SOUTH AFRICA: IMPLICATIONS OF FALLING GOLD PRODUCTION

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• Document Creation Date: December 22, 2016
• Document Release Date: January 26, 2012
• Sequence Number: 4
• Publication Date: April 1, 1984
• Content Type: REPORT

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Intelligence
South Africa:
Implications of
Falling Gold Production
Co_ i d_ _ ial
ALA 84-10037
April 1984
316
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South Africa:
Implications of
Falling Gold Production
An Intelligence Assessment
This paper was written by ALA,
with a contribution b I. Comments
and queries are welcome and may be directed to
the Chief, Regional Issues Branch, Africa Division,
Office of African and Latin American Analysis, on
Confidential
ALA 84-10037
April 1984
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South Africa:
Implications of
Falling Gold Production
Key Judgments The confidence of white South Africans has long been sustained by their
Information available trust in the fundamental economic strength of their country. Gold has been
as of 2 April 1984 the key to South Africa's economic growth because massive foreign
was used in this report.
exchange earnings from gold sales pay for up to half of total annual
imports, including capital goods critical to economic growth. The country's
gold production has been declining fairly steadily for more than a decade,
however, slipping from a high of 1,000 metric tons in 1970 to less than 700
tons last year.
The long-term decline in gold production has weakened South Africa's
economy by:
? Shrinking the contribution of gold mining, the most important industry
in the country, to real GDP.
? Reducing the amount of foreign exchange available for the purchase of
imports as compared with what would have been earned had gold
production continued to rise.
? Inducing the government (because of this foreign exchange constraint)
periodically to adopt fiscal and monetary policies that deliberately
sacrifice economic growth to curb demand for imports.
We.believe that Pretoria's conscious policy of periodically stifling demand
for imports as a means of reducing massive current account deficits was a
principal cause of the decline in the average rate of South African
economic growth from 5.7 percent in the 1960s to 2.8 percent since 1970.
Rising gold prices cushioned the impact of the fall in gold production on
the economy but did not offset it because of substantial increases in the
cost of imports and net services. Even though annual gold earnings
averaged over $10 billion in 1980-83, as compared with only $1.8 billion in
1970-73, the average annual cost of imports and services jumped from $5
billion to nearly $21 billion.
We expect gold production to rise slightly this year and in 1985-as it did
in 1983-but we believe production will begin to decline again in 1986 and
sink below 600 tons by the early 1990s. We base this projection on an ap-
parently irreversible depletion of ore reserves and the unlikelihood of major
new discoveries.
Confidential
ALA 84-10037
April 1984
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We believe that Pretoria will continue to constrain economic growth
periodically because of foreign exchange shortages. South Africa cannot
count on increases in the price of gold to offset the decline in production
and the increases in the cost of imports that we expect. Pretoria has only
two other options for avoiding chronic current account deficits-increasing
substantially its borrowing from Western banks or trying to accelerate the
growth of nongold exports:
? South African policymakers will be unlikely to undertake heavy foreign
borrowing, because that would clash with their conservative tenets and
longstanding practices and would-in Pretoria's perception-provide a
potential source of leverage to foreign critics of the government's racial
policies.
? Pretoria clearly regards the expansion of nongold exports as the most
desirable alternative, but while prospects for the key ones-coal, dia-
monds, platinum, corn, metallic ores, and ferroalloys-are fair to good,
foreign demand will not be strong enough to pick up the slack.
As a result, we expect that the country's average rate of economic growth
will bump along at no more than 2.5 or 3 percent during the remainder of
the 1980s.
We have not been able to establish a causal link between South Africa's
economic performance and the level of racial tension. Slow growth will,
however, have some other predictable effects:
? The financial burden of extensive military activities, such as those South
Africa has undertaken in Angola, and of maintaining administrative
control over Namibia will become more onerous. We doubt, however,
that economic considerations alone will lead Pretoria to withdraw from
Namibia.
? Pretoria will also have fewer resources to spend on domestic social and
economic reforms.
? Business opportunities for the 400 US firms that have subsidiaries,
branches, and affiliates in South Africa will be reduced, although US
banks may find increased opportunities for making commercial loans to
South Africa.
