SOUTH AFRICA: ASSESSING ECONOMIC VULNERABILITY

• Document Type: CREST
• Collection: General CIA Records
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• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 37
• Document Creation Date: December 27, 2016
• Document Release Date: May 26, 2011
• Sequence Number: 1
• Publication Date: August 1, 1986
• Content Type: REPORT

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Directorate of Secret
Intelligence
South Africa:
Assessing Economic
Vulnerability
Secret
ALA 86-10035
August 1986
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Directorate of Secret
Intelligence
Vulnerability
South Africa:
Assessing Economic
This paper was prepared byl Ithe
Office of African and Latin American Analysis with
contributions from analysts in the Office of Global
Issues. Comments and queries are welcome and may
be directed to the Chief, South Africa Branch,
Africa Division, ALA
Secret
ALA 86-10035
August 1986
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South Africa:
Assessing Economic
Vulnerability
Key Judgments The use of tough economic sanctions as a lever to promote change in South
Information available Africa would have risks and few likely rewards in terms of influencing
as of 15 July 1986
was used in this report. Pretoria's policies. On the one hand, the impact of sanctions on South
Africa would be blunted in large measure by Pretoria's successful efforts
over more than two decades to reduce its economic vulnerability to external
pressures. We believe that these preparations have insulated the domestic
economy fairly well from the sharpest impacts of a wide variety of possible
sanctions, but at a high cost to the economy's growth potential. On the oth-
er hand, the fluid internal situation, the unresolved issue of the country's
short-term debt, and the comparative ease and speed with which Pretoria
could damage the economies of neighboring states or withhold valuable
strategic minerals from the West raise disturbing uncertainties about the
ultimate impacts of external economic pressures. Moreover, South Africa
is still economically vulnerable to widespread and sustained labor unrest or
sagging domestic business confidence-internal dynamics that could be
triggered and reinforced by tough Western sanctions.
South Africa is well endowed with natural resources and must import
relatively few basic raw materials, aside from oil and bauxite, but it relies
heavily on imported capital equipment. An intense program of import
substitution, sanctions busting, and stockpiling has enabled Pretoria to
protect itself for the most part from the potential impacts of an oil-import
cutoff and-with somewhat less success-from cutoffs of other key
imports, such as capital equipment and chemical products.
South Africa's ability to import goods has been limited so far primarily by
the amount of foreign currency at its disposal rather than by embargoes.
Pretoria has taken steps that restrain a rapid loss of foreign currency, and
thus limit disinvestment as a source of vulnerability. Western sanctions
banning new loans and investment probably would have little immediate
impact either, as the country, in any case, is unlikely to receive substantial
capital inflows until the domestic unrest subsides. Moreover, South Africa
remains vulnerable to an erosion of its trade position if widespread boycotts
are directed against its exports of diamonds, coal, steel, and agricultural
goods.
The economy, however, is heavily dependent on black workers, who
constitute nearly 70 percent of the economically active work force.
Domestic production could be seriously disrupted by a lengthy general
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ALA 86-10035
August 1986
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strike by blacks or a widespread industrial sabotage campaign. Govern-
ment and business policies have reduced this threat somewhat by making
these tactics obviously risky for black workers and their unions. We have
no doubt that the South African Government would move, as it has in the
past, to crush black labor activism, and, if necessary, to seal off black
townships from food and water supplies.
A package of tough but limited Western economic sanctions could
eventually result in slower growth, though perhaps with an initial growth
spurt as further import substitution took place. We estimate that a
gradually tightened Western boycott of coal, steel, gold coins, and
agricultural exports would trim South Africa's economic growth potential
by 2 or 3 percentage points. We believe that the burden of reduced
economic growth would fall most heavily upon black South Africans and
on the economies of neighboring black-ruled countries. In addition, we
believe that Pretoria would actively shift more of the burden of sanctions to
neighboring black states. Within South Africa, Pretoria could shift the
burden of foreign sanctions toward nonwhites by cutting planned social
spending, reimposing sales taxes on foods, and reducing government
employment of nonwhite workers. On balance, these measures probably
would succeed in limiting the impact of sanctions on whites.
Short of a precipitous and sustained fall in the world price of gold, we fore-
see no external pressures that-taken in isolation-would produce a rapid
economic collapse. On the other hand, a severe economic dislocation in
South Africa could result from some combination of very tough sanctions
and unanticipated internal developments. Moreover, a very strong external
action-such as a widely supported ban on all trade-probably would have
important psychological effects on domestic investment, and also might
embolden black workers to launch longer general strikes or widespread
industrial sabotage in the expectation of a quick end to minority rule.
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Key Judgments
An Overview of Economic Vulnerability
I
Assessing Pretoria's Preparations
Foreign Finance
9
Domestic Economic Pressures
13
Foreign Sales
19
Pretoria's Counterlevers
19
Regional Economic Ties
19
Strategic Mineral Sales
21
Overall Assessment of Economic Vulnerability
22
Impact of Recent Limited Sanctions
25
Impact of Tougher Measures
25
Hurting White South Africa
26
Implications for the United States
27
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Figure 1
Economic Activity in South Africa
STAT
Industrial center
Mining center
Petroleum pipeline
Petroleum refinery
Port
Railroad
Road
Province boundary
200 Kilometers
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South Africa:
Assessing Economic
Vulnerability
Most analyses of South Africa's economic vulnerabili-
ty conclude that the country is relatively well insulat-
ed from Western economic sanctions. Pretoria, it is
argued, has long promoted self-sufficiency and built
counterleverage through strategic mineral sales and
the economic dependence of neighboring black-ruled
states on South Africa. While in large measure
correct, this perspective is too narrow, in our view,
and ignores major sources of economic vulnerability,
particularly those stemming from internal distur-
bances such as strikes and sabotage. Moreover, as the
recent debt crisis clearly shows, the anxieties of
foreign and domestic businessmen and consumers can
magnify the cumulative impact of even relatively
small pressures on the economy.
This assessment treats the South African economy
from a systems perspective, viewing it as an organism
that may be affected by a range of external or internal
pressures. We begin with a brief overview of the
vulnerability question, then-adopting the perspective
of the South African Government-assess the coun-
try's preparations to minimize specific vulnerabilities.
Finally, the paper concludes with an overall assess-
ment of South Africa's economic vulnerability and
implications for the United States.
By its natural endowments, South Africa appears
fairly well placed to weather embargoes on basic raw
materials. The country's extraordinary mineral
wealth includes virtually all of the essential natural
resources needed for a modern industrial state, lack-
ing only commercially viable crude oil and bauxite
deposits. Varied agricultural conditions allow for a
remarkable degree of food self-sufficiency, with sur-
pluses produced for export in most years of beef,
mutton, poultry, eggs, corn, wheat, sorghum, potatoes,
citrus, deciduous and subtropical fruit, grapes, sugar,
cotton, and oilseeds.
about half of the country's extensive fish catch is
exported. Of the few imported agricultural products
for which ready domestic substitutes are not avail-
able, only the loss of natural rubber would be damag-
ing, according to academic studies. The South Afri-
can economy, in our judgment, is somewhat more
vulnerable to effective embargoes on imports of ma-
chinery, equipment, and other manufactured goods,
but-aside from oil, weapons, and other security-
related systems-few trade restrictions have been
placed against such imports.
Historical experience with economic embargoes im-
posed on other countries has shown that isolating an
economy from international markets usually is ex-
tremely difficult. Foreign companies and countries are
attracted by the resulting new possibility of earning a
premium price and often participate in subterfuge
trade or the illicit transshipment of goods to the target
country. In some cases, the country of origin of a
transshipped good may not even be aware of the
In our view, most economies are vulnerable to embar-
goes on specific vital imports, to internal disruption
from strikes or sabotage, and to an array of pressures
that would undermine access to foreign currency,
such as foreign disinvestment or boycotts of the
country's exports. The extent of these economic vul-
nerabilities varies widely and depends-among other
things-on the natural resources, trading patterns,
and labor force characteristics of the particular
economy.
ultimate consumer
Secret
ALA 86-10035
August 1986
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South African Economy in a Nutshell
Despite having many components of a modern econo-
my-including an advanced telecommunications sys-
tem, well-developed transport infrastructure, and a
wide array of consumer goods-South Africa is still
an industrializing nation with most of the character-
istics associated with developing economies, such as a
sharp division between modern and traditional sec-
tors, a dependence on commodity exports, and a
legacy of heavy government intervention. (With a
population of 33 million and a GDP of $54 billion in
1985, the South African economy is roughly compa-
rable for size and per capita income to South Korea
and Argentina, according to IMF data.) Unlike many
Third World countries, however, the South African
economy also has a relatively dynamic private sector.
Dual Economy. Academic studies and government
data underscore the fact that the country's nearly 6
million whites enjoy an average per capita income
and lifestyle similar to that of Western Europe. By
contrast, most of the 27 million nonwhites lead lives
of grinding poverty. For the 13 million blacks who
live in the rural "homelands, " conditions generally
are not much different from those in the poorest
African countries. Most of the other 10 million
blacks, along with the 4 million Indians and mixed-
race Coloreds, provide cheap labor for the modern
economy, and have an average per capita income
closer to that found in middle-income countries such
as Turkey. The differences between living conditions
in the modern and traditional sectors are reflected in
infant mortality rates that are seven times higher for
blacks than for whites, according to government data.
