and assessing the current situation, we will use vector error correction model, which depend on three steps, first we will check the stationary of the data, and then we will check co integration relationship between indicators. If we found co integration between indicators (Real Trade balance, and RGDP), then we will apply the Error Correction Model to illustrated the short-run equilibrium. We plan to use the estimated equation in the Model specified below the aim of assessing Sudan economy competitiveness. T t = a + B 1 y t + B 2 + U t Where: T : is Real Trade balance. Y : is Real Gross Domestic Product (RGDP). : is Real Effective Exchange Rate (). The Concept of Competitiveness and Competitiveness Indicators First: The Concept of Competitiveness Competitiveness is a word whose meaning is depleted with controversy. In microeconomic literature, competitiveness is primarily a firm s affair. Firms are competitive when they are able to sustain earning overtime and also able to increase both market share and earnings. It is in this context that Krugman s argument that nation do not compete, that only firms do, can be rationalized. But such is a limited view of competitiveness. Competitiveness should not be confused with absolute advantage, comparative advantage, competitive advantage of nations, all of which related to competitiveness but are not the same concepts (Porter 1990, Krugman 1994). 76

3 2011, Vol. 2, No. 3, pp Second: Competitiveness Indicators International competitiveness is a useful indicator of economic performance, but by itself it is insufficient for assessing appropriate level of exchange rate or other policies. Usually that factors determining economic competitiveness are expressed using different indicators. Some may stress a country s low costs or the level of its exchange rate, others a country s technological leaders or its growth rate (Boltho 1996, Frhlich 1989). a- Real Effective Exchange Rate and Competitiveness The indices of effective exchange rate, as suggested by Higgens (1970), Rohmbery (1976) and others. The discussion of the real exchange rate typically abstract from how to deal with the fact that countries trade with multiply partners. The calculation uses the following geometric weighted average to obtain the real exchange rate, for country I, relative to other countries. dc = II m i=[e dc1 P G1] W id.1/p 1Gd. (1) where: m is the n dc umber of trading partners or competitors of the home country. II denotes the product of the bracketed term over the m countries. The geometric averaging method is used where w id is appreciate weight for each foreign country (I = 1, m) the sum of weights must equal one as shows in equation (2). I=1 m w id = 1.(2) One frequently use measure of competitiveness is a real exchange rate index computed using consumer price indices, which takes into account both exports and imports. The real exchange rate plays very important role it is in principal equilibrating variable of a country s international trade and payments. If the country imposes new import restriction, the real demand for foreign currency will decline, and its real price should rise. Productivity advanced export goods should add to the real supply of foreign currency, those in import substitute goods should be a fall in the real price of foreign currency. b- Competitiveness and Trade Balance Competitiveness is the degree to which a nation can, under free and fair market conditions, produce goods and services that meet the test of international market while simultaneously maintaining or expanding the real income of its citizens (Gediminas Ramanacskas, 2004). Therefore the ultimate goal is to is increase the standard of living of a nation under free and fair market condition (thought foreign trade, production and investment).it refers to a country s ability to create, produce and, distribute and/or service products in international trade while earning rising returns on its resources (Scott and Lodge, 1985). c- Gross Domestic Product and Competitiveness The most general indicator of national competitiveness is GDP per capita. The higher the GDP per capita, the higher the standard of living (Teollisden & Keslitto 1986). Competitiveness indicators in Sudan A - Trade sector Sudan economy heavily dependent on the imports from the world markets to the local demand of essential, basic and strategic goods and services for both consumption and production processing. Therefore, imports play vital role in the economy namely about 50% of the total government revenues come from import duties, (except for the year 1873). The value of import always exceeded the value of exports. The average annual rate of exports growth was about 77 JBSQ 2011

