The Indian Ocean Rim : Southern Africa and Regional Cooperation [1 ed.] 9781136842092, 9780700713448

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The Indian Ocean Rim The Indian Ocean Rim Association for Regional Co-operation was formally established in 1997 under the leadership of South Africa, India and Australia. The demise of Apartheid, the fall of the Soviet empire, and the rapid advance of globalization altered the geopolitics of the Indian Ocean region in the early 1990s and served as a catalyst in the creation of the IOR. This book contextualizes the founding of the IOR by outlining the historical aspects of economic ties across the Indian Ocean and previous attempts to promote regional co-operation. The contributors to this volume analyse the post-colonial ideological legacy, the political and economic constraints caused by Apartheid and communism, the end of protectionism and the problem of globalization. These major themes in the history of the IOR are applied to what the future holds for Southern Africa within this economic grouping, and whether or not regional cooperation will manage to compete with globalization. This volume will be of interest to scholars of development studies, international relations, Third World studies, and regional development. Gwyn Campbell served as an academic adviser to the South African government in negotiations that led to the formation of the IOR. He is a Lecturer at the Centre for North-South Interaction at the University of Avignon. He has published widely on the economic history of Madagascar and the south west Indian Ocean including Economic History o f Imperial Madagascar 1750-1850 (Lit Verlag: 2002).

RoutledgeCurzon-IIAS Asian Studies Series Series Co-ordinator: Dick van der Meij Institute Director: Wim A.L. Stokhof The International Institute for Asian Studies (HAS) is a postdoctoral research centre based in Leiden and Amsterdam, The Netherlands. Its main objective is to encourage Asian Studies in the Humanities and the Social Sciences and to promote national and international co-operation in these fields. The Institute was established in 1993 on the initiative of the Royal Netherlands Academy of Arts and Sciences, Leiden University, Universiteit van Amsterdam and Vrije Universiteit Amsterdam. It is mainly financed by The Netherlands Ministry of Education, Culture and Sciences. IIAS has played an active role in co-ordinating and disseminating information on Asian Studies throughout the world. The Institute acts an international mediator, bringing together various entities for the enhancement of Asian Studies both within and outside The Netherlands. The RoutledgeCurzon-IIAS Asian Studies series reflects the scope of the Institute. The Editorial Board consists of Erik Zurcher, Wang Gungwu, Om Prakash, Dru Gladney, Amiya K. Bagchi, James C. Scott, Jean-Luc Domenach and Frits Staal. Images of the ‘Modern Woman’ in Asia Edited by Shoma Munshi Nomads in the Sedentary World Edited by Anatoly M. Khazanov & Andre Wink Reading Asia Edited by Frans Husken & Dick van der Meij Tourism, Heritage and National Culture in Java Heidi Dahles Asian-European Perspectives Edited by Wim Stokhof & Paul van der Velde Law and Development in East and Southeast Asia Edited by Christoph Antons The Indian Ocean Rim Edited by Gwyn Campbell Rethinking Chinese Transnational Enterprises Edited by Leo Douw, Cen Huang & David Ip ‘Hinduism’ in Modern Indonesia Edited by Martin Ramstedt Indonesian Sea Nomads Cynthia Chou Diasporas and Interculturalism in Asian Performing Arts Edited by Hae-Kyung Um Reading East Asian Writing Edited by Michel Hockx & Ivo Smits

The Indian Ocean Rim Southern Africa and Regional Co-operation

Edited by Gwyn Campbell

First published 2003 by RoutledgeCurzon Published 2013 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017 USA Simultaneously published in the USA and Canada by Routledge Routledge is an imprint of the Taylor & Francis Group, an informa business Publisher’s Note This book has been prepared from camera-ready copy provided by the contributors © 2003 Gwyn Campbell for selection and editorial matter; individual chapters the contributors.

All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. The publisher makes no representation, express or implied, with regard to the accuracy of the information contained in this book, and cannot accept any legal responsibility or liability for any errors or omissions that may be made. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 978-0-700-71344-8 ISBN 978-1-315-02843-9 (eISBN)

Contents 1. Introduction: The Indian Ocean Rim (IOR) Economic Association: History and Prospects Gwyn Campbell

1

2. Cape Town and Port Louis in the Eighteenth Century Nigel Worden

42

3. The Hadhramis, The Hadhramaut and European Colonial Powers in the Indian Ocean David Warburton

54

4. An Analysis of the Cocoa Frontier in the Indian Ocean Rim Region Judith Streak

64

5. The Indian Ocean Rim: A Cost-benefit Analysis from a Developmental Perspective with Special Reference to Southern Africa Andreas Lombardozzi

77

6. Prospects for the Tourist Industry in Southern Africa Elizabeth Marabwa

92

7. The Feasibility of Including the Southern African Customs Union (SACU) 107 and the Southern African Development Community (SADC) in the Indian Ocean Rim Association for Economic Co-operation Marina J. Mayer 8. The Competitiveness of the Southern African Customs Union within the Context of the Indian Ocean Rim Mario Scerri

123

9. The Gold Mining Industry and the South African Economy 1980-95 Marc Flior

143

10.The Role of the Iron and Steel Industry in the South African Economy Ariella Kuper

157

11. Industrial Development and IOR Integration: Threats and Opportunities: A Research Agenda Simon Winter

174

12. A Future Common Agricultural Trade Regime for Southern Africa J. J. Truter

190

13. Forging Economic and Political Relations Between South Africa and Tanzania in the Post-apartheid Era C. S. Rwejuna

200

14. Mauritius and the IOR Association Jay sen Ramasamy

210

15. The IOR and its Economic Groupings Gwyn Campbell

220

16. South Africa and France in Africa and the Indian Ocean - Economic and Commercial Partners or Rivals? André Ulpat

238

17. The IOR and the Strategic Importance of the Indian Ocean Region in the Post-Cold War Era Gwyn Campbell and R. R. Subramanian

249

C h apter 1 I n t r o d u c t io n T h e I n d ia n O c e a n R im (IO R ) E c o n o m ic A s s o c ia t io n :1 H is t o r y a n d P r o s p e c t s G w yn C a m pbell

This volume focuses upon the relationship between South and southern Africa and the Indian Ocean rim, notably in the context o f the establishment o f the Indian Ocean Rim (IOR) association, an economic grouping formalized in March 1997 with an initial membership o f fourteen and a projected membership o f at least double that number. It surveys the historical background to economic co-operation across the Indian Ocean, and examines the potential opportunities and risks o f current moves towards regional co-operation in the area.2 The establishment o f the IOR occurred in a decade o f rapid liberalization and o f mounting criticism o f the economic, social, and environmental impact o f the latter. The protests that largely sabotaged the 1999 WTO summit in Seattle were the height o f an anti-globalization movement that has rocked the complacency characteristic o f First World economies and governments since the collapse o f the USSR. The protests also helped to convince many LDC (Less Developed Country) governments that they could, if united, influence those First World governments and institutions that have hitherto enjoyed monopoly control o f the WTO to accommodate major LDC concerns.3 The viewpoint o f many LDCs, notably in Africa, is that globalization threatens to accentuate the divide between them and more developed regions o f the world. It has certainly been seen to assist Africa less than any other global region. To many in Africa, the only answer is to seek to promote economic development and greater bargaining power vis-àvis the international economic institutions dominated by the ‘N orth.’4 A possible reflection o f such criticism is that international bodies like the World Economic Forum have started inviting relevant NGOs to express their views, and the IMF and World Bank, possibly stung by criticism o f the draconian social impact o f Structural Adjustment policies, have proposed a new loan scheme, to be devised and managed by recipient governments, aimed at reducing poverty.5

G w yn C am pbell

Such protests have also fed into the movement for regional co-operation, o f which the IOR grouping forms a part. These initiatives occur in an apparently paradoxical economic environment. The generally accepted theory o f international trade is based upon the precepts of free trade and comparative advantage, yet - apart from the British flirtation with free trade in the mid-nineteenth century - only since the conclusion o f the Uruguay Round o f GATT in 1993 has free trade become a realistic aim internationally. At the same time, the WTO and other major international economic institutions have promoted the formation o f regional economic groupings even though the latter tend by definition to discriminate against non-participants; member countries tend to start specializing in sectors in which, in an international context, they do not possess a comparative advantage. Some liberal economists argue that a better alternative to regionalism is to push for rapid multilateral trade liberalization within the WTO.6 However, the majority view is that the formation o f regional free trade areas are a step towards the ultimate goal o f international liberalization.7 Thus the institutions o f the North have given their blessing to associations like the Caricom Community o f fifteen Caribbean countries, and to the Central American common market. It is in this context that the IOR was founded. The organization is o f considerable geo-political significance for, although a number o f sub­ regional economic associations exist, it is the first pan-Indian Ocean region grouping to emerge, linking sub-regional economic giants like Australia, India and South Africa. With its vast natural and human resources the IOR has the potential not only to promote intra-regional growth, but also to become a major player in the North-South debate. Nevertheless, South and southern African involvement in the IOR grouping is contested both on the grounds that the costs will outweigh the benefits o f involvement and because o f the primacy o f prior claims o f regional organization within southern Africa (SADC) and o f traditional economic ties to Europe.8

T h e H is t o r ic a l B a c k g r o u n d

to th e

IO R

Economic co-operation across the Indian Ocean has a long history. Unlike the Atlantic and Pacific Oceans, the Indian Ocean benefits from the ‘m onsoons,’ a singularly stable pattern o f seasonal currents and winds; the south west monsoon blows from April to October and the north east from October to May, in theory enabling vessels to sail from one side to the other side o f the Indian Ocean and back within twelve months. By the early centuries AD, shipbuilding and navigational technology had advanced sufficiently to exploit the monsoons and a long-distance maritime trading

2

T h e In d i a n O c e a n R im (I O R )

network emerged that incorporated most countries bordering the Indian Ocean. This network facilitated movement o f goods and techniques across the Indian Ocean, leading for example to the spread o f ‘eastern’ crops (such as the banana and rice) and techniques (hydraulic riziculture and double­ outrigger canoes) to Africa.9 It also facilitated the movement o f peoples, on both a voluntary and a forced basis: the most striking example of the latter was the slave trade through which Africans were dispersed throughout the region, as far as China, and Indonesians were transported to the Cape. Voluntary migrations included both unskilled labour (e.g. Bengali Lascards and Pondicherry Malabards to eighteenth-century Cape Town) and mer­ chants who established trans-Indian Ocean commercial networks. The most notable commercial diaspora o f modern history comprise Indians, Chinese and Hadhrami whose activity was considerably stimulated by the Pax Britannica established in the region during the nineteenth century.10 The advent o f steamships and modern colonialism in the late nineteenth century deprived the region o f its unique natural advantages but the movement of goods, technology and people in the Indian Ocean region persisted through the colonial era.11 From the late 1960s, as former colonial powers became increasingly absorbed by the EU, regional ties to Europe began to be challenged, although it took the collapse of the USSR in the early 1990s to precipitate a radical change in the global balance of power that directly affected the geo­ politics o f the Indian Ocean region. On the one hand, the end o f the USSR removed the buttress o f ideological opposition to the capitalist world view and to that o f its institutions, which in consequence stepped up the pressure for liberalization. It is claimed that one reflection o f these changes has been that since 1990 world trade has grown by 6 per cent a year compared with less than 4 per cent a year in the 1980s. Membership o f GATT/WTO increased from 92 to 134 between 1986 and 1999 and the terms on which many other countries are to be admitted is being discussed.12 On the other hand, the blessing o f the World Bank and WTO has been given to regional trade groupings, over 75 o f which have been established or modified since 1948 (more than 50 per cent o f which have come into existence since 1990).13 Most prominent WTO members also belong to such groupings, notably the EU, NAFTA, and APEC.14 In addition, criticism o f the WTO and free trade has steadily mounted, both from LDCs (culminating in the Seattle debacle) and by economists - the most recent being Rodriguez and Rodrik.15 It is within this context that the IOR initiative was launched. The concept o f an IOR Economic Association was first expounded in 1993.16 In March 1995, seven countries, termed the ‘M 7’ - South Africa, India, Australia, Mauritius, Kenya, Singapore, and Oman - initiated the first o f a series of

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discussions that resulted in the formation o f an lOR association to promote economic co-operation between member states. Simultaneously a further seven countries accepted the invitation to become members - namely Madagascar, Mozambique, Tanzania, Yemen, Sri Lanka, Malaysia, and Indonesia.

IO R M e m b e r s h ip

IOR membership is ‘open to all sovereign states o f the IOR which subscribe to the principles and objectives o f the Charter and are willing to undertake commitments under the Charter.’17 In practice the initial M7 countries elected a further seven, a procedure which could lead to a doubling o f membership each year. Maximum membership will largely depend upon how the expression ‘sovereign states o f the Indian Ocean’ is interpreted. The original intention was to restrict membership to states geographically littoral to the Indian Ocean. However, this begs the question ‘what constitutes the Indian Ocean?’ Even the strictest definition might result in an IOR membership o f over twenty by the early twenty-first century. Potential ‘littoral’ members include Somalia, the Comoros, the Seychelles, Iran, Pakistan, Bangladesh, the Maldives, Myanmar, and Thailand. However, membership could logically be extended to all nations with major transport and trade links with littoral states. Australia invited twenty-three countriesmore than those with strictly littoral connections to the Indian Ocean - to the 1995 IFIOR conference.18 Additional members might include in Africa: Lesotho, Swaziland, Botswana, Zimbabwe, Malawi, Zambia, Burundi, Rwanda, Uganda, Djibouti, Ethiopia, Eritrea, Sudan, and Egypt; in the Middle East: Yemen, Saudi Arabia, Israel, Jordan, United Arab Emirates, Qatar, Kuwait, Bahrain, and Iraq; in South Asia: Afghanistan, Nepal and Bhutan; and in Southeast Asia: Papua New Guinea and New Zealand. Moreover, the territory o f some o f these countries stretches far beyond the borders o f the Indian Ocean. A case in point is Indonesia, a state composed o f islands some o f which lie in the South China Sea or western Pacific Ocean, neighbours o f which might thereby claim eligibility for IOR membership. As pertinent is the issue o f existing sub-regional associations whose policies will inevitably be influenced by the policies o f the wider IOR grouping. The IOR Charter states: Co-operation within the Association is without prejudice to rights and obligations entered into by Member States within the framework o f other economic and trade co-operation arrangements and will not automatically apply to Member States o f the Association. It will not

4

T h e In d i a n O c e a n R im (I O R )

be a substitute for, but seek to reinforce, be complementary to and consistent with their bilateral, plurilateral, and multilateral obligations.19

T a b l e 1: IOR M e m b e r s , 1997

(♦ = Original ‘M 7’ Member; ° = Invited ‘N 7’ Member Africa

Middle East

South Asia

SE Asia-Australasia

South Africa*

Oman*

India*

Australia*

Mauritius*

Yemen0

Sri Lanka0

Singapore*

Kenya*

Indonesia0

Madagascar 0

Malaysia0

Mozambique a Tanzania0 4

2

2

Total:

T a b l e 2: S o v e r e ig n S t a t e s L it t o r a l t o t h e In d i a n O c e a n

(*SADC M ember)20 Africa South Africa* Mauritius* Mozambique* Madagascar Tanzania* Comoros Kenya Seychelles Somalia Djibouti

Middle East Yemen Oman

South Asia Pakistan India Bangladesh Sri Lanka Maldives

Southeast Asia Myanmar Thailand Malaysia Singapore Indonesia Australia

T a b l e 3: A c t u a l a n d P o t e n t ia l IOR M e m b e r s h ip , 1 9 9 7

(A=Actual IOR Members; PL=Potential IOR Members Littoral to the Indian Ocean; OP=Other Potential IOR Members ) Africa Nr A: 6 PL: 3 OP: 15 Total 24

(% total) 42.86 44.44 45.45 40.74

Middle East Nr (% total) 2 14.29 -

9 11

-

27.27 20.37

5

South Asia Nr (% total) 2 14.29 3 33.33 3 9.10 8 14.81

Southeast Asia Nr (% total) 4 28.57 2 22.22 18.18 6 22.22 12

G w yn C am pbell

The major problem in forging closer economic co-operation between countries o f disparate economic levels has in the past been a question o f lack o f political will, rather than o f practicalities, as illustrated by the history o f sub-regional lOR groupings such as SAARC in South Asia and SADC in southern Africa.21 Although both business and government have been prominent in the IOR initiative, and most eligible states wish to join, the idea has also to be sold to sub-regional groupings. To avoid possible tension, and to facilitate the adoption o f IOR policies, it would appear logical to extend IOR membership to non-IOR states that are members o f important sub-regional groupings, such as Angola in the Southern African Development Co-operation (SADC).22 This is because IOR decisions would necessarily impact upon economic agreements already in place in sub­ regional associations. It would, for example, endanger SADC, given the cross-border initiatives already established by its members, and SACU (Southern African Customs Union), given its common external tariff system, if South Africa were to unilaterally negotiate co-operative economic agreements within the IOR. The same would be true in Australasia if current moves towards monetary union between Australia and New Zealand are successful.23 Through the promotion o f intra-association trade the IOR grouping could also help develop the smaller economies o f sub-regional associations like SADC.24 A further question is the status o f non-sovereign states with interests in the IOR region. O f these, the most intrusive is France which holds Mayotta (an Overseas Territory) and Réunion (a French département) through which it is a member of the Indian Ocean Commission (IOC) which groups the Francophone islands o f the Comoros, Seychelles, Réunion, Mauritius, and Madagascar, o f which the last two are already IOR members. Other extraIOR states, including Britain and the US, possess strategic bases in the Indian Ocean, whilst China has major hinterland influence on the region. The interests of these countries might be accommodated through granting them IOR observer status.25

The

IOR C o r e

The IOR core comprises Australia, India and South Africa - all dominant sub-regional powers - and Mauritius. A u s t r a l ia

Australia, the largest IOR country but one of the least populous, is alongside Singapore the region’s only ‘developed’ economy, and the only IOR member o f the OECD, o f which it is one o f the top performers. It also

6

T h e In d i a n O c e a n R im (IO R )

experienced continued growth through the ‘Asian crisis’ o f 1997, thus giving considerable substance to its claims to leadership in the region.26 A decade o f liberalization has reduced Australian tariffs to 6 per cent ad valorem, (except for textiles and cars) and laid the basis for the emergence o f important manufacturing and service sectors. Nevertheless, unprocessed raw materials still comprise approximately one third, and processed primary products approximately 20 per cent, o f its exports: It is the world’s leading producer o f wool and beef, a leading exporter o f coal and holds large reserves o f gold and strategic minerals.27 Until recently, Australia viewed the Indian Ocean largely in terms o f security, for its main economic interests lie in the Asia-Pacific region: twelve o f Australia’s main markets are members o f APEC. Australian trade with the IOR region is relatively small. Even ASEAN has never constituted a major market for Australia which in 1996, cut its aid programme to Asian countries other than China, Vietnam, the Philippines and Indonesia.28 However, the fall of the USSR, the emergence of China and o f a democratic South Africa, and the adoption of a more liberal economic attitude by India, has caused Australia to re-evaluate its Indian Ocean policy. Increasingly challenged by the economies o f the Far East, Australia sees in the non-aligned, post-Apartheid, post-Cold War era, the potential to establish itself as an Indian Ocean power par excellence, without losing any o f the advantages o f its links to the Pacific. It quickly developed a most ambitious and resource-backed approach to the IOR due to an alliance between Gareth Evans (foreign minister o f Australia from 1994-6) and the government o f Western Australia which, relatively distant from the Pacific, saw in the IOR considerable potential to enhance its economic interests. Prior to the August 1994 declaration o f its ‘Look W est’ policy, the Australian government commissioned research into the potential o f the IOR on the basis o f which in 1995 it formulated an IOR strategy.29 First, in June 1995 it launched the International Forum on the Indian Ocean Rim (IFIOR), a ‘second track’ structure, on the APEC model that comprises two think tanks - one academic (based at the Indian Ocean Centre in Perth) and one business.30 Although Australia failed in its aim to use IFIOR to dominate the first track process, and a change in government has removed the dynamism injected into the IOR initiative by Gareth Evans, this has in no way detracted from the economic advantages Australia possesses as one o f the region’s few truly first class economies. It is agitating for rapid and comprehensive liberalization in order that its currently globally competitive industries might take advantage o f still unprotected markets and un­ competitive industries in a region where, as the most advanced economy, it could become the dominant power. As Bob McMullan, the former Australian Trade Minister told South Africans in March 1995, ‘We are now

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saying to the region we don’t want to have barriers to you. We want you to take down your barriers to us.’31

T a b l e 4: A u s t r a l i a - T r a d e w it h IOR M e m b e r s, 1993-5 (in A u s$ b illion s and percentage)32

Country Indonesia Malaysia Singapore Sri Lanka India Oman Yemen Kenya Tanzania Mauritius Madagascar Mozambique South Africa IOR Members IOR Region* TOTAL

1993-4 1994-5 Exports % tot. Imports % tot. Exports % tot. Imports 2,105 3.14 1,906 2.95 1,105 1.71 1,198 2,041 2.72 1,759 1,103 0.17 3.04 1,421 3,207 4.97 1,792 2.78 3,639 5.43 2,247 141 104 0.16 50 0.08 0.21 50 1.34 427 0.66 978 865 532 1.46 101 0.16 9 0.01 81 0.12 3 73 0.11 0.02 14 0.02 11 0.01 15 0.02 0.02 11 6 11

% tot. 1.61 1.90 3.01 0.07 0.71 -

0.01

-

-

-

-

-

-

-

70

0.12

2

-

75

0.11

2

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

350 8,441 12,982 64,574

0.54 13.07 20.10

268 4,778 8,748 64,470

0.42 7.41 13.57

565 9,654 13,853 67,063

0.84 14.40 20.66

-

302 0.40 5,766 7.73 10,058 13.48 74,634

* maximum possible IOR membership according to criteria o f ‘littoral’ to the Indian Ocean - includes Brunei, Papua New Guinea, and countries littoral to the Red Sea and Persian G ulf

T a b l e 5: A u s t r a l i a - M a i n T r a d in g P a r t n e r s 1994-5 a n d 1998-9 (% o f total)33

US Japan Germany China UK

Imports from: 1994-5 US 21.5 Japan 17.1 China 6.5 Germany 6.1 6.0

UK

1998-9 21.4 13.9 6.3 6.2 5.7

Japan China Korea New Zealand USA

Exports to: 1994-5 24.3 Japan 8.3 US 7.9 Korea 7.1 New Zealand 6.9 UK

1998-9 19.3 9.3 7.3 6.8 5.2

T h e In d i a n O c e a n R im (I O R )

T a b le 6: A u s t r a l i a n A id t o IOR a n d A s ia n C o u n t r ie s , 1995-6 (estim ate) in Australian $m 34 (under Australian Country and G lobal aid program m es o f Australian $1392.6) Country Papua New Guinea Indonesia China Vietnam Philippines Thailand India Sub-total

A id 325.3 129.3 85.7 72.1 68.5 37.4 30.0 867.7

% total 23.36 9.28 6.15 5.18 4.92 2.69 2.15

Country Bangladesh Cambodia Laos Mozambique South Africa Ethiopia Malaysia

A id 29.3 29.0 17.5 14.0 10.0 10.0 9.6 62.31

% total 2.10 2.08 1.26 1.01 0.72 0.72 0.69

Second, a series o f Austrade and government delegations travelled to major IOR countries, forging bilateral trade agreements. A primary target is South­ east Asia (until the 1997-8 crisis Asia absorbed about 60 per cent o f Australia’s exports35) but India, which like Australia was little affected by the Asian crisis, is also becoming an increasingly important market for Australia, notably for industrial inputs like coal, and capital intensive exports aimed at infrastructural development.36 At the same time, Australia is aggressively investing in mining in Africa; for instance Australian venture capital is financing the $230 million Hartley platinum mine, the largest single investment in Zimbabwe since independence.37 I n d ia

India, the world’s largest democracy and economic giant o f South Asia has a history o f protectionism that has only recently been seriously challenged. A leading advocate o f sanctions against Apartheid South Africa, India forged close economic ties with the former Soviet Union. The almost simultaneous collapse o f Apartheid and the USSR forced India to radically reassess its international and regional role. In July 1991, it started to liberalize its economy. GDP in India has recently grown rapidly, it has cut income and corporate tax rates to ASEAN levels, and has progressively reduced import duties. Nevertheless, Western producers consider India the most protectionist market for textiles, while the Economist in June 1997 stated that ‘the country still bears only a passing resemblance to a market econom y.’38 India certainly continues to protect vulnerable sectors o f national importance - reflecting fear that unhindered liberalization may lead to economic tutelage to the North or to emergent powers like China. To fill the vacuum left by the collapse o f its Soviet ally, it is also seeking to promote for itself a major regional role. Given that the South Asian Association for

9

G w yn C am pbell

Regional Co-operation (SAARC) has been stymied by Indo-Pakistan rivalry, India has fully supported the IOR as an association o f potentially critical importance to it. For example, India views South Africa, and Southeast Asia not only as markets in their own right but also as spring boards to extra-regional markets. Thus it considers South Africa might help it gain access to the Latin American, and thereby the US-NAFTA, market.39 At the same time, India hopes that the IOR will enhance the bargaining power o f the region (and its members) in negotiations with the EU and other economic organizations o f the North.

T a b l e 7: In d i a - M a in T r a d in g P a r t n e r s 1992 a n d 1997 (% total)40

US Germany Japan Belgium UK

Imports from: 1992 9.6 US 7.6 Saudi Arabia 6.6 Germany 6.4 Belgium 6.3 Kuwait

1997 8.8 7.0 6.7 6.7 6.4

US Japan Germany UK Belgium

Exports to: 1992 19.0 US 7.8 UK 7.7 Hong Kong 6.5 Japan 3.7 Germany

1997 19.3 6.0 5.8 5.6 5.4

In order to consolidate its position within the IOR, India successfully sought a gradual increment in IOR membership that has ensured the dominance of the IOR initiative by the ‘core’ countries, whilst ensuring for Pakistan a delayed and thus initially lower-ranking membership. Fears that its dispute with Pakistan might become the focus o f attention within the IOR have in part caused India to resist the Australian desire to include security issues on the IOR agenda. However, as strong a reason is the wish to preserve for itself as unhindered a military role as possible in a region where it is a significant military power and where it is wary not only o f Pakistani but also o f US-Australian and Chinese military influence.41 M a u r it iu s

Mauritius, a small volcanic island, 1,864 km square, 800 km east of Madagascar and 2,000 km from the east coast of Africa, with a population o f just over one million, is relative to the other three core members o f the IOR, inconsequential. It was initially characterized by sugar monoculture with high unemployment (20 per cent), an overvalued currency, and inflation exceeding 30 per cent. However, in the 1980s, with IMF and World Bank backing, it developed a highly successful export processing zone (EPZ), based largely on the export o f clothing, encouraged by realistic exchange rates and government incentives, cheap labour, and Lomé

10

T h e I n d i a n O c e a n R im (IO R )

convention access to the EU.42 By 1985, the EPZ had become the chief source o f employment in Mauritius, accounting for 65.2 per cent o f total exports by 1992. At the same time, the tourist industry has boomed; it is currently the third most important generator o f foreign currency after sugar and the EPZ.

T a b l e 8: M a u r it iu s - M a in T r a d in g P a r t n e r s 1992 a n d 1997

(% o f total)43

France South Africa Japan UK Germany

Imports from: 1992 12.9 France 13.1 South Africa 9.5 India 6.7 UK 4.7 Germany

1997 16.4 12.1 9.7 5.5 4.6

UK France

Exports to: 1992 33.7 UK 20.4 France

US Germany Italy

12.0 8.6 4.5

US Germany Italy

1997 33.6 19.4 14.0 5.6 3.8

An economic growth rate o f 6 per cent per annum in the 1980s, compared to a population growth rate o f 1 per cent, resulted in higher standards o f living, a dramatic decline in unemployment, and a more equitable distribution of income.44 From 1990-4, the GDP o f Mauritius, which possesses arguably the most successful economy in Africa, grew by a yearly average o f 5.3 per cent, compared with 0.9 per cent for sub-Saharan Africa as a whole.45 However, the enlargement of the EU, the re-emergence o f South Africa, the winding down o f Lomé privileges and the end of cheap labour - direct labour costs in the clothing industry are about one-third higher than in Southeast Asia and 50 per cent more than in southern Africa - threatens continued economic growth on Mauritius. Consequently, it is encouraging its labour intensive industries to relocate in southern African IOR countries. For instance, textile factories have been established in Madagascar and sugar mills in Mozambique. At the same time, it is developing higher-skilled industries and services domestically.46 It is also active in regional associations. A member o f the Organization of African Unity (OAU), the Indian Ocean Commission (IOC) which groups the Francophone countries o f the western Indian Ocean, and o f the Common Market for Eastern and Southern Africa (COMESA - formerly the PTA) and SADC, Mauritius has also eagerly embraced the IOR initiative. In return for supporting India over the issues o f selective membership and defence, it has secured Indian backing for a successful bid to host the IOR Secretariat - at least in the short-term. In addition, India has part-financed the IOR chair at the University o f Mauritius to rival the Australian IOR research centre at Perth.

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More critically, Mauritius aims to use the IOR to help transform itself on the Singapore model into the service centre and entrepôt o f the Western Indian Ocean, beating other possible contenders like Nam ibia and the United Arab Emirates.47 It possesses the only free port in the Indian Ocean and has attracted considerable investment from the ASEAN and Hong Kong Chinese business community, although whilst African economies continue to perform poorly it will remain secondary to Singapore which rivals Hong Kong as the international investment centre for Asia.48 S o u t h A f r ic a

South Africa is the dominant economy on the African side o f the IOR region. This is due in part to natural resources, notably the huge gold deposits which from the 1880s fuelled South Africa’s economic develop­ ment, and in part to sanctions which pushed the Apartheid regime into erecting protective tariffs to promote import substitution. The result was the most developed manufacturing sector in sub-Saharan Africa. South African trade with the IOR region has in the twentieth century been limited, its external trade relations being predominantly with the West. However, the collapse o f the USSR undermined key western support for Apartheid South Africa as a buttress against communist influence in the sub-continent, and accelerated negotiations towards a democratic South Africa.49 The new ANC government inherited a western orientated trade bias. Denied Lomé status, it successfully negotiated a free trade agreement with the EU, operative from January 2000 in which 86 per cent o f tariffs on EU imports into South Africa and 95 per cent o f tariffs on South African exports to the EU were abolished, and is pushing for a similar agreement with the US.50 However, the EU is more interested in the economies o f the ex-Soviet bloc and North America than in South Africa, and FDI to the latter is still limited by investor fears o f corruption and an extremely high crime rate.51 In addition, the gold industry is experiencing long term stagnation. With a total gold output o f 522 tonnes in 1995, South Africa is still the largest gold producer, followed by America and Australia,52 but as exploitation has gone deeper underground it has become costlier to extract, and the quality o f ore and o f the gold price has declined (from 1980-95 gold and diamonds declined from 57.5 per cent to 37.7 per cent o f South African exports by value). Moreover, it is encountering mounting competition in gold exploration elsewhere in Africa which from 1994-5 rose by 60 per cent to $320 million, representing a sharper rise than anywhere else in the world.53 Also costly is its Reconstruction and Development Programme (RDP), aimed at the provision o f basic amenities for the 66 per cent o f its population, almost all Black, living in deprived conditions.54

12

T h e I n d i a n O c e a n R im (I O R )

These forces, in a context o f mounting WTO pressure for trade liberalization, have pushed South Africa into a crisis re-evaluation o f its industrial base in terms o f its international competitiveness, and has led to considerable business and political interest in initiatives for regional economic co-operation. Within Africa, South Africa is committed to SADC, but the latter is restrained by political factors, notably a fear by the majority o f its members o f domination by South Africa, and by a generally low rate o f economic development in the region.55 A recognition emerged in the last Apartheid government that South Africa possessed a long-neglected link to the Indian Ocean, wherein lay not only export markets but also potential suppliers o f technology and capital investment. Certain elements in the new ANC government initially resisted involvement in the IOR in favour o f maintaining traditional ties with the EU and SADC, but significant segments o f the South African business community and government became involved in the IOR initiative o f which it remained a founding member. However, whereas both India and Australia initially wished to establish a free trade area with complete freedom o f factors o f production, including labour by 2000, South Africa, opposed to uncontrolled immigration and a overly rapid exposure to international competition o f its traditionally highly protected industrial sector, obtained a compromise agreement that the IOR should work ‘towards freer trade,’ with a gradual dismantling o f tariffs.

T a b l e 9: S o u t h A f r ic a - M a in T r a d i n g P a r t n e r s 1993 a n d 19 9 7

(% o f total)56

Germany US Japan UK France

The

Imports: 1993 15.7 Germany 13.2 US 112. UK 6 Japan 11.1 3.5 Iran

1997 13.5 12.4 11.2 7.4 5.4

Switzerland US UK Japan Germany

Exports: 1993 10.0 UK 6.9 US 6.0 Japan 5.5 3.9

Germany Zimbabwe

1997 12.0 5.5 4.9 4.0 4.0

IOR a n d D e v e l o p m e n t in S o u t h e r n A f r i c a

The IOR region possesses ten major economies: Australia and India alone account for about 40 per cent o f the GDP o f the IOR and they, together with Indonesia, Malaysia, Iran, Pakistan, Saudi Arabia, Singapore, South Africa and Thailand account for roughly 90 per cent o f the total GDP o f the region.57 Traditional trade theory emphasizes broad complementarities and

13

G w yn C am pbell

inter-industry trade. There is considerable potential for such complemen­ tarities in the ten major IOR economies, which differ considerably in economic structure, notably between the resource rich Australia, Saudi Arabia and South Africa on the one hand and the industrializing economies of India, Thailand, Singapore, Malaysia, and Indonesia on the other. Moreover, the region contains between 25 and 31 per cent (about 2 billion) of the w orld’s population, of which India alone accounts for 987 million some 70 million o f whom are classified as ‘middle class.’ The potential economies o f scale within the IOR are thus considerable.58 Certainly, the major global powers are beginning to recognize the ‘geostrategic’ importance o f the leading IOR members. Three o f the latter, Indonesia, India and South Africa, are amongst the seven developing economies identified by the American Foreign Office as ‘Big Emerging Markets (BEM s)59 that will have an extraordinary influence on global affairs in the new post-Cold War era. They will become major actors in trade and finance, and ... will be the nations that will make the decisive difference in the kind o f global economy that exists in the next century - liberal and open, or protectionist and closed.’60

T a b l e 10: IOR M e m b e r s : B a s ic E c o n o m ic In d ic a t o r s 199961

(* = as % current IOR; • average; °1995 figure; «estimated) Pop (m)

Africa South Africa Mauritius Tanzania Kenya Madagascar Mozabique Sub total Middle East Oman Yemen Sub total South Asia India Sri Lanka

(% o f reg. total)

Pop. density per km^ (000s)

Area in km2 (000s)

(% o f reg. tot.)

Life ex­ pec­ tancy

GNP eer capita ($)

42.6

31.0

34.8

1,221.0

29.5

57.5

2,880

1.2 31.3 28.8 14.4 19.1 137.4

0.7 22.8 21.0 10.5 13.9 *9.7

600.0 33.1 49.3 24.5 23.8 33.2

2.0 945.0 583.0 587.0 802.0 4,140.0

-

22.8 14.1 14.2 19.4 *22.8

70.0 47.0 48.5 52.0 44.5 53.3

3,700 210 330 260 90 1,245

2.5 16.4 18.9

13.2 86.8 *1.3

11.7 31.0 25.5

212.0 528.0 740.0

28.6 71.4 *4.1

71.0 59.5 65.3

°5,200 300 •2,750

986.6 19.0

98.1 1.9

300.1 287.8

3,287.0 66.0

98.0 2.0

60.5 72.0

430 810

14

T h e In d i a n O c e a n R im (IO R )

Sub total SE Asia Australia Singapore Malaysia Indonesia Sub-total Total Grand Total

1,005.6

*70.8

299.9

3,353.0

*18.5

66.3

620

19.0 4.0 22.7 211.8 257.5

7.5 1.2 8.5 82.9 *18.1

2.4 6,472.4 75.6 111.1 26.0

7,687.0 0.6 330.0 1,905.0 9,922.6

77.5 3.3 1.9 *54.7

78.5 77.0 72.5 63.0 72.8

20,300 30,060 3,600 680 13,660

1,419.4

*100

78.2

18,150.6

*100

64.4

4,568.8

-

It has been estimated that almost 75 per cent o f growth in world trade from 1990 to 2010 will occur in developing countries, notably in the BEMs whose share o f world GDP could, over the same period, double from 10 to 20 per cent; by 2010 their share o f world imports could exceed that o f Japan and the EU combined.62 The 1997 Asian crisis temporarily cast gloom on such forecasts, but a 3-4 per cent growth in Southeast Asian economies in 1999 has largely restored confidence.63 From a very low base, intra-IOR trade is growing fast, being on a par with IOR exports to the EU. The bulk o f intra-IOR trade is between countries on its eastern rim (Australia and Southeast Asia) an area that has the potential to stimulate intra-IOR trade and investment elsewhere in the region.64 In total, trade between Malaysia and Africa grew in value by a factor o f 5.3 between 1993 and 1998 - by which time it stood at US$1,220 million, while Australian-South African trade grew by a factor o f 3.5 between 1991 and 1995 when it amounted to US$754 million.65 Moreover the 1990s witnessed a significant increase in intra-industry trade, both between IOR regions and within the IOR, reflecting specialization o f individual countries in labour or capital intensive segments o f an industry.66 The one arguably intractable problem area within the IOR is Africa where the 1996 mini-boom (when African economies grew by an average o f 4.4 per cent) appears to have been only a temporary respite from a long term trend towards stagnation and even de-industrialization that was accentuated by the fallout from the Asian crisis - African exports decreasing in value in 1998.67 Serious concerns also exist about Africa’s workforce. In 1995-7, it was estimated that over 40 per cent o f the population in East and southern Africa were undernourished.68 Africa is the continent worst affected by malaria and AIDS, both major killer diseases. In 1994 the WHO admitted that with the emergence o f cerebral malaria and the spread o f chloroquine resistant strains, malaria is out o f control and there is a distinct danger that, with the high level o f labour migration on the continent, it could spread to previously malaria-free areas; for example from Mozambique to both the coastal and highland areas o f South Africa.69 Moreover, southern Africa is

15

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currently the area o f the globe most ravaged by AIDS: in Botswana, Namibia, Swaziland and Zimbabwe between one fifth and one quarter o f people aged 15-49 are HIV positive, while in South Africa (in KwaZuluNatal possibly one third o f the sexually active population are HIV positive) AIDS treatment could account for between 35 per cent and 84 per cent o f public health expenditure by 2005.70 The key to development in southern Africa and on the African littoral o f the IOR is South Africa, the economic giant o f southern Africa, indeed o f the entire continent: 42 o f the biggest African-based companies are South African, more than half the assets o f the top 25 African banks are held by six South African banks, whilst its stock market capitalization o f $220,000 million is 8.6 times greater than that o f Egypt, second placed in Africa.71 Although its gold industry is in difficulties, South African low grade ores have considerable export potential in the region as demand in Asia and China, major consumers o f lower quality gold for jewelry (or in the Chinese case, for hoarding), is expected to be high for the next 30-40 years.

T a b l e 11: M i n e r a l E x p l o r a t io n in A u s t r a l i a , C a n a d a , t h e US, a n d A f r ic a , 1995 ($m)72 Region Australia Canada

Region Africa US

Exploration in $m 529 329

Exploration in $m 320 294

T a b l e 12: A f r ic a n G o l d M in e P r o d u c t io n - P e r c e n t a g e C h a n g e ,

1993-573 Country South Africa Ghana Zimbabwe

Country

Percentage change, 1993-5 -16 26 26

Zaire Rest o f Africa

Percentage change, 1993-5 9 5

This will in turn sustain a rising gold price and the profitability o f marginal mines provided that the technological problems associated with deep mining can be solved, and labour productivity improved.74 The IOR region also constitutes a potential market for African agri­ cultural production. The predominant place o f agricultural production in the GDP o f the IOR region, except for Australia and Singapore, and lower commodity prices, currently limit the possibility o f intra-IOR trade based on complementarity and economies o f scale.75 However, the industrializing

16

T h e I n d i a n O c e a n R im (I O R )

economies o f the IOR and neighbouring countries offer growing markets for agricultural exports. In China alone, grain imports will need to increase from the 16 million tonnes it imported in 1995 to an estimated 43 million tonnes by 2010. China has purchased Australian wheat since the 1960s, and although imports dipped from 1986 with US and EU subsidized exports, the return to a market-orientated system has brought Australia back into favour.76 Similar demands for food are likely to be generated with the rise o f industrial conurbations in Southeast Asia, India, and in South Africa where service and manufacturing sectors dominate GDP and where the population o f 42.6 million (50 per cent urban) is expected to rise to 53.4 million by

2010.77 Projected increases in such demand could be met, in part, by increases in grain and other agricultural output from IOR sub-regions, notably subSaharan Africa which the green revolution largely failed to penetrate, and South Asia where improved technology could increase yields by an estimated 40 per cent. Biotechnology promises to induce a second ‘green revolution’ that could further boost food production, although its implemen­ tation needs to be co-ordinated on sub-regional and regional levels to ensure sustainable development and eliminate wasteful practices, notably in irrigation schemes and in fishing, both o f which are o f enormous economic importance to the IOR region.78

T a b l e 13: ASEAN: C h ie f T r a d in g P a r t n e r s , 1997 (percentage)79 Exports to:

Imports from: Japan US Malaysia Singapore Korea

18.8 13.5 8.2 7.6 6.2

US Japan Singapore Malaysia Hong Kong

19.8 15.0 6.7 5.9 4.7

T a b l e 14: IOR R e g io n C o u n t r ie s w it h a H ig h S h a r e o f A g r ic u l t u r a l P r o d u c t s in t h e ir M e r c h a n d is e E x p o r t s , 1990 a n d 1997 (percentage)80

Malawi Mozam­ bique

1990 n.a. n.a.

1997 92 78

Madagascar Zimbabwe

1990 70 44

1997 72 51

Mauritius Australia

1990 33 30

1997 31 30

The IOR also promises a widening market for cash crops like coffee, tea, vanilla and cocoa; thus large markets for Malaysian and Indonesian cocoa

17

G w yn C am pbell

(low quality) exist not only in the West (notably the USA) but also in industrializing economies o f Asia (including Thailand and Singapore) - with further potential in South Africa. This is complementary to the much smaller scale Malagasy production of essentially high quality criollo cocoa in demand in western Europen markets.81 Orthodox theories o f development highlight trade (and thus exports) as the engine o f growth, but there is a strong argument that the basis for growth in South Africa, and thus o f development in southern Africa, lies - as in Southeast Asia and Mauritius - in the manufacturing sector and the export o f manufactured goods rather than o f primary products. From 1980-95 when South African agricultural exports remained at between 5 per cent and 7 per cent, manufactured commodities increased their share from 11.5 per cent to 27.9 per cent,82 while the ‘Growth, Employment and Redistribution’ (GEAR) strategy launched in 1996 aims at an annual non-gold export growth rate o f 10.2 per cent by the year 2000, with an annual growth rate in manufactured exports of 12.8 per cent.83 Several contributors to this volume thus argue that the manufacturing sector should be viewed as the pivotal concern o f regional co-operation for South Africa.84 Overall, manufacturing exports from IOR countries are currently shipped predominantly to OECD countries outside the region. The exception is South Africa, whose manufactured exports to IOR countries have grown, but whose industries are struggling, characterized by comparatively low inputs o f capital, skills and technology and suffering from outmoded management techniques, strained industrial relations, and low productivity. Although South Africa is looking to rationalize, improve productivity, and secure new markets it cannot at present compete in markets in Australia and Southeast Asia which possess technologically more advanced manu­ facturing sectors. Nevertheless, South Africa has in IOR and neighbouring markets considerable export potential; for example for its carbon steel in the Middle East, China and Southeast Asia, and for its high quality stainless steel in Southeast Asia and India.85 T a b l e 15: S e l e c t e d IO R C o u n t r ie s -

In f r a s t r u c t u r e In v e s t m e n t

R e q u i r e m e n t s , 1995-200486 Country Indonesia Malaysia Thailand

Power ($bn) 82 17 49

Telecoms. ($bn) 23 6 29

Transport ($bn) 62 22 57

18

Water & Sanitation ($bn) 25 4 10

Total as % o f GDP 6.8 4.8 7.2

T h e In d i a n O c e a n R im (IO R )

The promotion o f high value added manufacturing exports is difficult due to the pressure to liberalize; for instance, tariffs on cars, South Africa’s largest manufacturing business, fell from 115 per cent under Apartheid to 65 per cent in 1995, and will fall again to 40 per cent by 2002. As a result, imported cars are expected to increase their share o f the local market from 15 to 30 per cent by 2000. Nevertheless, as Mexican devaluation boosted its exports to the US, notably in automobiles, textiles and clothing,87 and low exchange rates in the Southeast Asian tigers helped fuel their exports,88 so the sharp devaluation o f the rand in the mid-1990s has assisted South African exports.89 South African manufacturers o f cars and other goods are focusing initially on areas where South Africa possesses a comparative advantage, notably southern Africa where the four BLNS countries (Botswana, Lesotho, Namibia, and Swaziland) constitute a larger market for it than either the UK or the US. BMW have decided to retain their South African plant (only one o f two retained outside Germany) in the expectation o f locating left-hand drive markets in Africa and former British colonies in the IOR region, including Australia, and Southeast Asia. The latter is the fastest growing market for cars but South Africa will face intense competition there from Thailand, which is set to become the region’s largest car market and producer.90 Tourism is also a sector o f major potential for southern Africa: despite the highly publicized crime rate and AIDS scare, the number o f international tourists to South Africa increased by 10 per cent from 1997-8, a rate topped only by Portugal (16 per cent), Malaysia (10.4 per cent) and Tunisia (10.3 per cent). A major factor in the economic growth o f Mauritius from 1982, tourism has strong multiplier effect in skilled and unskilled, rural and urban areas and is a major potential earner o f foreign currency not only through short term tourist expenditure, but also through long term linkages - for instance in developing exports o f local craft products.91 Considerable investment on the Mauritian model is required before the potential o f intra-IOR tourism can be realized - and attract not only Wester­ ners but also tourists from Southeast Asia and Australasia to Africa and the islands. Regional co-operation is likewise essential to ensure that the benefits are felt by the entire region, including some o f its most impoverished members, like Mozambique and Madagascar: the number of foreign visitors to the latter is increasing by about 20 per cent per annum but further growth is limited by the lack o f a tourism infrastructure.92

19

G w yn C am pbell

Sources

o f In v e s t m e n t

Most contributors to this volume highlight the fundamental importance o f attracting investment to a region that currently possesses limited sources o f capital and intra-regional investment. One o f the main reasons for the paucity o f capital in the IOR is that whereas in developed economies the commercial banks’ share o f financial services has declined as individuals save through mutual funds and companies borrow on the capital market, few such alternatives are available in the IOR. Even where national saving rates have increased markedly as in Southeast Asia and India, banks remain the major source o f finance. Thus in early 1997 in Malaysia, Thailand, India and Indonesia, banks held from 60 to 90 per cent o f the total assets o f financial institutions.93 However, few banks possess sufficient shareholder capital - estimated by the Basle Accord at approximately 8 per cent o f assets - to cope with the highly volatile conditions characteristic o f developing economies.94 This was certainly one o f the main obstacles to closer econo­ mic co-operation within the PTA,95 it formed the basis o f the banking crises that struck 20 African countries from 1988-96,96 and was a central factor in the Asian crisis - and which in May 1999 prompted Malaysia into issuing government bonds.97 E x t e r n a l In v e s t m e n t

The IOR region is heavily dependent upon FDI from outside the region: the six most industrialized countries o f the world constitute the only net exporters o f investment since the start o f the 1990s, while the top 100 TNCs (transnational corporations) which dominate FDI are all based in developed countries.98 jn the 1980s most FDI to the IOR flowed to Southeast Asia. In a reflection o f the Asian crisis, a net capital inflow in 1998 o f $103 billion into Indonesia, Malaysia, the Philippines, South Korea and Thailand changed to net outflows o f $1 billion and $28 billion in 1997 and 1998 respectively. In total, capital flows to LDCs dropped by 41 per cent in 1998.99 FDI but is again flowing strongly to Southeast Asia100 but not to Africa, ‘the w orld’s last investment frontier.’101 FDI inflow into Africa rose from an average o f $1.9 billion a year in the mid-1980s to $6 billion by the mid1990s, but its share o f FDI flows to LDCs fell from 9 per cent in 1981-85 to 4 per cent in 1996-97. From 1990-95 the proportion o f FDI flowing to subSaharan Africa fell from 3.5 to 2.4 per cent.102 Southern Africa, notably South Africa, is viewed as the only region in sub-Saharan Africa where investment risks are relatively good, although FDI to South Africa declined from $1,700 million in 1997 to $371 million in 1998.103

20

T h e I n d i a n O c e a n R im (I O R )

T a b l e 16: FD1 t o S u b - S a h a r a n A f r ic a a s a P e r c e n t a g e o f a l l FDI t o D e v e l o p in g C o u n t r i e s , 1990-5 (in billions o f US$)104 Year

FDI

Year

FDI

1990

3.5

1993

2.6

1991

5.2

1994

3.7

1992

3.2

1995

2.4

Credit to encourage multilateral trade was envisaged by Keynes at Bretton Woods, but the financial institutions that resulted did not provide credit on a sufficient scale, nor on terms acceptable to Third World countries - and it could be argued that the same is true today. The International Finance Corporation (IFC), the private-sector arm o f the World Bank, designed to act as a banker to businesses investing in underdeveloped countries, has been one o f the few large investors in the Third World. For instance, in 1996 it placed $911 million in Africa. However, the IFC’s only unequivocally profitable ventures there have been in the extractive industries - oil, gas, and notably mining. Indeed, mining in Africa is receiving investment independently o f the IFC - from South Africa, the USA, Canada, and Australia.105 Again, aid to developing countries - objected to by some IOR members like Singapore - is fast diminishing. In 1996 foreign aid amounted to US$59 billion, the lowest in real terms since 1973.106 In October 1996, the World Bank and IMF launched the Heavily Indebted Poor Country (HIPC) Debt Initiative with the aim o f reducing to sustainable levels the debt burdens o f the forty-one most impoverished countries for a period o f six years. The World Bank has promised up to US$2 billion, provided multilateral creditors contribute. However, the IMF has its own plan, while with the exception o f the Netherlands, Norway and Sweden, few rich countries have indicated a willingness to help.107 S o u r c e s o f I n v e s t m e n t w it h in t h e IOR

There nevertheless exist several potential sources o f capital within the region. One sizeable and concentrated source o f investment capital is the G ulf region. Another is the industrializing economies o f the IOR: in the 1990s there were significant FDI flows from Malaysia, Singapore, Australia, India and Indonesia.108 A further, more diffuse source o f investment, notably for small and medium size enterprises, is the region’s ethnic and cultural networks. This includes the Hadhrami diaspora in East Africa and Southeast Asia whose remittances are an important source o f revenue to their country o f origin,109 and notably the Indian and Chinese diaspora. There are an estimated 50 million Chinese outside China, some 20-25 million o f whom are concentrated in Southeast Asia (in Singapore and Malaysia they

21

G w yn C am pbell

comprise approximately 77.5 and 25 per cent respectively o f the popula­ tion). The wealth o f this diaspora is considered to be o f the same order as China’s own 1.2 billion population. In Indonesia the Chinese form 4 per cent o f the population but control about 75 per cent o f the large conglomerates that dominate the private sector, whilst in Jakarta, where the Chinese constitute only 3 per cent o f the population, they control 60 per cent o f the stock market capitalization.110 Although statistics are not readily available for some other countries, much o f the economic miracle in Mauritius from 1985 was financed by capital flowing from Hong Kong to the Mauritius Chinese community, while the Chinese dominate the retail trade and small credit system in east M adagascar.111 The Indian diaspora is another major potential source o f funds within the IOR due to their access to funding from India - which is set to increase as GDP in India grows - and to funds from the sizeable Indian communities in both the North (North America and Europe) and the South (Australia, South Africa, M auritius).112 M auritius’ newly established offshore banking facilities, which currently cater almost exclusively to India, could in the future become a major source o f investment for African members o f the IOR.113

G o v e r n m e n t a n d R e g i o n a l C o - o p e r a t i o n in t h e I O R In d u s t r y , A g r i c u l t u r e a n d To u r i s m

Most contributors to this volume emphasize the fundamental role played by government in making a success o f regional co-operation. This runs counter to current economic orthodoxy that stresses free trade and privatization as the key to economic growth. The IOR has adopted the APEC model o f ‘open regionalism’ which, in line with economic orthodoxy, aims at the removal of tariffs to enhance intra-regional trade, capital, and technology transfer.114 However, liberalization poses a major problem for LDCs whose small industrial bases would, unprotected, collapse in the face o f com­ petition from the larger, more efficient and technologically advanced industries o f advanced economies in the ‘North.’ As free trade favoured Britain in the nineteenth century, so liberalization today benefited the dominant economies, namely the EU, the US and Japan who in 1995 were responsible for 13.6 per cent, 12.8 per cent and 10.5 per cent respectively o f world trade. It promises to ensure their enduring dominance over LDCs, and for the latter the risk o f economic marginalization. Developed economies tip the balance even more in their favour by maintaining non-tariff barriers to protect their core industries, notably agriculture, textiles and iron and steel key export sectors for many IOR countries.113

22

T h e I n d i a n O c e a n R im (IO R )

Liberalization also tends to perpetuate the chronic imbalances within the IOR region between the more developed and the least developed economies. For instance, under conditions o f absolute free trade, there would be a tendency for the meagre funds o f skilled labour and capital in LDCs to migrate for higher returns to more advanced economies. Thus although South Africa’s industrial sector fears competition on world markets, the regional concentration of manufacturing investment and production in South Africa threatens the industrial sectors o f its African neighbours, notably in Zimbabwe, Kenya and Tanzania. Mauritius is the only African member of the IOR with a vibrant industrial sector and economic growth rate similar to countries o f Southeast A sia.116

T a b l e 17: N o n -T a r if f B a r r ie r s Im p o s e d b y t h e EU, USA, a n d Ja p a n a g a in s t

Im p o r t s , 1986117 (by number and percentage coverage o f imports

by category) Product All Food items Food & live stock Oilseeds & nuts Animal & vegetable oils Agricultural raw materials Ores & metals Iron & steel Non-ferrous metals Fuels Chemicals Textiles, yarn & fabrics

36 43 n.a. 4

% of imp. 28 32 3 1

4

6

45

13

5

9

n.a.

n.a.

19 65 6

15 73 11

40 80 3

30 74 5

6 5 1

5 0 0

13 35 3

5 20 4

26 3 51

27 2 74

0 7 53

0 14 76

15 35 48

2 19 46

11 3 25

4 3 19

EU

22 24 3 1

% of imp. 15 16 89 1

Ja­ pan 59 64 3 9

% of imp. 62 64 12 8

To­ tal 24 24 1 2

US

% of imp. 18 n.a. 5 1

There is little hope o f developed countries’ non-tariff barriers being removed while the poorer countries lack the bargaining power that member­ ship o f a powerful economic grouping could offer them or, in the context of total liberalization, o f the development o f vibrant LDC manufacturing sectors.118 Hence the argument for a pro-active role for government in order to counter the malign effects o f globalization, notably through the adoption o f a ‘variable geom etry’ or ‘multi-speed’ approach, implying a differential lowering o f protection according to national need.119 As the experience of Korea and Taiwan has shown, state involvement may be required to

23

G w y n C am pbell

promote entry into potentially competitive activities with difficult and lengthy learning periods, notably in formerly protected markets like South A frica.120 Even where the private sector is enthusiastic, active government policy to identify, safeguard and develop potentially viable industries and associated technologies is necessary, as is the case in M auritius.121 This accords with the recent attack upon the orthodox free trade theory by Rodriguez and Rodrik who argue that ‘temporary protection can boost growth by encouraging specialization in sectors that become competitive over tim e.’122 The development o f tourism also involves such a complexity o f issues ranging from transport infrastructure, health and environmental controls and anti-crime measures that it necessarily involves government. Considerations for the economic uplifting o f local communities, as for example through shareholding and fair trade schemes, similarly imply a significant role for government.123 The role o f government is particularly necessary in agriculture. Firstly, for most countries, agricultural self-sufficiency is a core strategic aim. In addition, it is a sector where regional co-operation, in terms o f weather forecasting, hazard analysis and flood and drought management, is essential given the trans-national nature o f climatic phenomena.124 At the same time, it is the sector which employs the vast majority o f the active population o f the IOR, notably those who are comparatively the poorest. It is thus an area vital to political aims o f social and economic upliftment. South African agriculture, formerly highly protected, has transformed itself along liberal lines into a vibrant competitive sector, but in the process small black producers with few capital resources have been steadily squeezed out.125 This is contrary to the case in Southeast Asia where, for example, cocoa production is largely in the hands o f smallholders, a process planned and facilitated by the Malaysian and Indonesian governments who played an essential role in credit provision and notably in R&D (Research and Development).126 Moreover, countries o f the ‘N orth’ have continued to protect their own agricultural sectors through non-tariff barriers while pressing for rapid liberalization in other sectors where they enjoy a competitive advantage. They have persistently resisted pressure from the CAIRNS group o f agricultural producing countries, led by Australia, that since 1986 have campaigned for the WTO to liberalize trade in agricultural goods. Only inter-government co-operation by agricultural producing countries can secure any such changes.127 G o v e r n m e n t i n In v e s t m e n t , Te c h n o l o g y a n d E d u c a t i o n

The IOR is characterized by a relative abundance of cheap unskilled labour and a relative paucity o f capital, skilled labour and advanced technology. For IOR LDCs to develop economically, they need to move away from

24

T h e In d i a n O c e a n R im (I O R )

dependence on cheap labour, natural resources and physical capital and seek investment o f capital, technology (including transport) and appropriate training.128 Again, there is a compelling argument that government inter­ vention is necessary to achieve these aims. 1. I n v e s t m e n t

The ‘New Growth Theory’ establishes a number o f prerequisites for attracting investment. The first o f these is the adoption by government o f ‘market friendly’ policies that include a liberal trade regime, low taxes and public spending, and incentives to foreign investors.129 Thus India became a major recipient o f FDI from January 1994 when it joined the MIGA (Multilateral Investment Guarantee Agreement).130 In Africa some foreign investment has also flowed to countries moving towards liberalization (from 1990-5, Zimbabwe attracted an annual average DFI equivalent to 1-2 per cent o f GDP and South Africa 0-1 per cent),131 but the region has in comparative terms been unable to attract substantial foreign investment. This has been blamed on weak currencies (except for extractive industries where output is priced in dollars), exchange controls, a limited local private sector, small local markets, an obstructive bureaucracy, political instability, a weak judiciary, and corruption. For instance, a WTO survey o f entre­ preneurs reveals that in sub-Saharan Africa, eight out o f ten respondents lacked confidence that the authorities would protect their property from criminals and seven out o f ten considered the judiciary to be arbitrary.132 However, crime and corruption is, in large part, a reflection o f a vicious circle o f economic and social deprivation, and that can only be tackled by government. Moreover, investment flows have a biased regional impact; FDI flows tend to accentuate South African dominance o f SADC that causes friction and constitutes a major obstacle to economic co-operation. Major regional disparities also exist within South Africa: most investment flows to Gauteng and the Western Cape, provinces where 80 per cent o f the population live above the poverty line, at the expense o f other regions, notably the Northern Transvaal and the Eastern Cape, where over 60 per cent o f the population are impoverished.133 Examples from elsewhere in the IOR region include Thailand, estimated to be the world’s 5th most unequal country, where development is concentrated in Bangkok and the surrounding region at the expense o f the poverty-ridden rural hinterland,134 and India where FDI has flowed predominantly to the south and west (notably to Tamil Nadu, Andhra Pradesh and Gujarat), whilst northern India, where risks are greater, has been neglected.135 Thus countries such as India, Tanzania and Malaysia vigorously oppose unregulated free trade in investment, arguing that it often exacerbates existing imbalances between sub-regions and can accentuate

25

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traditional economic dependence o f countries of the South upon those of the N orth.136 To avoid such imbalances and ensure that such investment is directed to the regions and sectors most likely to produce development beneficial to the long term interests o f the region as a whole, a more co-ordinated cross regional approach is needed.137 One possibility is to develop linkages between the region’s various development banks, on the lines advocated by the Asian Development Bank, to identify and promote ‘growth triangles’ across the IOR region, based on a reciprocity between rich economies that supply the capital, technology and know-how, and the poorer economies that supply the labour force.138 The potential for this is considerable in an IOR region which ranges from the sophisticated high-tech economies o f Southeast Asia, the oil-rich G ulf and trading entrepots o f Singapore and Mauritius to the newly industrializing India, and to much less developed cheap labour economies like Madagascar, Mozambique and Bangladesh.139 In addition, foreign exchange requirements and indebtedness in the region could be reduced - thus enhancing the possibility o f accumulating intra-regional sources o f capital and investment - through the establishment o f an IOR clearing union. Like the European Payments Union developed after the Second World War, this might provide credit at current interest rates and permit member countries to trade without resort to gold or dollars by using either their own currencies, or commodity credit notes which could be exchangeable and might even be used as an exchange reserve.140 Each country’s trade forecasts in terms o f commodities and values, and the release o f such knowledge could be enhanced through a centralized computer data bank, so that provisions (in the form o f international finance) could be made to cover imbalances - thus avoiding the syndrome whereby countries with a growing balance o f payments deficits cut imports, thus impacting adversely another country’s exports and sparking a general cut back on trade.141 2 Te c h n o l o g y

LDCs in the IOR region require massive investment in technology and R& D.142 This implies state involvement to promote formal co-operative research, technology exchange and bilateral trade agreements within the region.143 O f particular importance to industrial competitiveness is access to information and technology and their adaptation - which in South Africa could, for example, help offset high production costs in the iron and gold industries.144 Traditionally, technology transfer has occurred in a NorthSouth direction, but the IOR possesses on its eastern littoral several technologically advanced states, notably Australia (one of the world’s top investors in R&D) and Singapore, that could constitute source areas for technology transfer elsewhere in the IOR. Similarly, South Africa, which

26

T h e In d i a n O c e a n R im (I O R )

has the greatest concentration of information technology in Africa, could be a source o f technology transfer to its African neighbours.145 3 E d u c a t io n a n d T r a in in g

There exists a close positive correlation between educational and skill levels and economic development in general, as is illustrated by Malaysia and Thailand, both o f which, until recently experienced phenomenal growth and where basic primary education for females is o f the order o f 91 per cent and 96 per cent respectively.146 Moreover, education and skill formation are areas o f traditional and necessary government involvement. Skill formation is required to match technology as, should investment in embodied technology outpace investment in skills, the results are inefficiency, stag­ nation and waste - as has been the case for many sub-Saharan countries. 147 Again, the recent Asian crisis was in part associated with the lack of higher educational facilities as the need in Southeast Asia is increasingly for a workforce skilled in science and technical subjects. There is also a need for education in English - the international business and technical language in which Thai and Indonesian students, who are obliged to pursue courses in their official national languages, are at a disadvantage compared to Indians, Filipinos, Malaysians and Singaporeans.148 The experience o f sub-Saharan Africa and South and West Asia contrasts greatly with that o f Southeast Asia, demonstrating the impact of a traditional bias against education for a large section o f the population - non­ whites and females respectively. For instance, only 38 per cent o f Nepalese, 40 per cent o f Pakistani and 64 per cent o f Indian adults are literate compared to 94 per cent in Thailand, 85 per cent in Indonesia, 83 per cent in Malaysia, 78 per cent in Kenya and 68 per cent in Tanzania.149 This has resulted not only in low literacy rates but also indirectly (in South Asia) in malnutrition and thus physical and mental retardation notably for females (Sri Lanka where the adult literacy rate is 91 per cent is a notable exception).150 Nevertheless, literacy rates are improving in South Asia. By contrast, in Africa where literacy rates were comparatively high, education is now in crisis. UNICEF estimates that educational spending per child in sub-Saharan Africa has halved over the last two decades.151 South Africa spends more on education than most other countries o f comparable wealth, yet fewer blacks are graduating from secondary school than under the Apartheid regime, whilst its skill base has been steadily eroded by a brain drain. This is due in part to the Apartheid legacy and a deterioration in the culture o f learning since the Soweto Uprising o f 1976, and in part to a depressed economy and to rising crime and insecurity. The decision by the ANC government to enforce the 1996 act changing the school entrance age from 5 to 7 promises

27

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only to exacerbate the shortfall in educated black high school and university graduates.152

Table

18:

E d u c a t io n

and

E c o n o m ic

D evelopm ent

-

R e g io n a l

A g g r e g a t e s o f HDI In d i c a t o r s 1992153 (-excludes India; *includes the

Pacific) Region

Sub-Saharan Africa Arab States South Asia South Asia* S.E.Asia* LDCs All developing countries Industrial countries World

Adult literacy rate 58 54 52 40 58 34 54 80 58

Life expectancy 50.8 61.9 60.0 59.3 63.5 50.9 61.5 76.1 62.8

Real GDP per capita ($) 1,346 4,321 1,629 2,605 3,016 935 2,591 15,291 5,410

Human development index 0.3891 0.6443 0.4526 0.4865 0.6506 0.3370 0.5700 0.9162 0.7589

T a b l e 19: In v e s t m e n t in E d u c a t i o n - R e g io n a l A g g r e g a t e s o f HDI In d i c a t o r s 1992154 (• excludes India; * includes the Pacific)

Region Sub-Saharan Africa Arab States South Asia South Asia* S.E.Asia* LDCs All developing countries

Primary school pupilteacher ratio 40

Secondary technical enrolment 6.7

26 47 46 26 45 34

9.9 1.7 1.9 9.7 5.4 7.2

Tertiary students abroad 17

Public expenditure on education as % ofG N P 1990 n.a.