A rising unemployment rate among semiskilled and
unskilled workers coexists with a shortage of skilled
manpower, according to an IMF study of South
Africa. In mid-1985, registered unemployment among
whites, Coloreds, and Indians was relatively low-for
example, white unemployment was less than 2 per-
cent-and was limited largely to the semiskilled. On
the other hand, a number of academic studies have
estimated that black unemployment is running at 25
to 30 percent; and, in parts of the eastern Cape
Province, US Embassy sources believe the figure
exceeds 50 percent.
Dependence on Commodity Exports. According to
official trade statistics and our estimates, South
Africa depends heavily upon raw mineral and agri-
cultural exports, which together with semiprocessed
minerals and food products account for 86 percent of
the country's export revenues. In particular, the
mining industry is the backbone of the South African
economy, as gold alone accounts for nearly half of
total revenues. Processing of minerals particularly
the production offerroalloys-has progressed signifi-
cantly, and now accounts for some 40 percent of
nongold mineral exports by value.
Although the agricultural sector makes a much
smaller contribution to GDP and export earnings
than does mining, academic studies note that South
Africa is one of a handful of African countries that
are food self-sufficient in nondrought years, and that
it supplies grains to much of southern Africa. South
African farmers, however, do face significant prob-
lems. Rainfall is unreliable, and the country suffers
from recurring and prolonged droughts.
Legacy of State Intervention. The South African
Government openly advocates market-oriented princi-
ples and is decidedly anti-Communist, yet its actions
demonstrate a penchant for statist solutions to the
country's social and economic challenges. This inter-
ventionist approach is notorious for the limits it has
placed on black economic activity, but white busi-
nessmen, farmers, and consumers also have been
affected. For example, according to South African
data, state-owned companies dominate several indus-
tries and hold some 15 percent of the country's
physical capital. The South African Transport Ser-
vices (SA TS) operates the country's railroads, major
airline, largest road freight service, and harbors. The
South African Broadcasting Corporation (SABC) and
post office dominate the communications field, oper-
ating television, radio, telephone, and postal services.
The Iron and Steel Corporation (ISCOR) is by far the
largest producer in its market. Other monopolies
owned wholly or partially by the government include
ESCOM (electricity), SOEKER (oil exploration),
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SASOL (coal-to-oil conversion), UCOR (uranium en-
richment), FOSKOR (phosphate), ALUSAF (alumi-
num), Atlantis Diesel Engines, and ARMSCOR
(weapons).
Even when government companies do not dominate an
industry, the US Embassy reports that Pretoria often
sets the price or markets the product. Some academic
studies have estimated that approximately one-third
of South Africa's consumer price index consists of
prices controlled by the government or its companies.
Pretoria also is the sole overseas purchasing agent for
South African oil companies, and regulates domestic
energy prices. Some 70 percent of farm output is sold
to 29 agricultural marketing boards. The central
bank markets gold overseas on behalf of the mining
companies, and is heavily involved in the local foreign
currency market. Overall, we estimate that Pretoria
sells more than half of the country's exports, and
buys more than one-quarter of its imports.
Healthy Private Sector. Despite significant govern-
ment intervention, academic studies and IMF reports
indicate that the economy has a healthy private
sector with a small, but reasonably sophisticated,
financial market. The Johannesburg Stock Exchange
is dominated by a handful of corporate groups, most
notably Anglo American Corporation, South African
Mutual, and Sanlam, which are involved in South
African mining, property, manufacturing, and insur-
ance. Foreign-based multinational corporations also
play an important role in the economy, often in joint
ventures with local corporations.
Pretoria in the past has exhibited an ambivalent
attitude toward business, in part a reflection, we
believe, of the dominance of English-speaking rather
than Afrikaans-speaking South Africans in major
companies, and the importance of foreign, often Brit-
ish, corporations. Public statements suggest this atti-
tude has changed somewhat in recent years as more
Afrikaners have moved up in South African business,
and as the ruling, Afrikaner-dominated National
Party has sought business-sector support for its
racial reform program. Nonetheless, a mutual wari-
ness is still the norm in government-business rela-
tions.
After more than two decades of experience in skirting
embargoes on oil and arms, South Africa, in our view,
is well equipped for such covert trade. So far, South
Africa's ability to import goods has been limited
primarily by the amount of foreign currency at its
disposal rather than by embargoes. Since countries
obtain foreign currency from exports and new loans
and investment, any repayment of old loans or with-
drawal of foreign investments clearly reduces the
foreign currency available for imports. In addition to
new hard currency inflows, South Africa could dip
into its gold and foreign currency reserves. Gold and
foreign currency reserves, however, presently are at
near-record lows relative to trade, according to IMF
data, and thus afford little buffer against pressures
that would cut into export earnings or trigger a
massive capital outflow (see table 1).1
South Africa's narrow export base increases its eco-
nomic vulnerability, in our judgment (see figure 2).
For example, at current rates of production, a $50 per
ounce drop in the world gold price would cost South
Africa about $1 billion per year, or about 6 percent of
total export earnings. Export revenues, thus, are
potentially very sensitive to factors that would reduce
mineral or agricultural production, or restrict South
Africa's ability to sell these goods abroad.
A review of US Embassy reporting and the open press
shows that since 1960, when international attention
first seriously focused on apartheid, Pretoria has laid
the groundwork for weathering economic embargoes
by pursuing import substitution, circumventing the
sanctions imposed on imports of oil and military
supplies, and building up strategic reserves of critical
materials
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Table 1
South African Balance of Payments, 1980-86
a Estimated.
b Projected, based on 1- to 2-percent real growth.
Includes changes in valuation of reserves, errors, and omissions,
and supplier credits.
d Total reserves are not the sum of changes in reserves and the
previous year's total reserves because of year-to-year changes in
exchange rates.
South African leaders have been similarly conscious
of internal vulnerabilities. For example, Pretoria's
concern over the potential implications of South Afri-
ca's heavy dependence on black labor predates even
its longstanding worries about Western economic
sanctions. Under classic grand apartheid schemes,
South Africa tried to prevent the growth of a perma-
nent urban black population, preferring to deal in-
stead with nonunionized "foreign migrants" from the
homelands. The first crack in this apartheid scheme
came in 1979 when Pretoria granted black labor
unions legal recognition, an implicit acknowledgment
that a large and partly settled urban black labor force
was a permanent fixture on the South African scene.
We believe the government hoped that by recognizing
black unions it could channel black labor activism into
structured collective bargaining processes that would
reduce the country's vulnerability to politically moti-
vated strikes or industrial sabotage. Meanwhile, one
constant element in government strategy has been a
reliance on a powerful internal security apparatus.
Against this backdrop, Pretoria's preparations to re-
duce its specific economic vulnerabilities can be orga-
nized broadly around a number of general areas-key
imports, foreign finance, domestic economic pres-
sures, and foreign sales. In each area, notable differ-
ences can exist in the potential and duration of any
disruption, the range of options Pretoria can consider,
and the remaining vulnerabilities for South Africa
(see figures 3 and 4).
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Figure 2
South Africa: Imports and Exports, 1984
Other
18
Machinery and
equipment
45
Other minerals and
mineral products
4
Base metals and
fabricated metal products
5
Key Imports
Although South Africa's dependence on imported
crude oil is often highlighted by antiapartheid activ-
ists, we believe that Pretoria also is vulnerable to
restrictions on imports of machinery, equipment, and
esoteric chemical products and catalysts. Indeed, it is
on the nonfuel side that Pretoria has the greatest
potential problems since most government efforts
have focused on oil availability.
Liquid Fuels. Pretoria has devoted much effort-
successfully, in our judgment-to insulate itself from
the potential impacts of an oil-import cutoff. We
believe
t eir oil stockpiles are
adequate to cover a five-year embargo.
we estimate that South Africa
has accumulated a strategic oil reserve of some 200
million barrels of crude oil. On the basis of our
estimates of South African energy consumption, this
would last three years under normal use and at least
Other Gold
12 47
Machinery and equipment
(except arms)
2
Agricultural products
II
Other minerals, base metals,
and mineral products
28
five years with strict conservation measures, acceler-
ated construction of a fourth coal-to-oil facility, and
the proposed Mosselbai gas-to-oil conversion plant.
