Sanctions and the South African Economy¶
Overseas Development Institute (Roger Riddell named only as contact) (1986). Sanctions and the South African Economy. ODI Briefing Paper, December 1986. Overseas Development Institute, London.
| Type | report |
| Scope | Economics and economic history of apartheid |
| Method | policy analysis |
| Period studied | 1963–1986 |
| Regions | South Africa, Western Europe, United States, Commonwealth |
| Themes | sanctions divestment, macro fiscal finance debt, inequality poverty unemployment, business and state, transition post apartheid |
| Citation key | contact1986 |
Argument¶
The paper assesses how trade, investment and financial sanctions affect the South African economy itself, and how they affect its development prospects. It argues that the economy is highly vulnerable through trade, foreign investment, finance, technology and skills. The most damaging action so far has been financial: the 1985 refusal of foreign banks to roll over short-term loans, not the trade or investment measures that dominate public debate. Selective trade bans touch only a small share of exports and can be partly circumvented, though at a cost (oil is the example). Some effects are 'perverse': a weaker rand and higher gold prices have helped exporters. Unemployment is already high because of slow growth, and the loss of foreign finance and markets will deepen it. The conclusion is that South Africa has no medium-term option other than negotiating internal political reform.
Evidence and method¶
Official and international statistics (IMF International Financial Statistics, UN Commodity Trade Statistics, UK Department of Trade and Industry, South African Monthly Abstract of Trade Statistics). Also statements by the Reserve Bank Governor and President Botha, press-reported company and bank withdrawals, the Investor Responsibility Research Center, a chronology of sanctions measures (Box 1), an oil-sanctions case box (Box 2), and a Fransman (1986) estimate of boycott effects on unemployment. The paper itself notes that South African data on oil and arms imports, gold destinations, debt and foreign investment are secret or unpublished.
Place in the debates¶
- Sanctions effectiveness: which measures actually hurt the South African economy (see Sanctions, disinvestment and the anti-apartheid movement). Financial sanctions (bank credit withdrawal) and any action to lower the gold price matter far more than trade or investment bans, which are limited in scope or circumventable.
- Do sanctions fail because they can be evaded (oil case)? (see Sanctions, disinvestment and the anti-apartheid movement). Evasion is possible but costly. Oil import premiums, storage, exploration and SASOL investment imposed large costs even though oil kept arriving.
- Perverse effects of sanctions (rand depreciation, mineral price rises) (see Sanctions, disinvestment and the anti-apartheid movement). The rand fall and the gold price rise gave short-term relief. The paper doubts they will last, since medium-term forecasts point to flat or falling prices and oversupply of other minerals.
- Who bears the cost of sanctions: blacks or whites (see Sanctions, disinvestment and the anti-apartheid movement). Sanctions would raise black unemployment in absolute terms, especially through export-sector job losses, but the white-dominated modern sector would lose proportionately more. The long-run low-growth trend matters more than marginal sanctions effects.
Findings¶
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The economy is heavily externally dependent, with trade ratios stable over 25 years. (p. 1)
In 1985, South Africa's exports were valued at $18.2bn, 33% of GDP, its imports at $12.7bn, 23% of GDP.
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Foreign loans became the dominant form of foreign liabilities by 1984. (p. 1)
In 1970 foreign loans amounted to 40% of the total stock of foreign liabilities, but by 1984 they had risen to over 70% of the total.
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Financial sanctions, not trade or investment measures, have been the most damaging. (p. 2)
in fact it has been the action taken by foreign banks to withhold South Africa's access to foreign finance that has had the most significant effect on the South African economy.
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Recent trade measures cover only a small share of exports. (p. 3)
However, taken together these measures would affect only 7% of the total 1985 value of South African exports.
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The 1985 bank refusal to roll over loans, not weak fundamentals, triggered the debt crisis. (p. 4)
It was in mid-1985 that the leading foreign banks, led by a small group within the US, decided not to roll over their short-term loans and to freeze new credits to South Africa.
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Roughly $14bn of foreign debt was frozen under the moratorium. (p. 4)
It led the South African authorities to declare a moratorium on debt repayment and to freeze payments on $14bn (58%) of its total outstanding foreign debt.
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Disinvestment left a net capital outflow, while the ban on new investment mattered little. (p. 3)
Overall, in the period 1977 to 1984, there was a net outflow of direct and portfolio investment of some $2.7bn.
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Oil sanctions imposed large evasion costs even though imports continued. (p. 4)
President Botha revealed that between 1974 and 1984 South Africa had to pay R.22bn over and above prevailing prices to procure its imported oil requirements.
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A higher gold price offset much of the sanctions pressure in the short term. (p. 5)
On present production levels, a $50 rise in the gold price adds more than $lbn to the value of South Africa's gold exports increasing current total export earnings by over 7%.
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Unemployment was already very high before further sanctions. (p. 6)
Unofficial estimates suggest that over three million people, some 25% of the entire workforce, are currently unemployed.
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Growth fell sharply from the 1960s to the 1980s. (p. 6)
Between 1965 and 1973, the South African economy grew at the rate of 5.1% p.a. and in the period 1975-80 it grew at 3.1% p.a.
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Vulnerability is concentrated in finance and gold. (p. 6)
South Africa is particularly vulnerable to two key types of sanction: restrictions on access to foreign finance, and actions aimed at initiating a substantial fall in the price of gold.