4 Omran Abbass Yousif Abdallah 12.6% over the period and 31.9% and 10.7% during and respectively, on other hand, the average annual rate of imports growth was about 23.2% over the period and 26.3% and 35.2% over the period and respectively; as a result, the balance of the trade has deteriorated over the period The Sudan s balance of trade and balance of payment were in deficit throughout the period , with the exception of few years. Sudan balance of payments vulnerability stems from the fluctuation in Sudan exports caused by the decline in the international demand for the primary exported products, the decline in the productivity, and rising of imports bills together with low prices of national exports in the international markets. B - Gross Domestic Product Growth Rate Over the period the Sudan s GDP at current prices grew at 19.3 % on average per annum, whereas during GDP. Grew by 39.5% and 76% on an average for the whole period. Moreover, real GDP growth rate for the same period grew at average rate 8.5% during and 1.9% and 6.4% for respectively. These low levels of GDP growth rate in real terms indicate that the high level of GDP growth at current prices level in the last decades (bank of Sudan). C- Real Effective Exchange Rate The rate of exchange of the Sudanese pound was tied to the US dollar in 1971.( see appendix (1) below. The policies of exchange rate in Sudan changed from fixed exchange rate to multiple exchange rate and floating exchange rate. During the period ( ), does not account for the real effective exchange rate by methodology approach, and there is no agreement about the determinants of real effective exchange rate in Sudan, accept the IMF s calculation. Empirical Result First: Unit Root Test We used this test to check for the stationary of data and determine the order of integration, by applying augmented Dickey Fuller ADF test, first test is applied without level series and the first differences. Table (4 1) Augmented Dickey Fuller test ADF for level ADF for Value* 5% Critical 1% level 5% 10% *Mackinnon critical values for rejection of hypotheses of unit root Variable) Trade balance RGDP From Table (4 1) above, the null hypotheses that the series had a unit root will be rejected for the series, but it will not be rejected for the trade balance and RGDP series in 10% level significance, because the ADF test statistics is greater than the critical value in all levels of significance. Table (4 2) Augmented Dickey Fuller test ADF-on first difference ADF statistics Variable* Critical 1% 5% 10% * Mackinnon critical values for rejection of hypotheses of unit root Variable 78

5 2011, Vol. 2, No. 3, pp Table (4 2) above shows that when considering for the case of first difference, we find Real effective exchange rate () are stationary. The trade balance and RGDP are integrated in order zero I (1) because there are stationary in the level, but is integrated in order one with them (i.e. I(1)). Second: Co-integration test After we determine the order of integration of all series, as a result of stationary test, the next step is to test the co-integration between variables to determine the long-run relationship. We use (Johansen 1988) test. Table (4 3) Co-integration test Hypothesized No. 1 percent c. v. of CE(s) None ** At most At most percent critical value Likelihood critical value Engle value (**) denote rejection of hypothesis at 5% (1%) significance level L. R. test indicator 1 cointegrating equation (s) at 5% significance level. Table (4 3) above shows that when examining the co-integration test, we find that there is one co-integration equation at 5% level, because the likelihood ratio is greater than the critical value at 5% significance level. Table (4 4) Normalized co-integrating coefficient = 1, co-integration Equation : - Constant RGDP R. Trade balance ( ) Log likelihood ( ) Table (4 4) above shows that when considering moralized co-integration we that in the long-run trade balance depends negatively on the real effective exchange rate and RGDP. The estimated coefficient of is ( ), RGDP is ( ) and constant equal ( ). Third: Engle Granger Error Correction Model After we Appling Engle Granger Error Correction Model, we find that, the (ECM) coefficient is smaller than (-1) i.e. equal (-1.35), and the coefficient of RGDP and RTB(-1) are insignificant. See appendix (1). According to this view we delete the most insignificant variables to obtain the significant determinants of trade balance. Table (4-5) Co-integration test No. of CE(s) Critical Value Critical Value Ratio Eigen value None * At most 1 * JBSQ 2011