12 3 7 4 15 5

6.2 3.9 4.0 n.a. n.a. n.a.

E n v ir o n m e n t Another issue necessitating a strong role for government is the environment. Unregulated private investment, which highlights the laxity o f laws in the Third World dealing with environmental protection, can have devastating consequences, notably in mining, tourism, and forestry.155 Some IOR governments oppose restrictions on the exploitation o f their natural

28

T h e I n d i a n O c e a n R im (I O R )

resources lest they reduce employment and revenue. Thus India and Kenya were in 1995 prominent in influencing the group o f seventy-seven developing countries and China in attempting to stall a reduction on levels o f ozone depleting substances.156 However, while sentiments such as those expressed by Frederick Chiluba, president o f Zambia, who declared at the 1997 World Economic Forum meeting o f southern African leaders in Harare, that ‘We don’t care who buys the mines in Zambia so long as the mines make money and contribute to the exchequer’157 might be applauded by the leading international financial institutions, unqualified FDI - the growing control by TNCs o f the natural resources o f the region - is not necessarily conducive to the best long term national or regional economic interests o f IOR countries.158 One o f the biggest causes for concern is forestry, and mining activities such as RTZ-CRA’s copper and gold exploitation in Irian Jaya, Indonesia, and its proposed mining project in the tropical rainforest in southeast M adagascar.159 The problem, global in nature due to the impact o f such damage on the climate, is not restricted to any single country. This has been demonstrated by the destruction o f huge tracts o f forest in M alaysia and especially in Indonesia which in 1999 suffered a series o f devastating forest fires. Anxieties over environmental damage have been expressed at Seattle and other forums o f international institutions, but a strong argument exists in favour o f IOR governments co-operating to establish a regional environ­ mental monitoring agency rather than relying on Greenpeace or similar environmental groups from the ‘North.’160

S e c u r it y A further area o f immediate pertinence to governments is security. India and South Africa opposed Australia’s desire to place security on the IOR agenda for fear that the Indo-Pakistani conflict would overshadow the economic debate. Nevertheless, it is a topic that needs to be addressed, for security and commerce are mutually self-enhancing: peace and security are essential for trade and development, while regional economic co-operation involving increased intra-IOR exchange o f goods, capital and services can help foster better political relations and reduce tension. The abundance o f strategic minerals in the region and the importance o f existing and potential oil routes through the Indian Ocean have been the focus o f a number o f sub-regional conflicts affecting the Horn o f Africa, and the Gulf. This has emphasized the historic strategic importance o f the three major maritime entrances to the Indian Ocean, via the Indonesian archipelago, the Red Sea and the Cape o f

29

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Good Hope and ensured that all major powers have security interests in the IOR including China which has vital oil interests in the hinterland.161 Southern Africa is relatively peaceful following the demise o f Apartheid, despite the continuation of war in Angola, and an involvement in the Congo conflict which has cost Zimbabwe the equivalent of 5.3 per cent o f its GNP and which has accentuated that country’s social and economic crisis.162 Sub­ regional conflicts in South and Southeast Asia are of a different order. First, the recent heightening o f the half century long Indo-Pakistani conflict over Kashmir, notably with the threat by both sides to use their well publicized nuclear capabilities, poses a distinct security risk of regional and potentially global dimensions. Another major concern is conflict in Indonesia, a country that has long been considered a lynchpin o f Western defence in Southeast Asia. The simultaneous rise o f internecine and secessionist disputes within the Indonesian archipelago, notably in Aceh and Irian Jaya,163 and Chinese expansionism (based on claims o f ascendance in the region dating to the fifteenth century) constitutes a threat to regional security probably greater than that posed by the former USSR.'64 At the same time, there exist a number o f non-military security issues. The IOR region produces about 80 per cent o f global production o f heroin, concentrated in the Golden Crescent (Afghanistan, Iran, Pakistan and India) and the Golden Triangle (Myanmar, Thailand and Laos). As ASEAN is making efforts to curtail the heroin trade in the Triangle, the Crescent will probably become increasingly important. There are direct links between the heroin traffic and the purchase o f arms for local disputes - e.g. the Mujahideen in Afghanistan, and Sikh and Tamil separatists in the Punjab and Sri Lanka respectively. Heroin is both consumed locally (Pakistan has an estimated 2 million heroin addicts and India close to a million) and exported. O f significance is the increasing role o f Africans in the heroin trade from the IOR, and the use o f African IOR countries (Kenya, Tanzania, Mozambique, Zimbabwe and South Africa) as places of transit for heroin and other drugs.165 Such issues give meat to the Australian argument that security be placed on the IOR agenda, and notably its wish that the concept o f an Indian Ocean Zone o f Peace (IOZP) be considered. The region possesses in Australia, India and South Africa stable ‘Middle Powers’ with the potential to arbitrate in regional conflicts and, if necessary, to constitute a peace-keeping force. This is fraught with difficulties, as the recent military interventions o f South Africa in Lesotho and o f Australia in East Timor have demonstrated. Nevertheless, without such capability the IOR remains ultimately dependent upon a major US and French military presence in the Indian Ocean to counter any conflagration o f sub-regional conflicts as well as any conceivable Chinese military expansion in the region.166

30

T h e In d i a n O c e a n R im (I O R )

The

IOR

C o n c lu s io n a n d th e W o r ld O r d e r

This volume presents a series o f papers exploring aspects o f the historical and current relationship between South Africa, Southern Africa and countries o f the Indian Ocean rim, notably in the initiative that led to the founding in 1997 o f the association for the economic co-operation o f Indian Ocean Rim countries (IOR). It examines the issues at stake for southern Africa, notably for South Africa, in the IOR grouping, one o f a number o f regional trading groups that have become a permanent feature of the modern international economy and which are proving compatible with a multilateral trading system .167 The Indian Ocean witnessed the emergence of one o f the earliest complex long-distance commercial networks in which a number o f important trade diaspora were established across the region, some o f which like the Hadhramaut, Indian and Chinese remain important economic forces. Modern colonial empires and Cold War alignments distorted the traditional economic unity o f the region. However, the dissolution of the USSR and the end o f the Apartheid regime in South Africa resulted in a realignment o f political and economic relations in the region that led to a renewed interest in forging relations between countries o f the Indian Ocean rim. It was the relentless progress o f liberalization that, in this political vacuum, was mainly responsible for the emergence o f an IOR grouping. For the more advanced economies on the eastern rim o f the Indian Ocean, it represented an opportunity for their industrial sectors to benefit from enlarged markets. For the less developed economies o f the region, an IOR grouping represents the opportunity to collectively explore means to counter the growing risk o f economic marginalization, due to the effects o f globalization - including domination by TNCs and the exodus o f capital and skilled labour to more advanced economies. An IOR regional grouping could attract, from both internal and external sources, the capital, skill and technological resources to stimulate economic growth in less developed economies o f the region. It also offers Indian Ocean rim countries the op­ portunity to collectively pursue the Seattle initiative and challenge the domination o f international economic policy by governments and insti­ tutions o f the North. A well-researched and co-ordinated strategy is essential if the maximum benefits are to be drawn from the IOR. In part this may be supplied by the private sector, as represented in the IOR Business Forum (IORBF).168 However, all contributors to this volume emphasize that the active participation o f government is vital in order to achieve the long term goal of establishing a free trade area that ensures the welfare o f the region as a

31

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whole, including Africa, a region that otherwise runs a grave risk o f permanent marginalization.

N otes

1

2

3

4 5

The full title, adopted in March 1997, is ‘The Indian Ocean Rim Asso­ ciation for Regional Cooperation - IOR-ARC.’ For the sake o f simplic­ ity, the original abbreviation o f TO R ’ is retained in this volume. This volume comprises in large part papers - subsequently updated first delivered at the conference on ‘France, Southern Africa and the Indian O cean’ held at the University o f the Witwatersrand, 5-9 Septem­ ber 1995. Agnès Sinai, ‘Le jour où le Sud se rebiffa,’ Le Monde Diplomatique (Janvier 2000), p. 4; The Economist (4 December 1999), pp. 53-4; (11 December 1999), pp. 17-18. See chapters in this volume by Mayer, Rwejuna, Scerri, and Winter. The Economist (8 January 2000), pp. 88-90; (29 January 2000), pp. 19-

20 . 6 7

8

9 10 11

12

13 14

‘Spoiling world trade,’ The Economist (7 December 1996), p. 15. Bhagwati considers that the term ‘Free Trade Agreem ents’ (FTAs) used to cover such regional groupings should be replaced by ‘preferential trade agreem ents’ (PTAs) to indicate the real protectionist nature o f such groupings - Jagdish Bhagwati, ‘Fast track to nowhere,’ The Economist (18 October 1997), p. 24; see also ibid., pp. 23-6. While these papers were formalized before the US-led attack on Af­ ghanistan, the paradigm shift in international relations this has pro­ duced has only served to reinforce the importance o f regional coopera­ tion in the IOR region. See e.g. G.P. Murdoch, Africa, Its Peoples and Their Culture History (New York, 1959). Chapters by Streak, Warburton and Worden. See chapter by Warburton; also Gwyn Campbell, ‘The Origins and De­ velopment o f Coffee Production in Réunion and Madagascar, 17111960,’ in William Gervase Clarence-Smith (ed.) volume on The history o f the Development o f Coffee Production to 1960 - forthcoming. ‘Spoiling world trade,’ and ‘World Trade - all free traders now ?,’ The Economist (7 December 1996), pp. 15, 23; The Economist (12 June 1999), p. 16. The Economist (7 December 1996), 25; (20 November 1999), pp. 25-6. ‘Spoiling world trade,’ The Economist (7 December 1996), p. 15.

32

T h e I n d i a n O c e a n R im (I O R )

15

Francisco Rodriguez and Dani Rodrik, ‘Trade Policy and Economic Growth: A Sceptic’s Guide to the Cross-National Evidence,’ NBER pa­ per 7081 (April 1999). 16 The Hindu (23 Nov 1993), p. 1; Business Day (23 Nov 1993). 17 See Charter in appendix 2. 18 W. M cLennan, Year Book Australia 1996 (Canberra: Australian Bureau o f Statistics, 1996), p. 48. 19 IOR Charter, clause v, in appendix 2. 20 Larousse, Faits et Chiffres du 1er janvier au 31 décembre 1995 (Paris: Larousse, 1996); Greg Mills, Alan Begg & Anthoni van Nieuwkerk (eds), South Africa in the Global Economy (Johannesburg: SAIIA, 1995), pp. 216, 223. 21 Erich Leistner, ‘South Africa’s Options for Future Relations with Southern Africa and the European Community,’ SACOB (October 1992), p. 2. 22 Chapters by Mayer and Lombardozzi; see also Gwyn Campbell and Mario Scerri, ‘An Indian Ocean Rim Association,’ South African Jour­ nal o f International Affairs 2.2. (1995), pp. 24-8. 23 Chapters by Mayer and Truter; see also Courrier international - Le Monde en 2000 (décembre 1999-février 2000), p. 102. 24 Chapters by Rwejuna and Campbell. 25 Chapters by Campbell & Subramanian, and Ulpat. 26 Le M o d 1365 (2 décembre 1998), pp. 14-23; ‘Australia,’ The Econo­ mist (24 January 1998), p. 114 and (15 May 1999), pp. 66-7. 27 Chapter by Flior; see also CII, ‘Non-Tariff Barriers,’ pp. 34-8; Brian Pinkstone, Global Connections. A History o f Exports and the Austra­ lian Economy (Canberra: AGPS, 1992), p. 385; McLennan, Year Book Australia 1996, p. 685. 28 ‘Australia,’ The Economist (3 August 1996), pp. 54-5. 29 ‘Australia Looks W est,’ Joint Statement by the Minister for Foreign Affairs, Senator Gareth Evans and the Minister for Trade, Senator Bob McMuIlan (9 August 1994). 30 Although the EU is also expanding relatively quickly, other significant groupings are moving slower - NAFTA has three members and APEC ‘is moving at glacial pace’ - see ‘Spoiling world trade,’ The Economist (7 December 1996), p. 15; see also ‘World Trade - all free traders now ?,’ The Economist (7 December 1996), pp. 23-4. 31 Quoted in Business Times [South Africa] (26 March 1995), p. 12. 32 McLennan, Year Book Australia 1996, pp. 673-5. 33 McLennan, Year Book Australia 1996, pp. 673-5. 34 DFAT, ‘Australia Fact Sheet’ (September 1999), www.dfat.gov.au; McLennan, Year Book Australia 1996, p. 58

33

G w yn C am pbell

35

36

37 38

39

40 41 42

43 44 45 46 47

APEC is responsible for about 50 per cent of world output and 40 per cent o f world trade - see Business Times [South Africa] (26 March 1995), p. 12; McLennan, Year Book Australia 1996, pp. 41, 48. K.P. Kalirajan & R.T. Shand, ‘Australian Economy and Indian Ocean Grouping Countries,’ ms. ANU [1995]; [K.P. Kalirajan & R.T. Shand], ‘Current Economic Characteristics and Economic Linkages in the In­ dian Ocean,’ Working Paper 2 (International Forum on the Indian Ocean Region, 11-13 June 1995, Perth, Australia), p. 2; ‘Australia Looks W est’; ‘Australia,’ The Economist (24 January 1998), p. 114. ‘Mining in Africa,’ The Economist (25 May 1996), pp. 74, 79. ‘Road M ap,’ The Economist (7th June 1997), p. 91; CII, ‘Non-Tariff Barriers,’ p. 125; Le M o d 1 1374 (28 janvier 1999), p. 45; ‘Textile trade - Knotted,’ The Economist (8 December 1997), p. 90. Other low-wage countries like Thailand and Indonesia look to the es­ tablishment o f assembly plants in Latin America for similar access to the US - see ‘Economic Viability of Establishing Direct Shipping Links Between India and South America via South Africa’ Export-Import Bank o f India Occasional Paper 33 (December 1994); ‘Asian invest­ ment in Latin America,’ The Economist (24 August 1996), p. 55; ‘Stategy for Increasing India’s Exports to South East Asia’ Export-Import Bank o f India Occasional Paper 3) (December 1994). DFAT, ‘India Fact Sheet’ (January 2000), www.dfat.gov.au; Confed­ eration o f Indian Industry (CII), ‘Non-Tariff Barriers,’ p. 125. Chapter by Campbell & Subramanian. See chapter by Ramasamy. The Lomé Convention was a pact of ‘trade, aid and development,’ signed in 1963 between the EU and 49 (now ex­ tended to 70) o f the world’s poorest nations, in Africa, the Caribbean and the Pacific (the ACP countries). Its basic aim was to provide ACP countries with aid, and to guarantee them access for specified products to the EU market. DFAT, ‘Mauritius Fact Sheet’ (January 2000), www.dfat.gov.au; CII, ‘N on-Tariff Barriers,’ p. 126. Jaysen K. Ramasamy, ‘Income Tax policy in M auritius’ (Dissertation, University o f Natal, October 1993), p. 7. ‘A half-African success story,’ The Economist (14 December 1996), p. 47. ‘A half-African success story,’ The Economist (14 December 1996), p. 47; Le Monde - Bilan du Monde 2000, p. 108. ‘Growing a Nation. The United Arab Emirates at 25,’ The Economist (30 November 1996); L ’Express [Mauritius] (27 mars 1995), 3 and (28 mars 1995), pp. 1,5; Les 500 - Jeune Afrique hors-série (2000), p. 210.

34

T h e In d i a n O c e a n R im (IO R )

48 49

50 51

52 53 54 55 56 57 58

59

60

61 62 63 64 65

66

Le Figaro économie (6 décembre 1995), x; Le M o d 11374 (28 janvier 1999), p. 257. L.H. Gann & Peter Duignan, South Africa: War? Revolution? Peace? (Cape Town: Tafelberg, 1979); [Kalirajan & Shand], ‘Current Eco­ nomic Characteristics,’ p. 23. Courrier international - Le Monde en 2000 (décembre 1999-février 2000), p. 104. See for example, ‘Behind the razor wire,’ The Economist (16 January 1999), p. 40; ‘Part time in South Africa,’ The Economist (20 February 1999), pp. 47-8; Les 500 - Jeune Afrique hors-série (2000), p. 166. ‘Emerging market indicators,’ The Economist (25 May 1996), p. 124. Chapter by Rwejuna; Le Monde - Bilan du Monde 2000, p. 99; ‘Mining in Africa,’ The Economist (25 May 1996), pp. 74, 79. ‘South Africa - Building slowly for the future,’ The Economist (16 No­ vember 1996), p. 56. Chapters by Mayer and Lombardozzi. DFAT, ‘South Africa Fact Sheet’ (January 2000), www.dfat.gov. au; CII, ‘Non-Tariff Barriers,’ p. 127. [Kalirajan & Shand], ‘Current Economic Characteristics,’ p. 1. Jeffrey E. Garten, ‘India and the United States: Ending the Era o f Missed Opportunities,’ address to the Asia Society, Washington D.C., 20 January 1994, p. 11; Confederation o f Indian Industry (CII), ‘NonTariff Barriers and Impediments to Investments in Indian Ocean Rim C ountries,’ IOR Consultative Business Network Working Paper 1 (New Delhi: CII, 1995), p. 4; and see also The Economist (25 January 1997), p. 108. The others are the Chinese Economic Area - comprising China, Hong Kong, and Taiwan - South Korea, the Latin American trio o f Argen­ tina, Brazil and Mexico, and Poland. Garten, ‘India and the United States,’ p. 9; See also Mukul G. Asher, V.V. Bhanoji Rao & Ramkishen S. Rajan, ‘Towards an Association for Indian Ocean Economic Co-operation (AIOEC): An Exploratory Paper’ ms. (May 1994), pp. 1-2. Le Monde - Bilan du Monde 2000. Garten, ‘India and the United States,’ p. 10. Survey South-East Asia, The Economist (12 February 2000). [Kalirajan & Shand], ‘Current Economic Characteristics,’ p. 2. ‘South Africa,’ www.dfat.gov.au/geo/eaag/south-africa.pdf; Mamadou Bah, ‘Malasie, tigre d ’Afrique,’ in Les 500-Jeune Afrique hors-série (2000), p. 60. Chapters by Lomardozzi, Scerri and Winter; see also [Kalirajan & Shand], ‘Current Economic Characteristics,’ p. 3.

35

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67

68 69

70 71 72 73 74

75

76 77 78

79 80 81

82 83 84

‘World Trade Growth ...’ (16 April 1999), www.wto.org/wto/intlrad/internat.htm; ‘Will the World Starve?,’ The Economist (16 November 1996), p. 23; ‘An African success story,’ The Economist (14 June 1997), p. 53; ‘South A frica’s economy - Turnaround,’ The Economist (8 March 1997), p. 98; ‘Emerging Africa,’ The Economist (14 June 1977), p. 13. The Economist (16 October 1999), p. 59. Anon, ‘Non-M ilitary Security Issues in the Indian O cean,’ Working Paper 4B (International Forum on the Indian Ocean Region, 11-13 June 1995, Perth, Australia), p. 21. ‘Aids in the Third W orld,’ The Economist (2 January 1999), pp. 40-2; ‘AID S,’ The Economist (27 November 1999), p. 52. Les 500-Jeune Afrique hors-série (2000), pp. 119, 148-9, 162. ‘Mining in Africa,’ The Economist (25 May 1996), p. 79. ‘Mining in Africa,’ The Economist (25 May 1996), p. 79. Chapter by Flior; ‘South Africa - Golden handshake,’ The Economist (26 July 1997), p. 36; Patrick McGowan & Fred Ahwireng-Obeng, ‘South Africa in Africa - Partner or Hegemon?,’ Global Dialogue 2.2 (1997), pp. 15-16. Even in Thailand and Indonesia where manufacturing and services ac­ count for a greater proportion o f GDP, the agricultural sector still em­ ploys over 50 per cent o f the economically active population - The Economist (3 April 1999), p. 52; (10 April 1999), pp. 55-6; see also [Kalirajan & Shand], ‘Current Economic Characteristics,’ p. 1. Lynne O ’Donnell, ‘Australia to stake claim in China wheat m arket,’ The Economic Times, Bombay (8 December 1995). ‘South Africa,’ www.dfat.gov.au/geo/eaag/south-africa.pdf. Chapter by Truter; see also CII, ‘Non-Tariff Barriers,’ p. 65; ‘Just when you thought it was safe,’ The Economist (16 November 1996), p. 30; ‘India and Bangladesh - Sweeter waters,’ The Economist (16 Novem ­ ber 1996), p. 73; ‘Will the World Starve?,’ The Economist (16 Novem ­ ber 1996), pp. 24, 30. DFAT, ‘ASEAN-10 Fact Sheet’ (August 1999), www.dfat.gov.au. Appendix Table 4, ‘World Trade Growth...’ (16 April 1999), www.wto.org/wto/intltrad/internat.htm. Chapter by Streak; see also Gwyn Campbell, ‘The Cocoa Frontier in Madagascar, the Comoro Islands and Réunion, c. 1820-1970,’ in W.G. Clarence-Smith (ed.), Cocoa Pioneer Fronts since 1800 (London: Macmillan 1996), pp. 195-211. ‘Emerging market indicators,’ The Economist (25 May 1996), p. 124. McGowan & Ahwireng-Obeng, ‘South Africa in Africa, pp. 15-16. Chapters by Ramasamy, Scerri, and Winter.

36

T h e I n d i a n O c e a n R im (I O R )

85

86 87 88 89 90

91 92

93 94 95 96 97 98

99 100

101 102 103 104 105 106

All these countries form potential markets for South African iron ore see chapters by Kuper, Scerri and Winter; see also The Economic Times, Bombay (8 December 1995); McLennan, Year Book Australia 1996, p. 680. ‘Building the new Asia,’ The Economist (25 May 1996), p. 72. ‘The NAFTA Effect,’ The Economist (5 July 1997), pp. 17-18. ‘Wobbly tigers,’ The Economist (24 August 1996), pp. 13-4. ‘Rand raiders,’ The Economist (17 August 1996), p. 66. Chapter by Scerri; see also Hélène Vissière, ‘Thaïlande - La croissance dans le désordre,’ Challenges 100 (février 1996), p. 111; ‘The long drive to freedom ,’ The Economist (30 March 1996), pp. 65-6; ‘Bumper to bum per,’ The Economist (17 August 1996), pp. 53-4; McGowan & Ahwireng-Obeng, ‘South Africa in Africa, p. 16. Chapters by M arabwa and Ramasamy; see also The Economist (20 Feb­ ruary 1999), p. 120. Madagascar, received only 80,000 foreign tourists in 1998 compared to the 500,000 that visited Mauritius - see chapters by Marabwa, Rama­ samy, and Rwejuna; Le Monde - Bilan du Monde 2000, p. 107. Matthew Valencia, ‘Banking in Emerging Markets - Survey,’ The Economist (12 April 1997), p. 9; The Economist (1 May 1999), p. 108. ‘Standard raisers,’ The Economist (30 November 1996), pp. 93-4. Leistner, ‘South Africa’s Options,’ p. 6. Valencia, ‘Banking in Emerging M arkets,’ p. 5. ‘Asian currencies - More turbulence ahead,’ The Economist (23 August 1997), pp. 56-7; The Economist (16 August 1997). Jannik Lindbaek, ‘Le secteur privé constitue le véritable socle de la croissance,’ L'Expansion, L Atlas de la croissance 543 (20 fév. 1997), p. 103; [Kalirajan & Shand], ‘Current Economic Characteristics,’ p. 44. Africa and the Middle East received only 5.2 per cent o f the total - The Economist (6 February 1999), p. 114. ‘South-East Asia Survey,’ The Economist (12 February 2000); ‘On the mend, at last,’ The Economist (9 August 1997), p. 13; see also ‘Build­ ing the new Asia,’ The Economist (25 May 1996), pp. 71-2; South-East Asia in Denial,’ The Economist {18 October 1997), p. 16. ‘Investment in A frica,’ The Economist (9 November 1996), p. 109. ‘Investment in A frica,’ The Economist (9 November 1996), p. 109. Le Monde - Bilan du Monde 2000, p. 99; The Economist (24 July 1999), p. 108; Le M o d 11374 (28 janvier 1999), pp. 232-3. ‘Investment in A frica,’ The Economist (9 November 1996), p. 109. ‘Investment in Africa,’ The Economist (9 November 1996), p. 109. Singapore objects to the principle o f aid on the grounds that it prefers to assist the poor through technical assistance and direct investment -

37

G w y n C am pbell

‘The Asian Development Bank,’ The Economist (4 May 1996), p. 78; also ‘Development finance,’ The Economist (5 October 1996), p. 92. 107 ‘A fund in need o f funds,’ The Economist (9 November 1996), p. 109. 108 [Kalirajan & Shand], ‘Current Economic Characteristics,’ pp. 44, 52. 109 Chapter by Warburton. 110 ‘South-East Asia Survey,’ The Economist (12 February 2000); ‘Indone­ sia Survey,’ The Economist (26 July 1997), p. 11; K.S. Jeong, ‘Les réseaux branchés de la diaspora chinoise,’ Challenges (février 1996), p. 80; Beernard Dorléans, ‘L ’irrésistible ascension mondiale de la dias­ pora chinoise,’ Le M o d 11209 (30 novembre 1996), pp. 58-60; ‘La re­ vanche des coolies,’ Challenges (février 1996), 101; ‘Fissiparous for­ tunes and family feuds,’ The Economist (30 November 1996), pp. 73-4; ‘A Survey of China,’ The Economist (8 March 1997), p. 4; Le M o d 11374 (28 janvier 1999), p. 46. 111 Virginia Thompson & Richard Adloff, The Malagasy Republic (Stan­ ford: Stanford University Press, 1965), pp. 272-3; Maureen Covell, Madagascar. Politics, Economics and Society (London & New York: Frances Pinter, 1987), p. 84. 112 [Kalirajan & Shand], ‘Current Economic Characteristics,’ pp. 2, 14. 113 From 1997-9 there was a 30 per cent increase in the number o f compa­ nies registering in the Mauritian offshore Banking sector - see chapter by Ramasamy; Le Monde - Bilan du Monde 2000, p. 108. 114 Jeffrey Sachs and Andrew Warner, ‘Economic Reform and the Process o f Global Integration,’ Brookings Papers on Economic Activity (1995). 115 CII, ‘Non-Tariff Barriers,’ pp. 7-32. 116 Chapters in this book by , Lombardozzi, Mayer, Rwejuna, and Winter. 117 CII, ‘Non-Tariff Barriers,’ p. 29. 118 Chapter in this book by Scerri; see also Campbell & Scerri, ‘South Af­ rica and the Indian Ocean Rim (IOR): An Evaluation,’ p. 9; ‘Emerging Africa,’ The Economist (14 June 1997), p. 13. 119 Chapters in this book by Lombardozzi, Scerri, and Winter. 120 Sanjaya Lall, ‘What will make South Africa Internationally Competi­ tive?,’ ASPEN/IDASA Conference on South Africa’s International Economic Relations in the 1990s (April 1993), pp. 10-13; Business Times (16 April 1995), p. 16. 121 Chapters in this book by Ramasamy and Winter. 122 The Economist (3 July 1999), p. 80; see Rodriguez & Rodrik, ‘Trade Policy and Economic Growth.’ 123 Chapters in this book by Marabwa and Rwejuna. 124 Chapter in this book by Truter; see also anon, ‘Non-Military Security Issues,’ pp. 38-9. 125 The Economist (20 November 1999), pp. 98-9.

38

T h e In d i a n O c e a n R im (IO R )

126 127 128 129 130 131 132

133 134 135 136 137 138 139

140

141 142

143 144

145

Chapter in this book by Streak. The Economist (27 November 1999), pp. 13, 23-4. Chapters in this book by Kuper, Scerri, and Winter. ‘It’s the government, stupid,’ The Economist (28 June 1997), p. 93. [Kalirajan & Shand], ‘Current Economic Characteristics,’ pp. 44-7. Chapter in this book by Winter; Lindbaek, ‘Le secteur privé,’ p. 103. At the same time, more than 40 per cent o f entrepreneurs in developing countries, as opposed to 15 per cent in developed countries, stated that they habitually had to pay bribes, The Economist (28 June 1997), p. 93 and (9 November 1996), p. 109. ‘South Africa,’ www.dfat.gov.au/geo/eaag/south-africa.pdf. ‘We have persons at the door, sir,’ The Economist (15 March 1997), pp. 64-5. ‘Venture capital in India - Tread softly,’ The Economist (18 January 1997), p. 79. ‘World Trade - All free traders now?,’ The Economist (7 December 1996), p. 25. Chapter in this book by Winter. ‘Les nouveaux conquérants,’ Challenges 100 (février 1996), pp. 78, 80. See Rashad Cassim & Moeketsi Setai, ‘Asia and the Experience of Economic Integration: Implications for South Africa and the Region,’ Trade Monitor 8 (Dec 1994), pp. 11-12. Goseco developed the idea o f commodity credit notes in 1964. Unlike money, such notes would not be a means o f exchange or a store o f value, and might comprise letters of credit, warehouse receipts or ir­ revocable contracts to deliver specified goods or services: see Michael Barratt Brown, Fair Trade (London: Zed Books, 1993), pp. 147-50. Brown, Fair Trade, pp. 146, 152-3, 155. The inclusion o f a project on technology transfer in the IOR ‘Work Programme’ is therefore o f considerable significance - IOR Work Pro­ gramme, March 1997, clause 6.10; see also Le Monde - Bilan du Monde 2000, pp. 30-1; Paul Krugman, ‘Interview,’ LExpansion, L \Atlas de la croissance 543 (20 fév. 1997), p. 117. Chapters in this book by, Lombardozzi, Truter, and Winter. Chapters in this book by Flior, Kuper, and Scerri; see also Gwyn Campbell & Mario Scerri, ‘South Africa and the Indian Ocean Rim (IOR): An Evaluation,’ ms, University o f Johannesburg, 1995; Lall, ‘What will make South Africa Internationally Competitive?,’ pp. 4-7. ‘South Africa,’ www.dfat.gov.au/geo/eaag/south-africa.pdf; V.L. Narayan & R.L. Chawla, ‘Information Technology (including Telecommu­ nications) in Indian Ocean Rim,’ Working Paper 4 (F1CCI, New Delhi, December 1995).

39

G w yn C am pbell

146 Jacques Delors, ‘L’Asie de l’Est décolle parce qu’elle forme bien ses jeunes,’ L'Expansion, L'Atlas de la croissance 543 (20 fév. 1997), p. 105; ‘India and Pakistan Survey,’ The Economist (22 May 1999), p. 11; ‘The mystery o f growth,’ and ‘Economic Growth,’ The Economist (25 May 1996), pp. 16-17, 23-4, 29. In this respect it is o f note that the IOR ‘Work Programme’ includes a project on ‘human resource development’ - IOR Work Programme, M arch 1997, clause 6.7. 147 Chapter by Scerri; see also Lall, ‘What will make South Africa Interna­ tionally Com petitive?,’ pp. 4-7. 148 ‘South-East A sia’s learning difficulties,’ The Economist (16 August 1997), pp. 47-8. 149 Swaminathan Aiyar, ‘Les Indiens se débrouillent mieux que leur Etat,’ Courrier international - Le Monde en 2000 (décembre 1999-février 2000), p. 52; ‘Indonesia Survey,’ The Economist (26 July 1997), p. 15; ‘India and Pakistan at 50,’ The Economist (16 August 1997), pp. 17-18; The Economist (16 August 1997), 75; ‘India looks east,’ The Economist (8 March 1997), p. 70; see also table 13. 150 The Economist (8 June 1996), pp. 64-5; ‘India and Pakistan Survey,’ The Economist (22 May 1999), p. 11. 151 The Economist (27 March 1999), p. 47. 152 Chapters by Kuper, Scerri, and Winter; see also The Economist (24 April 1999), pp. 86, 89, (15 May 1999), p. 48 and (10 July 1999), p. 116; You (2 December 1999), pp. 18-19. 153 UNDP, Human Development Report 1995 (New Delhi: Oxford Univer­ sity Press, 1995), p. 214. 154 Literacy rates for Sub-Saharan Africa and South Asia including India are taken from The Economist (9 January 1999), p. 53; Other figures are taken from UNDP, Human Development Report 1995, p. 215. 155 ‘Investment in Africa,’ The Economist (9 November 1996), p. 109. 156 The Economic Times, Bombay (8 December 1995). 157 Quoted in ‘An African success story,’ The Economist (14 June 1997), p. 53. 158 Chapters by Lombardozzi and Winter; see also Lindbaek, ‘Le secteur privé,’ p. 103. 159 The fun o f being a m ultinational,’ The Economist (20 July 1996), pp. 57-8. 160 Chapters by M arabwa and Rwejuna. 161 Chapters by Worden, Campbell & Subramanian, and Warburton; see also Henry Kissinger, ‘Il y a toujours des risques dans une moitié du m onde,’ L'Expansion, L'Atlas de la croissance 543 (20 fév. 1997), pp. 106-7.

40

T h e I n d i a n O c e a n R im (I O R )

162 Le Monde - Bilan du Monde 2000, p. 100; The Economist (3 July 1999), p. 36; (20 November 1999), p. 60. 163 See e.g. The Economist (27 March 1999), p. 64; (2 October 1999), pp. 67-9; (13 November 1999), pp. 72-3; (8 January 2000), pp. 60-1; Cour­ rier international - Le Monde en 2000 (décembre 1999-février 2000), p. 101. 164 Chapters by Campbell and Campbell & Subramanian. 165 Anon, ‘Non-M ilitary Security Issues,’ 1, pp. 11-15. 166 Chapters by Campbell & Subramanian and Ulpat; see also Michelle Gratin, ‘Australie: Optimisme de rigueur,’ Courrier international - Le Monde en 2000 (décembre 1999-février 2000), p. 53. 167 Cassim & Setai, ‘Asia and the Experience o f Economic Integration,’ pp. 11-12. 168 (i) Co-operation in Standards and Accreditation, (ii) the establishment o f an IOR Business Centre and IORNET an international web site for IOR businesses, (iii) Investment Facilitation and Promotion, (iv) the es­ tablishment o f an IOR Chair in Indian Ocean Studies and Associate Fellows, (v) Trade Promotion Programme and IOR Trade Fair in 1999, (vi) Development, Upgrading and Management o f Seaports; Maritime Transport; Insurance and Re-insurance, (vii) Human Resource Devel­ opment Co-operation, (viii) Working Towards Complementarity - A Comparative Analysis o f Existing Multilateral and Regional Economic and Trade Policy Arrangements and Processes, (ix) Tourism Promotion and Development and (x) Technology Enhancement in the Indian Ocean Region.

41

C hapter 2 C a pe T o w n a n d P o r t L o u is in t h e E ig h t e e n t h C e n t u r y N ig e l W o r d e n

The historiography o f the Cape (indeed o f South Africa more generally) is notoriously insular, but it is self-evident that a settlement which was founded as a minor cog in a major mercantilist project spreading across the Indian Ocean and which was subject to the ultimate authority o f officials not only in the Netherlands but also in Batavia and Ceylon, was integrally a part o f the Indian Ocean world and was shaped by forces from the East as much as from the North and West. Despite the theoretical and empirical insights that can be obtained from such comparative readings, there are few colonial port towns in the eighteenth century which offer direct parallels to the experience o f Cape Town. Atlantic ports were not under the control o f chartered companies,1 while the European factories and fort settlements o f India and Southeast Asia were dependent upon pre-existing Asian social and trading systems, perched on the edges o f local polities and societies.2 None of them were colonies of European settlement, and their towns were accordingly o f a fundamentally different character to Cape Town. The closest parallel lies rather in the ports o f the French colonies in the Mascarenes, and especially in Port Louis. Founded by the Compagnie des Indes (Cl), the port o f lie de France (later Mauritius) served as the administrative and marketing centre of a French colonial settlement as well as constituting a vital part o f French trading networks in the Indian Ocean. Although the historiography o f Port Louis is as patchy as that o f Cape Town, a focus on it points to some regional specifics o f the western Indian Ocean and highlights some significant and hitherto neglected features of Cape Tow n’s early colonial history.

T h e F o u n d a t io n s The physical layout o f eighteenth century Cape Town and Port Louis bore some striking similarities which reflected their origins and are still visible today. Circumscribed by hills or mountains, both towns faced determinedly out to sea, their harbours fringed by public buildings comprising fortress,

C a p e T o w n a n d P o r t L o u is in t h e E ig h t e e n t h C e n t u r y

barracks, warehouses and hospital interspersed with vegetable gardens and, situated on the perimeter, a quarter o f narrow streets and mosques. Both towns were founded on land previously unoccupied by settlements, although Cape Town was established on the site of the seasonal herding routes of Khoikhoi pastoralists who attacked its first mud fort, while early Port Louis and its surrounding area was subject to attacks by bands o f maroons fugitive slaves. But the structural layout o f the towns symbolized an external presence on an uncharted landscape pointing to the wider economic systems o f the chartered companies. Both sites were established in the context of local rivalries with other companies. The VOC established a fort in Table Bay in 1652 as a pre-emptive move against English settlement. French plans for settlement in Mauritius in the mid-seventeenth century were foiled by the Dutch presence there and they only returned under the aegis o f John Law’s newly-established Cl in 1722 after the VOC had abandoned the island.3 In both towns, the first few years were years of uncertainty. It was not until after Van Riebeeck’s departure that the VOC committed itself to a permanent settlement in Table Valley and stone buildings were erected in the 1660s-70s. On the lie de France the Cl dallied between alternative harbours on the southeast and northwest o f the island and Port Louis’s main buildings were only erected in the 1730s, when plans sent out from France were suitably modified to the local environment.4

C h a r t e r e d C o m p a n ie s

and

I n d ia n O c e a n T r a d e

The foundations o f these settlements thus point to both an assertion of control over a new landscape and an initial hesitancy about the wisdom o f such an investment. Lacking the infrastructure o f a pre-existing settlement or the base o f a local trading system o f the kind which underpinned Company settlements in such places as Colombo, Madras or Batavia, both the VOC and the Cl were embarking on a different sort o f venture; one in which both bravura and hesitancy played a part. European chartered company activities in the western Indian Ocean were only forged in the course o f the late seventeenth and eighteenth centuries. Here there was no pre-existing history o f the kinds o f trading relationship which existed between the Portuguese and Asians on the more established trade routes of the eastern seas where the main activities of the VOC and Cl were focused. Barter between the Khoi and Europeans at the Cape had taken place from the early sixteenth century, but there was a limit to the amount o f cattle that the Khoi were prepared to trade, even before the Dutch established the Cape Town settlement. Thus in traditional historiography, company settlements in the Cape and the Mascarenes have been assigned an utterly subordinate

43

N ig e l W o r d e n

position - as provisioning posts - to the much more commercially and politically significant bases in India and the East Indies.6 This was indeed largely the case, but there are two important riders to such a perspective which a joint consideration o f Cape Town and Port Louis brings to attention. Both ports were also part o f a new network o f trade in the south-western Indian Ocean in the eighteenth century, and both, whilst retaining their role as refreshment stations for passing ships were also, uniquely in the Indian Ocean, markets for agricultural hinterlands farmed by European settlers. The extent o f European trading activity in the eighteenth century western Indian Ocean is not well known in Cape historiography. VOC vessels traded regularly from Cape Town to Mozambique and Madagascar, and in the 1720s the VOC briefly established a trading post at Rio de la Goa (the site o f modern Maputo) which was itself under the aegis o f the Cape Town administration. A large part o f this activity was to procure slaves, although M alagasy rice and other foodstuffs were also imported to Cape Town which, increasingly unable to feed itself, became dependent on such supplies by the late seventeenth century. Such trade was firmly under VOC control. In 1719 the ruling Council o f Policy proposed a burger-funded voyage to M adagascar and the east coast o f Africa for slaves, but twelve years later nothing had been done. Those Capetonians who knew the area (doubtless from the V OC’s abandoned station in Rio de la Goa) were by then dead or too old to travel and the Council reported that if such proposals were acted upon the French, who were present in the region, would constitute competition and even a military threat.7 Only at the end o f the eighteenth century did VOC control over this trade relax. Robert Shell has recently argued that the Cape benefited from imported slaves brought by outside traders as a spin-off o f the increased slaving activities centred around the M ascarenes.8 By the 1770s, the Cape was providing grain to Ile de France, in a reversal o f the seventeenth century pattern. By this stage the C ape’s agrarian economy was firmly established and producing a surplus. Grain exports to the Ile de France supplemented supplies to that island from Réunion. Indeed Claude Wanquet has recently argued that this trade provided the only and essential means o f survival for the island after the conflicts o f the Seven Years War and such dependency led to French ideas o f conquering the Cape from Port Louis after the colony’s fall to the British in 1795.9 Yet although there were renewed pressures from Cape colonists for permission to participate in the Malagasy and Mascarene trade, it was not until the transfer o f the Cape to British rule at the turn o f the century that private merchants gained a foothold in the region. In Port Louis, Cl monopoly over trade was less firmly established. The Cl, founded in 1719, was only one o f a succession o f French chartered companies, and in contrast to the VOC it lacked a secure permanent capital

44

C a p e T o w n a n d P o r t L o u is in t h e E ig h t e e n t h C e n t u r y

base.10 As a result in the eighteenth century the various French trading companies intermittently recognized the rights o f private trading - although de facto private trading continued throughout. The Cl also failed to establish such a profitable foothold in the East Indian trade networks as the VOC or the English East India Company. Although campaigns carried out from the base in Port Louis in the 1740s led to French victories against the British in India, including the capture o f Madras, defeat in the Seven Years’ War in 1767 led to the exclusion o f the Cl from India and its ultimate collapse.11 In place o f the eastern Indian Ocean, trade in the more localized region o f the Mascarenes, Madagascar and Southeast Africa played a considerable role in the economy o f Port Louis and at an earlier stage than is often recognized. French mercantile links in the region had been developed since the mid-seventeenth century, with a settlement at Fort Dauphin and, following its destruction by the Malagasy, from Bourbon (later called Réunion). Governor Labourdonnais recognized the potential o f this trade for Port Louis’s economic development and granted trading concessions to private merchants in the 1740s; a ‘second fleet’ o f local trading vessels operated from the harbour from the late 1730s.12 Fiscal incentives, together with the impetus provided by shipbuilding for the fleet in the 1740s, gave openings for local artisans as well as for company employees which boosted local capital accumulation in early Port Louis and provided the basis for a boom in private trading after the transfer o f the island to royal control in 1767.13 Plans were then designed to make Port Louis the ‘bastion o f France in A sia’ and the port boomed, particularly in the 1780s when it was frequented by foreign merchant vessels, notably from France’s American allies, and the harbour was extended.14 Indeed Auguste Toussaint has questioned the primacy given to defence o f the India route or French interests in the East as an explanation o f the C l’s vision for Port Louis, arguing that its role in the ‘country trade network’ o f the western Indian Ocean was at least, if not more, significant.15

T h e H in t e r l a n d , L o c a l M a r k e t ,

and

L o c a l In v e s t m e n t

These trading and mercantile activities were linked to another important distinctive feature o f Cape Town and Port Louis as Company trading towns: both became centres o f exchange and administration for a settler-dominated rural hinterland. This process is well recognized in Cape historiography, where the development o f settler farming has dominated much o f the literature (often to the detriment o f its urban component). Wine, grain and pastoral production were not staple export crops o f the kind grown in Atlantic plantation colonies, but they nonetheless formed part o f an

45

N ig e l W o r d e n

important regional market providing foodstuffs to the town and to fleets in Table Bay as well as to the Mascarenes in the later eighteenth century.16 The VOC maintained control over the provision of wine to Cape Tow n’s large number o f taverns, and auctioned the franchise o f grain and meat supplies to its own garrison, but was never able to control the sale of goods between colonists or the victualling o f ships, especially those not owned by the Company. Auction sales, market trading and small-scale retailing became distinctive features o f Cape Town by the early eighteenth century. A sizeable proportion o f the urban population worked as retailers and intermediaries between the markets o f Table Bay shipping and the increasingly extensive rural hinterland o f the Cape.17 On the Ile de France the emergence o f settler agriculture was given a boost in the 1740s by the establishment o f freehold land grants and the opening o f roads between Port Louis and the Moka and Pamplemousses regions o f the island. Early hopes o f the establishment of coffee, spice or indigo plantations came to little, but by the 1760s provision crops for the town and the naval fleets dominated the rural economy, although demand outstripped supply so that Port Louis was also dependent on grain supplies from Réunion and the Cape. It was not until the later eighteenth century that sugar began to emerge as a major plantation crop and Port Louis became a staple export harbour along the lines o f Caribbean and port cities o f the southern United States. In this 18 development, it diverged markedly from Cape Town. The late eighteenth (and nineteenth) century divergence o f the Cape and the Mauritian rural economies is obviously the result o f differing environmental and climatic features - it was Natal, rather than the Cape which followed the Mauritian pattern o f tropical plantation production. But there were other differences which point to an important feature o f the urban history o f the two ports. In the Ile de France much o f the capital invested in agriculture came from mercantile and urban sources.19 The boost given to mercantile activities by Port Louis free trading activities greatly increased the market for plantation produce (both indigo and sugar), with traders based in Port Louis investing in agriculture. Port Louis’ more prosperous merchants invested in land and built country houses as markers o f their 70 wealth. At the Cape, capital accumulation took place within the countryside and there was little merchant capital investment in agriculture until the nineteenth century. The building o f eighteenth century Cape Dutch gabled houses was the product o f agrarian capital and a symbolic statement o f rural, not urban mercantile, wealth.21 The wealthiest Cape farmers rather invested in urban properties, and property ownership in the town was integrally linked to the capital base of the wine and wheat hinterland.22

46

C a p e T o w n a n d P o r t L o u is in t h e E ig h t e e n t h C e n t u r y

T h e P o r t P o p u l a t io n s These features o f the economy o f Cape Town and Port Louis also underpin their demographic and social structures. As port towns their populations were transient, fluctuating with the arrival and departure o f fleets; in 1746 as the Indian fleet was mustering in Port Louis the population of the small settlement trebled; similarly in the late 1770s Cape Town’s numbers soared. This was not only the result o f extra ships in harbour; the VOC administrative establishment in Cape Town included three armed regiments and soldiers outnumbered citizens.23 Transient visitors aside, VOC employees consistently outnumbered adult free people in Cape Town. Thus in 1731, a year in which unusually we have a complete census o f the inhabitants, there were 648 adults (361 males and 287 females) but 1000 VOC employees.24 Some o f these were working in Company posts outside the town, but the preponderance o f VOC employees in such occupations as bakers, butchers, blacksmiths and carpenters is a striking indication o f the preponderance o f the Company as an employer in the town. Many moved on to more lucrative posts in the East Indies, but others bought their way out of Company service and stayed on as retailers and craftsmen in the town. In Port Louis it appears that the proportion o f C l’s employees was less after the initial few years o f the settlement. The relatively higher degree o f both mercantile and petty retailing activities in the hands o f non-Company employees provided the basis for Port Louis economic boom in the subsequent period o f royalist administration. And, as in Atlantic ports, it is apparent that ‘the higher the degree o f independent maritime activity, the more varied and complex the diversity o f other occupations’.25 It is clear that we need to know much more about the precise nature o f the mercantile network in both towns, and the relationship o f merchants to the rest o f the urban elite. A mercantile class came to play an important role in Port Louis by at least the 1770s.26 The preliminary findings o f Teun Baartman’s research into family and business networks in late eighteenth century Cape Town reveal a division o f the city’s wealthiest inhabitants into factions, in which access to urban office, status and trading privileges by burgers linked to the VOC by kin or by financial credit played a crucial role. Indeed the Patriot movement, led by discontented burgers in the 1770s and 1780s, appears to have been the response o f a faction excluded from this trading and political elite.27 What a comparison o f Port Louis reveals most fully, however, is the vital role played in the economy o f both towns by people originating from other parts o f the Indian Ocean. Here the trade nexus o f the ports is crucial in explaining the social forces within the towns themselves. As in many Atlantic ports in the eighteenth century, a high proportion o f the population

47

N ig e l W o r d e n

were slaves. The importance o f the slave trade from M adagascar and the M ozambique channel to both the Cape and the lie de France has already been noted. In both towns slaves were also imported from India, where many were obtained through the VOC and Cl factories, and in the Cape a large number also came from the East Indies where they had been obtained through the Celebes and Javanese slaving trade network.28 Robert Shell has argued that until at least the 1770s, the majority o f Cape slaves were based in Cape Town.29 While there may be some problems in defining urban slavery in a society where many farmers also owned urban properties, it is certainly true that slavery underpinned the demographic and social structure o f the Company town. The 1731 census recorded 1,856 adult male slaves and 451 females, as well as 358 slave children in Cape Town, showing a ratio o f slaves to free people o f approximately 3:1. In Port Louis it appears that there was a similar ratio; a census o f 1776 records 5,088 slaves in the town to 1,638 whites, although there too there is some uncertainty from the records o f the precise location o f slaves between town and its surrounding farmlands.30 The dependence o f both towns on slave labour is relatively well recorded in the literature. What is less appreciated is the size and significance o f a free population o f Indian Ocean origin. Although a part o f the Mauritius population described as ‘libres’ were manumitted slaves, a large proportion had always been free people. Free Asians had played an important role in Port Louis from its earliest years when Indian Lascard sailors, predominantly Bengalis, were employed to develop the harbour. Free Indians from the region o f Pondichery known as ‘M alabards’ worked not only in the French fleets but also as soldiers, masons and artisans in the town under Cl rule. Although this early ‘libre’ population was limited in size, it had increased markedly by the 1780s.31 Musleem Jumeer has revealed the extent o f such a group in Port Louis; by 1788 there were 2,456 ‘libres’ and 4,452 ‘blancs’. He has also shown how a propertied class of predominantly Moslem Indian merchants established themselves in the town from the 1770s, operating in the Indian Ocean trade and providing supplies for the French fleet.32 Port Louis thus reflected an Indian trading system in its population from early in its history. The impact o f this on the spatial and social geography o f the town was profound. As Jumeer has shown, distinct communities o f Mibres’, based on differences o f origin (manumitted slave or free), class and religion (Moslem Lascards, predominantly Catholic and Hindu Malabards) were concentrated in the eastern parts o f the town by the end o f the century with their own forms o f social and administrative organization.33 Cape Town also had a population o f ‘free blacks’ (as free people not o f European origin were described), although they formed a smaller proportion

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C a p e T o w n a n d P o r t L o u is in t h e E ig h t e e n t h C e n t u r y

o f the total than was the case for the libres o f Port Louis; only just over 178 were recorded in the 1731 urban census in a total population o f 1,388 although numbers grew appreciably by the end o f the century.34 Cape T ow n’s ‘free black’ population did not include a sizeable merchant community. Nonetheless, the perception that it was solely o f slave or political exile origin needs considerable revision. Jim Armstrong has painstakingly reconstructed the Chinese population o f the town to show that a small but significant number o f free Chinese traders existed in Cape Town throughout the VOC period, linked to the trading communities o f Chinese Batavia. It is apparent that much o f the informal credit system o f the town lay in their han d s.35 The complexity o f intermarriages and kinship networks between free Asians, slaves and exiles is only just beginning to be appreciated. Furthermore, Jum eer’s work on Port Louis shows the significance o f the ‘poor w hites’ in the make-up o f the working and artisanal classes o f the town. Cape historiography has been too occupied with issues o f racial identity and divisions to perceive the importance o f an underclass community which brought together Company employees, poorer free burgers and their kin, Asian traders, manumitted and still bonded slaves.36 How differing cultures and religious and ethnic identities were forged in the context o f the city is an intriguing aspect o f both Port Louis and Cape T ow n’s past. One clear marker o f a specific community identity in Port Louis was Islam. As in Cape Town, restrictions against the open practice o f other religions in Port Louis were only relaxed to permit the building o f a mosque at the turn o f the century. But the Yamsay celebration took place from at least the 1760s, blending religious observance with a form o f street carnival.37 Work on Cape Town’s Moslem community has hitherto focused primarily on the better documented nineteenth century, but it is clear that a distinctive cultural identity was being forged in the Company period and some descriptions exist o f Moslem ceremonies and community observances from the 1770s.38 Some o f the work on Cape Islam has tended to imply a unified and exclusive ‘pure’ community, ignoring the variety o f cultural forms and interactions o f the VOC town, rooted as it was in migrants, both free and unfree, from a wide spectrum o f Indian Ocean societies.39 In this important respect, the popular culture o f Cape Town differed from the rural areas o f the colony: even more so than in lie de France, free Asians and Africans were overwhelmingly located in the port town. The base o f these forms o f urban popular culture, in which Malay, Malagasy and Creole Portuguese played as important a role as Dutch, is a much neglected aspect o f Cape Tow n’s history and work on Port Louis is instructive in this regard.

49

N

ig e l

W

orden

Analysis o f a distinctly urban popular culture leads to consideration of the port city as an entrepôt not only o f trading goods and migrating people, but also o f ideas and new ideologies. In a comparative study o f Atlantic trade ports, Peggy Liss has suggested that the revolutionary impetus and ideologies o f the late eighteenth century penetrated the Americas through the coastal towns.40 The presence o f mercantile communities disenchanted with metropolitan trading policies gave impetus to a distinctive form of localized nationalism which adapted some of the rhetoric o f democracy without its socially disruptive connotations. There are clear signs o f similar processes at work in both Port Louis and Cape Town. The Cape Patriot movement, while wholly a product of a disaffected section o f the colonial population and focused on economic issues, drew much o f its rhetoric from the democratic ideas which filtered through from Europe and the seedbed of its organization lay in Cape Town.41 Similarly, resistance to royalist administration in the Ile de France was centred around Port Louis merchants, encouraged by the initial phases o f opposition to absolutism in France in the late 1780s.4 The historian needs to be sensitive to the ways in which such ideological impetuses from outside were transformed by the specifics o f the port town’s social and economic environment.

C o n c l u s io n Much o f the background to the better known Indian Ocean contacts o f the nineteenth century was laid down by similarities o f historical processes in the preceding century. Mauritius’s history, long before its occupation by the British and the close mercantile links o f Cape Town and Port Louis which emerged in the subsequent decades, is o f importance to South Africanists. And if Port Louis' early history can offer more in terms o f comparative insights to the historian o f Cape Town than that o f most other port cities, this is a clear indication o f the need for more regional academic interchange in the western Indian Ocean, and across the Anglophone-Francophone divide.

N otes 1

2

For example see F.W. Knight and P.K. Liss, Atlantic port cities: economy, culture and society in the Atlantic world, 1650-1850 (Knoxville: University o f Tennessee Press, 1991). F. Broeze (ed.), Brides o f the sea: port cities o f Asia from the 16th 20th centuries (Sydney: University o f New South Wales Press, 1989).

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3 4 5 6

7 8

9

10

11 12 13 14 15

16

17

Huguette Ly-Tio-Fane Pineo, Ile de France, 1715-1746: Vémergence de Port Louis (Moka: Mahatma Gandhi Institute, 1993), pp. 43-8. A. Toussaint, Port-Louis: deux siècles d'histoire (Port Louis: Le Typo­ graphie Moderne, 1936), pp. 29-39. R. Elphick, Kraal and castle: Khoikhoi and the founding o f white South Africa (New Haven & London: Yale University Press, 1977), pp. 71-89. See for example G. Williams, The expansion o f Europe in the eighteenth century (London: Blandford Press, 1966); C.R. Boxer, The Dutch Seaborne Empire (London: Penguin, 1965). N. Worden, Slavery in Dutch South Africa (Cambridge: Cambridge University Press, 1985), p. 42. R. Shell, Children o f bondage: a social history o f the slave society at the Cape o f Good Hope, 1652-1838 (Johannesburg: Witwatersrand University Press, 1995), p. 45. C. Wanquet, ‘South Africa and the Mascarene islands in French revol­ utionary policy,’ paper delivered at Conference on ‘France, Southern Africa and the Indian Ocean’, Johannesburg, 5-9 September 1995. N. Steensgaard, ‘The Companies as a specific institution in the history o f European expansion,’ in: L. Blusse and F. Gaastra (eds), Companies and trade (Leiden University Press, 1981), p. 255 and P. Boulle, ‘French mercantilism, commercial companies and colonial profitability’ in the same volume, pp. 97-118. A. Toussaint, Le mirage des isles: le négoce français aux Mascareignes auXVIIIe siècle (Aix-en-Provence: Edisud, 1977), p. 20. J-M. Filliot, La traite des esclaves vers les Mascareignes au XVIIIe siècle (Paris: ORSTOM, 1974), p. 102. Boulle, ‘French mercantilism,’ pp. 108-9; Ly-Tio-Fane Pineo, Ile de France, pp. 249-53. A. Toussaint, L'océan indien au XVIIIe siècle (Paris: Flammarion, 1974), pp. 61-2. See the exchange between Toussaint and Madeleine Ly-Tio-Fane in M. Mollat (éd.), Sociétés et compagnies de commerce en orient et dans l'océan indien (Paris: SEVPEN, 1970), pp. 494-5. R. Ross, ‘The Cape o f Good Hope and the world economy, 1652-1835,’ in: R. Elphick and H. Giliomee (eds), The shaping o f South African society, 1652-1840 (Cape Town: Maskew Miller Longman, 1989), pp. 246-8. By the later 18th century, this network extended into the eastern reaches o f the Cape Colony, see Newton-King ‘Commerce and material culture on the Eastern Cape frontier, 1784-1812’, Societies o f Southern Africa Seminar, Institute of Commonwealth Studies, University of London, 1985.

51

N ig e l W o r d e n

18

A. North-Coombes, A history o f sugar production in Mauritius (Floreal: Mauritius Printing Company, 1993). 19 M.D. North-Coombes, ‘Labour problems in the sugar industry o f Ile de France or Mauritius, 1790-1842’ (MA thesis, University of Cape Town, 1978), pp. 38-44. 20 North-Coombes, ‘Labour problems,’ pp. 44-51; K. McPherson, The Indian Ocean: a history o f people and the sea (Delhi: Oxford University Press, 1993), p. 222. 21 M. Hall, ‘The secret lives o f houses: women and gables in the eighteenth-century C ape’ Social Dynamics 20.1 (1994), pp. 1-48. 22 Worden et al., Cape Town: making o f a city, p.58. 23 Worden et al., Cape Town: making o f a city, p.81. 24 Algemeen Rijksarchief, The Hague, Collectie Rademacher 507 for the free population and VOC 5179, f. 161-197 for the Com pany’s muster roll. 25 J. Price, ‘The American panorama o f Atlantic port cities,’ in Knight and Liss, Atlantic port cities, p. 271. 26 Toussaint, Le mirage des isles, pp. 20-1, 303. 27 Teun Baartman is working for a PhD at the University of Cape Town, and his findings are as yet very preliminary and unpublished. They are, however, highly suggestive. 28 Filliot, Traite des esclaves, 175-81; M. Carter, ‘Indian slaves in M auri­ tius,’ Indian Historical Review 15 (1988-9), pp. 233-47; J. Armstrong and N. Worden, ‘The slaves,’ in Elphick and Giliomee, Shaping, pp.

110- 22 . 29 30

31

32 33

34 35

Shell, Children o f Bondage, p. 140. M. Jumeer, ‘Les affranchis et les indiens libres à l’île de France au X V ille siècle,’ (Doctorat de 3ème cycle, Université de Poitiers, 1984), pp. 235-7. R. Allen, ‘Economic marginality and the rise o f the free population o f colour in Mauritius, 1767-1830,’ Slavery and Abolition 10 (1989), p. 129. M. Jumeer, ‘Les affranchis,’ p. 61. Jumeer ‘Les affranchis’; see also A. Kalla, ‘The road to Cap M al­ heureux: migration, memory and the meaning o f community’ - paper delivered at Ninth International Conference o f Historical Geographers, Perth, Australia, July 1995. Algemeen Rijksarchief, RAD 507. J. Armstrong, ‘The Chinese at the Cape in the Dutch East India Period, 1652-1795,’ Slave Route Project Conference, Robben Island, 24-26 October 1997.

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36

37 38 39 40 41 42

See for example R. Elphick and H. Giliomee, The Shaping o f South African Society, 1652-1840 (Cape Town: Masken Miller Longman, 1989). Jumeer, ‘Les affranchis,’ pp. 430-4. Y. da Costa and A. Davids, Pages from Cape Muslim history (Pieter­ maritzburg: Shuter and Shooter, 1994), p. 47. See e.g. I.D. du Plessis, The Cape Malays (Cape Town: A.A. Balkema, 1972). P. Liss, ‘Introduction,’ in Liss and Knight, Atlantic port cities, p. 8. G.J. Schutte, De Nederlandse patriotten en de Koloniën (Groningen: H.D. Tjeenk Willink, 1974). For analysis o f the impact o f the French Revolution on the island, see U. Bissoondoyal and À. Sibartie (eds), L 'ile de France et la révolution française (Moka: Mahatma Gandhi Institute, 1990).

53

Ch apter 3 T h e H a d h r a m is , t h e H a d h r a m a u t a n d E u r o p e a n C o l o n ia l P o w e r s in t h e I n d ia n O c e a n 1 D a v id W

H a d h r a m is

arburton

a n d the

W

orld

The Indian Ocean is a region o f communities linked inextricably through trade. One o f these communities is the Hadhramis o f the South Arabian coast who participated in that trade as both merchants and sailors. Chaudhuri has demonstrated that the Indian Ocean emerged as a region o f communities linked by trade well before a similar network was forged to link communities on different sides o f the Atlantic.2 The intrusion o f the Atlantic system into the Indian Ocean network from the start o f the sixteenth century with the expansion o f first mercantile and then industrial capitalism, and the onset o f European colonialism, profoundly affected Indian Ocean commercial communities and patterns o f trade. In contrast to many other significant trading communities, like the Gujaratis, Bengalis, and Javanese, the Hadhrami homeland was not incorporated into a European empire until relatively late. Thus a study o f their adaptation to shifts in the trading structure o f the Indian Ocean provides significant insights into the intricacies o f the relationship between European powers, notably the British, and local communities.

