Economic Effects of a Trade and Investment Boycott against South Africa¶
Mats Lundahl (1984). Economic Effects of a Trade and Investment Boycott against South Africa. The Scandinavian Journal of Economics, Vol. 86, No. 1. Blackwell Publishing on behalf of The Scandinavian Journal of Economics.
| Type | journal article |
| Scope | Economics and economic history of apartheid |
| Method | theoretical or conceptual |
| Period studied | 1887–1984 |
| Regions | South Africa, bantustans/reserves |
| Themes | sanctions divestment, comparative theory, labour markets wages, politics ideology elections, agriculture land, business and state |
| Citation key | lundahl1984 |
Argument¶
Lundahl uses a three-sector small open economy model (African reserves, European agriculture, and 'industry' combining mining and manufacturing) to trace how export boycotts, an oil embargo and an investment boycott change the real incomes of white groups. He compares these effects with those of reducing labour-market discrimination (skill restrictions and the pass system). Landowners and agricultural capitalists gain from boycotts of industrial exports or investment, while skilled workers and industrial capitalists lose. Admitting more unskilled Africans to the European economy would benefit every white group. Because Afrikaner politicians are of rural origin, sanctions would work in the short run only if aimed at agriculture, though industrial sanctions may bite more as Afrikaner capital moves into industry.
Evidence and method¶
A comparative-static general-equilibrium model built on Lundahl (1982). Background data on foreign capital, export shares, oil dependence and Afrikaner enterprise come mainly from Nattrass (1981), Thompson & Prior (1982) and UNCTAD. Analysis of cabinet backgrounds follows Thompson & Prior. No new empirical data are presented.
Place in the debates¶
- Sanctions effectiveness: can trade and investment boycotts reduce apartheid? (see Sanctions, disinvestment and the anti-apartheid movement). Sceptical of sanctions as an 'infallible weapon'. Boycotts shift incomes among white groups, and a boycott may be preferred to reducing discrimination. Effective short-run pressure would need to target agriculture, with industrial sanctions more effective in the longer run.
- Political economy of apartheid: whose interests drive discrimination (farmers, white workers, industrial capital)? (see Liberal vs revisionist: was apartheid functional or dysfunctional for capitalist growth?). Treats the white polity as a set of competing interest groups. Farmers and white skilled workers have economic reasons to oppose African skill advancement, while industrialists may favour reform. Rural-origin Afrikaner politicians give farmers disproportionate weight.
Findings¶
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Foreign capital was historically a large share of gold-mining capital formation, but its share of national investment fell over time. (p. 2)
From 1887 to 1934, 60% of the capital formation in the gold mining industry was due to an inflow from abroad.
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Gold dominates South Africa's export earnings, which makes the economy vulnerable to export restrictions. (p. 3)
Ever since its beginnings, the gold industry has often accounted for more than 50% of South Africa's total exports. In 1978-79, the figure was 61 %.
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Boycotts of industrial exports and investment benefit landowners and agricultural capitalists, harm white workers, and hurt the majority of unskilled Africans in the white economy. (p. 10)
landowners and agricultural capitalists stand to gain the most from the imposition of a boycott of South African industrial (mineral) exports and investment in South Africa, while white workers may incur a loss from both measures.
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A boycott of agricultural exports would instead hurt agricultural interests and favour skilled workers and industrialists. (p. 10)
A boycott of agricultural exports, on the other hand, is more likely to hurt agricultural interests while skilled workers and industrialists gain.
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Allowing more unskilled Africans into the European economy benefits all white groups, because unskilled labour is complementary to all 'white' factors. (p. 11)
Table 2 clearly shows that all groups in the white community benefit from this measure. The reason is simple.
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Loosening the skill colour bar would hurt agricultural interests and white skilled workers, while industrial capitalists may gain. (p. 12)
agricultural interests and white industrial workers may raise objections, while industrial capitalists possibly gain.
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The likely white political response to a credible boycott threat would be to admit more Africans to work outside the bantustans, rather than to dismantle skill discrimination. (p. 12)
perhaps the most likely outcome of the political bargaining process among white interest groups will be an offer to allow more Africans to work in the European parts of the economy
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Afrikaner political dominance and its rural character are evidenced by cabinet composition and National Party seat totals. (p. 13)
Nineteen of the twenty cabinet ministers and all six deputies were Afrikaners.
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Short-run sanctions should target agriculture, with industrial sanctions becoming more effective as Afrikaner interests in industry grow. (p. 14)
in the short run, attempts to reduce racial discrimination in South Africa by means of international economic sanctions call mainly for action against South African agricultural exports.
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Afrikaner-owned enterprise grew to a substantial share of the private sector, which is the basis for the longer-run argument. (p. 13)
In 1975 the share of exclusively Afrikaner enterprise in the private sector of South Africa's economy was estimated to be 27.5 %.