Evidence ledger¶
Sources used¶
| Source | Kind | Period | How used |
|---|---|---|---|
| Table 1 sources: IMF, International Financial Statistics; UN, Commodity Trade Statistics; UK Overseas Trade Statistics; South African Monthly Abstract of Trade Statistics | international trade or finance data | 1984 | Builds Table 1 on South African exports of food/agricultural products, iron and steel, and coal by destination, to size the exposure to trade sanctions. |
| 1984/1985 South African trade data by country and commodity (unspecified series) | official statistical series | 1984-1985 | Establishes trade concentration (eight countries took 71% of non-gold exports) and estimates the share of exports affected by EEC and US measures. |
| Aggregate national figures on exports, imports, GDP, foreign liabilities, foreign loans, direct investment and foreign debt (unattributed) | national accounts macro | 1970-1985 | Establishes South Africa's external vulnerability: trade/GDP ratios, gold's role, foreign liabilities and debt structure. |
| UK Department of Trade and Industry figures on UK company disinvestment, released October 1986 | official statistical series | 1982-1984 | Quantifies British direct disinvestment from South Africa. |
| Investor Responsibility Research Center (US) data on state, city and university divestment | other | to October 1986 | Documents the extent of US portfolio disinvestment by public bodies and universities. |
| Statement of the Governor of the South African Reserve Bank, August 1986 | official statistical series | August 1986 | Authority for the claim that financial sanctions damaged the economy more than trade sanctions. |
| President Botha's April 1986 revelation of oil sanctions-busting costs | commission or official report | 1974-1984 | Sole official figure for the cost of evading oil sanctions (R22bn extra, ~10% of export earnings). |
| Estimates of SASOL costs and oil exploration spending (unattributed) | other | 1983 to late 1970s | Illustrates the cost of oil self-sufficiency: SASOL capital costs, per-barrel cost, exploration spending. |
| South Africa's Mineral Bureau forecast, October 1986 | official statistical series | 1986 forecast vs 1985 | Supports the claim that excluding gold, mineral export gains from price rises are small. |
| Shares of world mineral production (high estimates, unattributed) | official statistical series | mid-1980s | Shows South Africa's market power in gold, platinum and other minerals to assess the 'perverse' price effects. |
| M. Fransman, The South African Manufacturing Sector and Economic Sanctions, IUEF Geneva, 16 August 1986 | secondary literature compilation | 1976 exports scenario | Source of the estimate that a 20% export boycott would raise unemployment by 433,000, split by race. |
| Anglo-American Corporation economists' judgement on foreign funding needs | company records or reports | 1986 to end of decade | Used to show growth of 5% requires about R3bn a year of foreign investment. |
| Statements of South African Reserve Bank Governor (October 1986) and economic planners on required growth and current account surplus | official statistical series | 1986 | Establishes the growth rates and external surplus needed to absorb job-seekers and repay debt. |
| Unofficial unemployment estimates and growth rate series 1965-1985 (unattributed) | national accounts macro | 1965-1986 | Documents declining growth and rising unemployment (over 3 million, 25% of workforce). |
Inference¶
Quantification: Descriptive tables.
Descriptive policy analysis combining aggregate trade, investment and debt statistics with reasoned scenario assessment of which sanctions bite. It uses a single table of export exposure, a chronology of sanctions measures, an oil-sanctions case study, and quoted official statements; there are no econometric methods.
Key claims¶
| Claim | Basis | Strength |
|---|---|---|
| South Africa's economy is highly vulnerable to external action because of its dependence on trade, gold, foreign capital, technology, skills and oil. (p. 1) | Aggregate national statistics on trade ratios, gold earnings, foreign liabilities, debt, import composition and oil dependence (unattributed national figures). | Partial data |
| Financial sanctions (banks refusing to roll over loans) have had the greatest impact on the economy so far, more than trade or investment sanctions. (p. 4) | Debt and bank liability figures, the 1985 debt moratorium, and the Reserve Bank Governor's remarks. | Partial data |
| Specific trade sanctions as enacted in 1986 affect only a small share of South African exports (about 7%, or 16% under a total ban in food, coal and steel). (p. 3) | 1984/1985 trade data by commodity and destination and Table 1 (IMF, UN, UK and South African trade statistics). | Systematic data |
| Oil sanctions failed to stop imports but imposed large costs on South Africa. (p. 4) | President Botha's disclosure of R22bn in premiums, SASOL cost estimates, storage and exploration spending. | Partial data |
| Price rises in gold and other minerals produce 'perverse' short-term benefits, but these are unlikely to persist in the medium term. (p. 5) | Gold price movement April-September 1986, Mineral Bureau forecast, world production shares and gold price forecasts. | Partial data |
| Company withdrawal has had limited direct economic and employment effects but large confidence effects. (p. 4) | Counts of US firm withdrawals, UK DTI disinvestment figures, and the pattern of asset sales to South African interests. | Partial data |
| Sanctions would raise black unemployment in absolute terms, but whites would be proportionately more affected by growth loss; without foreign participation, growth stays below the 4.5-5% needed. (p. 6) | Fransman's export boycott scenario, workforce racial composition, participation rates and growth rate series. | Illustrative or anecdotal |
The author's caveats¶
The author notes that detailed effects of sanctions are hard to quantify and separate from other factors. South African statistics on trade and finance are far from comprehensive: the origin of oil and arms imports and the destination of gold exports are classified, trade with African countries is not disaggregated, and no official figures on debt and foreign investment are published. Oil-sanction cost analysis is hampered by secrecy.
Gaps in the evidence¶
The argument lacks a counterfactual or modelling framework, such as a CGE or macro-econometric model, to separate sanctions effects from the domestic downturn, the political unrest and the falling gold and oil prices. Disaggregated data on debt, oil and arms imports and gold destinations were classified then, though later BIS, central bank and archival releases (and the Reserve Bank's own data) may permit better tests. Employment estimates rely on a single 1976-based secondary scenario, so firm-level or sectoral labour data would be needed.
Replicability: Data poorly documented.