H a d h r a m is

and

Euro pean Pow ers

The Hadhrami community shared a strong desire for enrichment with the Europeans who entered the Indian Ocean trading network from the end of the fifteenth century. However, their feeling o f identity was linked to the past and maintenance o f ancestral tradition rather than to the concept o f a nation state in the process o f being created. This meant that their relations with European powers tended to be ambivalent, their loyalty shifting in accordance with their perceived interests. The sixteenth century was marked by a major battle between the Portuguese and Ottoman powers for control over the Red Sea and its littoral, the key cross-roads o f trade between the Mediterranean and the Indian

T he H a d h r a m is , th e H a d h r a m a u t a n d E u r o p e a n C o l o n ia l Po w e r s

Ocean, and Arabia and East Africa. Both the Portuguese and Ottomans occupied the Hadhramaut at different times. This not only stemmed a pattern o f Hadhrami migration to East Africa, but led to the control o f the Yemeni trading system by the Ottomans. Thus by 1616, Aden was replaced by Mocha as the chief entrepot o f the region, attracting Indian, Arab and European (notably VOC) merchants. Portuguese power declined even further as the Persians took Hormuz in 1622, and the Omanis recovered Muscat in 1650. Omani power continued to expand during the late seventeenth and early eighteenth centuries, with attacks on Portuguese stations in India and the seizure of most Portuguese strongholds on the Swahili coast o f East Africa, as well as a struggle with Yemeni authorities over control o f the Hadhramaut.3 However, such changes did little to damage either the Hadhrami trading structure or its connections with the Indies. Unlike the Portuguese and, initially, the Dutch, British and French policy through their respective East India Companies was concentrated on India where they largely rejected conquest in favour o f manipulating local political constellations. The Seven Years War (1756-63) which ensured the triumph of British over French interests in India, followed by the loss o f the British American colonies in 1783 decisively altered British attitudes towards the Mediterranean and the routes to India, henceforth the ‘jew el’ of the empire. This was confirmed by the British victory in the Napoleonic Wars and the rise o f Britain as the first industrial nation. The Indian Ocean in the nineteenth century became a region dominated by Pax Britannica. The Hadhramaut was a source of commodities much valued by Europeans - myrrh, which grew locally, and o f Yemeni coffee, the harvesting and transport o f which was in the hands of Hadhrami merchants, but British intervention in 1839 to seize Aden was motivated by the desire to secure the Red Sea route to India.4 The success o f the Hadhrami and similar militarily powerless trading communities lay initially in their ability to exploit European rivalry to their own advantage. Arab mercenaries, renowned for their military prowess, played a significant role in the internecine princely rivalry in India that developed following the death of the Mogul emperor Aurangzeb in 1707. By the mid-eighteenth century mercenary forces numbered between 6,000 and 10,000 men and in 1747 one Arab leader even created his own minor state in Mangrol. Hadhrami mercenaries and politicians, who possessed liquid capital, also became involved in money lending and tax farming. In 1818, following the British defeat o f the Maratha, Arab mercenary forces were disbanded. Native Arabs were deported, but those born locally were permitted to remain. However, the links between the Hadhramaut and India remained intact. Many o f Hadhrami origin who remained in India were hired as mercenaries by the Nizam o f Hyderabad, and some, like Umar ibn Awad

55

D a v id W a r b u r t o n

al-Qaiti, became very wealthy. His success led to a renewed migration to India from the Hadhramaut, firstly o f the al-Awlaqis (1829-30), and then the al-Kathiris and the Abdalis. Moreover, the Hadhramis in India largely financed the factional disputes in their homeland and it was from India that the Qaiti chief, Awad al-Quaiti, purchased a steamer with which to bombard, in 1874, the combined Kassidi-Awlaqi force that had seized the Quaiti stronghold o f Mukalla.5 It was at this stage that the British became concerned about the Hadhra­ maut. Their wish, as ever, was to minimize involvement in the internal affairs o f the region, but from the 1870s this aim was increasingly compromised by the overriding objective o f securing the Red Sea route to India, the importance o f which grew following the opening o f the Suez Canal in 1869. It is in this context that their disquiet at the 1872 Ottoman occupation o f Yemen, and the increasing involvement o f India-based Hadhramis in fomenting internecine disputes in the Hadhramaut needs to be viewed. They consequently applied pressure on the Nizam o f Hyderabad to distance him self and his Hadhrami supporters from events in southern Arabia. The Nizam, possibly counting on British acquiescence due to his support for them in the 1857 mutiny, continued to support the Quaiti who captured Ghayl Ba Wazir in 1876 and Mukalla in 1881. However, coincident with their take-over o f Egypt and increasing friction in the region with France and with the Ottoman empire, the British in 1882 intervened with a treaty, followed in 1888 by the declaration o f a protectorate over the Hadhramaut in which the Qaiti was recognized as Sultan. Tension in the region continued high. In the lead-up to the Fashoda crisis in 1898 the French made an unsuccessful attempt to establish a trading post at Mocha, followed by a successful one to found an outpost at Shaykh Said, opposite Perim Island, and another in Djibouti. At the same time, the Kathiris, excluded from power by the British, chose to support the growing Ottoman influence. This reached a climax during the First World War when there was considerable Hadhrami support for a Kathiri-Ottoman alliance not only from Kathiri within the Hadhramaut, but also from progressive anti-colonialist circles throughout the diaspora, notably from Java, and from Hadhrami merchants whom Ottoman authorities favoured over Indian traders in the Red Sea commerce to Yemen.6 Like other trading communities indigenous to the Indian Ocean, the Hadhramis, without being formal subjects o f the British empire, profited considerably from the Pax Britannica which guaranteed relative security from piratical and other hostility and created a vast free trade area. For instance, in contrast to the Ottomans and Portuguese, the British made no attempt to deprive the Qaiti o f a percentage o f customs receipts at Mukalla and Shihr. British imperial domination, both formal and informal - as for

56

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example in East Africa where Portuguese possessions and the neighbouring Omani trading emporium were incorporated into the British sphere o f influence - proved to be a paradise for traders working under the protection o f the British or Indian crowns. Commerce had always been the life blood o f the Indian Ocean and world trade was the life blood o f the British empire. Thus Hadhrami traders from Mukalla, Shihr and al-Hami continued to sail their wind-borne vessels not only to ports on the Arabian Peninsula, but also to those on the coasts o f East Africa and the Indian subcontinent. The local peninsula trade involved the shipping from Muscat o f rose water and dried flower blossoms, and between Hadhrami ports the carriage o f gypsum, honey, dates, fish oil, dried fish, salt and passengers. Intercontinental trade involved the carriage to India o f sugar and other merchandise from the Mediterranean and the Atlantic, and o f ivory and slaves from East Africa, with a return load o f textiles and spices.7 The vessels and routes used by the Hadhrami remained largely the same. The vessels were sailing ships, built from wood purchased in Calicut, and fashioned by Hadhrami shipbuilders either in India itself, in Calicut or Malabar, or in the Arabian Peninsula where each village port maintained a distinctive style o f construction. The oceanic routes used by the Hadhrami remained largely the same, the general rule being to hug the coastline. This system continued even after the advent o f steamships which, as they generally maintained long distance trans-oceanic routes linking major ports, supplemented rather than rivalled sailing ships. Indeed, in certain parts o f the empire, wooden sailing vessels were able to service the heavy steamers, thus establishing a symbiotic relationship.8

T h e H a d h r a m i D ia s p o r a Such was the security and prosperous nature o f trade under Pax Britannica, that the traditionally small Hadhrami trading diaspora that extended from East Africa to China was supplemented from the early nineteenth century by enormous waves o f emigration from the agriculturally barren Hadhramaut hinterland. These non-trader Hadhrami emigrants sought whatever, mainly unskilled, work was available, often to the extent o f displacing from such positions not only non-Hadhrami foreigners but also indigenous people, and their remittances have continued to be critical to the Hadhramaut economy.9 Southeast Asia proved the most popular destination for emigrants until the Second World War after which most emigrants remained in the region, notably in the Gulf, Kuwait and Saudi Arabia, a tendency reinforced following South Yem en’s independence in 1967.

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T h e M a l a y o -I n d o n e s i a n r e g i o n

The presence o f Hadhramis in the Indonesian archipelago dates back to the pre-Islamic silk roads to China. Certainly it would appear that Arabs from Iraq and the Persian G ulf migrated there during the early Abbasid period towards the end o f the first millennium AD. Their presence in Malacca dates from the fifteenth century and in Malaya, where most Arabs are o f Hadhrami origin, from the sixteenth century, indeed, a Hadhrami established the Pontianak Sultanate in 1771. The Hadhrami community in Southeast Asia was notable for its merchants and scholars, and maintained regular commercial and educational contact with the hom eland.10 The Hadhramis sought to ally themselves with the British from the arrival o f the latter in the region, with their occupation o f Penang in 1786. At the same time, the British were glad to secure the support o f a small, commercially vibrant, community who, as foreigners, could be kept distant from local politics. When Raffles founded Singapore in 1819, he encouraged Hadhrami settlement in the colony in order to promote it commercially. At that time possibly 600 Arabs lived in the Indonesian archipelago and a small group o f them, Hadhrami Sayyids, responded to his invitation and in Singapore augmented their already considerable fortunes to the degree that some became wealthier than the ruling families in the Hadhramaut.11 The rapport with the British continued to the degree that Hadhramis actually invited the British to take-over Negeri Sembilan in 1874.12 Such Hadhrami communities were reinforced from the opening o f the Suez Canal in 1869 and the advent o f relatively cheap steamship passage to the East, and by British pressure on the Dutch in Indonesia to welcome Hadhrami settlers. The late nineteenth century certainly witnessed a large wave o f emigration from the Hadhramaut to Indonesia. Thus the Arab population o f the Indonesian archipelago doubled between 1869 and 1900 to 20,000, increasing again to 45,000 by 1920 and possibly 80,000 by 1940. A small number o f these invested in steamships, which enabled them to dominate inter-island trade in the eastern archipelago. Indeed, most lived by money lending and trading in textiles, construction materials, furniture, gems, perfume and horses. ' However, by the late nineteenth century, the attitude towards European colonialism amongst Hadhramis settled in the Malayo-Indonesian region had become more ambivalent. This was due in part to a growing feeling of attachment to their place o f residence, and in part to a change in the attitude towards them o f the British who, in the late nineteenth century, started to look for collaborators in the local indigenous ‘M alay’ community. Thus at the time o f the Pahang Rebellion o f 1891-95, Hadhramis were found on both sides o f the conflict.1

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In the early twentieth century they invested heavily in the economic infrastructure o f the Hadhramaut, and reputedly assisted other Sayyids in persuading the British to limit the influence there o f the Irshadi reform movement. The latter, nominally devoted to educational and cultural activities, was used by reformist groups at the start of the twentieth century as a vehicle to undermine traditional Sayyid authority expressed in the Sayyid controlled society Jamiyat al-Khayr, both in the Hadhramaut and elsewhere in the Hadhrami diaspora.15 E a s t A f r ic a

As with the Malayo-Indonesian region, Hadhramis commenced trading with East Africa before the rise of Islam. By the time o f the arrival o f the Portuguese in the early sixteenth century, the Hadhramis had become part o f the trading and settlement structure o f the east African littoral. From the seventeenth century, Omani pressure forced the Portuguese to retreat from their settlements on the Swahili coast and to concentrate on Mozambique. The ruling Omani al-Busaidi family played a crucial role in facilitating migration from the Hadhramaut to East Africa, where Hadhramis came to dominate Lamu, notably from 1840 when the Sultan moved his capital to Zanzibar. During the late nineteenth century the Omanis themselves lost ground to the new imperialisms, the British, German and French which resolved itself following the First World War into French possession of some o f the offshore islands and Djibouti, and British control over the coast. Although trade formed a point o f contact, Swahili culture was distinct from the cultures o f the east African hinterland in that it was focused upon the Indian Ocean, respected Arab customs and closely interlocked with the Arab-Indian maritime trading network. Hadhrami traders established on the Swahili coast thus maintained commercial contact with their homeland and the Hadhrami diaspora elsewhere. Indeed, they in many ways acted as a commercial frontier, extending Hadhrami trading activity to the Comoros and Madagascar from the eighteenth century. The Hadhramis on the East African coast, as elsewhere in the Indian Ocean, benefited enormously from the Pax Britannica o f the post 1815 period. They traded locally in rice, copal, textiles, resin, cattle, wax, salt, gum, wood and soapstone, and exported slaves, mangrove stakes and rice to Arabia and the G ulf from where they imported beads, pottery, textiles and silver. During the course of the nineteenth century, the export o f slaves and import o f arms became increasingly important, notably with the clandestine slave trade to the French islands and to Madagascar. However, it was from the 1880s, when British pressure to stem the slave export trade was at its height, that the greatest waves o f Hadhrami emigration to East Africa occurred, and it continued up to 1950, suggesting that the benefits o f life under the security

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o f British rule outweighed the supposed gains o f the slave trade. During this period, Hadhrami settlement spread from the coast to the hinterland, they gradually came to dominate Indian traders and thus the Swahili trading structure, and their activity expanded into agriculture and religion/ education.16 In contrast to Malaysia, Hadhramis on the Swahili coast, as in Indonesia, were not accorded any privileges by the ruling power. At independence, Hadhrami allegiance was split rather between those wanting an independent coast and those, notably the wealthier commercial echelons, who wanted the littoral to unite with Kenya. The latter sent their children to schools established by Omani modernists in Mombassa, a part o f Kenya, which today is the centre o f Hadhrami activity in east Africa. Nevertheless, they have maintained contact with the homeland with a two-way flow o f financial receipts as younger East African Hadhrami visit the Arabian G ulf in order to earn money.

P o s t s c r ip t When the British abandoned Aden in 1967, the Hadhramaut was incorporated into the People’s Democratic Republic o f Yemen. This drove most Hadhrami sultans, merchants and sailors to the G ulf where many remained even when the Hadhramaut joined the Republic o f Yemen in 1990. Considerable migration to the G ulf from settlements o f the Hadhrami diaspora occurred until the downturn in the economy o f the G ulf from the mid 1970s. Although the G ulf continues to attract east African Hadhramis, those in M alaysia and Indonesia have remained in their adopted homelands with the remarkable economic revival o f Southeast Asia from the late 1970s, notably in Singapore where the Sayyids maintain their position as the wealthiest members o f the Hadhrami community. However, the diaspora continues to maintain its contact with the homeland to which it makes a vital financial contribution.

C o n c l u s io n The Hadhrami community inhabit an infertile but strategically critical strip o f the South Arabian coast for it is on the axis o f East-W est and N o rth South long-distance trade in the north western corner o f the Indian Ocean. It thus to a large degree regulated trade between India and the Mediterranean and between Arabia and East Africa. This ensured that early on the Hadhramis developed expertise as merchants and sailors and became an

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T h e H a d h r a m is , t h e H a d h r a m a u t a n d E u r o p e a n C o l o n ia l P o w e r s

important element in the traditional Indian Ocean maritime trading network. Like other such mercantile communities, they travelled to and established trading settlements in all commercially important areas o f the region. An especially significant link was established with India, an important market and a source o f the wood used to construct Hadhrami vessels. This essentially trading diaspora was supplemented through the rise o f Islam by scholars and clerics. The intrusion o f European powers into the Indian Ocean from the end o f the fifteenth century failed to radically alter this structure. European powers concentrated their attention upon India and Indonesia where the Hadhramis formed a small, politically powerless but commercially important, foreign community. The British who came to dominate the colonial scene from the mid-eighteenth century adopted a benign attitude towards the Hadhramis, inviting them into their Malay settlements where they developed into a highly wealthy community. In return, the Hadhramis generally remained aloof from local politics while maintaining their links to the Hadhramaut to which they remitted earnings and from where they continued to receive migrants. This symbiotic relationship with European colonial rule flowered following the British victory over the French in the Napoleonic Wars, the British occupation o f Aden, and the establishment o f the Pax Britannica throughout the region. The retreat o f Britain from the region following the Second World War, notably in the 1960s, whilst causing severe political disturbance in the Hadhramaut, has not basically altered the structure o f the Hadhrami diaspora, nor its contacts with the homeland.

N o tes

1

2

Much o f the information which forms the backbone o f this chapter was gathered from interviews conducted in the Hadhramaut. My ac­ knowledgements are due to such informants, and notably to Dr Ahmed Bataya and Dr Muhammad Bakalla. Acknowledgement is also due to participants and organisers o f the 1995 Conference on the Hadhrami Diaspora held at the School o f Oriental and African Studies, the University o f London. The most important materials relating to the Hadhrami diaspora appear in U. Freitag and W. Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen in the Indian Ocean, 1750s-1960s (Leiden: Brill, 1997). K.N. Chaudhuri, Trade and Civilisation in the Indian Ocean (Cambridge: Cambridge University Press, 1985); idem, Asia Before Europe (Cambridge: Cambridge University Press, 1990); Fernand Braudel, La Méditerranée (Paris: Armand Colin 1979); idem,

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3

4 5

6

7

8 9

10

11

12

13

14 15

Civilisation matérielle. Économie et Capitalism XVe-XVIIIe siècle (Paris: Armand Colin 1979). R.B. Serjeant, ‘Omani Naval Activities off the Southern Arabian Coast in the late 11 th/17th Century, from Yemeni Chronicles,’ Journal o f Oman Studies 6 (1983), pp. 77-89, republished in Customary and Shari’ah Law in Arabian Society 16 (Hampshire: Variorum, 1991). G. Waterfield, Sultans o f Aden (London: Murray, 1968), pp. 19-31, especially pp. 29-30. O. Khalidi, ‘The Hadhrami Role in the Politics and Society o f Colonial India, 1750s to 1950s,’ in: Freitag & Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen, pp. 67-81. L. Boxberger, ‘Hadhrami Politics 1888-1967: Conflicts o f Identity and Interest,’ in: Freitag & Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen, pp. 51-66. Interviews with former sailors in the Hadhramaut; J. Ewald & W.G. Clarence-Smith, ‘The Economic Role o f the Hadhrami Diaspora in the Red Sea and G ulf o f Aden, 1820s to 1930s,’ in: Freitag & ClarenceSmith (eds), Hadhrami Traders, Scholars and Statesmen, pp. 289ff. Ewald & Clarence-Smith, ‘The Economic Role o f the Hadhrami Diaspora,’ p. 286. Ch. Lekon, ‘The Impact o f Remittances on the Economy of Hadhramaut, 1914-1967,’ in: Freitag & Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen, pp. 264-80. P.Riddell, ‘Religious Links Between Hadhramaut and the MalayIndonesian World, c.1850 to c.1950,’ in: Freitag & Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen, pp. 217-30. H. de Jonge, ‘Dutch Colonial Policy Pertaining to Hadhrami Immi­ grants,’ in: Freitag & Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen, pp. 94-111. M.R. Othman, ‘Hadhramis in the Politics and Administration o f the Malay States in the Late Eighteenth and Nineteenth Centuries,’ in: Freitag & Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen, p. 90. W.G. Clarence-Smith, ‘Hadhrami Entrepreneurs in the Malay World, c.1750 to c.1940,’ in: Freitag & Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen, pp. 306ff. Othman, ‘Hadhramis in the Politics and Administration o f the Malay States,’ pp. 92-3. N. Mobini-Kesheh, ‘Islamic Modernism in Colonial Java: the Al-Irshad M ovement,’ in: Freitag & Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen, pp. 231-48.

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16

See for example F. Le Guennec-Coppens, ‘Changing Patterns of Hadhrami Immigration and Social Integration in East Africa,’ in: Freitag & Clarence-Smith (eds), Hadhrami Traders, Scholars and Statesmen, pp. 163ff.

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C h apter 4 A n A n a l y s is o f t h e C o c o a F r o n t ie r I n d ia n O c e a n R im R e g io n 1

in t h e

J u d it h S t r e a k

Until the mid nineteenth century cocoa was largely restricted to the Americas but from the 1880s West Africa emerged as the world’s major producer: by 1970, Africa produced about 72 per cent of the world’s cocoa output, America’s contribution having declined to 25 per cent.2 Since the 1970s, there appears to have been some movement o f the cocoa frontier towards the Indian Ocean Rim (IOR) Region where, however, it has played a significant role in only four countries: Sri Lanka, Madagascar, Indonesia and Malaysia. This is due to the climatic and physiographical constraints governing cocoa production which is generally limited to rich tropical lands between latitudes 20°N and 20°S below 1,000 feet and with abundant all-year-round rainfall.3 All four countries mentioned are situated in or close to the equatorial zone. The fact that the cocoa tree also likes shade places a premium on tropical rainforest, a resource in which, historically, all were blessed. Before the 1970s the region was a marginal cocoa producer, the cultivation of cocoa being largely limited to Sri Lanka and Madagascar both o f which have witnessed a drastic reduction in their tropical rainforest in the course o f the twentieth century. The possession o f extensive tracts o f rainforest formed the basis for a post 1970 cocoa boom in Malaysia and Indonesia, two High Performing Asian Economies (HPAEs4) that by 1992 were responsible for around 20 per cent of world cocoa production and exports.5 Large, unexploited tracts of rainforest give Indonesia the potential to further extend its cocoa frontier. This chapter analyses the shift o f the cocoa frontier towards the IOR region, notably to Malaysia and Indonesia, and considers the future cocoa prospects o f the region.

T h e E a r l y H i s t o r y o f C o c o a P r o d u c t i o n in t h e

IOR R e g io n

Cocoa was probably introduced into the IOR region via the Philippines to where it was carried from South America in the late 1660s.6 Philippine cocoa was o f a high quality criollo variety, reflecting a possible origin in the west o f modern Mexico and Ecuador. From the Philippines it quickly spread to Indonesia7 and by 1778 was being grown in Melaka on the Malay Peninsula.8

A n A n a l y s i s o f t h e C o c o a F r o n t ie r in t h e In d i a n O c e a n R im R e g io n

The plant was subsequently taken to Sri Lanka from where by 1820 it reached Réunionnais planters who in turn introduced it to Madagascar. At first, cocoa production in the IOR region was not significant. One o f the factors restraining production on the demand side was taste as a considerable portion o f the region’s market for luxury goods comprised Muslims who preferred coffee and tea. With resources devoted to the latter, there was limited regional expansion in cocoa production.9 Only from the mid-nineteenth century, after the Industrial Revolution had created a rapidly expanding middle class who created a large market for chocolate drink and other cocoa products, did cocoa became a potentially profitable cash crop in the Indian Ocean region. However, in the late nineteenth century, cocoa production for the market increased significantly in the region only in Madagascar. This was the result of a number of factors shaping supply responses. In Sri Lanka, coffee production on British-owned plantations increased sharply in the 1840s and by mid­ century dominated both agricultural production for export and the Sri Lankan economy. However, a blight which first appeared in 1869 effectively crippled production by the end o f the 1870s, bankrupting many plantation owners and leading to the abandonment o f land. The Botanical Gardens in Sri Lanka had shown both tea and cocoa to be amenable to the local climate and soil and, faced with limited capital after the coffee crisis, and the difficulties o f the transition from coffee to tea, some coffee growers turned to cocoa. However, by the late 1880s tea, and by 1900, rubber were claiming the attention o f most planters due to growing demand for these products, thereafter relegating cocoa to a minor cash crop.10 In Malaysia, rubber had surpassed tin as the main export commodity by the early twentieth century. Although there was some experimentation with cocoa production at the colonial government station o f Serdang in 1934, it was not until after the Second World War, due to wide fluctuations in tin and rubber prices, and a rapid rise in cocoa prices due to disease and to uncertainty o f production in West Africa where cocoa was affected by a combination o f the rise o f nationalism and an outbreak of swollen shoot disease, that the government invested seriously in cocoa production.11 In consequence, foreign capital was injected into experimental cocoa estates in Malaysia and a number o f companies formed, such as the Malaysian Cocoa Company, a joint effort involving Cadbury Bros., Harrisons, and Crossfield (an agency house) and the Colonial Development Corporation.12 The 1950s also witnessed the first smallholder production o f cocoa in Malaysia, a process supported by a colonial government eager both to find an alternative for rubber, the market for which was being diminished by synthetics and, in the context o f political instability and rising nationalism, to create a class o f prosperous Malaysians committed to capitalism. However, further growth in cocoa production was arrested in 1958

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by the outbreak of dieback disease, so that by 1960 Malaysia was still a mar­ ginal producer o f cocoa.13 Cocoa started in the Philippines as an estate crop, for the official Dutch dream was o f Dutch settler dominated cocoa plantations.14 However, the outbreak of pod borer disease, for which the sole remedy was to root out all the cocoa trees worst affected and thoroughly prune the rest or to move to new land to enable replanting, made cultivation highly labour- and land-intensive. This disadvantaged the capital- and labour-intensive estates so that European investment in cocoa declined, to be replaced, as the cocoa frontier spread out from eastern Indonesia in a pattern dictated by the outbreak of the pest, by Indonesian smallholder investment. By the end of the 1860s, cocoa cultivation was smallholder dominated even in areas under direct Dutch administration.15 There was an attendant shift in the variety of cocoa grown in Indonesia. At the outset, production was dominated by criollo, which by 1884 had become almost completely replaced by forestero and trinitario, cocoa varieties more resistant to pod borer disease. However, until the 1970s cocoa production was constrained by three factors: disease, the end of the cocoa frontier in the northern part of Sulawesi (Celebes),16 and competition from coffee, copra and cloves which were considered more important export commodities by both farmers and the state. Given the lack o f success o f cocoa production elsewhere, it was Madagascar that by the 1960s had become the region’s most important producer. Cocoa production in Madagascar developed in the nineteenth century first on the east coast and subsequently in the north west o f the island. Réunionnais Creole settlers introduced cocoa cultivation on the east coast where it was initially dominated by smallholdings because, relative to sugar and coffee, it was respectively neither labour-intensive nor land extensive. Wealthier farmers tended to opt for coffee, leaving cocoa to farmers with limited land and capital.17 Cocoa production remained small scale until French colonization in 1895, which coincided with a crisis for coffee which was hit by the Hemileia vastatrix disease. Many European coffee growers switched to cocoa production in which from 1895 many new French and Mascarene settlers also invested. Cocoa production in Madagascar, which thus also began to be cultivated on European estates, experienced a minor boom, most of the crop being exported to France. During the nineteenth century, criollo remained the dominant cocoa variety grown on the island, but from 1900 the hybrid trinitario and forastero varieties were introduced. The latter increasingly replaced criollo over much o f the east coast, but neither hybrid managed to undermine the dominance of criollo in the north west o f the island, where it was introduced around the turn of the century and where, in contrast to the east coast, cultivation was dominated by large estates. However, given competition for resources from other export crops like vanilla and coffee, which witnessed a

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revival, cocoa production remained limited; in 1923, cocoa constituted only the 16th most important agricultural product by area cultivated in Madagascar.18 Nevertheless, Madagascar was not only the most important supplier of cocoa in the Indian Ocean region before the 1970s, but until then also made an increasing contribution to world supply of ‘fine’ {criollo) cocoa. In the 1960s, by which time most east coast hybrid cocoa farms had disappeared, the newly independent government tried to capitalize on its criollo cocoa, which enjoyed both a premium on the world market and preferential access to the French market, by initiating smallholder Malagasy cocoa production co-operatives in the north west of the island. Cocoa bean exports rose from 4 metric tons in 1900 to 700 tons in 1967 when the Malagasy government decided to limit coffee production and instituted a series of five year plans to expand cocoa production, setting a target of 4,500 tons for 1978. Also, in reaction to the European market’s premium on ‘fine’ cocoa, the government sponsored research into improving the quality o f Madagascar’s cocoa and began to promote criollo exports. Cocoa exports rose rapidly in the 1970s but failed to reach the established target because of the economic turmoil that beset Madagascar under Ratsiraka from 1978.19 In any event, the spotlight in the region was taken off Madagascar as cocoa production took off in Malaysia and Indonesia.

T he C o co a B oom

in

M a l a y s ia

a n d I n d o n e s ia

From the mid 1960s until the early 1970s, the swollen shoot virus and witches broom disease that affected West Africa, the world’s most important cocoa producing region, restricted output from that quarter and provoked a rise in the price o f cocoa. Although in the IOR region Malagasy cocoa production failed to meet the challenge, first Malaysia and subsequently Indonesia responded to demand and quickly became major cocoa producers. Although high market prices caused by shortages in the global supply of cocoa constituted the preconditions for this, the increase in cocoa production in Malaysia and Indonesia was maintained during the period o f declining prices from 1979 until the early 1990s, indicating that factors on the supply side, notably the state, also played an essential role.

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T a b l e 20: W o r l d C o c o a B e a n O u t p u t b y R e g io n , 1970-91

(thousands o f metric tons) Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

20

World

Africa 1,541 1,602 1,454 1,366 1,553 1,542 1,372 1,429 1,483 1,612 1,664 1,740 1,612 1,598 1,771 1,978 2,069 2,063 2,516 2,459 2,576 2,384

1,115 1,178 1,035 963 1,019 996 885 934 910 1,009 1,024 1,072 887 890 1,073 1,054 1,125 1,219 1,472 1,377 1,440 1,280

Latin America 385 379 373 361 477 481 454 435 504 532 552 562 607 571 534 738 729 572 679 674 668 623

Far East* 12 13 14 17 22 26 30 28 34 38 54 71 90 105 127 147 179 236 325 355 421 440

* Indonesia and Malaysia are the only significant cocoa producers T a b l e 21: V o l u m e o f C o c o a B e a n E x p o r t s b y R e g io n , 1970-91

(thousands o f metric tons) Year

Africa

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

866 916 977 889 865 807 860 681 763 613 757

21

Latin America 226 226 226 174 255 270 209 187 211 230 183

Far East 4 5 7 10 14 15 18 18 24 27 41

Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

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Africa 976 826 783 894 831 1,008 977 955 1,193 1,188 1,198

Latin America 201 241 229 211 289 238 254 260 218 263 215

Far East 65 88 91 121 143 180 249 333 313 336 379

A n A n a l y s i s o f t h e C o c o a F r o n t i e r in t h e In d i a n O c e a n R im R e g io n

T a b l e 22: C o c o a P r o d u c t io n in t h e W o r l d ’ s L e a d in g P r o d u c e r C o u n t r ie s , 1989 a n d 199222 (thousands o f metric tons)

1989 1992

Ghana

Ivory Coast 840 750

Malaysia 225 225

305 250-280

Brazil 330 280

Indonesia 102 220

T a b l e 23: C o c o a P r o d u c t io n in t h e W o r l d ’ s L e a d in g P r o d u c e r C o u n t r ie s , 1993-623 (metric tons / [position]) 1993 803,799 340,458 254,700 257,959 200,000 135,000 100,928

Ivory Coast Brazil Ghana Indonesia Malaysia Nigeria Cameroon

[11 [2] Î41 PI [5] [61 [71

1994 808,662 330,398 309,400 269,981 177,172 142,700 107,900

[11 [21 [31 [41 [51 [61 [71

1995 1,120,000[11 296,491 [41 400,000 [21 273,881 [31 131,457 [61 145,000 [51 130,000 [71

1996 l,254,480ril 256,174 [41 340,000 [21 274,115 [31 125,000 [71 145,000 [51 125,726 [61

T a b l e 24: T h e R e l a t iv e C o n t r ib u t io n s o f t h e In d i a n O c e a n R im A r e a a n d A f r ic a n R e g io n s t o W o r l d C o c o a B e a n P r o d u c t io n , 1993-6

(metric tons)24 World 1993 1994 1995 1996

2,501,468 2,537,986 2,907,266 2,953,598

Africa0 Total 1,334,882 1,408,667 1,833,537 1,905,041

% 53 55 63 64

IOR Region* Total 465,857 453,765 412,947 407,006

% 19 18 14 14

°excludes Madagascar *comprises Malaysia, Indonesia, Sri Lanka and Madagascar Cocoa production took off in Malaysia as a direct result of the government’s New Economic Policy (NEP) launched in 1970 wherein cocoa was chosen as a cash crop that could be integrated into the peasant economy and thus promote the living standards o f the rural poor. Extensive research had demonstrated that cocoa was a viable option as long as intensive techniques were used to control pests, and identified the hybrid amelado variety o f trinitario cocoa, which had proved so successful in West Africa, as the cocoa plant most suitable for production in Malaysia. Furthermore, cocoa cultivation required relatively low capital outlay and technical skills. Under the Coconut Replanting and

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Rehabilitation Scheme, the Malaysian government began to promote the cultivation o f cocoa with coconut as an intercrop. It also set up the Malaysian Agricultural Research and Development Institute (MARDI) to co-ordinate and conduct research into the development requirements o f cocoa and coconuts. Specific extra-market incentives to smallholders to adopt cocoa cultivation included land allocations, credit provision, and technical assistance.25 The response to government incentives was staggering and Malaysia, in the 1960s a marginal producer, was by 1992 competing with Brazil and Ghana for third place amongst cocoa producing countries. Increased cocoa production was accompanied by a change in the structure o f fanning. Prior to 1948, cocoa in Malaysia was developed as an experimental and commercial crop by the colonial state and private sector, primarily on estates. After World War II, smallholders became increasingly important, but only with the government reforms of the 1970s when they became integrated into huge land settlement schemes designed along the lines of ‘technically superior’ estate production, did ‘smallholder’ production prove successful. The bulk o f cocoa in Malaysia is currently cultivated by smallholders either in huge land settlement schemes, or as an intercrop with coconuts.26 Indonesia’s cocoa boom started in 1979. Cocoa production increased from 7.000 tons in 1979/80 to 85,000 tons in 1989/90 and by 1991/2 reached 200.000 tons, double the target projected for 1994. In the process, it became a major export earner.27 As in Malaysia, the cocoa boom in Indonesia was facilitated by political developments, state development plans, increases in demand and availability o f labour and land. However, in Indonesia smallholder initiative in responding to market and extra-market institutions played a larger role than in Malaysia and, following the boom in Sulawesi from 1992, the percentage of smallholder production increased from 38 to 70 per cent o f total cocoa output.28 As elsewhere on expanding cocoa frontiers, cocoa production in Indonesia was driven by the right combination of land and labour inputs, the requirements being large tracts o f preferably virgin tropical forest and the availability o f an abundant and relatively cheap workforce to work the land. Whereas formerly, imported slaves provided the necessary workforce, voluntary migrants have since constituted an efficient substitute. By the 1880s the cocoa frontier in the northern part of Sulawesi had reached its limits. The availability of forest in the southern part o f Sulawesi provided Indonesia with another potential cocoa producing region, but it required a large labour input. The Bugis of south­ western Sulawesi had long experienced high population densities and a shortage o f rice lands, and possessed a tradition of large-scale migration. Cocoa cultivation in southern Sulawesi was first started by Islamic guerrillas active in the uprising o f the 1950s and 1960s. After the rebellion ended in 1965, former rebels spread information that cocoa represented a potentially viable economic

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activity in the southern part of Sulawesi. Aspirant cocoa farmers were further encouraged to migrate and plant cocoa there not only because o f a relative decline in the prices of alternative cash crops, tobacco, soya beans and cloves, but more directly by the government proclamation that access to and exploitation of the forest would be open to all, including former guerrillas. This led to a large scale migration to southern Sulawesi and a resultant rapid expansion there o f smallholder cocoa production.29 However, other factors were necessary to sustain Indonesia’s cocoa boom. The rise o f a pioneer cocoa front is also dependent on entrepreneurial action, the existence of an effective marketing network, and on the emergence of a price for cocoa higher than that of alternative cash crops. In addition, successful competition in the international cocoa market depends upon the capacity o f a developmental state to use price incentives and extra-market institutions to set up the conditions required for the creation o f a comparative advantage in cocoa exports. In Indonesia, the expansion o f cocoa production was part of the State Development Programme of the fourth and fifth National Plans (1989-94). The Indonesian State reacted to prices and used institutional innovation to elicit the desired response from cocoa farmers. It has assisted the cocoa producer in three main ways: credit provision for small farmers, upgrading the technical skills of cocoa fanners via the establishment of research institutions and extension services, and the provision to growers of subsidized planting materials. Also, to stimulate production for export, the government has maintained a competitive exchange rate. Finally, the state has restrained from intervening in the marketing of cocoa and reaping revenue in the form o f taxes, by allowing the development of relatively free competition among middlemen. Thus the history of the increase in cocoa production in Indonesia from the 1970s reveals low marketing costs, with a high percentage of the FOB price finding its wa^ into the pockets of the Indian Ocean Rim’s most dynamic cocoa producers.3

P r o s p e c t s fo r C o c o a P r o d u c t io n In d i a n O c e a n R im R e g io n

in t h e

Any discussion o f prospects for agricultural products is necessarily tentative in nature because o f the presence of factors, such as climate and disease, that are unpredictable and which frequently prove to be uncontrollable. At the same time, it is difficult to foresee what priority each government will give to continued production o f this export commodity or the ability o f various governments - both within and outside the region - to intervene to assist cocoa producers in gaining a competitive advantage. Also, conditions on the demand side for cocoa and substitute markets, and costs of production, vary.

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Nevertheless, on the basis o f a study o f the history o f cocoa production in the Indian Ocean region, and a comparative analysis o f emerging production costs in the five leading cocoa producing nations - Ivory Coast, Malaysia, Indonesia, Brazil and Ghana - some tentative remarks may be made concerning potential export markets and future demand for the IOR region. With the exception o f Madagascar, the region produces a poorer quality cocoa than that produced by Brazilian and West African smallholders. However, poor quality is only a constraint if there are no markets and Malaysia and Indonesia’s cocoa export drive over the last two decades has been assisted by the availability o f markets for non-fermented cocoa. Indonesia, in particular, has found a niche in America which, in contrast to Europe, does not place a premium on |o o d fermented beans for the production o f chocolates for mass consum ption/1 In the past Brazil has largely dominated supply to North American but Brazilian cocoa production is currently dropping, indicating that the IOR economies might be able to step into the breach. Four other considerations suggest a growing demand for cocoa from Asian suppliers. Firstly, the rapid late-industrialization in the HPAEs like China, Singapore, Thailand and South Korea, and development in India, translate into rising incomes and thus potentially large new markets in close proximity to Malaysia and Indonesia. At the same time, closer ties with other IOR countries and a rising standard o f living for the majority o f its population could mean that South Africa, which currently imports most o f its cocoa from West Africa, will also form a growing market for Asian cocoa. The formation o f a free trade area in the region would also stimulate demand for Indonesian, Malaysian and Malagasy cocoa. Thirdly, European markets still place a premium on criollo cocoa for the manufacture o f luxury chocolate. Political stability could enable Madagascar to meet this demand and thereby assist in increasing the Indian Ocean region’s future contribution to cocoa production. Finally, international cocoa prices rose markedly in 1992/3, largely because o f an increase in demand from the Russian Federation and from North America.32 Proximity to the former region, and the niche found by Indonesia and Malaysia in the American market makes this trend significant for prospects o f continued expansion o f cocoa production in the eastern IOR region. Although the world’s leading producers are currently the Ivory Coast, followed by Brazil and Ghana,33 supply side factors indicate that IOR producers, notably Indonesia, are in the strongest position to compete for any increase in demand. The exhaustion of forest land and the low success rate o f replanted plots afflict the Ivory Coast where production probably peaked in 1996 as a result o f unusually good weather in 1995,34 while Brazil is affected by escalating production costs and a fall in output due to land shortage, increasing labour costs, witches broom disease and lack o f government support.3 By contrast, Ghana still possesses ample forest and labour. It was the

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world’s leading producer from 1910-76, but cocoa output declined from the early 1970s until the late 1980s due primarily to macroeconomic mis­ management characterized by cocoa board export and production disincentives, adverse exchange rate and trade policy, over taxation o f producers, inefficient supply and distribution o f inputs into cocoa farming, and lack o f research. However, from the late 1980s, cocoa production increased substantially. This was due to the implementation from 1983 o f a World Bank structural adjust­ ment programme, notably encompassing devaluation, increased marketing competition, and a decline in taxes, as well as the anti-export bias o f trade policy.36 Nevertheless, the IOR region is better placed than Ghana to supply international demand for cocoa. Malaysia is not as well placed to compete as Indonesia due to higher production costs emanating from rising estate wages and lower yields from their older trees. By contrast, Indonesia possesses a vast reservoir o f cheap labour, plentiful unexploited forests in Sulawesi and in southern provinces, and government incentives, including the absence o f cocoa export taxes. Although unusual weather permitted a bumper cocoa crop in West Africa in 1996, so that the IOR’s share o f world cocoa output actually decreased from 19 per cent in 1992/3 to 14 per cent in 1996, West Africa’s boom is expected to be temporary. It is estimated that Indonesia, the world’s cheapest producer, will attain an output o f 400,000 tons per annum in 2000 to become the second largest producer internationally.37 At the same time, Mada­ gascar, itself subject to a rigorous structural adjustment programme, possesses the potential to re-create for itself a special niche as supplier o f high quality criollo cocoa.

C o n c l u s io n The history o f cocoa production suggests that on the demand side, there is growing demand for both luxury and poorer quality cocoa beans. This being the case, the critical factors in promoting a successful cocoa industry are found on the supply side. Three o f these are o f particular importance: plentiful primary tropical forest, plentiful and cheap labour, and strong government backing. The world’s primary producers, the Ivory Coast, Brazil and Ghana are all facing a decline in cocoa production because of a failure of one or more of these conditions. Thanks to World Bank measures, Ghana may succeed in stemming its fall in production. However, the experience o f cocoa production there and elsewhere suggests that World Bank disapproval o f government intervention in the economy might hinder further recovery in its cocoa sector. By contrast, cocoa farming in Indonesia and Malaysia, which already produce more than one third of the world’s cocoa supply, is being sustained largely by

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government support. The natural and institutional comparative advantage of the latter two countries over competitors and their comparative advantage in cocoa technology, together with the latent potential of Madagascar, which could create a special niche for itself as a supplier of the superior quality criollo cocoa, suggest that, in the absence of any natural disaster, cocoa production in the IOR region will soon dominate the world market.

N o t es 1 2 3

4

5 6

7 8

I wish to thank Gwyn Campbell for his comments on an earlier draft o f this chapter. Any errors remain mine. United Nations Food and Agricultural Organization, The State o f Food and Agriculture (UN, 1980). Urquhart (1956) cited in Gwyn Campbell, ‘The Origins and Development o f Cocoa Production in Madagascar’, paper presented at the Conference on Cocoa Production and Economic Development in the 19th and 20th Centuries, SOAS, London University, 1993, p. 1. The term HPAEs has been developed by the World Bank in its East Asian Miracle Report (1993). HPAEs refers to a collection of Asian developing economies, namely South Korea, Taiwan, Singapore, Hong Kong, China, Malaysia and Indonesia, which have shown remarkable performance in industrial transformation and improving welfare outcomes in the post World War 11 period. See tables 20-4. Two versions of this exist. The first is that in 1665 a Jesuit father planted a seedling in Carigara on the north coast of the island of Leyte, in the Visaya archipelago. The second tradition records that in 1670 a sailor gave a seedling to his brother, a priest in the Kabikolon region o f Southeastern Luzon, from whom it was stolen by a local Filipino and used as the progenitor of all cocoa trees in the Philippines - W. Clarence-Smith, ‘From Maluka to Manilla: Cocoa Production and Trade in Maritime Southeast Asia from the 1820s to 1880s’, paper presented at the Conference on Cocoa Production and Economic Development in the 19th and 20th Centuries, SOAS, London University, 1993, p. 2. François Ruf, ‘Indonesia’s Position Among Cocoa Producing Countries,’ Indonesia Circle, 61 (1993), p. 21. A. Kuar, ‘The Origins of Cocoa Cultivation in Malaysia,’ paper presented at the Conference on Cocoa Production and Economic Development in the 19th and 20th centuries, SOAS, London University, 1993, p. 2.

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9

10 11

12 13

14 15 16

17 18 19 20 21 22

23 24 25 26

François Ruf, ‘Smallholder Cocoa in Indonesia: Why a Cocoa Boom in Sulawesi?’, paper presented at the Conference on Cocoa, Challenges in the 1990s, Kuala Lumpur, September 1991, p. 12. E. Ludowyk, The Modern History o f Ceylon (London: Cox and Wyman, 1966), pp. 87-8. Kuar, ‘The Origins of Cocoa Cultivation in Malaysia’; F. Weymar, The Dynamics o f the World Cocoa Market (Cambridge: 1968), p. 13; Gareth Austin, ‘The Political Economy of Small and Big Farmers in Ghanaian Cocoa Cultivation c. 1890-1992’, paper presented at the Conference on Cocoa Production and Economic Development in the 19th and 20th centuries, SOAS, London University, 1993, p. 2. Kuar, ‘Origins o f Cocoa Cultivation in Malaysia’, p. 8. Kuar, ‘Origins o f Cocoa Cultivation in Malaysia’, p. 10; H. Bruton et al., The Political Economy o f Poverty, Equity and Growth: Sri Lanka and Malaysia (New York: Oxford University Press, 1992), p. 188. Clarence-Smith, ‘From Maluka to Manilla’, p. 9. Ibid, p. 8. William Clarence-Smith and François Ruff ‘Cocoa Pioneer Fronts: The Historical Determinants,’ in: Cocoa Pioneer Fronts since 1800. The role o f smallholders, planters and merchants (London: Macmillan, 1996), p. 2. Campbell, ‘The Origins and Development of Cocoa Production in Madagascar,’ p. 3. Ibid., p. 15. Ibid, p. 17. Source: United Nations FAO, The State o f Food and Agriculture (1980); ibid (1986); ibid (1992). Source: United Nations FAO, The State o f Food and Agriculture (1980); ibid (1986); ibid. (1992). Source: Ruf, ‘Comparison of Cocoa Production Costs in Seven Producing Countries,’ The Planter 69 (1993) p. 248; see also V. Nyanteng, ‘Cocoa Production in Ghana: A Review of Policies and Impacts, 1890-1990’, paper presented at the Conference on Cocoa Production and Economic Development in the 19th and 20th Centuries, SOAS, London University, 1993, p. 5, table 3. United Nations FAOSTAT DATABASE (1996) http://apps.fao. org/lim500/nph-wrap.pl?crops.Primary&Domain=PlN. United Nations FAOSTAT DATABASE (1996) http://apps.fao. org/lim500/nph-wrap.pl?crops.Primary&Domain=PIN. Kuar, ‘Origins of Cocoa Cultivation in Malaysia,’ p. 16. Kuar, ‘Origins o f Cocoa Cultivation in Malaysia’, p. 17; François Ruf, ‘Comparison of Cocoa Production Costs in Seven Producing Countries,’ The Planter 69 (1993), pp. 47-262.

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27

28 29

30

31

32 33

Ruf, ‘Indonesia’s Position Among Cocoa Producing Countries,’ pp. 21, 34; ‘Introduction to Indonesian cocoa,’ www ms http://www. prica.org/commerce/guide/cocoa. Ruf, ‘Indonesia’s Position Among Cocoa Producing Countries,’ pp. 26-7. Ruf, ‘Indonesia’s Position Among Cocoa Producing Countries,’ pp. 6, 910, 26-9; idem, ‘Smallholder Cocoa in Indonesia’; Clarence Smith and Ruff, ‘Cocoa Pioneer Fronts.’ T. Akiyama and A. Nishio, ‘Indonesia’s Cocoa Boom: Hands-Off Policy Encourages Smallholder Dynamism’, World Bank Working Paper 1580 (1996); Ruf, ‘Smallholder Cocoa in Indonesia’, pp. 6, 10; idem, ‘Indonesia’s Position Among Cocoa Producing Countries,’ pp. 28-9. www ms - http://www.prica.org/commerce/guide/cocoa/intro.html; F. Ruf, ‘Comparison o f Cocoa Production Costs in Seven Producing Countries,’ The Planter 69.807 (1993), p. 252. United Nations FAO, The State o f Food and Agriculture (UN, 1992). United Nations FAO, The State o f Food and Agriculture (UN, 1993), p.

20 . 34

35 36 37

Michael Speltz, ‘Cocoa Makes a Big Move Downwards,’ Trade Winds (April 1995) - www.ms http://cyclone.weather.net/roemerwx/ publications/tradewinds/tw-aug-95/cocoa.htm; idem, ‘Cocoa At Rest for N ow ,’ Trade Winds (October 1995) - www mshttp://www.weather.net/roemerwx/publications/tradewinds/tw-jul-95-95/cocoa.htm. Ruf, ‘Comparison o f Cocoa Production Costs,’ p. 249. C. Jebuni and K. Tutu, ‘Trade and Payments Regime and the Balance o f Payments in Ghana,’ World Development 22.8 (1994), pp. 1161-73. Ruf, ‘Smallholder Cocoa in Indonesia,’ p. 14; Akiyama & Nishio, ‘Indonesia’s Cocoa Boom ,’ p. 16.

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C hapter 5 T h e I n d ia n O c e a n R i m : A C o s t -B e n e f it A n a l y s is f r o m a D e v e l o p m e n t a l P e r s p e c t iv e w it h S p e c ia l R e f e r e n c e t o S o u t h e r n A f r ic a A ndreas Lom bardozzi

Recent major changes in the regional and global economic-political situation have resulted in an increased interest in economic co-operation in the Indian Ocean region (IOR). Some such changes are viewed in the region as ‘negative’ and some as ‘positive’. An example o f the former is the ‘Washington Consensus’ which has forced many lesser developed countries (LDCs) not only to accept the stringent austerity measures o f the IM F’s Structural Adjustment Programmes, but also the unfavourable trading conditions set out in the GATT and WTO agreements. By contrast, the end o f the Cold War and the failure o f the United States to thereby achieve sole global superpower status have permitted the countries o f the IOR to explore the possibility o f regional economic co­ operation. For example the collapse o f the Soviet Union undermined the dominance o f India in South Asia: it ended a major source o f economic funding for India and forced it to re-orientate towards a market-based system. Such changes shifted the balance o f regional political power in favour o f India’s hostile neighbours, encouraging India to extend its ties with non-aligned states outside South Asia in an attempt to maintain its hegemony in the Indian sub-continent. This helps explain its role as major promoter o f an IOR economic association. At the same time, the transition to democracy in South Africa has caused nations in the African region to look to closer relations with South Africa as a possible means o f escaping neo-liberal policies and their economic dependency on the developed countries o f the North. Economic and political exchanges in the global context have also enabled Australia to emerge from the political ‘hinterland’: by establishing bilateral links with many less powerful IOR countries it has assumed the position o f a major, if not the dominant regional power. This in turn has enhanced its say in international affairs, as shown in its strongly voiced protest against French nuclear tests in the Pacific.

A ndreas Lom bardozzi

An IOR association may hold immense advantages for all countries involved. The region has recently gained remarkable political stability - a precondition o f successful economic co-operation and integration. However, the IOR’s vast size and extreme diversity create potential obstacles to this. Current trade and investment linkages between potential members o f the IOR region are limited, co-operation agreements being restricted to specific sub-regions; thus the South African government has defined southern Africa as its prime area of concern while Australia is concentrating its economic efforts on East Asia.1 Moreover, an IOR association would be economically asymmetrical, members ranging from competitive and technologically advanced sub-regions like Australia and Southeast Asia to India and the fragile struggling economies o f East Africa. All would push their own agendas: Australia and Singapore would look for a model of integration similar to APEC that would promote a comprehensive and speedy reduction o f tariffs, enabling them to take advantage o f their advanced competitiveness. Such a model might be opposed by low-income nations, who would constitute a numerical majority in an IOR association, as it would limit co-operation to trade creation and trade diversion (within the ambit o f neo-liberal ‘trade integration’). Certainly middle income countries such as South Africa (and its SACU partners), Zimbabwe and Botswana would wish the IOR to adopt an alternative developmental model of integration.2 Such divergences point to the importance o f a negotiated integration strategy. This paper seeks to evaluate the potential of IOR integration from a development perspective. It presents the rationale for this model o f integration and examines the conditions necessary to ensure the development o f the lesser developed countries (LDCs) o f the IOR - albeit within the institutional constraints o f the IMF, the World Bank and the GATT/W TO agreement.

C r it e r ia

of

E v a l u a t io n

The neo-classical theory of integration formulated by Viner and Meade and elaborated by Heckscher-Ohlin is based primarily on the theory of custom unions and uses trade creation and trade diversion as its main criteria o f evaluation for the success o f a Regional Trade Agreement (RTA).3 Trade creation refers to the replacement of high cost production by a source o f lower cost production from within the union and a concomitant increase in consumption through reduction of tariffs between members. The advantages arise through specialization and accessing economies of scale. In trade diversion, tariffs cause a lower cost world

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supplier to be replaced by higher cost production from within the union. As trade creation will increase social welfare - judged by private consumption o f goods and services - and trade diversion will reduce such welfare, the neo-classicists consider the former to be the best option. However, such an analysis o f integration is essentially static, for it fails to take into account other relevant criteria, both economic and socio­ political. Firstly, an emphasis on trade to the neglect o f wider factors can disadvantage LDCs.4 Seers, who considered ‘economic geography’ to be a ‘point o f departure more promising than any school o f economics’, emphasized the cumulative effect o f geographical and demographic inequalities.5 In their turn, Prebish and Cardoso emphasize the importance o f incorporating into any cost-benefit analysis of integration external economic, political and socio-historic influences; in particular, they stress the dangers for LDCs involved in RTAs with industrialized countries of domination and industrial polarization stemming from economic asymmetry.6 Certainly the danger o f industrial polarization and concen­ tration o f investment is one o f the major stumbling blocks to successful economic integration in NAFTA and SADC.7 Again, cross-border spillover effects due to the harmonization o f regional policy may not only lead to a loss o f national sovereignty for an individual country, but may also adversely affect regional stability. Bhagwati further highlights the importance o f the political context, stating that it is often ‘politics that seems to drive these choices o f partners, as in the case o f the EC, and now in the case o f free trade agreements throughout the Americas’.8 He notes that any evaluation o f integration has to account for three relevant political ‘agents’: governments o f member countries, interest groups in member countries and interest groups and governments of outside countries. On the other hand, trade diversion, considered a ‘second choice’ option within the neo-classical paradigm,9 may be viewed as beneficial (i.e. enhancing ‘collective consumption’) within a wider political context that takes into account state objectives, economies o f scale in the use of shared resources, community building and the enhanced bargaining power o f a wider economic grouping. Liebenstein emphasizes not only the orthodox production and consumption effects o f integration but also positive productivity increases due to exposure to competition, techno­ logical transfers and other X-Efficiency factors.10 In summary, not only trade creation and trade diversion, but also the following factors should be taken into account in analysing international integration agreements: (i) factor, product and social mobility, (ii) comprehensive tariff, fiscal and monetary arrangements, (iii) institutional arrangements and powers concerning both national and supra-national

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bodies, (iv) political ‘power’ arrangements o f the community and (v) socio-political motivations o f member governments. Analysis o f these factors would allow not only comprehensive assessment o f markets, investments and the status o f productive activities, but would also permit an appraisal of other important aspects crucial to a comprehensive evaluation o f regional economic integration. A fundamental objective o f integration, the enhancement o f the bargaining power o f countries within the group and for the union as a whole, should be included in any costbenefit analysis, as should the equitable distribution o f income and social services, and environmental protection.

T h e W o r l d B a n k In it ia t iv e

The World Bank, (and IMF), formerly opposed to regional integration, currently supports such initiatives and, satisfied that most African countries have adopted SAPs (Structural Adjustment Programmes), have sponsored several studies into regional integration. However, agreement on formal models o f integration belies differences concerning the rationale for and objectives of, integration. The World Bank/IM F/OECD model emphasizes an outward orientated ‘market led’ laissez faire economic strategy that, for example, is intended ‘to push forward a rapid process o f liberalization throughout Southern Africa.’11 The adoption o f such a model would lead to South Africa being highly formalized and ‘open’ within the IOR, intent - in conformity with neo-liberal theory upon eliminating impediments to regional trade. There would be no attempt to attain an equitable distribution o f investment and income through the creation o f new institutions, as such issues would be left to the workings o f the market. Any attempt to deviate from the norm - for example in favour o f the ‘variable geometry’ approach suggested by the development model - would be countered by GATT/W TO, and by the World Bank who, argues Keet (1994), endorse liberalization programmes that ‘actively foster a private enterprise constituency and develop such forces into local pressure groups in favour o f yet further liberalization m easures’.12 Country specific programmes are to be sponsored by the European Commission, the World Bank and the African Development Bank, while the requisite macro-economic and structural frameworks are to be provided by the IMF whose ‘Common Programme o f Action’ emphasizes that the adoption o f neo-liberal principles are a sine qua non for obtaining development funding.13 Critics state that the World Bank’s neo-classical approach runs contrary to ‘developing regionally balanced investment strategies’ in the

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Third W orld.14 In general terms, World Bank strategies would prevent the local implementation o f co-ordinated programmes based upon a variable geometry or multi-speed approach in which there might be a differentiated lowering o f protection. It would also undermine the possibilities for sectoral co-operation as, for example, in the protection o f infant industries - something seen as inimical to free trade openness. As the state is ‘rolled back’, World Bank policies would permit indiscriminate entry into African countries o f MNCs (Multinational Corporations) and legitimize potential domination by advanced economies. In the southern African context, it would run counter to the principles underlying SADC, would disrupt the re-negotiation o f SACU, and would eliminate potential advantages from IOR regional integration based on a South-South developmental approach.

T he D ev elo pm enta l A pproach The developmental approach to regional integration incorporates a greater range o f criteria as pertinent to the promotion o f sustainable economic - a goal that implies the reversal o f the economic and political marginalization o f the Third World. It simultaneously criticizes the IMF/World Bank approach as being too rigid in theory and unable in practice to promote growth in many African countries; indeed, it is argued that the IM F’s structural adjustment programmes and GATT and WTO trade liberalization agreements have, in some cases, contributed to the economic decline o f client countries. The developmental approach identifies in LDCs general ‘internal’ and ‘external’, features hindering economic development that may be corrected through a policy o f regional integration:

Internal Factors - continued reliance on exports o f primary goods (i.e. limited growth o f secondary and tertiary sectors - limited ability to secure effective technological transfers and innovations - outdated and/or decaying economic infrastructures

External Factors - deteriorating terms o f trade as primary product prices continue to decline - asymmetrical distribution of gains from international trade - limited access to markets o f developed economies

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- high unemployment and low consumption - limited investment in human development

- extension of global trade liberalization - limited bargaining power vis-à-vis OECD countries and global institutions like GATT and the WTO

- a highly skewed income distribution - institutional rigidities - limited availability of internally generated funds and resultant high debt ratio - limited administrative capabilities The combination o f these factors has distorted the functioning o f the market which often relays incorrect price signals, thus limiting its function as a control mechanism. Institutional rigidities and poor infrastructure accentuate such belated and inaccurate responses, which in turn help explain the slow and inadequate reaction o f economic agents in important markets. Such distortions form the basis o f the call by advocates o f the ‘development approach’ for a ‘developmental state’ to guide the market process,15 notably to secure meaningful sectoral co­ operation and nromote regional integration in order to achieve the following goals: 6 1. Economies o f scale in resource management (including water resources, power supply, skills and technology), and in infrastructure (e.g. transportation and telecommunication); 2. Effective transfer of technology and skills through co-operation in business enterprises; 3. The creation o f a climate conducive to raising investment and of encouraging investment in new forms of production; 4. Raising productivity levels through increased competition and specialization; 5. Ensuring temporary protective barriers for the advancement o f infant industries; 6. Creating mechanisms for the equitable distribution o f regional income; 7. The establishment of regional funds or banks giving special priority to the least developed members;

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8. Implementing measures (such as variable geometry) to give less developed members preferential access to regional markets and facilities, as well as longer periods in which to reduce tariffs and increase competitiveness; and 9. Increase ‘Third W orld’ bargaining power through the creation of cohesive trade blocs. The ‘developmental approach’ has two inherent assumptions. Firstly, trade integration alone, especially in an economically asymmetric environment, may not lead to great advantages in the long term, and may exacerbate the current slow and inconsistent development characteristic o f some economies. Secondly, where market forces have failed to fulfil their theoretical role, the state should become supervisory and guide the market. Within the context o f the IOR, this would necessitate not only a formal agreement with early political co-ordination between members, but also the recognition that the IOR should aim for more than just trade integration. This forms the context for the following comments about the framing o f an IOR constitutional framework that might facilitate economic development of member countries along the lines o f the ‘development approach.’

A C o n s titu tio n a l F ra m e w o rk f o r th e

IOR

Political will is a fundamental condition for successful integration. The lack o f it, notably in groupings characterized by different levels of development, undermines integrationist initiatives, as the history o f the Latin American Free Trade Agreement (LAFTA) and the East African Community (EAC), has illustrated. In both cases, the less economically developed members considered that they would be ‘net losers’ and therefore pursued more nationalistic aims. The political will by member countries to recognize economic disparity as a difficulty and to take measures to compensate for it, to the long-term benefit o f all members of the grouping, was lacking.17 Within the IOR, over 50 per cent o f the potential membership are classified as low income countries,18 signifying that political will in the grouping will be essential to establish mecha­ nisms to redress the problems arising from such economic asymmetry. On the part o f the LDCs, this may lead to the formation o f a Third World sub-grouping within the IOR to represent the interests o f the poorer members. This in turn will increase the likelihood of developmental approach concepts being implemented, as opposed to those o f the neo­ liberal model which would be potentially harmful to LDCs. Were the

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neo-liberal approach to be adopted, there would be a real threat o f Third World members - despite their numerical superiority - being economically and politically marginalized, and the long-term success of integration undermined. The bargaining position o f the LDCs vis-à-vis the ‘N orth’ may be enhanced by the presence o f Australia, Singapore and Malaysia, but only if the TOR bloc’ bargained collectively for conces­ sions from the IMF and GATT. However, should developed members and the LDCs adopt different bargaining positions, the global bargaining position o f LDCs could be impeded. Thus, should there be a real likelihood o f the neo-liberal model being endorsed by an lO R grouping, potential LDC members o f that grouping should regard membership as a ‘second best’ choice. In such a case, an alternative option for the LDCs would be to form their own ‘regional bloc’ and to negotiate their position, without reservations, directly with the IMF and GATT. The Abuja Treaty could be seen as the framework around which such a ‘bargaining bloc’ could be set up for the African continent. Political integration would precede both sectoral co-operation and economic integration, and simultaneously promote the ability to negotiate for the implementation o f the development model o f integration. To avoid dissension within the lOR, the constitutional framework o f the grouping would need to incorporate the main objectives o f members in joining. This in turn necessitates an appraisal o f the role and the function o f the state. The objectives o f member states with globally competitive economies, such as Australia and Singapore, will be to adopt a ‘market-led approach, leading to the reduction o f tariffs, in order to gain a potentially massive captive regional market.’ By contrast, governments o f low-income economies will be looking to consolidate their fragile industrial base, and accordingly seeking the adoption o f a developmental model o f integration. Given such differences, conflict is possible. How­ ever, most governments now accept that integration is not necessarily a polarized choice between co-operation and trade integration. Rather, the examples o f other regional initiatives have taught that it is best to seek a ‘combination o f co-operation, co-ordination and integration, realistic and feasible under prevailing conditions, which can best advance the goals o f contributing to growth and development.’19 Only through adopting such an approach can the type of sectoral co-operation be secured that will attain for members both short-term benefits and longer-term dynamic changes. However, LDCs will need to secure such a compromise as a sine qua non o f any IOR agreement, and not let it be used by the developed economies as a ‘carrot’ to gain increased tariff reductions. The latter, if implemented rapidly, could destroy vital or potentially competitive industries in sectors where intra-regional co-operation was envisaged.

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At the inaugural Mauritius Meeting o f the IOR, in March 1995, agreement was reached to define the IOR economic association along the lines o f ‘open regionalism’ as ‘a community configured as an open economic association: open to the rest o f the world.’20 This resolution points to two important factors. Firstly, that the IOR is accepting a model of integration that suits the economically expansionary objectives o f first world economies. This means that should the less developed countries wish to counter the prevailing dominance o f developed economies within the IOR, they will need to establish a strong and united Third World forum within the organization. Secondly, an ‘open’ approach to integration could destroy emerging industries in LDCs that in their present internationally uncompetitive state are still in need o f protective barriers that control the nature and the speed o f tariff reductions.21 If concepts o f variable geometry are ignored, LDCs within the IOR will not have the time and flexibility necessary to render their industries competitive, and this could spell disaster for any future IOR industrialization policy.

I n s t it u t io n a l Q u e s t io n s The creation o f a suitable institutional framework for the IOR is o f fundamental importance to its future viability and success. In its formation, analysis should be directed towards three main spheres: 1. Defining the position o f the IOR vz’s-a-vis institutions and structures already in existence between potential members, notably other RTAs, and the constraints imposed on members by the IMF, GATT and WTO. For instance, Australia was one o f the founding members o f APEC in 1979 and Indonesia, Malaysia and Singapore are members o f ASEAN. Although membership o f one RTA does not exclude membership of another, one would probably remain a priority - APEC and ASEAN in the above cases.22 The issue is yet more complex for South Africa whose ‘future is inextricably linked to that o f the Southern African region.’23 South Africa is a member o f SACU, the Common Monetary Area (CMA) and SADC. As joining the IOR unilaterally would compromise South A frica’s commitment to SACU, one might envisage South African membership o f the IOR entailing membership by all SACU countries, if not also for non-SACU members o f SADC who are not immediately eligible for IOR membership (i.e. not littoral to the Indian Ocean). Should such countries (Angola, Malawi, Zambia and Zimbabwe) remain excluded from the IOR, they could run the risk o f economic

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marginalization. Moreover, it could prove deeply divisive, sowing the seeds o f political instability in the African sub-continent.24 The March conference established the principle that IOR membership should be restricted to ‘sovereign states’ of the region.25 This would effectively exclude Réunion, which is a ‘département' o f France, and limit it and other non-sovereign states influencing IOR decisions. The IOR would thus form an important counterweight to the ‘O ECD’ group, to which Australia belongs, and to its policies. However, from a developmental perspective, the IOR should also aim to reduce pressure from GATT, as from the WTO, which aims to extend its ambit o f control to agricultural products, liberalize investments through Trade Related Investment Measures (TRIMs), liberalize the trade in services through the General Agreement on Trade in Services (GATS), and guarantee TradeRelated (intellectual) Property Rights (TRIPs). Such developments could seriously diminish the LDCs’ chances o f rapid industrialization by obstructing their access to required technology, whilst the ‘cost of adjusting domestic industry, agriculture and the service sector to the new rules o f the WTO will be expensive in social and economic term s.’26 As noted above, should the IOR become another vehicle for the attainment o f global trade liberalization and not react to the developmental constraints o f its lesser developed members, the association would be o f limited value and might further obstruct the respective industrialization pro­ grammes o f member LDCs. 2. IOR members should aim to create new, or to modify existing, institutional structures to accommodate IOR objectives. ‘Positive’ integrational aspects are important to correct imbalances emanating from a dysfunctional market mechanism and to facilitate potential conflict resolution within the IOR region. Essential for the creation o f a framework to maximize equitable gains from integration are the following: a.

b. c. d.

Compensatory and corrective mechanisms to permit an equitable distribution o f gains from integration, and prevent the burden o f sacrifice falling disproportionately on the working class and poor; A common fund to stimulate investment in depressed or disadvantag­ ed IOR regions; A resolution o f the debt burden hampering the development o f LDC members o f the IOR; The enforcement o f regulations to ensure environmental protection and the responsible use o f natural resources; and

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e.

The acceptance o f the principle of variable geometry to ensure a developmental policy best suited to each member’s needs.

3. To ensure harmonization o f policy, IOR member states should, as a matter o f urgency, create a framework of political co-operation in order to correct inaccurate price signals, fund essential industrial projects, afford tariff protection to growing industries and prevent the indiscriminate entry into the IOR o f MNCs. In the past, cross-border spill-overs from integration have undermined national sovereignty and could do so again in the IOR if policies that cause spill-overs are not mutually agreed on, and no compensatory mechanisms put in place. The degree o f co­ operation required to avoid this poses difficulties in that not only are such development policies in direct conflict with both the IM F’s Structural Adjustment Programmes and GATT’s liberalization policies, but it is uncertain whether LDCs possess the necessary administrative capacities to implement successful market intervention. Thus Lai has argued that in attempting to correct market failures, the state introduces greater cost distortions in the market through bureaucratic inefficiencies and its administrative ineffectiveness.27 Nevertheless, it is important that governments maintain a high profile within the IOR as they have the potential to create the framework to facilitate the technical administration o f policies, expose governmental departments to examples o f transparent governance, police mutually agreed programmes, and provide skills and resources. This is o f extreme importance in the protection o f the environment, as many LDCs possess neither the funds nor the expertise to facilitate or interpret essential environmental impact studies. Although the responsibility for implementing and assessing environmental studies should remain with a neutral institution, the cost of disproving potential environmental damage should be borne by the parties who seek to invest in a country - thus reducing the risk that MNCs might exploit and degrade ecologically sensitive areas.