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We doubt that South Africa's economic predicament will give Washington
much leverage over the way Pretoria conducts its domestic or regional
policies. The ruling National Party's leaders have never allowed economic
constraints to stop them from protecting those things they regard as vital to
their country's security or to Afrikaner political control. We believe the
pinch on Pretoria's budget and on the white standard of living will
engender a sense of insecurity among the Afrikaners, who tend to become
more aggressive when they believe their backs are against the wall.
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Key Judgments
Impact of Declining Gold Production on Economic Growth 1
South Africa's Options
Implications for the United States 8
Prospects for Nongold Exports 11
1. South Africa: Economic Activity (map)
2. South Africa: Gold Production and Prices, 1960-83
3. South Africa: Current Account Trends and Real GDP
Growth, 1970-83
1. South Africa: Falling Gold Yields, 1963-82
2. . South Africa: Current Account, 1970-83
3. South Africa: Gold Holdings, Production, and Sales, 1970-83 6
4. South Africa: Major Exports
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Figure 1
South Africa: Economic Activity
NAMIBIA
BOTSWANA
South '
Atlantic
Ocean
Upington0 Fe
D
D Kimberley
Bloemfontein
Z IM BABWE
vlbabane
SWAZILAND
J Gold mining region
Cr Chromium
C Coal
D Diamonds
Fe Iron
Pt Platinum
ichard's
Bay
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South Africa:
Implications of
Falling Gold Production
Gold mining has been a major, and perhaps the key,,
factor in South African economic development since
the discovery of large reefs of gold in 1886 along the
Witwatersrand (the Rand), the area around which
Johannesburg has developed. For years South Africa
has produced at least half of the world's newly mined
gold and generally exported its entire annual output.
In an economy in which exports account for about a
fourth of GDP, gold sales usually make up a third to a
half of total annual export,earnings.
South African gold production peaked in 1970 and,
has declined by more than 30 percent since then.
Although gold production increased slightly last year
and we expect similar rises in 1984 and 1985, annual
gold output will, according to our analysis, continue
its long-term downward trend thereafter, dipping
below 600. tons annually by the early 1990s (see box).
We base this projection on what South African
mining journals and the financial reports of South
African mining companies indicate has been an irre-
versible depletion of reserves of gold ore and on the
judgment of mining experts that it is unlikely that
vast new deposits will be discovered (see table 1)F-
This paper examines the impact of declining gold
production on South African economic growth, Pre-
toria's options for reducing its reliance on gold, and
obstacles to the expansion of -South Africa's nongold
exports. We assess how falling gold production will
affect South Africa's longer term economic prospects
and the implications for the United States
Impact of Declining Gold Production on Economic
Growth
The fall in South African gold production since 1970
casts a shadow on the country's economy:
? The decline in the output of gold has shrunk the
contribution of mining to real GDP from 18 percent
Figure 2
South Africa: Gold Production
and Prices, 1960-83
Production
Metric tons
Prices
US $ per troy ounce
in 1970 to 11 percent in 1983, ,even though produc-
tion of minerals other than gold increased by three-
fourths. ..
? The fall in gold production has reduced the amount
of foreign exchange available for the purchase of.
imports, including capital goods critical to economic
growth, as compared with what would have been
earned had gold production continued to rise. Earn-
ings from gold sales nevertheless continue to play a
crucial role, enabling South Africa to import at
about twice the level possible without gold.
? This foreign exchange constraint has induced the
government periodically to adopt fiscal and mone-
tary policies that deliberately sacrifice economic
growth to stifle demand for imports.
Confidential
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According to South African mining experts, most of
the easily mined ores in the country were exploited
long ago; remaining ores are largely at extreme
depths and of low grade. Average yields dropped from
11.2 grams per metric ton of ore in 1970. to 6.4 grams
in 1982 (see table 1), and we expect that ore grades
will continue to decline. Mining. experts do not fore-
see any major new discoveries.
