Author: Graeme Polson
Business Analyst: Universe, International Business Consulting (Pty) Ltd
B.Com (Law) (UNISA), MBA (IB) (SIU, Paris)
This paper explores eight published articles on South Africa. South Africa formally joined the BRIC Bloc, how will it affect business with the continent? The BRIC bloc is known to be a trading bloc that facilitates trade amongst these major emerging economies of the world. It then goes further to find answers to the concerns raised on the advent of the newly formed BRICS Bloc and what economic and business impact it will have on South Africa and the African continent.
The research conducted in this paper is of concern for every informed businessperson, economist or international manager situated in this trading area as it should change their perspective on global business.
South Africa joining the BRIC bloc, which is a well known trading bloc for four of the world most successful emerging economies, has been recent news across the world as well as in the trade area. The controversy of admitting an African nation to this trade bloc has raised a lot of concerns as it affects a substantial part of global business and in particular South Africa and the African continent.
There have been numerous arguments for and against such an inclusion into the trade bloc, yet speculation based on opinion will not suffice and this paper looks at recent and less recent publications to find insight into what this inclusion will mean for global business and business on the African continent.
BRIC bloc members favour South Africa’s inclusion.
The BRIC Bloc members seem to welcome South Africa into the trading area and see it as a favourable economic move.
“The world’s biggest economy, China, recently invited South Africa to a member of fastest growing economies in the world”. (I –Net Bridge, 2011)
India also seems to be positive about the inclusion. “India welcomes SA in BRIC Bloc”. Shekhar (2011). In the Ramalapa’s (2009) summary article the reason why the members favoured collaboration with Africa is made clear, in this article the reader can deduct that interest in Africa is popular because of Africa’s possession of rich natural resources and already well – established trade and foreign direct investment in Africa, especially China and India who has already previously accessed Africa as a foreign market. The article further states that China has targeted South Africa as a strategic and economic market place for future business and investment. The latter statement is supported by Marafa’s (2009) article which reviews and provides insight into China’s relationship with Africa. In this article it is stated that China has more than 800 aid projects in Africa and that foreign direct investment resources will come from China to the emerging markets of Africa in the near future. The article also states the existence of a clear comparative advantage between China and Africa,
“Africa has abundant resources that China increasingly needs, and china has an edge in manufacturing goods that Africa requires”. (Marafa, 2009)
China’s infiltration into the South African financial system is also stated by Langeni’s (2010) article in which China’s industrial and Commercial bank (ICBC) acquired a 20% stake in Standard Bank, a well known retail bank in South Africa. Standard bank will also be a financial service provider of choice for the high speed-railway between Durban and Johannesburg.
India also seems to favour such inclusion as it has engaged in private trade with South Africa. it has multinational corporations operating there such as Tata, Ranbaxy and Mahindra according to Rampala (2009). Brazil and Russia are not particularly against such an inclusion.
South Africa is very open to international trade and Foreign Direct Investment.
South Africa is considered to be the gateway into Africa and it is omniscient that South Africa’s index of openness is amongst the highest in the world. In the article by Langeni (2010), it is evident that South Africa’s current president Jacob Zuma supports trade liberalisation which is an obvious objective of the BRICS bloc,
“We believe the group will take a favourable decision”, Mr Zuma Said yesterday.
“He said there was no African member in the grouping and that SA’s participation in the group would mean an entire continent, where a population of more than 1 billion people would be represented”. (Langeni, 2010)
Should trade liberalisation be promoted in South Africa, Africa and developing nations?
In the publication titled, “Global trade liberalisation and the developing countries” by international monetary fund (IMF) staff (2001), the benefits of trade liberalisation in developing countries and surely Sub-Saharan African countries including South Africa are stated as follows,
- Trade liberalisation policies that embrace international trade and investment enhance sustainable economic growth.
- Trade liberalisation and soliciting FDI has been an essential element in the economic success of East Asia where the average import tariff has visibly decreased over the past 20 years.
- Trade openness has helped developing economies to establish a competitive advantage in the manufacture of certain goods.
- Countries that advocated trade liberalisation, in recent years, e.g. India, Vietnam and Uganda, have experienced increased growth and poverty reduction.
- Trade liberalization has reduced the inequality among countries, especially in developing countries.
These reasons for trade liberalisation are very applicable to the African continent and also to South Africa, the results of trade liberalisation is already visible in South Africa, and South Africa can serve as an example for the rest of Sub- Saharan Africa, which are still very protectionist in nature according to (Tupy, 2005).
What about trade protectionism?
Notwithstanding the benefits of trade liberalisation in developing nations, there is an obvious concern that a high degree of trade liberalisation will lead to an increase in the rate of depletion in the continent’s natural resources. Secondly the expected increase in foreign direct investment will increase competition in a free market, and a corresponding difficulty for nascent industries to reach maturity not to speak about penetrating foreign markets.
The BRIC bloc and South African government favour a high degree of trade liberalisation, with China being the world’s second largest economy and the dominant member in the trade bloc, it is evident that a degree of protectionism should logically be exercised by South Africa in order to maintain real economic growth rather than rapid economic growth as a result of an oversupply in foreign direct investment.