C o n c l u s io n

International economic integration is an inherently complex issue and a precise indication o f the effects o f policies in the IOR - a region characterized by wide economic asymmetry is difficult to give. This paper argues that the neo-liberal objective o f trade liberalization through integration is not a sufficient rational for the creation o f the IOR. Trade liberalization is defined as the promotion of freer trade through an increase in international factor and capital mobility. However, it does not

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attempt to accommodate the principle o f ‘fair trade’. The OECD argument that the ‘playing fields should be levelled’ in the area o f labour and environmental policy would prevent both the exploitation o f comparative advantage by low-income countries, and industrial migration to countries that may have a low wage comparative advantage.2 Thus LDCs contend that the gains from free trade are not equitably accounted for and are distributed asymmetrically in favour of developed nations.29 Certainly there is little historic evidence o f industrial migration to LDCs, even where the latter are in close geographical proximity to advanced economies, as is the case in NAFTA with the US and Mexico. Moreover, unfavourable terms o f trade encouraged by development along lines o f comparative advantage have accelerated the economic decline o f many LDCs. It is therefore important that integration be assessed in terms o f much wider criteria than trade integration alone. If the IOR can succeed in establishing a dual-track developmental approach, the advantages in terms o f economies o f scale and specialization in production, which in turn affect important dynamic changes such as technological transfers and institutional innovation, could benefit all members. In addition, such an approach could provide the catalyst for ‘South-South’ co-operation wherein LDCs could not only diminish their dependence on the ‘N orth’, but also create a more equitable international economic environment. Internally, the IOR could be divided into three sub-regions, based on the middle powers o f South Africa, Australia, and India. These ‘webs o f dependency’30 would not only allow the respective nations to develop at their own pace within a framework o f variable geometry, but would also reduce the complexities o f the IOR, establishing the basis for cross-regional integration, wherein close geographical proximity would facilitate both sectoral co-operation and trade integration in regions with relatively homogeneous development objectives - without denying the advantages that may in time be gained from integration throughout the IOR region. Australia is, however, pushing forward in its establishment o f bilateral agreements, thereby significantly extending the ambit o f its influence and control. Furthermore, the market-led model o f integration also lies within the negotiating forum o f the IOR, and is being aggressively pursued by both Australia and its APEC partners. The need therefore, for Third World nations to establish themselves as a formidable group within the IOR, to ensure not only the creation o f an agreement that is economically beneficial to all, but one that will improve their position within the global context, is clearly apparent.

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T h e In d i a n O c e a n R i m : A C o s t - B e n e f it A n a l y s i s

N otes 1

Marina Mayer, ‘The Feasibility o f Including the Southern African Customs Union and the Southern African Development Community in an Indian Ocean Rim Association for Economic Co-operation,’ University o f Witwatersrand, mimeo (1995); Gwyn Campbell and Mario Scerri, ‘South Africa and the Indian Ocean Rim: An Evaluation,’ University o f the Witwatersrand, mimeo (1995). 2 F. Cheru, The Not So Brave World! Problems o f Regional Integra­ tion in Post-Apartheid Southern Africa (Johannesburg: SAIIA, 1992); Campbell and Scerri, ‘South Africa and the Indian Ocean Rim.’ 3 Jacob Viner, The Customs Union Issue (London: Stevens & Sons, 1950); J.E. Meade, Trade and Welfare (London: Oxford University Press, 1955); B.G. Ohlin, Interregional and International Trade (Cambridge, Boston, Harvard University Press, 1935). 4 A.J. Downs, ‘An Economic Theory o f Political Action in a Demo­ cracy,’ Journal o f Political Economy 65 (1957), pp. 135-50; A. Breton, ‘The Economics o f Nationalism,’ Journal o f Political Economics 72 (1964), pp. 376-87; Harry Johnson, ‘An Economic Theory o f Protectionism, Tariff Bargaining, and the Formulation o f Customs Unions,’ Journal o f Political Economy 73 (1965), pp. 25683; P. Robson, The Economics o f International Integration (London: Allen and Unwin, 1984). 5 D. Seers and C. Vasitos, Integration and Unequal Development. The Experience o f the EEC (New York: St. M artin’s Press, 1980). 6 F.H. Cardoso, Dependency and Development in Latin America (Berkeley: University o f California Press, 1979). 7 R. Davies, D. Keet and M. Nkuhlu, ‘Reconstructing economic relations within the Southern African region: Issues and options for a democratic South African,’ MERG Working Paper 1 (1993). 8 J. Bhagwati, ‘Regionalism versus Multilateralism,’ paper presented at the conference on New Dimensions in Regional Integration, W ashington D.C. (1992). 9 R.G. Lipsey and K.J. Lancaster, ‘The General Theory o f Second Best,’ Review o f Economic Studies 24 (1956-7), pp. 33-49. 10 H.Liebenstein, ‘Allocative vs. X-Efficiency,’ American Economic Review 56 (1966), pp. 392-415. 11 D. Keet, International Players and the Programmes fo r - and against - Economic Integration in Southern Africa, South African Perspectives 36 (Cape Town: Centre for SA Studies, 1994), p. 16;

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12 13

14

15

16 17

18 19 20 21 22

23 24 25 26

see also Davies, Keet & Nkuhlu, ‘Reconstructing economic relations,’ p. 50. Keet, International Players, p. 9. World Bank, IMF, European Community and African Development Bank, Initiative to Facilitate Cross Border Private Investment, Trade and Payment in Eastern and Southern Africa and the Indian Ocean Concept Paper (Washington DC: World Bank, 1993). Cheru, The Not So Brave World!; Keet, International Players, p. 19; Marina Mayer and Flarry Zarenda, The Southern African Customs Union: A review o f Costs and Benefits, Development Bank of Southern Africa Working Paper 19 (Midrand: DBSA, 1994); Mayer, ‘Feasibility o f Including the Southern African Customs Union’. See e.g. P. Streeten, ‘Markets and States: Against Minimalism,’ World Develop?nent 21.8 (1993); H. Chang, ‘The Economic Theory o f the Developmental State,’ in: The Developmental State in Historical Perspective (CUP, 1994); and A. Amsden, ‘Why isn’t the Whole World Experimenting with the East Asia Model to develop? A Review o f the World Bank’s East Asian M iracle,’ World Development 22.4 (1994). R. Davies, ‘Approaches to regional integration in the Southern African context,’ Africa Insight 24.1 (1994). P. Robson, Economic Integration In Africa (London: George Allen and Unwin, 1968); idem, The Economics o f International Integration. Cam pbell and Scerri, ‘South A frica and the Indian Ocean R im ,’ p. 34. Davies, Keet & Nkuhlu, ‘Reconstructing economic relations,’ p. 52. Cam pbell and Scerri, ‘South A frica and the Indian Ocean R im ,’ p. 21. Cheru, The Not So Brave World! Campbell and Scerri, ‘South A frica and the Indian Ocean R im ’; G. Freer, ‘The Indian Ocean Region: b’twixt and b ’tween,’ paper presented at the conference on ‘France, Southern Africa and the Indian Ocean’, Johannesburg, 1995. Davies, Keet & Nkuhlu, ‘Reconstructing economic relations’, p. 1. Mayer, ‘Feasibility o f Including the Southern African Customs Union.’ Campbell and Scerri, ‘South Africa and the Indian Ocean Rim,’ p. 6. A. Hirsch, ‘From GATT to the WTO: The Global Trade Regime and its Implications For South Africa,’ South Africa in the Global Economy (Johannesburg: SAIIA, 1995), p. 54.

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27 28 29 30

D. Lai, The Poverty o f ‘D evelopm ent Economics (London: Hobart, 1983). J. Bhagwati, ‘Free Trade: Old and New Challenges,’ The Economic Journal 104 (1994), pp. 231-46. Michael Barratt Brown, Fair Trade (London: Zed Books, 1993). P. Wijkman, ‘Patterns o f production and trade,’ in: W. Wallace (ed.), The Dynamics o f European Integration (London: RIIA, 1990).

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C h apter 6 P r o spects in

f o r t h e T o u r is t I n d u st r y S o u t h e r n A fr ic a

E l iz a b e t h M a r a b w a

Tourism may be defined as ‘the relationships and phenomenon arising out o f the journeys and temporary stays o f people travelling primarily for leisure or recreational purposes.’1 Its essential characteristic is the movement o f people away from their place o f permanent residence to a holiday destination or destinations. However, no standard definition exists o f a ‘tourist’ nor any consensus as to the maximum duration o f a ‘tourist’ visit for statistical purposes, a four night minimum stay is generally accepted for domestic tourists and twenty-four hours for an international tourist.2 Here, the standard World Tourism Organization definition is adopted. The focus o f this chapter is the development o f international tourism, domestic tourism being excluded since it does not concern itself with the main subject o f regional co-operation in the Indian Ocean Rim (IOR). It is argued here that there is scope for IOR co-operation in economic, social and cultural aspects as manifested in tourism. Although the IOR regional share o f tourist arrivals and receipts is still small, it has been growing at an impressive rate since the demise o f apartheid in South Africa. Secondly, intra-regional tourism in southern Africa is quite high, and o f particular importance to the South African economy. Indeed, if managed competitively and efficiently, tourism could be an engine o f economic growth for the southern African-western Indian Ocean region (comprising South Africa, Malawi, Namibia, Botswana, Lesotho, Swaziland, Mozambique, Zimbabwe, Mauritius and M adagascar) which offers a unique product that complements rather than competes with other tourism products in the wider IOR region.

T he N ature

of the

Product

Within the southern Africa-western IOR region, South Africa possesses the most developed tourist industry, with comparatively the most sophisticated travel and tourism products. Since the end o f Apartheid, increasing numbers o f visitors have been drawn from all over the world by its combination o f superb climate, unspoiled and uncongested environment, diversity o f

P r o s p e c t s f o r t h e T o u r i s t In d u s t r y in S o u t h e r n A f r ic a

scenery and wildlife, cultural variety and richness, and first world infra­ structure - all at attractive prices. Another important attraction o f South Africa is its highly developed conference facilities. The democratic process in South Africa has opened doors internationally, creating an interest in the country and making it possible for international organizations to host meetings and sporting events there. This business tourism has boosted considerably tourism growth in the region. Besides the vast resources offered by South Africa, the southern African region supplements both the natural and cultural richness o f South Africa. Zimbabwe is the home o f one o f the Seven Wonders o f the World - the Victoria Falls and the world-famous Great Zimbabwe monuments. Kenya has equally competitive eco-tourism, a well developed infrastructure with world class hotel accommodation, and a rich, diverse culture highly attractive to tourists. Islands such as Mauritius and Réunion complement continental eco-tourism by providing clean, pollution-free beaches with plenty o f sunshine. Given the outstanding and unique products offered by the region and South Africa in particular, the region is capable o f attracting all forms o f tourism clientele: from up-market down to lower-income mass tourism. Although low in number, up-market tourists - mainly from Europe - bring in comparatively the greatest tourism receipts: most (67 per cent) are male, aged 25-55 and possess an average income o f over RIO,000 per month.3 Conversely, mass tourism, o f domestic and regional origin, contributes a smaller share o f tourism receipts. THESIZE, THE COSTS AND BENEFITS OF THE INTERNATIONAL TOURISM MARKET

Developments in the tourism industry should be viewed in the context o f the service revolution. Advances in technology, especially in information technology, are revolutionizing the image o f services. Traditionally, the components o f the service sector, including transport, tourism, insurance and information have been regarded as ‘a collection o f mainly non-tradable activities with low productivity growth potential.’4 That picture has changed radically over the last quarter century as services have developed into a leading sector o f the world economy. Services include the following sub­ sectors: transportation, travel, insurance and other private services comprising finance and brokerage, communications, non-merchandise insurance, leasing and rentals o f equipment, communications, technical and professional services, temporary movement o f labour, and property income. The growth o f the service industry has been phenomenal. A brief review o f tourism demonstrates its increasing importance in the international economy. Whereas world-wide merchandise exports have risen from 11 per cent to 18 per cent o f GDP over the past two decades, services including tourism

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have increased from 15 per cent to over 22 per cent of world trade since 19805 and account for three-fifths of Direct Foreign Investment (DFI) flows. For example, international travel and tourism generate approximately $3,500 billion in total gross output and employ 127 million people (about one in every 15 workers).6 According to the World Tourism Organisation’s estimates, total international tourist arrivals worldwide amounted to 561 million in 1995, 2.8 per cent greater than in 1994, while receipts from tourism increased 10 percent over the same period to an estimated US$381 billion (excluding international transport estimated at US$57 billion).7 From 1988-95, worldwide international tourist arrivals grew at an average rate of 5.5 per cent per year and international tourist receipts (excluding transport) at 12.5 per cent. From 1992-4 the average increase in international tourism receipts outstripped world exports in commercial services. Tourism alone produces 6.1 per cent o f world GNP, more than the GNP o f any individual country except the United States and Japan, and is a major generator o f tax revenue (about US$303 billion). Moreover, employment in tourism is projected to grow 50 per cent faster than in other major economic sectors.8 In addition to generating foreign currency, tourism creates employment for skilled, semi-skilled and unskilled human capital in the host economy as the case of Mauritius (see below) demonstrates. The ability to create employment is crucial for the economies o f southern African and western Indian Ocean Rim that are currently confronted by high levels of unemployment. O f particular importance is the impact o f tourism on rural areas where unemployment levels are consistently high. There, tourism has the potential to help promote balanced and sustainable development. The tourism industry accommodates a thriving and dynamic informal sector which ranges from craft and fruit to beach chair vendors. It also provides business opportunities in a wide number of associated activities, including accommodation, laundry and transport services, craft and curio production, entertainment, tour services ‘on foot and m otorized,’ car washing, repair and maintenance services, the teaching o f local languages and customs and local cuisine. Other potential linkages are agriculture, (including game farming), and manufacturing.9 Tourism also creates, through overseas visitors (over 4 million annually to South Africa alone) a taste for local products, like music, food and beverages, wine, beer, clothing and crafts, that can lead to the formation o f permanent overseas markets for such goods. However, tourism also has social, environmental and financial costs. Before southern Africa, and the IOR in general, can enjoy high returns from tourism, it is important to first inject substantial investment into regional tourism infrastructural development, including its human capital resources.

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A p a r t h e id a n d T o u r is m in S o u t h e r n A f r i c a : T h e H is t o r ic a l D e v e l o p m e n t o f T o u r is m in S o u t h A f r ic a Hitherto, tourism in southern Africa has been considered in terms o f two distinct geographic spheres, continental southern Africa, comprising South Africa and its neighbours, and the western Indian Ocean islands. Tourism in continental southern Africa has been little studied - a reflection o f the fact that it was both o f minor importance to tourism internationally and has played a relatively small role in the regional economy. The exception is South Africa, which from 1960-90 developed a considerable tourist industry. Thus, whereas its average annual growth o f GDP declined from 5.5 per cent in the period 1960-74 to one per cent in 1980-5, and the ability o f the formal sector to accommodate new entrants to the labour market declined from 75 per cent in the period 1965-70 to 12.5 per cent in 1985-9, foreign exchange earnings generated by tourism leapt from R l,220 million in 1987 to R2,759 million in 1991, and the number of overseas visitors from 339,307 to 521,257. Over the same period tourism created an annual average o f approximately 6,000 direct and 12,000 indirect jobs.10 In the early 1970s, tensions resulting from apartheid policies reached their climax, adversely affecting tourism. Within South Africa there was growing antagonism between the black, coloured and Indian communities on the one hand and whites on the other, whilst armed conflict involving South African troops destabilized the entire sub-continent, with particularly disastrous intervention in Angola and Mozambique. Externally, international pressure to dismantle apartheid increased, resulting in the imposition of economic sanctions. At the same time, tourism internationally was adversely affected by the 1980s recession and the Gulf War. Thus in 1991-2, although tourism was the fourth most important sector o f the South African economy after manufacturing, gold and mining, the number o f visitors to the country dwindled and the growth rate o f the tourist industry slowed to 4.5 per cent.1 The negotiated end to apartheid and the establishment of a new democratic order in South Africa caused political tension within the country and on the sub-continent to ease dramatically. As a result, tourist flows to South Africa started to pick up, the 1993 figure o f 608,651 overseas visitors to South Africa representing a 17.5 per cent increase on the previous year. Increased tourism has directly benefited the air and car transport industries. Between 1993 and 1995, the number o f international airlines serving South Africa rose from 19 to 50 to cater for increased passenger numbers passenger traffic on traditional South African Airways routes grew from 15 to 30 per cent. Over the same period, demand for car rentals has increased substantially. For instance, a comparison o f the first quarter o f 1995 with that o f 1994 shows that Avis experienced a 35 per cent increase in rental

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days.12 Avis has not only grown within South Africa, but within the entire region, establishing a standardized product throughout southern Africa. Currently, Avis has substantial branch operations in the following countries: Angola, Botswana, Lesotho, Madagascar, Mozambique, Namibia, Zambia and Zimbabwe. This form o f diffuse expansion has enabled Avis to develop an integrated standardized and a highly efficient product to the tourists and business travellers to the region as opposed to a single country. Thus, although in 1994-5 tourism was responsible for approximately 2 per cent o f South African GNP, it was well below the world country average o f 6.1 per cent.13 The tourism industry is likely to be o f increasing importance given the comparative lack o f growth in the South African economy as a whole. Currently, it is one o f the few buoyant sectors, is relatively labour intensive, has a strong multiplier effect and is potentially a major foreign exchange earner.

T o u r is m a n d t h e P o s t -A p a r t h e id O r d e r : W hat are the B o ttlen eck s? The post-apartheid era has witnessed a growth spurt in the tourism industry. The number o f South Africa’s foreign visitors rose from 3.09 million in 1993 to 4.94 million in 1996. O f these, the number o f ‘high spenders’ grew from 618,508 in 1993 to 1.172 million in 1996,14 leading to increased foreign exchange earnings and the creation o f more jobs - notably in car rental services, hotels, restaurants and conference centers. The ability o f tourism to earn foreign currency is o f particular importance given that gold, hitherto the main source o f foreign exchange, is facing a troubled future. However, the growth o f tourism can be guaranteed only if bottlenecks emanating from the nature o f the industry, and the influence o f the Apartheid years, are dealt with promptly and effectively. Demands for a more open and equitable society in post-apartheid South Africa have major repercussions for the tourist industry. The first o f these is the call for an ecologically balanced tourist policy. Tourism in South Africa is based on access to and the use o f natural resources, the main threats to which are soil erosion, dumping, deforestation, and spoliation caused by population pressure in the form o f urbanization and uncontrolled tourism. As Esterhuysen notes, ‘The natural environment which is already under severe threat from many angles, is sensitive to unplanned and uncontrolled exploitation for tourism purposes.’15 A notable example is the Cape Peninsula, currently enjoying a major developmental boom, which possesses more plant species than Western Europe and the United States o f America

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together. O f equal importance are the region’s cultural and historical assets, such as the Victoria Falls, the Great Zimbabwe monuments, the so-called ‘bushm en’ paintings, and Cape Dutch homesteads. The sound management o f these cultural and historical resources will assist not only in diverting tourist traffic from ecologically sensitive sites, notably the national parks, but, through diversifying the tourist product, also help to create jobs and ensure the sustainability o f the industry. It is thus crucial to devise, adopt and maintain responsible and balanced tourist management policies which, in turn, depend on government legislation that ensures efficient and environmentally friendly use o f the region’s natural resources. Second, private tourist enterprises will be under pressure to be subject to the same general guidelines as public enterprises. For instance, game ranching - one o f the most profitable tourist activities in southern Africa will be obliged to take into account the political, social and economic interests o f the community. Failure to do so would create areas o f tension that would, in the long-run, lead to social instability and prove inimical to the growth o f the tourism industry. Therefore, stakeholders in tourism should be prepared to work with their governments, establishing a cordial relationship between the private and public sectors. This may require private stakeholders to consider ethical, community, as well as purely ‘economic’ interests when making investment decisions. Similarly, the issue of safeguarding the environment could be handled by legislation covering both public and private tourist concerns. Licensing could control over-crowding by restricting the number of visitors to, or operators in, safari parks and other sensitive areas, while a complete ban could be imposed on private vehicles in national parks whenever necessary. However, some regional watchdog would need to be appointed to ensure that such legislation was implemented and that cases o f corruption were reported and duly punished. On the same note, the region is confronted by an immense problem o f landlessness, especially in South Africa and Zimbabwe. For instance in South Africa, the majority of the population live on just 14 per cent o f its territory, leading there to serious overcrowding and soil erosion. Moreover, o f the 24 million people who live in the rural areas, 17 million use fuelwood for cooking and heating - thus contributing to deforestation. Third, the tourist industry in southern Africa needs to be geared to meet some o f southern Africa’s political and social needs. Relatively labour intensive, tourism employs large numbers o f semi-skilled and unskilled workers. The growth o f tourism would therefore assist considerably in reducing high unemployment levels, estimated at between 30 and 40 per cent for South Africa and 40 per cent for Zimbabwe. As most tourist attractions in southern Africa are located in the rural areas, where under­ development and poverty is highest, well-managed tourist development

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could act as an agent for rural development. However, there is also a danger that up-market tourists may form a luxury enclave in an impoverished local community, thus provoking tension with the latter. Should this antagonism take the form o f overtly hostile action, it would adversely affect the tourist trade. This could be averted by community participation as shareholders in aspects o f the tourist industry. Indeed, government may well promote local community involvement in the shaping and managing of tourist amenities, and divert some o f the profits from local tourism into community development. In Zimbabwe, for example, local communities have been encouraged to establish curio shops and catering facilities near tourist resorts, and are given first preference when tourist employment opportunities arise.16 At the same time, the local community could itself be encouraged to take holidays locally in resorts designed for lower income groups. Off-season discounts on travel and accommodation could be offered to encourage this. Responsible tourism is not a luxury for the southern African-western Indian Ocean region, it is an absolute necessity if the region is to build a successful and sustainable tourism industry. This applies particularly to South Africa, where race has played such a significant role in the history o f the country and where tourism is widely viewed as an activity exclusive to Whites. Responsible tourism entails involving local communities in: 1. A tourism infrastructure which includes small guest houses or bed and breakfast establishments; taverns, shebeens, bars and restaurants; transport (e.g. taxi services); entertainment - music, dance, theatre, story telling, hair salons, beauty parlours and craft shops. 2. The provision o f services, including travel agencies, tour operator services, tour guides, marketing services, and tourism training. 3. Supply side facilities, including laundry services, craft production and sales (pottery, wood, etc.), interior decor, construction o f indigenous structures (e.g. traditional African thatched cottages), and specialist tourism products such as traditional hunting and traditional medicine and herbs.17 All this points to the need for regulation, notably by government, as do environmental safeguards. As the regions’ tourism is based on environment, it is crucial to ensure a sound environmental management, which implies commitment from government, as well as the approval o f local communities that reside near these resources. The government is also called on to secure health and security in tourism. Tourism is associated with transmission of deadly diseases such as Aids, the social cost of which could, if it runs out of control outweigh the benefits of tourism. At the same time, government

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involvement is essential in issues of security, not just the risk o f theft from tourists - particularly acute in South Africa - but also the use o f the tourist industry to traffic in arms, drugs, or laundered money.18

R e g io n a l C o - o p e r a t io n a n d T o u r is m

The creation o f the IOR offers considerable potential to the development of tourism in the southern African-lndian Ocean area, both in terms of intraregional and international traffic. 1. INTRA-REGIONAL TOURISM

As indicated above, international tourism in southern Africa has traditionally been divided into two geographical areas, continental southern Africa and the western Indian Ocean islands. Most tourist revenue in the region is generated by international visitors. Nevertheless, there is considerable intraregional tourism, comprising both short- and medium-hauls. For example, South Africa is the major medium-haul market for Mauritius: 42,300 South African tourists (11 per cent o f the total) visited the island in 1992, while Réunion is its major short-haul tourist market (23 per cent of the total), followed by Madagascar, the Seychelles and Zimbabwe.19 Indeed, some countries derive most o f their tourists within the region, notably from South Africa. For instance, South African holiday makers comprised 50 per cent of total international tourists to Zimbabwe which, until recently, was their major holiday destination: 465,000 South Africans visited Zimbabwe in 1995 compared to 150,000 in 1985 (January to July figures). This is a reflection o f the comparatively wealthy status o f South Africa, and an indication that economic development in the sub-region, through increased regional economic co-operation and higher living standards, could promote the growth o f intra-regional tourism. Through a development programme focused on institutional strengthening, common policies could be adopted to ensure that investment is both equitably distributed and, where it comes from external sources, subjected to common investment guidelines so as to avoid ‘exploitation’ o f the local economy and a reinforcement of structural anomalies and inequalities.20 2. INTERNATIONAL TOURISM AND SOUTHERN AFRICA

The inauguration o f the IOR and onset o f regional co-operation in the Indian Ocean region offers great potential for the development o f the southern African-lndian Ocean islands area as a major international tourist market. There exist, in effect, two markets, that of the coast and that o f the

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hinterland. The coasts o f southern Africa and the islands offer basic tourist attractions o f sunshine, unpolluted beaches, and sea. Although the tourist potential o f much o f the region’s coastline remains unrealized at present, Mauritius provides a case study o f how other coastal areas in the region might develop. Before 1982 the Mauritian economy was stagnant, dependent upon a monoculture, sugar, and characterized by high inflation and declining investment. Within a decade it had diversified to include manufacturing (sugar processing, textiles and electronics) and tourism, currently the third largest sector. As such, tourism is a major generator o f foreign exchange and an important source o f employment. The number o f foreign tourists Mauritius attracted increased from 36,000 in 1971 to 115,000 in 1980, and by 1992 had grown to 374,000 (in 1993 visitors generated a total o f 4.6 million tourist-nights - with an average stay o f 12.3 nights). Gross tourist revenue grew from an estimated 4.7 to 6 billion rupees between 1992 and 1994. The number o f jobs generated directly by tourist establishments engaging more than 10 staff grew from 11,700 in 1993 to 13,700 in 1994, 66 per cent being employed in hotels, 9 per cent in restaurants and 25 per cent in other tourist and travel establishments.21 As is the case in South Africa, most tourists to Mauritius (50 per cent) originate in Europe (Britain contributes 85 per cent, France 23 per cent, and Germany 10 per cent).22 This indicates an up-market tourist product which could, if emulated in other countries, provide an invaluable economic boost. This is particularly the case in Madagascar and Mozambique, currently among the poorest ten nations in the world and which have unique tourist products o f their own: over 80 per cent o f M adagascar’s flora and fauna are unique, while M ozambique possesses areas such as the Ilha da Mozambique, declared a UNESCO World Heritage Site in 1992. Although in some respects continental southern Africa is in competition with the islands (endowed with ample sun, beach, and sea), it possesses a relatively advanced natural resource base, transport and communications infrastructure and tourist catering facilities. Moreover, it enjoys a compara­ tive advantage in that, unlike Mauritius, its tourist products are still relatively cheap to maintain. In addition, its hinterland possesses flora and fauna not found on the islands. O f notable importance to tourism in southern Africa is its wildlife. For instance, wildlife ranching is one o f the fastest growing new uses o f commercial farming land in Zimbabwe. Indeed, wildlife farming there is more productive than either mixed or cattle farming: it has been estimated that the average return on investment per hectare in wildlife farming in Zimbabwe is over twice as great as for mixed farms and or for cattle ranches. Studies indicate that it could thus be more productive and efficient

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to convert land hitherto used for production o f crops to tourist-related purposes.23 Southern A frica’s share o f tourist arrivals in Africa increased from 14 per cent to 30 per cent between 1990 and 1995, and its share o f tourism receipts from 23 per cent to 28 per cent over the same period.24 Given both a relatively improved political environment, and secondly, expanded regional co-operation through the Southern African Development Co-operation (SADC) and the IOR, southern Africa is capable o f attracting many more tourists. There are signs that this is already occurring, as in addition to traditional tourist networks, the tourist industry globally develops new longhaul markets, characterized by a diversification into the Far East and the development o f tourist links from East Asia to southern Africa. Increased co-operation in the IOR will be conducive to an already expanding intraIOR tourist traffic. For example, from 1993-4, according to the South African Tourism Board (SATOUR) there was a 105 per cent increase in the number o f inbound passengers from Asia. The increase was greatest from Hong Kong (159 per cent), followed by Singapore (37 per cent) and Japan 30 per cent).25 At the same time, there exist traditional ties between southern Africa on the one hand, and Australasia and South Asia on the other. Most white emigrants from southern Africa relocated to New Zealand and Australia but have maintained family and other links with the region which they continue to visit. In addition, South Africa has a considerable and economically buoyant Indian community which has established social and business links with South Asia. There is therefore a growing tourist industry between southern Africa and other members o f the Indian Ocean Rim region. Both Mauritius and South Africa are relatively well established international tourist markets. The potential to expand tourism to other areas o f the region exists, but its success depends on responsible environmental management, effective marketing, product development, cheap but good quality services and tourist products, and institutional support. Greater regional co-operation, the promotion o f complementary tourist products, and the adoption o f an aggressive IOR marketing strategy could create, for the southern AfricanIndian Ocean region, a major niche o f its own in the international market. Two organizations have hitherto promoted regional tourism, SADC’s Tourism Co-ordination Unit (TCU) and the Southern Africa Regional Tourism Council (SARTOC). The objective o f the TCU, based in Lesotho and which covered Angola, Botswana, Zambia, Zimbabwe, Lesotho, Swaziland, Tanzania, Malawi, and Mozambique, was to synchronize product development and marketing strategies. SARTOC, comprising South Africa, Lesotho, Malawi and Swaziland, had similar, if more, limited aims. Following South Africa’s membership o f SADC, SARTOC and TCU in

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May 1995 merged to form an umbrella organization called the Regional Tourism Organisation o f Southern Africa (RETOSA), the aims o f which include regional tourist development and promotion, the formulation o f tourist policy, and the encouragement of private sector participation in the industry.26

C o o p e r a t io n P r o g r a m m e Regional co-operation in tourism needs to focus on the development o f markets, tourist-related institutions, tourist products, human capital, and the formation o f a tourism database. An expensive long-haul destination, the southern African region needs to cater for up-market international tourists. As competition globally for such tourists is strong, the region will need to invest substantial sums in marketing which, given the weak economies o f most member states o f the region, implies pooling resources. At the same time, common institutional norms should be put in place. These might include an approved regional inspectorate to regulate a common hotel grading system, environment monitoring (for both coastal and hinterland areas), and a common fund to provide human and financial assistance to members, such as Mozambique, with capacity-building deficiencies. Similarly, a body that identifies and allocates appropriate resources to local authorities is required to provide basic tourist public facilities like electricity and water, a communications infrastructure and medical support. Ideally, investment policies would be synchronized at a regional southern Africa-western Indian Ocean level to accord with a regional master plan that embraces the notion o f sustainability. So as to avoid taxing local communities, care needs be taken to ensure that the full cost o f implementation and the maintenance o f such services will be met in the first instance by regional funds - although the medium to long-term aim would be that all such expenses be met by tourist generated revenues. User fees should be proportional to the services provided and charges be the same region-wide for identical products. It could be argued that in the case of Mozambique, whose economy was devastated largely as a result o f apartheid policies, and whose tourist sites are frequented mostly by South African visitors, South Africa should bear the brunt o f the establishment costs o f tourist utilities and services. However, rather than penalize the new post-apartheid government, the regional tourist organization should seek additional finance from bodies such as the European Community (EC) that are currently providing funds to assist the reorganization o f the TCU and SARTOC.

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A common policy on the use o f tourist revenues is required. Joint ventures within the region should be encouraged in order to retain profits for re-investment within the region. Such funds could be used locally in order to promote economic development projects in deprived communities. However, a proportion of tourist revenue should also be invested in environmental and conservation monitoring, and research. The human capital needs o f regional tourism are manifold. Skilled personnel are required as marketing and business managers, hotel and catering managers, environmentalists, wildlife experts, rangers and nature trail guides. Lesser skilled posts, both part and full-time include information desk assistants, drivers, ordinary administrative personnel and cleaners. Special attention needs to be paid to customer service at the points o f visitor entry and exit as these tend to make an enduring impression. It is important to enhance the tourism industry’s human capital resources, both higher and lesser skilled, through the establishment of a regional training institute that implements a cohesive regional training programme. The costs o f such an institute and the training programme could be met by the private sector who could also devise and implement the training programme. It is also o f major importance to enhance the region’s transport and com­ munications infrastructure. This implies heavy investment in roads, and road transport and traffic, civil aviation, ports and shipping, railways, postal services, telecommunications and meteorology.27 To facilitate travel, a user friendly road signpost programme, based on specific legislation devised in consultation with representatives o f tourist agencies and local, regional and national planning authorities, should be implemented to ensure the provision o f consistent and adequate information for travellers. The transport and communications structure in Mauritius and South Africa are well advanced. However, they need to be maintained and, where necessary, improved, while the transport and the communications networks of most other countries in the region require radical upgrading and extension. O f particular importance is war-devastated Mozambique, which will need more o f the type of assistance the Zimbabwean government has offered to reconstruct its infrastructure and clear its roads of land-mines. However, as a well developed transport and communication system is also basic to the development o f other sectors o f the economy, the costs of such programmes could be met partly from national development budgets and partly (notably road and signpost upkeep) from user levies charged in both public and private tourist areas. Development o f infrastructure will, in order to maintain efficiency, require data processing. In the first instance, this means outlay on data processing equipment such as computers and telephones. Subsequently, relevant data, including the monitoring o f tourist traffic, accommodation,

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airline and other bookings, will need to be collected and synchronized before being linked to marketing offices and a central reservation information office. Such an office should be responsible for the collection o f data important to the different sectors o f the tourism industry, so that planning and marketing development forecasts may be made. The success o f the regional tourism programme will depend firstly on the available tourist infrastructure including trained manpower, institutions and equipment. Savings could be made by concentrating certain aspects o f the industry, such as training, in already existing centres. However, to avoid a total concentration o f resources in one or two countries, namely South Africa and Mauritius, some institutions and resources need to be devolved to the poorer countries o f the region. In large part, their ability to generate resources will depend upon their ability to attract both foreign and domestic investment. This, in turn, depends on their ability to bolster investor confidence. In part, this is a function o f security as tourism is highly sensitive to political and social tension in both the country o f origin o f the tourist and the host country. Should any member country o f the regional grouping experience political or social tension that compromises the personal safety and security o f tourists and/or receives poor international media coverage, the bad publicity that ensues could endanger the industry. O f particular note is the current high crime rate in South Africa which shows no signs o f diminishing despite pledges by the government to curb it, and the bad publicity currently received by Zimbabwe which is in the throes o f an economic and political crisis. Secondly, regional co-operation through which trade and other barriers are reduced or removed would facilitate investment flows to poorer countries o f the region.

C o n c l u s io n This chapter indicates that tourism is a fast growing industry in the IOR and, if proper regional planning and co-operation is implemented, could prove to be a significant factor in promoting economic development in the southern Africa-western Indian Ocean region. The tourist industry is, at present, relatively unprotected, with a high degree o f local ownership and employment. However, as a major source o f foreign currency earnings increased state participation could help flagging national revenues through tax levies and profits from state-controlled tourist amenities. However, the success o f the industry will also depend on the support rendered by the community and it is important that local communities receive a direct financial benefit from the industry in order for them to act as custodians o f the environment. As most labour required is semi-skilled, a major

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contribution tourism could make to the local economy is through generating employment. It is critical that a standardized product be created through co­ operation between private and public concerns. This will provide the basis for a regional tourism development strategy, the establishment o f a cohesive regional tourist infrastructure based on a diversification o f the industry’s resource base, and will strengthen its competitiveness in the international market.

N

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

16 17

18 19 20

otes

Douglas Pearce, Tourist Development, Topics in Applied Geography (UK: Longman, 1981), p. 1. Pearce, Tourist Development, p. 1. Satour, A Survey o f South Africa's International Tourism Market (Pretoria: Satour, 1996), p. 1. Pearce, Tourist Development, p. 43. The World Bank Global Economic Prospects and the Developing Countries (W ashington DC: World Bank, 1995) p. 2. E. Heath, International Strategic Focus and Marketing Plan 1992/93194/95, Confidential Draft, (South Africa: 1989), p. 9. Satour, A Survey o f South A frica’s International Tourism Market. Heath, International Strategic Focus and Marketing Plan, p. 9. Heath, International Strategic Focus and Marketing Plan, p. 9. Heath, International Strategic Focus and Marketing Plan. Heath, International Strategic Focus and Marketing Plan, p. 9. Business Day (27 September, 1995). Heath, International Strategic Focus and Marketing Plan. Satour Annual Report 1996 (South Africa: Satour, 1997), p. 41. A. Esterhuysen, ‘The Role o f Selected Facilitators in the Promotion o f Tourist Opportunities and Activities,’ University o f Cape Town Research Report 19 (1989), pp. ii, 16. Esterhuysen, ‘The Role o f Selected Facilitators.’ White Paper Development and promotion o f tourism in South Africa, government o f South Africa, Department o f Environmental Affairs, (Pretoria: Government publication: 1996), p. 7. W hite Paper Development and promotion o f tourism in South Africa, p. 12. Esterhuysen, ‘The Role o f Selected Facilitators,’ pp. ii, 16. S.G. Britton, Tourism and Under-development in Fiji, Development Studies Centre, Monograph, No. 31 (Australia, 1983), p. 198.

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21

Central Statistical Office (CSO), Mauritian Ministry o f Economic Planning and Development, ‘Economic Indicators,’ Occasional Paper 190 (1994); International Travel and Tourism (1st semester, 1994). 22 CSO, ‘Economic Indicators,’ pp. 190, 198 and ibid. p. 184 (1994). 23 K.A. Hill, ‘Politicians, Farmers and Ecologists: Commercial Wildlife Ranching and the Politics of Land in Zimbabwe,’ Journal o f African and Asian Studies 29 (1994), p. 238. 24 Ibid. 25 Business Day (27 September, 1995); M.J. Mayer, ‘An Evaluation of South Africa’s participation in SADC,’ draft document, School of Economics and Business studies, University o f the Witwatersrand, 1995. 26 Quoted in Mayer, ‘An Evaluation o f South Africa’s participation in SADC,’ p. 41. 27 Mayer, ‘An Evaluation o f South Africa’s participation in SADC,’ p. 43.

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Chapter 7 T h e F e a s ib il it y o f I n c l u d in g t h e S o u t h e r n A f r ic a n C u s t o m s U n io n (S A C U ) a n d t h e S o u t h e r n A f r ic a n D e v e l o p m e n t C o m m u n it y (S A D C ) in t h e I n d ia n O c e a n R im A s s o c ia t io n f o r E c o n o m ic C o - o p e r a t io n 1 M

a r in a

J. M

ayer

In 1993 Pik Botha, then Minister of Foreign Affairs, identified the IOR as an area o f great mutual interest to South Africa and India. The concept was formalized in March 1995 when seven ‘core’ IOR countries (South Africa, India, Australia, Singapore, Mauritius, Oman and Kenya) agreed to initiate negotiations towards the formation o f an IOR association for economic development. Further discussions were held in Perth in June 1995 and later in Mauritius in August 1995. However, domestically, South Africa’s membership o f the IOR is hotly contested for two reasons: first, it has not been proven that the IOR will benefit South Africa economically; second, IOR membership would not cohere with South Africa’s foreign policy commitments to the southern African region and its institutions and to negotiations with the EU for an asymmetrical Free Trade Area. As South Africa’s regional commitments are seen as an integral part o f her national policy, any analysis o f the costs and benefits o f joining the IOR would have to factor in the southern African region. This paper examines the feasibility o f including the regional institutions o f southern Africa - SACU and SADC - in a proposed IOR trading block. It argues that given the South African commitment to southern Africa, and the potential benefits from economic co-operation with the IOR, the possibility o f including SACU and SADC in an IOR economic association is worthy o f consideration.

T h e G l o b a l E c o n o m ic O r d e r , R e g io n a l I n t e g r a t io n a n d G l o b a l iz a t io n Regional integration and co-operation is both circumscribed and propelled by the global economic order, embodied in the rules o f the new trade order under the auspices o f the WTO. The primary objective o f the new trade

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order is globalization, which entails universal tariff liberalization. The 1994 Marrakesh Agreement, which replaced the GATT with the WTO, established the framework for trade into the new century. O f the 117 signatories to the WTO, almost three quarters are developing countries. The World Bank (1995) has estimated that although developed nations are likely to be the major beneficiaries o f the new global economic order, the estimated gains for developing countries will be significant, albeit relatively small. However, the benefits accruing to developing countries would be spread unevenly: most analyses suggest that Asia will benefit the most, Latin America less and Africa will gain least.2 Moreover, it is here argued that the prevailing neo-liberal global economic environment, which is grounded in the neo-classical paradigm and upholds trade liberalization as its prime objective, will impact asymmetrically, enhancing growth in the first world (the North) and retarding development in the Third World (the South). It will foreclose many o f the development options followed by the industrialized countries o f Europe and North America and more recently the Newly Industrialized Countries (NICs) o f East Asia. Moreover, it has the potential to lock developing countries into a colonial era type o f production with the North. The major flaw o f the WTO trade order ‘is its inherent inability to deal effectively with the issue o f equity or the economic expression o f this principle: the distribution of income and wealth.’3 Such global inequity is illustrated by the fact that the agreement will benefit Africa, the poorest continent, the least, and exporters o f manufactures the most. Moreover, African exporters already receive more liberal access to their main market, the EU, than will be the norm after the new agreement is implemented.4 It is in this context that regionalism must be seen. The orthodox view is that regional trading blocks should act as a vehicle to globalization: by exposing countries to regional competition and allowing them to lower tariff barriers within a regional environment, which is less onerous than immediate exposure to world markets, regional trading blocks are an intermediate step to multilateral tariff liberalization. Such a view is premised on the assumption that the new global economic order is a given, is acceptable and is unlikely to be altered.5 By contrast, in assessing the potential for regional institutions such as SACU and SADC to join the IOR, this paper argues that the primary purpose o f regional institutions is to foster economic development in a hostile global environment, by pooling resources and pursuing the development o f the region collectively. Raghavan has argued that ‘the first requirement for changing the inequities o f the system, is to deny legitimacy for the neo-liberal laissez faire doctrine.’6 This is possible only if developing

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countries are sufficiently unified to counter the overwhelming political dominance o f North America and the European Union. Regional institutions, because they are premised on some level o f political cohesion among member countries, constitute a platform from which to challenge the global economic order. In sum, the examination o f the feasibility o f incorporating SACU and SADC member countries into the IOR and the benefits o f doing so is firmly grounded in the view that the rationale for regional institutions in the Third World is not to buttress the prevailing neo­ liberal global economic environment, but to challenge it.

W hy

IOR M e m b e r s h ip f o r SACU a n d SADC?

Australia, India and South Africa have been identified as the ‘core’ countries o f a potential IOR trading block.7 All are members of, and have commitments to, other established regional groupings. In the case o f South Africa, commitment to SACU and SADC will profoundly influence her decision to join the IOR. It is therefore advisable to examine the possibility o f South Africa entering the IOR as part o f a unified SACU and/or SADC grouping. South Africa’s transition to democracy in April 1994 led to a profound change in her trade and foreign policy. The view that ‘[S]outh A frica’s economic destiny is inextricably linked to that o f the southern African region and the way in which relations with the rest o f the region evolve in the years ahead will impact on the macro-economy o f a democratic South Africa in a number o f ways,’8 is widely held , particularly in South African government circles.9 Accordingly, the pursuit o f regional integration within the framework o f SADC and SACU has been accorded the highest priority by the Government o f National Unity. This is reflected by two events: first, the decision to re-negotiate SACU, an organization almost one hundred years old which comprises Botswana, Lesotho, Namibia, South Africa, and Swaziland. The re-negotiation o f the SACU treaty is rooted in a desire to alter traditional South African dominance o f other SACU countries, who perceive the Customs Union as a vehicle which benefits the South African economy to their detriment. Second, in August 1994 South Africa acceded to SADC whose major aim is to pursue sectoral co-operation through the gradual establishment o f a common market and hence the progressive elimination o f barriers to the free movement o f capital, labour, goods, and 10 services. South African commitment to the region is justified on two grounds: first, the economic benefits it derives from trade in the region and the potential to enhance such benefits. Conversely, should the region fail to

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develop, the South African economy will be adversely affected.11 Indeed, in the long term, SACU and SADC are expected to integrate and form one regional grouping. Second, South A frica’s historical attempts to destabilize the region and the latter’s support o f the liberation movement, have given rise to a strong ANC commitment to the region and its institutions.12 Regional integration is even viewed as integral to South Africa’s domestic policies, notably the RDP ‘Reconstruction and Development Programme’ (South Africa). Commitment to southern Africa therefore has the potential to inhibit both South Africa’s political will and her institutional capacity to enter the IOR. Unilateral South African accession to the IOR is likely to be perceived as a threat to the future of the region. It may also give rise to suspicions on the part o f other SADC countries that South Africa’s commitment to the region is mere lip-service and that her national interests take precedence over the interests of the region. Indeed, it has been argued that ‘any approach on the concept o f the Indian Ocean Rim that is premised on reducing the focus on southern Africa, or that does not take adequate account o f South Africa’s responsibility to the region, will fly in the face o f government policy.’13 Certainly a common external tariff prevents any o f the five SACU members from entering other trading blocks without unanimous SACU consent on trade related issues. Conversely, if South Africa joined the IOR ‘[I]n keeping with the thrust of the re-negotiations of the Customs Union ... it will be necessary to bring the BLNS states on board and assess very carefully the implications for this set o f arrangements.’14 There exist, in addition to South Africa’s SACU and SADC commitments, two further arguments for including the southern African region in the IOR. First, it will prevent the southern African region from being fragmented by a division o f countries between the IOR and the South Atlantic region. Second, ‘the IOR is a crucial step towards South-South co­ operation, a move away from economic domination o f the south by the north.’15 There are currently two wider regional initiatives, the IOR and ZPCAS, which will impact upon southern Africa. Membership determined on a geographical basis would divide SADC members into two groupings; Angola and Namibia belonging to the South Atlantic region; Lesotho, Mozambique, Swaziland and Tanzania to the IOR; and South Africa to both. Given their geographical location, it is unclear to which region Botswana and Zambia might belong. Such a division o f SADC countries could create political tensions and frustrate the process o f economic development in the region, as well as undermining its identity and weakening its political influence in the international arena. On the other hand, should southern African countries remain aloof from either grouping, they will forsake the potential economic and political benefits of membership. Moreover, countries that do not attempt to access the emerging regional economic

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associations could face the danger o f political and economic marginaliza­ tion.16 An obvious way to avoid the pitfalls inherent in splitting the southern African region between the two groupings without sacrificing the benefits o f doing so, is to join one or both as a regional entity, rather than as individual countries. The potential for South-South co-operation is an attractive dimension of the IOR, particularly as it is the only emerging formal framework for such co-operation. Economic co-operation between a unified southern African region and the IOR could set a precedent for the creation o f economic relations between various regional groupings in the developing world. Moreover, as alluded to earlier, the neo-liberal global economic order can only be challenged if there is a higher level o f political unity among developing countries. The IOR has the potential to achieve such unity. In sum, it has been argued that there are three compelling reasons for evaluating southern African membership o f the IOR: first, the inclusion o f SACU and SADC will cohere with the South African government’s foreign policy objectives and prevent this initiative from playing a divisive role in the region. Second, it has the potential to yield economic benefits for all countries in the region. Third, the IOR is, to date, the only formal framework that has the potential to enhance South-South co-operation. However, in order to assess the feasibility o f incorporating SACU and SADC member countries into the IOR, it is necessary first to outline the nature o f these institutions.

T h e S o u t h e r n A f r ic a n C u s t o m s U n io n (S A C U ) The origins o f SACU (comprising Botswana, Lesotho, Namibia, South Africa and Swaziland - all of whom also belong to SADC) lie in South African-BLNS co-operation. In 1891 Basutoland (then under British rule) was included in a customs union which had been formed in 1889 between the Cape Colony and the Orange Free State. The customs union facilitated a common external tariff and free trade internally, but Basutoland received no additional customs revenue from this union. In 1893 Bechuanaland joined. From 1894-1904, when Swaziland was administered by the Transvaal, it was incorporated into a customs area which, since 1889 had united the Transvaal and the Orange Free State (they formed a free trade area); and which in 1898 incorporated Natal. The Anglo-Boer war o f 1899-1902 disrupted trade, but in 1903, British administered Southern Rhodesia, the Cape, Natal, Transvaal and Orange Free State re-established a customs union that also incorporated Basutoland and Bechuanaland. Swaziland entered as a separate entity in 1904. The Union of South Africa in 1910

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necessitated the negotiation that year o f a new customs treaty between South Africa (The Cape, Transvaal, Natal and Orange Free State) and the High Commission Territories (Basutoland, Bechuanaland and Swaziland) which were represented by Britain.17 SACU members have a common external tariff. Excepting Botswana, they also belong to the Common Monetary Area (CMA), but as Botswana’s currency is convertible, there are virtually free flows o f currency within the SACU area. Because o f this, it has been argued that SACU is the only existing grouping which fulfils the criteria for economic integration: together with the Common Monetary Area it provides the southern cone of the region with a degree o f integration which in some respects is deeper than that found in the European Community today.18 Nevertheless, SACU faces considerable difficulties. The current re­ negotiation o f the treaty is due to a belief by Botswana, Lesotho, Namibia and Swaziland that they are not adequately compensated via SACU’s revenue-sharing formula for losses incurred by increased prices due to South A frica’s tariff protection o f its own industries, loss o f fiscal discretion, and the concentration o f industrial development in South Africa to the detriment o f the BLNS countries. Moreover, South Africa has historically acted unilaterally in making decisions that affect the customs union area.19 On the other hand, the former South African government’s view that excessive BLNS claims on SACU revenue (the residual o f the common revenue pool) meant that its own share had been on a secular decline, appeared confirmed by the Margo Commission which concluded that ‘continued membership [of SACU] on the present basis holds little or no economic advantage for South Africa.’20 The core o f the dispute is the revenue-sharing formula. This evolved in three distinct phases: in 1910 SACU decided to give member countries a fixed proportion o f the common revenue pool irrespective o f their share o f total imports. The 1969 SACU treaty, negotiated after the independence of the BLNS countries, introduced an ‘enhancement’ factor designed to compensate the latter for any deleterious impact SACU might have on their economies. Finally in 1976 a ‘stabilization’ factor was introduced in order to keep fluctuations in SACU revenue from BLNS countries within the range o f 17-23 per cent o f the value o f the imports and excisable production o f the BLNS countries.21 A further source o f dissension is the secret memorandum o f the 1969 treaty requiring that prior to any consideration o f tariff protection, 60 per cent o f the quantitative requirements o f all SACU countries must be satisfied and a high quality o f goods maintained. Moreover, tariff relief for inputs will not be granted, unless there are no suitable substitutes for the good in the customs union area. BLNS countries are thus effectively prevented from setting up industries which may pose a

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competitive threat to South Africa. Furthermore, the secret memorandum is not applicable to South Africa, which means that the latter can increase tariff protection for its own industries without meeting the quantity, quality or availability requirements to which the BLNS countries are subject. The renegotiation o f the SACU treaty will address not only the revenuesharing formula and the abolition o f the secret memorandum, but also mechanisms through which to foster economic development in the SACU region and implement democratic decision-making processes with respect to issues that affect the entire region. Evidence o f South Africa’s commitment to the development o f the SACU region is the leading role she is playing in establishing a research programme to study regional industrial location in the region. Although SACU comprises only five o f the eleven member countries which form the southern African region, its significance lies in the fact that it is seen as a platform from which to build economic integration in the entire southern African Region Indeed, it has been argued that: The main features o f a multi-speed approach to greater integration in Southern Africa are that the SACU and CMA together could be deepened into a common market, that there should be an ultimate merger in an economic integration scheme between that common market and the non-SACU countries o f Southern Africa, and that Southern Africa should be treated as a distinct, coherent region on its 22 own. SACU thus has the potential to act as a catalyst for the economic integration o f non-SACU members o f SADC. In the long term, it is desirable that 2^ SACU and SADC merge at the same level o f integration. ~ The tone o f the current SACU re-negotiation stressing democracy and extensive consultation with respect to common issues serves to reinforce the difficulties South Africa would face in joining the IOR unilaterally. In addition, the existence o f a common external tariff means that SACU consensus would have to be reached once IOR members start tariff negotiations; other SACU members would oppose any tariff reductions that would benefit only South Africa. Finally, SADC and SACU are expected in the long term to merge and form a single entity. It is therefore difficult to envisage South Africa entering the IOR without SACU.

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T h e S o u t h e r n A f r ic a n D e v e l o p m e n t C o m m u n it y (S A D C ) SADC grew out o f the Southern African Development Co-ordination Conference (SADCC), founded in 1980 by countries neighbouring South Africa with the aim o f decreasing their economic dependence on the apartheid state. During its 12-year existence SADCC played an important role in five areas:24 1. 2. 3. 4. 5.

Forging a regional identity for southern Africa; Establishing SADCC solidarity in the face o f apartheid South Africa; Focusing international attention on southern Africa; Attracting financial and other aid from overseas donors; and Promoting the view that closer economic co-operation was not only desirable but imperative for economic growth and development in southern Africa.

However, SADCC, which relied entirely on project and sector co-ordination to promote regional co-operation, lacked a strategy and institutional framework for dealing with the macro-economic aspects o f integration. In response to these limitations, member countries decided to transform SADCC into SADC. Established in August 1992, SADC comprised the 9 original SADCC members (Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, Swaziland, Tanzania, Zambia and Zimbabwe). South Africa joined in 1994 and Mauritius in 1995. SADC expanded SADCC’s role in three main areas: 1.

2. 3.

The progressive elimination o f barriers to the free movement o f capital, labour, goods and services with the long term aim o f establishing a common market; The creation o f institutions to promote regional integration; and The promotion of good government, human rights and democratic practice.

There exist two basic models for regionalism. The first, sectoral co­ operation, entails co-operation in specific economic sectors such as agriculture, transport and natural resources; the second, trade integration, involves a gradual integration in trade and investment, as well as the movement o f capital and human resources and the harmonization o f national economic policies across the region. Although the two models are distinct, success in one area tends to reinforce success in the other. For example, co­ operation in areas such as the development o f transport and communications infrastructure in the region enhances the ability o f member countries to trade

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with each other.25 SADC members are currently negotiating a trade protocol for a preferential trade area as a first step towards the establishment o f a common market. At the same time SADC aims to foster economic development in the region. It is thus implementing integration and co­ operation simultaneously. Institutionally, SADC comprises a secretariat and sector co-ordinating units. The secretariat, located in Botswana and financed by subscriptions from member countries, is responsible for overall co-ordination of regional co-operation. However, SADC members share responsibility for the co­ ordination o f sectoral activities and associated costs.26 The sector ‘Food, Agriculture and Natural Resources’ is divided into six divisions: 1. Agricultural Research and Training; 2. Food Security; 3. Forestries, Fisheries and Wildlife; 4. Livestock Production and Animal Disease Control; 5. Environment and Land Management; and 6. Marine Fisheries. Two new sectors, ‘Finance and Investment’ and ‘Labour’ are not yet operational, while the possibility o f creating ‘Health’ and ‘W ater’ sectors is under discussion. Commissions, financed by subscriptions from member countries, have been established to augment the role of the co-ordinating country in three sectors: 1. 2.

3.

The Southern African Transport and Communications Commission (SATCC) - for ‘Transport and Communications’; The Southern African Centre for the Co-ordination o f Agricultural Research (SACCAR) and to a lesser extent, the Regional Early Warning System (REWS) - for ‘Food, Agriculture and Natural Resources’; and The Regional Tourism Organization o f Southern Africa (R E T O S A )for ‘Tourism.’

Sectoral co-operation has benefited all SADC members: it has decreased duplication of functions at a national level, enhanced efforts to deal with common issues such as human, animal and plant diseases, facilitated the sharing o f the region’s natural resources, promoted the exchange of information, knowledge and experience, enhanced the region’s infra­ structure, increased regional bargaining power at international meetings, and attracted donor funding.27 However, three factors impede the process o f regional integration: first, sector co-ordinating units lack the financial resources and administrative capacity to effectively implement sectoral co-operation. In the sectors where commissions have been established, the failure o f member countries to pay subscriptions on schedule has hindered their effective functioning. Further, SADC and many o f its projects are funded by donors who effectively

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determine the SADC agenda. Moreover, funding now appears to be drying up, which will decrease donor-dependence, but will also render SADC’s activities vulnerable. Thirdly, like all regional groupings, SADC is subject to tension between national and regional interests - a tension exacerbated by the huge disparity in levels o f economic development within the region. An example is proffered by the history o f the Cross Border Initiative (CBI) to encourage regional co-operation in eastern and southern Africa. The EU and World Bank offer an incentive o f US$50 million to encourage CBI members to reduce tariffs, enticing some poorer SADC members to join the CBI; in return for EU/World Bank finance, they support a programme o f tariff reduction counter to that of SADC and which has contributed to de­ industrialization amongst CBI members.28

T a b l e 25. SADC S e c t o r s

Sector Trade and Industry Food, Agriculture and Natural re­ sources Energy Transport and Communications Human Resource Development Mining Tourism Culture and Information Finance and Investment Labour

Co-ordinating Country Tanzania Zimbabwe Angola Mozambique Swaziland Zambia Lesotho Mozambique South Africa Zambia

Such obstacles are surmountable. Leistner29 considers that SADC is primarily concerned with sectoral co-operation, and Maasdorp30 holds both that the existence o f SACU and COMESA render SADC’s trade protocol superfluous and that the purpose o f regionalism is to promote globalization. By contrast, this paper argues that SADC’s main purpose is to foster genuine economic growth in southern Africa. Thus the South African Department o f Trade and Industry considers trade integration a mechanism to promote regional industrial development. It intends to research existing and potential industrial capabilities and opportunities, as well as comparative advantages o f SADC countries, in order to produce a blueprint for a gradual trade liberalization based on the principles o f variable

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geometry/multi-speed via a system o f preferential access arrangements. Sourcing on favourable terms from within the region should also become increasingly possible. South Africa will become increasingly dependent on resources, like energy and water, from within the region and to secure them will invest in SADC countries. The co-operative development o f regional resources will be in South Africa’s interest and greatly enhance the region’s ability to attract both local and foreign investment.31 The South African government’s main trade concerns are the re­ negotiation o f SACU, pursuit o f trade and sectoral co-operation with SADC, and an agreement with the EU to establish an asymmetrical free trade area. Leistner has argued that regional priorities should not impair South Africa’s economic standing in the world market32 while ‘[T]he business sector feels that southern Africa is too small a regional market for South Africa and that the country should maintain sufficient flexibility to be able to interact with countries beyond the borders o f SADC.’33 However, government priorities diminish South African interest in, and capacity to help develop, the IOR for Pretoria currently looks to the EU rather than to the IOR, whilst South African business lacks a sufficiently long-term and unified position with respect to the IOR to act as an effective lobby. The sole way to marry the two sets o f priorities (southern Africa and world standing) with the IOR is to push for the exploration o f South-South co-operation - including membership o f the IOR - as part o f SADC. For other key players in the IOR, notably Australia and India, the willingness to consider SADC membership o f the IOR would be contingent upon the importance o f South Africa in the IOR and the institutional and political implications o f including member countries some o f which might be ineligible for membership because o f their geographical location, and which would also negotiate collectively. At the same time, the benefits o f IOR membership must be clearly demonstrated to other SADC countries. Although a comprehensive study o f the costs and benefits arising out o f IOR membership is required, at a first approximation, the proposition o f joining the IOR as a unit is attractive for five reasons. The IOR could: 1. 2.

3.

Counter South Africa’s overwhelming economic dominance in southern Africa; Open up more diverse markets for trade (and thus alter a pattern o f regional trade characterized by significant flows from South Africa to other SADC countries, but insignificant flows both in the contrary direction and between other SADC members;34 Hold the potential (as an institutional framework within which to forge South-South co-operation) to decrease SADC dependence on the North and, as a body, effectively challenging the existing neo-liberal global

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4. 5.

economic order o f the WTO which otherwise could lead to the economic marginalization o f southern Africa;35 Attract capital flows from other IOR countries to southern Africa; and Through sectoral co-operation across the IOR enable SADC to benefit from the technical expertise and experience of other IOR countries.

Certainly there are strong political and economic reasons for considering SADC membership o f the IOR; a failure to at least evaluate the costs and benefits o f so doing may result in the rejection o f the IOR by South Africa, the fragmentation o f the southern African region to the detriment o f sustained economic development, or its exclusion from emerging trading blocs. Such an evaluation would need firstly to take into account the institutional implications, for southern Africa has adopted a variable geometry approach in order to accommodate two organizations, SACU and SADC, that have each achieved different levels o f integration.

T h e I n s t i t u t i o n a l , P o l i t i c a l a n d E c o n o m ic D im e n s io n s o f I n c o r p o r a t i n g SACU a n d SADC i n t o t h e IOR It is here proposed that South Africa should seek membership o f the IOR as part o f a southern African grouping pursuing integration on the basis of variable geometry (SACU and SADC) that would co-operate collectively with regard to the IOR. This arrangement has the potential to strengthen and provide a new model for South-South co-operation, without compromising the identity and objectives o f the southern African region. Whether it is feasible to incorporate SACU and SADC into the IOR depends on whether the institutional, political, and economic implications o f doing so are positive for the three regional entities concerned. The first issue is how to incorporate into a wider IOR both SACU and SADC, given the inter-relationship between the latter (overlapping membership and the long-term objective o f merging). SACU has attained a significant level o f trade integration which is buttressed by the CMA. By contrast, SADC has achieved considerable sectoral co-operation but has yet to implement measures to enhance regional harmonization o f monetary and fiscal policies, and investment. It would be easier to incorporate SADC into the IOR than to maintain different arrangements for SACU and SADC. However, while SACU member countries are in a position to achieve consensus about tariff reduction vis-à-vis the IOR, the balance o f the SADC member countries are not. The problem is exacerbated by the fact that within SADC tariff reductions are not uniform but differ for each country in terms o f the concept o f variable geometry; also all SADC countries - except

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Botswana and South Africa - are members of COMESA, and six o f them participate in the CBI. While these issues introduce complexities into the proposed arrangement, they are not insurmountable. The different levels o f SACU and SADC integration suggest two options: either SACU alone, or both institutions, enter the IOR - with the proviso in the latter case that the six SADC members not party to the Customs Union join on different terms. It is possible to negotiate an agreement with the IOR which coheres with the terms o f the draft trade protocol o f SADC - excepting that whereas the five SACU members o f SADC could negotiate uniform tariff reductions with the IOR, members o f the latter might be granted preferential access to the markets o f the six non-SACU members o f SADC. Thus there exist three alternative southern African-IOR arrangements: 1. 2. 3.

SACU alone joins the IOR; SACU and the six non-SACU members of SADC join the IOR as distinct entities; and SADC alone joins the IOR.

It has been argued that if South Africa were to join the IOR, it would be untenable to exclude SACU because o f the existence o f a common external tariff. The first alternative therefore appears to be a sine qua non for South African membership o f the IOR. Furthermore, SACU has the institutional framework for all member countries to adopt a common position vis-à-vis the IOR. If SACU were to join an IOR that already includes Mozambique and Tanzania - who qualify for membership because they are littoral to the Indian Ocean - four SADC countries would still be excluded. This has the potential to harm regional cohesion and objectives. Again, if only either SACU or SADC were to enter the IOR, it would create political tension between the two southern African institutions, hindering co-operation between the two and raising obstacles to their envisaged merger. The sole solution is to incorporate into the IOR both SACU and S A D C on a two-tier basis that recognizes the different levels o f integration attained by the latter. SACU members, given their common external tariff, would jointly decide on tariff reduction issues - without compromising SADC’s trade protocol. In their turn, non-SACU members of SADC would - in consultation with SACU - decide on tariff reductions that cohere with their trade protocol. If sectoral co-operation is an aspect o f the IOR, it could be dealt with through the institutional framework established within SADC for this purpose. There are two political implications o f such an arrangement: First, SADC as a regional grouping would enjoy a stronger negotiating position than individual IOR countries. While this might help neutralize

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Australian and Indian influence in the IOR, it could tip the balance the other way and lead to southern African issues dominating the IOR - a danger that could be averted by according regional institutions a voting power less than the sum o f voting powers that might be granted to SADC/SACU members individually, but more than that enjoyed by any individual IOR member. Second, SADC has traditionally had difficulty achieving political consensus among its members. Achieving consensus on the issue of IOR membership hinges on the ability to convince SADC countries o f the economic benefits o f joining. Clearly, if the relationship between the southern African region and the IOR proposed by this paper is to be explored, further research is required to establish whether any benefits would be forthcoming from such an arrangement, and the extent o f such benefits.

C o n c l u s io n This chapter argues that South Africa’s role in the IOR cannot be seen in isolation from her commitment to the southern African region. It therefore follows that at this stage o f negotiations towards the establishment o f the IOR, the possibility o f bringing the southern African region into the IOR as a unit should be explored. Such an option requires consideration for two reasons: first it would make South African membership o f the IOR more palatable to her government and to the southern African region; second, it would avert the risk o f regional fragmentation - and hence o f the frustration o f southern African developmental objectives - that might follow if southern African countries joined the IOR individually. Moreover, if the southern African region co-operates with other regional groupings as a unit, it can both access the benefits accruing from such an arrangement without jeopardizing its regional identity, and create a new model for South-South co-operation. Given the absence to date o f an empirical cost-benefit analysis, the central contention o f this chapter, that the possibility o f including SACU and SADC in the IOR should be considered, is at this stage conjectural; its purpose is to alert policy-makers to the potential o f such an arrangement and the need to conduct studies in order to ascertain its viability.