Resource statistics show that South Africa has ample
domestic coal reserves to feed its three existing
government-financed coal-to-oil conversion plants
that produce some 30 to 40 percent of the country's
liquid fuel requirements, according to our estimates of
consumption rates. The first small coal-to-oil plant
began operation in 1955, with two larger plants
coming on line in 1980 and 1982. On the basis of
current technology, we believe that a fourth plant
could be built in as little as two or three years, if
needed, although without foreign participation con-
struction time might be somewhat longer. In addition
to public-sector efforts, two private South African
companies are considering building smaller coal-to-oil
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Figure 3
South Africa: Summary of Major Economic Vulnerabilities
O Low vulnerability (neglible effect on national economy)
A Medium vulnerability (could dampen economic growth)
O High vulnerability (could cause severe economic dislocations)
Vulnerability
Importance to economy
Short
disruption
Long
disruption
Key imports
Liquid fuels
0
0
Stockpiles
Covert trade
Coal-to-oil plants
Conservation
Import substitution
Covert trade
Import substitution
Stockpiles
Foreign finance
New loans and investments
Disinvestment
Technology and personnel
0
0
0
A
0
0
Promote domestic savings
Foreign currency controls
Could hire commercially
government-sponsored
research
Domestic economic pressures
Strike activity
Business confidence
Infrastructural sabotage
Industrial sabotage
0
0
0
0
0
0
0
0
Mass dismissals
Internal security apparatus
Domestic economic policies
Internal security apparatus
Internal security apparatus
facilities, according to press and Embassy reporting,
but these would not be operational before the early
1990s.
Despite adequate overall liquid fuel, South Africa
could face problems achieving the right product mix.
The existing coal-to-oil plants produce insufficient
diesel fuel to meet South African needs, according to
press reports. We believe that Pretoria has placed a
high priority on increasing the production of diesel
fuel, and that the Mosselbaai gas-to-oil facility is
intended in part to address this imbalance.
Capital Goods. In many ways, effective sanctions on
South African imports of capital equipment could
prove more bedeviling to Pretoria than liquid fuel
disruptions. Despite some 25 years of high-priority
attention and substantial progress in selected indus-
tries, South Africa's import substitution drive, in our
view, has not freed the economy from heavy depen-
dence on foreign capital equipment and machinery.
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Figure 4
South Africa: Vulnerability of Key Exports
O Low vulnerability (little impact on sales)
e Medium vulnerability (moderate impact on sales)
O High vulnerability (major impact on sales)
Approximate percenta,g
share of export earnings
Production Suitability for Comments
vulnerabilities foreign boycotts
Gold 47 e
Bullion
Kruggerand
Agricultural products 11
Intraregional trade
Elsewhere
Market could be undermined
O by large Soviet or US sales
O from reserves.
O South Africa is lowest cost
producer.
Country produces some very
valuable specialty steels that
probably could skirt boycotts.
Few ready substitutes; platinum
mostly mined in nominally
independent Bophutatswana
0 South African firm based in
London dominates market.
Indeed, South Africa imports almost all of its capital
equipment-with domestic industry essentially pro-
viding only the buildings in which it is housed,
according to an academic study. We believe that
South Africa's heavy dependence on imports of ma-
chinery and equipment reflects the constraints im-
posed by a small domestic market and limited techno-
logical innovation. As a result, South African
companies lack the scale of operation enjoyed by
high-volume foreign producers.
The vulnerability to an effective embargo on capital
goods might not be readily apparent; we estimate that
the initial effect of such an embargo would be a spurt
of GDP growth as domestic resources mobilize to
build new facilities to produce capital goods. We
believe, however, that this "miniboom" would dissi-
pate as inefficiencies resulting from small production
volumes began to be felt. Local production of capital
goods probably would drive up costs and would need
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to be offset by government subsidies or passed on as
higher prices. We also expect that product quality and
quantity would suffer as foreign-made capital equip-
ment gradually was replaced with less efficient do-
however, may face considerable difficulties in gearing
up technologically to produce aircraft engines and
heavyweight tractors.
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mestic substitutes
On the basis of industrial and academic studies of
South African technological capabilities and existing
plant and equipment, we believe that producing com-
puters and other sophisticated electronic devices whol-
ly from domestic resources probably is beyond current
South African capabilities. However, most of the vital
components not produced domestically are small
enough to be smuggled in, making an effective embar-
go difficult. Moreover, South Africa has made signifi-
cant progress in semiconductor fabrication. As in the
case of oil and arms procurement, we have little doubt
that Pretoria would employ clandestine means to
obtain computer and electronic equipment.
Chemical Products. Despite advances toward self-
sufficiency in chemical products, reports in the South
African financial press indicate that some 25 to 30
percent of the raw materials used by the chemical
industry are still imported. According to these press
accounts, dependence is greatest in the pharmaceuti-
cal and pesticide industries-where imports include
80 percent or more of the active ingredients-and
least in the production of fertilizers, paint, and
explosives.
Outside the chemical industry, many sophisticated
catalysts and other chemical compounds vital to min-
ing, agriculture, and manufacturing are used in insuf-
ficient quantities to justify local production
For example, soda ash imports-
Companies are already making provisions for possible
embargoes of electronic equipment.
which are used in the manufacture of glass, in
vanadium extraction, and in the production of deter-
gents-could be replaced by a synthetic substitute.
Other Imports. South Africa buys numerous other
foreign goods, but, according to academic studies =
disruption of most of these imports
South Africa's motor vehicle and motor vehicle com-
ponent industry appears fairly well positioned to
weather a lengthy embargo, though at a substantial
cost. Local content rules-which require 60-percent
local content by weight-do not specify which parts of
the vehicle are to be manufactured domestically.
Since manufacturers have implemented these rules
quite differently, an academic study concludes, most
of the components needed to make automobiles,
trucks, and light-to-medium weight tractors are pro-
duced somewhere in South Africa. South Africa,
copper in most applications.
would have little impact on the national economy. The
loss of bauxite imports, for example, would close the
country's aluminum smelter with some loss of employ-
ment, but aluminum could be replaced with domestic
We have little data on the size, composition, or quality
of stockpiles of specific nonoil items. Embassy sources
report Pretoria spent some $2 billion building and
maintaining nonmilitary strategic stockpiles, but oil
reserves reportedly accounted for 80 to 90 percent of
the cost. A private South African firm estimated a
few years ago that government stocks total about one
year's consumption of spare parts and other items
considered critical to industry and commerce, accord-
ing to a US Embassy contact. Among the items that
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Although South Africa, on average, has been a net
capital exporter in recent years, there have been years
of significant capital inflows. This dependence proba-
bly was greatest in 1975 when net capital inflows
represented 22 percent of domestic fixed investment,
according to government data. Our analysis of past
episodes of heavy foreign investment and borrowing
indicates that large capital inflows have served prin-
cipally to fund major infrastructural projects or to
cushion the impact of reduced export earnings at
times when the gold price has declined:
? In the mid-1970s, state-run corporations undertook
major capital projects such as port development
and improvements, expansion of iron and steel
plants, establishment of television service, and more
rapid electrification that required foreign funds.
? By contrast, 1981 and 1982 were years of little new
investment, but South African banks and the cen-
tral government borrowed abroad to finance current
account deficits totaling $7.5 billion; gold prices
had fallen from an average of $608 per ounce in
1980 to $460 in 1981 and $376 in 1982, according
to IMF data.
On the basis of academic studies and government
development plans, we believe that South Africa is
likely to experience a heavier than normal demand
for foreign funds over the next few years, which will
increase slightly its vulnerability to investment and
loan restrictions. We judge that South Africa will
need new foreign investment to help fund envisaged
expenditures on synthetic fuel projects, black educa-
tion, and improvements to economic infrastructure,
and to sustain even a modest economic recovery, once
existing productive capacity is fully utilized.
South Africa reportedly has stockpiled are synthetic
rubber, urea, carbon black, and ferro-titanium.
Figure 5
Total Foreign Investment in
South Africa by Country, 1985
United Kingdom
15
Foreign Finance
Pretoria's external dependencies extend beyond criti-
cal imports into the foreign financing arena. Foreign
investment in South Africa totaled about $40 billion
in 1985, on the basis of South African Government
statistics and scattered reporting from various US
Embassies. These liabilities included direct invest-
ment, foreign-owned shares on the Johannesburg
Stock Exchange, other types of equity investment, and
overseas debt. Half of these liabilities reportedly were
to countries in the European Community, especially
Great Britain and West Germany (see figure 5).
Against these liabilities, South Africa had about $12
billion in foreign assets, much of it invested in mining
operations in southern Africa, the United States, and
South America. During 1985, net foreign liabilities
fell by nearly $4 billion as the result of disinvestment,
loan repayment, and capital flight.
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Origins of the Debt Crisis. Pretoria has long prac-
ticed conservative foreign debt management to assure
continued access to credits in spite of foreign criti-
cism of its racial policies. The country's economic
record shows that on several occasions the govern-
ment has clamped down hard on growth to reduce
import demand. In 1983, however, misplaced expec-
tations of higher gold prices and an end to the
southern African drought led Pretoria to allow a
rapid expansion of consumer purchases funded by
short-term overseas borrowing.
Although the amount of debt relative to GDP during
the 1983-84 miniboom was not unprecedented, South
Africa's vulnerability to a cutoff inforeign credits
increased substantially. Bank for International Set-
tlements data indicate that the maturity of the
foreign commercial debt shifted from 38 percent
short-term debt in 1979 to 66 percent in 1984-a
trend which meant that a larger fraction of the debt
needed to be paid off or reborrowed each year.
Meanwhile, Pretoria's foreign currency and gold re-
serves fell relative to imports. Whereas these reserves
were sufficient in 1980 to pay for five months of
imports, by 1984 they could buy less than three
months' worth.