Evidence ledger¶
Sources used¶
| Source | Kind | Period | How used |
|---|---|---|---|
| 1973 census of foreign investment (South Africa), as reported via Nattrass (1981) | secondary literature compilation | 1973 | Establishes the sectoral distribution of foreign capital (manufacturing about 40%, mining about 15%). |
| Nattrass (1981), The South African Economy: Its Growth and Change (data on foreign capital shares, gold and mining output) | secondary literature compilation | 1887-1979 | Supplies background figures on foreign capital formation shares and the gold/mining/manufacturing output shares used to justify treating industry as a small open sector. |
| Gold and mining output value shares, 1979 (Nattrass 1981, pp. 25 and 149) | secondary literature compilation | 1979 | Used to calculate that gold is around 25% of the value of the model's 'industry' sector, justifying the small-open-economy assumption. |
| UNCTAD (1980), Handbook of international trade and development statistics, Supplement 1980 | international trade or finance data | c. 1980 | Supports the statement that more than half of South Africa's imports are machinery and equipment, linking export earnings to capital formation. |
| Hobart Houghton (1976), The South African Economy, 4th ed. | secondary literature compilation | mid-1970s | Source for South Africa's roughly 70% share of non-Soviet world gold output. |
| Thompson & Prior (1982), South African Politics (cabinet backgrounds, Afrikaner interest groups, oil dependence) | secondary literature compilation | 1948-1981 | Provides the background data on the rural origins of the 1981 cabinet and ministers and the dominance of Afrikaner interests, on which the political-weight argument depends. |
| Parliamentary seat totals in House of Assembly, 1948-1981 (National Party vs opposition) | election returns | 1948-1981 | Shows Afrikaner/National Party dominance of political decision-making. |
| Lundahl (1982), 'The rationale of apartheid', AER (model and parameters) | secondary literature compilation | n/a | Supplies the theoretical model and the characterisation of the South African polity's targets and influx assumptions. |
| Estimated share of Afrikaner enterprise in the private sector, 1975 (unattributed) | other | 1975 with projection to 2000 | Used to argue that Afrikaner interests in industry are growing, so industrial sanctions become more effective in the long run. |
| Export, foreign capital and oil dependence statistics (gold share of exports 1978-79; manufactures and agriculture 1975; oil 1980; liquid fuels 1977; FDI shares 1887-1975) | official statistical series | 1887-1980 | Establishes South Africa's dependence on foreign capital, gold exports and imported oil as motivation for sanctions. |
Inference¶
Quantification: Illustrative figures.
Theoretical comparative-static general-equilibrium model (three-sector specific-factors model with linearly homogeneous production functions) solved analytically; qualitative sign results (Tables 1 and 2) are compared with each other, and a political-economy argument based on secondary descriptions of Afrikaner political composition identifies whose interests dominate. No estimation or calibration.
Key claims¶
| Claim | Basis | Strength |
|---|---|---|
| Import restrictions on South African industrial exports or an investment boycott would benefit landowners and agricultural capitalists and harm white skilled workers and unskilled Africans; boycotts of agricultural exports have the reverse effect. (p. 10) | Derived from the model's comparative-static solutions (Table 1, Appendix); no empirical data test the signs. | Asserted |
| Allowing more Africans into the European economy benefits every white group, so it may be the likely bargaining outcome under threat of boycott. (p. 11) | Model solution (Table 2, Appendix); assumes no additional costs to white taxpayers and uses Lundahl (1982) for influx structure. | Asserted |
| The effects of an oil embargo on sectoral output and factor rewards are theoretically indeterminate, depending on relative marginal productivities of unskilled labour. (p. 9) | Model with shift parameter t; Table 1 and Appendix; no oil data used beyond background dependency figures. | Asserted |
| Afrikaner political dominance and rural roots mean rural interests carry most weight, so short-run sanctions should target agricultural exports. (p. 14) | Thompson & Prior (1982) on cabinet backgrounds; National Party seat totals; Afrikaner share of private enterprise estimate. | Partial data |
| In the longer run, as Afrikaner interests move into industry, industrial sanctions may become more effective. (p. 13) | Single estimate of Afrikaner enterprise share (27.5% in 1975, projected 34% by 2000) and Thompson & Prior on leaders' business involvement. | Illustrative or anecdotal |
| South Africa is highly dependent on foreign capital, gold exports and imported oil, motivating sanctions proposals. (p. 3) | Statistics from Nattrass (1981), the 1973 census of foreign investment, UNCTAD and Hobart Houghton. | Partial data |
The author's caveats¶
Notes that the foreign-investment share is misleading because retained earnings of South African companies partly belong to foreign shareholders; acknowledges that South Africa is not small with respect to gold, so a gold boycott may be partly self-defeating; and that the analysis omits white security considerations and additional costs to taxpayers.
Gaps in the evidence¶
The argument is purely theoretical and never estimates the production-function parameters or elasticities that determine the signs in Tables 1 and 2, nor does it test the political-weight assumption (that agricultural interests decide policy). Sectoral data on factor shares, labour allocation and elasticities from the South African censuses of agriculture and industry and national accounts existed in the early 1980s and could have been used for calibration. Evidence on actual white interest-group lobbying (Hansard, party and farmers' union records) would also test the claim directly.
Replicability: Not applicable.