N otes 1

I am grateful for comments made by Gwyn Campbell and Mario Scerri on an earlier draft o f the chapter.

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2

3 4 5

6 7

8

9

10 11 12 13 14 15 16 17

18

C. Stevens, ‘The Gatt Round: What Does it Mean for Developing Countries?,’ paper presented at the Workshop on Reconstituting and Democratising the Southern African Customs Union, Gabarone, 6-8 March 1994. C. Raghavan, ‘The WTO and New Trade Order: Advantage for W hom ?’ Third World Economics 101 (1994), p. 15. Stevens, ‘The Gatt Round,’ World Bank, Global Economic Prospects and the Developing Countries (Washington DC: World Bank, 1995). World Bank , Global Economic Prospects; G. Maasdorp, ‘Models for Regional Co-operation in the Indian Ocean Region: Southern Africa,’ paper presented to the IFIOR, Perth, 12-13 June 1995. Raghavan, ‘The WTO and New Trade Order,’ p. 18. G. Campbell and M. Scerri, ‘The Prospects for an Indian Ocean Rim Economic Association,’ South African Journal o f International Affairs 2.2(1995). R. Davies, D. Keet and M. Nkuhlu, ‘Reconstructing economic relations within the Southern African region: Issues and options for a democratic South Africa,’ MERG Working Paper I (1993), p. 1. Department o f Trade and Industry (DTI), ‘A Vision for Economic Integration and Co-operation in Southern Africa,’ - prepared by Gavin Maasdorp - (Pretoria: DTI, March 1994); E. Leistner, ‘Prospects for Increasing Regional Co-operation: A South African Perspective,’ Africa Insight 25.1 (1995). African Development Bank, Economic Integration in Southern Africa (Abidjan: African Development Bank, 1993). Davies et al. ‘Reconstructing economic relations within the Southern African region.’ Leistner, ‘Prospects for Increasing Regional Co-operation.’ M. Nkuhlu, ‘The Concept o f the Indian Ocean Rim: A Strategic, Politi­ cal and Economic Analysis,’ - discussion paper, mimeo (1995), p. 4. Nkuhlu, ‘The Concept o f the Indian Ocean Rim ,’ p. 4. Campbell and Scerri, ‘Propects for an Indian Ocean Economic Association,’ p. 2. Campbell and Scerri, ‘Propects for an Indian Ocean Economic Association.’ A.J. Bruwer, Protection in South Africa (Stellenbosch, 1923); J. Stephen Ettinger, ‘The Economics o f the Customs Union between Botswana, Lesotho, Swaziland and Lesotho,’ PhD thesis (Ann Arbor: University o f Michigan, 1984). G. Maasdorp and A. Whiteside, ‘Rethinking Economic Co-operation in Southern Africa: Trade and Investment,’ Adenhauer Foundation Occa­ sional Paper (Johannesburg: Adenhauer Foundation, 1993), p. 31; see

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19 20

21 22

23

24

25 26 27

28 29 30 31 32 33 34 35

also idem, ‘Briefing Document,’ SADC Workshop (Helderfontein, 1-2 June 1995) mimeo. Marina Mayer and H. Zarenda, T h e Southern African Customs Union: A Review o f Costs and Benefits,’ DBSA Working Paper 19 (1994). Margo Commission, Report o f the Commission o f Enquiry into the Tax Structure o f the Republic o f South Africa (Pretoria: Government Printer, 1987), p. 362. Mayer and Zarenda, ‘The Southern African Customs Union.’ Maasdorp and Whiteside, ‘Rethinking Economic Co-operation in Southern Africa,’ p. 41; see also African Development Bank, Economic Integration in Southern Africa; Davies et al., ‘Reconstructing economic relations within the Southern African region.’ S. Kimaro, ‘Southern Africa - Emerging Prospects on Regional Co­ operation,’ - mimeo (1992); African Development Bank, Economic Integration in Southern Africa. African Development Bank, Economic Integration in Southern Africa; E. Leistner, ‘South Africa’s Options for Future Relations with Southern Africa and the European Community,’ SACOB Discussion Paper (Johannesburg: SACOB, 1992). Maasdorp, ‘Briefing Document.’ See Table 25. Marina Mayer, ‘An Evaluation o f South Africa’s Participation in SADC,’ - paper commissioned by the Republic of South Africa Departments o f Trade and Industry and Foreign Affairs, and by the D B S A -m im e o (1995). Mayer, ‘An Evaluation of South Africa’s Participation in SADC.’ Leistner, ‘Prospects for Increasing Regional Co-operation.’ Maasdorp, ‘Models for Regional Co-operation.’ Mayer, ‘An Evaluation o f South Africa’s Participation in SADC.’ Leistner, ‘Prospects for Increasing Regional Co-operation.’ Maasdorp, ‘Models for Regional Co-operation,’ p. 4. Maasdorp, ‘Briefing Document.’ Campbell and Scerri, ‘Prospects for an Indian Ocean Rim Economic Association.’

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C h apter 8 T h e C o m p e t it iv e n e s s o f t h e S o u t h e r n A f r ic a n C u s t o m s U n io n w it h in t h e C o n t e x t o f t h e I n d ia n O c e a n R i m 1 M

a r io

Sc e r r i

1. T h e S e t t in g The recent drive to enhance and formalize multilateral economic co­ operation among countries which lie on, or are linked to, the Indian Ocean Rim (IOR) raises an immediate concern regarding the effects o f trade liberalization on the various economies within this region. Though the initiative for increased economic co-operation among countries within the IOR is still relatively young, it is moving at a rapid pace. The countries concerned therefore have to evaluate their present location within this region as a basis for negotiations regarding their future role within an economic bloc whose formation is still in the initial stages. One o f the main foundations o f any future economic bloc is obviously trade. Negotiations in this area should be informed by an assessment o f relative strengths and weaknesses o f the various prospective members o f a future IOR bloc. This paper reports the findings o f a preliminary analysis o f the determinants o f the competitiveness o f the Southern African Customs Union (SACU) in manufactured commodities vis-à-vis trading partners within the IOR. The rationale for focusing on SACU is the imperative on South Africa, due to the long historical commitment to SACU, against entering into any agreements with potential blocs such as the IOR in isolation from other SACU members. While the trade statistics that are used in this analysis pertain to SACU as a whole, the fact that they reflect trade in manufactured commodities implies that the country which is largely represented in this analysis is, by virtue o f its relative industrial structure and export mix, South Africa.2 As can be seen from Table 26, the relative importance of SACU’s trade with countries that are eligible for inclusion in a future IOR trading bloc grew substantially between 1991 and 1994. It is a reasonable conjecture that as trade flows adjust to the presence o f a post-Apartheid South Africa this trend will persist. The countries listed in Table 26 vary widely in their degrees o f economic and industrial and human development, as well as in their economic and industrial structures. One would therefore expect

M a r io S c er r i

substantial differences in the structure and determinants o f SA CU’s trade flows vis-à-vis these countries. This expectation is borne out by the analysis reported in this paper. The methodology used is discussed (section 2) as are the data base and estimation methods employed (section 3). The estimation results and policy implications are assessed (section 4 and 5) and in the concluding section an agenda for future research is suggested.

2. M

ethodology

Over the past three decades the analysis o f international trade flows, comparative advantage and competitiveness has become polarized into two broad camps. The traditional neo-classical Heckscher-Ohlin-Samuelson (HOS) model considers trade as determined by the availability o f conventional factors o f production (labour, physical capital and, in some extensions, land and natural resources). It assumes technology to be free and equally accessible across all boundaries, be they at firm or national level. Apart from the exhortation to dismantle barriers to free trade, the policy implications o f this approach are essentially non-existent. Factor endow­ ments are a given datum and, assuming perfect information, the only possible impediments to optimal allocation o f resources derive from either irrationality or the presence o f imperfect markets. The cavalier treatment o f technology in the HOS model, as in the mainstream neo-classical paradigm, led to the emergence o f neo-technology accounts o f trade which, in conjunction with the development o f evolutionary theories o f growth, resulted in the ‘heretical’ approach first articulated in 1990 by Dosi, Pavitt, and Soete. The alternative school views access to technology as imperfect, uneven across economic agents and costly. Through various mechanisms, property rights over technology can and are enforced and innovation and the ability to absorb technology are seen as main determinants o f dynamic comparative advantage.3 The policy implications o f the ‘heretical’ approach are dramatically different from those o f the neo-classical school. Combined with other propositions on the nature and role o f technology that are postulated within the evolutionary paradigm4 the alternative approach considers that, in altering the impositions o f given factor endowments on comparative advantage, governments play a crucial role. So does human capital (often considered interchangeable with technology in early neo-technology accounts), a factor which, in so far as its development is one o f the concerns o f the public sector, has important policy implications. The methodology used follows Hulsman-Veisova and Koekkoek (1980), Katrak (1973), Stern (1976) and Wolter (1977).

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T h e C o m p e t i t i v e n e s s o f t h e S o u t h e r n A f r ic a n C u s t o m s U n i o n

TABLE 26 : S A C U TRADE IN MANUFACTURED COMMODITIES WITH VARIOUS C o u n t r y G r o u p s w it h in t h e In d i a n O c e a n R im R e g i o n , a s a P r o p o r t io n o f it s T o t a l (G l o b a l ) T r a d e in t h e s e C o m m o d it ie s

(percentages) Country Group

1 : Kenya, Mozambique, Tanzania, Somalia 2: Comoros, Madagascar, Mauritius, Réunion, Seychelles 3: Oman, Iran, United Arab Emirates 4: Pakistan, India, Bangla­ desh, Sri Lanka, Maldives 5: Burma, Thailand, Malay­ sia, Singapore, Indonesia 6: Australia 7: Zimbabwe, Malawi, Zambia, Uganda, Ethiopia, Sudan, Egypt 8: Yemen, Saudi Arabia, Qatar, Bahrain, Iraq, Kuwait 9: N ew Zealand TOTAL

Proportion o f total trade Imports Imports Exports 1991 1994 1991 0.070 0.12 2.40

Exports 1994 4.35

0.040

0.03

2.26

3.10

0.040

0.17

0.18

0.19

0.374

0.78

0.65

1.64

2.860

3.41

1.69

4.48

0.990 0.760

1.49 1.33

0.75 9.87

1.33 9.60

0.020

0.05

0.79

0.35

0.080 5.500

0.12 7.50

0.09 18.70

0.19 25.63

Various measures o f international competitiveness are regressed against measures o f ‘factor endowments’ which include labour, physical capital, human capital, R&D, and input o f primary industries. The approach used in this paper is a hybrid o f the conventional and alternative approaches to international competitiveness. The use o f single equation models o f the evolutionary school, which implicitly treats all determinants as given, is not adequate to model the dynamics o f comparative advantage as envisaged by the evolutionary school. However, the inclusion o f R&D (as a proxy for the technology content) and human capital shifts the conceptual underpinning o f the analysis into the evolutionary camp. Three measures o f export compe­ titiveness are related to the above determinants, as follows where (* r = rands): (Xij-Mjj)t = F(lit, pkit, hkit, rdit, rmiit) (1) [(Xij-M ij)/Si]t= F(pklit, hklit, rdsjt, rmitit) (2) {lnKXij/MijViXi/MOllt = F(pkllt, hkl,„ rdsit, rmitit) (3)

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M a r io S cer r j

X: exports (f.o.b.) from SACU (>n r) M: imports (c.i.f.) into SACU (in r) S: total sales (r.millions) I: number o f labourers employed pk: physical capital stock (r.millions) hk: human capital stock (rOOOs); measured as the difference between the average wage rate in a specific industry and the lowest wage rate, discounted by the bank acceptance rate, averaged out for the year rmi: input from the primary sector, i.e. agriculture and mining (r.millions)

pkl: ratio o f physical capital stock to labour hkl: ratio of human capital stock to labour i: the (four digit ISIC) industrial grouping j: the trading partner, while t represents a specific time period rmit: proportion o f inputs from primary sector in total inputs rd: R&D expenditure (r.millions); rd = rdg + rdt + rdb, where rdg, rdt and rdb, represent R&D expenditure by government institutions, the tertiary education sector and th^ private sector respectively. rds: ratio of R&D expenditure to sales; rds = rdgs + rdts + rdbs, where rdgs, rdts and rdbs, represent the same measure for government institutions, the tertiary education sector and the private sector, respectively

The dependent variable in equation (1) is the simple trade balance. The main difficulty with this specification is that it ignores the possible effect o f size on the trade balance. If this is significant (e.g. if larger industrial groups are better net exporters), it constitutes a serious source o f mis-specification in the analysis. The transformation o f the dependent variable in equation (2) deals with this issue by normalizing the trade balance by the value o f sales, in which case the explanatory variables are specified as intensities. This formulation also reduces the incidence of multicollinearity in the estimations. The third specification places the ratio of exports to imports of a particular industry grouping within the context of total trade with the specific partner, in which case explanatory variables are again expressed as intensities. The R&D variable is decomposed by the type o f performer in recognition o f the diverse stages o f R&D activity (basic research, applied research, and development). Data on these three stages are not available at the four-digit ISIC level. However, aggregate data shows that the different categories o f performers listed here exhibit substantial differences in their bias towards one stage or another.7 Moreover, it is reasonable to assume, a priori, that the motives for engaging in R&D activity, and its distribution

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across sectors, depends on the institutional terms o f reference o f the particular performer. The long term development o f indigenous technologi­ cal capabilities requires a sound backdrop of basic research activity which is usually engaged in by tertiary education and government institutions. In terms o f defining a competitive edge in technology, therefore, the nature o f R&D activity considered is crucial. Thus within the South African context, R&D activity o f the business sector, which is heavily biased towards the development and adaptational stages, should carry less weighting of technological competitiveness than that o f the other two sectors. All data, apart from those on exports and imports, pertain to South Africa, rather than to SACU. This is due to constraints on obtaining industry level data for other SACU members. As long as the distributions o f the values o f the various indicators across industrial sectors for SACU in general are close to those for South Africa, this should not cause serious problems.8 The preponderance o f South Africa’s industrial status within the region further reduces the possibility o f significant discrepancies. The general specification o f the functions estimated in this paper cannot imply causality. It is, rather, a statement o f association. The signs o f the respective regression coefficients cannot be determined a priori. They will be used, as will be discussed, to locate SACU’s trading position within the region. The framework o f causal links within which the relationships are here specified is complex and cannot easily be represented by mathematical or stochastic models.

3 . D a t a a n d E s t im a t io n T e c h n iq u e s 9

Industry groupings are classified on the ISIC four-digit classification system, although some categories are grouped together. In total, it was possible to study sixty-seven industrial groupings (listed in the appendix), the number varying for different trading partners since not all commodity categories may be traded in specific cases. Moreover the occasional presence o f zero values reduces the number o f observations in the case o f regressions with equation (3) as the dependent variable. The Ramsey RESET tests show that in most cases the hypothesis that significant variables have been omitted cannot be rejected. Possible sources o f misspecification are discussed below. The Cook-Weisberg test indicates that heteroscedasticity is present in most o f the OLS estimates. One possible reason for this, given the nature o f the data groupings, is the presence o f outliers. Hence, two versions o f robust regression were used to estimate the functions.

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M a r io S c er r i

As in most model specifications, the most serious source o f misspecification can be found in the ceteris paribus closet. These include transport costs and tariff and other trade agreements. In the case o f this analysis, which is based on cross-section data on trade o f various commodity groupings with country groupings, there are therefore two main sources o f unaccounted variation possible as transport costs and trade agreements may vary across commodities and across commodities for different countries within each grouping. As far as the former is concerned, the grouping o f countries on the basis o f rough geographical proximity might go some way towards alleviating this particular problem. A further source o f mis-specification lies in the use o f R&D expenditure or intensity as a proxy for the technology content o f manufactured commodities when R&D p er se is but one o f a variety o f sources o f technology (e.g. locally bought technology, specific or embodied in new capital equipment, technology transfers from abroad, and technological spillovers). Moreover, R&D only results in new technology after a time lag and in a manner difficult to specify a priori. The adoption o f R&D as a proxy for the technology content o f output therefore rests on the assumption that local R&D expenditure and intensity patterns are not significantly different from the spread o f other sources o f technology content. Since the only factor intensity measures that are used apply to South African industries, a further assumption is that there are no factor reversals (i.e. the same intensities are approximately the same) for one or more trading partners. For 1991, all the variables used are measured in the current time period. The choice o f 1991 as the base year for the estimates is due to R&D data constraints and could prove problematic as although that year signalled the end o f apartheid, international sanctions against South Africa were not normalized until 1993. For this reason, regressions were also estimated for 1993 (also the latest date for which trade data were available in the form used in this study). The estimation results for the two years are not, however, strictly comparable, since R&D indicators and those regarding the input o f the primary sector are still based on 1991 data. A reasonable assumption made in the interest o f strict comparability is that the distribution o f the two sets o f variables across sectors remained essentially unchanged during the intervening years. More problematic, whereas a positive coefficient attending an R&D variable would normally indicate that SACU tends to export R&D or technology-intensive goods to a particular partner, the introduction o f a time lag for R&D variables introduces a causal element into the otherwise strictly associative nature o f the estimated relationship. This exacerbates, rather than reduces, the specification problem, firstly through rendering the estimated functions hybrid and, more crucially, through the implicit postulate (which has neither been proposed

128

T h e C o m p e t i t i v e n e s s o f t h e S o u t h e r n A f r ic a n C u s t o m s U n i o n

nor estimated) o f a relationship between R&D, innovation and the export competitiveness measure. Therefore, lagged variables are valid only under the strict assumption that they are equivalent to the current (unobservable) ones. Thus the functions estimated for the base year 1993 are specified as follows: (Xy-M ij)t= F(ljt, pkit, hkit, rd|t_3, rmiit_3) (4) [(X ij-M ij)/Si]t = F(pklit, hklit, rdsito, rmitit_3) (5 ) { In [(X jj/M ij)/(X i/M i)]} t = F(pklit, hklit, rdsjt.3 , rmitit_3) (6)

4. E v a l u a t io n

of

E s t im a t io n R e s u l t s

The location o f economies vis-à-vis each other can take one o f three forms: centre-periphery; periphery-centre; and approximate equivalence. Following previous similar work in a number o f contexts,10 we can use empirical results on the determinants o f export competitiveness to locate SACU (primarily South Africa as the main SACU exporter o f manufactured commodities) in relation to various trading partners within the IOR. A relatively central role in the trading relationship would be indicated by measures o f competitiveness positively related to measures o f human capital and technology and negatively to those o f labour, physical capital and primary input. The reverse would be true when the relative role is that of a peripheral partner. Where the roles are indistinct (i.e. equivalence o f status) contradictory indications are to be expected. An examination o f the regression results provided in the appendix will give some preliminary indication o f SACU’s role within the IOR trading area. R e s t o f th e w o r ld

A preliminary analysis o f SACU’s trade with the rest o f the world, within which the study o f South Africa’s trading position relative to specific IOR country groupings may be placed, demonstrates the R&D measure o f each estimated equation to be significant and negatively related to the dependent variable. Where significant, the variable representing the primary sector input intensity carries a positive coefficient. In results that support earlier empirical w ork,11 it was found that, where significant, variables representing labour and the physical capital to labour ratio are positively related to the dependent variable, while human capital bears a negative regression coefficient. These are the characteristics o f a peripheral trader which imports technology- and human capital-intensive commodities and exports those intensive in labour, physical capital and raw materials.

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M a r io S c e r r i

A u s t r a l a s ia

Australia (group 6): The study demonstrates SACU to be peripheral relative to Australia. In every regression where the human capital variable is significant the attendant regression coefficient is negative. The coefficient o f the physical capital variable is, on the other hand, always positive. Indicators regarding the R&D variables are conflicting: government R&D expenditure and intensity measures in the case o f regressions on the dependent variables (1) and (2) bear a positive coefficient for the base year 1991, but its R&D intensity bears a negative coefficient in the case o f dependent variable (2) for 1993 while the tertiary education sector R&D intensity variable carries a negative coefficient with respect to dependent variable (3) for both years. The latter exhibits the highest proportion o f basic research. A provisional conclusion would be that SACU has lost any vestige o f a competitive edge in terms o f technology over the two years under consideration. Where significant, the variable for 1991 representing primary sector inputs bears a negative coefficient except in the case o f the regression run on the dependent variable (3). This may be due to Australia being both an industrial economy and one so rich in natural resources that SACU cannot compete on the basis o f primary input content. New Zealand (group 9): SACU is also a peripheral trader relative to New Zealand. R&D variables are negatively related to the dependent variable whenever the regressors are significant. Physical capital (and capital/labour ratio) carries a positive coefficient, human capital variables are never significant, and all primary input content indicators bear a negative coefficient. S o u t h e a s t A sia

Burma, Thailand, Malaysia, Singapore, Indonesia (group 5) SACU’s trading position is clearly peripheral relative to this grouping. Where significant, the physical capital (and capital/labour ratio) is positively related to the dependent variable while human capital variables are never significant. Conversely, where significant, R&D indicators are negatively related to the dependent variable. There are contradictory signs for primary sector inputs. Whereas the absolute input measure in regressions run on the dependent variable (1) for 1991 carries a negative coefficient, the primary sector input intensity measure for the dependent variable (3) bears a positive coefficient. For reasons discussed above, the dependent variable (3) is preferable to the unweighted measure o f net exports in (1) as a measure o f competitiveness. Hence, a tentative conclusion is that, in relation to this group o f countries, SACU tends to possess an advantage in exports of commodities intensive in their primary sector input content - reinforcing the view that SACU has a relatively peripheral status.

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S o u t h A sia

Pakistan, India, Bangladesh, Sri Lanka, Maldives (group 4) The estimation results indicate SACU’s position to be central relative to this group. The human capital to labour ratio is positively related to dependent variable (2) for both years and to (3) for 1993. Absolute human capital input carries a negative coefficient with respect to the unweighted net exports for 1991, but, as discussed above, regressions run on this variable should carry less weight when evaluating results. For this dependent variable, labour input indications are contradictory for both years while those for physical capital are positive. The physical capital to labour ratio is a consistently insignificant regressor. However, in the sole instance where it is significant (dependent variable (2) for 1991) the R&D intensity variable has a negative coefficient. For both years, primary sector input intensity is positively related to net exports weighted by sales. When measured in absolute terms, primary sector inputs are negatively related to unweighted net exports for 1991. M id d l e Ea s t

Yemen, Saudi Arabia, Qatar, Bahrain, Iraq, Kuwait (group 8) SACU’s role here tends towards that o f a central player. Human capital variables exhibit a positive relationship with the various dependent variables wherever significant, while regression coefficients o f the physical capital indicators are invariably negative. However, coefficients o f significant R&D variables are contradictory. The two cases showing a negative coefficient involve business sector R&D activity (notably at the development stage), while the one positive coefficient relates to tertiary education (particularly basic research). The primary industry input indicates the relationship to the dependent variable/s changed from being positive to negative. South Yemen, Oman, Iran, United Arab Emirates (group 3): SACUs role relative to this grouping is indistinct. While absolute R&D expenditure is positively related to unweighted net exports for 1991 and negatively for 1993, the reverse is true for the relationship between R&D intensity, and dependent variable (2). It may be indicative that the relevant R&D performer in the case o f dependent variable (1) is the business sector while that for dependent variable (2) is the government sector. Not only are these two distinct in that one is primarily a market agent while the other is (or should be) motivated by public choice criteria, but, as has been discussed above, government R&D activity is more heavily biased towards basic and applied R&D than is that o f the business sector. The estimation results therefore might indicate a shift over time towards competitiveness in technology intensive commodity ranges. On the other hand, the human

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capital variable is either insignificant or negatively related to the dependent variable, while in all cases, except one, the physical capital (and capital/labour) variable carries a positive coefficient. Wherever significant, the primary input variables bear a negative coefficient. E a s t A f r ic a

Zimbabwe, Malawi, Zambia, Uganda, Ethiopia, Sudan, Egypt (group 7) Relative to this group, SACU generally occupies a central trading position. The labour input variable carries a negative coefficient for both years, and physical and human capital inputs (as well as the relevant capital/labour ratios) carry a positive coefficient whenever these variables are significant regressors. The R&D expenditure variable bears a negative coefficient for 1991 in the case o f the dependent variable (1), but the R&D intensity variable (tertiary education sector) is positively related to the dependant variable (2) for both 1991 and 1993. The primary input variable is insignificant for every regression. Kenya, Mozambique, Tanzania, Somalia (group 1): The ceteris paribus conditions (discussed in section 3) here vary so widely across countries (all regressions, save for unweighted net exports, proved insignificant) that separate estimations are required before any conclusions can be made as to relative trading roles. W e s t e r n In d i a n O c e a n Is l a n d s

Comoros, Madagascar, Mauritius, Reunion, Seychelles (group 2) The estimation results here provide unclear signals. R&D intensity shows a positive coefficient in the regression run on dependent variable (2) for 1991 but a negative one for dependent variable (3) for both years. The physical capital to labour ratio is positively related to dependent variables (2) and (3) whenever it is significant. Measures o f human capital (or capital/labour ratios) are insignificant except in the regression run on unweighted net exports for 1991 which showed a positive coefficient. However, when set against evidence from all other regressions, this is insufficient to enable sound inferences to be made. From regressions run on unweighted net exports, it would appear that a central position in 1991 (negative coefficient for the labour input and a positive one for human capital) was lost by 1993 (variables positive for labour input and insignificant for human capital). Whenever significant, regression coefficients for primary sector input variables are negative. Thus SACU exports physical capital-intensive and imports technology- and primary sector content-intensive goods although the absence o f clear indications regarding the impact o f the technology and human capital contents on competitiveness precludes the assignment o f specific roles.

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5 . P o l ic y Im p l ic a t io n s

Within the context o f global trade, SACU is peripheral. If it (and primarily South Africa) is to achieve a first world status, its competitiveness must shift away from a dependence on labour, physical capital and natural resources towards technology and human capital. The possibility o f participation in a trading bloc such as the IOR should be informed both by the potential for increasing trade flows and the possibility o f altering existing patterns o f comparative advantage, two goals which may conflict since the immediate tendency is to trade in accordance with existing patterns o f comparative advantage and thus to reinforce the status quo. On the other hand the diversity o f economies and trading relationships within the region offers SACU the possibility o f becoming a more central player. This is a specific advantage o f South-South trade relations, for the possibilities for such change in North-South relations are more remote. Research indicates that the trading partners which offer the greatest possibility for the enhancement o f SACU’s role as a central player are in South Asia (group 4), East Africa (group 7) and the Middle East (group 8). In 1994 exports to these markets constituted approximately 11 per cent of SACU’s total exports o f manufactured commodities, while imports from them made up approximately 2 per cent o f SACU’s total imports o f manufactured goods. However, an examination o f the economies concerned clearly shows that current prospects for significantly altering SACU’s role are not promising. In group 4, India is already a significant exporter o f technology12 and its recent liberalization programme should, given the previous extremely protectionist stand on the role o f transnational corporations in the development and transfer o f technology within the country, significantly increase India’s technological capabilities. Hence there is a likelihood that SACU’s position vis-à-vis this group will, in the absence o f a sound national Science and Technology policy and given the rapid liberalization o f trade, alter in the near future in favour o f South Asia. The absorptive capacity for imports in the East African countries in group 7 (with the possible exception o f Egypt) is limited. It is not unreasonable to expect that after an initial surge in trade following the demise o f apartheid, exports to these countries will shortly peak. The prospects offered by increased trade with the Middle Eastern countries in group 8 seem more promising. Most countries within this group have considerable purchasing power and a consequent absorptive capacity for imports. In all these cases the basis for assigning a central trading role to SACU has been a consistently positive relationship between human capital indicators and

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measures of competitiveness. However, the indications related to R&D activity are often mixed, the estimation results reflecting the lack of any coherent Science and Technology policy in South Africa. Estimation results clearly indicate a peripheral position for SACU vis-àvis countries in Southeast Asia (group 5), and Australasia (groups 6 and 9). In 1994, exports and imports o f manufactured commodities to and from these economies stood at approximately 6 per cent and 5 per cent respectively o f total SACU exports and imports of manufactures. SACU’s peripheral role here is a cause for grave concern on two counts. Firstly, most o f these countries either enjoy a first world status or are rapidly industrializing economies. There is therefore a strong probability that liberalizing trade relations will reinforce SACU’s present position. Moreover, there is also the strong possibility that these countries will displace SACU from the rather tenuous central role that it occupies with respect to countries in South Asia, the Middle East and East Africa (groups 4, 7, and 8). Research would thus indicate that SACU (specifically South Africa) should only enter new trade agreements gradually and selectively, in conjunction with sound complementary Science and Technology and human capital development policies. Lall (1992, 1993) argues that the success stories in international trade o f the newly industrialized economies are characterized by extensive selective government intervention to enhance such capabilities.13 The choices that South Africa (and SACU) faces with respect to the IOR are limited by the pace at which this bloc is being established. The choice is not whether or not to join. SACU’s trade with countries in the region, at almost a quarter o f its exports o f manufactured goods in 1994, is much too high to allow it to become excluded from a newly formed trade liberalization. The choice is rather on the manner in which it should enter the IOR and its vision o f the process which should be followed in its establishment. The immediately obvious aim o f joining a trade bloc is to increase trade flows. If this does not occur for SACU, revenue compensating formulae may be devised, as South Africa has done for other member countries o f SACU in the past. However, this might prove disastrous for the long term development o f southern Africa, entrenching its position vis-à-vis the rapidly industrializing economies of the IOR, with the likelihood o f a widening gap in terms o f most o f the indicators o f development. Ultimately the success o f multilateral trade agreements depends on a perceived benefit for all prospective members. The kind o f relationship that has emerged (provisionally) from the estimation results for Indian Ocean and Middle Eastern countries in groups 2 and 3 is a more promising basis on which prospective partners might join a trading bloc. Ideally, within the

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constraints imposed by past development processes and the availability of natural resources, the objective should be for trading partners to attain first world characteristics in their trade with each other. This would imply that, in the case o f the type o f regressions used here (with the extensions suggested in this paper), none o f the explanatory variables, with the exception o f the primary sector input incidence, would prove significant. In this respect, South Africa, as one o f the initiators o f the IOR prospectus, has a significant role to play as a major advocate for regional interests within SACU and, in the light o f its admission into the Southern African Development Community (SADC), within sub-Saharan Africa. The only serious danger is that it may enter the game plan uninformed. If there exists sufficient awareness o f the costs imposed on prospects for regional development by the apartheid economics o f South Africa, it might be possible to include in negotiations towards participation in IOR integration a policy aimed at ‘picking winners’ among industrial sectors and developing potential or actual core capabilities.

C o n c l u s io n s

The research outlined in this paper is still in its preliminary stages. It needs to be amplified in several directions. One obvious extension is to include hitherto excluded measures o f variables, such as technological spillovers and rates o f protection which would enable simulations o f the effects of alternative trade liberalization policies to be made. Another extension consists o f the running o f similar (or amplified) regressions with respect to single trading partners instead o f country groups. Finally, the essentially static nature o f the analysis must be kept in mind. The results o f any similar estimated regressions carry the assumption o f a constant framework both for SACU and for the other countries within the IOR. The constituents o f this framework are multitudinous and exhibit complex interrelationships. Some are directly dependent on explicit national policies, but most are the outcome o f largely unrecognized and ungovernable forces. The results of analyses similar to those presented here must therefore be constantly qualified by a cognisance of their setting and their shifting nature.

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N otes 1

2 3

4

5

6 7

The assistance o f the Federation for Research Development in procuring data, both on R&D and other indicators, is gratefully acknowledged. Special thanks in this regard go to William Blankely. Thanks are also due to Marina Mayer and Martin Wittenberg, both colleagues in the School o f Economics and Business Economics at the University o f the W itwatersrand. The former’s comments on the semi final draft o f this paper were highly incisive. The latter was most helpful in guiding me through the regression package used for the estimations. The usual disclaimers apply. See M. Mayer and H. Zarenda, ‘The South African Customs Union: A Review o f Costs and Benefits’, DBSA Policy Working Paper 19 (1994). See P. Daniels, ‘Research and Development, Human Capital and Trade Performance in Technology-Intensive Manufactures: A Cross-Country A nalysis,’ Research Policy 22 (1993), pp. 207-41; L. Soete, ‘The Impact o f Technological Innovation on International Trade Patterns: The Evidence Reconsidered,’ Research Policy 16 (1987), pp. 101-30; G. Dosi and L. Soete, ‘Technical Change and International Trade,’ in: G. Dosi, K. Pavitt, and L. Soete, The Economics o f Technical Change and International Trade (New York: Harvester Wheatsheaf, 1990). These include the tacit aspects o f technology, the discontinuities in its development (techno-economic paradigms) and the public good content in various stages in the development o f different technologies. M. Hulsman-Vejsova and K.A. Koekkoek, ‘Factor Proportions, Tech­ nology and Dutch Industry’s International Trade Patterns,’ Weltwirtschaftliches Archiv 116 (1980), pp. 162-77; H. Katrak, ‘R&D, International Production and Trade: The Technological Gap. Theory in a Factor Endowment M odel,’ The Manchester School 56 (1988), pp. 20522; R.M. Stern, ‘Some Evidence on Factor Content o f West Germ any’s Foreign Trade,’ Journal o f Political Economy 84 (1976), pp. 131-41; F. Wolter, ‘Factor Proportions, Technology and West German Industry’s International Trade Patterns,’ Weltwirtschlaftliches Archiv 113 (1977), pp. 250-65. These include parastatal corporations, private business enterprises and independent research laboratories respectively. The distribution o f aggregate R&D activity in the natural sciences for the three performers for the year 1991 was as follows:

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Performer sector

Government Tertiary Education Business Enterprise

8 9

10

11 12 13

Percentage o f total R&D Expenditure Basic Development Applied Research Research 13 51 36 52 40 8 5 40 55

(Source: ‘Resources for R&D, 1991/92-R e su lts o f Survey Programme No. 17.’ Department o f National Education, Pretoria) For regressions run on cross-section data, contact author. R&D data was gathered by the Federation o f Research Development and from the Industrial Development Corporation. The input-output matrix for 1991 was generated by Economic Analysis Systems (Pretoria). See Hulsman-Vejsova, and Koekkoek, ‘Factor Proportions, Technology and Dutch Industry’s International Trade Patterns’; Stern, ‘Some Evidence on Factor Content o f West Germ any’s Foreign Trade,’ Mario Scerri, ‘R&D and the International Competitiveness o f the South African Manufacturing Sector’, South African Journal o f Economics 58 (1990), pp. 341-56; Wolter, ‘Factor Proportions.’ Scerri, ‘R&D and the International Competitiveness.’ S. Lall, ‘Developing Countries as Exporters o f Industrial Technology,’ Research Policy 9 (1980), pp. 24-52. Idem, ‘Technological Capabilities and the Role o f Government in Developing Countries,’ Greek Economic Review 14 (1992), pp. 1-36 and ‘What Will Make South Africa Internationally Competitive?’ - paper delivered at the ASPEN/IDASA Conference on South Africa's International Economic Relations in the 1990s (1993).

A p p e n d ix 1

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D r a f t R e s o lu t io n o n t h e A d o p tio n o f t h e C h a r t e r o f t h e I n d i a n O c e a n R im A s s o c i a t i o n f o r R e g i o n a l C o o p e r a t i o n , 1 s t M i n i s t e r i a l M e e t in g , M a u r i t i u s , 5 -7 M ar c h 1997

We, Ministers and Representatives of: AUSTRALIA THE REPUBLIC OF INDIA THE REPUBLIC OF INDONESIA THE REPUBLIC OF KENYA THE REPUBLIC OF MADAGASCAR MALAYSIA THE REPUBLIC OF MAURITIUS THE REPUBLIC OF MOZAMBIQUE THE SULTANATE OF OMAN THE REPUBLIC OF SINGAPORE THE REPUBLIC OF SOUTH AFRICA THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA THE UNITED REPUBLIC OF TANZANIA THE REPUBLIC OF YEMEN; HAVING met at Ministerial level in Mauritius on 5 - 7 March 1997; RECALLING the Joint Statement issued at the First Inter-Governmental Meeting o f the IOR Initiative held in Mauritius on 31 March 1995, outlining the principles, objectives and areas o f cooperation within the Indian Ocean Region; RECALLING also the report o f the Chairman o f the Second InterGovernmental Meeting held in Mauritius on 10-11 September 1996; HEREBY ADOPT THE CHARTER ESTABLISHING THE IOR ASSO­ CIATION FOR REGIONAL COOPERATION (IORARC) ANNEXED HERETO.

A

p p e n d ix

138

2

T h e C o m p e t i t i v e n e s s o f t h e S o u t h e r n A f r ic a n C u s t o m s U n i o n

C h a r t e r o f t h e IO R A s s o c ia t io n f o r R e g io n a l C o o p e r a t io n

(IOR - ARC) 1.

Conscious o f historical bonds created through millennia among peoples o f the Indian Ocean and with a sense o f recovery o f history; cognisant of economic transformation and speed o f change the world over which is propelled significantly by increased intensity in regional economic cooperation; realising that the countries washed by the Indian Ocean in their diversity offer vast opportunities to enhance economic interaction and cooperation over a wide spectrum to mutual benefit and in a spirit of equality; convinced that the IOR, by virtue o f past shared experience and geo-economic linkages among Member States, is poised for the creation o f an effective association and practical modalities o f economic cooperation; and conscious of their responsibility to promote the welfare o f their peoples by improving their standards o f living and quality of life; the Governments o f Australia, India, Indonesia, Kenya, Madagascar, Malaysia, Mauritius, Mozambique, Oman, Singapore, South Africa, Sri Lanka, Tanzania, Yemen hereby establish the IOR Association for Regional Cooperation (IOR-ARC), with the following fundamental principles, objectives, areas of cooperation, and institutional and financial structures and arrangements.

Fundamental Principles'. 2.

The Association will facilitate and promote economic cooperation, bringing together representatives of government, business and academia. In a spirit o f multilateralism, the Association seeks to build and expand understanding and mutually beneficial cooperation through a consensusbased, evolutionary and non-intrusive approach. The Association will apply the following fundamental principles without qualification or exception to all Member States: i) Cooperation within the framework of the IOR will be based on respect for the principles o f sovereign equality, territorial integrity, political independence, non-interference in internal affairs, peaceful co-existence and mutual benefit; ii) The Association will be open to all sovereign States o f the IOR which subscribe to the principles and objectives o f the Charter and are willing to undertake commitments under the Charter; iii) Decisions on all matters and issues and at all levels will be taken on the basis o f consensus;

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iv) Bilateral and other issues likely to generate controversy and be an impediment to regional cooperation efforts will be excluded from deliberations; v) Cooperation within the Association is without prejudice to rights and obligations entered into by Member States within the framework o f other economic and trade cooperation arrangements and will not automatically apply to Member States o f the Association. It will not be a substitute for, but seek to reinforce, be complementary to and consistent with their bilateral, plurilateral and multilateral obligations; vi) Within the framework o f the Association, Member States will pursue adequate measures to promote the achievement o f its objectives, and will not take any action likely to prejudice its objectives and activities; vii) The Work Programmes o f the Association will be undertaken by Member States on a voluntary basis. Objectives: 3. i)

ii)

iii) iv)

v) vi)

The objectives o f the Association will be: To promote the sustained growth and balanced development o f the region and o f the Member States, and to create common ground for regional economic cooperation; To focus on those areas o f economic cooperation which provide maximum opportunities to develop shared interests and reap mutual benefits. Towards this end, to formulate and implement projects for economic cooperation relating to trade facilitation, promotion and liberalisation; promotion o f foreign investment, scientific and technological exchanges, and tourism, movement o f natural persons and service providers on a non-discriminatory basis; and development o f infrastructure and human resources, as laid down in the Work Programmes o f the Association; To identify other areas o f cooperation as may be mutually agreed; Towards promoting liberalisation, to remove impediments to, and lower barriers towards, freer and enhanced flow o f goods, services, investment and technology within the region; To explore all possibilities and avenues for trade liberalisation with a view to augmenting and diversifying trade flows among Member States; To encourage close interaction o f trade and industry, academic institu­ tions, scholars and the peoples o f the M ember States without any discrimination among M ember States and without prejudice to obligations under other regional economic and trade cooperation arrangements;

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v ii)T o strengthen cooperation and dialogue among M ember States in international fora on global economic issues, and where desirable to develop shared strategies and take common positions in the international fora on issues o f mutual interest; and viii) To promote cooperation in development o f human resources, particularly through closer linkages among training institutions, universities and other specialised institutions o f the Member States. Membership: 4.

All sovereign States o f the IOR are eligible for membership. To become members, States must adhere to the principles and objectives enshrined in the Charter o f the Association. Expansion o f membership o f the Association will be decided by Member States.

Institutional Mechanism: 5.

6.

7.

There will be a Council o f Ministers o f the Association. The Council will meet once in two years, or more often as mutually decided, for formulation o f policies, review o f progress o f cooperation, decisions on new areas o f cooperation, establishment o f additional mechanisms as deemed necessary, and decisions on other matters o f general interest. There will be a Committee o f Senior Officials o f the Association composed o f government officials o f Member States. It will meet as often as mutually decided. It will review implementation o f the decisions taken by the Council o f Ministers; and in cooperation with the IOR Business Forum (IORBF) and the IOR Academic Group (IORAG) establish priorities o f economic cooperation, develop, monitor and coordinate Work Programmes, and mobilise resources for financing o f Work Programmes. The Committee will submit periodic reports to the Council o f Ministers, and refer, as and when necessary, policy matters for the Council's decision. There will be a Secretariat o f the Association to coordinate, service and monitor the implementation o f policy decisions and Work Programmes as laid down.

National Focal Points: 8.

Each M ember State o f the Association will set up a tripartite National Focal Point for IOR cooperation to coordinate and advance implementation o f its activities and achievement o f its objectives.

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IOR Business Forum (IORBF) and IOR Academic Group (IORAG): 9.

The Association includes bodies known as the IOR Business Forum (IORBF) and the IOR Academic Group (IORAG) in accordance with the tripartite nature of the Association. They may meet together with the Council of Ministers and the Committee of Senior Officials as mutually decided. They may also meet as and when they deem it necessary. They will interact with the Committee o f Senior Officials and the Secretariat in the consideration, formulation and implementation o f the policies and Work Programmes o f the Association. The IORBF and the IORAG may draw upon other non-governmental regional business and academic networks, as necessary.

Financial Arrangements 10. Each Member State will contribute to the finances o f the Association as decided. Adequate arrangements will be made by participating Member States for providing finances for implementing the Work Programmes. This will not exclude external sources o f financing where appropriate. 11. The Member States will endeavour to promote the spirit o f economic cooperation enshrined in the Charter o f the Association.

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C h apter 9 T h e G o l d M in in g In d u st r y a n d S o u t h A f r ic a n E c o n o m y 1980-95

the

M a r c F l io r

It is likely that the gold market will remain in a stable state in the year ahead, supported by continued growth in physical demand and by professional interest at lower prices, and supplied by producers and by other players in the market at higher prices.1 N.F. Oppenheimer (Chairman o f Anglo American Gold/ Investment Company Limited).

The mining sector has been the catalyst o f South African economic development. Major mineral discoveries, diamonds in Kimberley in 1870, and notably gold on the Witwatersrand in north-eastern South Africa in 1886, transformed South Africa from a rural agrarian to an urban industrial economy. The Witwatersrand System comprises a rocky uplift over 610 metres (more than 2,000 feet) above the surrounding plateau which extends in a 500 kilometre arc2 from Evander in the east to Virginia in the west. Also known as the Rand, the Witwatersrand is historically the most productive gold-mining district in the world. Surface gold was discovered in the area in 1884, active mining operations began in 1886 when Johannesburg was founded, and the main gold reef was discovered in 1889, at a depth o f 177 metres (581 feet). The great extent o f the deposits, both laterally and in depth, has permitted gold exploitation on a large and very profitable scale. In the 1930s, following the abandonment by many countries o f the gold standard and the initiation by the United States o f unlimited gold purchases, the ore was mined at a depth o f about 3,360 metres (about 12,000 feet); subsequently, the deepest workings averaged some 2,745 metres (some 9,000 feet) in depth.3 The gold mining industry has acted as a leading sector in the South African economy, spawning other major sectors, including banking and finance, transportation and communication, chemicals and explosives and many associated manufacturing industries. However, gold

M a r c F l io r

mining is entering a period of prolonged decline, its future dependent upon the solution o f many problems, including those o f low labour productivity, rising costs and a deflated international gold price. This chapter analyses the role o f gold mining in the period 1980-1995, examining its structure, state involvement in the sector, the influence that gold has had on the South African economy, its role as an export product, and the relationship o f gold to the South African currency. The issue o f labour is omitted as its complexity warrants a separate analysis.

O r g a n iz a t io n

and

Stru ctu re

of the

G o l d -M in in g I n d u s t r y

Gold mining in South Africa initially required large inputs o f capital due to both the depth o f the deposits and the low average grade o f ore. This in turn led to a system o f collective organizations centred around the finance corporation, today listed on the Johannesburg Stock Exchanges as Mining Houses. The major mining houses are currently Anglo American Corpora­ tion o f South Africa, Anglo-Transvaal Consolidated Investment Company, General M ining and Finance Corporation, Gold Fields o f South Africa, Johannesburg Consolidated Investment Company and Rand Mines and Union Corporation.4 They provide, from a pool o f skilled resources, managerial, technical, administrative, and financial services to existing mines, and undertake geological exploration, feasibility studies and development work to promote new mining projects for which they have listed on the Johannesburg Stock Exchange in order to attract the capital necessary to start exploitation.5 All South African gold ore was previously sent for processing to the Rand Refinery in Germiston, the largest gold refinery in the world. Prior to 1995, the gold was subsequently sold to the South African Reserve Bank (SARB) which either sent it out to the world’s bullion markets or retained it as part o f South A frica’s financial reserves. In 1995, the SARB monopoly was abolished, permitting mining houses to market and sell their own gold output on the international gold market. This in turn forced mining houses to invest in sales personnel, and in analysts to monitor foreign exchange markets, and forward and futures contracts and exchanges - a role previously fulfilled by the SARB. Such changes will prompt major restructuring o f mining houses. Some leaders in the field, such as Gary Maude, Chairman o f Gengold, believe that they will change from organizations designed to attract and hold large amounts o f capital and expertise, to emulate mining companies elsewhere in the world, character­ ized by small head office structures, and concerned more with the financial and exploration aspects o f mining administration than with the management

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o f output and labour - although labour relations and production capacity will continue to be a priority.6

S t a t e A s s is t a n c e t o G o l d M in e s

Although in the late 1950s it appeared that several central W itwatersrand gold mines had reached the end o f their profitable life, they were kept open because, as all underground workings in this area were to some degree interconnected, their closure would have resulted in water filling their underground workings and threatening neighbouring mines with flooding. This latter hazard could only be averted through investment in pumping facilities, a high additional expense that would shorten the economic life o f still operational mines. As the mining houses were reluctant to incur that cost, the government offered to subsidize expenses associated with pumping - an offer later extended to East and West Rand mines. In 1964, the government also implemented a system o f loans to deserving mines to cover working losses and to finance approved capital projects. This was superseded from April 1968 by a comprehensive tax-credit scheme in the form o f tax relief to mines that paid tax, or financial assistance to those that paid no tax. Since then state assistance to mines has solely been in the form o f tax relief and exemption7

T a b l e 27 : P e r f o r m a n c e o f M a j o r S o u t h A f r ic a n G o l d M i n e s - Ju n e QUARTER 19948 (prices in rands) Yield grams p er ton

G old output (kg)

Cost p er ton milled

Cost p er kg ° f gold p ro ­ duced

Price recei­ ved p e r kg

5,431 3,093 1,636

4.15 5.04 5.24

22,142 15,592 8,579

181.00 179.00 206.00

43,704 35,530 39,242

44,769 45,783 45,096

31,300 153,700 55,400

536 12,042

6.89 0.29

3,693 2,481

253.00

36,748

-

-

45,444 45,126

30,100 25,600

7.7

5,737

304.42

39,319

45,547

Tons milled (000s)

A nglo A m erica: Freegold Vaal Reefs Western Deeps Elandsrand Ergo Anglovaal: Hartebeesfontein (underground)

741

145

Net profit ROOOs

M a r c F l io r

Hartebeesfontein (lowgrade) Hartebeesfontein EasternTransvaal Consolidated Loraine Village Main R an d M ines: ERPM Blyvooruitzicht Harmony Durban Deep Gengold: Beatrix Buffelstein Grootvlei Kenross Leslie Oryx St Helena Stilfontein Unisel Winkelhark Johannes­ burg Consolidated: Ranfontein Western Areas HJ Joel

483

-

1.29

-

625

27.67

21,386

44,272

-

-

-

-

34,196 4,444

73

11.1

815

383.26

34,546

45,361

393 121

4.3 0.83

1,671 100

184.02 40.77

43,279 49,290

45,050 48,390

241 137

6.71 6.31

1,618 864

324.31 274.84

48,306 43,580

45,461 44,994

3,255 982

1,405 63

3.48 3.75

4,892 236

152.13 191.32

43,693 51,072

45,681 45,157

15,842 (1,221)

6.3 2.4 5.4 5.3 6.1

144.78 108.99 214.53 236.63 248.64

23,059 46,031 40,050 44,694 40,679

-

-

266.60 41.35 226.79 274.42

37,620 44,698 38,147 45,235

45,195 45,238 45,484 45,379 45,281 42,269 45,169 45,133 44,890 45,176

43,734 (1,166) 3,881 9,668 3,285

7.1 0.9 5.9 6.1

3,585 2,273 616 1,996 599 3 1,389 235 951 2,002

1,681 589

3.30 6.58

5,547 3,874

135.72 266.70

41,131 40,549

45,648 45,737

35,888 23,894

175

5.18

906

266.70

51,529

45,630

(5,165)

571 960 115 377 98 -

196 254 160 330

-

4,099

.

(519)

-

4,940 821 4,918 6,777

T a b l e 28: S t a t e A s s i s t a n c e t o G o l d M i n e s , 1968-789 Year

1968 1969 1970 1971 1972

Tax-credit p a id to assisted mines (R.m) 6.8 8.6 16.0 16.0 9.2

(X) = output o f assisted mines (kg) 100,896 108,804 120,706 137,301 109,048

(X) as percentage o f industry production 10 11 12 14 12

146

Value o f (X) (R.m)

86 96 103 129 140

Lease consideration & mining tax pa id by assisted mines (K m ) 0.4 0.3 0.0 2.0 3.3

T h e g o l d m in in g i n d u s t r y a n d t h e S o u t h A f r i c a n E c o n o m y

1.2 0.8 19.6 40.9 32.3 27.5

1973 1974 1975 1976 1977 1978

C o n t r ib u t io n

99,015 79,312 65,929 68,874 60,857 62,619

to

12 11 9 10 9 9

T a x a t io n

by

208 274 241 229 249 349

1980-95 12.8 19.0 1.5 0.6 0.8 n.a.

S o u t h A f r ic a n M in e s

Although from 1989-93, taxation remained almost constant at a quarter of the GDP, taxes on mining dropped from 23 per cent to 3 per cent of mining’s contribution to GDP. In 1993, the gold mining industry contributed some R1.4 billion in tax to the State (revenue from gold mining falling from 10 per cent to less than 1 per cent o f government income.10

G r a p h 1 : A n a l y s i s o f S o u t h A f r ic a n M in in g T a x C o l l e c t io n s ,

1980-9311

80000000 70000000 60000000 50000000 40000000 30000000

20000000 10000000

0

X— CN CO C CM O ooo vCD D O m 00 C D O C OT O O C CD O 00 oo OD O O CD C D O C D C D C— D C C— D C CD D C CD O CD C D CD D o> 00 C > O x— T T T—

An anticipated improvement in profits in 1995-6 was expected to yield a further 11 per cent rise in income tax from gold mines compared to an increase o f 9.5 per cent from non-mining companies (an anticipated R13.6 billion). This illustrates a direct relationship between the gold price, income tax contributions and the existence o f marginal m ines.12

147

M a r c F l io r

G old a n d the Econom y

G r a p h 2: S o u t h A fr ic a - G D P b y T y pe of E c o n o m ic A c t iv it y 1 9 9 3 13 (1 9 9 0 prices at factor incom es)

General Government Mining Financial Services Manufacturing Community Services Other products Financial charges Construction Elec, Gas, W ater Agriculture Transport Commerce 0

0,05

0,1

0,15

0,2

0,25

0,3

weighting of sector concentration of GDP (on a relative scale totalling 1)

It has been argued that South Africa should have fully beneficiated its mineral wealth instead o f exporting the raw material or semi-processed commodities. The relative contribution o f the mining sector as a whole to real GDP rose from approximately 36 per cent at the end o f the Second World War to a peak o f 41 per cent in 1963, and fell to 20 per cent by the end o f the 1970s, at which level it has remained.14 Gold production in 1970 reached a record 1,000 tons, accounting for 79 per cent o f all mining output, and representing 28 per cent o f GDP at factor cost. However, the gold mining industry is currently in the throes o f a prolonged decline. By 1986,

148

T h e G o ld M in in g I n d u s t r y a n d t h e S o u t h A f r ic a n E c o n o m y

1980-95

gold’s contribution to total mining output had fallen to 70.6 per cent, representing 14.4 per cent o f GDP. The significance o f gold to economic growth in general is reflected in the fact that the decline o f gold as a proportion o f total mining production has had a more than commensurate impact on GDP, to which its contribution through forward and backward linkages, rose to over 18 per cent by 1993.15

G r a p h 3: S o u t h A fr ic a - C o n t r ib u t io n o f G o ld E x p o r t s E x p o r t R eceipts ( percentag e / 6

to

Total

80000000 -, 70000000 60000000 50000000 40000000 30000000 20000000 10000000 0

The ills besetting the gold industry mainly result from the ageing process on the mines where costs have increased due to the exhaustion o f easily accessible reserves, and an accompanying decline in the average grade o f ore. Cost containment is therefore a major preoccupation o f gold mines. In 1993, working costs per kilogram o f gold increased by only 4.45 per cent to R27,547 per kg, compared with the 1993 average domestic inflation rate o f 9.7 per cent, whilst the relative improvement in the Rand gold price and the cost containment effort by gold mines meant working profits per kilogram o f gold improved by 57.4 per cent.17 In 1993, three gold mines were closed down, and the number o f marginal and loss making mines reduced from 11 to 7. This resulted in a relative improvement in profitability in 1993, which enabled mines to commit more capital expenditure, up by 5.1 per cent to R2.3 billion, and to announce R2.7 billion worth o f new projects.18 M oreover, the remaining marginal gold mines, which suffered a R47.63 million loss in the final quarter o f 1994,19 were under close scrutiny from the Chamber o f Mines Productivity Monitor.20 It was estimated that gold mining unit costs increased by 20.6 per cent in the first quarter o f 1995 compared to

149

M a r c F l io r

the first quarter o f 1994, while production had declined by 27 tons over the first five months o f 1995 compared to the same period in 1994. The poor performance o f the gold mining industry, meant that its contribution to GDP in 1995 fell by 8 per cent for the first quarter.21 The fall in productivity o f South African gold mines results from a generally poor work ethic based on high expectations from the new government, tensions between regular and contract workers, the number o f public holidays and continual work disruptions over pay structures. As mines have a fixed cost structure, lower production has led to an increase in costs per kilogram o f gold produced, which in turn rapidly sterilized large portions o f the reserves as exploitation o f the ore became uneconomic, leading to a shortening o f the mine life. A decline in productivity and the consequent sterilization o f reserves has resulted in a call by the mining industry for all-year-round exploitation and operational flexibility at mine level. These changes could stabilize jobs at mines which were facing closure o f marginal shafts, and create work at mines which have reserves and the capacity to increase production.22 Indeed, the relationship between gold mining and employment is of critical concern. One o f the m ines’ main problems is labour difficulties and the depressing impact on productivity o f the increased number o f paid public holidays. This in a context o f rising costs and falling profitability has meant that gold mines, traditionally a major employer, have reduced their workforce. This is most noticeable in the case o f marginal concerns; for instance, in 1995 Randfontein Estates (JCI) retrenched 2,000 workers from its Cooke 3 section.23 The same year, it was estimated that a 20 per cent increase in South African gold mining costs and resultant closure o f marginal mines would cause as many as 130,000 jobs to be lost, which in mining regions like the Orange Free State and Western Transvaal, would have a major negative impact on regional and provincial employment, taxation receipts and revenue.24 Unemployment in the industry could be countered by foreign investment. Trillion Resources’ (Canada) acquisition for R40 million o f large minority stakes in JSE-listed Consolidated Mining Corporation (JCI) and West Witwatersrand Gold Holding will assist in this direction, but significant increases in production and employment will only result from investment in new ventures,25 investment that would be induced by a sustained increase in the gold price. A higher gold price, whilst strengthening existing mining houses, would also weaken the monopolistic nature o f the industry, and would permit an increase in wages.

150

T h e G o l d M in in g I n d u s t r y a n d t h e S o u t h A f r i c a n E c o n o m y

G o l d , F o r e ig n E x c h a n g e

and the

1980-95

D o llar

Declining ore quality and the international price o f gold has also had a significant impact on gold exports, traditionally an important contributor to foreign exchange earnings. Despite an increase in the dollar price o f gold from an average o f $35 to $447 an ounce between 1960 and 1987, from 1970-87 there was a decline in gold output in South Africa26 due to a relentless fall in grade from 13 to 5.4 grams per ton, lower labour productivity and the fall in the external value o f the rand. The rand fell by 47 per cent on a trade weight basis against the US dollar between late 1983 and mid 1987, deterring mining houses from capital investment.

G ra ph 4: S o u t h A f r ic a - T

o ta l

O utput

in

G o ld M in in g 1950-85

(1980=100)27

160 140 120 100 80 60 40

20 0 1950

1960

1970

1980

1985

The importance o f gold to exports is illustrated by the fact that in 1986 gold exports constituted 34.8 per cent o f total exports and represented 11.9 per cent o f GDP compared to 1970 figures o f 29.5 per cent and 6.7 per cent respectively. The gold industry continued to play a major role in the South African economy in 1993 when total exports from South Africa increased in value by 14.8 per cent in 1993 due mainly to gold, exports o f which grew by 19.1 per cent. 8 The gold market in 1994 achieved stability at US dollar price levels, almost 20 per cent above the low prices o f 1992 and 1993. This was achieved on the back o f a resurgence o f physical gold demand, particularly in the developing markets, but also in certain o f the developed markets. At the end o f 1994, analysts were anticipating that gold production would revive, but it fell significantly in 1995,29 resulting in decreased

151

M a r c F l io r

exports and foreign exchange, and rendering the economy dependent upon volatile net capital inflows. Thus it was estimated that poor gold exports would deprive South Africa o f R3 billion in foreign exchange earnings in 1 9 9 5 .30

G r a p h 5: S o u t h A f r ic a n G o ld P r o d u c t io n ,

m e t r ic

T o n , 1 9 8 3-9331

700 680 660 640 620 600 580 560 540 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

G r a p h 6: S o u t h A f r i c a - T o t a l G o l d O u t p u t in R a n d T e rm s 1950-8532 (R m illion s )

20000 15000

10000 5000

0 1950

1960

1970

1980

1985

Declining gold export earnings could undermine the SARB’s traditional preference for maintaining a large proportion o f its foreign reserves in gold and lead to a change in the country’s gold-sales policies.33 Exchange rate

152

T h e G o l d M in in g I n d u s t r y a n d t h e S o u t h A f r i c a n E c o n o m y

1980-95

policies could also come under the spotlight. Recent SARB policy has largely been to allow the trade-weighted value o f the rand to decline in nominal terms to reflect the differential in inflation rates between South Africa and its major trading partners. The question now arises o f whether the rand should be allowed to depreciate at a faster rate in view o f the erosion o f the export base, stemming from the decline in gold production. This erosion is placing a greater burden on other export sectors to generate foreign exchange and create new jobs, targets that might be facilitated if currency depreciation was expressed in both nominal and in real terms. The SARB has hitherto opposed such a policy since it might both ignite demands for higher salaries and precipitate a wage-price spiral which would neutralize the benefits o f depreciation, and remove incentives for the goldmining industry to carry out structural improvements in productivity, such as the introduction o f a seven day working w eek .34

T he F uture

of

G o l d M in in g

in

S o u t h A f r ic a

In 1993, South African producers benefited when, accompanying a 4.6 per cent improvement in the US$ price o f gold to $359.70, the rand gold price improved dramatically by 20.2 per cent to R l,177.7035 as, although gold ore milled declined from 1992-3, ore grades increased by 3.5 per cent to 5.56 grams per ton, resulting in an increase o f 0.6 per cent in gold output to 578.01 tons o f fine gold produced. However, this proved a temporary fillip as in 1994 ore milled decreased by more than 4 per cent and the average grade declined by almost 3 per cent with the result that total gold production fell to 548 tons. Moreover, the gap left by the decline in the South African gold output is rapidly being taken up by Australia, the quickest growing gold mining industry in the world. Such figures reflect the underlying crisis o f an industry plagued by stagnant gold prices, rising costs, lower productivity, labour disputes and closures. Changes are required, but any drastic alteration in policy on the lines o f state ownership o f mineral rights could cause irreparable harm to the industry where long lead times are the norm and where the costs o f drilling exploratory holes are very large. As Oppenheimer says, ‘The industry is concerned that this fragmented approach will not lead to a policy that is supportive o f the industry’s aim to maintain its world-class stature into the next century.’36 Nationalisation would discourage local and deter foreign investors and might precipitate the collapse o f the gold industry, with severe repercussions for the economy as a whole. The future o f the industry can only be secured by the adoption o f well-researched and innovative strategies aimed at mine rationalization and mergers, regimes o f continuous work,

153

M

ar c

F l io r

administrative decentralization and risk capital expenditure. For example, rationalization and mergers have ensured that mature mines like Freegold, Harmony, Vaal Reefs and Gengold’s Evander mines benefit from economies o f scale. However, continual and innovative investment is required to maintain profitable output. The new South Deep mine was developed only following several years o f exploration, technological investment and risk capital expenditure of the sort that cannot be raised on the Stock Exchange and which must therefore be raised directly by mining houses. Also o f prime importance is capital expenditure on human resource development. AngloAm erica’s Ergo and Elandsrand have performed relatively well due to management initiatives aimed at motivating employees and improving productivity through multi-skilling. The appointment as C hief Executive of Anglo Am erican’s gold division o f Bobby Godsell, an expert in human resources, highlights where the present problems for South African gold mining rest, and where future expenditure will flow, if South Africa wishes to maintain a high percentage o f world gold production.

C o n c l u s io n South Africa’s gold mining industry is in inescapable decline due to its relatively high costs o f production. This has major ramifications for the economy as a whole in terms o f reduced employment and export earnings, with the resultant impact on associated industries, on the balance o f payments, and on the social order. Whilst many mines have attempted to counter rising costs by abandoning lower for higher grade exploitations, this is a temporary palliative. The future o f the South African gold mining industry and with it economic growth and improved living standards for the majority o f South Africans, lies in its ability to compete on the international gold market. What is required is new capital investment, technological managerial innovation and enhanced productivity to reduce production costs and develop not only gold but also other export industries based on non­ depleting resources or on realistic beneficiation o f ores and other raw materials.

N otes 1 2

N.F. Oppenheimer, ‘An abridgement o f the annual review in respect o f the year ahead 31 March 1995,’ Business Day (23 June 1995). It is 40 kilometres (about 25 miles) wide at its maximum width.