6 Omran Abbass Yousif Abdallah (**) denote rejection of the hypothesis at 5% (1%) significance level L. R. test indicator 2 co-integrating equation (s) at 5% significance level. Table (4-5) shows.when delete the insignificant variables, we found that, there are two cointegration equations between real trade balance and RGDP. Table (4 6) Normalized co-integrating coefficient = 2, co-integration Equation Constant Trade balance log likelihood Table (4 7): Engle Granger (ECM): dependent variable: d(real trade balance) : include observations 23 after adjusting end points: Prob T statistic Std Coefficient Variable D() EC(-1) R 2 = 0.72 Adjusted R = 0.71 D.W. stat = 2.00 The above table (4 7) shows that when using the Engle Granger error correction model (ECM) based on co-integration analysis, we find that the (ECM) determine the short-run of trade balance which is based on real effective exchange rate. The short run illustrates the speed (of adjustment to revert the system to the equilibrium stage. The error correction when the coefficient is negative and lies between zero and one the cointegration relationship between indicators is valid). Our findings imply that this model should be adjusted by 90% to revert to equilibrium condition. (i.e. ECM coefficient equal (- 0.90). GDP is also affected by other macroeconomic indicators the data of trade in Sudan is negative at most of series, which is affected on the sign of RGDP coefficient. The negative sign of means that the relationship between trade balance and is negative. The high value of R2 =( 0.72), means that 72% of the variation in the dependant variable were explained by the explanatory variables and 28% the variation in trade depends on other explanatory variables which were not included the model. The value D.W. test suggests that there is no problem. Our equation as we have shown has a simple error correction form, it allows us to easily compute the long-run elasticity of trade balance with respect to, it can be calculated as follows: E t =b t /EC coefficient = 2.14 This means, the trade balance is elastic with respect to. Result and Policy Recommendation First: The Result This study explains the relationship between competitiveness indicators in Sudan (i.e. Trade balance,, and RGDP), during the period ( ). Section four shows the empirical evidences. First we checked for the stationary of the data, 1 80

7 2011, Vol. 2, No. 3, pp we find that, the Trade balance and Real GDP are stationary in level, but is not stationary. When using first difference, we find that Trade balance and are stationary, but RGDP is not stationary. As a result of this test we determined the order of integration of all series, and then we applied the co integration test between competitiveness indicators to determine the longrun relationship by using Engle Granger (1987) test. The test showed that there are two co integration equations between RTB and at 5% level. After that we determined the long run relationship, we checked the Error correction Model (ECM)to determine the short run relationship to illustrated the speed of adjustment to revert the system to the equilibrium stage. We found that, this model should be adjusted by 90% to revert equilibrium condition. Our result presented in table (4 3) above show the acceptance of hypothesis one, which is, and RGDP are interrelated with trade balance (i.e. co integration relationship). The implication of this result is that the hypothesis one is acceptance and the result is consistent with theoretical and empirical literature as (Tokarick and March 1994). Our findings presented above indicate rejection of hypothesis two, that RGDP is insignificant, the implication of this finding is that, the RGDP has not affected on trade balance, thus Sudan must be improves the deficit of trade balance to adjusts the Real Gross Domestic Product (RGDP). Second: Policy Recommendations The empirical result of competitiveness indicators in Sudan during the period ( ) showed that, there is co-integration relationship between trade balance, and RGDP are negative. The implication of this result is that, the hypotheses one is acceptance and the result is consistent with theoretical and empirical literature as Tokarick and March (1994), but hypotheses two is rejected because the sign of RGDP is positive in economic theory, thus, this result does not excepted. According to finding, Sudan must to be improves the deficit in trade balance by increasing the total of export. After we applied the co integration test, we checked the Error Correction Model (ECM) to determine the short-run equilibrium. Our finding implies that the model should be adjusted by 90% to revert to equilibrium stage. According to this result, the research recommended that: - 1 For improvement of awareness about the importance of competitiveness more research should be done to clarify a unify definition, measurement and assessment of the competitiveness. 2 Improvement in competitiveness and RGDP requires treatment of the deficit in trade balance has effect in RGDP and competitiveness, thus Sudan must threat this problem by decreasing the quantity of imports. 3 Improvement of competitiveness and quality of the live in Sudan requires quantitative and qualitative in the domestic production of goods it supports the local consumption of these goods, and to minimize the dependence on imported goods. 4 Improvement in competitiveness depend on the speed of adjustment, which is equals 90%, thus, Sudan must improve and support the macroeconomic indicators to revert equilibrium stage. 81 JBSQ 2011

8 Omran Abbass Yousif Abdallah Appendix: Year RGDP Source: World Bank, Bank of Sudan (annual reports). RTB

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