Production rose slightly last year and will probably
do so again this year and in 1985, but we believe this
is only a temporary development (see figure 1). The
decline in gold prices since 1980 has induced compa-
nies to bypass lower grade ores that could have been
mined profitably at higher prices in order to concen-
trate on dwindling veins of relatively high yield ore.
In addition, the price surge in 1980 induced several
companies to expand their capacity to mill ores and
led to the development of one additional mine-
including a new shaft and ore processing complex-
that is just now coming on stream.
The Mines. The top dozen South African gold mines,
which include all of those that produced over 25 tons
of gold in 1982, account for nearly two-thirds of the
Foreign exchange shortages caused by the fall in gold
production would have been much more severe had
there not been steep, speculative increases in the price
of gold. Increased earnings from gold sales-from an
average of $1.8 billion a year in. 1970-73 to over $10
billion annually so far in the 1980s-offset slightly
more than half of the increase in the average annual
cost of imports and net services from $5 billion in
1970-73 to nearly $21 billion in 1980-83 (see table 2).
To meet severe current account deficits in 1970-71,
1975-76, and 1981-82, economic policy makers in
Pretoria followed essentially the same pattern of
behavior each time: initially selling gold from the
country's gold production. Nine of these are more
than 20 years old and beyond their peak productive
years, but they are still workingfairly rich and
extensive ore deposits and should be able to keep
producing-albeit at a lower rate for the next 10 to
30 years.
Ore bodies have been substantially depleted and ore
grades are falling rapidly in almost all of South
Africa's other 28 gold mines. We estimate that of
these at least 12, accounting for about one-seventh of
total production, will be closed by the early 1990s. F-
Unless gold prices regain high levels-$800 an ounce
or more for a sustained period, we estimate that the
level of new investment in South African gold mines
will decline. New projects are becoming increasingly
expensive to bring into production. Projects sched-
uled for startup over the next several years consist
primarily of extensions to. existing mines. Moreover,
the depletion of the richest ore reserves is inducing
the mining industry to shift its attention from gold to
coal, according to the South African Chamber of
Mines.
government's stock,' then using monetary and fiscal
tools-higher interest rates and reduced government
spending-that constrained economic growth in order
to reduce demand. for imports (see box).
In our judgment, Pretoria's conservative financial
policies indicate that it places higher priority on year-
to-year balances than on longer term performance.
Figure 3 illustrates how peak years of economic
' Although Pretoria generally. exports its annual production of gold
to maintain a reputation as a reliable supplier to the international
market, it also allows sales to exceed production when necessary to
help reduce current account deficits. Pretoria has drawn down its
stock of gold in government vaults by 60 percent, or 350 tons, since
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Table 1
South Africa: Falling Gold Yields, 1963-82
Date of
Startup
Ore Grade
(grams per
metric ton)
Production
in 1982
(metric tons)
Vaal Reefs (North/South)
1956
8.6
9.4
78.7
Driefontein Consolidated (West)
1952
14.4
14.1
41.5
Western Holdings
1953
4.8
14.4
40.2
Western Deep Levels
1962
11.3
7.1
39.5
Driefontein Consolidated (East)
1972
12.5
35.3
Harmony
1954
7.8
8.0
31.8
Hartebeestfontein
1955
10.2
9.2
29.9
Kloof
1968
15.0
27.8
Buffelsfontein
1957
8.6
8.6
27.5
Randfontein
1974
5.0
27.1
Free State Geduld
1956
8.0
20.6
25.4
President Brand
1954
7.4
14.6
25.1
St. Helena (St. Helena Section)
1951
6.8
8.5
14.6
Windelhaak
1958
6.3
6.8
13.1
Stilfontein
1952
7.3
9.1
12.5
Doornfontein
1953
7.4
8.9
10.8
E.R.P.M.