154

T h e G o l d M in in g I n d u s t r y a n d t h e S o u t h A f r i c a n E c o n o m y

3

4

5

6

7 8

9 10 11 12 13 14 15 16 17 18 19 20

1980-95

The major productive gold reefs are currently Carbon Leader and Ventersdorp Contact, on which the richest mines are concentrated, followed by Main Reef, Kimberely, Northern Leader and Elsburg R eef Anglo American Mines and their March 1995 results; Anglovaal gold Mines and their June 1995 results; Gengold’s Mines and their June 1995 results; Gold Fields Mines and their 1995 results; The Johannesburg Consolidated Investment Company Mines and their June 1995 results, Table 25. Fourie, Falkena & Kok (eds), The Mechanics o f the South African Financial System: Financial Institutions, Instruments and Markets (Cape Town: Macmillan, 1984), p. 117. Michael Urquhart, ‘Mining contracts need to be re-examined - M aude,’ Business Day (5 May 1995); Interview with Graham Davin, Insinger Bank, London (13 July 1995). Provided in the Gold Mines Assistance Act o f 1968. Anglo American Corporation o f South Africa Limited, 1994 Annual Report; Anglovaal, 1994 Annual Report; Rand Mines, 1994 Annual Report, Gengold, 1994 Annual Report; Johannesburg Consolidated Investments, 1994 Annual Report. Interview with the Information Officer, South African Chamber of Mines Office, Johannesburg (29 August 1995). Makegetla Neva Seidman, ‘Reconciling fiscal discipline with a Utopian vision,’ Business Day (28 April 1995). Source: Department o f Finance. Edward West, ‘Mining exceeded expectations,’ Business Day (7 March 1995). Source: Central Statistics Service. R.M. Gidlow, ‘Exchange rate Policy, Export Base and Gold mining taxation,’ The South African Journal o f Economics 56.1 (March 1988). Source: Chamber o f Mines of South Africa, Satistical Tables (1970-93). Source: South Africa 1995 (Cape Town: South African Foundation, 1995). South African Mining Industry (SAMI), Statistical Overview 1993 (Johannesburg: South African Chamber o f Mines, 1994), inside cover. Base year 1992 - SAMI, Statistical Overview 1993, back cover. The September 1994 quarter loss was R7.36 million. The Productivity Monitor found that Chamber members realized an average R40,701/kg for their December 1994 Quarter, this being considerably lower than the average R45,892/kg secured for marginal production in the previous quarter Working revenue produced consequently fell quarter-on-quarter - from R400.3 million to R347.9 million. With the total working cost bill o f R395.5 million amounting to

155

M a r c F l io r

21 22 23 24

25 26 27 28 29 30 31 32 33 34 35 36

substantially more than their revenue tally, the group recorded a significant widening in the quarterly working loss - John Spira, ‘Marginal mines suffer losses,’ The Star (27 May 1995). Michael Urquhart, ‘Decline in gold output expected to continue,’ Business Day (29 June 1995). Urquhart, ‘Decline in gold output expected to continue.’ Harverson Karen, ‘Gold mines battle to survive,’ Mail and Guardian (28 July-3 August 1995). Llewellyn Kriel (spokesman for the Chamber o f Mines o f South Africa), in: Michael Urquhart, ‘Gold mining fatality rate at a new low,’ Business Day (29 June 1995). Spira John, ‘Canadian group buys local stakes,’ The Star (23 March 1995). Despite increased amounts of ore milled. SAMI, Statistical Overview 1993, p. 23. Source: Chamber o f Mines o f South Africa, Statistical Tables (1993). Output fell by approximately 10 per cent in the first 5 months o f 1995 compared with the same period in 1994. Nico Czypionka (Standard Bank group economist) in Soggot Mungo, ‘Mines could cost SA R3bn,’ Business Day (6 August 1995). SAMI, Statistical Overview 1993, p. 39. SAMI, Statistical Overview 1993, p. 26. ‘Problems in gold mining industry put pressure on policies for foreign reserves and exchange rates,’ Sunday Independent (30 July 1995). ‘Problems in gold mining industry put pressure on policies for foreign reserves and exchange rates,’ Sunday Independent (30 July 1995). SAMI, Statistical Overview 1993, p. 27. Oppenheimer, ‘An abridgement.’

156

C h a p t e r 10 T he R ole

o f t h e I r o n a n d S t e e l I n d u s t r y in t h e S o u t h A f r ic a n E c o n o m y

A r ie l l a K u p e r

The power to produce is obviously limited by the scarcity o f land ... by the decreasing pro­ portion o f the produce which must necessarily be obtained by the continual additions o f capital applied to land - (Malthus)1

The creation o f a leading sector is a prerequisite for economic growth in developing countries (LDCs), while the maturation and creation o f export potential from this sector is essential to industrialization. The iron and steel industry has traditionally been considered such a leading sector. Demand for traditional carbon steel products has steadily fallen in advanced economies as basic industries have been superseded by electronics, communications and services, a trend reflected by the steady substitution o f high strength low-alloy and corrosive-resistant (chrome and nickel alloy) recyclable steel for traditional steel sheet.2 Most LDCs are still characterized by intense steel consumption for infrastructural development, although over the last 20-30 years sustained industrialization has led to a shift from light towards more heavy steel intensive chemical and engineering industries, a trend more accelerated in outward (e.g. China, Korea and Taiwan) than in domestically orientated (e.g. India) economies. South Africa, classified as an LDC, in fact exhibits a dualistic economy, with the institutional structure, communication network and financial system o f a First World country, and overall educational and public utility provisions characteristic o f the Third World. Thus, although transformation to full First World status might be achieved relatively quickly, the degree o f transformation necessary supports the argument that steel could be a leading sector, with capacity steel expansion being anticipated for both infrastructural and consumer commodity production.3 Moreover, whilst demand for steel may decline, it will not decrease dramatically both because every economy needs to maintain and improve its infrastructure and because o f the industrial potential o f steel due to its unique properties and its cost efficiency. Thus as South Africa

A r ie l l a K u p e r

becomes more politically stable, and gains a credible international invest­ ment rating, it will be able to generate both economic development and greater steel production.4 This chapter examines the potential o f the South African iron and steel industry, one dominated by Iscor (a top international steel producer, and the largest in Africa and South Africa where it controls approximately 75 per cent o f the steel market), to play the role o f a leading sector in the economic development of the country.5

P r o m o t in g V a l u e -A d d e d P r o d u c t io n Beneficiation o f iron ore involves increasing its value-added content at each stage o f processing, from its extraction to the manufacture o f a stainless steel product. There are traditionally three stages involved: iron making, steel making and rolling. In the first stage, molten iron is produced by removing the oxygen from the ore in a blast furnace into which coke and fluxes are also continuously fed. Steelworks remove excess carbon and other impurities from the molten iron and add alloys (steel scrap, burnt lime and dolomite). The refined steel, essentially an alloy o f iron, carbon, manganese, phosphorous, silicon, and sulphur,6 is subjected to continuous casting in order to form solid semi-finished relatively weak and unevenly grained products - rectangular slabs for flat products (e.g. sheet) and square billets (for rolling into rod and wire). The third stage, re-heating and rolling, refines, strengthens and shapes the semi-finished product - although further shaping may occur under a cold rolling process. In addition, some sheet, coil and wire products are given a corrosion resistant coating. Changing demand, due in part to tariff reduction in line with GATT and in part to economies evolving from Newly Industrialised Country (NIC) to More Developed Country (MDC) status, is causing South African iron ore and steel manufacturers to seek alternative outlets for their carbon steel commodities, whilst maintaining the niche for stainless steel products.7 Concentration on focused production lines at various stages o f beneficiation will enable plants to both satisfy foreign and domestic customers and supply subsidiary plants for further beneficiation. Such rationalization involves two stages; low value-added carbon steel and high value-added stainless steel. After privatization in 1989, Iscor restructured in order to become interna­ tionally competitive in both flat and value-added secondary manufactured products. Vanderbijlpark, whose hot rolled coil production costs are now amongst the lowest in the world, was in 1992 upgraded to produce a wide range o f steel, tin, and galvanized commodities. The mill has an annual capacity o f around 5 million tons o f liquid steel and produces all of Iscor’s flat products. In order to achieve greater quality and efficiency, it will shed

158

T h e R o l e o f t h e I r o n a n d S t e e l In d u s t r y in t h e S o u t h A f r ic a n E c o n o m y

its ingot (crude steel) casting to move to 100 per cent continuous casting.9 Pretoria, Iscor’s oldest and fifth largest factory, 0 traditionally produced long products, (reinforcing bars, fencing uprights, window sections, steel wire rod, heavy beams, and railway tracks), its annual production peaking at over one million tons in the early 1980s. However, in the late 1980s all outdated sections were shut down and the Corex liquid iron production plant established at a cost o f R130 million with an output o f 350,000 tons per annum .11 Newcastle (Kwazulu-Natal), the second largest factory, traditionally ran at a loss and only in 1994/5 after extensive reorganisation did the plant become profitable with a potential production capacity of 420,000 tons o f wire rod, and 200,000 tons o f slab and billets.12 The assimilation o f Tosa, a seamless tubes mill, and the installation o f a new continuous casting machine, has cut manufacturing costs and has permitted a growth in production which, with a potential output o f 100,000 tons a year, in 1997 stood at 82,000 tons per annum o f which 66,000 tons were exported. Other promising projects include the Columbus Joint Venture created in October 1991 by the acquisition o f Middleburg Steel and Alloys by an Anglo American- De Beers- Gencor- Barlow Rand consortium. A R3.5 billion investment, 64 per cent spent locally and 36 per cent on the import of foreign technology and raw materials (unavailable domestically), enabled Columbus to increase production to 300,000 tons per annum. At full capacity it will employ 1,800 people and produce around 700,000 tons per annum, making it the largest single site producer o f stainless steel in the world.13 It is estimated that during its first twenty-five years o f operation Columbus will generate about R16 billion in foreign exchange, in part due to the production o f 3CR12, a 12 per cent corrosion resistant chrome steel used primarily in wet abrasion applications in heavy industries such as sugar mills, coal and gold mines, and in rail and road transport.14 A second project is Iscor’s Saldanha Bay iron ore plant which will be supplied from the Sishen (Northern Cape) high grade iron ore deposits to which it is linked by rail, as well from overseas (340,000 tons per annum of imported iron ore pellets). It anticipates generating R12.5-13.5 billion a year through exporting 1.25 million tons o f high quality hot rolled coil for the construction industry (welded pipe and tube), automotive components, and re-rollers. H alf will be exported to Asia Pacific, 250,000 tons each to Western Europe and America (North and South), and 125,000 tons to the Middle East.1 Saldanha’s production costs for liquid steel will be equivalent to the USS140-150 per ton at Nucor’s new iron carbide plants in Trinidad and Arkansas, and should Kudu supply cheap gas, it opens the option of producing iron carbide for Saldanha.6

159

A r ie l l a K u p e r

T he M arket

In theory, the quantity o f value-added steel produced in South Africa and its competitiveness is determined by access to requisite inputs, and to supply and demand for iron ore, carbon steels and stainless steel. For strategic and economic reasons, it has been considered that South Africa should be as self sufficient as possible in inputs into steel making. The country has important reserves o f some raw material inputs, possessing 81 per cent o f the w orld’s manganese, 69 per cent o f its chrome, 10 per cent o f its nickel, 11 per cent o f its coal and 6 per cent o f iron ore reserves - sufficient to supply Iscor’s needs.17 Moreover, all Iscor’s requirements o f dolomite are met by its open pit mines at Mooiplaas near Pretoria and Glen Douglas near Vereeniging; its requirements o f zinc by Rosh Pinah (Namibia), in which Iscor holds a 51 per cent shareholding; o f quartzite (silica stone) by its Donkerhoek quarry near Pretoria; and o f sling sand (to line casting ladles and runners) by its Fortsig Sandworks near Pretoria. Other raw materials, including direct reduced coal, manganese ore, chocolate and refractory clay, fluorspar, calcium carbide and calcium chloride are obtained from local suppliers. However, South A frica’s poor endowment o f capital equipment and skilled labour, both prerequisites for value-added processing, have traditionally underpinned the argument for exporting its iron ore rather than processing it domestically. Where import substitution occurred, equipment had to be imported, contributing to diminishing foreign reserves. Hence, the emphasis has remained on the export o f low value high bulk iron ore, exports o f which rose from 13.6 million tons in 1991/2 to 15.1m tons in 1995. 8 A vital component o f the iron ore and steel industry is the steel cycle which depicts the crests and slumps indicative o f consumption and production patterns. The international steel industry will always seek to secure recent and future sales at both the spot and forward prices at the upturn o f a cycle, rather than at a downturn when prices dip as a result of tenders having been secured and ‘players in the industry not requiring additional projects.’19 Furthermore, international export prices correlate well with industrial capacity utilization. Given the high fixed overheads and costs associated with temporarily closing capacity, steel producers look to maximize production. Thus during the last steel shortage in 1988/9 capacity utilization reached 94 per cent due to the 25 per cent per annum increase in steel prices reached in the 1986/9 upturn.20 1. I r o n o r e

From 1983-94, global sea-borne trade in industrial iron ore grew from 260 million tons to 370 million tons, the major markets being Western Europe and Japan. It is expected to continue growing quickly as demand rises in

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Western Europe but also in the new Asian markets as China and South Korea increasingly challenge Japan’s dominance as the major market player and price setter in the international iron ore market.21 China, which recorded a GDP growth rate o f approximately 8-10 per cent in 1995, is forecast to absorb 18.5 per cent o f world production by the year 2000. In 1993/4 world iron ore production and exports were 932.6 million tons and 398.5 million tons respectively, with Brazil and Australia responsible for 63 per cent o f the world market.22 From 1993/4-1995, production rose by 6 per cent and exports by 17 per cent, and it is anticipated that exports will increase by 2.5 per cent from 1997 to 2000 and consumption by an average o f 2 per cent.23 Prices for ore generally lag behind demand by about a year, reflecting the long term nature o f supply contracts and the oligopolistic structure o f the industry. In addition, lumpy iron ores can fetch a 30 per cent premium over fine ores because the latter have to be pelletized before being sent to blast furnaces. Sishen lumpy enjoys a lower premium due to its relatively low ferrous oxide content, but is nevertheless shipped to both Europe and the Far East, notably to China - a relatively new customer - and Japan where it is in great demand due to its high iron ore content.24 In 1995, Sishen produced 70 per cent lumpy and 30 per cent fine, but Thabazimbi, where reserves are estimated at 18 million tons, expanded its production (1995 = 2.4 million tons per annum) to allow more Sishen iron ore to be shipped abroad.25 In 1994/5, the demand for both fine and lumpy ores exceeded supply as markets responded to an upturn in the steel cycle.26 South A frica’s Sishen mine, which with Thabazimbi supplied all the 8.5 million tons o f iron ore required by Iscor in 1992/3, exported around 18 million tons o f lumpy in 1995. However, constrained iron ore shipments caused by a lack o f capacity on the Sishen to Saldanha railroad resulted in a 6 per cent fall in ore exports from 18.6 million tons to 17.5 million tons between 1994/5 and 1995/6 when strong markets for Iscor’s premium grade lumpy ore should have facilitated an increase.27 2. S teel

Global demand for steel rose from 615 million tons in 1993 to 650 million tons in 1995 and is estimated to rise to 750 million tons by the year 2000, an average growth rate o f 2.8 per cent per annum.28 Demand for finished (carbon) steel is closely linked to economic cycles. War devastated economies in the post-1945 era required low value-added carbon steel to restore infrastructure and industrial activity, and in the 1960s there was widespread expectation that LDCs would also build an industrial infrastructure. However, the 1970s were characterized by economic stagnation in LDCs which accumulated debt beyond their debt servicing capacities, thus reducing domestic saving and investment.29 Only recently

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has a significant shift occurred in demand for steel away from the traditionally dominant industrial states to LDCs. For instance, while consumption in the former USSR has halved since 1989, China’s steel consumption has increased rapidly.30 Assuming no radical change in the value o f the rand, steel imports into South Africa are estimated to remain below 300,000 tons (6-7 per cent o f the market) up to 2000. As far as steel exports are concerned, South Africa is, in theory, threatened by capacity expansion in the Asian Rim although in reality, the latter region, including China, should remain a net importer o f steel. Hence, assisted by expanding demand in the Middle East and Africa, South African steel exports are expected to rise to over 5 million tons by 2000.31 3. S t a in l e s s st e e l

In 1995, world demand for stainless steel was approximately 11 million tons per annum, with demand generally expected to grow by 3-4 per cent per annum until the year 2000 and 3 per cent thereafter.32 This is largely because demand from Iscor’s traditional markets in the Far East, in countries which are evolving from NICs to MDCs, is shifting from profile products for infrastructural development to stainless steel for the manufacture o f white products. Given the unique characteristics o f stainless steel - its strength, its resistance to heat, abrasion and corrosion, and its workability, aesthetic appeal, availability and price - substitution is unlikely. Thus nickel-based stainless steel, despite nickel being subject to volatile price fluctuations, commands a premium from manufacturers o f durable items like stainless steel exhausts.33 Moreover, consumption grew at an average rate o f 5.8 per cent per annum from 1980-95 as demand for traditional stainless steel products like cutlery and exhaust pipes was supplemented by demand for luxury goods.34 increases in capacity and powerful secular forces positively influencing consumption will, in all probability, lead to expanded steel production. It is estimated that from 1996-2000 there will be an increase o f 4 million tons in stainless steel meltshop capacity in the western world, of which the Asian Rim would contribute an estimated 25 per cent, Europe, South Africa and India an estimated 20 per cent each, North America 10 per cent and Brazil 5 per cent.35 From 1992-4, Iscor exported 50-60 per cent of its production due to a stagnant local economy, although relatively low margins in world markets kept profits low. In 1994/5, despite both the upturn in the steel cycle and a 36 per cent discount for exports on the domestic price per ton, exports were 16.2 per cent down on the 1992/3 figure. This was due both to the lower percentage o f value-added on Iscor export products compared to products for the local market and to increased international transport and shipping costs.36 Despite this, strong arguments exist for processing steel locally.

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Because o f a sharp devaluation o f the rand, which has reduced input costs, as well as one site operations, direct ferrochrome charging, integrated operations and low labour and power costs, South Africa is potentially one o f the world’s cheapest producers o f stainless steel.37 The task for South African steel producers is to harness their competitive strengths, take advantage o f the saturation o f the international steel market and expand domestic steel production and the South African share o f the international ferrous metal (ferro-alloys and stainless steel) market.38 This could set the stage for a sustained period o f good financial performances which, together with production expertise, could enable South African plants, dominated by Iscor, Columbus and Microsteel, to increase production o f stainless steel. Production will comprise in the main flat steel products (sheets, plates and coil) with 50,000 tons converted into final products (tubes and pipes) - most o f which go into the fabrication o f International Marine Organisation tank containers.39 Catalytic converters required in motor vehicles using unleaded fuels is a further profitable valueadded product for which there is a healthy foreign, but currently no domestic demand. It is critical in South Africa that raw materials are supplied to local fabricators at advantageous prices in order to make the creation of downstream activities financially viable. However, whilst domestic producers have the choice between exporting or selling their products on the domestic market at prices below ruling international prices, the incentive will be biased towards the former not the latter. Nevertheless, capital-intensive foreign exchange earnings together with expanded labour intensive production for the domestic market assist in creating a base for expanded domestic employment.40 The impact of downstream developments such as stainless steel production will expand the potential market for relatively labour intensive products, qualify for assistance under the low interest loan scheme, and provide long term growth incentives to primary steel producers in supplying local manufacturers.41

T he R ole

of

G o vernm ent

Keynesianism and structuralist orthodoxy provide the theoretical basis for an entrepreneurial state. The case for such intervention is pressing in South Africa where the Apartheid regime distorted the economy which the new government is committed to change to reflect social justice. There are also local demands for government aid in manpower training and Research and Development (R&D). At the same time there is mounting pressure from

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international institutions like GATT for rapid trade liberalization and the distancing o f government from the economy. Government has hitherto done little to promote the steel industry. Tariffs protecting primary steel producers have disadvantaged exporters o f finished goods - considered the area o f greatest growth potential - but neither the Department o f Trade and Industry’s (DTI’s) export incentive schemes,42 nor funds financing the supply o f carbon steel to export manufacturers at a discount, have done much to improve South African competitiveness and to mitigate against local consumption o f beneficiated products.43 However, there is currently an upsurge in domestic demand assisted by private and public sector social upliftment programmes (steel components for house construction, electricity pylons and electric appliances) and a rise in consumption due to a narrowing in the wage gap between unskilled and skilled workers. South Africa may well wish to consider adopting the Southeast Asian approach o f a detailed structure o f tariffs, quotas and subsidies, and supply side measures aimed at securing competitive advantage through attracting investment and technology to specified sectors.44 One such example is the South Korean state owned Pohang Iron and Steel Company (POSCO). Termed by the World Bank in the 1960s a ‘premature proposition without economic feasibility’ due to a lack o f capital, skills and a domestic market, POSCO is one o f the world’s lowest cost producers exporting both steel and steel making technology to the USA.45 Its rapid increase in productivity resulted from the adoption o f advanced technology, and appropriate supply side policies (lowering company taxes, a realistic exchange rate policy and expanding skilled labour).46 The South African government could give high priority to export driven projects.47 As these tend to be capital rather than labour intensive, incentives to encourage technology transfer and steel exports need not be conditional upon large scale job creation.48 An example is the tax concession that enabled 120 per cent o f the capital cost (R1 billion) o f the Saldanha Bay project to be written o ff in the first year o f construction.49 However, such incentives should be subject to clear and assessable criteria. Government has a duty to ensure that local mineral reserves are not inefficiently exploited by exporting at low prices, and should actively encourage both mineral exploration and technology that might convert formerly uneconomic resources into reserves.50 At the same time, government measures should aim at maintaining a stable exchange rate. O f particular importance are distribution and transport, issues crucial to the cost o f natural resource inputs and to market output, and often the determinant factor in plant location. The comparative cost advantage in South Africa o f access to local raw materials for the iron and steel industry

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may be outweighed by the distance to markets, as when, under Apartheid, trade embargoes obliged South Africa to seek distant markets. Also, the lack o f any overall strategy may lead to local consumers o f iron ore commodities having to pay prices determined on international commodity exchanges plus a transport premium. Certainly a strong argument may be made that the high rail freight rates charged by Transnet, which enjoys a quasi-monopoly o f bulk transport, are stifling the export competitiveness o f metal companies (70 per cent o f which are located in the inland Gauteng region).51 Transnet has traditionally used such rates to subsidize the loss-making transport o f iron ore from the North Western Cape to the ports o f Saldanha Bay, Port Elizabeth, Durban, and Richards Bay.52 In order both to provide a cost incentive for the beneficiation o f iron ore prior to shipment to terminal markets, and to ensure that exporters pay appropriately for services, it is likely that Transnet’s privileged status will be ended and an independent and integrated profit-oriented transport system be established.53 Government should also promote the upgrading o f port facilities and ships, and take other measures to combat sea freight prices. The latter, which have risen significantly over the past decade, have led companies to make co-operative shipping and ‘piggy-backing’ agreements. Probably more pressing are policies aimed at job creation, for the government is fully aware o f the social and political repercussions o f an unemployment level estimated at around 40 per cent o f the workforce. Both the neo-classical Phillips approach and Keynesian demand management emphasise a positive correlation between output and employment, although the traditional aim o f 2.5 per cent unemployment has now become a ‘moving target’.54 Whereas employment in industrialized countries has shifted towards the service sector and highly skilled labour, demand in South Africa is still largely for workers with operator level qualifications. For example, the bulk o f steel output comprises labour intensive profile and long products, usually used in buildings, bridges, railways and other fixed investments. However, the price o f profile and long products has remained largely stagnant in contrast to that o f flat products, used in consumer products such as tins, cars and white goods (electrical appliances) which has risen steadily since 1994. The reaction o f manufacturers will be to rationalize and concentrate on more profitable products. This could cause job losses in the short term, although this should be countered in the medium term as production becomes more streamlined and volumes increase. Moreover, there exists brisk world demand for tank containers, the production o f which is more labour intensive than electronic goods. Nevertheless, on-going training is essential to ensure that the labour pool remains flexible enough to supply a changing job market. Industrial training, supplemented by government supported industry forums as a vehicle for

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creating ‘growth coalitions’ between unions and employers on issues such as investment, training and productivity, could enhance employment oppor­ tunities.55 Certainly, widening income differentials have become accepted as a reflection of a wider splay o f skills - although some argue that manufacturing workers are more economically important than those on equivalent salaries in other sectors because manufacturing creates more linkages and employment.56 Speculation that affirmative action in South Africa has reduced the Black-White wage gap without any parallel increase in productivity as yet lacks empirical evidence. Von Tunzelmann estimates that real wages in South Africa decreased as a percentage share o f national income from the 1970s,57 although those in the steel industry from 1993-5 remained constant at 28 per cent o f total costs.58 Certainly any negative impact o f wage increases in the iron and steel industry would have been compensated for by increased export earnings due to the depreciation o f the rand from the 1980s, although the benefits o f devaluation are short term and a constant rand value is necessary to perform comparative cost structures. Finally, the government could attempt to combine capital intensive export-orientated and labour-intensive production through emulating South Korea’s reciprocal requirement subsidies, whereby firms are under obligation within a stipulated time period to undertake new investment, upgrade productivity (through human resource investment), or meet certain export targets.59 There is no lack o f innovative ideas, but the shortage in South Africa o f venture capital, developmental research, capital equipment and skilled labour, restrains production of all steel commodities. Government policy should ensure that future projects attract sustainable long-term portfolios and Direct Foreign Investment.

C o n c l u s io n

South African steel producers planning for the 21st century need to assess domestic capacity expansion and its financing in terms o f both the export and domestic market. International demand for high value, high cost speciality steels (stainless steel) is growing at a rate that surpasses the present carbon steel annual growth rate as certain regions, notably in Southeast Asia, China and the Middle East undergo rapid economic development. By contrast, South Africa is, in terms o f its infrastructure, a developing country demanding a higher percentage of profile and long products for the building, construction, electrification and communication industries. Local producers should therefore diversify production towards manufacturing a higher ratio o f stainless steel to carbon steels, exporting high value-added goods while distributing lower value-added carbon steels

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to the local market. Beneficiation prior to export will promote subsidiary industries, thus helping to diversify the industrial base o f the economy. An example is Iscor which has created numerous satellite industries linking mining, refining, and the manufacture o f consumer and capital goods. It should also aim to improve the efficiency, quality and range o f existing operations, via amongst other factors, the application o f new technology (energy saving and environment friendly), enhanced worker training, increase in market realization, and capitalizing on by-products and secondary sources o f revenue. New investment should take into account plant size and location, product range and international co-operation agreements.

N otes

1

2

3 4

5

6

Thomas Malthus, quoted in M. Blaug, Economic Theory in Retrospect (1962) - this limitation does not constitute economic scarcity until all resources have been employed. Hence to beneficiate may be seen as a way o f increasing a country’s natural resource endowment. Also, the 1973 OPEC oil crisis provoked a substitution o f large by small size automobiles, thus reducing the car industry’s aggregate demand for steel - Dirk Maree (Economist at Iscor), personal interview, 11 October 1995. David Slater (Executive Director, South African Stainless Steel Association - SASSDA), personal interview, 3 November 1995. South Africa will need to increase the GDP level (2.3 per cent in 1994; 2.5 per cent in 1995) to around 4 per cent, continue to curtail inflation (6.4 per cent in 1995; 8.9 per cent in 1997) and achieve a Gross Domestic Fixed Investment o f 8 per cent to be competitive on international cpital markets - see J. Loewen and M. Winckler, Ivor Jones Roy/S.G.Warburg Research, Enriching the Business (Johannes­ burg: February 1995), 8; South Africa 1995 (Johannesburg: South Africa Foundation, 1995), p. 132; Nedcor Economic Unit, Guide to the Economy (Johannesburg: Nedcor, 1997), p. 8. Iscor passed from the 19th to the 25th largest steel producer in the world - USI, Steel Statistical Yearbook (Brussels: USI, 1996); Highveld Steel and Vanadium (owned by Anglo-American) and Dav Steel control 25 per cent o f the South African market from which importers are deterred by high local rail freights and Iscor’s multi-tiered pricing strategy . Besides these remnants, the iron is deliberately alloyed with selected other chemical elements, such as chromium, nickel, molybdenum, and

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copper, together with additional manganese and silicon, to obtain the required properties for specific uses. 7 Iscor’s previous Far East markets are changing fom NICs requiring profile products for infrastructural development to MDCs requiring stainless steel products for the manufacture o f white products. However, new markets in mainland China and the Middle East are requiring increasing volumes o f carbon steels for infrastructural development - H. Vermeulen, personal interview, 2 November 1995. 8 Including four blast furnaces (at the cost o f R200 million), a Direct Reduction plant (R193 million), a continuous caster (R130 million), upgrading the hot strip mill (R593 million), and the addition o f tin-free and electrogalvanizing lines (R276 million). In 1995 the under-utilized chrome line was converted into a specialized beverage can tin-plate line and current projects include the installation o f a pulverized coalinjection plant, saving up to 170 kg o f coke per ton o f hot metal, and the relining o f two blast furnaces. Its production costs are in the lowest 5 per cent o f the eighty-three steel mills surveyed - below that o f BHP, British Steel and Nippon, Iscor - Basic Investment Report (Johannes­ burg: Martin & Co., 24 February 1994), p. 18; Iscor Annual Report 1995, p. 17. 9 Continuous casting requires less liquid iron to produce the same amount o f steel, resulting in lower unit costs and less electricity to reheat ingots - Vermeulen, personal interview, 2 November 1995. 10 In 1994, Pretoria Works converted to stainless steel production at a cost o f approximately $35-40 million (slab only), with a capacity o f 500,000 tons. However, in April 1997, the plant was mothballed, only the Corex unit remaining operative. 11 70 per cent o f Iscor’s coke, an essential constituent o f the charge o f a blast furnace, is obtained from Iscor’s four coking coal mines Durnacol and Hlobane in Northern Natal, Grootegeluk in north western Transvaal, and Tshikondeni in Venda while 1.26 million tons (510,000 tons o f which was imported) was purchased from external sources. Taking energy costs into account, Corex (steam coal) is cheaper to run than coking coal by about 15 per cent (because it enables direct charging o f non coking coal and lumpy iron ore), while simultaneously enabling South Africa to become less dependent on coking coal in which she is poorly endowed - Iscor Annual Report 1995, pp. 14-16. 12 Newcastle was acquired from Armscor in 1970. The reorganised factory redirected 200,000 tons o f billets (which sold for US$50 per ton) into the production o f wire rod (US$80 per ton) - Vermeulen, personal interview, 2 November 1995; Its current (1997) production is approximately 1.5 million tons - D. Marcisz (General Manager, Special

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13

14

15

16

17

18

19 20

21

& Tubular Division, Macsteel International), interview, 4 September 1997. By January 1993, Anglo American’s Highveld Steel, G encor’s Samancor, and the Industrial Development Bank (IDC) each held a 33.3 per cent stake in the venture - Columbus Stainless Information booklet (1995). It is estimated that when operating at full capacity (600,000-700,000 tons per annum), Columbus will contribute R82.5 billion annually to South Africa’s GDP. Assisted by Microsteel, it will represent just under 10 per cent o f world production - the 4th highest after Japan, the USA and Germany - Columbus Information Booklet (1995). Iscor started mining iron ore at Sishen in 1953 and in the 1960s discovered high grade deposits estimated at 4,000 million tons. The Saldanha minimill will comprise a Corex C2000 smelter (with an annual capacity o f 650,000 tons per annum o f hot metal), a DR plant (804,000 tons), a twin shell DC arc furnace, a thin slab caster, and a hot strip mill. - Loewen, personal interview, 31 October 1995. Saldanha also produces virgin steel, is integrated upstream (reducing fluctuations in input costs) and possesses the advantage o f a single site furnace - Loewen & Winckler et al., Enriching the Business (1995), p. 13. For example, Thabazimbi iron ore mines in Northern Transvaal, 235 km by rail from Pretoria, supply Iscor’s Pretoria, Vanderbijlpark and Newcastle works, whilst plentiful cheap coal resources in Eastern Transvaal reduces energy costs, permitting mills to produce high value added products with relatively low capital and raw material expenditure - Hennie Vermeulen (Simpson McKie Inc.), personal interview (2 November 1995); see also Nedcor Group, South Africa's Statistical Profile 1995/96 (Johannesburg: Goldfields Press, 1996). This was despite a decrease in world crude steel production by 2 per cent to 721 million tons in 1992/93. Approximately 1/3 o f the cost o f pig iron, and 2/5 o f the price o f steel-mill products represent the transport charges on materials. Dirk Maree, personal interview, 11 October 1995; see also H.J.J. Reynders, Report o f the Commission o f Enquiry into the Export Trade o f the Republic o f South Africa (Pretoria: Government Printer, 1972). Vermeulen, personal interview, 2 November 1995. Peter J. Dupont, ‘SA Steel and Ferroalloy Review’, Union Bank o f Switzerland Global Research (21 Oct 1996), pp. 1, 16; Loewen & Winckler et al., Enriching the Business, p. 18. Loewen & Winckler et al., Enriching the Business, p. 18.

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22 World steel production declined from 725 to 712 million tons between 1993 and 1994 - , Iscor - Basic Investment Report, p. 7. 23 Dupont, ‘SA Steel and Felloalloy Review,’ p. 31. 24 Sishen has integrated downwards into the shipment o f iron ore through its 40 per cent holding in the joint venture with Safore, which owns two large bulk carriers, each with a 100,000 tons plus capacity, and which in 1995 was chartering four other carriers. Closer regional co-operation, as for example through SADC or the IOR (e.g. via SA DC) should further facilitate in the reduction o f transport costs - S. Oke and J. Pickard, ‘Iscor, Stronger than Steel’, Smith Borkum Hare, Steel and Allied Research (June 1995). 25 Thabazimbi is estimated to possess a mining life of thirty years - Oke & Pickard, ‘Stronger than Steel.’ 26 Japan curtailed the 1995 BHP (the largest supplier o f iron ore) price increase in lumpy ore to 6.5 per cent, in exchange for additional volumes. In April 1995, Iscor negotiated a 9.9 per cent increase on lumpy ore and a 5.8 per cent increase on fine ore, illustrating increasing market participation and value - Iscor Annual Report 1995 (Iscor, 1995). 27 Instead, there was a loss o f about R40 million on variable profit Dupont, ‘SA Steel and Ferroalloy Review’, 76; see also Loewen & Winckler et al., ‘Iscor - Enriching the Business,’ p. 5. 28 A recession folowed the peak production o f 665 million tons in 1989 H. Vermeulen, Iscor financing the challenge o f change (Simpson McKie Inc., 23 February 1995); Iscor - Basic Investment Report, p. 5. 29 P.D.F. Strydom, ‘Saving and Consumption,’ unpublished manuscript, Cape Town: AIPA, 1995. 30 The USSR experienced a decrease o f around 40 per cent in production, to just under 100,000 tons, by 1994 - Loewen & Winckler et al., Iscor Enriching the Business, 17; see also Tison, Iscor - Basic Investment Report, p. 5. 31 Dupont, ‘SA Steel snd Felloalloy Review,’ p. 28. 32 However, the International Iron and Steel Institute (IISI) forecast that world steel consumption would only grow to 775 million tons (less than 1 per cent increase per annum) - Iron and Steel Engineer- Annual Review (February 1988), 26; H. Smith, Financial Mail (1 September 1989); see also Loewen & Winckler et al., Iscor - Enriching the Business, p. 14. 33 The increased demand for stainless steel in the production o f catalytic converters and exhausts has allowed the stainless steel market in the USA to grow by over 12 per cent per annum; South Africa currently

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34 35

36

37

38

39

40

imports 35,000 tons per annum o f nickel - Vermeulen, personal interview, 2 November 1995. David Slater (Executive Director, SASSDA), personal interview, 3 November 1995. World stainless steel production is estimated to grow by 4.5 to 5 per cent in 1998, slowing to 2 per cent in 1999 as OECD markets soften, with an upturn o f 7-8 per cent in the first years o f the 21st century - Dupont, ‘SA Steel and Ferroalloy Review,’ p. 41. Lower value added products such as hot rolled coil and billets comprise about 10 per cent of Iscor’s export sales volume - Loewen & Winckler et al., Iscor - Enriching the Business. Exports represented 32 per cent o f total dispatches, against 51 per cent the previous year. Steel dispatches to the local market in 1994/5 increased by 18.7 per cent over the previous year to 3.3m tons - Vermeulen, ‘Iscor financing the challenge of change’. For competitive disadvantages, including transport costs to distant markets, see Dupont, ‘SA Steel and Felloalloy Review,’ pp. 43-5. Labour costs in the South African steel industry are aprroximately $8 an hour, compared to $15 an hour in the USA. Assuming productivity levels similar to the USA and western Europe, Columbus could enjoy a labour cost advantage o f $100-200 - Dupont, ‘SA Steel and Felloalloy Review’, p. 44. In 1994, o f 174 steel producers globally, Iscor ranked 54th cheapest. South Africa also has the 2nd lowest electricity costs in the world, half that o f western Europe - Project Committee, Global Advantage o f South Africa Project (Monitor Company, 21 September 1994), pp. 12-13,54. Approximately 80 per cent of South African stainless steel is exported in its raw state, the remaining 20 per cent being beneficiated locally Xavier Coetzee (stainless steel trader, Macsteel International), personal interview, 1 September 1997. Iscor has subsequently mothballed its Pretoria Works stainless steel plant. Revised 1997 figures estimate Columbus to produce 300,000 million tons, reaching 700,000 million tons by the year 2000. Microsteel produces around 40,000 million tons, 100,000 million tons being anticipated by 2000 - Xavier Coetzee, personal interview, 1 September 1997. Anthony Black, ‘The Role o f the State in Promoting Industrialisation: Selective Intervention, Trade Orientation, and Concessionary Industrial Finance’, in M. Lipton & C. Simkins (eds), State and Market In Post Apartheid South Africa (Johannesburg: Witwatersrand University Press, 1993), p. 230.

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41 Iscor supplies more than 85 per cent o f the steel for these manufactures - metal pipes and pipe fittings, plate and sheet metal works for shipping containers and cable and wire products - Iscor Annual Report 1995. 42 Ferro-alloy producers may claim a 27 per cent power cost rebate on products for the export market, but not for the local market. 43 One fund administered by the Rolled Steel Producer’s Co-ordinating Council (SARSPCC) and the other by Middelburg Steel and Alloys: Firstly a minimum o f 26 per cent added value should be attained where value added is defined as fob export price minus material cost per ton o f steel content expressed as a percentage o f the latter. Secondly, the article must be fabricated from South African produced rolled, drawn, and/or forged primary steel - N. Boshoff, South Africa's Rolled Steel Co­ ordinating Council, (1990). 44 Boshoff, South A frica’s Rolled Steel Co-ordinating Council; Black, ‘The Role o f the State in Promoting Industrialisation,’ p. 217. 45 I. Amsden, ‘A Theory o f Government Intervention in Late Industriali­ sation’, in L. Putterman and L. & D. Rueschmeyer (eds), The State and Economic Development (Cambridge: CUP), p. 291; A. Amsden, Asia's Next Giant (Oxford: Oxford University Press, 1989). 46 Black, ‘The Role o f the State in Promoting Industrialisation’, p. 218. 47 Research dem onstrates that international trade, having risen 4.7 per cent per annum since 1970 compared with a 3.6 per cent annual growth o f GNP, remains one o f the driving forces o f economic and industrial developm ent - Iscor Executive Summary 1995 (Pretoria: Iscor, 1995), p. 1. 48 Applications for foreign exchange involving technology agreements should be evaluated according to criteria such as the level o f royalty payments, restrictive clauses (such as limits on exports) and the existence o f alternative domestic sources o f technology; see Board o f Trade and Industry (BTI), ‘A Policy and strategy for the Development and Structural Adjustment o f Industry,’ (BTI, 1988), p. 166. 49 Section 37E o f the Income Tax Act (1991) permits the writing o ff o f capital expenditure on machinery and installations in the year that it is incurred rather than when production begins. To qualify, a project has to be on a scale that makes it internationally competitive, must add a minimum o f 200 per cent to the value o f the product which is being fabricated, and at least 60 per cent o f production must be exported Loewen, personal interview, 31 October 1995; see also Loewen & Winckler et al., Iscor - Enriching the Business, p. 11. 50 P.J. Lloyd, ‘Technology Transfer and Implementation o f New Techniques’, Paper presented at the Capex in mining Conference,

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51 52 53 54

55 56

57

58 59 60

Techno-economic Society o f South Africa (Johannesburg, 20 March 1986), p. 8. Loewen & Winckler et al., Iscor - Enriching the Business, p. 8. M. McDonald, ‘Oil the wheels, says Seifsa,’ Exporting SA, Supplement to Business Day (31 October 1995). White Paper on National Transport Policy (Pretoria: Government Printer, 1986), 55; SATS Act No. 65 (1981). In 1995 unemployment in the USA was around 7 per cent, and although lower than the EC (11 per cent) and EFTA (8 per cent), it was above the Japanese unemployment level o f almost 3 per cent - OECD, Jobs Study: Facts, Analysis, Strategies (Paris: OECD, 1994), p. 10; Phillips emphasises the trade off between unemployment and inflation, whilst Keynes stresses the importance o f the fiscal policies o f an active state R. Levacic and A. Rebmann, Macroeconomics (London: Macmillan, 1982). By lowering company taxes; and by a realistic exchange rate policy to increase confidence (reduce uncertainty). Evidence o f successful transformation in the Netherlands and Belgium shows that economic growth is not sector specific, but that productivity within the sector is the main criterion. BIS, 64th Annual Report (Basle: BIS), ch. 2. Moreover, he believes that higher wages can be overcome by a proportionate increase in productivity - N. von Tunzelmann, ‘The European Econom y’, in D. Dyker (ed.), The Main Trends o f European Economic History since the Second World War (London: Longman, 1992), pp. 15-50. Dirk Maree, personal interview, 11 October 1995. A. Amsden, ‘A Theory o f Government Intervention in Late Industrialis­ ation.’ See e.g. The Reynders Report (1972) - P.J. Lloyd, ‘Technology Transfer and Implementation o f New Techniques’; David Slater, personal interview (3 November 1995).

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C h a p t e r 11 I n d u s t r ia l D e v e l o p m e n t a n d IO R I n t e g r a t io n : T h r e a t s a n d O p p o r t u n it ie s : A R e s e a r c h A g e n d a S im o n W

in t e r

There is little widely accessible literature which specifically links issues o f industrial development and industrial policy to the moves towards greater regional integration in any o f the regions which overlap geographically with the Indian Ocean, namely Southeast Asia, South Asia, the Middle East, or East and southern Africa. Moreover, there is also scant literature explicitly dealing with the impact of regional integration in general on industrial development. This deficit, together with the developing interest in the Indian Ocean Rim (IOR) implies a need for further research. After briefly examining available data on industrial development in the IOR region, this chapter reviews firstly the theoretical underpinnings, and subsequently the empirical evidence for both threats and opportunities. It then outlines neglected areas o f relevance to industrial development and the IOR and proposes an agenda for further research.

B ackground

Although the term ‘integration’ was first coined in literature about industrial organization to refer to the combination either vertically or horizontally o f industrial firm s,1 industry does not figure largely in much o f the available literature on regional integration. Industrial development per se is not seen as a priority reason for integration, nor is the latter viewed as having a strong impact on industrial development or, more particularly, as having major implications for industrial policy. The impact o f integration on industry is rather viewed as a by-product of its main focus of interest, trade. There exist, nevertheless, many reasons for supposing that regional integration will have a major impact on the pattern o f industrialization. A framework for examining this impact is here presented through a study of the threats and opportunities created by regional integration. Integration poses a threat to existing and nascent industries in member countries by exposing them to new or increased competition. On the other hand, it also creates opportunities for the expansion o f those industries through, for

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example, enhanced market access and economies o f scale. Any potential member o f a regional grouping thus needs to clarify in what ways such positive and negative ‘trade’ factors are likely to affect the development of their industrial sector. In addition to trade, regional integration has a more direct potential impact on industrial development through, for instance, a change in the pattern o f Direct Foreign Investment (DFI). This might result in new industrial investment or joint ventures in the region, enhanced technology transfer, and regional co-operation in research and development activities. In terms o f industrial policy it is therefore important to develop methods o f minimizing potential threats and maximizing the advantages presented to industrial development by regional integration, at both national and regional levels. Opportunities for industrial capability development, for example, could be encouraged through a range o f planned networking and other co-operative mechanisms.

T a b l e 29: C h a r a c t e r is t ic s o f In d u s t r y in S e l e c t e d IOR C o u n t r ie s 2 Popu­ lation (m) Mid 1993 S. E. A sia Singapore Malaysia Thailand Indonesia South A sia India Pakistan Bangladesh Sri Lanka S/E A frica South Africa Kenya Mauritius Tanzania

Average annual manufacturing growth 1970198080 93

Manufacturing as % o f GDP 1970

1993

% o f machinery & transport equipment 1992 1970

3 19 58 187

9.7 11.7 10.5 14.0

7 10 11 12

20 12 16 10

28 n.a. 28 22

28 8 4 2

54 34 40 14

898 123 115 18

4.6 5.4 5.1 1.9

6 7 3 7

15 16 6 17

17 17 10 15

20 6 3 10

25 n.a. 7 4

40

4.7

-0

24

23

17

19

25 1 28

9.9 7.1 3.7

5 10 1

12 14 10

10 23 5

16 5 5

10 3 n.a.

What such an analysis cannot provide is a ready answer to the issue of what should constitute the optimum level o f economic integration within the IOR. The form integration takes (e.g. free trade area / customs union / common

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market / economic union) will affect the potential impact o f integration on industrial development. There may indeed be a model form o f integration best suited to the maximization o f industrial development across the region, but its adoption is likely to be a source o f conflict. Models best suited to promote the industrial interests o f advanced economies may not be the ones less developed countries might choose. Research needs to be conducted to identify conflicts o f industrial interest and means to resolve them prior to assessing which form o f regional co-operation is likely to most promote industry across the region as a whole. The other important issues this chapter will not attempt to address in any depth include the implications for industrial development and policy in the region, o f pursuing varied macroeconomic policies in the participant countries, and the implications for macro-economic policy making o f attempting to maximize the rate o f industrial development. Macro-economic co-ordination would come at a very late stage o f economic integration and should not figure in current lOR debates. Also, while assuming that regional integration in the IOR region is a realistic agenda in the medium term, and one desired by potential participants, this chapter does not examine their motives which are likely to range widely from Western Australia, which might primarily desire access to new and enlarged markets, to Tanzania and Mozambique, countries that might hope regional co-operation would bring increased employment, new sources o f investment and access to more modern or appropriate technology. Different motives for belonging to the IOR grouping are likely to result in different national attitudes to issues o f industrial development, and hence have the potential to become major political stumbling blocks in IOR negotiations.

E x a m in a t io n o f t h e D a t a o n IOR I n d u s t r i a l D e v e l o p m e n t

An examination o f selected data on IOR industrial development (see Tables 29 and 30) reveals the following general observations (for countries other than Australia):3 1. Since 1970, average growth rates for industry and manufacturing have been highest in Southeast Asia, followed by South Asia, and lowest in Africa (except for Mauritius). In the 1980s, growth in most Southeast Asian countries slowed slightly, while in most o f South Asia it accelerated. This trend presents both threats and opportunities for southern African IOR members. They would be entering into closer trading relations with more industrially dynamic countries, but those

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countries would present new opportunities through their growing markets. 2. Since 1970, industry and manufacturing as a share o f GDP has grown markedly in Southeast Asian countries and much less so in South Asia. In southern and eastern Africa there are indications o f stagnation (South Africa) and de-industrialization (Kenya and Tanzania). At present, all southern African countries except Zimbabwe and South Africa have very limited potential for industrial development. 3. Within the manufacturing sector, the more advanced states o f Southeast Asia have rapidly developed capital goods industries. The percentages o f machinery, transport equipment, and chemical manufacturing production are significantly higher than for the rest o f the IOR. South Africa and India have not experienced rapid growth in the key sectors exhibited by the Southeast Asian countries. However, their relatively well-developed and diversified manufacturing sectors provide a base for future growth and specialization. South Africa has relatively a very high percentage o f manufacturing value represented by total earnings. This could mean that South African workers are: -

-

relatively unproductive and could be pushed to work harder in order to improve value added (in South Africa in the early 1990s, unlike most other IOR countries, gross output per employee was lower than in 1980). unable to improve productivity in the same way as in other countries because o f the significant shortfall o f investment in South Africa.

There appears to be much scope in the longer term for improving productivity in South Africa. Except for South Africa, merchandise exports as a percentage o f GDP grew rapidly from 1970-93 in all IOR countries. During that period, the growth o f manufactured imports from Southeast and South Asia by OECD members was especially rapid. The share in this trade o f more technologically advanced products, like machinery and transport equipment, also grew faster than general export growth (see Table 30). In most African countries, this share stagnated or declined. Research is required into the impact of differences in the trade patterns and possible changes in export destinations between IOR countries.

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T a b l e 30: T r a d e in M a c h in e r y & T r a n s p o r t E q u ip m e n t in S e l e c t e d IOR C o u n t r ie s 4 Exports (% total merchandise exports) 1970 1993

Imports (% total merchandise imports) 1970 1993 S. E. Asia Singapore Malaysia Thailand Indonesia South Asia India Pakistan Sri Lanka S/E Africa South Africa Kenya Madagascar Mauritius

23 28 36 40

49 54 45 42

11 2 0 0

55 41 28 5

23 31 18

14 35 21

5 0 0

7 0 2

46 34 30 13

44 25 41 25

7 0 2 0

8 n.a. 2 2

T h e T h e o r e t ic a l C o n t e x t

Orthodox economic theories o f regional integration tend to use simple models that primarily examine the effects o f integration on welfare.5 The earliest formation o f a theory of customs unions by Jacob Viner suggests that integration will result in both trade creation and trade diversion. The more complementary the member economies in terms of tastes and the production o f goods, and the greater the differences in the relative costs of production o f those goods, the higher the benefits derived from trade creation. Thus, following the move into a customs union, the greater are the ensuing resource reallocation and specialization, the greater are the benefits. This view assumes that pre-integration tariffs present significant barriers to trade, and that regional integration is a step towards free trade which would optimize resource allocation. With trade creation and/or trade diversion possible, each customs union must be assessed individually in order to determine the net benefits ensuing from both. However, such theory is essentially static in analysis, ignores distributional considerations and reveals little about the differential sectoral impact o f integration. Its assumption that countries will alter their production patterns in accordance with static comparative advantage implicitly prejudices industrial development opportunities, notably capital intensive ones, in less developed countries. By contrast, this chapter follows

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Chenery et al. in highlighting, as a critical factor in accelerating growth, the development o f manufacturing because the latter is characterized by high income elasticity, tradable and substitutable goods, productivity gains through reallocation o f resources, and technological change.6 While some of these may be true o f other sectors as well, it is only manufacturing that brings them together to offer the possibility o f sustained dynamic growth, both in manufacturing and in other sectors. For example, major tech­ nological progress in agriculture is enhanced by the application o f fertilisers, machinery and biotechnology - all o f which are manufactured. Thus, o f key interest to the debate about the IOR is the impact o f integration upon manufacturing development. A more dynamic view o f comparative advantage as something which can evolve, and even be shaped, provides a different theoretical basis for examining the potential impact o f integration upon industrial development. It also supports the argument for the need to examine the role for industrial policy in the context o f integration. Orthodox theories make other restrictive assumptions, including competition in the markets for productive inputs such as raw materials, labour and finance, as well as assumptions o f insignificant transport costs, factor mobility within but not between countries, prices that accurately reflect opportunity costs o f production, and full employment o f resources.7 The relaxation o f some o f the more restrictive and, in the current context, less realistic assumptions will necessarily modify projections based on theory. For instance, free international factor mobility, as might occur in a common market, or allowing for the presence o f transnational corporations (TNCs), will have theoretical implications for industrial development. The impact o f integration on rents earned by foreign companies will change the welfare impact on the host country from that postulated in the simple orthodox model.8 Furthermore, in TNC dominated markets characterized by imperfect competition or oligopolistic structures, a priori predictions o f net economic outcomes may be very difficult.9 Individual industries have different ownership patterns across the IOR so that, while the general theoretical impact o f the relaxed assumptions can be developed, detailed research is required into likely industry specific responses to increased regional integration. The so-called ‘new trade theory’10 and more recent geographical literature on trade11 also re-examine these restrictive assumptions and provide openings for further theoretical research. The former emphasizes the exploitation o f economies o f scale and imperfect competition, while the latter examines the impact on industry agglomeration (locational concen­ tration) and regional differentiation o f transport costs, market size and trade policy regimes. Such literature offers reasons as to why manufacturing industry will not always relocate to where production costs are lowest. For

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example, in more densely populated areas, transport costs to market will be reduced and there may be economies o f scale in producing close to other manufacturers. This chapter suggests directions in which such theories could be further developed in order to indicate the threats and opportunities integration might present for industrial development. I. T h e o r e t ic a l t h r e a t s

According to orthodox theory, a customs union is more likely to raise welfare for a given volume o f international trade ‘the higher is the proportion o f trade with the country’s union partner and the lower with the outside w orld’ and ‘the lower is the total volume o f foreign trade [i.e. outside the union], for the lower is foreign trade, the lower must be purchases from the outside world relative to purchases o f domestic com m odities’.12 Thus the threat o f net loss o f welfare from integration is greater for small open economies that consume little o f either their own or their partners’ produce and which by implication do not possess well developed, broad-based, industrial sectors. The threat is greater should the smaller economies be less developed than larger ones in the region, for they may then also suffer cost, technology and efficiency disadvantages. To counter this a compensation scheme might be required in integration proposals, as might other projects to develop capabilities in smaller and economically weaker countries. As this is a potentially highly contentious issue, such proposals require prior theoretical and empirical research. In theory, the threats to industrial development posed by factor mobility arise from flows o f capital and labour (notably skilled) to areas in the region where returns are highest. Market imperfections, such as information deficits that result in an over-estimation o f risk in less developed economies, may accentuate such patterns. Here again, theoretical research on industrial concentration and agglomeration, could provide a useful framework for empirical analysis. Also, although there are currently few TNCs based in the region, the enlarged market o f a more integrated IOR could prove attractive to them. The subsequent pressure on regional companies could result in a growth o f oligopolistic and monopolistic structures within the region. However, the threats arising from increased foreign ownership o f regional industrial capital depend on how rents are distributed and what opportunities arise for learning and competing within the region. Alternatively, regional oligopolies might be strengthened that could counter non-regional TNCs. Further research, which might have implications for competition policy, needs to be pursued into the potential impact o f TNCs on integration. A further threat derives from the speed o f intra-regional tariff reductions that more competitive countries might pursue. For instance, many sectors o f hitherto protected South African and Indian industry may require time to

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improve their com petitiveness.13 Research, such as Scerri’s, could help to indicate the optimal rate o f tariff reduction for each country as well as to identify which national industries are potentially com petitive.14 2. T h e o r e t ic a l o p p o r t u n i t i e s

The main advantage o f integration in orthodox theory is increased specialization o f production stemming from enhanced market opportunities. In natural resource rich, skill poor, countries, increased specialization is unlikely to lead by itself to the development o f more than primary industrial sectors. This may present one-off static gains, but the dynamic picture in terms o f allocative shifts in the region as integration increases, requires more study. In less orthodox approaches, gains from integration can result from increased economies o f scale in an enlarged regional market. Similarly, integration may increase regional competition for national based companies and thus improve factor efficiency. Given continuous technological and market change, this could mean larger markets for a range o f national goods and mitigate any costs o f adjustment.15 Such arguments assume the development o f enlarged homogeneous markets and improved production techniques and management. However, IOR markets are relatively fragmented and some o f the more advanced economies are already highly efficient producers. A possible answer to increased polarization is the relocation o f especially low skill labour intensive industries to areas where, whilst serving the same markets, costs could be reduced. Such relocation would require political stability, infrastructure and an initial skill base. Again research could indicate optimal industrial relocation within a more integrated IOR. Co-operation in policies for the development o f industry, technology and other industrial capabilities could be important to counter any negative effects o f polarization such as the growth o f monopolies.16 The industrial policies o f countries in the eastern IOR could provide models for the rest o f the region. 3. C o n c l u s i o n

Theoretically, integration is viewed from the perspective o f maximizing the opportunities and minimizing the threats for participating countries by, for example, developing a sufficiently flexible framework to enable each member to design trade and industrial policies that maximize their potential dynamic comparative advantage

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T he E m pir ic a l C o n t e x t

This section examines the experience o f economic integration in southern Africa. As proposals by SADC and the PTA/COMESA to develop regional industrial policies have hitherto failed due to the projection o f national over regional interests,17 attention is focused upon the Southern African Customs Union (SACU), comprising South Africa and the BLNS (Botswana, Lesotho, Namibia and Swaziland) countries. In an arrangement that is no longer acceptable to the new South African government, the South African exchequer through SACU has traditionally implicitly subsidized industry to locate in South Africa rather than in the BLNS countries.18 South Africa has compensated the BLNS states for the price raising effects o f supportive import restrictions through a revenue sharing scheme.19 Nonetheless, there exist ‘natural’ constraints, such as small and landlocked domestic markets, skill shortages and lack of research and development capabilities, to industrial development in the latter. With the recent signing o f the SADC Trade Protocol, awaiting ratification by member countries, and ongoing discussions about the future o f SACU in the context o f that protocol, the future o f trade relations in the sub-region is not clear at present. However, it is evident that prospects for industrial development continue to take a backseat in the various deliberations presently taking place. 1. T h r e a t s

Through SACU, the BLNS countries lost the possibility of developing some viable industries, whilst the revenue sharing scheme proved inadequate compensation. Moreover, South African tactics damaged non-BLNS neighbours like Zimbabwe where a number o f textile firms went bankrupt due to onerous South African import duties. In general, protectionism has contributed to the rise o f inefficient and uncompetitive industries in southern 20 Africa that are characterized by excess capacity. Even potentially competitive South African industries are currently experiencing difficulty adjusting to competition internationally because o f the rapid removal o f protective barriers and a lack o f well planned and implemented promotional measures to take their place. To strengthen rather than weaken the southern African economies, there is a need for co-operative regional reforms such as the reduction o f tariff and non-tariff barriers within the region. Within the IOR, South Africa is one o f a number o f medium sized economies overshadowed by larger powers, while southern Africa is one o f its poorest sub-regions. Without adequate co-ordination and support, southern Africa may continue to find difficulty attracting industrial investment.

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2. E m p i r ic a l o p p o r t u n i t i e s Its dominance o f SACU ensured for South Africa the main industrial benefits stemming from the organization, including an enlarged captive market, enhanced manufacturing growth, and protection within the SACU area.21 Although the IOR might act as a check on South African dominance in southern Africa,22 and would certainly not permit it to reproduce the same trade patterns within the IOR region, South African industry would gain from strengthening o f neighbouring economies. The sub-region will remain a major market and area o f competitive advantage for South Africa under a more integrated IOR due to transport costs, regional market knowledge and accessibility. Over 70 per cent of South African exports to non-SACU African countries consist largely o f manufactured goods, a high percentage relative to its exports to other parts o f the world which were around 40 per cent in 1997. While only 13 per cent o f total exports went to the rest o f Africa, those destinations absorbed nearly a quarter o f South African manufactures. Nearly 65 per cent o f all African trade was with southern African countries.23 There also exist opportunities for South Africa’s neighbours to improve their prospects for industrial development at a sub­ regional level prior to substantive moves towards IOR integration. For instance, the ADB recommends that BLNS countries should participate in forming SACU policies that affect the manufacturing sector.24 Research should be undertaken to investigate the potential impact o f the IOR initiative on sub-regional integration, and into areas o f potential industrial complementarity within the IOR between national industries. Some apparently competitive industries may offer opportunities for intra­ industry trade or product diversification and specialization, as is the case with the exchange o f both iron and steel manufactures between South Africa and Zimbabwe.25 More generally, whereas immediate exposure to international competition could threaten the existence o f national industries in southern Africa, their controlled exposure to regional competition, together with appropriate levels of support, could help them improve efficiency.26 3. C o n c l u s i o n

Southern African literature on co-operation focuses on integration within the sub-region or closer ties with Europe, little attention to date having been paid to the IOR. Relative resource endowment in the latter need to be researched on an industry-specific basis. Given the limited success of industrial co-ordination in southern Africa, research should also, whilst assuming national self interest to be initially paramount, be directed to regional policy harmonization as a precursor to IOR integration, rather than to co-operation at micro- or enterprise level.

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F u r t h e r F ie l d s o f R e s e a r c h

L The experience o f other IOR sub-regions: Both Europe and the USA import more manufactured goods from East Asian NICs than does Japan, an indication that the industrial trade o f those NICs is greater with advanced external economies than with one another.27 This is due to their industrial growth being based on exports. Research is needed into what lessons the IOR could learn from the NICs and others in its sub-regions in order to encourage growth in intra-regional trade and assist members to increase their penetration o f OECD markets. 2. The experience o f integrated regions outside the IOR: The IOR could learn lessons from Europe where the persistence o f national economic policies, the absence o f an EU corporate law, and the persistence o f non­ tariff barriers, have adversely affected the ability o f industries to benefit from integration.28 It was only in 1992, after nearly 30 years o f moving towards greater European trade integration, with the programme implemented to create a single European market, that implicit competition, technology and regional policies were formulated. This negation o f interventionist policies at the national level has not been replaced by a regional industrial policy. If adopted by the IOR, such an approach would prevent the adoption o f the successful interventionist industrial policies o f the East Asian NICs. Research is required into the best form o f regional co­ ordination, legal and other regulatory structures to ensure that regional industrial policies stimulate industrial development at a sub-regional level. 3. Policy and capacity building issues: Research is needed into the East Asian and European experiences in order to assess alternative approaches to supporting the promotion o f industrial development.29 Research is similarly required into which types o f capacity building projects,30 such as networking and human exchange and technology transfer programmes, or regional development initiatives such as developed in the EU, could promote AsiaAfrica co-operation. Co-operation between private concerns, as in the exchange o f information on complementary technology by TNCs, should occur on a commercial basis. 31 Industry specific studies that the ADB recommend at sub-regional levels, focusing on production rationalization, capacity utilization, projected regional demand and changes in employment,32 should be extended to the IOR as a whole. Research into appropriate ways o f building capacity for regional industrial development must be based on a sound understanding o f established institutional norms and patterns o f social relations that would be likely to facilitate or impede the success o f the various proposals. Implicitly such research must be driven

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by experts from the IOR member countries, and should not be based on purely technocratic solutions. 4. Direct foreign investment (DFI) into and within the IOR: As DFI tends to seize both export and domestic or open regional market opportunities, it will be attracted to an integrated IOR. Many IOR countries already possess incentives to attract outside investment. DFI, an important source o f learning and technology transfer, which in turn enhances technical efficiency and thus the competitiveness o f industries, tends to flow to countries that possess pools o f skilled labour and have proven flexibility in adopting and adapting imported technology. This causes problems for South Africa which has traditionally neglected human capability development, and for southern Africa in general where structural adjustment programmes ^SAPs) have resulted in decreased expenditure on education and training. ' Investment and relocation o f industries within a region are affected by political stability, the quality o f infrastructure, and differential costs o f labour, capital, and utilities. For example, the end o f Apartheid and the attraction o f lower wages and more stable labour conditions have prompted some South African industrial investment in neighbouring countries.34 Research is required to ensure a pro-active regional policy to avoid members competing for DFI in a zero-sum game and to provide a counter-weight to the power o f TNCs.35 5. Export Processing Zones (EPZs): Many IOR countries are considering establishing EPZs, following the successful examples o f Mauritius, and Asian countries like Korea, Malaysia and Indonesia.36 EPZs are seen as a way o f attracting major flows o f DFI. Thus Mauritius raised money not only on a local market flush with funds from the sugar industry, but more importantly through equity from Hong Kong.37 However, much investment tends to be unregulated and unco-ordinated, and in addition EPZs tend to be characterized by weak backward and forward linkages, limited transfer o f skills and technology, and poor treatment o f workers. As EPZs are designed to develop industrial enclaves free o f national tariffs and other regulations, they may be unnecessary in an integrated open IOR. Research is required to investigate this, and ways to ensure a co-ordinated approach to EPZs. 6. Treatment o f workers: A close relationship exists between the increase in technological and managerial skills, and industrial development. Increased competition will alter the returns to workers relative to capital both between countries and across skill and experience levels, which may place a downward pressure on wages and thus provoke worker resistance. Research is required into the relationship between worker treatment and integration at both theoretical and empirical levels, and into possibilities within the IOR to

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promote the development o f skills and co-operation between labour movements. 7. Trade in services, intellectual property and WTO: Research is further required into the potential for developing financial services and tourism, and into the impact on regional industrial development o f WTO regulations on trade in services and intellectual property and o f Trade-Related Intellectual Property Rights (TRIPS). 8. Peculiarities o f the IOR: The IOR links advanced industrial countries like Australia and Singapore to relatively poorly developed economies in Africa and South Asia. There also exists a wide variety o f industrial experience across the IOR. These need to be identified and research carried out into the considerable potential for the development o f hitherto undeveloped intraregional trade in manufactures.

C o n c l u s io n : A R esea r c h A g e n d a

There exist many areas where research is required before the range o f threats and opportunities stemming from IOR integration can be fully identified and translated into policy recommendations. This in turn calls for a research agenda, with co-ordinating agencies, established in each sub-region. The agenda might include both theoretical and empirical issues. Theoretical research might include (i) a comparative study to evaluate which is the optimal form o f regional integration for industrial development, (ii) the application o f relevant new trade and geographical theories to regional integration, and notably the impact o f TNCs on integration, (iii) the impact o f integration on weaker economies and the possibility, within a dynamic theoretical environment, for compensation schemes, (iv) the potential for the development in an integrated IOR o f supra-national policy co-operation on development o f industry, technology and human and institutional capacity and (v) the refinement o f alternative theories on optimal levels o f intervention in industrial development at regional level. An empirical research agenda might include (i) relative resource endowments within the region and likely allocative shifts, on an industry specific basis and in aggregate, (ii) the nature o f capital, labour and product markets within the IOR, and the relative efficiency o f members’ industries, (iii) labour markets and worker treatment in IOR countries and in non IOR integrated regions, (iv) issues o f competitiveness and the potential expansion o f intra-regional trade in manufactures, (v) mechanisms for accommodating historical

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IOR I n t e g r a t i o n

imbalances in southern Africa and the IOR, (vi) harmonization o f policies towards, and incentives for, the attraction o f investment into and across the IOR, (vii) the need for regional protection, or promotion, o f infant industries, (viii) the promotion o f exports within WTO constraints, (ix) alternative mechanisms for developing strong co-ordinating and regulatory institutions within the region, (x) regional policy to develop industrial districts, (xi) the promotion at policy and industry levels o f industrial capa­ bilities and (xii) the potential development o f service industries in the IOR.