As in the past, Pretoria reined in the 1983-84 mini-
boom with austerity measures to reduce inflation and
overseas borrowing by cutting import demand. These
measures, however-which included a record 25-
percent prime lending rate and restrictions on con-
sumer borrowing-contributed initially to a contin-
ued runup of the country's short-term debt. South
African banks profited from the high domestic rates
by borrowing cheaply abroad to relend domestically.
In many cases, according to US Embassy sources, the
banks misrepresented the loans to foreign creditors as
short-term trade finance and relent them at higher
long-term rates.
Foreign Banks Pull Back. Growing international
nervousness over South African domestic political
uncertainties led some foreign banks to curtail their
credit lines in the first half of 1985, causing signifi-
cant downward pressure on the rand. With floating
exchange rates, the rand plummeted as South Afri-
can companies scrambled for foreign currency com-
mitments to cover future transactions in the self-
fulfilling expectation of further declines. From an
average of $1.30 in the first quarter of 1980, the rand
sank to $0.40 in the third quarter of 1985. Political
events, such as riots outside of Pollsmoor prison in
February 1985, the killing of 20 blacks by security
police in Uitenhage in March, the declaration of a
state of emergency in major black townships in July,
and a hardline speech by President Botha in August,
triggered near-panic runs on the rand.
Pretoria suspended trading on South African foreign
currency and stock markets for four days on 28
August 1985, pointing'publicly to the slide in the
value of the rand, an acceleration of the withdrawal
of foreign credit lines, and a bunching of foreign debt
repayment commitments as key reasons behind the
decision. Pretoria then announced on 1 September a
four-month suspension of principal repayments on
$14 billion of South Africa's $24 billion in foreign
debts. Foreign currency controls also were tightened
in an effort to slow the capital outflow, reversing a
previous policy of economic liberalization.
Fragile Resolution. Initial talks among Pretoria,
major commercial bank creditors, and Swiss debt
mediator Fritz Leutwiler to resolve the debt crunch
were inconclusive, and Pretoria extended its morato-
rium through March 1986 to gain additional time to
negotiate. After an abortive proposal in December by
South Africa to delay repayments of the frozen debts
until 1990, Leutwiler presented a compromise debt
deferral plan that formed the basis for an agreement
in principle reached in March. Under this plan, the
moratorium will be extended through June 1987, and
South Africa will make a 5 -percent downpayment
this year against the blocked debts. Creditors are to
review the country's financial position in April 1987
to consider further repayments.
The debt accord is vulnerable to financial pressures.
As a result of the impact of the recession on import
demand, we expect a current account surplus this
year of about $3 billion. With $3.6 billion in debts
outside the moratorium falling due this year-in
addition to the agreed downpayment of some $400-
500 million-Pretoria is counting on creditors to
continue rolling over expiring loans.
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From Pretoria's perspective, foreign investment re-
strictions could take the form either of bans on new
investment or loans, or the forced sale of existing
assets. Such measures would have a direct effect on
the balance of payments-assuming that foreign cur-
rency could be withdrawn from South Africa-and an
indirect effect on economic growth, access to foreign
technology and personnel, and domestic business con-
fidence. The magnitude of such effects, however, will
depend on which countries adopt measures and on the
vigor with which they are enforced. In addition, South
Africa has at its disposal some countermeasures-
such as allowing the value of the South African rand
to fall or imposing tighter foreign currency controls-
to blunt at least short-term balance-of-payments im-
pacts of investment restrictions.
New Loans and Investment. We believe that many
studies overstate South African economic vulnerabili-
ty to foreign restrictions on new loans and investment,
although we are convinced that widespread restric-
tions would reduce long-run growth potential. South
African investment has not depended heavily on
foreign funds: net capital inflows accounted for only 9
percent of domestic fixed investment between 1963
and 1980. Since 1980, capital outflows have exceeded
capital inflows by an average of $400 million per year,
and investment has been funded from internal corpo-
rate savings. A portion of these internal funds have
come from subsidiaries of foreign companies, but, to
date, bans on new investment have not applied to
reinvested profits.
Even without foreign loan and investment restrictions,
however, we do not expect South Africa to receive
substantial capital inflows until the domestic unrest
subsides. The recent debt crisis-triggered by a loss of
foreign confidence in South Africa-clearly indicates
investor concern over domestic political and economic
uncertainties. On the basis of investor behavior fol-
lowing widespread black unrest in 1960 and 1976, we
believe that investor confidence would return only
gradually, even in the unlikely event that the unrest
ended quickly.
Pretoria has manipulated domestic policies to offset to
a limited extent the effects of restrictions on new
foreign investment and loans. For example, Pretoria
recently has streamlined its monetary policies to
encourage greater domestic savings and investment.
Similarly, interest rates in the past have been boosted
to attract foreign loans from countries still offering
new loans to South Africa, or-as was done recent-
ly-lowered in the hope of stimulating a domestic
economic recovery to partially restore lost investor
confidence.
Disinvestment. In our judgment, a substantial reduc-
tion in existing foreign loans and investments might
once have cut deeply into economic growth, but
Pretoria has taken several steps that largely offset this
vulnerability. From an investor standpoint, we would
have expected a massive selloff of foreign investments
to have caused prices on the Johannesburg Stock
Exchange to fall-but domestic interest rates to
rise-as South African companies scrambled to pur-
chase foreign interests at bargain prices. As far as
economic performance is concerned, a sustained capi-
tal outflow would have left less foreign currency for
purchase of vital imports, which would have con-
strained domestic growth if local substitutes could not
have been found. Pretoria, however, has limited the
potential loss of foreign currency:'
? South Africa moved in the late 1970s from a fixed
exchange rate to a "managed float," in which the
exchange value of the rand has been chiefly deter-
mined by supply and demand. Many academic
studies note that allowing the exchange rate to move
freely encourages investors to keep the proceeds of
any disinvestment in South Africa since a massive
withdrawal of foreign capital would depress the
value of the currency and of proceeds from the sale
of South African assets.
? In response to the debt crisis, foreign currency
controls were reimposed last year that further dis-
courage the sale of assets in South Africa by using a
penalty exchange rate for such transactions. In
addition, the currency controls specify that compa-
nies may repatriate funds from the sale of assets
only if another foreign company is willing to buy the
rand generated from the sale.
' As early as 1961, foreign currency controls were used to stem a
large capital outflow following the killing by police of 69 black
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Figure 6
South Africa: Selected Economic Indicators
US S per rand
US $ per ounce
? Additional controls empower the government to by blocking all capital outflows and requiring these
restrict foreign debt repayment. funds to be invested in government bonds. One South
African diplomat recently went so far as to imply that
These currency controls reduce the potential impact Pretoria would renounce its foreign debt obligations in
of foreign disinvestment or loan repayment on the the event of severe Western economic sanctions,
balance of payments and, thus, on domestic economic according to press accounts.
growth. If necessary, Pretoria could take further steps
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Financial controls can stem a massive financial drain,
but they are neither costless nor completely effective.
A falling exchange rate adds to domestic inflation by
raising the local cost of imported goods. Likewise,
while domestic substitutes could be made available,
they would come with a higher price tag than foreign
goods. Moreover, foreign currency regulations can be
skirted to some extent by foreign subsidiaries that can
overpay a parent company for imports and inflate
dividend remittances.
Foreign Technology and Personnel. We believe that
Western bans on direct investment in South Africa
would merely raise its cost for obtaining new technol-
ogy and skilled foreign labor. Foreign companies
facilitate the transfer of technology and skilled per-
sonnel to South Africa that would otherwise be
available only on a more costly commercial basis,
according to academic studies. These studies indicate
that, except for underground mining technology, there
are few machines, techniques, or advanced develop-
ments that are uniquely South African. Instead,
South African research efforts have focused on im-
proving and adapting foreign processes to local condi-
tions. Even the much-vaunted coal-to-oil conversion
plants are simply a commercial application of foreign
technology. South Africa devotes less than 1 percent
of its GNP to research and development, compared
with 2.5 percent in the West, according to press
reports.
South Africa also depends heavily on foreign manage-
ment and training to run its economy, according to a
variety of economic publications. The country has
good higher level technical training for whites, but, in
proportion to its entire population, the educational
system does not produce as many graduates in scien-
tific, managerial, and technical fields as most West-
ern countries, according to an academic study. Thus,
while the United States has one professional, scien-
tific, or managerial worker for every nine people,
South Africa has one for every 50 people. The study
notes, for example, that major breakdowns of machin-
ery often must be repaired by foreign technicians.
On balance, however, we do not believe that South
Africa's limited research and development base and
small skilled labor pool present serious vulnerabilities
so long as needed technologies can be purchased
commercially and skilled labor hired abroad. Open
source material and Embassy contacts report numer-
ous cases of foreign technology obtained by South
African companies under a variety of arrangements
that involve no direct foreign investment:
? Japan has long banned direct foreign investment in
South Africa, but South African-built models of
Japanese cars increasingly dominate the domestic
automobile market. The South African-owned com-
panies making these cars purchase technology and
parts on a licensing basis.
? One of the coal-to-oil conversion plants was built
under contract by a US firm using West German
and French technology.