1894
4.0
5.1
..10.7
Libanon
1949
6.4
6.1
10.7
Kinross
1968
5.9
10.0
3.3
1.2
Wit Nigel
1940
3.2
0.9
St. Helena (Beisa Section)
NA
1.5
0.6
Vaal Reefs (Afrikander)
NA
1.8
NEGL
Anglo-American-Orange Free State joint
metallurgical production
1977
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Table 2
South Africa: Current Account, 1970-83
-3,615
-4,087
-3,697
-5,127
-8,492
-9,212
-8,559
Nongold exports
2,034
2,169
2,885
3,635
4,658
4,991
5,622
Net services and transfers
-806
-849
-816
-1,139
-1,412
-1,727
-1,682
Current account before gold sales
-2,387
-2,767
-1,628
-2,631
-5,246
-5,948
-4,619
Gold sales a
1,617
1,578
1,341
2,572
4,004
3,774
3,495
Current account after gold sales b
-770
-1,189
-287
-59
-1,242
-2,174
-1,124
-7,913
-9,222
-11,569
-18,200
-20,809
-16,702
-15,000
Nongold exports
7,237
8,566
10,469
12,553
11,006
9,350
9,800
Net services and transfers
-2,064
-2,259
-2,503
-3,535
-4,032
-3,412
-3,500
Current account before gold sales
-2,740
-2,915
-3,603
-9,182
-13,835
-10,764
-8,700
Gold sales a
3,761
4,374
6,862
11,902
11,012
8,530
8,925
Current account after gold sales b
1,021
1,459
3,259
2,720
-2,823
-2,234
225
a Estimated.
b The current account after gold sales was balanced by net capital
flows, changes in foreign exchange reserves, and net errors and
omissions.
growth (5.3 percent in 1970, 7.1 percent in 1974, and
7.8 percent in 1980) were followed chronologically-
and we believe causally-by substantial current ac-
count deficits and how the elimination of these defi-
cits was accompanied chronologically-and we also
believe causally-by sharp declines in economic
growth. We believe that the apparent symmetry in the
cycles of rising economic growth followed closely by
severe current account deficits, on the one hand, and
economic recession immediately preceding current
account surpluses, on the other, largely reflects the
success of Pretoria's policy of allowing economic
growth to fall to levels in keeping with prudent
management of the country's foreign exchange
balance.
We believe that Pretoria's policy of periodically sti-
fling growth compounded the effect of the fall in gold
production and was, the principal cause for the decline
in the average rate of South African economic growth
from 5.7 percent in the 1960s to 2.8 percent since
1970. Moreover, in our judgment, Pretoria's short-
term reactions made it all the more difficult for South
Africa to adjust to the peaks and troughs that have
wrenched the world economy since the early 1970s. If
figures for the past three years-when the South
African economy reeled under the combined impact
of worldwide recession and severe drought-are fac-
tored out, the average annual rate of South African
economic growth (1971-80) was still less than 4
percent. Even that figure paints an artificially rosy
picture of the economy's capabilities, however, be-'
cause that level of growth would not have been
attained without steep, fortuitous increases in gold
prices in 1974 (when the average price jumped by two-
thirds to $160 an ounce) and 1980 (when prices
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Pretoria's Method of Dealing With Current Account
Deficits
In our judgment, South African economic policymak-
ers try to balance their quest for high economic
growth against the obligation they feel to manage the
country's foreign exchange balance prudently. They
followed essentially the same pattern of behavior in
redressing severe current account deficits in each of
the following periods:
? Pretoria at first opted to cover the 1970-71 current
account deficit by supplementing gold exports from
current production with sales from the govern-
ment's stock of gold. After selling nearly two-thirds
(626 tons) of its total gold holdings, Pretoria in
1971 clamped down on economic growth by increas-
ing domestic interest rates and cutting government
spending to reduce demand for imports. This
halved economic growth in 1972, which led to a
reduction in the volume of imports by 15 percent.
The resulting decline in the current account deficit,
aided by a one-third increase in nongold exports in
1972, ended the foreign exchange hemorrhage.
? This pattern was repeated during 1975-77 following
a 40 percent jump in the volume of imports by 1974
associated with the spurt in economic growth,
which in turn was made possible by the increase in
foreign exchange earnings stemming from the jump
in the price of gold. After gold prices flattened out
in late 1974, the government sold a total of 266
tons of gold from its own stock over the next three
years and cut government spending and increased
interest rates. These policies depressed real growth
to zero by 1977, with the result that the volume of
imports slid back by 40 percent to about the same
level as in 1972 and the current account recorded a
surplus.