N otes 1

M.N. Jovanovic, International Economic Integration (London: Routledge, 1992), p. 4. 2 World Bank, World Development Indicators, 1995 (World Bank: Washington DC, 1995). 3 These observations would benefit from more detailed research using full year by year data available from the World Bank’s World Tables and other appropriate secondary data sources. 4 World Bank, World Development Indicators, 1995. 5 See e.g. Jacob Viner, The Customs Union Issue (New York: Carnegie Endowment for International Peace, 1950); R.Lipsey, ‘The theory o f customs unions: a general survey,’ Economic Journal 70 (1960), pp. 496-513; P. Robson, The Economics o f International Integration (London: George Allen and Unwin, 1984); Jovanovic, International Economic Integration. 6 H. Chenery, S. Robinson and M. Syrquin, Industrialisation and Growth: a Comparative Study (Oxford: Oxford University Press, 1986), especially, p. 351. 7 Robson, Economics o f International Integration, pp. 11-12. 8 Robson, Economics o f International Integration, pp. 176-7. 9 Robson, Economics o f International Integration, p. 179. 10 See E. Helpman and P. Krugman, Market Structure and Foreign Trade (Cambridge: MIT Press, 1985). 11 See P. Krugman, Geography and Trade (Cambridge: MIT Press, 1991) for a good outline and exposition o f the importance o f economic geography and its use, in the context o f new trade theory assumptions, in examining issues related to patterns o f regional manufacturing development. 12 Lipsey, ‘theory o f customs unions,’ p. 277.

187

S im o n W in t e r

13 Gwyn Campbell and Mario Scerri, ‘The Indian Ocean Rim - Possi­ bilities for an Association,’ South African Journal o f International Affairs 11.2 (1995), pp. 11-37. 14 Mario Scerri, ‘R&D and the International Competitiveness o f the South African Manufacturing Sector,’ South African Journal o f Economics 58 (1990), pp. 341-56; idem, ‘The competitiveness o f the Southern African Customs Union within the context o f the Indian Ocean Rim ’ in this volume. 15 Jovanovic, International Economic Integration, p. 279. 16 Although, if well regulated, monopolies are not necessarily negative. 17 African Development Bank (ADB), Regional Integration in Southern Africa (Abidjan: ADB, 1993), pp. 38-41. 18 Marina Mayer and Harry Zarenda, The Southern African Customs Union: a review o f costs and benefits (Halfway House: DBSA, 1994), pp. 29-30. 19 ADB, Regional Integration in Southern Africa, pp. 30-1. 20 ADB, Regional Integration in Southern Africa, p. 24. 21 M ayer and Zarenda, The Southern African Customs Union, pp. 27-9. 22 Campbell and Scerri, ‘The Indian Ocean Rim ,’ p. 18. 23 R. Davies, D. Keet and M. Nkuhlu, Reconstructing Economic Relations with the Southern African Region: issues and options fo r a democratic South Africa (Bellville: MERG/Centre for Development Studies, 1993), p. 6; CSS Trade Statistics (Pretoria: CSS, 1997). 24 ADB, Regional Integration in Southern Africa, p. 66. 25 ADB, Regional Integration in Southern Africa, p. 56. 26 ADB, Regional Integration in Southern Africa, p. 70. 27 D. Lorenz, ‘Trade in manufactures, newly industrialising economies, and regional development in the world economy - a European view ,’ The Developing Economies 27.3 (1989), p. 227 - table III. 28 Jovanovic, International Economic Integration, p. 215. 29 For the controversy over East Asian industrial development see, e.g. World Bank, The East Asian Miracle (Washington DC: World Bank, 1993); A. Amsden, Asia's Next Giant (New York: Oxford University Press, 1989); Ha-Joon Chang, th e Political Economy o f Industrial Policy (London: Macmillan, 1994); R. Wade, ‘Japan, the World Bank, and the Art o f Paradigm Maintenance: The East Asian Miracle in Political Perspective,’ New Left Review 217 (1996), pp. 3-37. 30 Campbell and Scerri, ‘The Indian Ocean Rim,’ p. 22.. 31 F. Chesnais, ‘Multinational enterprises and the international diffusion o f technology,’ in: G. Dosi et al. (eds), Technological Change and Economic Theory (London: Pinter, 1988). 32 ADB, Regional Integration in Southern Africa, p. 83.

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33 34 35 36

IOR I n t e g r a t i o n

ADB, Regional Integration in Southern Africa, p. 4. ADB, Regional Integration in Southern Africa, p. 90. ADB, Regional Integration in Southern Africa, p. 91. ADB, Regional Integration in Southern Africa, p. 73; World Bank, Export Processing Zones (Washington DC: World Bank, 1992). 37 ADB, Regional Integration in Southern Africa, pp. 73-4.

C h a p t e r 12 A F u t u r e C o m m o n A g r ic u l t u r a l T r a d e R e g im e f o r S o u t h e r n A f r ic a 1 J.J. T r u t e r

South and southern Africa stand on the threshold o f a new era, both political and economic, as a consequence o f two main factors: firstly the new political acceptability o f South Africa in both the regional and the world economy and, secondly, the changing nature o f the international economy. This chapter, focusing upon trade in agricultural commodities, examines the options open to southern Africa, notably in the context o f regional co­ operation.

R e g io n a l is m

and the

W o r l d E c o n o m ic O r d e r

The world economic order has undergone a fundamental shift during the past two decades, characterized by the rapid development o f two apparently contradictory trends, global liberalization, and regionalism. The conclusion of the Uruguay Round o f GATT multilateral trade negotiations and the establishment o f the World Trade Organisation (WTO) have brought increased pressure for global trade liberalization. However, the dismantling o f protectionist barriers has not only made the global economic environment much more competitive but has also increased the interdependence o f economies. This in turn has made countries much more vulnerable to the actions o f others. It is in this light that the formation o f regional trading groups is being encouraged as a means o f offering national economies the advantages o f regional co-operation and assistance whilst ineluctably pushing them towards total liberalization.2 The strongest regional groupings have so far emerged in the developed world. Thus Europe, the history o f which was hitherto characterized by political and economic fragmentation, has forged what is today one o f the strongest regional economic organizations. It is one that many o f the newly independent states o f eastern Europe aspire to join. Similarly a traditionally introspective United States has not only signed the North American Free Trade Agreement (NAFTA) with Canada and Mexico but also launched the ‘American initiative’ to establish a western hemisphere free trade

A F u t u r e C o m m o n A g r ic u l t u r a l T r a d e R e g im e f o r S o u t h e r n A f r ic a

agreement. However, such developments have been viewed with some concern by less developed nations. The latter fear that the EU and NAFTA might raise their external trade barriers whilst granting other nations former East European members of the Soviet bloc in the case o f the EU and Chile in the case o f NAFTA - preferential access to their markets, and that they might use their regional clout to drive harder bargains with other, less competitive economies. Certainly such groupings have successfully promoted regional trade. The OECD has predicted that in the decade 19922002, trade liberalization will generate a net GNP gain o f $213-274 billion, o f which approximately $180 billion (66-84 per cent) is expected to go to OECD countries and only $30-70 billion (11-33 per cent) to developing countries.3 In less economically developed regions o f the world, GATT is seen to be a tool o f the ‘North’. As such, it is considered inequitable for the barriers it considers should be dismantled are those which suit the economic interests o f advanced rather than o f developing economies. This fear stems in part from the policies o f regional groupings in the ‘North’. Thus the agricultural exports o f developing countries have been adversely affected by the farm policies adopted by the US and by the EU since the late 1970s. For instance, Mexico has benefited little from NAFTA whereas, from the inception o f the organization in 1994 to m id-1995, US agricultural exports to Mexico have increased by 11 per cent. Also, prior to its EU membership, Britain was one o f the world’s largest importers o f cereals, but with the introduction o f EU preferences and guaranteed farm prices almost 30 per cent higher than open market prices, Britain in the 1980s became a net exporter o f cereals. Argentine, a traditional supplier o f cereals to Britain, thus found itself excluded from a profitable market.4 In the ‘South’ the main gains from liberalization are expected to be felt in the agricultural and textile sectors, although in Africa some countries are expected to reap net gains from liberalization only from the 21st century, whilst others are predicted to lose out completely. Countries o f the ‘South’ must adapt their institutions to accommodate the changes in the global economic environment or face the risk o f economic decline and marginalization. However, there is now a premium upon forming regional groupings, not only to facilitate the transition to full liberalization but, more importantly in many cases, to shield individual economies from the more pernicious effects o f regional organizations and institutions in more developed countries.

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A C o m m o n I n s t it u t io n a l F r a m e w o r k It is in this context that options for regional co-operation need to be discussed. Regional guidelines need to be devised both to deal with trade disputes which have become increasingly common and contentious in recent years due to fundamental shifts in the international economic environment, and to facilitate the transition from national to regional economic policies with the aim o f promoting regional trade and development through an optimum use o f natural resources and improved factor allocation along the lines o f comparative advantage and thereby increased production and value added. A common regional policy in turn implies common institutions, which could be established at a number o f levels o f economic co-operation, each implying a lesser or greater degree o f harmonization o f national institutions, at both national and regional level. However, care must be taken to ensure that policy formation for regional co-operation should form an institutional response designed to promote Pareto efficient improvements,5 rather than a reflection o f the relative bargaining power o f primarily political pressure groups who have no inherent long term communality o f interests with forces directing change at a the level o f the regional or international economy.6 Similarly, in order to promote economic development within the region, it is important that regional co-operation leads to trade creation and not merely trade diversion.7 A common regional institutional framework could imply one o f two set­ ups. The first is where a country has access to a market which is also open to all other members o f the international economic community. The second is where a small group o f countries establish a market common to themselves and with a common policy towards other economies. This might include common external tariffs, common rules governing industrial or agricultural trade, and / or a common monetary and fiscal policy. Economic co-operation could assume one o f a number o f forms, including that o f a preferential trading club, a free trade area, a customs union, a common market, and finally that o f complete economic union. That adopted by the EU, the common market, implies the abolition o f all trade restrictions between member states, a common external tariff, and the free movement o f all factors including capital and labour.8 A further institution that might assist regional co-operation is a common development fund, the administrators o f which would be responsible for the co-ordination o f development markets in the region, and promote those regional industries that possess a comparative advantage. Examples o f such an agency are the Central American and the Southern African Development Banks.

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T h e S o u t h e r n A f r ic a n C a s e

In southern Africa there exist a number o f barriers to the harmonization o f policy and institutions. Whereas most African nations gained independence from colonial rule in the 1960s, some countries in southern Africa, like Zimbabwe in 1980 and Namibia in 1990, only became independent relatively recently and naturally cherish their national institutions as emblems o f their independence. Even for other southern African states, the surrender o f decision making sovereignty with regard to issues like trade policy, labour relations or the establishment o f export standards for agricultural and industrial products is a complex issue with important domestic as well as international political consequences. However, a major positive element is the end o f Apartheid in South Africa and the introduction o f stable democratic government. This has permitted a reversal o f the previous isolationist and antagonistic Apartheid policy towards its neigh­ bours. In consequence, South Africa in 1994 renegotiated the Southern African Customs Union Agreement (SACUA) with Botswana, Lesotho, Namibia and Swaziland in the context o f its application to join the Southern African Development Community (SADC), an organization founded to counter South African predominance in the region. Its membership was accepted the same year. This is a critical development as although the region can supply some o f the industrial, agricultural and service needs o f South Africa, the latter with a GDP o f $US 103.7 billion (1992) has an economy five times larger than the rest o f SADC (excluding Mauritius). Although the EU is the primary export market for other SADC members, primarily due to their Lomé Convention status, South Africa, which is their primary source o f imports, will become more important to SADC once Lomé privileges are curtailed in the early 21st century. The presence o f South Africa is thus essential to the success o f SADC.

T able 31:

P rospects for R egional C o - operation in S outhern

A fr ic a 9

Rules 1. Proximity

2. Proportionality

Comments Historically, overlapping transport networks tend to create good neighbours. Low cost systems will strengthen this trend South Africa’s economic dominance renders a balanced, symmetric trade pattern difficult. However, it could export its research and training to help correct the imbalance

193

J.J. T r u t e r

3. Comparative advantage

4. Distortion

5. Elasticities

6. Trade Creation

7. Trade diversion

8. Compensation

9. Policy compatibility

Amongst other factors, transport costs, production and processing technology, and variation in soil and rainfall patterns provide the basis for evaluation o f comparative advantages Regional prices o f foodstuffs, like maize, are highly distorted. However, in areas where liberalization has occurred, prices are close to the world equilibrium Income elasticity o f demand is high for meat, fish, milk and vegetables, but less so for grains which are subject to food security policies Policies are required to exploit existing and to establish future positions o f comparative advantage Economic imbalances within the region, and restrictive sanctions, promote the likelihood of trade diversion. Cost savings for compensation could be available An innovative compensation scheme is required, inter alia to develop future positions o f comparative advantage through investment programmes Policies will need to take into account major regional and global economic and political forces

T able 32: SADC - Population , GNP and External D ebt 10 Country /

Population

Total

GNP per

Eternal

External

Region

(000's)~

GNP

capita

debt

debt as %

1996

(US$ b) ~

(US$) 1992

(US$ b) -

GNP1992

1992 Angola Botswana

1992

11,500

6.0

620

n.a.

n.a.

1,500

3.3

2,450

n.a.

-251 41

Lesotho

2,100

1.2

610

0.5

Malawi

11,400

2.3

230

1.7

73

1,100

3.0

2,800

102

-17

Mauritius Mozambique Namibia

16,500

1.0

70

4.9

478

1,600

2.4

1,670

n.a.

-138

194

A F u t u r e C o m m o n A g r ic u l t u r a l T r a d e R e g im e f o r S o u t h e r n A f r ic a

South Africa Swaziland Tanzania Zambia Zimbabwe

42,400

109.7

2,830

104

900

0.8

1,080

n.a.

1,314 n.a.

30,500

2.7

100

6.7

247

9,700

3.2

370

7.0

219

11,500

6.1

580

4.0

66

Considerable potential exists for regional economic growth. One o f the most important areas for development is agricultural trade. The state has a vital interest in agriculture both for economic and political security goals. Thus the agricultural sector o f all countries o f southern Africa have been characterized by considerable state intervention. In terms o f regional co­ operation, regional self-sufficiency in food is again an economic and political priority. Regional co-operation will thus necessitate a far greater degree o f collaboration on both the economic and political levels than has hitherto existed in order to produce a harmonized regional agricultural policy from a plethora o f national policies.11 For instance, despite a chequered record o f production o f maize, demand for the latter is likely to grow from approximately 27 million tonnes in 1989 to 70 million tonnes by 2025, representing a fourfold increase in demand in 30 years. Some o f this demand will have to be met by imports, but the governments in the region wish to ensure that the bulk o f the increased demand for maize is met by increased market production within southern Africa. This goal implies the establishment within SADC o f co-ordinated marketing, pricing and transport systems capable o f ensuring the efficient movement of surpluses from one part o f the region to another. The guidelines exist, but the political will must be created to abide by them .12

S o u t h A f r ic a , t h e IO R a n d A g r ic u l t u r e

South Africa is the economic giant in southern Africa, but SADC is still a small player in world terms with a combined GDP o f approximately $US 126.4 billion (1992), roughly equivalent to that o f Denmark.13 South Africa has attempted in vain to negotiate for itself Lomé status with the EU, whilst its other attempts to gain privileged access to the European market have been limited. Thus in terms o f agricultural trade, restricted EU market access has been granted mainly for products in which South Africa does not possess a comparative advantage. Such exclusion from traditional markets outside Africa obliges South Africa to consider new emerging markets, such as the IOR countries, both as potential partners in a two-way trade in primary products and as a source o f new technology. At the same time,

195

J.J.

T r u te r

regional co-operation in the ‘South’ can enhance the bargaining power o f groupings in the ‘South’ with countries and economic institutions o f the ‘N orth’.

T a b l e 33: S o u t h A f r ic a n ( S A ) A g r ic u l t u r a l T r a d e w it h S e l e c t e d C o u n t r i e s , 1993 ( k g ) 14 Country Kenya Mauritius Malawi Saudi Arabia Kuwait Oman

Table

34:

Exports to SA wheat flour cane molasses tea wheat wheat flour -

Trade

in

Weight

Imports from SA Apples Maize Wheat flour Oranges Chickens Fruit juice

5,789,664 43,682,308 32,153,692 36,997,542 3,932,331 -

S elected

Weight 2,579,254 34,132,697 56,873,885 78,404,494 782,726 219,807

A g r ic u l t u r a l

C o m m o d it ie s

by

S e l e c t e d IOR C o u n t r i e s , 1993 ( k g ) 15

Country

Commodity egetables

Singapore: imports Exports Australia: Imports Exports India: Imports Exports M alaysia: Imports Exports Thailand: Imports Exports Indonesia: Imports Exports

Fruit

oil cake

Grains

pulses

-

12,417

1,300 12,104,704

736,559

77,938

530,215

-

-

-

1,886

12,104,704

125

16,849,170

-

-

450,120 63,000

2,531 -

375

266,337

457,507

46,325

-

-

-

-

-

-

1,337,267

50,000

-

-

-

-

-

-

-

.

.

.

358,776

-

-

41,665 35,000

-

-

620

-

251,164,856

It is in this context that the foundation o f the Indian Ocean Rim association, o f which South Africa is a founding member, must be considered. The IOR. has an estimated 25-35 per cent o f the global population, a market that

196

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includes many rapidly developing economies o f south and Southeast A sia.16 It is thus an organization which could open up valuable new markets for South Africa as for its other thirteen members. It could also, following the NAFTA example whereby the USA helped alleviate M exico’s balance o f payments problem, provide the basis for monetary stability throughout the region. That said, it is important that the lOR association is not dominated by the larger economies o f the region to the extent that they manipulate it for their own ends, to boost their own trade at the expense o f that o f smaller IOR member economies. This could be achieved by assigning a role within the IOR to the various sub-regional organizations. T able 35 : P roduction of S elected A gricultural C ommodities by S elected In d ia n O cean C o untries , 1993 ( 1,000 M T)17 Country South Africa India Indonesia Thailand Australia Singapore Malaysia Kenya Mauritius Malawi Saudi Arabia Kuwait Oman

Commodity Cereals 12,141 201,479 n.a. 22,226 28,549 n.a. 2,137 2,112 2 2,137 4,897 2 5

Vegetables 1,921 60,000 4,912 2,604 1,662 5 383 655 48 251 2,470 89 167

Fruit 3,938 31,850 n.a. 6,628 2,495 n.a. 1,184 974 12 498 933 1 202

Pulses 70 13,145 504 440 2,247 n.a. n.a. 200 2 264 8 n.a. n.a.

Although industrial trade and the provision o f services will be the main focus o f the IOR, the current definition o f membership will admit many less developed economies that are in the main exporters o f primary commodities including agricultural products. Some IOR countries have already shown an interest in purchasing South African agricultural commodities. Bilateral protocols on sanitary and phytosanitary standards already exist to facilitate agricultural trade between South Africa and certain IOR countries; Australia (flowers and meat), Thailand and Singapore (fruit, vegetable and meat) and India and M alaysia (fruit and vegetables). South Africa exports meat to Australia, Thailand and Singapore, but its most vibrant agricultural export to the IOR at present comprises citrus and deciduous fruit. Moreover, Outspan, the primary South African exporter o f citrus products, is currently also the export agent for citrus producers in Zimbabwe, Swaziland and Mozambique. The establishment o f a common exporter has optimized marketing, research

197

J.J. T r u t e r

and distribution facilities for the countries involved, ensuring the maintenance by producers o f common standards o f quality and health regulations. This in turn provides the basis for the growth o f an internationally competitive industry in southern Africa. The figures shown in Table 35 indicate that there is no real overlap in bilateral trade in agricultural commodities. This complementarity within the IOR indicates that its countries would benefit from closer agricultural trade and the harmonization o f trade practices, possibly with the long term goal of creating a common market in the region.

C o n c l u s io n

It is important for the economic development of southern Africa that the region promotes the process o f regional integration. It should advance from the current network o f flexible bilateral agreements and regional institutions like SADC, SACU and the Common Market for Eastern and Southern Africa (COMESA) to a more fully regionally synchronized organization with regional economic development as its overriding aim. Ideally, the region should establish a timetable whereby a free trade area would be created within five years and a common market within fifteen years. This entails rapid changes and a system o f compensation should be worked out for those countries adversely affected by the opening o f the southern African market. However, that compensation should not be used to bolster uncompetitive economic activity. Rather, countries should be encouraged to concentrate resources on increasing efficiency in sectors and industries in which they possesses a comparative advantage. At the same time, the southern African region has to accept that it is, in global terms, o f little economic significance. Moreover, it does not possess the infrastructural resources, such as capital, human capital and transport, to facilitate the creation o f a common market in the region. Thus a partnership with other countries within a larger, more economically powerful regional grouping, such as the IOR, is the best option. Such a partnership will benefit both southern African as a whole and its component countries. However, in order to reap the benefits o f regional co-operation, on all levels, member countries must adhere by the rules o f the organization and national institutions will need to change their national policies in order to accommodate those o f the regional grouping. Such policies in turn must address the pertinent issues: for example, an analysis o f the regional distribution o f natural resources would need to be undertaken in order to encourage production along the lines o f comparative advantage. Thus some countries would specialize in agricultural production, and others in technology, services or industrial

198

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production. At the same time, there would be increased movement o f factors, labour for example tending to move to where compensation for expertise is highest.

N otes

1 2

3 4 5 6 7

8

9 10

11 12 13 14 15 16

17

Opinions expressed in this chapter are those o f the author and do not reflect the opinion o f the Department of Agriculture o f South Africa. See e.g. K. Anderson and R.H. Snape, ‘European and American Regionalism: Effects on and Options for Asia,’ Journal o f the Japanese and International Economies 8 (1994), pp. 454-77. Anderson and Snape, ‘European and American Regionalism.’ K. Watkins, ‘Agriculture and Food Security in the GATT Uruguay Round,’ Review o f African Political Economy 50 (1991). David L. Weimer, ‘Institutional Design: Overview,’ in: idem (ed.), Institutional Design (London: Kluwer Academic Publishers, 1995). J. Knight, Institutions and Social Conflict (New York: Cambridge University Press, 1992). Van Rooyen, J. Nuppenau, E.A. von Bach, H.S. van Zyl and B. Njobe, ‘Agricultural Trade in Southern Africa: Opportunities for Co-operation and Development,’ paper presented at the IAAE Conference, Harare, 1994. M. Chacholiades, International Trade Theory and Policy (London: McGraw-Hill, 1978), p. 545; idem, International Economics (London: McGraw-Hill, 1990), p. 225. Source, Van Rooyen et a l , ‘Agricultural Trade in Southern Africa.’ Source: Le Monde, Bilan du Monde: L'année économique et sociale 1996 (Paris: Le Monde, 1997), pp. 97-106; UNDP, Human Development Report 1995 (Delhi: Oxford University Press, 1995), pp. 158-9, 180-1, 194-5; P. Esterhuysen, D. Fair and E. Leistner, South Africa in SubEquatorial Africa: Economic Integration (Pretoria: Africa Institute of South Africa, 1994). Van Rooyen et a l, ‘Agricultural Trade in Southern Africa.’ Van Rooyen et a l, ‘Agricultural Trade in Southern Africa.’ UN DP, Human Development Report 1995, pp. 192-3,212-13. Source: South African Department o f Agriculture. Source: South African Department o f Agriculture. Gwyn Campbell and Mario Scerri, ‘The Prospects for an Indian Ocean Rim (IOR) Economic Association,’ South African Journal o f Inter­ national Affairs 2.2 (1995), pp. 11-34. Source: United Nations, FAO, Agrostat (UN-FAO, 1995).

199

C h a p t e r 13 F o r g in g E c o n o m ic a n d P o l it ic a l R e l a t io n s b e t w e e n S o u t h A f r ic a a n d T a n za n ia in th e P o st A p a r t h e id E r a C .S . R w e j u n a

For many years Tanzania severed political relations with South Africa due to the apartheid policies practised by the former White minority government. Formal relations only resumed in 1992 following the release from jail of Mr. Nelson Mandela, and were fully restored after the landslide victory for the ANC in the first democratic South African election in 1993, when Tanzania nominated its first High Commission to South Africa. However, it must be emphasized that whilst the absence o f political relations under Apartheid had not permitted the expansion o f economic links between Tanzania and South Africa, it failed to destroy relations in some key economic sectors, notably mining, which had first been established in the 1940s. The advent o f the new South Africa, with a government dedicated to co-operation within the sub­ continent, augurs well for the regeneration o f old and expansion o f new relations on both the political and economic front. In particular, other countries o f southern Africa are hoping that South Africa will utilize its comparatively advanced technology to boost the economy o f the sub-continent in the spirit o f regional co-operation. Her southern African neighbours, such as Tanzania, are fully aware o f the giant economic status on the African continent o f South Africa - a country classified as possessing an economy with characteristics both o f advanced capitalist and underdeveloped societies.1 Given the fall o f Apartheid and the exigencies o f GATT, South Africa needs to rapidly expand its market possibilities both regionally and internationally. However, the possibilities o f it achieving that on its own are minuscule due to the fact that international trade is currently characterized by trade blocs each comprising a number o f national economies. Given this context, the obvious choice for South Africa is not only to help forge a regional trading bloc within southern Africa, but also to help stimulate economic development in neighbouring countries in order to boost the economic significance o f the bloc. The alternative is that South Africa and her southern African neighbours might soon become, in global terms, economically marginalized. This chapter examines the possibility o f forging such regional economic co­ operation through studying a specific case - the potential for expanding

F o r g in g E c o n o m ic a n d P o l it ic a l R e l a t io n s b e t w e e n S o u t h A f r ic a a n d T a n z a n ia

economic relations between South Africa and Tanzania. However, as the latter’s economy has much in common with most o f South Africa’s other southern African neighbours, it forms a solid basis for an analysis o f the need for and potential of, greater regional co-operation. The chapter is divided into three sections: the first focuses on the underlying need for promoting economic links between the two countries within the context o f economic problems currently facing both countries. The second section, which concentrates on existing relations between Tanzania and South Africa, examines traditional, existing and potential economic co-operation, whilst the third section proposes some recommendations.

T h e N e c e s s it y of F o r g in g E c o n o m ic L in k s

There is currently a considerable momentum towards the establishment o f regional co-operation which is viewed as a major means not only of forging economic development but o f economic survival. In Europe, countries o f the former Soviet Union are looking to join the European Union; a free trade area comprising Canada, Mexico and the US has been created in North and Central America; and the countries o f the Asia-Pacific, including Japan, are forming a powerful zone o f economic co-operation. This points to the advantages to be gleaned from the establishment o f trading blocs and other organizations for regional co-operation. In southern and eastern Africa, where South Africa comprises the only country with a viable economy, the argument for regional co-operation is even greater, as it is, in the first instance, a means to avoid the very great danger o f economic marginalization. Largely in reaction to the threat posed to them by the former Apartheid regime in South Africa, many o f the latter’s neighbours formed a regional grouping, SADC, to foster increased regional trade and co-operation. However, the results were not encouraging. Amongst the factors being blamed for lack o f success are population growth rates, well above economic growth rates, that have depressed the standards o f living and outstripped and overburdened social services. The result has been impoverishment, a serious deterioration in the quality o f services, particularly education and medical care, and environmental degradation due to mounting demographic pressure. This has resulted in growing deforestation and creeping desertification. Another factor contributing to the poor performance o f SADC was continued imbalances in the regional economy, with large disparities existing between member states in terms o f GDP per capita and average life expectancy (see able 36). Again, due to a worsening of the terms o f trade o f primary products, most southern African countries have found it increasingly difficult to provide the foreign exchange on which import substitution industries depended to sustain

201

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R w eju n a

growth and modernization. Moreover, local markets were too small to support internationally efficient production. In addition, manufacturing has tended to be monopolistic or oligopolistic in character. The result has been that many countries have found themselves on the one hand saddled with increasingly uncompetitive monopolistic industries, and on the other, lacking the resources necessary to effect any major restructuring o f the economy.2 Due to these defects most SADC members have found themselves doing less business amongst themselves than with South Africa. In 1993, while SADC represented more than 12 per cent of South Africa’s total foreign trade, South AfricaSADC trade was 5.5 to 1 in favour o f South Africa.3 There is an awareness in the sub-continent that the incorporation of a post-Apartheid South Africa into a structure of regional co-operation on terms acceptable to both South Africa and its neighbours will not be easy. There exists an underlying economic polarity in the region for, with a GNP approaching 100 billion US dollars the South African economy dwarfs that of all the SADC countries.4 There is considerable fear in the latter that South Africa will use her economic dominance to concentrate regional manufacturing within her borders and attempt to turn her neighbours into supermarkets. This fear has been fuelled by that fact that, despite her dominance in regional trade, South Africa has maintained a policy of high protective tariffs. Thus in 1994 Zimbabwe’s commercial grains producers voiced concern over South African growers’ moves to impose a 35 per cent duty on maize imports,5 whilst Zambian manufacturers have urged their government to intervene against alleged unfair competition from heavily subsidized imports from both South Africa and Zimbabwe.6 T able 36: SADCC Countries and S outh A frica - B asic Indicators : 19897 Population (millions) Angola Botswana Lesotho Malawi Mozambique Namibia Swaziland Tanzania Zambia Zimbabwe SADCC South Africa

9.7 1.2 1.7 8.2 15.3 1.7 0.7 23.8 7.8 9.5 79.6 35.0

Area 000 (sq km) 1247 582 30 118 802 824 17 945 753 391 5708 1221

202

GNP/Cap (US$) 610 1600 470 180 80 1030 936 130 390 650 363 2470

GDP (US$ billions) 7.72 2.50 0.34 1.41 1.10 1.65 1.66 2.54 4.70 5.25 28.87 80.37

Life Expec-tancy (Years) 46 67 56 48 49 57 55 49 54 64 62

F o r g in g E c o n o m ic a n d P o l it ic a l R e l a t io n s b e t w e e n S o u t h A f r ic a a n d T a n z a n ia

The issue is complicated by the growing economic insecurity within South Africa which, despite being a regional economic giant, is faced with the possibility o f being marginalized in global terms. Firstly, the South African economy has been plagued by low growth and stagnation mostly due to economic sanctions imposed on her because of the apartheid policy. As a result read GDP growth fell from an average o f 4.1 per cent between 1965 and 1980 to 1.5 per cent between 1980 and 1989. With an increasing population growth rate - it averaged 2.4 per cent during the 1980s - average living standards in that country have also declined.8 Three additional problems exist that could undermine the economic base of South Africa unless she quickly expands her domestic and regional markets. The first is the Reconstruction and Develop­ ment Programme (RDP) the goal of which is to narrow the economic gap between the nation’s black majority and white minority. It is estimated that the implementation o f the RDP may cost $10.5 billion over five years.9 Moreover, the financing o f the project may necessitate reduction in some form of subsidies to farmers and/or the introduction o f a graduated taxation system for some businesses. The second problem is that reserves o f gold, the country’s traditional export, are dwindling.10 In order to compensate for this, the country will in the long term need to expand the economy through embarking on a new industrialization policy and by stimulating exports. However, the third major problem is devising a new industrialization policy. Apart from periodic booms in the 1960s and 1970s, the general pattern from 1950-80 has been one o f a relative decrease in exports.1 The formation o f trading blocks such as the European Community and the North American Free Trade Zone, as well as rapidly developing economies in the Far East, have created new markets. However, these markets are proving difficult for South African products to penetrate because many South African industries have relatively out-of-date plant and equipment and therefore manufactured products that are not necessarily up to international standard in pricing and quality.12 Moreover, there has been no compensatory growth in the domestic market due largely to the heritage o f Apartheid policies that obliged the majority o f South Africa’s population to live in poverty. This contrasts with two of South Africa’s trade competitors, South Korea and Taiwan, where the domestic market was relatively larger and in consequence the phase of import-substitution was short.

A reas

E c o n o m ic C o - o p e r a t io n b e t w e e n S o u t h A f r ic a a n d T a n z a n ia

of

1. S o u t h A f r ic a n -T a n z a n ia n r e l a t io n s

Possibly the one area o f potential market growth for South African products is Africa, and notably southern Africa. Hence it is of vital importance for eastern

203

C .S . R w e j u n a

and southern African countries to analyse which areas are amenable for an economic co-operation that might create linkages and thus stimulate economic growth in the region. It is in this context that relations between South Africa and Tanzania will be examined. Traditional South African-Tanzanian economic relations have been based on mining. The Tanzanian mining industry was started by private South African companies in the 1940s and until 1960 both small and large private companies from South Africa were involved in the exploration, development and mining o f diamonds, gold and base metals in the Shinyanga, Lupa, Mpanda, Geita, and Kiabakari regions. However, most o f these companies pulled out in the early 1960s due to a conjunction o f three factors: the then world-wide market depression, particularly in gold prices, imminence o f political independence, and the imposition o f a trade embargo against South Africa due to her apartheid policy. Nevertheless, some South African companies remained. South African interest in diamond mining at Mwadui, Shinyanga continued to expand unabated. In 1958, M/S De Beers of South Africa acquired 50 per cent stake shares in M/S Williamson Diamonds Limited (WDL) through its subsidiary whereas 50 per cent equity shares were being held by the Government o f Tanzania.

T a b l e 37: E x p o r t s f r o m T a n z a n i a to S o u t h A f r ic a , D e c e m b e r 1993J u l y 199413

Commodity Tobacco Game Trophies Handicrafts Fresh Prawns Gemstones Live Birds Seedbeans Batik materials Cotton Seed Total

Quantity 761,000 kg 313 kg 300 kg 3,730 kg 1.53 gm 7,010 units 21,000 kg 150 kg 1,725,000 kg -

Value (US$) 469,505.156 22,825 900 13,590 425.32 26,590 15,750 250 197,499.99 747,335.87

Following firstly the release from jail o f Mr Nelson Mandela, and then his election as President o f a newly democratic South Africa, contact between Tanzania and South Africa has been officially re-established and economic links renewed. In 1992 the Government of Tanzania entered into agreement with De Beers to carry out diamond exploration in the Shinyanga, Tabora and Mwanza regions in the name o f a new company, M/S Tanex Ltd. The main basis o f the agreement is that if sufficient diamond reserves are discovered to

204

F o r g in g E c o n o m ic a n d P o l it ic a l R e l a t io n s b e t w e e n S o u t h A f r ic a a n d T a n z a n ia

justify the establishment o f diamond mining, the Government will acquire a 20 per cent and De Beers an 80 per cent interest on the mining operation. At the same time, in October, 1994, De Beers acquired further shares in Williamson Diamond Ltd to raise its equity share to 75 per cent, thus leaving the Government with 25 per cent o f equity. The Diamond Mines are now being rehabilitated by the De Beers Group at a cost o f US$12-15 millions. The first phase o f rehabilitation was completed in mid 1995, from which time diamond production has commenced with the aim o f producing about 120,000 carats o f diamonds per year. Collaboration has also started on an inter-governmental level in surveying and printing geological maps.14 Co-operation has extended beyond the mining sector. The larger co­ operation projects include the 1993 investment of R100 million by South African Breweries (SAB) to rehabilitate Tanzania Breweries existing breweries in Dar es Salaam and Arusha, and to construct a new brewery at Mwanza. This has taken the form o f a supply of capital equipment from South Africa to a value o f $17m, and a direct cash injection over two years o f $ lm .15 As a consequence o f this investment the shortfall in supply of beer to the Tanzanian market has vanished. Another South African Company, Rostiville Construction, has signed a contract worth $11.5 million with the Tanzania electricity supply company to install 41,000 new budget meters.16 A joint venture between the television companies Multichoice Africa, a subsidiary of M.Net, and the Kenya Broadcasting Corporation is looking at the Tanzanian media market for further regional expansion.17 In June 1995 another joint venture, Africa Joint Airline Services (AJAS popularly known as ‘Alliance’) has been established between South Africa, Uganda and Tanzania. Finally, Eskom, the South African power utility company is co-operating with Tanesco (Tanzania Electricity Supply Company) in a feasibility study to establish a power line interconnector between Zambia and Tanzania. In addition Eskom has carried out studies for TANESCO/NDC (National Development Corporation) to assess the suitability o f Mchuchuma coal for power generation. In addition, there has been South African-Tanzanian co-operation in the retail trade by small businessmen. This trade, heavily in favour of South Africa, mainly involves the export to Tanzania o f machinery, cars, dairy products and roofing tiles.18 2. F u t u r e t e c h n ic a l c o - o p e r a t io n

The Tanzanian government has recently highlighted some areas in which the two countries can operate for mutual benefits. These include minerals, water, energy, tourism, the environment, and agriculture. Tanzania possesses considerable mineral resources but lacks the expertise, equipment and capital to exploit them. It would thus like to further encourage and promote South African private sector involvement in the mining sector, notably through

205

C .S . R w e j u n a

support and technical assistance from the South African Chamber of Mines in the organization and operation of the newly formed Tanzania Chamber of Mines, to establish and equip seismological stations, to facilitate the printing of more geological maps (quarter degree sheets), and to establish exchange programmes to train Tanzanians in the specialized skills o f mining engineering, mineral processing, metallurgy and environmental engineering. There exists an acute shortage o f both water and fuel in Tanzania, which would welcome South African co-operation in both fields. Assistance would be welcomed in dam construction and borehole drilling in the semi-arid areas of Tanzania, in the establishment of a water treatment plant, and in scientific water related research - especially on defluoridation, hydra technology, and low cost technologies in water production, operation and maintenance. In terms of energy, there is similarly need for assistance. The Tanzanian National Grid is mainly fed from the Kidatu and Mtera hydro power stations but drought has for some time caused an acute shortage o f electricity. However, o f Tanzania’s assessed hydro potential o f 3,800 Mw, only 10 per cent has been developed. Tanzania would thus welcome South African assistance in establishing a number o f hydro and thermal electric power stations. In terms o f mineral energy, the most important resources are oil and coal. The chief petroleum fields are the Songosongo and Mnazi Bay Natural Gas reserves. The Songosongo gas field has been appraised and is estimated to hold the equivalent in energy content to 25 million tonnes of oil. Most coal reserves are in the south western region, which possesses an estimated total of 1.2 billion tonnes o f coal. Proven coal reserves amount to 304 million tonnes, but there is currently only one commercially developed colliery at Kiwira, Mbeya, with a mining capacity of 150,000 tonnes per annum. The primary source of energy in Tanzania is wood but assistance is required to protect and maintain its 28 million hectares o f forest. As far as the tourist sector is concerned the Government has pointed out the following areas for co-operation: exchange programmes between the ministries o f tourism and tourism training institutes, and co-operation between the national tourism boards including the exchange of tourist information and data. Related to both mineral and forestry exploitation and tourism is the issue o f the environment. Assistance is particularly required in wildlife conservation in National Parks, Game Reserves and Game controlled areas, in the management of the integrated coastal zone and in the development o f environmentally sound technologies.19 The final important area of potential co-operation is agriculture. As Tanzania has agreed to the policy of liberalization of trade in agricultural produce and animal materials, commodities that require strict monitoring at points of exit and entry from the country, there is an urgent need to establish an estimated 200 sanitary and phytosanitary units. South African expertise would

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be most welcomed in controlling pests and diseases in these centres, as it would in food security, notably in locust and other migratory pests research and control.20 There is thus considerable potential for co-operation at the inter­ governmental level, or with major South African corporations in projects involving a large injection of capital and technological know-how, such as mineral exploitation and the construction o f dams. However, moves to promote economic linkages in terms of trade would be resisted by Tanzania because of the structural imbalance between the two countries.21 A trade approach to co­ operation would entail an elimination o f internal trade barriers one o f the consequences o f which would be a contraction o f import competing industries in the weaker member. Such a tendency might be countered through measures like the transfer tax system wherein intra-union tariffs might be imposed by a partner country on imports from other partner states with which it has an overall trade deficit. Thus the priority in the case o f South African-Tanzanian co-operation should remain on the level of planning larger projects wherein the problems and needs of the individual weaker countries might be identified and bilateral agreements formed to assist in providing solutions to those problems. Tanzania has clearly stated its wish to establish such bilateral co-operation with South Africa. At the same time, the Tanzanian government pledges full support to movements towards regional integration in southern Africa. Tanzania is currently a member o f two such organizations, SADC and COMESA, both of which have similar objectives. However, as she benefits more from the former than the latter, and will potentially receive much more assistance in terms of finance and technology from SADC, Tanzania will probably relinquish her membership o f COMESA.22

C o n c l u s io n

This paper has focused on potential areas o f co-operation between South Africa and Tanzania. South Africa is the only country in southern and eastern Africa that possesses an internationally viable economy. Nevertheless, South Africa has serious economic problems and is in danger o f becoming marginalized. It is thus in its interests to develop trading links with its southern African neighbours and, more pertinently, to promote regional co-operation so that the sub-continent might become a powerful trading bloc in its own right. At the same time, despite its anti-Apartheid stance, Tanzania has always valued highly the importance of economic co-operation with South Africa, notably in the mining sector. With the end of Apartheid a new era has opened for Tanzania, as for other southern African countries, for economic co-operation

207

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with South Africa. It is hoped that South Africa will react positively to the requests from her neighbours for such co-operation, notably in the form o f projects requiring heavy capital intensive investment and new technology. Countries external to the sub-continent have already proved willing to invest. For instance, following the discovery by an Australian prospector in June 1995 of 10 million tonnes of exploitable gold reserves in Tanzania, his company, East African Gold Mines, which has already spent 4 million dollars on gold prospecting in the country, proposed a project to develop within two years a 40 million dollar gold mine operation.23 The resources o f the region, most o f which is economically depressed, should not be gleaned by other countries. To prevent this, there is an urgent need for inter-governmental co-operation, firstly to research and establish data banks on the diversity and disparities o f southern African countries in respect o f levels o f development, resource endowment and capacities, and subsequently to plan how to exploit those resources with the aim o f developing the economy o f the entire region.

N otes

1

M. Legassick, ‘South Africa: Capital Accumulation and Violence,’ Economy and Society 3.3 (1974), p. 253. 2 SADCC, ‘Towards Economic Integration,’ paper 6 (University o f the Western Cape: Centre for Southern African Studies, 1992), pp. 17-18. 3 Business Day (9 Dec 1993) - quoted in Mfundo Mkuhlu, ‘South Africa’s increasing Economic Interaction with Africa since Cuito Cuanavale - A Chronology o f Press Reports,’ paper 10 (University o f the Western Cape: Centre for Southern African Studies, 1993), p. 12. 4 Comment by the Secretary General of UNCTAD Geneva - Mr K.K.S. Dadzie, in: The SADC Management o f Regional Co-operation (1994), the Proceedings o f the Consultative conference held in Gaborone, Republic o f Botswana (26-28 January, 1994), p. 192. 5 Business Day (28 Feb 1994) - quoted in Mkuhlu, ‘South Africa’s increasing Economic Interaction with Africa,’ p. 7. 6 Cape Times (21 Feb 1994) - quoted in Mkuhlu, ‘South Africa’s increasing Economic Interaction with Africa,’ p. 5; See also tables 34 and 35. 7 Source: SADCC, Annual Progress Report 1989-1990 - quoted in SADCC, ‘Towards Economic Integration,’ p. 19. 8 SADCC, ‘Towards Economic Integration,’ p. 16. 9 ‘Black enterprises,’ South Africa Inc 25.10 (May 1995), pp. 58-68. 10 Jim Ainworth (a partner in a mining advisory firm, Worrior International Limited), ‘report’ Business Times - Tanzania - 348 (23-29 June 1995), p. i .

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11 D.V. Seventer, ‘The Employment Effects o f Trade Regimes and Industrialization Policy in South Africa: A Reply,’ Development Southern African 6.1 (1989), p. 112. 12 Ron Haywood (SACOB deputy director general), ‘note’ Cape Times (15 February 1994) - quoted in Mkuhlu, ‘South Africa’s increasing Economic Interaction with Africa,’ p. 3. 13 Ministry of Energy and Minerals, Budget Speech (Dar es Salaam: Government Printing Press, 1977), p. 42; Ministry o f Foreign Affairs and International Co-operation (Tanzania) ‘report’ on the ‘brief on the Tanzanian and South African relations’ on the occasion o f a state visit to Tanzania by his Excellency President N. Mandela, 29-31 May 1995. 14 Ministry o f Foreign Affairs and International Co-operation (Tanzania), ‘Report’ (May 1995). 15 Cape Times (2 Nov 1993) - quoted in Mkuhlu, ‘South Africa’s increasing Economic Interaction with Africa,’ p. 10. 16 The Guardian - Tanzania - 164 (24 July 1995), p. 1. 17 The East African 34 (26 January -2 July 1995), p. 1. 18 Tanzania Revenue Authority, Commission o f Customs and Excise Department, ‘Export Flash Report’ (1995). 19 Tanzania Revenue Authority, ‘Export Flash Report’ (1995). 20 ibid. 21 S. Kim Kwan, ‘An Appraisal of the East African Economic Integration Scheme: critical issues and possibilities,’ in: Kwan S. Kim et al., Press on the Political Economy o f Tanzania (Nairobi: Heinemann Educational 1979), p. 181. 22 Ministry o f Foreign Affairs and International Co-operation (Tanzania) ‘Report’ (May 1995). 23 Business Times - Tanzania - 348 (23-29 June 1995), p. 1.

209

C h a p t e r i4 M a u r itiu s a n d t h e

IOR A s s o c i a t i o n

Ja y sen R a m a sa m y

This chapter examines the recent development o f the Mauritian economy and its options for the future. Mauritius, almost alone in Africa, has pulled out o f the Third World syndrome in which the majority o f both continental and island African states are caught to reach a level of growth similar to that o f many Southeast Asian countries. However, the Mauritian government and business community are faced with the problem o f how to maintain the level o f growth. The answer would appear to be two-fold: to further diversify the economy, and to promote regional co-operation and the role o f Mauritius within that initiative.

T h e D e v e l o p m e n t o f t h e M a u r it ia n E c o n o m y ,

1964-94

Over the past thirty years, Mauritius has undergone major structural changes. Its economy has shifted from one characterized by an agricultural monocrop, rising population growth, high unemployment and low per capita incomes, to one characterized by quasi-full employment and growing diversification, notably with the development o f manufacturing for export and tourism .1 In addition, the government family planning programme has succeeded: the birth rate has fallen from 29 in 1970 to 21 in 1993 and is expected in 1997 to fall to below 18 per thousand. In this, it has fully approved o f moves towards global economic liberalization. For this it has received the support of world economic institutions. Thus the IMF stabilization programme negotiated in 1980, together with the structural adjustment programme of the World Bank that included a 30 per cent devaluation o f the Mauritian rupee, a reduction in public expenditure and in the recurrent budget deficit, and a curtailment o f wage increases and in the expansion o f domestic credit. At the same time, the island received large flows o f capital investment from Hong Kong and privileged access to the European market courtesy o f the Lomé Convention. A result o f these internal and external factors enabled the country’s economy to experience ‘take off,’ an unprecedented growth from 1985-95 o f 6.5 per cent per annum that was felt in all sectors o f the economy, notably in

M a u r it iu s a n d t h e

IOR A s s o c ia t io n

the Export Processing Zone (EPZ) which in 1996 was responsible for twothirds o f the island’s exports2 With the possible exception o f the Seychelles, this marks Mauritius apart from the other western Indian Ocean island states that are struggling to maintain a reasonable growth rate.

T a b l e 38: M a u r it iu s - D e m o g r a p h y a n d F e r t il it y , 1970 a n d 19933 Crude birth rate

Crude death rate 1970

Total fertility rate

1970

1993

1993

1970

1993

2000

Mauritius

29

21

7

7

3.6

2.3

2.2

Sub-Saharan

48

44

21

15

6.6

6.2

5.6

Africa

Table

39:

W estern

In d i a n

O cean

Is l a n d s

-

B a s ic

G row th

S t a t i s t ic s , 1985-964 % growth 1996

% growth 1985-95

Popula­ tion (m)

GNP 1995 ($m)

0.08

0.5

6,410 490

Seychelles

-1.8

5.4

Comoros

per capita GNP 1995 ($)

-2.3

0.7

0.50

0.2

Madagascar

3.5

1.5

13.50

3.2

240

Mauritius

5.0

6.5

1.10

3.6

3,280

Sub-Saharan

3.7

n.a.

589.90

270.7

458

Africa T a b l e 40: M a u r it iu s - U n e m p l o y m e n t , 1980-965

(in thousands and as a percentage o f the workforce) Year

Number

Rate

0 0 0 's

(%)

1980

37.0

11.0

1981

55.0

15.9

1982

73.0

20.6

1983

72.0

19.7

1984

66.0

17.6

1985

58.0

15.3

Year

Number

Number

rate

0 0 0 's 15.0

(%) 3.3

18.0

3.9

1994

21.0

4.5

1995

24.5

5.2

26.7

5.5

rate (%)

Year

0 0 0 's 1986

43.0

10.9

1992

1987

24.0

6.0

1993

1988

16.0

3.9

1989

15.4

3.6

1990

12.2

2.8

1996

1991

12.0

2.7

211

Ja y s e n R a m a s a m y

However, in 1996, growth dropped to 5.0 per cent, wages and costs o f production are high enough to raise doubts as to M auritius’ ability to be internationally competitive, notably as the GATT accords limit its access to the EU market, whilst unemployment has risen steadily since 1992 to reach more than 6 per cent o f the active population in 1997, and is expected to reach 10 per cent by the end o f the century.6 To prevent the risk o f further stagnation the Mauritian government and business community is highly motivated to consolidate the existing pillars o f the economy, the export processing zone, tourism and the sugar sector and implement a further phase o f its development programme through the development o f a freeport, which will stimulate greater transhipment and re­ export trade. At the same time it intends to create a financial services sector with the development o f a wide range o f offshore banking and other off­ shore financial activities, together with the stock exchange. The government, private sector and the Mauritian public in general are today aware o f the need for competitiveness, for quality, for innovation, for investment and for new technology to face the competitive world environment. It is also believed that a synergy between the offshore sector, the stock exchange and the freeport can bring more value added to the country’s financial sector and to the Mauritian economy on the whole. This phase, it is anticipated, will make Mauritius a major regional financial centre and the focal point for trading with the African continent, The Indian Ocean Islands and the Far East (through India). In this context, the promotion o f regional co-operation within the Indian Ocean is considered critical. O f particular importance is the opening up o f the Indian economy which offers great potential scope for a wide range o f economic, social, cultural and technological exchanges, and the reintegration into the world economy o f South Africa, where Mauritius’s trading links are already well established. At the same time, the Mauritian government recognizes the importance o f Australia, the dominant economy in the Indian Ocean. As noted in Table 41, most o f M auritius’ foreign trade is with the EU and US but with GATT-induced changes, Mauritian preferential access to those markets will be eroded. Mauritius therefore is looking to regional co­ operation to enhance its trading opportunities. It first turned, through the IOC, COM ESA, and SADC to Africa, although its current trade with African countries, with the exception o f South Africa, is small. However, more can be expected from an expanded IOR which, with its massive resources, is poised to become a major economic force to be reckoned with. Mauritius, which considers that its own economic future and that o f the region is very much tied to the success o f regional economic co-operation, has the prerequisite characteristics to enable it to play the role o f catalyst in promoting such co-operation. Mauritius has already made the decision to

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open up to the world, but in order to achieve its goals, it will need the help o f neighbouring countries. T a b l e 41 : M a u r i t iu s - F o r e ig n T r a d e , 1993 ( r a n d s m )7

Imports: Country South Africa France United Kingdom Japan India Germany Hong Kong China Taiwan Italy Australia Singapore M alaysia Belgium USA Switzerland Pakistan Republic o f Korea Indonesia Denmark

Value 4,311.09 3,830.16 2,143.97 1,792.14 1,772.53 1,458.24 1,393.16 1,276.98 1,262.62 1,024.90 897.83 893.31 834.44 748.12 699.19 545.91 462.58 448.11 403.69 381.96

Exports: Country United Kingdom France USA Germany Italy Spain Belgium Netherlands Réunion* Madagascar Switzerland Canada Hong Kong South Africa Singapore Zimbabwe Japan Mozambique Portugal Kenya

Value 7,423.17 4,651.20 4,104.25 1,620.09 911.84 569.18 479.66 459.53 449.63 314.21 291.50 121.64 95.30 85.54 84.75 78.93 78.43 72.24 71.83 58.87

* Réunion is a department o f France

R e g io n a l E c o n o m ic C o - o p e r a t io n a n d t h e R o l e o f M a u r it iu s w it h in t h e IOR

Apart from those limited to continental Africa, there exist four main associations for economic co-operation linking both the islands o f the western Indian Ocean and the latter to mainland Africa. The main objective o f the Indian Ocean Commission (IOC), comprising the Comoros, Réunion, Madagascar, Mauritius, and the Seychelles, is to liberalize and augment

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trade both between IOC members and between the IOC and other regional groupings. The second grouping, the Common Market for Eastern and Southern Africa (COMESA), grew out o f the former Preferential Trade Area for Eastern and Southern Africa (PTA) established in Lusaka in 1982. The PTA/COMESA, o f which Mauritius was a founder member, has a current membership o f around 20. Its long term objective is the creation o f a preferential trade Area to ‘promote co-operation and development in all fields o f economic activity, with the aim of fostering closer relations between its member states, and to contribute to the progress and develop­ ment o f the African continent.’8 The last significant regional association in the western Indian Ocean is the Southern African Development Community (SADC). Comprising 12 members, including South Africa, and Mauritius which was admitted in August 1995. Its main objectives are to achieve development and economic growth through regional integration based on the harmonization o f the political and socio-economic policies o f member countries and the initiation o f joint development programmes. Mauritius stands to benefit through the access SADC membership grants it to the continental southern African market. However, it also makes available important assets to other SADC countries for it is the only member with all three components o f an efficient financial sector - an offshore centre, stock exchange and freeport. Although SADC is important, and a primary concern for South Africa, countries o f the region are beginning to realize that in the context o f the new trading arrangements which are emerging in other parts o f the world, the Indian Ocean area as a whole was the only major region that traditionally possessed no major economic association. Hence the importance o f the fourth major regional grouping is the Indian Ocean Rim (IOR) association which is different from the three preceding groupings in that it links the economies not only o f the western Indian Ocean but of the entire Indian Ocean littoral. It thus ties the former to much more dynamic economies like those o f Australia, the Southeast Asian giants and India. Unlike the European Union which is based on the principle o f economic integration, the IOR is based on the principle of economic co-operation. It is therefore much more limited in scope. However, this is not necessarily a disadvantage and it could use ASEAN, (Association o f Southeast Asian Nations), as a possible example to emulate. ASEAN, comprising Indonesia, Malaysia, the Philippines, Singapore, Thailand and Brunei, follows two basic guidelines: that all decisions be unanimous and that direct foreign investment be encouraged along liberal lines. Mauritius is one o f the founders and a leading promoter o f the IOR association. It has, without doubt, a vested interest in the success o f the organization, but IOR success will also be in part dependent upon the

214

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IOR A s s o c i a t i o n

support o f Mauritius. For example, Mauritius has established a fully-fledged international financial services sector and is expected to play a significant role in channelling flows o f investment to, from and within the region. The offshore sector has contributed to a broadening of the international outlook o f the economy and is playing a catalytic role in Mauritius’s integration within the world economy. Within three years o f the ‘Euromoney conference,’ held in April 1992, approximately 2,500 offshore entities were registered on Mauritius, their fields o f operation ranging from international trading and shipping to fund management. Also, from the opening o f the Mauritian stock exchange in 1991, share prices climbed steadily, the share price index peaking at SEMDEX 480 in December 1994. it then fell sharply before evening out and, from 1996, picking up again to reach 380 in December that year. The future success o f the stock exchange depends on the installation o f a central depository system which, once in place, will enable Mauritius to encourage cross border trading with exchanges elsewhere, notably in Europe and southern Africa. At the same time, the Mauritian freeport up to mid 1995 registered 270 companies and had a turnover o f 980 million rupees, mainly from the export o f chemicals, fertilisers and plastic goods to Singapore, Hong Kong and India. By the end o f 1995, the Mauritian freeport hoped to be handling one per cent o f COMESA imports (worth US$30 billion). Mauritian port facilities are currently being upgraded and modernized through a joint venture project with the port o f Fremantle that will draw on Australia’s expertise in port facilities with the aim of turning Port Louis into the western Indian O cean’s most competitive port. Mauritius also offers a variety o f double taxation treaties. In choosing a financial centre from where to establish an operational base, an investor usually takes into account the tax regime which, in the case o f cross border transactions involving two or more countries generally involves double taxation. The avoidance o f double taxation usually involves the signing of bilateral conventions by the governments o f the countries concerned. In order to stimulate trade, Mauritius has signed double taxation treaties with about 15 countries. That signed with India, with which it conducts around 90 per cent o f its offshore business is extremely advantageous to Mauritius, giving the latter a head start in trade with one o f the w orld’s potential economic giants. It would also firmly establish Mauritius as the financial hub o f the western Indian Ocean. However, Mauritius is wary o f Singapore, already a financial centre o f international standing, with whom India cultivates close relations and which is also a founding member o f the IOR. However, Mauritius has a major advantage in that it is strategically placed in the western Indian Ocean. Historically, vessels plying between Europe and the East have frequently used it as a port of call and a base for

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entering into the regional trade network. For this reason it was termed ‘the star and key o f the Indian Ocean.’ In the 1990s, the renewed commercial interest in the Indian Ocean meant Mauritius could re-establish its importance. By offering incentives to attract commercial vessels to the island, the Mauritian government plan to make Port Louis the Singapore o f Africa, a broker between Australia and the East and the countries o f the western Indian Ocean. At the same time, as Mauritius not only lies on the axis o f trade and investment flows between countries o f the Indian Ocean Rim but is rapidly establishing itself as a major financial centre, it is hoped that it will become a strategic location for international businessmen ‘to tap regional opportunities or structure their financial set up.’9 It will be assisted in these aims by the presence in Mauritius o f immigrants from many different countries, notably from India and China. Moreover, during the 1970s a significant number o f Mauritians migrated to Australia and South Africa. Furthermore, because the Mauritian population comprises immigrants from all the major continents and has inherited the languages o f two colonial rulers, France and Britain, all Mauritians are at least bilingual. Research carried out in the 1980s indicates that twenty-two languages are spoken on the island. English is the official language but French is spoken more currently, while Hindi is also widely spoken. As most other countries in the IOR are either anglophone or francophone, the bilingualism o f Mauritians makes them natural linguistic arbiters in IOR negotiations and business transactions between the different linguistic communities in the region. As investors tend to invest in a country where they have good family or collegiate ties, and where they can do business in their own language, rather than trying an uncertain social and linguistic environment, this multilingual community with its own strong familial links with the other major economies o f the region may not only facilitate further outside investment in Mauritius, but may also further underpin M auritius’ strategic role within the IOR. The island has the further advantage that it has considerable experience in regional co-operation. The country is a founding member o f the PTA, IOC (Indian Ocean Commission) and IOR. It played a particularly important role in the establishment o f the latter organizations and intends to play a catalytic role in the integration o f member states o f the above organizations through the promotion o f cross border initiatives. At the same time, it is one o f the few countries o f the region fully committed to global free trade. Mauritius is also an active member o f the Indian Ocean Tourist Organization (IOTO) the secretariat o f which is based in Perth. It currently holds the chairm anship10 o f this organization which aims to promote the Indian Ocean as a tourist centre notably through stressing the diversity and complementarity o f the countries within it. Mauritius, as both an attractive

216

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tropical island with a cosmopolitan population and advanced tourist infrastructure, and a major financial centre, is poised to play a central role in regional tourism. More importantly, Mauritius is internally stable, possessing a democratic system in which all political parties share approximately the same vision o f the future, and as a small island state poses no economic or military threat in the region. In this it contrasts with the other three founder members o f the IOR, Australia, India and South Africa. The latter two, in particular, have severe domestic economic and political problems, and all three are seen as economically and militarily dominant in their own sub-regions. Thus ‘The predominating influence o f either Australia, India or South Africa in the region puts them in a delicate position and any canvassing by them may be interpreted wrongly and thus send the wrong signals.’1 By contrast, Mauritius is viewed as neutral and is therefore equipped to play the role o f arbiter in IOR negotiations and institutions. Amongst the latter is the Indian Ocean Institute, first proposed in November 1994 by both government and the private sector represented by the Mauritius JEC ( Joint Economic Council), the academic priorities for which were identified at the ‘Meeting o f (IOR) Experts’ held on Mauritius in March 1995. The main objectives o f this institute are firstly, to provide for core activities on which Mauritius could build up a competitive advantage and present itself as a potential candidate for a future secretariat, and secondly to give permanent international exposure to Mauritius for its offshore, freeport and tourism activities, the key sectors for M auritius’ future economic development. The means to achieve these aims would be the creation o f a centre o f ‘excellence’ to promote research projects, seminars, workshops on the IOR region in the fields o f economics, culture, commerce, industry, agriculture and maritime environment. It would also construct a data bank on all IOR countries. In order to meet the challenges facing Mauritius as a potential centre for the Indian Ocean Rim, special attention will be given to human capital development e.g. education, training, etc. The Institute would be backed by the Indian Ocean Study Group (IOSG) established in May 1995 at the University o f Mauritius. Conscious o f the creation by the recent Indian Ocean Rim meeting in Mauritius o f an academic sub-committee in order to service ‘the need for data collection and distribution, policy, information, training, and development program s’ the IOSG has established for itself the aim to (i) carry out research and study programs on the history, cultures, societies and economics o f the Indian Ocean region, (ii) establish links and exchange programmes with other study groups and research centres in the area, (iii) organise local and regional seminars, workshops and conferences and (iv) promote the publication o f its

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research, conference papers and proceedings.12 Both institutions will also be on hand to service the research needs o f the IOR secretariat.

C o n c l u s io n Mauritius has played a major role in initiating regional co-operation in the Indian Ocean area. In this, it is fully aware that its economic future is bound up with the success o f regional co-operation. As a small island state it is in world terms economically and politically marginal. Moreover, once the larger economies o f the IOR region enter into fully-fledged trade relations, Mauritius also runs the risk o f becoming insignificant regionally. However, It possesses the unique advantage that that both public and private sector interests are fully united behind the vision of maintaining M auritius’ role as the arbiter o f the IOR through the establishment o f IOR research institutes and making Mauritius the base for the IOR secretariat. At the same time, they are vigorously promoting Mauritius economically as the Singapore o f the western Indian Ocean, servicing the shipping and transactions between Africa, on the one hand, and Australasia and Asia on the other. Given this domestic unity o f vision and determination, Mauritius is set to continue to play a major role within the IOR.

N otes 1 2

3 4 5 6 7 8

9

Mauritius Ministry o f Planning and Economic Development, National Development Plan, (Mauritius: Government Printer, 1993), p. 2. Le Monde, Bilan du Monde, 1996 (1997), p. 106; Roland Lamusse, ‘From a sugar-locked to an open textile export economy and a regional financial centre,’ unpublished ms., University o f Mauritius (1995). World Bank, Workers in an Integrating World (Oxford: Oxford University Press, 1995), p. 213. L ’Expansion 543 (20 fev 1997), p. 97. Central Statistics Office, Mauritius. L Expansion 543 (20 fev 1997), p. 97; Le Monde, Bilan du Monde, 1995 (1996), p. 96; Le Monde, Bilan du Monde (1997) p. 106. Mauritian Chamber o f Commerce and Industry, 1994. PTA Treaty article 13 quoted in Y. Carrin, The Preferential Trade Area fo r Eastern and Southern Africa and COMESA. A Call for Suspension (Cape Town, 1994). Rama Sithanen, Mauritian Minister o f Finance.

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10 Sir Harry Tirvengadum chairman and managing director o f Air Mauritius. 11 Mauritius working paper on the IOR (1994). 12 University o f Mauritius Indian Ocean Study Group (IOSG) Information Paper on the IOR (1994).

219

C h a p t e r 15 The

IOR a n d

i t s E c o n o m ic G r o u p in g s

G w yn C a m pbell

In pre-industrial times the IOR region constituted one o f the first and major long-distance trading networks. Regional economic unity was disrupted from the late nineteenth century by divisions imposed firstly by colonization, and secondly by Cold War ideology. These have been reflected in economic organizations that have developed within the region. The distinctiveness o f such organizations has been in part responsible for, and in part been accentuated by, remarkably different growth patterns experienced since the 1970s by the different regions that border the Indian Ocean. The IOR, the most recent o f such organizations, is both modelled on existing regional organizations, and aims to link members o f these sub-regional groupings over a geographically large area. This chapter traces the emer­ gence and outlines the structure o f the major economic groupings which will impact upon the future membership, structure and policies o f the IOR.