? A proposed gas-to-oil conversion plant at Mossel-
baai is to be built with foreign technology purchased
commercially.
In addition, on the basis of our assessment of past
efforts to deprive South Africa or other countries of
new technologies or skilled personnel, we believe that
a ban on all technology transfer and skilled expatriate
labor would be extremely difficult to enforce.
Domestic Economic Pressures
In our judgment, the South African economy at
present is far more vulnerable to internal disruption
than to foreign economic reprisals. Among the major
damaging factors, the most dramatic-but probably
least important economically-are bombings of eco-
nomic targets by the African National Congress
(ANC). Of potentially much greater economic conse-
quence is the growing incidence of industrial sabotage
and work boycotts by black workers. In addition,
white business confidence is sensitive to these various
external and internal pressures.
Sabotage. In our judgment, the South African econo-
my is not now seriously vulnerable to insurgent at-
tacks, given opposition capabilities, redundancies in
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ized and short term.
economic infrastructure, and Pretoria's security
strengths. Isolated ANC bombings sometimes have
caused extensive property damage, but press and
Embassy reports indicate that the installations usually
have been quickly repaired. We believe that repeated
bombings of key installations sufficient to physically
hamper the national economy are beyond current
ANC capabilities. The impact of sabotage to date-
aside from the psychological and propaganda effect
on the South African political scene-has been local-
We believe that the economy can withstand all but a
carefully orchestrated and technically demanding se-
ries of bombings of key economic installations, be-
cause the infrastructure associated with energy, min-
ing, and transport is widely dispersed (see figure 1):
? Energy infrastructure-a favorite ANC target-is
spread among numerous installations. The most
important potential targets, in our judgment, proba-
bly are the oil pipelines from Durban to Johannes-
burg, and the coal-to-oil conversion plants
Pretoria
has been increasing security around these facilities.
Moreover, with significant oil stockpiles and the
alternative of road transport, temporary loss of even
these facilities most likely would be only an expen-
sive inconvenience from an economic standpoint,
albeit an important psychological blow against
whites.
Although we doubt the ANC can physically cripple
the economy, we believe an ANC campaign against
selected subsidiaries of foreign corporations could
scare off parent companies by drawing attention to
their involvement in South Africa and raising the
costs of doing business in the country. ANC officials
have threatened-but not yet adopted-this tactic,
possibly fearing it would cost the group some Western
political and financial support.
The threat of black workers turning to industrial
sabotage on a large scale also has long concerned
South African policymakers, as several academic
studies have argued that worker sabotage generally is
much easier to carry out effectively than a bombing
campaign by outsiders, for whom access to facilities
can be more easily denied.
So far, we have
seen no evidence of workers adopting sabotage on a
widespread basis
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gold is mined at more
than 30 sites, none of which produces over 12
percent of the total output. For other metals, how-
ever, production tends to be more concentrated.
Moreover, many key economic installations, such as
oil refineries, can be readily repaired following most
attacks, unless critical components that are only
produced abroad are destroyed
? South Africa's extensive road and rail network
provides numerous alternative routes between any
two major destinations.
black anger over domestic developments has been
reflected in declining worker productivity, work slow-
downs, and factory sit-in strikes geared to disrupt
production.
South Africa's powerful internal security apparatus,
of course, acts to suppress the threat of sabotage. The
backbone of this security system is the South African
Police, a nationwide paramilitary organization with
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Figure 7
South Africa: Employment by Race, 1984
over 40,000 members. It is supplemented in its inter-
nal security role by the military and an extensive
private security industry employing some 250,000
people
The security forces have strong political backing.
Security legislation permits detention without trial
and wide powers of search and seizure. Moreover, the
South African Parliament has enacted special legisla-
tion to protect important economic installations
through the National Key Points Act of 1980, which
empowers the Minister of Defense to declare as a
"national key point" any place or area in the country
Whites
Blacks
that he deems of strategic importance. The Act
requires the owners of key points to adopt and
maintain security measures. Those owners who fail to
comply with the provisions of the Act can be fined up
to $26,000 and imprisoned for up to five years. Key
points are protected by personnel from private securi-
ty firms or by Industrial Commando units made up of
military personnel, according to press sources.
Strikes. The South African economy is heavily depen-
dent upon labor provided by black workers, who
constitute nearly 70 percent of the economically ac-
tive work force, and are especially important in
mining, manufacturing, and construction, according
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Black Consumer Boycotts
Consumer boycotts have been revived as a tool for
black economic leverage, but, in our view, they do not
represent a major source of vulnerability for the
national economy. Since 1979, several black consum-
er boycotts have been directed against particular
companies in efforts to win reinstatement for workers
fired in labor disputes. More recently, localized
consumer boycotts of all white-owned shops have
been called in most major urban areas to protest
South African racial policies, according to press and
Embassy reporting. These protests generally have
had broad political goals-such as freeing jailed
African National Congress leader Nelson Mandela-
as well as specific local demands.
Consumer boycotts tend to be local, affect only a
relatively small segment of the white population, and
have little direct impact on the national economy.
The effect on local economic conditions or small
businesses catering to blacks undoubtedly has been
quite pronounced in many cases, and press reports
indicate that, during several of the more successful
boycotts, white-owned shops have lost most of their
usual sales, with some businesses going bankrupt
under the twin pressures of recession and boycotts.
to government statistics (see figure 7). Domestic pro-
duction, thus, could be disrupted severely by a lengthy
general strike by black workers. Recent organization-
al advances by black labor unions that are committed
to using economic leverage for political gain make
general strikes more viable.
The potential economic implications of a lengthy
general strike are staggering, far outweighing the
consequences of any plausible economic sanctions
scenario, in our judgment. In sharp contrast to sanc-
tions and black unrest to date, which have had little
direct economic impact on whites, a lengthy nation-
wide general strike would-at a minimum-cut the
disposable incomes of the vast majority of whites, and
disrupt their normal patterns of life and business.
Mineral and mineral product exports, in our view, are
particularly vulnerable to strike activity. Without
black labor, whites probably could not sustain signifi-
cant mineral and mineral product exports.
white employees at the Pala-
bora copper mine failed in their efforts to sustain
production during a 1 May work boycott this year,
and a white supervisor was killed accidentally while
attempting to use mining machinery with which he
was unfamiliar. Members of the major black miners'
union in South Africa have staged three major legally
sanctioned strikes and numerous small strikes, and
have demonstrated the capability to suspend produc-
tion simultaneously in most major gold and coal
mines. An extended strike that shut all gold and coal
mines would cost the country each week about $200
million, or about 1 percent of total projected export
earnings for 1986. Short of a nationwide black min-
ers' strike, a rash of small mine strikes already has
hurt export earnings marginally, and this trend ap-
pears likely to continue.
Government and business policies have reduced the
threat of a lengthy strike by making these tactics
obviously risky for black workers and labor unions. As
in the past, companies almost certainly would threat-
en-and quickly carry out-mass dismissals of partic-
ipating workers, a credible threat in most industries,
given high black unemployment. Even when a com-
pany makes use of massive dismissals, however, the
time and expense involved in replacing workers can
hurt company profits and-in some cases-cost South
Africa some export earnings, as the dismissal of
23,000 striking platinum miners in January 1986
indicated. According to Embassy and press reporting,
mining companies anticipating strikes often have
stockpiled ore on the surface, but the black miners'
union has countered successfully in several cases by
involving surface workers in strikes.
Pretoria has responded in the past to growing political
activism in the black labor union movement by crack-
ing down hard on participating unions. Indeed, each
of four past waves of black labor activism has ended
abruptly with the government arresting labor leaders
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1918-30. The first significant black union, the Indus-
trial and Commercial Union (ICU), is formed and
calls unsuccessful dock strike over wages. Member-
ship reaches 100,000 by 1927 as ICU becomes in-
creasingly political. ICU founder Clements Kadalie is
arrested in 1930, and black union activity effectively
collapses.
1938-46. Trade Union Coordinating Committee is
formed as a loose black labor federation, and gives
way to the more formal Council of Non-European
Trade Unions in 1942. Union membership grows
rapidly, reaching 158,000 by 1945, as labor move-
ment again becomes increasingly political. Illegal
strike by 74,000 black miners results in arrests that
significantly weakens the black labor movement.
1954-61. South African Congress of Trade Unions
(SA CTU) formed in 1954 as labor wing of Congress
Alliance, claiming a peak membership of about
100,000. A smaller politically oriented black labor
federation, the Federation of Free African Trade
Unions of South Africa (FFA TUSA), is formed by
black nationalists in 1959. SACTU functions briefly
in the early 1960s as the front for the African
National Congress and the South African Commu-
nist Party following the banning of the ANC. The
arrest and banning of activist union leaders and the
burden of repressive legislation contribute to effective
collapse of SACTU and FFATUSA in early 1960s,
though remnants of SACTU continue to survive in
exile.