? The current account deficit in 1981-82 was given a
vicious twist because the gold price boom, which
had peaked at $850 an ounce in 1980, was followed
by worldwide recession. The boom had enabled
South Africa to increase its volume of imports in
1980 by one-third more than would have been
possible at the gold price level of 1979 without
incurring a current account deficit. The decline of
gold prices by 1982, however, forced Pretoria to
take particularly severe contractionary measures-
in addition to selling 143 tons of gold from stock-
at a time when gold production dropped by 25 tons
and nongold exports fell by one-fourth. According
to sketchy data, the volume of imports was down by
40 percent or more in 1983 as compared to 1980
and the contraction has had the intended result: the
current account appears to be in surplus.
doubled to an average of more than $600 an ounce).
Without the relief that those two price surges provid-
ed for the foreign exchange constraints on Pretoria,
the annual rate of South African economic growth
during the period 1971-80 would in all likelihood have
been less than 3 percent.
So long as the long-term trend in South African gold
production continues to be downward, we doubt that
Pretoria will be able to avoid similar balance-of-
payments predicaments in the future. Apart from
hoping for large new gold discoveries, which we and
South African mining experts believe to be highly
improbable, or for large, sustained gold price in-
creases, which would be strictly fortuitous, South
Africa, it seems to us, has essentially only two options
to its established policy of periodic clampdowns on
growth: heavy borrowing from Western banks or
trying to accelerate the growth of nongold exports.
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The first option-increasing substantially public and
private borrowing from Western banks-probably
already is a source of concern to economic decision
makers in Pretoria; South Africa's foreign debt in-
creased from about $7 billion in 1980 to $15 billion in
mid-1983, according to statistics published by the
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Figure 3
South Africa: Current Account
Trends and Real GDP Growth,
1970-83
Current Account Real GDP Growth
Billion US $ Percent
Bank of International Settlements. Further in-
creases-particularly large ones that might threaten
South Africa's solid international credit rating-are
unlikely, in our judgment, for three reasons:
? They would mark a significant departure from the
pattern of economic fine-tuning that the government
has carried out since the decline in gold production
began.
? They would clash with the Calvinist-based tenets of
the government's Afrikaner leaders, who tend to
view heavy debt as immoral.
? Heavy foreign debt would, in the perception of
South Africa's leaders, provide a potential source of
leverage to foreign critics of the South African
racial system.
Policymakers in Pretoria have long recognized that
their second and most desirable option would be to
increase nongold exports enough to offset the loss of
the economic boost that steadily rising gold produc-
tion once provided. About 98 percent of South Afri-
ca's nongold exports consist of raw and intermediate
goods. Six product groups-coal, diamonds, platinum
Table 3
South Africa: Gold Holdings,
Production, and Sales, 1970-83
Gold in
Government
Gold
Production
Gold Sales
Bank Vaults a
Total From Stocks
1971
365
976
1,203
227
1972
558
910
717
0
1973
591
855
822
0
1974
568
759
782
23
1975
552
713
729
16
1976
394
713
871
158
1977
302
700
792
92
1978
304
704
702
0
1979
312
703
695
0
1980
378
673
607
0
1982
23)
6S2
1U6
S4
1983
242
664
657
0
group metals (PGM),2 metallic ores, ferroalloys, and
corn-normally account for about 40 percent-of the
total (see table 4). South Africa has found it cheaper
and easier to increase exports of raw and intermediate
goods than to produce and market finished consumer
goods abroad.
The long-term performance of South Africa's nongold
exports has been good but not good enough"to make
up for the combined effects of the fall in gold
production and inflation in import prices. The coun-
try's nongold exports grew by an average of 20
percent annually during the period 1971-80-about
the same rate as that of total export growth in the
United States, the United Kingdom, and Japan. This
was well behind the export performance of such fast-
growing LDCs as Singapore and South Korea, how-
ever, which achieved average annual export growth of
' The composition of available ores in South Africa dictates that
PGM production consists of about one-half platinum and about _
one-fourth palladium, with the remaining one-fourth, rhodium,
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ZoA]
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uonnaenual
Table 4
South Africa: Major Exports
Million US $
Total
3,651 24,455 18,725
Gold
1,617 11,902 8,925
Nongold
2,034 12,553 9,800
Of which:
inability of nongold exports to take up the slack to pay
for the level of imports that would be required by a
high rate of economic growth.
