Sanctions do hurt, but will they move S. Africa?

Press, 27 October 1989, Page 12

Sanctions do hurt, but will they move S. Africa?

WHETHER economic sanctions hurt South Africa or not, its new State

President, Mr F. W. de Klerk, seems to take them seriously. At the Commonwealth summit, in Kuala Lumpur Mrs Thatcher sought to defend him against more of them. Release of eight prominent black nationalists, including Mr Walter Sisulu and four others jailed for life at the Rivonia treason trial in 1964, seems timed to strengthen her case that there is no point trying to hurt a new Government that is committed to reform and talking publicly to black leaders, as Mr de Klerk was on October 11. For the moment, forget the arguments of principle and tactics on both sides, and look at what economic and financial pressure on South Africa means so far. The country’s economy is in deep trouble, but sanctions are not its main problem. The outstanding fact about South Africa’s economic relations with the outside world is that the price ‘of. gold,", which comprises about half the- country’s exports, has ,been Talling (see: cha|t) and is likely to fall further. V The hardest-headed tribute to 1 the power of. sanctionst comes from the;Trust Bank of South Africa. :,lt. 7’estimates/ that real' average: incomes •? today 'are 15 .. per cent loWer than they./wbuld have been without.sanctions and disinvestment. .The batik’s own statistics: (see chart) somewhat weaken that argument, ? since they show that the economy was doing rather badly even before sanctions, and especially financial sanctions, began to bite in 1985-86.

South Africa has managed rather better than most African economies, but worse than basket-case debtors like Brazil and Mexico. Real growth was 5.8 per cent a year during the 19605, 3.3 per cent in the 19705, below 2 per cent in the 1980 s. Since the

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population was growing at 2.5 per cent a year, average real incomes have been falling for almost a decade. Some blame not sanctions but Government incompetence for the country’s economic plight. It has experienced prolonged double-digit inflation, rising consumption and falling investment, and groaned under the misinvestment needed to maintain apartheid. Capital outflows have been ’huge — more than SUSI2 billion since 1985 — partly to repay foreign debt. The effects of sanctions should, if they worked, be felt in four main areas. On trade, there has been little effect. The main trading partners are the big industrial nations. Non-gold exports, mainly minerals (especially coal) and manufactures, have boomed. They rose 65 per cent in dollar terms between 1985 and the first, half of 1989, while volumes went up a bit more. ./ ///;’•' ■■ Disinvestment has an intense psychological impact ton white South Africa — almost/as much as sports embargoes, fits economic effect, at least in the short run, has been United Nations show that about half the 121 foreign companies known to have equity investments in South Africa in 1980 have left; the rate of disinvestment has slowed', since only the most thick-skinned remain.

The balance-of-payments effects have been cushioned by a system of dual exchange rates, which has driven down the price of the financial rand, and thereby also the foreign-cur-rency value of disinvested capital. The more foreign firms move out, the lower goes the

financial-rand rate and the greater the incentive to hang on in South Afrida, or even to undertake new investment on the cheap. One study shows that, in more' than 60 per cent of recent cases of disinvestment, South African firms, especially conglomerate giants like Anglo American and Barlow Rand, bought assets dirt cheap, while retaining operating links with the disinvestor through franchise and licensing agreements. Mr Gavin Relly, chairman of Anglo American, argues (though he would wouldn’t he?) that the private sector is being restructured into leaner, more efficient businesses. Longer-term effects could be worse for South Africa. Even where they keep their links with, foreign firms, local. companies seem bound to lose direct access to technology and to foreign markets. Once foreign firms have got out, they are unlikely to return.. Concentration of 7 owner- ■ ship in. the hands of a few .big local firms may reduce competi- ; (ion; and? so /increase inefficiency. -7 ■■ - : ‘"- . -Sanctions in finance seem to

have had the greatest real impact. They were imposed in 1985 not by Governments but by international banks, mainly because lenders had come to regard South Africa as a poor credit risk. They have forced South Africa to maintain large currentaccount surpluses, to offset the massive outflow of capital. Mr Chris Stals, governor of the central bank, says the present rate of capital exports imposes a ceiling of about 2 per cent a year on the country’s growth rate. That means falling living standards and rapidly rising unemployment. Black unemployment is officially put at almost 800,000, 11.8 per cent of the economically active black population; in the first half of the 1980 s the rate was 8 per cent. Mr Stals says South Africa needs a growth rate of 5y 2 per cent a year to match population growth and to improve living standards even modestly. Without new capital, it might manage 3-4 per cent. With capital exports, living standards can only fall. Sanctioneers think this strengthens the argument for

tightening financial pressures. ; Their chance is coming with the forthcoming negotiations over ' rescheduling about SUSB billion : of South Africa’s SUS2O billionworth of foreign debt, just as the country faces debt repayments j of some SUS 3.6 billion in 1990-91, i and SUSI billion a year there- J after. The lobbyists are urging ■ the banks to seek 1 earlier repay- 1 ment of their loans, and to extend sanctions to cover short- • term trade credit (as well as ■ credits for more than two years, . access to which is already ■ limited). The effects on politics have no • balance-sheet. Sanctions, some * said, would drive white voters i into the laager. But in the General Election last month, under ■ threat of sanctions, those same • voters opted clearly for reform. - An ingenious anti-sanctions ar- ’ gument is that ‘ the greater -the <• shortage of capital now, ‘ the ; shoddier the economy will? be when majority rule at last ar- * rives. This, like so much else, in ’ the sanctions debate, leaves out { of the calculation the interaction /J of economic and political change. < Seven out of every ten rand < spent in central; Johannesburg today are spent by black con- ->• sumers; nearly one-third of . black ; workers belong to unions; by the J turn of the centmyj.7o per cent ■! of those completing secondary i, school will be black, and the rurban black population will outnumber other racial groups by three to one. These people, no doubt, will be demanding both political rights and economic opportunities. Whether sanctions will help them achieve either is the great

unanswered question. Copyright — The Economist