In the Van den Bosch (2011) article a protectionist view is adopted by saying that South Africa’s inclusion to the bloc will have little effect in the rest of Africa. South Africa is also accused having acted on behalf of Africa which does not necessarily view South Africa as their leader.
“At this stage it seems to be a political rather than an economic move, BRIC is the vehicle for global economic recovery and as such it puts South Africa in the spotlight, but I do not think it will benefit other African countries in the short to medium term”, says independent trade analyst Wallie Roux from SADC.
Is trade liberalisation and trade protectionism mutually exclusive?
In an article by Kaplinsky et al. (1997), the authors introduce the success story of a nascent family business that made it to maturity and beyond. The company was erected in 1954 as an equipment business and by 1995 had already gone global with its competitors being Caterpillar and Volvo.
“Bell Equipment Ltd (hereafter bell), which is located in Richards Bay in Kwazulu Natal, manufactures a range of earthmoving, forestry and cane cutting equipment. It competes with some success in an extremely competitive global sector against some of the world’s largest and most well-known firms and has a record of consistent innovation, both in relation to new product development and in variety of products which it manufactures. In 1995, it overseas sales exceeded $45m, making it one of the most significant South African exporters of manufactured capital goods, and in 1995 Bell was rewarded with South Africa’s premium export reward”. (Kaplinsky and Mhlongo, 59)
According to the article the company’s success can be ascribed to the fact that the company grew under protectionist factors during the years of isolation as consequence of apartheid which forced the company to seek foreign markets and to produce off shore, at the end of isolation, the South African government wanted to encourage exports and subsidised the company to expand their business even more. However, South Africa joined global trade again and foreign direct investment and the competitors returned to the country. By that time the company had grown to maturity and they were able to compete with their global equivalents in an open economy.
The author also stresses Bells’ ability to continuously innovate in using product development and marketing to stay competitive. Had it not been for a period of protectionism during economic isolation and a consecutive period of trade liberalisation, the company would not have been as successful as it turned out to be. The fact that the company had a continuous ability to innovate, definitely contributes to their success and it is seen as one of the main elements of Michael Porter’s trade theory introduced in 1990, called the National Competitive Advantage theory or the Porter Diamond. The theory is based on an industry, company or even a nation’s competitiveness in an industry depending on the capacity to innovate and upgrade. Wild et al, (2011)
It is evident from the success story of the Bell equipment company, that trade liberalisation and trade protectionism are not mutually exclusive and that neither one nor the two will serve as a solution to the concerns raised in this paper.
The author is convinced that a combination of three factors, namely trade liberalisation, trade protectionism and constant innovation working in synergy, would be a possible solution for the concerns raised concerning the advent of the BRICS trade bloc, provided that these forces work in a favourable manner, meaning an economically and politically stable environment. Such factors at work would also not only result in rapid growth, but also sustainable growth and development.
It is the authors’ opinion that each factor has a very specific function in contributing to sustainable development. Trade protectionism to keep market equilibrium in a free market where demand needs to meet supply only after domestic supply has been exhausted. Therefore, in some industries local content requirement is a good method of regulation between protectionism and liberalisation. Trade liberalisation is necessary to establish comparative advantage and keep an edge on competition. And innovation is necessary for survival in a globally competitive world.
It is clear that South Africa will benefit from the BRIC bloc and that trade liberalisation in Sub- Saharan Africa should not be prohibited just because of the negative effects it might cause in the long term.
It should be clear from this research that there is a definite responsibility on South Africa to protect their industries and natural assets and to address these concerns to make sustainable development and economic growth more durable and long term rather than rapid. The lesson learned from this research can be applicable to any country, especially those of developing nations.
South Africa’s inclusion into the BRIC bloc should be seen as an asset for South Africa in that it establishes south- south trade amongst developing nations, it establishes international trade amongst nations geographically distant, yet beneficial for the continent of Africa as consequence of comparative advantage between them.
Hérault, N (2005). Trade liberalisation, poverty and inequality in South Africa: A CGE- micro simulation analysis
I-Net Bridge (2011). Joining BRIC gives SA leverage. (www.fin24.com)
IMF staff (2001). Global trade liberalisation and the developing countries. (www.imf.org)
Langeni, L (2010). South Africa confident of joining developing nation bloc BRIC
BBC Monitoring International Reports (www.lirn.net)
Kaplinsky, R., Mhlongo E (1997), Infant industries and industrial policy:
A lesson from South Africa
Marafa, LM (2009). Africa’s business and development relationship with China, seeking
Moral and capital values of the last economic frontier
Rampala, J (2009). Africa: Foreign investment may do little for black majority.
Global Information Network
Shekhar, C (2011), India welcomes SA in BRIC Bloc. The Press Trust of India Ltd.
Van den Bosch, S (2011). Development – African LDC’s won’t benefit much from BRICS
Tupy, LM (2005). Trade liberalisation and poverty reduction in Sub-Saharan Africa
Policy analysis, No 557Arrival; Inter Press Service (Johannesburg, South Africa)
Wild J, Wild L (2011); International Business, 11th edition, Pearson