31 percent and 34 percent, respectively, in the same
period
Moreover, South Africa's nongold exports have de-
clined by one-fifth since 1980. This decline-the first
in 25 years-resulted from a combination of factors:
? Reduced demand for South Africa's nongold ex-
ports because of economic recession in the country's
principal markets: Western Europe, the United
States, and Japan.
? Severe drought in 1983, which halted corn exports.
Although prospects for coal and South Africa's other
five major.nongold exports in foreign markets are fair
to good, we doubt that they will be outstanding
enough to make up for the loss of the growth stimulus
that rising gold production formerly provided (see
appendix).
In our judgment, the South African Government will
continue to restrict economic growth from time to
time in order to minimize current account deficits
caused by fluctuations in gold earnings and by the
We believe that the main determinant of the timing of
such actions will be speculative swings in the price of
gold. An increase of $100 an ounce in gold prices, for
example, would raise the value of annual gold produc-
tion by $2.1 billion at the current rate of output,
assuming that the price increase was sustained over a
full year. In addition to easing foreign exchange
constraints on the purchases of imports, this price
increase would provide a temporary stimulus to
growth in several ways:
? Rising foreign exchange reserves would increase the
domestic money supply, which in turn would tend to
reduce interest rates, stimulating both investment
and private consumption.
? The companies would be encouraged to increase
expenditures on prospecting and development of
lower grade ores.
? The government's revenues from taxes on gold
mining profits would rise by about $400 million in
the first year of higher prices but would taper off
afterward as rising outlays for wages and capital
investment ate into mining -profits.'
Decreases in the price of gold are equally likely and
would have the opposite effect:
? Reduced foreign exchange available for the pur-
chase of imports would be likely to induce the 25X1
government to impose fiscal and monetary
constraints.
? Reduced foreign exchange reserves would cut the
money supply and lead to higher interest rates.
? The mining companies would lose the incentive to 25X1
spend on prospecting and development.
? The government's revenues would drop.F__~ 25X1
In our judgment, it is unlikely that the net result of
speculative gold price swings will provide the where-
withal for a return in this decade to the healthy pace
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of economic growth that was achieved in the 1960s.
Our inability to predict gold prices with any degree of
confidence and the uncertainties caused by weather-
related crop fluctuations and swings in world demand
for minerals stand in the way of practicable year-to-
year projections. We believe, nonetheless, that South
Africa's annual rate of real economic growth in 1984-
90 will average no more than 2.5 to 3 percent.
It has long been an article of faith among observers of
South Africa that economic hard times increase the
potential for the kind of racial upheaval that would
jeopardize US economic and strategic equities in
South Africa and open the door to wider Soviet
involvement in the region.' The acceleration of unem-
ployment during periods of slow economic growth has
been viewed as a particularly potent trigger to vio-
lence, especially among urban black youth. Similarly,
slow growth has been seen as fueling the militancy of
the black labor union movement and limiting the
funds available for government spending on housing
and other programs important to nonwhites.
Despite the undeniable logic of this argument, it has
not held up well in the face of the actual pattern of ra-
cial unrest in South Africa. Although the Soweto riots
in 1976 occurred during an economic downturn, they
were triggered by.noneconomic factors, particularly
student grievances over forced instruction in the
Afrikaans language. The extraordinary spurt in eco-
nomic growth in 1980, on the other hand, was accom-
panied by a notable increase in major acts of protest
including an upsurge in strikes, school boycotts, and
riots. By contrast, during the severe economic con-
traction of 1982 and 1983, outbreaks of racial vio-
lence were relatively few in number and small in
scope.
