Do we need foreign investment? Margaret Legum appears to think not (”Hard lessons of the G8”, June 20).
Disinvestment is credited with being one of the instruments that led to apartheid’s demise. If foreign investment mattered in the apartheid years, why not now?
This is just one of a host of economic policy implications in the cracked mirror Legum holds up to the South African economy.
At the core of her argument is the idea that attracting foreign direct investment (FDI) robs the government of choice and leads to unemployment.
Legum does not spell out an alternative to attracting foreign investment. I suspect her proposals would simply take us back to the siege state of the apartheid years.
After former president PW Botha’s finger-wagging Rubicon speech in 1985, disinvestment from South Africa began in earnest. The balance on the financial account, which measures all capital flows, was in negative territory throughout the second half of the 1980s.
Foreign investment comes in two flavours: direct and portfolio. Portfolio investment tends to be ”hot” money, flowing into shares of companies listed on the JSE Securities Exchange and the bond markets. Without it, South Africa would be hard-pressed to raise capital for investment and would have to rely completely FDI.
Governments want FDI because it is longer term. Moreover, it sometimes brings with it technology, skills and access to foreign markets. If BMW invests in South Africa, it may want to export to markets elsewhere as well as selling Beemers locally. In fact, it does.
South Africa saw foreign direct disinvestment almost every year from 1984 to 1990, and until 1994 FDI flows were meagre. So it is true that we can do without FDI. The apartheid government certainly did not let disinvestment curtail its ”freedom of action” in suppressing the majority by force.
The cost of doing without FDI was that we had to run surpluses on our current account, our cheque account with the world. This in turn meant exporting by any means possible, in defiance of sanctions, and discouraging imports by imposing high ad valorem duties on top of normal, but generally high and complex, import taxes.
Discouraging imports meant industries were protected from imported price and quality competition, and that inflation caused by an inefficient industrial sector and administered prices had to be reined in at times by high interest rates. Inflation was in double-digit territory for decades, leading to all sorts of distortions.
Strict exchange controls and a financial rand mechanism regulated the flow of capital in and out of South Africa, giving the Reserve Bank endless headaches because of the potential for fraud that it offered. It did not stop capital flight.
So, yes, do without FDI, and see what happens to the economy, and specifically industry. Let’s take the motor industry as an example, as our most globalised major industry. Without sustaining FDI in its broadest sense (even if it means reinvesting profits in plant and machinery rather than new money) we would not be able to keep up with technological change.
I know it sounds romantic to drive a brand-new but decades-old model Morris Oxford, but if India, with its huge market, cannot create a motor industry around such vehicles, I suspect that in car-fashion-conscious South Africa ”appropriate technology” might stall.
In any case, as we move away from Fordism and mass production, the old brands of import replacement do not make sense. As Timothy Taylor, managing editor of the Journal of Economic Perspectives, noted at a globalisation conference last week, the production chain is being sliced up.
Taylor used the example of modern production of a motor car, where one country may make the springs for seats, another seat coverings, another chassis and so forth. We are heading for a situation where cars are not really made in one country, merely assembled there. The implications are that companies need to be part of the global production chain. For that we need greater, rather than less, integration with the world economy.
Legum, however, says: ”We need radical solutions.”
The trouble is that closed states like the one apartheid created, and which would result from the policies Legum proposes, are profoundly undemocratic.
They can only exist where ordinary people are either prevented from expressing their democratic rights, or from receiving the information that would allow them to choose properly.
The reverse is not true: dictatorships can run or try to run free-market economies. Free markets are a ”necessary but not sufficient” condition for democracy. Centralising state power in the economic sphere has invariably been associated with denial of individual freedom of choice.
What the citizenry will bear is the real point. Ordinary people may not know much about macroeconomics, but they know what they want. If the Growth Employment and Redistribution strategy continues to fail to create enough jobs to mop up unemployment, and if the government does not adapt its policies, a mass-based opposition party will emerge.
By the same token, should that new party shun investment and the South African economy go into reverse, the citizens will vote it out, if there is a truly democratic system.
Tyrannies don’t have to worry much about investment, foreign or domestic, as long as the elite can continue to plunder its own citizens’ wealth. Democracies whose leaders can persuade citizens to do without modernising contact with the outside world can also shun FDI.
But beware the anger of an electorate informed enough to know that the state of the economy is due to mismanagement by its leaders, rather than mysterious forces inside and outside the country, such as the International Monetary Fund, the World Trade Organisation, multinationals and colonialists.
Reg Rumney is executive director of the BusinessMap Foundation