1972-76. The Trade Union Advisory Committee, a
black labor coordinating body, is formed in Natal
Province in 1972. A spontaneous outburst of strikes
in Natal the following year adds to black organizing
efforts as six new black unions emerge. Total mem-
bership in black unions reaches a peak of nearly
60,000 in 1975. Following the riots that began in
Soweto in 1976, however, Pretoria cracks down on
black political activism, banning the activities of 26
individuals involved in the black labor movement.
and, in several cases, banning major unions. Govern-
ment security forces have considerable discretion in
detaining labor organizers, and security legislation
affords the government ample latitude to ban unions
or other groups. If needed, security forces could seal
off townships to prevent food and other goods from
reaching striking workers. With little in the way of
strike funds or. stores of food, black workers probably
could not sustain a lengthy siege.
Even if mass dismissals and security measures failed
to break a strike or end industrial sabotage, not all
production in South Africa would grind to a halt. As
the economy moved to a near-war footing, we would
expect Pretoria to carefully allocate resources be-
tween various sectors of the economy. Most state-run
companies traditionally have hired a disproportionate
number of Afrikaners, and probably could continue to
operate without black labor. This would allow many
basic services, such as electricity and transport, to
continue, although probably at reduced levels. Pre-
toria might move available white mineworkers to
those collieries producing for domestic coal-to-oil
conversion plants, sacrificing mineral exports to se-
cure domestic energy production. Highly mechanized
production processes, including much of the modern
agricultural sector and oil refining, would continue
largely unaffected. Pretoria undoubtedly also could
mobilize many white teenagers and housewives to fill
relatively unskilled positions in industry and com-
merce.
Business Confidence. With control over the country's
physical capital concentrated in the hands of a few
hundred South African whites, attitudes among this
group determine the investment climate. In particu-
lar, three major mining and industrial groups have
controlling interest in 30 of South Africa's 50 largest
publicly listed companies, according to reports in the
financial press. Official data reveal that, since 1960,
over 90 percent of investment has been funded from
domestic savings. These statistics further indicate that
foreign control of South African companies generally
is modest outside of banking and heavy industry.
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Figure 8
South Africa: Real Fixed Domestic Investment,
1979-85
As with investors everywhere, local white business-
men base their investment decisions on expectations
about future sales and profitability. In making these
calculations, businessmen factor in both the economic
and political outlook. The historical record of the past
25 years suggests to us that these expectations are
sensitive to outbreaks of black protest activity or
limited foreign economic sanctions.
Businessmen have responded to South Africa's eco-
nomic and political uncertainty by reducing real fixed
investment, which has fallen 50 percent below what it
was in 1981 (see figure 8). Finance Minister du Plessis
has stated publicly that, after making allowance for
investment expenditures for depreciation, real fixed
investment probably will be negative in 1986, indicat-
ing that the country's real capital stock is declining.
Du Plessis also has blamed business pessimism for the
failure of the economy to respond to heavy govern-
ment economic stimulation.
Figure 9
South Africa: Immigration and Emigration,
1960-85
1111111111111111111111111
0 1960 65 70 75 80 85
Nervousness over political and economic uncertainties
also promotes capital flight and white emigration.
For many professionals with marketable skills,
employment opportunities outside of the country will
be attractive, as indicated by a recent survey of
whites, in which 12 percent stated that it was likely or
fairly likely they would emigrate within the next
decade. Emigration already has risen in response to
domestic uncertainties, and during the second half of
1985 it exceeded immigration for the first time since
1978, according to government statistics. Many of
those leaving are engineers and doctors whose skills
already are in short supply in South Africa, but less
than 1 percent of professional, technical, and manage-
rial workers left in 1985. Historical data indicate that
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similar brain drains occurred during earlier periods of
significant black unrest and poor economic perfor-
mance (see figure 9). Pretoria has sought to discour-
age emigration by restricting emigrants to taking at
most 100,000 rand from the country-worth about
$40,000 at current exchange rates.
Foreign Sales
In our judgment, widespread foreign boycotts of
South African products could have a significant, but
probably not crippling, impact on export earnings.
Such boycotts could include official trade sanctions,
decisions by foreign governments or companies to
switch to less politically sensitive sources of supply,
and actions launched by foreign dockworkers refusing
to handle South African trade. Our analysis of past
trade boycotts against South Africa and other coun-
tries leads us to believe that such actions are most
likely to be effective when the goods involved are
easily traceable to country of origin, have a low value-
to-weight ratio (which makes smuggling less attrac-
tive), and substitutes are readily available at similar
prices from other sources of supply. This would affect
exports of coal, steel, agricultural exports, and Kru-
gerrand gold coins, but these goods account for less
than one-third of total South African export earning
(see figure 4). By contrast, we believe that boycotts of
gold bullion, diamonds, and platinum-which account
for some 60 percent of export earnings-would be
difficult to enforce as they are readily marketable,
easily transshipped, and difficult to trace, according
to academic studies An Embas-
sy contact reports that, in an effort to circumvent
possible trade sanctions, some exporters of mineral
commodities already are laundering forwarding docu-
ments to disguise South African origin.
For many commodities, foreign sales probably are
under much greater threat from internal strike activi-
ty that could disrupt production than from foreign
boycotts. Aside from a lengthy general strike, an
upsurge in narrower strike activity-including short
politically motivated work boycotts, wildcat strikes,
and legally sanctioned labor disputes-could seriously
affect export production.
Pretoria probably believes that it has been partially
shielded from tough economic sanctions by Western
reliance on South Africa's strategic mineral exports
and by concern over the region's economic depen-
dence on South Africa. Because mineral sales and
regional economic ties have promoted South African
economic development, they are less obviously defen-
sive measures than is stockpiling. Nevertheless, oft-
repeated threats to embargo mineral sales to the West
or cut economic ties to neighboring black African
states clearly indicate the significance that Pretoria
attaches to these counterlevers. Moreover, Pretoria
has hinted openly that it would retaliate for tough
Western economic sanctions by damaging the econo-
mies of neighboring black states and cutting strategic
mineral sales to the West. We believe that both of
these threats are credible, but that Pretoria most
likely would begin with a measured response and only
raise the stakes gradually as it perceived its other
options to be narrowing. A rash reaction, of course,
cannot be ruled out.
Regional Economic Ties
In our judgment, South Africa could cause consider-
able economic dislocation and hardship to regional
economies at a relatively minor cost.' South Africa
dominates a regional economic network that provides
significant economic benefits to all of its neighbors
except Angola (see figure 10). According to Embassy
reporting, official publications, and open source
information:
? South Africa has 75 percent of the region's rail
network and the most efficient ports, making trans-
portation Pretoria's greatest source of economic
leverage over its neighbors.
? About 350,000 workers from the neighboring states
are legally employed in South Africa, and their
remittances are estimated to support an additional 3
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Figure 10
Economic Links With South Africa
K
Zaire- More than 40 percent of minerals
exported in 1985 shipped through South
Africa ... three-fourths of food,
petroleum, and chemicals for Shaba
Province imported through South Africa.
Zambia- Nearly half of mineral exports
shipped through South Africa ...
Ndola refinery receives some of its
feedstock from South Africa.
Botswana
Botswana- All petroleum products
come via South Africa ... nearly
19,000 miners employed in South
Africa ... recipients from Southern
African Customs Union account for
nearly 20 percent of government
revenues.
South
Atlantic
Ocean
LUSAKA
2/
Boundary representation is
not necessarily authoritative.
Lesotho- Remittances from 110,000 Basotho
miners employed in South Africa and
Customs Union revenues account for 90
percent of foreign currency earnings ...
over 95 percent of imports originate in
South Africa and all exports either sold to or
transhipped through South Africa.
Malawi- Approximately 95
percent of Malawi's petroleum
comes from South Africa ...
19,000 Malawians work in
South Africa and earn nearly
$12 million in foreign exchange.
Mozambique- South Africa
provides 60 percent of
Maputo's electricity ... more
than 50,000 Mozambican
miners work in South Africa
and account for more than half
of foreign currency earnings.
Zimbabwe- About 90 percent of
Zimbabwe's export and import
traffic uses South African trans-
port system ... South Africa is
Zimbabwe's largest trading partner
accounting for about 20 percent
of total.
Swaziland- Southern African
Customs Union accounts for
more than 50 percent of
government revenues ... more
Indian
Ocean
0 200 400 Kilometers
I 'l l
0 200 400 Statute Miles
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million people in neighboring countries. One esti-
mate also indicates that between 200,000 and
700,000 illegal migrants work in South Africa.
During 1984, official data showed that the 195,000
foreign black workers employed in gold and coal
mines remitted over $200 million to their countries
of origin through savings programs run by the
mining companies.
? Receipts from the South African-dominated South-
ern African Customs Unions (SACU) account for
between 50 and 70 percent of the government
revenues of Lesotho and Swaziland, and over 20
percent of Botswana's.
Nonetheless, Pretoria's initial response to economic
sanctions would be limited, in our judgment. Past
actions and public statements indicate that Pretoria
recognizes the value of maintaining-and even ex-
panding-its regional economic relations, which we
estimate yield South Africa about $1.2 billion per
year. Moreover, we believe Pretoria would prefer to
reserve tough economic measures against its neigh-
bors as a lever for reducing the presence of ANC
guerrillas in those states. In the event of tough
sanctions, we believe that Pretoria would take selec-
tive actions designed to showcase its regional econom-
ic muscle and indicate to the West the cost of
sanctions to the region. In particular, we would expect
Pretoria to expel selected foreign workers and disrupt
some rail links. At the same time, the government
would threaten to respond in kind to further Western
sanctions.