As a result, we believe that economic growth projec-
tions will by themselves remain unreliable indicators
for predicting the timing or magnitude of racial
unrest in South Africa. We believe the potential for
major racial disturbances will remain high under
almost any economic circumstances. Indeed, racial
unrest-including the small-scale labor strife and
violent crime that occur practically every day in
South Africa-may even become more common and
extensive during periods of rapid economic growth
that tend to intensify black frustration and resent-
ment over fundamental social and political disparities
that cannot be alleviated by short-term economic
gains
In our view, the long-term leveling off of economic
growth that we expect will have some other predict-
able, albeit from the US standpoint, mixed effects:
? The financial burden of extensive military opera-
tions in the region, such as those South Africa has
undertaken in Angola, and of maintaining adminis-
trative control over Namibia will become more
onerous; we doubt, however, that economic consid-
erations alone will lead Pretoria to withdraw.
? Pretoria will also have fewer resources to spend on
domestic social and economic reforms.
? Business opportunities for the 400 US firms that
have subsidiaries, branches, and affiliates in South
Africa will be reduced, although US banks may find
increased opportunities for making commercial
loans to South Africa.
? Pretoria will be likely to seek balance-of-payments
assistance periodically from the IMF.
? Neighboring southern African countries may seek
additional aid from the United States and other
foreign donors because of reduced growth in South
African demand for imports of manufactured goods
(important to Zimbabwe) and for migrant labor
(from Lesotho, Mozambique, Botswana, and to a
lesser extent Swaziland and Zimbabwe).
25X1
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We doubt that South Africa's economic predicament
will give Washington much leverage over the way
Pretoria conducts its domestic or regional policies.
The ruling National Party's leaders have never al-
lowed economic constraints to stop them from protect-
ing those things they regard as vital to their country's
security or to Afrikaner political control. Even so, we
believe the pinch on Pretoria's budget and on the
white standard of living will engender a sense of
insecurity among the Afrikaners, who tend to' become
more aggressive when they believe their backs are
against the wall.
9 Confidential
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Appendix
Prospects for Nongold Exports
South Africa's major nongold exports have fair to
good prospects for growth-but not outstanding
enough to offset the decline in gold exports.F_
is the active component of catalytic converters used to
control automotive exhaust emissions. The impact of
rising car sales in the United States on demand for
these metals may be strengthened over the next year
or so by moves in Western Europe to begin installing
Coal
Coal exports will probably increase over the next few
years, but they are unlikely to match the surge of the
past several years. That rapid growth resulted from
the completion of expanded bulk loading facilities at
the South African port of Richards Bay during the
same period that domestic unrest in Poland caused a
sharp drop in its coal production and exports. South
African coal exporters are now engaged in an interna-
tional price war because of renewed competition by
Poland at a time that world demand for coal is
depressed and supplies of oil at attractive prices are
ample. Industry observers doubt South Africa will be
able to fully use the large additional coal loading
capacity scheduled for completion at Richards Bay in
1987, according to reporting by the US Consulate in
Johannesburg. Tokyo's Electric Power Development
Company, the largest Japanese importer of South
African coal, has announced it will cut imports of
South African coal by 40 percent, according to press
reports.
Diamonds
Prospects for the diamond industry are poor and are
likely to remain so for the next few years. Even
though sales of diamond jewelry are now recovering in
the principal markets-the United States, Japan, and
Western Europe-another inflation-induced boom
will be unlikely as long as interest rates are tightly
controlled. Industry observers doubt that demand for
jewelry will expand enough to absorb output from a
large new diamond mine in Australia, which will add
3 to 5 million carats to world gem diamond production
by 1985. World production is now about 12 million
carats.
auto emission controls.
Exports of metallic ores and ferroalloys probably will
pick up as foreign importers build stockpiles in re-
sponse to economic recovery. We do not expect a large
new increment to exports of metallic ores, however,
because no major new South African mining and ore
handling facilities are under construction. Similarly,
there is substantial excess capacity among South
African ferroalloy producers
Corn exports will continue to be subject to the vaga-
ries of South African weather. Preliminary reporting
indicates that drought this growing season (November
1983 through April 1984) will severely depress har-
vests in 1984. Although the return of good weather in
future years probably will result in exports, prospects
for long-run increases in exportable surpluses are poor 25X1
because of constraints on arable land and limitations
of normal rainfall.
There is no prospect in the foreseeable future that
South Africa will develop additional major exports on
the scale of gold or the six leading nongold product
groups. Continuing surpluses are likely in world sup-
plies of copper, sugar, phosphates, and other commod-
ities in which South Africa could conceivably expand
productive capacity. Expansion projects that are on
the drawing boards, such as a multimillion-dollar
phosphate development scheme scheduled for comple-
tion in 1987 by the government-owned Phosphate
Development Corporation, are not large enough to
add significantly to total nongold exports.
Other Minerals and Food
Prospects for exports of platinum group metals appear
to be brighter than for coal or diamonds. Besides its
use in the chemical and electrical industries, platinum
25X1
25X1
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Finished Consumer Goods
South Africa would benefit from exporting more
finished consumer goods, but the outlook is poor.
Prospects for growth in Sub-Saharan African econo-
mies-currently the principal markets for South Afri-
can consumer goods-are not strong enough to gener-
ate much increase in demand. A breakthrough into
Western consumer markets that would be large
enough to provide a significant shot-in-the-arm to
South African exports is highly improbable for two
reasons:
? Consumers in the United States and Western Eu-
rope would be likely to react unfavorably to any
large-scale promotion of South African products
because of the stigma that the government's racial
policies gives to the "Made in South Africa" label.
South African consumer exports that are currently
identifiable by label in Western countries consist
almost exclusively of wine, fruit, and a limited
number of other food products. Exports of bulk
foodstuffs and raw and intermediate mineral prod-
ucts lose their South African identity on the produc-
tion lines for finished goods in Western countries
and Japan.
? South Africa cannot compete effectively for foreign
investment dollars in consumer export industries
against resource-poor Asian countries, which offer
highly motivated and comparatively highly skilled
labor forces and a reputation for producing high-
quality goods.'
' The lack of substantial investment in human capital-education,
job skills, health, and nutrition-for the vast majority of the people
in South Africa hinders the pace of industrialization despite the
large supply of cheap labor. A recent CIA analysis argues that
investment in human capital has been more important to the pace
of industrialization in LDCs than endowments of natural resources
access to foreiLm aid, or other factors. F_
Import Substitution: A Drag on Export Growth
Pretoria's policy of import substitution 2 is a major
obstacle to the promotion of nongold exports. Import
substitution is rooted in Pretoria's fear that the
international community eventually will impose trade
sanctions against South Africa because of apartheid.
Pretoria also justifies import substitution by citing the
economic stimulus that results from building and
operating import substitution industries.
Pretoria's obsession with import substitution tends to
hold back export growth for three reasons:
? Investment in import substitution, which in South
Africa is limited essentially to capital goods because
most major consumer goods are already produced
domestically, increases the cost of capital goods to
South African export industries because of the
extremely high unit costs of producing such goods
for the small South African market.
? Because heavy protection from imports assures
South African manufacturers healthy profits in the
small domestic market, they have little incentive to
cut costs to meet foreign competition or to expand
sales abroad in order to achieve economies of scale.
? Import substitution stimulates economic growth
only while such industries are being developed.
Expansion is limited thereafter because of the in-
ability of protected industries to compete in export
markets.
liquefaction and gasification and in oil storage facilities.
' The policy includes protective tariffs, licensing requirements, steep
local-content requirements in the automobile industry, and direct
government investment in basic industries such as oil, steel, and
chemicals. The government-owned Industrial Development Corpo-
ration has invested directly in a wide range of manufacturing
industries-including phosphates, aluminum, and heavy diesel en-
gines-that meet the government's requirements for import protec-
tion. Pretoria has also invested more than $15 billion in coal
25X1 25X1
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The effect of import substitution has been to create a
number of powerful vested interests that would resist
any dismantling of the government's import substitu-
tion policy. Indeed, protection against imports has
become critical to the economic health of many major
manufacturing industries.
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