We cannot, of course, rule out a harsher reaction.
Pretoria could choose to cut all rail ties to its neigh-
bors and expel all migrant workers. Such moves would
cripple the economies of Lesotho, Mozambique, Swa-
ziland, and Botswana, and cause severe economic
dislocation for Malawi, Zambia, Zaire, and Zimba-
bwe. These countries undoubtedly would seek in-
creased Western aid. Balance-of-payments assistance
to compensate for the loss of all exports currently
funneled through South Africa would total nearly
$2 billion per year.
Table 2
Strategic Minerals: South African
and Soviet Production, 1985 a
Share of
Western
Production
Share of
World
Production
Share of
World
Production
Chromium
53
31
31
Manganese
29
15
43
Platinum group
86
43
50
Vanadium
58
42
31
Strategic Mineral Sales
Concerns that South Africa would use its vast mineral
wealth as a political lever against the West have
surfaced each time Western economic sanctions have
been suggested or imposed. South African officials
themselves have publicly hinted that a strategic min-
eral cutoff might be used in retaliation. What makes
the threat appear credible is the heavy dependence of
many Western countries on a variety of South African
minerals and the relatively small contribution these
minerals make to South African foreign exchange
earnings (see tables 2 and 3):
? South Africa is the West's leading producer of
chromium, manganese, platinum-group metals
(PGM), and vanadium, accounting for 30 to 90
percent of Western output. These metals are critical
in making some industrial products and sophisticat-
ed military equipment. Only the Soviet Union can
compete with South Africa in terms of volume of
production and reserves.
? Western import dependence for these four strategic
minerals varies from 50 to 100 percent for the
United States, 90 to 100 percent for the European
Community, and 95 to 100 percent for Japan. South
Africa is the key supplier for most of these markets.
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Table 3
Strategic Minerals: Critical Uses and Alternatives to
South African Supplies, 1985 a
Share of US Consumption Strategic Applications
Supplied by South Africa
(percent)
Chromium 56 Stainless steel and specialty alloys for
tanks, ships, military aircraft, and
naval nuclear propulsion systems
Manganese 39 Steel for ships, tanks, and other
vehicles
Catalysts for petroleum and fertilizer
production
Electrical contacts for jet aircraft en-
gines and lasers
Steel and titanium alloys production
and for oil pipelines and jet engines.
Increased imports from India, Phil-
ippines, Turkey, USSR, and Alba-
nia; substitute other materials in
noncritical applications.
Increase imports from Gabon and
Australia
Increase recycling-particularly
from spent catalytic converters
? For South Africa, these industries earn no more
than 9 percent of total export earnings and employ
only 1 percent of the labor force-equivalent to
about 5 percent of all miners-making the costs of a
cutoff relatively low for South Africa unless it
resulted in an even tougher Western response
It is clearly in South Africa's best economic interest
to continue to export strategic minerals. Any deliber-
ate supply cutoff would tarnish South Africa's reputa-
tion as a reliable supplier, and a portion of its market
could be lost even if the embargo were later lifted. In
addition, a supply cutoff would undoubtedly trigger
accelerated substitution and recycling efforts, encour-
age competing producers to increase production, and
possibly lead to use of Western stockpiles.
Should Pretoria choose a total embargo as a political
gesture, however, we believe that Western countries
could adjust-at some cost-by encouraging alternate
producers to restart idled capacity, increasing pur-
chases from the Soviet Union, using stockpiled mate-
rials,'intensifying recycling efforts, and, if necessary,
reducing civilian usage. The Soviet Union would
probably benefit substantially by increasing exports
and charging higher prices. A partial embargo-
which we judge somewhat more likely-initially
would be far less costly to both South Africa and the
West. South Africa would lose little of its trade
volume in the short run as it reoriented sales away
from targeted countries to other markets. Over the
long run, however, even a partial embargo would
encourage substitution.
Overall Assessment of Economic Vulnerability
Pretoria's public statements and past actions suggest
that the prospect of tougher Western economic sanc-
tions is of considerable concern to the South African
Government, but that it believes it can do little to stop
an eventual tightening of the sanctions net. Instead,
government strategy appears geared toward publiciz-
ing its reform program and the regional costs of
sanctions in hopes of delaying-as opposed to prevent-
ing-the adoption of tougher measures. Nonetheless,
recent actions against neighboring states and a harsh
internal security response to domestic protests clearly
indicate that other considerations weigh more heavily
in Pretoria's decisionmaking calculus.
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Economic Prospects in the Absence of New
Dislocations
The South African economy has been buffeted in
recent years by numerous shocks-drought, lower-
than-anticipated export prices, and a debt crisis that
has threatened to isolate it from international credit
markets. As a result of these shocks, real economic
growth has averaged about 1 percent per year since
1981, a rate insufficient to keep per capita income
from declining. We believe that the brunt of this
mediocre economic performance has fallen on blacks,
and, in our view, has contributed significantly to
grievances underlying the serious unrest of the past
two years.
According to a recent government study, the econo-
my's long-run real GDP growth potential is 3.6
percent in the absence of new foreign capital inflows
or a sharp rise in world gold prices. The study held
that economic growth will be constrained by stagnant
gold production, limited prospects for further import
substitution, and only fair-to-good opportunities to
increase traditional commodity exports.
currency controls that were intended to protect high-
cost domestic industry from foreign competition. In
addition to allowing the rand to float against foreign
currencies, the monetary reforms eliminated ceilings
on domestic interest rates. Some selective promotion
of exports also is envisaged, but, as a signatory to the
General Agreement on Tariffs and Trade, South
Africa is limited in the types of export subsidies that
it can use.
Even without new economic dislocations, however,
our economic model for South Africa forecasts real
GDP growth averaging no more than 3 to 4 percent
per year through 1991. We believe Pretoria's efforts
to boost nontraditional exports probably will have
little impact. South Africa's recent dismal economic
performance and political uncertainties make it an
unattractive target for new investment. Moreover,
without some internationally recognized resolution of
the country's racial problems, the market for con-
sumer goods bearing the "Made in South Africa"
label is likely to be quite small.
We believe concern over the country's mediocre long-
term growth prospects has been reflected in Pretoria's
efforts since 1979 to liberalize its economic policies in
order to promote manufacturing exports and attract
new foreign investment. A key element in this strategy
has been the removal of selected import and foreign
In our judgment, the policies that Pretoria has adopt-
ed to reduce economic vulnerability have insulated the
domestic economy fairly well from the most serious
potential impacts of external pressure. For example,
we believe it highly unlikely that a campaign of
foreign disinvestment or embargoes on the sale of
goods to South Africa by itself could cause severe
economic dislocation.
We believe, however, that Pretoria's efforts to insulate
itself from foreign pressures have come at a signifi-
cant cost to economic growth potential. Government
policies have diverted scarce financial resources to
relatively nonproductive uses, such as funding strate-
gic stockpiles and uneconomic import substitution. In
our view, Pretoria's industrial development strategies
and broader economic policies often have been distort-
ed by the overwhelming primacy of maintaining white
rule.
Pretoria's policies to reduce economic vulnerability
also offer the country little protection against a
gradual erosion of its foreign trade position in the face
of tough Western economic sanctions, in our judg-
ment. Likewise, the economy appears to us to be only
moderately well braced to withstand serious and
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Lessons From the Sanctions Against Rhodesia
The Rhodesian Sanctions. After the Ian Smith gov-
ernment unilaterally declared independence in No-
vember 1965, the United Kingdom imposed a wide
range of economic sanctions-embargoing arms and
petroleum sales, banning new loans, and boycotting
major imports from Rhodesia. The United Nations
followed suit in 1966 and 1968 with mandatory
sanctions banning all trade except medical and edu-
goods moving from Rhodesia to South Africa ended
up in world markets with false documentation ]
A 1978 report sponsored by the British Gov-
ernment accused the two largest UK oil companies of
supplying petroleum products to Rhodesia until
1976-first through South African middlemen, then
via a complex swap arrangement with a French
cational supplies.
In several respects, Rhodesia in 1965 appeared an
ideal target for sanctions with its heavy dependence
on a narrow range of exports primarily to a handful
of markets. Tobacco and mineral sales alone ac-
counted for more than half of export revenues. Over-
all exports totaled a fairly high 34 percent of GNP,
according to IMF statistics. Moreover, Britain, Zam-
bia, and South Africa-which together purchased
nearly half of Rhodesian exports-were not critically
dependent on supplies of raw materials from the
country.
Despite these advantages, the sanctions proved diffi-
cult to enforce, largely, in our view, as a result of
increased South African trade, loans, and investment.
South African companies became the dominant force
in the Rhodesian business community, buying inter-
est in Rhodesian mining, agriculture, corn milling,
food processing, brewing, and other concerns. The
embargo also was violated by other African na-
tions-including Portuguese Mozambique (until its
independence in 1975), Zambia, Botswana, Malawi,
and Zaire-and by almost every major Western
country, including the United Kingdom. Subterfuge
trade flourished. We estimate that two-thirds of the
company in Portuguese Mozambique.
Among Rhodesia's exports, the most significant im-
pact of sanctions appears to have been on tobacco
sales, Rhodesia's largest foreign currency earner. The
tobacco was easily traceable to country of origin,
making transshipment ineffective. The sharp decline
in tobacco exports and the need to boost domestic
food production led growers to switch to corn and
wheat production.
In our judgment, the overall effect of the sanctions
and South African financial support was to strength-
en the Rhodesian economy. Import substitution re-
ceived a substantial boost, with manufacturing re-
placing agriculture as the leading sector of the
economy. Total domestic investment climbed from 13
percent of GDP in 1964 to 20 percent in the first half
of the 1970s. From 1965 to 1974, real GDP growth
averaged 6.5 percent per year. C
Rhodesia and South Africa Compared. In some re-
spects, the South African economy is similar to the
Rhodesian economy in 1965. For example, South
Africa has a similar heavy dependence on mineral
and agricultural exports. On the other hand, the
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South African economy currently is far larger and
more nearly self-sufficient. According to IMF statis-
tics, South African imports equal nearly one-fifth of
a GDP totaling $54 billion. Rhodesian imports
equaled one-third of a GDP of only $1 billion.
Moreover, some 45 percent of South African imports
is machinery and equipment that would only gradual-
ly need to be replaced. According to our estimates,
another 15 percent is crude oil, for which some
domestic alternatives exist. By contrast, the Rhode-
sian economy depended on a much broader array of
imports, with machinery and equipment, for example,
representing only 32 percent of all imports. Another
major difference, however, is that South Africa has
no obvious wealthy patron state that could play the
same role for it that it played for Rhodesia.
sustained labor unrest or further sharp declines in
domestic business confidence. Some combination of
such internal pressures-perhaps in part triggered
and reinforced by tough Western economic sanc-
tions-could produce more dramatic economic ef-
fects.
Impact of Recent Limited Sanctions
South Africa has yet to experience the sort of econom-
ic siege that Rhodesia faced in the last few years
before majority rule. To date, limited Western eco-
nomic sanctions have reduced slightly South African
fruit, gold coin, and coal exports, but left the vast bulk
of its foreign trade intact. Declining investor confi-
dence has reduced the country's access to internation-
al credit, and many small foreign investments are
being withdrawn. Nonetheless, some trade credit still
is available, and most major foreign investors remain.
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Implications. We believe that South Africa is unlike-
ly to prosper under widespread economic sanctions to
the same extent that Rhodesia did. For Rhodesia, the
essential economic problem posed by sanctions, in our
judgment, was to exploit a surge in South African aid
and investment to diversify the economy and promote
self-sufficiency. Eventually, growth flagged when the
civil war intensified and the inefficiencies of very
small-scale production accumulated. By contrast, the
South African economy already has exhausted most
ready opportunities for import substitution. While
the imposition of tough sanctions would generate new
import substitution possibilities, the primary chal-
lenge for South Africa would be to tap years of
stockpiling, expertise on subterfuge trade, and past
import substitution to sustain the economy more or
less on an even keel.
The most important immediate consequences of the
debt crisis, sanctions, and limited disinvestment to
date, in our view, probably have been psychological,
political, and inflationary. International attitudes to-
ward South Africa are of major concern to the
country's top business leaders, making many of them
strong advocates of racial change. The inflationary
consequences of South Africa's negative international
image stem from the declining exchange value of the
South African rand-a barometer of domestic and
international concern over the country's economic and
political problems-which has raised the cost of im-
ports and added to inflationary pressures
Impact of Tougher Measures
A package of tougher Western economic sanctions
could eventually result in slower growth, though
perhaps with an initial growth spurt as further import
substitution took place. For example, according to our
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model of the South African economy, the country's
economic growth potential is about 3 to 4 percent per
year in the absence of new foreign loans and invest-
ment. We estimate that a gradually tightened boycott
by the United States, the European Community, and
Japan of South African coal, steel, gold coins, and
agricultural exports would trim this growth potential
by 2 or 3 percentage points. From Pretoria's stand-
point, such an induced slower growth would only
complicate already troublesome demographic trends
that foster unemployment.
Distributive EBects. We believe that the burden of
zero economic growth would fall most heavily upon
black South Africans and on the economies of neigh-
boring black-ruled countries. According to a recent
academic study, a real economic growth rate of about
5.5 percent per year would be needed to absorb new
jobseekers into formal-sector employment. The study
further estimates, in the absence of real economic
growth, some 350,000 new jobseekers per year would
be unable to find formal-sector work over the remain-
der of this century. Even with 3-percent real average
annual growth, nearly 200,000 new jobseekers would
fail to receive modern-sector jobs. In our view, the
vast bulk of these new unemployed would be black.
In addition, we believe that Pretoria would actively
shift more of the burden of sanctions to neighboring
black states, and from white to nonwhite South
Africans. In particular, we expect that Pretoria would
follow through with its threats to expel illegal migrant
workers, as well as some migrant black miners.
Pretoria probably also would retaliate for sanctions
with short slowdowns at border posts on rail traffic to
and from neighboring countries. Within South Africa,
Pretoria could shift the burden of foreign sanctions
toward nonwhites by cutting planned social spending,
reimposing sales taxes on foods, and reducing govern-
ment employment of nonwhite workers. On balance,
these measures probably would succeed in limiting the
average impact on whites. A reduction in employment
of foreign workers also would offset partially the
increased burden on nonwhite South Africans, but we
would expect growing inequity in the distribution of
incomes between whites and blacks even as most
whites faced declining real income.
Political Repercussions. We expect that slower eco-
nomic growth would add to divisions within the white
community as competition rose for increasingly scarce
resources. As it is, survey data and Embassy reporting
indicate that a sizable minority of the white popula-
tion already believes Pretoria has moved too rapidly
on racial reform at considerable cost to whites. In
particular, many Afrikaners fear that President
Botha's reform program will jeopardize their future-
both as a people and as individuals. Rightwing politi-
cal parties have achieved some gains in recent byelec-
tions, in part by stressing the economic costs of
reform, and we believe they probably will make
further gains if the economy stagnates.
At the same time, Pretoria is under pressure from
other quarters to accelerate reforms. For example,
several representatives of the international banking
community have indicated that progress on reforms
would facilitate future debt rescheduling agreements.
According to press and Embassy reporting, most of
the major business organizations-representing En-
glish-speaking, Afrikaner, black, or foreign busi-
nesses-already have presented the government with
individual or joint agendas for reform. Even many
small businessmen within South Africa who may not
be directly affected by sanctions or the country's
international economic difficulties have felt the im-
pact of consumer boycotts and work stayaways, and
are lobbying for change. The effectiveness of busi-
ness-group pressure on the government, however, is
questionable. The Afrikaner-dominated government
has had generally cool relations with the business
community, which is dominated by English-speaking
South Africans and foreign companies.
Hurting White South Africa
Short of a precipitous and sustained fall in the world
price of gold, we foresee no external pressures that-
taken in isolation-would produce a rapid economic
collapse. On the other hand, a severe economic dislo-
cation in South Africa could result from some combi-
nation of very tough sanctions and unanticipated
internal developments. Moreover, a very strong exter-
nal action-such as a widely supported ban on all
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trade-probably would have important psychological
effects on domestic investment, and also might em-
bolden black workers to launch longer general strikes
or widespread industrial sabotage in the expectation
of a quick end to minority rule.
Political Repercussions. A sharp economic crisis re-
sulting from some combination of external and inter-
nal pressures, in our view, is less likely to divide the
white community than a gradually stagnating econo-
my. On balance, we believe the more immediate the
security threat appears, the more whites will tend to
rally around the government as attention is diverted
away from contentious issues-such as negotiation
with blacks and reform-toward security issues,
where a greater consensus exists. Thus, a very strong
set of sanctions or lengthy general strike could in-
crease support for the government, especially if it
were to take a hardline response.
The use of tough economic sanctions as a lever to
promote change in South Africa has risks and few
likely rewards in terms of influencing Pretoria's poli-
cies. The fluid internal situation, the unresolved issue
of the country's short-term debt, and the comparative
ease and speed with which Pretoria could damage the
economies of neighboring states or withhold valuable
strategic minerals raise disturbing uncertainties about
the ultimate impacts of external economic pressures.
In our view, a cat-and-mouse game of gradually
tightening sanctions against Pretoria would fail to
force the South African Government to the bargain-
ing table with blacks or prevent it from carrying out
military raids against its neighbors to protect its
security. Such sanctions might spur some further
racial reforms, but even these gains are unlikely to
involve major departures from Pretoria's own agenda.
Rapid imposition of harsher sanctions is unlikely to
fare much better. In our judgment, under the pressure
of strong foreign sanctions, the government would
retreat quickly into an economic laager, cutting divi-
dend and profit remittances, pegging the exchange
value of the rand, and imposing wage and price
controls domestically. We believe that the economy is
well positioned to survive in a state of economic siege
for as long as three or four years, and much longer
under the reasonable assumption that the sanctions
could be skirted to a large extent.
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Secret
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