So uth east A

s ia a n d

A

u s t r a l a s ia

The economic balance o f power within the IOR is at present in favour o f the eastern side o f the Indian Ocean, incorporating the Southeast Asian countries and Australia. They have considerable sway over the structure and policy o f the IOR, for which they use as models their own experience o f regional organizations. 1. A u s t r a l ia A u s t r a l ia a n d N e w Z e a l a n d

A ustralia’s traditional economic ties were with Britain and the British Empire. However, since Britain’s decision to enter the EU, Australia has been obliged to radically reassess its position and has increasingly regarded its economic future within the Asian-Pacific and, more recently, Indian Ocean context. Its first preoccupation was with its immediate neighbours, notably New Zealand and Indonesia. From 1966-80, Australian trade with New Zealand was regulated by the New Zealand Australia Free Trade Agreement - misnamed as it did not involve free trade. The Australia-New

The

IOR a n d i t s E c o n o m i c G r o u p i n g s

Zealand Closer Economic Relations Trade Agreement (CER) established in 1983 succeeded in reducing many regulatory obstacles to trade between the two countries and is currently working towards common regulations relating to goods, the registration o f occupations, and food standards, in the process developing a customs compendium, an integrated trade and investment database, and co-operation on trade-related product standards and certification system s.1 However, whereas New Zealand offers a high income market for elaborately transformed Australian manufactures, it is far more limited in size than the domestic Australian market which, by contrast, offers considerable openings for manufactured goods from New Zealand.2 Australia is also linked to New Zealand (and the US) through a security organization, ANZUS3 and through th q South Pacific Form (SPF). The SPF, which was founded in 1971 as an offshoot o f the South Pacific Commission, also includes the Cook Islands, Fiji, Kiribati, Nauru, Niue, Papua New Guinea, Solomon Islands, Tonga, Tuvalu, Vanuatu, and Western Samoa. In 1985 it adopted a treaty for the creation o f a nuclear-free zone in the Pacific.4

T a b l e 42: C l o se r E c o n o m ic R e la tio n s T r a d e A g r e em en t (C E R ) G N P a n d P o p u l a t io n 19955 (°IO R m ember; *C om m onw ealth m em ber)

Country Australia0* New Zealand* Total

GNP ($ billions) 340.86 54.46

% CER GNP 86.22 13.78

395.32

Population (m) 18.0 3.5

% CER Population 83.72 16.28

21.5

A USTRALIA AND INDONESIA Until the 1960s, Indonesia was feared as a centre o f communist activity. Since then, because o f its proximity, size and, until recently, its fast rate o f economic developm ent, it has become considered an economic and political ally o f major importance and a bulwark against the advance o f Chinese influence in the region. It also provides Australia, which in the Pacific Rim has felt increasingly challenged by the economies o f the Far East, with ‘a springboard for closer strategic and economic involvement in Southeast A sia’. Closer ties with Indonesia were established in 1992 when an Australia-Indonesia Ministerial Forum was established.6 A further reflection o f such links is that approximately 15,000 Indonesian students have been granted visas to study in Australia,7 and that although Australia’s

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Development Import Finance Facility (DIFF) aid programme to Asian countries was cut in mid 1996, projects earmarked for Indonesia were maintained under alternative aid financing.8 It is no surprise that Australia also invited Indonesia to become a member of the initial fourteen IOR countries. A s i a -P a c i f i c e c o n o m i c c o - o p e r a t i o n (A P E C )

APEC, one o f the largest regional groupings, overlaps with the eastern border o f the IOR region. Initially involving twelve countries (Australia, New Zealand, the six ASEAN countries, Japan, Korea, the US, and Canada), it was established in 1989 as a result o f an Australian initiative and by 1996 reached the final stages o f negotiations, membership having been expanded to include China, Hong Kong and Taiwan, Mexico, Papua New Guinea, Brunei, Chile and Vietnam.9 Despite the presence in the association o f major world powers, it is accepted practice that every second APEC summit is held in an ASEAN country.10 APEC is the model pushed by Australia for the IOR. Integral to its structure is ‘open regionalism’, by which it seeks to overcome the apparent tension between global liberalization and the formation o f regional blocs by welcoming the removal o f tariffs and other barriers to trade, whilst rejecting ‘inward looking’ integration structures such as customs unions.11 At the 1994 Bogor meeting, APEC agreed to create a free trade area in the Pacific Ocean by the year 2020, industrialized economies reaching this target by 2010.12 In November 1996, largely due to US pressure, APEC also agreed to ‘substantially’ free trade in information technology by 2000.13 As APEC in 1996 accounted for approximately half o f world output and 40 per cent o f world trade,14 such decisions could represent major gains for member states. For instance, over the next two decades it is anticipated that APEC will constitute a market o f Australian $ 15,000m for Australian companies, that in 1994 directed 77 per cent o f their exports to, and drew 69 per cent o f their merchandise imports from, APEC countries.15 Th e C a i r n s g r o u p

Australia is also leader of the Cairns Group, an organization o f top agricultural exporting countries. It comprises Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Flungary, Indonesia, Malaysia, New Zealand, the Philippines, Thailand and Uruguay - responsible for about 20 per cent o f the w orld’s agricultural exports - with Paraguay and South Africa being accorded observer status. Founded in 1986 largely in response to the failure o f the dominant industrialized countries, notably the US, Japan and the EU, to surrender protectionism in agriculture whilst successfully pressing through GATT for large reductions in tariffs on manufactured goods, the

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Cairns Group’s major aim is free trade in agricultural goods.16 At the Uruguay Round o f GATT, they succeeded in obtaining the establishment for farm products o f trade liberalizing rules, to be overseen by the WTO Committee on Agriculture (COA), in which Australia, through the Cairns Group, seeks to wield a powerful influence.17 However, world trade in agricultural goods remains highly distorted and protected and it is generally considered that agricultural goods is likely to be one of the last categories of commodities to be fully liberalized, after telecommunications, financial 18 services and maritime transport. 2. T h e A ss o c ja t io n o f So u t h e a s t A s ia n N a t io n s (ASEAN) ASEAN, created in 1967 is one of the earliest regional economic groupings, comprising nine o f the ten main Southeast Asian countries: Indonesia, Thailand, the Philippines, Malaysia, Singapore, Brunei formed the initial members, Vietnam joined in 1995, as in 1997 did Laos and Myanmar, leaving only Cambodia, which postponed membership due to a military coup, outside the fold.19 Although ASEAN initially excluded all bilateral issues from its agenda and adopted a largely informal consultative administration, it today constitutes a formidable structure with a permanent headquarters in Jakarta headed by a Director General. It holds annual meetings o f foreign and economic ministers respectively,20 and possesses a number o f affiliated voluntary non-governmental bodies, the most important o f which is the ASEAN Chamber o f Commerce and Industry. The latter has established working groups on issues such as industrial complementarity, trade, banking, tourism, shipping, food, agriculture and fisheries whose re­ commendations are often presented to, and adopted by, ASEAN meetings.21 The original aim o f ASEAN was to unite Southeast Asian countries in a common economic grouping to both maintain good relations with, and to ensure freedom from dominance by, larger Asian powers like Japan, India and China.22 This aim has since been extended to the West, notably the US and the EU upon whom ASEAN countries wish to reduce their export dependence.23 ASEAN has experienced considerable success in achieving its aims, mainly through promoting economic development. Hence the emergence o f the four ‘tigers’ o f what, until the 1997-8 financial crisis, was termed the East Asian economic ‘miracle’ - Singapore, Malaysia, Thailand, and Indonesia. For example, in the mid 1960s, Indonesia was a povertystricken country incorporating 13,667 islands, but from 1970-96 it experienced an economic growth averaging 6 per cent per annum, its GDP per capita rose from less than US$100 to US$900 and the percentage o f its population living in ‘absolute poverty’, as defined by the World Bank, declining from 70 to 15.24

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T a b l e 43: ASEAN - E st im a t e d P o p u l a t io n a n d P er C a p it a GDP, 1996 (IN MILLIONS a n d IN US$)25 (»application delayed; °IOR member;

* Commonwealth member) Member

Indonesia0

Popu­ lation

per capita GDP

Member

196.9

1,150

Vietnam

75.5

311

Philippines

69.8

Thailand Myanmar

Malaysia0*

Popu­ lation

per capita GDP

20.6

4,260

Laos

4.9

377

1,200

Singapore0*

3.0

30,860

61.3

2,980

Brunei*

0.3

16,427

45.6

107

10.7

292

Cambodia*

This transformation owed much to increased foreign, and notably intraregional, trade. By 1996, East Asian countries were the w orld’s most active traders, being led by Malaysia and Singapore whose imports and exports added up to the equivalent o f over 120 per cent o f their GDP,26 whilst in 1995, Thailand’s exports to ASEAN grew by 34 per cent.27 ASEAN, comprising a market estimated in 1995 to comprise 350 million people, has moved steadily towards the creation o f a regional free trade area: it is committed to a Common Effective Preferential Tariff(CEPT) scheme for the ASEAN Free Trade Area (AFTA), except in agricultural products, by 2004, thus bringing ASEAN more in line with APEC’s 1994 Bogor agreement to achieve free trade in the Asia-Pacific region by 2002.28 At the same time, ASEAN has become accepted as a formidable economic and political grouping by other major powers and groupings, groupings including NAFTA, the CER, Japan, China, Russia, India and South Korea.29 It waits to be seen what the medium to long-term consequences o f the 1997-8 banking crisis will have upon ASEAN, but it appears that more stringent financial controls, combined with devaluation is assisting a recovery based yet again upon exports. 3 . S o u t h A sia

Virtually the sole regional economic association o f any standing in South Asia is the South Asian Association fo r Regional Co-operation (SAARC). Founded in December 1985, two decades after ASEAN, SAARC comprises India, Pakistan, Sri Lanka, Bangladesh, the Maldives, Nepal and Bhutan. It came into being because o f pressure from its poorest members, and despite initial opposition to it from both India and Pakistan. SAARC, which has its headquarters in Kathmandu and is headed by a Secretary General, has gradually enlarged its areas o f co-operation to include agriculture, environ-

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ment, communication, rural development, science and technology and prevention o f drug trafficking and abuse, was initially restricted to the promotion o f co-operation.30

T a b l e 44: SAARC: GNP

and

P o p u l a t io n 199531

(°IOR member; *Commonwealth member) Country

GNP ($ billions)

India0* Pakistan* Bhutan Nepal

% SAARC GNP

Population (m)

% SAARC Population

338.42

73.71

930.00

76.18

72.27

15.74

130.00

10.65

0.28

0.06

0.60

0.05

4.72

1.03

22.60

1.85

Bangladesh*

30.04

6.54

119.20

9.76

Sri Lanka0*

13.13

2.86

18.20

1.49

0.27

0.06

0.26

0.02

Maldives* TOTAL

459.13

1,220.86

However, given the fragility o f Pakistani-Indian relations, and the fear amongst the smaller countries, notably Bangladesh and Nepal, o f economic domination - even o f economic imperialism - by India, SAARC also decided that all decisions must be unanimous, and that all ‘bilateral and contentious issues shall be excluded from the deliberations’.32 This effectively eliminates political and security issues which, at some stage, could become part o f SAARC’s agenda, not only because o f Indo-Pakistani enmity but also because o f apprehension in India that regional co-operation might make its ‘strategic perimeter’ vulnerable to outside intervention.33 It has also meant that until recently SAARC constituted a talking shop, focusing ‘more on peripheral functional areas rather than [sic] the core areas o f South Asian Co-operation’.34 The SAARC Preferential Trading Agreements (SAPTA), founded in 1993 in an attempt to re-animate the organization, established a wider agenda o f co-operation focusing on primary goals o f trade and economic co­ operation. Although in 1995, intra-SAARC trade was around a mere 4-5 per cent o f total SAARC trade,35 it is hoped that this will soon expand under bilateral negotiations within SAPTA between India, Nepal, Bangladesh and Sri Lanka, to implement gradual tariff and non-tariff trade liberalization. It provides for the creation o f free trade areas, exclusive tariff preferences and long-term export contracts to assist individual members to ‘achieve reasonable levels o f sustainable prices’ on all commodities, whether raw,

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semi-processed or manufactures.36 Moreover, the 1994 Bogor meeting o f APEC influenced Y.K. Silwal, General Secretary o f SAARC, to reject for the latter concepts o f a customs union, defined as essentially ‘inward looking’ and to embrace the APEC goal (within the Asia-Pacific region) o f ‘open regionalism’ and of free trade; The SAPTA programme was launched in 1995, but there proved important obstacles to its success. Firstly, its ‘product by product’ approach caused bureaucratic hurdles and slowed down the benefits, as it had within ASEAN which in consequence changed policy in 1992 and adopted a free trade approach. In addition it was limited to commodity trade and thus failed to address issues o f capital or labour movement, or o f the monetary implications o f freer trade. Moreover, official proscriptions failed to stem massive clandestine trade, which is mainly in favour o f India which in 1995 had an estimated regional current account surplus - legal and illegal trade combined - o f $1 billion plus. In order to overcome the disparity between India and its smaller neighbours, which WTO liberalization could only accentuate,38 some have argued for educational and skill development, as well as technology transfer in favour o f disadvantaged areas, backed by the provision o f concessional credit facilities and joint ventures. These could be financed by the SAARC Fund fo r Regional Projects (SFRP) and South Asian Development Fund (SADF).39 The second major obstacle is Pakistan’s reluctance to participate in SAPTA because o f its long-standing enmity towards In d ia40 Thus, any move towards tangible co-operation in South Asia can only be initiated and maintained if the political will to do so exists.41 4. T h e M i d d l e E a s t M id d l e E a s t a n d N o r t h A f r ic a E c o n o m ic C o n f e r e n c e (M E N A )

The MENA economic conference was established in 1994. Proposals for regional integration mooted at the Casablanca (1994) and Aman (1995) MENA conferences were stalled at the 1996 Cairo meeting by the rupture in Arab-Israeli relations caused by the new hard-line approach o f Binyamin N etanyahu’s government. There are, moreover other problems for regional integration. Israel’s economy is powered by high-tech exports to the West and arguably does not need to look to the region. Indeed, only 8 per cent o f total trade in the Middle East and North Africa is intra-regional, whilst its non-oil exports are negligible. In addition, although Morocco, Tunisia, Jordan and Egypt are all following WTO dictates, some trade regimes in the area are amongst the most protected in the world,.42

226

T h e IO R a n d it s E c o n o m i c G r o u p in g s

T h e G u l f C o - o p e r a tjo n C o u n c il (G C C )

The GCC, founded in 1985, links the 6 Arab oil monarchies; Saudi Arabia, like India in SAARC, the dominant member o f the grouping, the UAE, Oman, Bahrein, Kuwait and Qatar. Despite its aim by the year 2000 to establish a common market that will comprise about 25 million people, the GCC has yet to establish a free trade area - although the UAE has plans for a free trade zone.43 Nevertheless, some intra-regional co-operation projects have been started. For instance, the Islamic Development Bank, based in Jeddah, put up the $2.7 million to counter weevil attacks on the G u lfs date farms.44

T a b l e 45: G u l f C o o p e r a t i o n C o u n c i l (G C C ) P o p u l a t i o n , 199545 (°IOR member) Country Saudi Arabia

GNP ($ billions)

% GCC GNP

137.50

59.52

Population (m) 18.50

GNP a n d

% GCC Population 72.78

36.33

15.73

1.90

7.47

Bahrain

4.54

1.97

0.57

2.24

Kuwait

35.44

15.34

1.90

7.47

6.45

2.79

0.40

1.57

10.76

4.66

2.15

8.46

UAE

Qatar Oman0 Total

25.42

231.02

5. S u b -S a h a r a n A f r ic a T h e I n d i a n O c e a n C o m m i s s i o n (IO C )

The IOC groups the islands o f the south west Indian Ocean, comprising Madagascar, the Comoros, the Seychelles, Réunion and Mauritius. The island economies are small, with the exception of Mauritius. This means that France, the fourth greatest economic power globally, which holds Réunion as a French Département and Mayotte as an Overseas Territory, is the dominant influence in the IOC. Although France is clearly not itself littoral to the Indian Ocean and its economic interests lie with the EU rather than with Indian Ocean countries, it maintains a considerable economic and military presence in the region. Moreover, as signalled by Chirac’s 1996 visit to Singapore and 1998 visit to India, that interest is being actively promoted with anglophone as well as Francophone regions.46

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T a b l e 46: IOC c o u n t r ie s - GNP a n d P o p u l a t i o n , 199547

(°IOR member;*Commonwealth member) Country

GNP ($

% IOC GNP

Population (m)

billions)

% IO C Population

Mauritius0*

4.01

28.81

1.1

6.13

Réunion

5.43

39.00

0.66

4.42

Seychelles*

0.53

3.81

0.74

4.13

Madagascar0

3.65

26.22

14.80

82.54

Comoros

0.30

2.16

0.63

3.51

Total

13.92

17.93

C o m m o n M a r k e t f o r E a s t e r n a n d S o u t h e r n A f r ic a (C O M E S A )

COMESA comprises a large number o f states from Lesotho in the South to Sudan in the north, and includes most SADC countries. Its origins lie in the Preferential Trade Area fo r Eastern and Southern Africa (PTA), founded in 1983 with the aim o f improving trade between member countries. The PTA was superseded in December 1994 by COMESA, the title o f which indicates its long-term aim o f creating, via a gradual reduction o f tariff and non-tariff barriers to trade, firstly a free trade area and, ultimately, a common market. However, whilst a PTA/COMESA Trade and Development Bank has functioned since the late 1980s, a number o f major difficulties face COMESA. One is poor intra-regional, and in many cases domestic national, transport and communications networks, a problem compounded by differing national standards (e.g. on the mass and dimensions o f vehicles). Moreover, national tariffs have been maintained, trade between member states actually declining in the 1980s: current estimates are that only 6 per cent o f total trade o f the countries o f Southern and Eastern Africa is conducted intra-regionally.48 Through its Freeport Authority, created in 1993, Mauritius planned to establish itself as the service centre and entrepot o f the region, channelling imports to and exports from COMESA countries. However, since SADC has widened its membership to include South Africa and Mauritius, the attention o f the latter has shifted decisively to SADC and the I OR.49 As was the case with the East African Community, a more intractable problem is the disparate economic performance o f different countries, Kenya, Mauritius and Zimbabwe being the only member states to have industrialized to any significant degree. Moreover, Kenya and Zimbabwe feel nervous about South Africa whose presence in the continent cannot be ignored, whose industrial exports, they fear, would swamp them, and whose

228

T h e IO R a n d it s E c o n o m i c G r o u p in g s

more powerful economy will attract greater investment at the expense o f the less powerful economies o f the region.50 T h e S o u t h e r n A f r i c a n D e v e l o p m e n t C o m m u n i t y (S A D C )

SADC grew out o f the Southern African Development Co-ordination Conference, established in 1980 to increase members’ independence from an Apartheid South Africa. This rationale, and with it external financing, collapsed with the emergence o f a newly democratic South Africa which was accepted as a member in 1994. SADC, which since 1992 has been promoting the idea o f cross border investment and trade and labour and capital flows, is focusing increasingly on South Africa, the region’s economic giant and chief source o f regional investment.51 The region has experienced some recent successes. Some progress has been made in terms o f transport infrastructure. Thus new roads will link Johannesburg to Maputo on the Indian Ocean and Windhoek in Namibia.52 Although in 1996, for the first time in many years, the economies o f all SADC members grew - in eight out o f the twelve by over 5 per cent, whilst seven SADC states had inflation rates o f 10 per cent or lower, the region still faces problems. In the first place, the 1996 result was largely induced by good rains, which for example made Mozambique, like many African countries traditionally a net importer o f food, almost self-sufficient in grain.53 It was also assisted by higher prices for agricultural products. However, the price o f gold and other metals has remained stagnant, and most SADC countries’ economies are so weak that any improvement makes a major statistical difference.54 Moreover, regional co-operation has not yet entered into the economic strategies o f member states as a priority for national development, partly because o f the fear that South Africa will dominate SADC and use it to promote its national economic and political ascendancy over the other members.55

T a b l e 47: SADC: G N P AND POPULATION, 199556 (°IOR member; ^Commonwealth member) Country

GNP ($ billions)

% SA D C GNP

Population (m)

% SA D C Population

Angola

4.4

2.7

10.8

8.0

Botswana*

4.4

2.7

1.5

1.1

Lesotho*

1.5

0.9

2

1.5

Malawi*

1.6

1.0

9.8

7.3

Mauritius0*

3.8

2.3

1.1

0.8

229

G w yn C am pbell

Mozambique0*

1.4

0.8

16.2

Namibia*

3.1

1.9

1.5

1.1

130.9

79.1

41.5

30.8

South Africa0*

12.0

Swaziland*

1.1

0.7

0.9

0.1

Tanzania0*

3.7

2.2

29.6

21.9

Zambia*

3.6

2.2

29.6

6.7

Zimbabwe*

5.9

3.6

TOTAL

165.4

11.0

8.2

134.9

6. T h e C o m m o n w e a l t h

For a number o f reasons it is possible to consider the Commonwealth as a grouping o f relevance to the Indian Ocean region and to the future o f the IOR grouping. The Commonwealth comprises a voluntary association o f states that once belonged to the British empire. Its origins lie in the granting o f internal self-government to the ‘White Dominions’ of Canada (1867), Australia (1901), New Zealand (1907) and the Union o f South Africa (1909). At the Imperial Conference o f 1926 these became referred to, as members of the ‘British Commonwealth of Nations’, a status further defined in 1931 as an association of self governing states formerly o f the British Empire.57 The Ottawa Conference o f 1932 bound the members o f the Commonwealth in a preferential trading system, wherein Britain supplied other members with industrial products, capital, and skilled labour in return mainly for raw materials, agricultural products and semi-processed goods. Such links were reinforced by the growth o f protectionist tendencies during the Second World War and during the post-1945 pre-occupation with the social contract and the promotion o f domestic employment.58 A new stage in the development o f the Commonwealth was inaugurated from the end o f the Second World War due to decolonization and to Britain’s moves to join the EU. The first change to the Commonwealth, thereafter known as the ‘Commonwealth o f Nations’, with the membership in 1947 o f India and Pakistan, followed by other non-‘W hite’ countries o f the former British Empire as they became independent.59 The second development was a radical change in the economic relationship between Britain and the former ‘White Dominions’. In the first place, Britain adopted a protectionist policy to build up and maintain its agricultural sector enabling the latter to increase its share of the home market for food products from approximately 50 per cent in the early 1930s to about 66 per cent in the 1950s. Secondly, by the early 1960s Britain declared its intention of joining the European Community which, as a condition o f membership, refused to countenance a continuation o f Britain’s a special economic relationship with

230

T h e IO R a n d it s E c o n o m i c G r o u p in g s

Commonwealth countries. In 1973, by which time the number o f Common­ wealth countries had grown to thirty-one, Britain became a member o f the EU and thus ended its imperial preferential system.60

T able 48: C om m onw ealth M embers of A ctual and Potential IOR G rouping , GNP($ m ) 1997 (A=Actual IOR Members; PL=Potential IOR Members Littoral to the Indian Ocean; OP^Other Potential IOR Members ) South Asia

Middle East

A frica

SE AsiaA ustralasia

Number A:

5

Num­

Num­ ber

Num­ ber

(% Total)

83.33

-

-

2

100.00

3

75.00

25.00

-

-

3

100.00

-

-

-

3

50.00

62.50

6

50.00

(% Total)

ber

PL:

1

OP:

8

53.33

-

-

-

Total 14

52.00

-

-

5

(% Total)

(% Total)

T a b l e 49: C o m m o n w e a l t h M e m b er s of A c t u a l a n d Po t e n t ia l IOR G r o u p in g ,

1997 (A =A ctual IOR M em bers; PL=Potential IOR M em bers

Littoral to the Indian O cean; OP=Other Potential IOR M em bers ) A Number (% sub-total)

PL

OP

Total

10

4

11

25

(71.43)

(44.44)

(33.33)

(44.64)

From 1973-97 the number o f member states o f the Commonwealth grew from thirty-one to fifty-three, including countries like Mozambique that were never part o f the British Empire, whilst territories still dependent upon Britain rank as ‘Commonwealth countries’. The growth in interest in the Commonwealth stems from the fact that the organization has, since 1970, increasingly reflected the LDC status o f the majority o f its members. Thus whilst the English monarch is formal head o f the association, and English remains its language, the Commonwealth has become less a ‘cultural’ association and increasingly concerned with technical and educational co­ operation. O f notable importance was the foundation in 1971 o f the Commonwealth Fund fo r Technical Co-operation (CFTC).61 Moreover, with GATT/W TO pressure to liberalize, and its encouragement o f regional economic groupings, the Commonwealth by the early 1990s became increasingly interested in promoting its potential economic significance. By

231

G w yn C am pbell

1997, its member states represented 25 per cent o f the population o f the globe, 20 per cent o f international trade, 19 per cent o f global investments and 40 per cent o f world GNP. At the Edinburgh Heads o f Government Meeting in October 1997, it was decided to transform the Commonwealth into an economic grouping.62 This is o f relevance to the IOR given the large number of countries in the region that are members o f the Commonwealth. Thus 71 per cent o f current IOR members and 44 per cent o f other states ‘littoral to the Indian O cean’ the current criterion for IOR membership - are Commonwealth states. In terms o f the more important existing sub-regional organizations in the Indian Ocean region, all members o f the CER, all bar one SADC member, 71 per cent o f SAARC states, and 33 per cent o f ASEAN members also belong to the Commonwealth. O f current IOR members, including all four key founder members (Australia, India, South Africa and Mauritius) 71 per cent are also Commonwealth members. Although this figure is likely to drop to about 45 per by the early twenty-first century, the proportion o f Commonwealth members in the IOR is likely to increase from 20 per cent in 1997 to almost 50 per cent by the early twenty-first century. The only area o f the IOR region in which the Commonwealth has virtually no representation is the Middle East. Links with the Commonwealth are further aided by the fact that almost all states o f the IOR region maintain English either as an official language or as the main language o f foreign affairs. The exceptions are the Comoros, and Madagascar whose request in 1997 that French be adopted as an official language o f the IOR was rejected.63

T a b l e 50: T h e C o m m o n w e a l t h : B a s ic E c o n o m ic In d i c a t o r s , 1995

(* = median; HDI = Human Development Index)64 Countries Current IOR Potential IOR Current & Potential IOR Non-IOR All Commonwealth Current IOR as % all

GNP ($m)

Population (000s)

HDI

1,105,700

1,001,760

906

0.587*

311,514

143,520

460.72

0.599*

1,417,214

1,145,280

808.12

0.587*

236,879

1,863,560

7,867.14

0.586*

1,654,093

3,008,840

1,819.03

0.586*

66.85

33.29

85.68

38.06

Commonwealth Current & Poten-tial IOR as % all Commonwealth

GNP per capita ($)

232

T h e IO R a n d it s E c o n o m i c G r o u p in g s

T a b l e 51: IOR M e m b e r s : B a sic E c o n o m ic In d ic a t o r s , 1995

(except for Human Development Index (HDI) = 1992) (♦ = as % current IOR; D= average; # = median )

Africa Middle East S.Asia

Pop (m)

Area

Life

GNP per

HDI

(%> Tot)

(000s km2)

Expec­

capita

(Rank)

(% Tot)

tancy 56.2

($) 1,087.9

0.534#

740.0

52.7

902.4

(121)° 0.570#

(4.1)* 3,353.0

60.6

316.3

(116V

131.1

4,140.0

(9.8)

(22.8)»

16.6 (1.2) 953.3 (71.2)

(114V

(18.5)*

SE AsiaAustralasia

9,922.6 (54.7)*

64.7

2,665.9

0.782#

(17.7)

Common­

1,110.2

14,922.6

60.7

811.2

(85)°

wealth Other Grand Total

237.5

(52)°

(82.9)

(82.2V

228.3

61.6

839.8

(127)°

(17.1)*

3,228.0 (17.8V

1,338.5

18,150.6

60.8

816.1

(100)°

(100.0)

(100.0V

More important than membership figures is the economic predominance o f Commonwealth members in the IOR. They currently dominate the IOR, whilst the potential IOR grouping within the Commonwealth possesses, on present criteria alone, 67 per cent o f the Commonwealth’s population and, if one excludes Canada and Britain, the only two Commonwealth members who are both geographically and economically part o f the ‘N orth’, 78 per cent o f its total GNP. Moreover, current IOR and Commonwealth members possess a high percentage o f some o f the world’s most valued minerals. In 1995, they ranked globally as producers o f gold (1 and 2), diamonds (1, 2 and 5), chrome (1 and 4), bauxite (1 and 7), nickel (3 and 5), silver (4 and 7), uranium (4 and 8), iron ore (4 and 8), coal (4 and 5), copper (5 and 6), tin (7 and 8), lignite (8), and aluminium (10).65 Thus the considerable overlap between membership o f the IOR and the Commonwealth could enable the IOR grouping to exert considerable pressure upon the emerging structure and policies o f the Commonwealth as it transforms itself into an economic grouping.

233

G w yn C am pbell

C o n c l u s io n A number o f sub-regional economic groupings exist within the IOR region, as well as economic groupings like APEC that overlap with other large geographic areas. Most of the former have in principle accepted the APEC lead in promoting liberalization and the concept o f ‘open regionalism’. However, most are facing major, possibly intractable difficulties associated not only with traditional or climatic and geographic factors inhibiting growth, but more importantly in terms o f policy, with intra-regional rivalry. Thus SAARC and SADC are plagued by ‘political’ enmity between the smaller economies and the two predominant economies, respectively India and South Africa. The IOR is different in that, whilst accepting the same principles o f liberalization and ‘open regionalism’, it possesses a balance o f power between a number o f powerful regional economies. The potential for positive co-operation is thus much greater. At the same time, the considerable overlap in potential membership o f the IOR and Common­ wealth, at a time when the latter is transforming itself into an economic grouping, offers the opportunity for the formation of a powerful IOR interest group within the Commonwealth that could exercise considerable influence over the way in which the structure and policies o f the latter, as an economic grouping o f major global significance, might develop.

N otes 1 2 3

4 5 6 7 8 9

W. McLennan, Year Book Australia 1996 (Canberra: Australian Bureau o f Statistics, 1996), pp. 45, 63. Brian Pinkstone, Global Connections. A History o f Exports and the Australian Economy (Canberra: Grills, 1992), pp. 289-90. Gwyn Campbell & R. R. Subramanian, ‘The IOR and the Strategic Importance o f the Indian Ocean region in the Post-Cold War era’ in this volume. The Wordsworth Encyclopaedia 5 (Ware: Helicon, 1995), pp. 2006-7. Le Nouvel Observateur, Atlas Économique Mondial 1998, pp. vi, x-xi McLennan, Year Book Australia 1996, p. 41. ‘Indonesia Survey,’ The Economist (26 July 1997), p. 15. Projects for China, Vietnam, and the Philippines were similarly maintained - ‘Australia,’ The Economist (3 August 1996), pp. 54-5. Spoiling world trade,’ The Economist (7 December 1996), p. 15; McLennan, Year Book Australia 1996, pp. 48-9; Y.K. Silwal, ‘SAARC Perspectives,’ in: L.L. Mehrotra, H.S. Chopra & Gert W. Kueck (eds),

234

T h e IO R a n d it s E c o n o m i c G r o u p in g s

10 11

12

13

14 15 16

17 18 19

20 21 22 23

24 25 26 27

SAARC 2000 and beyond (New Delhi: Omega Scientific Publishers, 1995), pp. 8-9. Silwal, ‘SAARC Perspectives,’ pp. 8-9. Spoiling world trade,’ The Economist (7 December 1996), p. 15; McLennan, Year Book Australia 1996, p. 49; Silwal, ‘SAARC Perspectives,’ pp. 8-9. McLennan, Year Book Australia 1996, p. 49; Foo Siang Luen and John Rocha (eds), Singapore 1995 (Singapore: Ministry o f Information and the Arts, 1995), p. 52. Spoiling world trade,’ The Economist (7 December 1996), p. 15; McLennan, Year Book Australia 1996, p. 49; Serge Marti, ‘Les pays asiatiques confortent leur position au sein de l’OM C,’ Le Monde (8-9 décembre 1996), p. 2; Marie-France Baud, ‘Le CNPF à l’écoute de l’économie australienne,’ Le M O C I( 15 déc 1994), p. 16. McLennan, Year Book Australia 1996, p. 48. McLennan, Year Book Australia 1996, p. 49. [Australian] Department o f Foreign Affairs and Trade (DFAT), International Public Affairs Branch, ‘The Cairns Group,’ Fact Sheet 036 (May 1995); McLennan, Year Book Australia 1996, p. 52. DFAT ‘The Cairns Group,’ p. 53. Marti, ‘Les pays asiatiques,’ p. 2. Luen & Rocha (eds), Singapore 1995, pp. 52-3; ‘Les nouveaux conquérants,’ Challenges 100 (février 1996), pp. 78, 80; ‘The tigers lose their grip,’ The Economist (19 July 1997), p. 14. The coup has raised the question o f political conditions to adherence, which may in effect trangress the original intention of non-interference see ‘The tigers’ fearful symmetry,’ The Economist (19 July 1997), p. 53. L.L. Mehrotra, ‘Why Regional Co-operation?,’ in: Mehrotra, Chopra & Kueck (eds), SAARC 2000 and Beyond, p. 23. Mehrotra, ‘Why Regional Co-operation?,’ p. 23. K.R. Narayanan, ‘Inaugural Address’ in: Mehrotra, Chopra & Kueck (eds), SAARC 2000 and Beyond, p. 4. Narayanan, ‘Inaugural Address,’ p. 4; ‘Japan and Asia - not so fast,’ The Economist (18 January 1997), p. 61; ‘Singapour,’ Challenges (février 1996), p. 102; ‘Asia,’ The Economist (16 December 1995), pp. 63-4; ‘Les nouveaux conquérants,’ Challenges 100 (février 1996), p. 78; ‘ASEAN. Suharto’s regional swing,’ The Economist (7 June 1997), pp. 69-70. ‘Indonesia,’ The Economist (3 August 1996), p. 21. ‘The tigers’ fearful symmetry,’ The Economist (19 July 1997), p. 53. ‘Trading Nations,’ The Economist (2 August 1997), p. 86. ‘East Asian economies,’ The Economist (20 July 1996), p. 72.

235

G w y n C am pbell

28 ‘Asia,’ The Economist (16 December 1995), pp. 63-4; ‘Les nouveaux conquérants,’ Challenges 100 (février 1996), p. 78; Mehrotra, ‘Why Regional Co-operation?,’ p. 23. 29 Luen & Rocha (eds), Singapore 1995, 52-3; Mehrotra, ‘Why Regional Co-operation?,’ p. 24. 30 Mehrotra, ‘Why Regional Co-operation?,’ pp. 24-5; Eric Gonsalves, ‘South Asian Co-operation: an agenda and a vision for the future,’ in: Mehrotra, Chopra & Kueck (eds), SAARC 2000 and Beyond, p. 36; Silwal, ‘SAARC Perspectives,’ p. 9. 31 Le Nouvel Observateur, Atlas Économique Mondial 1998, pp. vi, x-xi. 32 Narayanan, ‘Inaugural Address,’ p. 4; Gonsalves, ‘South Asian Co­ operation,’ pp. 34-7. 33 Narayanan, ‘Inaugural Address,’ p. 4. 34 Silwal, ‘SAARC Perspectives,’ p. 9; see also Narayanan, ‘Inaugural Address,’ pp. 3-4; Mehrotra, ‘Why Regional Co-operation?,’ p. 25. 35 Narayanan, ‘Inaugural Address,’ p. 6. 36 Kamal Hossain, ‘Towards a single market for South Asia,’ in: Mehrotra, Chopra & Kueck (eds), SAARC 2000 and Beyond, pp. 117-18; Narayanan, ‘Inaugural Address,’ p. 6; Silwal, ‘SAARC Perspectives,’ p. 10. 37 Silwal, ‘SAARC Perspectives,’ pp. 8-10. 38 Hossain, ‘Towards a single market for South A sia,’ p. 118. 39 Hossain, ‘Towards a single market for South A sia,’ p. 119. 40 Gonsalves, ‘South Asian Co-operation,’ pp. 36-7. 41 Gonsalves, ‘South Asian Co-operation,’ pp. 40-1. 42 ‘Middle East economies,’ The Economist (16 November 1996), pp. 578.

43 ‘Middle East economies,’ The Economist (16 November 1996), p. 57; ‘G ulf citizen, no qualifications, seeks well-paid jo b ,’ The Economist (12 April 1997), p. 49; ‘Growing a Nation. The United Arab Emirates at 25,’ The Economist (30 November 1996). 44 ‘Setting a worm to catch a weevil,’ The Economist (18 October 1997), p. 58. 45 Le Nouvel Observateur, Atlas Economique Mondial 1998, pp. vi, x-xi. 46 See Campbell & Subramanian, ‘The IOR and the Strategic Importance o f the Indian Ocean region.’ 47 Le Nouvel Observateur, Atlas Economique Mondial 1998, pp. vi, x-xi. 48 Erich Leistner, ‘South Africa’s Options for Future Relations with Southern Africa and the European Community,’ SACOB (October 1992), p. 6; Business Times (19 March 1995), p. 11; ‘Africa Calls for Debt Reduction,’ L ’Expresse-Economie (28 mars 1995), p. 11. 49 L 'Expresse (27 mars 1995), p. 3; (28 mars 1995), pp. 1, 5. 50 Leistner, ‘South Africa’s Options,’ pp. 2, 6-7.

236

T h e IO R a n d it s E c o n o m i c G r o u p in g s

51 Leistner, ‘South Africa’s Options,’ pp. 4-5, 11; Greg Mills, ‘The History o f Regional Integrative Attempts: The Way Forward?’ in Greg Mills, Alan Begg & Anthoni Van Nieuwkerk (eds), South Africa in the Global Economy (Johannesburg: SAII, 1995), p. 223. 52 ‘An African success story,’ The Economist (14 June 1997), p. 53. 53 ‘Will the World Starve?,’ The Economist (16 November 1996), p. 23; ‘An African success story,’ The Economist (14 June 1997), p. 53; ‘South Africa’s economy - Turnaround,’ The Economist (8 March 1997), p. 98. 54 ‘An African success story,’ The Economist (14 June 1997), p. 53. 55 The Citizen (4 Aug 1994), p. 8; The Star, ‘Business Report,’ (3 April 1995), p. 3; Leistner, ‘South Africa’s Options,’ pp. 4-5. 56 ‘An African success story,’ The Economist (14 June 1997), p. 53. 57 Jacqueline Beaujeu-Garnier & Annie Delobez, L'Économie du Common­ wealth (Paris: Presses Universitaires de France, 1967), pp. 8-10. 58 See e.g. Pinkstone, Global Connections, pp. 103-61. 59 Beaujeu-Garnier & Delobez, L 'Économie du Commonwealth, pp. 8-10. 60 Pinkstone, Global Connections, pp. 186-8. 61 Other relevant programmes include the Commonwealth Youth Pro­ gramme, the Commonwealth Scholarship and Fellowship Programme and the Commonwealth of Learning -DFAT, International Public Affairs Branch, ‘Australia and the Commonwealth,’ Fact Sheet 050 (November 1995); Jean-Claude Redonnet, ‘Les Sommets du Common­ wealth (Commonwealth Head o f Government Meetings): des Rites diplomatiques aux Réalités géopolitiques,’ Cultures o f the Commonwealth 2 (1996-7), p. 79. 62 Tundé Fatundé, ‘Commonwealth: L ’Empire britannique se ressoude,’ Jeune Afrique Economie 252 (17-30 novembre 1997), pp. 24-5; DFAT, ‘Australia and the Commonwealth,’ Fact Sheet 050 (November 1995). 63 Gwyn Campbell, ‘The Development o f the IOR (Indian Ocean Rim) Association and its implications for the Commonwealth,’ to appear in Cultures o f the Commonwealth 3 (1997-8). 64 Le Nouvel Observateur, ATLASECO, Atlas Économique Mondial 1998; UNDP, Human Development Report 1995 (Delhi: Oxford University Press, 1995), pp. 155-7. 65 Nouvel Observateur, Atlas Économique Mondial, 1998; Larousse, Faits et Chiffres, 1995 (Paris: Larousse, 1996).

237

C h a p t e r 16 S o u t h A f r ic a a n d F r a n c e in A f r ic a a n d t h e I n d ia n O c é a n - E c o n o m ic a n d C o m m e r c ia l P a r t n e r s o r R iv a l s ? A n d r é U lpa t

This chapter first describes how South Africa and France stand in relation to one another. This in turn prompts not only an analysis of current bilateral economic and commercial relations but also a close examination o f the foreseeable changes in each country’s policies both within the regional context o f shifting patterns within South Africa and the southern Africa - Indian Ocean area, and within the wider context o f the inelucta­ ble transformation o f the world economy as new giants begin to emerge, notably in Asia.

S o u t h A f r ic a

and

F rance

After successfully negotiating her political transition to multiparty democracy, South Africa is currently reviewing her domestic economic policies with the aim o f devoting more resources to job creation and to the social upliftment o f the Third World majority o f her population. This entails the mobilization o f both domestic and external financial resources. In this regard, long-standing partners like France are potentially able to offer valuable assistance. French assistance could be provided on a purely commercial and economic basis through the development o f trading links, direct investment in employment creating projects, development assistance, or even by pleading South Africa’s case with multilateral donors such as the EU or UN agencies. However, France is not the only potential source o f assistance for South Africa possesses a wide range of relations with foreign countries, some o f which are considerably stronger than those which exist with France. Such is the case o f Britain which, because o f a common colonial heritage, has strong traditional and current relations with South Africa. Thus there are at present about 1,500 affiliates o f British firms operating

S o u t h A f r ic a a n d F r a n c e in A f r ic a a n d t h e I n d i a n O c e a n

in South Africa whilst direct British investment was put conservatively at £10 billion (1994). Germany also figures prominently, although her position as the second largest investor in South Africa is less a reflection o f traditional ties - although there remain some vestiges o f cultural affinities due to former colonial links with Namibia (former South West Africa) - than assiduous German cultivation o f market opportunities world-wide. Direct German investment in South Africa was in 1994 estimated to be well in excess o f DM 2 billion. Moreover, German firms tend to operate in key sectors, such as the automobile industry, where multiplier effects are highest. At the same time American firms, which deserted South Africa en-masse during the second half o f the 1980s, are currently making a significant comeback. In 1994, it was estimated that 10 US firms a week were making contact with South African counter­ parts.

T a b l e 52: F r a n c e ’ s F in a n c ia l C o m m it m e n t t o S o u t h A f r ic a 1994-

5 ( in FF.

m il l io n ) 1

1994 30 230

Project French Embassy French Development Fund Financial Protocol World Environment French Fund TOTAL

-

260

1995 30 400 150 30 610

T a b l e 53: S o u t h A f r ic a ’ s M a in T r a d in g P a r t n e r s , 1994 (R b il l io n ) 2 Country United States Germany Japan United Kingdom Switzerland Italy Taiwan Netherlands Belgium France

Total 16.9 16.7 12.1 14.9 7.9 4.4 4.3 4.8 3.0 3.7

239

Imports 12.5 13.0 7.9 9.0 1.9 2.6 1.7 3.0 1.9 2.7

Exports 4.4 3.7 4.2 5.9 6.0 1.8 2.6 1.8 2.1 1.0

A n d r é U lpat

T a b l e 54: S o u t h A f r ic a n F o r eig n T r a d e - D istr ib u t io n 19943

Region Europe Asia Africa Americas Middle East

Exports: 1993

Total 1. A gri­ cultural Products Agriculture, Forestry, Fisheries Agro Industries 2. Energy 3. Industry (i) Semi Products Mineral raw materials

R e g io n ,

Percentage o f trade 40 20 14 10 7

T a b l e 55: F r a n c o -S o u t h A fr ic a n T r a d e , 1994 (FF. Sector

by

Imports: % cha­ nge

1994

1993

m illio n

F O B )4

Balance: % change

1994

1993

1994

cha­ nge

3,337

4,584

37.3

2,599

3,011

15.5

738

1,573

835

189

264

39.5

664

816

22.1

-475

-552

-77

33

14

-57.3

560

677

20.8

-527

-663

-136

157

750

59.2

104

139

28.7

53

611

558

3

14

-

522

409

-22.6

-519

-395

124

3,144

4,254

35.2

1,405

1,784

26.9

1,739

2,470

731

925

1,246

34.2

1,168

1,526

30.6

-243

-280

-37

3

3

-

231

235

1.7

-228

-232

-4

Metals

191

318

66.4

723

1,048

44.9

-532

-730

-198

Chemicals & chemical products

734

925

26.0

213

243

14.0

521

682

161

(ii) Capital Goods

1,638

2,316

41.3

55

44

-20.0

1,583

2,272

689

(iii) House­ hold & Electrical Goods

32

23

-28.1

32

22

-10

(iv) Land Transport Equipment

62

62

27

29

2

1

35

240

33

-5.7

S o u t h A f r ic a a n d F r a n c e in A f r ic a a n d t h e I n d i a n O c e a n

Private cars

2

1

-

-

-

-

-

-

-

Spare parts & professional vehicles

60

61

1.5

35

32

-4.5

25

29

4

483

607

25.6

147

181

23.1

336

426

90

1

2

-

5

2

-

-4

0

-

(v) Consu­ mer Goods (vi) Other

The French, with the singular exception o f the Huguenot refugees who arrived in 1688, were comparative latecomers to South Africa. French economic influence grew in the 1960s to reach a high point in the mid1970s, notably in arms sales. French economic involvement dwindled following the 1977 imposition o f the UN embargo, to which France, under François Mitterand, fully adhered. This permitted less scrupulous rivals to fill the gaps left by the withdrawal o f French firms, although over 100 French affiliates remained, dominated by the French Oil Company Total, which still accounts for approximately 4/5ths o f direct French investment in the country. Moreover, given the support by France to the anti-Apartheid measures o f the UN, the French government and French firms hope that the new ANC dominated government will sponsor renewed economic relations with France. These were certainly the sentiments espoused by the then French Foreign Trade Minister, StraussKahn, following his 1990 visit to South Africa prompted by Frederik de Klerk’s unequivocal commitment to a multiparty democracy. Today, given South Africa’s commitment to the SADC and its membership o f the newly created IOR, France needs to review its policy towards economic relations not only with South Africa, but also with southern Africa as a whole within the Indian Ocean context. The new South African government has made a commitment to free market economics and trade liberalization, and has undertaken to create an investor-friendly environment in South Africa. This has drawn a positive response from France, both from the government and from private entrepreneurs. The French Trade Commission in Johannesburg has been enlarged, and the Franco-South African Chamber o f Commerce and Industry has promoted networking and visits between businessmen from the two countries. O f particular importance, and a reflection o f the priority given by the French foreign trade ministry to South Africa, has been the establishment o f a unique institution, the Organization for Industrial Co-operation and Investment between South Africa and France (OCSAF). It has retained close ties with its founders, the French Foreign Trade Department and South Africa’s Industrial Development

241

A n d r é U lpat

Corporation, as well as with important organizations like the International Branch o f the French Association o f Employers and the Paris Chamber of Commerce. OCSAF’s aim o f updating businessmen and potential investors on both sides on investment opportunities and commercial information in the other country, has already stimulated considerable investment in South Africa by French private businesses.5 Similarly unique in the history of French foreign policy has been the creation of the French Institute o f South Africa whose contribution will be invaluable in promoting a better knowledge and understanding o f French culture and ways of life in South Africa, and vice-versa, through student exchanges and collaborative research projects.

T a b l e 56: F r en c h T r a d e

w ith

S o u th A fr ic a , 1994 (FF. 0 0 0 ’s &

percentage)6 Exports to SA

Value

Aircraft etc. Chemical products Data processing equipment Public works equipment Pharmaceu­ ticals Steel foundry equipment Special machinery Manoeuvring equipment Telephonic equipment Raw plastic materials Meat,poultry & game Low volt signal equipment Industrial chemicals Heat control

Imports from SA

Value

215,071 186,849

% of total 4.7 4.1

Coal Non-tropical fruits

378,988 352,531

% of total 12.6 11.7

180,956

3.9

Ferro alloys

344,653

11.4

180,673

3.9

Nuclear products

307,715

10.2

168,431

3.7

160,279

5.3

168,003

3.7

152,740

5.1

161,882

3.5

131,202

4.4

161,508

3.5

104,094

3.5

143,381

3.1

85,382

2.8

136,360

3.0

70,592

2.3

120,245

2.6

Coffee, cocoa & tropical fruit Raw precious metals Wool, silk, honey & wax Raw copper, nickel etc. Copper, lead & zinc ores Raw paper & cardboard Other metal ores

70,159

2.3

118,666

2.6

Pulp

57,463

1.9

114,294

2.5

51,137

1.7

111,770

2.4

Canned fruit & jams Building stone

41,766

1.4

242

S o u t h A f r ic a a n d F r a n c e in A f r ic a a n d t h e In d i a n O c e a n

equipment Paper products Heat resistant products Finished steel products Steel pipes Refined petroleum products Electronic equipment

103,233

2.3

Iron ore

41,280

1.4

78,210

1.7

39,570

1.3

76,154

1.7

36,751

1.2

66,472

1.5

32,164

1.1

63,971

1.4

Raw alum & aluminium Raw foundry products Car parts & equipment Canned fish

24,996

0.8

63,160

1.4

Processed wool

24,894

0.8

T a b l e 57: F r e n c h G o v e r n m e n t F in a n c ia l C o m m it m e n t s t o S o u t h A f r ic a , 1994-5 (F F . m )7 Funding Organization French Embassy French Development Fund Financial Protocol French World Environment Fund Total

1994 30 230 -

260

1995 30 400 150 30 610

More importantly for the economy o f South Africa, the French government in 1994 authorised the Caisse Française de Développement (CFD - French Development Fund) to expand its activities to South Africa. The CFD, which specialises in soft loans to developing countries, in 1994 and 1995 granted FF. 230 million and FF. 610 million respectively in favour o f ‘underprivileged’ South Africans.8 To this must be added the grants available through the French Embassy and the Fonds Français pour VEnvironment Mondial (French Funds for the Global Environment) which comes under the CFD. In addition, former French Minister o f Post and Telecommunications, José Rossi, announced in March 1995 that the FF. 150 million financial protocol promised by Mitterand during his visit to South Africa in July 1994 would be released. This loan, granted directly by the French government, and which has a long repayment period and a low interest rate, is intended to finance projects in RDP focused sectors such as water provision and purification, telecommunications and electrification.

243

A nd r é U lpat

France, which was committed to pleading the cause o f social and economic upliftment efforts in South Africa, has also been partly responsible for EU developmental aid to the country, In 1995, EU development aid to South Africa reached ECU 125 million (R 587 million), o f which France alone contributed 20 per cent, whilst in addition, in May 1995, the European Parliament made available to South Africa a loan package totalling R 1.2 billion from the European Investment Bank. This money will speed up the implementation o f badly needed infrastructural projects. Although South Africa had wanted but has been refused Lomé convention status, France and her partners within the EU are prepared to grant it some preferential treatment. Privileged access for South Africa to the EU ’s lucrative market o f 340 million customers with high purchasing power is o f vital importance to a country like South Africa which has to generate foreign exchange in order to finance its development needs. The importance o f the EU-South Africa relationship is reflected in the estimation that three out o f every ten South Africans owe their livelihood to the country’s link to Europe. South Africa’s relationships with the USA and Japan, whilst on a lesser scale, are also o f critical importance as the latter constitute both major markets and important sources o f development aid. Political and social stability in South Africa ultimately depends upon stimulating economic development and raising standards o f living for the majority o f the country’s population. The South African government’s commitment to the RDP is, in this context, fully understandable. However, the South African government also recognises that it cannot achieve these aims if its neighbours north o f the Limpopo remain beggars on her doorstep. Hence the wish to incorporate southern Africa, and possibly much o f the rest o f Africa, into her own developmental drive. France and the EU thoroughly endorse this policy initiative, aimed at regional integration in southern Africa, which they are willing to back in financial terms. Thus at the September 1994 Berlin Conference, the SADC entered into dialogue with the EU on an inter-regional basis for the first time ever.

244

S o u t h A f r ic a a n d F r a n c e in A f r ic a a n d t h e In d i a n O c e a n

T a b l e 58: S o u t h A frica (in FF. m )9 Imports

Como­

and

Fr a n c e : Share

of

IOC Im p o r t s , 1992-3

Réunion

Mada­ gascar

Mau­ ritius

Sey­ chelles

Total

Total excluding Réunion

ros

1992

310

12,650

2,360

8,560

910

24,790

12,140

South

15%

2%

5%

12%

16%

6%

11%

France

36%

70%

30%

13%

5%

44%

16%

1993

360

11,760

2,600

9,550

1,200

25,470

13,710

South

8%

2%

5%

13%

14%

7%

11%

France

44%

70%

27%

12%

7%

41%

15%

South

-36%

-11%

12%

20%

18%

13%

17%

47%

-4%

5%

11%

85%

-5%

6%

Africa

Africa

Africa 93/94 France 93/94

Moreover, it must be underlined that France is no newcomer to Africa. It remains the major trading partner o f the continent which accounts for 20 per cent o f its foreign trade. Approximately half o f the countries in Africa are Francophone and most o f these have received more in investment and assistance from France than from elsewhere. Joint ventures or even trilateral agreements are likely to succeed precisely because what South A frica and France have to offer is complementary rather than identical. It is thus not far-fetched to envisage a partnership wherein South Africa would utilize its assets - relatively cheap labour, relatively advanced infrastructure, and technical know-how adapted to African conditions and France provide finance, capital goods and advanced technology. Moreover, French and South African zones o f influence in Africa do not overlap. SADC, for example, is largely unknown even to French businesses long established in Africa, and there are a number o f cases elsewhere in Africa, notably in the mining and oil sectors, where French participation would have been impossible without South Africa assuming some o f the responsibility. One could envisage a major role for South Africa in West Africa, a region about which French entrepreneurs possess intimate knowledge and from which South Africa was excluded during

245

A n d r é U lpat

the long period of UN sanctions. Certainly joint Franco-South African ventures are already taking shape and new financial mechanisms such as offset may assist in overcoming the nagging problem of a lack o f foreign exchange in target countries. Indeed, South Africa’s comparative advantages are sufficiently strong to be causing many French firms with African interests to transfer their regional headquarters and use South Africa as a base for doing business with countries further north.

S o u t h A f r ic a

and the

I n d ia n O c e a n R im

The situation is somewhat different with the five island country members o f the Indian Ocean Commission, Réunion, Mauritius, the Seychelles, the Comoros, and Madagascar with which she was able to retain limited trade links in the period o f sanctions. Although she has turned away from markets with a low growth potential such as the Comoros and Madagascar, South Africa currently possesses a strong commercial relationship with Mauritius and the Seychelles, her share o f trade with these countries even exceeding that o f France. In addition, South Africa has invested heavily in the tourist infrastructure (Sun International) o f these two countries. Flowever, South Africans appear also to have assimilated the policy lessons o f the forty odd years o f the ‘development’ experience. They well know that the Asian economies whose growth path they would like to emulate based their development policies on export-led growth. This entails expanding the number o f foreign trade partners and o f accessing the fastest growing markets. The latter are concentrated in Asia which is poised to become the economic giant o f the twenty-first century. Given the positive correlation between high growth rates and imports, these Asian economies present a golden opportunity for countries, including South Africa, keen to increase their exports. In 1993, seven o f South Africa’s top twenty trading partners were in the East Asia region. They comprised Japan (third largest trading partner), Taiwan (sixth), Hong Kong (eleventh), South Korea (fourteenth), China (fifteenth), Singapore (eighteenth) and Australia (nineteenth). More significant has been South Africa’s percentage trade increase in the period 1990-94 with Vietnam (1,185 per cent), India (560 per cent), Malaysia (283 per cent), China (226 per cent), Indonesia (180 per cent) and Thailand (136 per cent). Some of these started from a very low base, but the increase in trade cannot be discounted. It must be added that some o f these countries are already significant sources of direct investment in South Africa. Japan is a case in point as is Taiwan, which dramatically increased its share of

246

S o u t h A f r ic a a n d F r a n c e in A f r ic a a n d t h e In d i a n O c e a n

investment in South Africa during the Apartheid years. A parallel o f sorts may be drawn with Mauritius which was able to diversify its economy, expanding from a monoculture sugar base into textiles and tourism largely due to heavy investment in the island by Hong Kong businessmen worried about the future o f their own colony at the start of negotiations with Beijing. In this latter respect, it is to be noted that although South Africa continues to have strong relations with Taiwan, it has not hesitated to recognise and cultivate economic relations with China. A reflection o f the importance o f Asian markets to South Africa has been its participation in the founding o f an Indian Ocean Rim (IOR) association for economic co-operation. South Africa, the dominant member economy in the western Indian Ocean, is likely to play a major role in the IOR grouping which could be a manifestation of the shifting o f the world’s economic centre that economists have been predicting for some decades. The IOR association raises certain questions as to its relationship with France which also possesses long-established interests in the western Indian Ocean. Indeed, Réunion, an integral part o f France, gives France sovereign status in the region, although her presence there is resented by some countries who perceive it as a vestige o f colonialism. Certainly French involvement in the recent political crises in the Comoros and the Seychelles has raised eyebrows elsewhere in the region. Nevertheless, the direct involvement o f a First World country in the region also has distinct advantages. The French navy is the second largest - albeit far smaller than that o f the USA - in the region and France has proved its capability for emergency and logistical support in times o f natural disasters. Although the French government has not as yet fully realized the potential importance o f the IOR and shifting economic relations in the region, and o f the implications o f these changes for France, its commitment to economic involvement in southern Africa, and to Réunion, will ensure that it will play an important role in the economic future o f the entire region.

C o n c l u s io n Unlike Britain, France does not possess strong historical links to the southern African continent. However, it does have a considerable colonial history in the proximate region of the islands of the south west Indian Ocean, where it has maintained both a direct territorial presence and major economic links. However, the French government is keen to take advantage o f the investment opportunities offered by the new democratic regime in South Africa and to facilitate this has increased its official

247

A n d r é U lpat

economic, political and cultural representation in the country, and its aid programme there. The French government is similarly prominent in EU endorsement o f South Africa’s promotion o f regional economic co­ operation in the form o f SADC. Given its presence in the Indian Ocean, France is also keenly aware o f the opportunities to be gleaned by southern Africa through the forging o f co-operative links to countries o f the IOR. Its possession o f the Indian Ocean island o f Réunion will ensure that France plays a considerable role in this initiative.

N o tes 1 2 3 4 5 6 7 8

Source: South African Press Association. Source: South African Customs, 1994. Source: South African Customs, 1994. Source: French Foreign Trade Department, 1994. Twelve French firms had invested by mid-1995. Source: French Department o f Foreign Trade, 1994; French Damex. Source: South African Press Association. Conditions are particularly attractive. They include a five-year grace period with repayment over ten years at 3.5 per cent interest, or a five-year grace period and a fifteen-year repayment period at 5 per cent interest. 9 Source: Indian Ocean Commission, 1994. 10 The Sun International Group, one case in point, has invested heavily in profitable seaside resorts in several Indian Ocean island states.

248

C h a p t e r 17 T h e IO R

a n d t h e S t r a t e g ic I m p o r t a n c e o f t h e I n d ia n O c e a n R e g io n

IN THE POST-COLD WAR ERA G w y n C a m p b e ll a n d

R.R. S u b r a m a n i a n

After the Second World War and especially from the 1980s, rivalry became a persistent feature o f the Indian Ocean strategic environment. The IOR was conceived in the Cold War years by the intelligentsia in geo-strategic terms. Its underwater topography, was from the 1960s to the early 1980s, ideally suited for locating submarine launched ballistic missiles. The region continues to be o f importance in the post-Cold War era: the bulk o f global oil resources and many valuable raw materials and strategic minerals are located in the littoral o f the Indian Ocean. In consequence, the few maritime entrances to the Indian Ocean have great importance. Political instability in the Suez region has meant that the Cape o f Good Hope, the only alternative oceanic entrance from the Atlantic to the Indian Ocean has become particularly important for the superpowers.1 From 1967-72, when the Suez Canal was closed, 112,000 tankers passed via the Cape, 24,000 ocean going vessels (or an average o f sixty-six ships a day) taking that route in 1975 alone.2 To the east, following the brutal suppression o f the Communist revolt there in 1965, when as many as 500,000 people were killed, Indonesia was viewed as a bulwark against Communism in Southeast Asia.3 The end o f the Cold War and the collapse o f the Apartheid regime in South Africa has not lessened the importance o f the region. For instance, the introduction o f supertankers, which require costly refuelling facilities and specific dry-docks for maintenance and repair, has accentuated the importance o f South Africa which possesses such facilities at Saldinha Bay, near Cape Town and Richards Bay near Durban. The latter is currently capable o f handling vessels displacing up to 152,000 tonnes, and when further renovated can accept vessels displacing 254,000 tonnes.4 Almost 70 per cent o f oil and 44 per cent o f all cargo traded by NATO countries pass via the Cape o f Good Hope, as do a quarter o f Europe’s food supplies. By the same token, most G ulf countries depend on the West for the import o f technology, military hardware and commercial goods. The bulk o f the cargo vessels capable o f supplying these goods pass around the Cape.5

G w y n C a m p b e l l a n d R .R . S u b r a m a n i a n

59: Im p o r t a n c e o f IOR A g r ic u l t u r a l P r o d u c t io n , 1995 (=1994)6 (* = IOR Member; • = Potential IOR Member) T able

Country

Product

South Africa*

maize wine sheep tobacco copra0 manioc0 tea camels0 coffee millet manioc0 coffee camels0 cattle sorghum0 wood camels0 dates0 dates0 oranges dates0 dates0 dates0 sheep tea oranges cattle tea bananas millet milk0 rice sugar cane silk0 peanuts0 wheat cotton wood tobacco0 sheep fish potatoes

Zimbabwe* Mozambique* Tanzania* Kenya* Uganda*

Ethiopia*

SomaliaOman* Egypt* Saudi Arabia* Iraq* Iran*

India*

World ranking 6 7 10 6 8 6 4 7 7 8 10 5 6 8 9 11 1 8 3 9 4 2 1 4 8 8 1 1 1 1 2 2 2 2 2 3 3 3 4 5 6 6

Country

Product

World ranking

India cont’d

Pakistan*

Sri Lanka* Malaysia*

Indonesia*

Myanmar* Thailand*

Australia*

250

oranges Maize coffee cotton Sugar cane wheat tobacco0 oranges Sheep Tea rubber0 rubber0 Cocoa Wood rubber0 Copra0 coffee Rice Cocoa Tea peanuts0 manioc0 bananas Wood ‘cereals’ Fish Sugar cane Rice peanuts rubber0 pineapples0 manioc0 Rice Sugar cane Fish bananas Sheep Sugar cane Wine Cattle cotton

6 7 8 4 4 9 10 10 11 3 8 3 5 10 2 2 3 3 4 5 5 5 6 6 6 7 9 6 9 1 1 4 7 7 9 10 1 8 9 10 10

T h e IO R a n d t h e S t r a t e g ic I m p o r t a n c e o f t h e In d i a n O c e a n R e g io n

The eastern entrances to the Indian Ocean have also become the focus of considerable attention due to the recent assertion by China o f territorial claims in the western reaches o f the South China Sea. Such claims conflict with the claims o f countries in the region, like Indonesia, and have led to considerable concern in Southeast Asia and in the US about Chinese territorial ambitions. These supplement traditional fears about Chinese expansionism in interior South Asia, especially in India where concern about China’s intentions in the region overshadow its long-standing enmity with Pakistan. Table

60: Im p o r t a n c e

of

IOR M in e r a l , E n e r g y & In d u s t r i a l

P r o d u c t i o n , 1995 (° = 1994)7 (* = IOR Member; • = Potential IOR

Member) Country

Product

South Africa*

Gold

Botswana* Zambia* Saudi Arabia* Jordan* UAE * Iran India*

World ranking 1

Chrome0 manganese0 diamonds Coal iron ore Nickel Uranium Lead phosphates silver0 diamonds Copper petroleum

1 3 5 5 8 8 8 9 10 10 2 6 1

natural gas potasium phosphates petroleum petroleum natural gas Coal Chrome0

10 6 7 10 4 11 4 4

Country

Product

India (cont’d)

Steel

Malaysia* Indonesia*

Thailand* Australia*

iron ore bauxite aluminium0 tin° Tin nickel natural gas copper Tin diamonds bauxite Lead Gold Silver uranium iron ore Coal copper nickel Tin lignite

World ranking 6 6 7 10 8 1 3 6 10 10 1 1 1 3 4 4 4 5 5 5 7 8

This paper examines the current and potential implications o f current moves to greater economic co-operation within the region on defence capabilities o f ‘middle powers,’ IOR members with a visible naval and military

251

G w y n C a m p b e l l a n d R .R . S u b r a m a n i a n

presence, in the context o f the changes in its strategic importance in the immediate post-Cold War era.

T e n s io n

w it h in t h e

IO R

In 1995, there were forty areas o f major military conflict in the world, o f which sixteen occurred in the IOR region and its immediate hinterland. Although many o f these are labelled ‘ethnic’ or ‘separatist,’ a number have involved issues o f international strategic importance. The potential for these to continue is considerable given the concentration in the IOR region o f valuable resources, notably in sub-soil energy and mineral resources. Local conflicts that have threatened the production and distribution o f some o f these resources have affected outside interests sufficiently to invite direct intervention, notably from powers, like the US and France. Moreover, although Russia, the remnant o f the former Soviet Union, has withdrawn its military presence from the region, there is another, rapidly growing power China.8 Napoleon once said: ‘Let China sleep; when she wakes she will shake the w orld’.9 China is now the world’s eleventh largest exporter,10 but its burgeoning economy also means that it requires massive food and energy imports. Due to both population growth and the development o f industrial conurbations, Chinese grain imports will need to increase from the sixteen million tonnes it received in 1995 to an estimated forty-three million tonnes by 2010. China has purchased Australian wheat since the 1960s, and although imports dipped from 1986 with US and EU subsidised exports, the return to a market-orientated system has brought Australia back into favour.11 Projected increases in Chinese food demand could be met, in part, by increases in grain and other agricultural output from other parts o f the IOR, notably sub-Saharan Africa much o f which the green revolution failed to penetrate, and from South Asia where improved technology could increase yields by an estimated 40 per cent. Biotechnology promises to induce a second ‘green revolution’ that could further boost food production.12 However, concomitant with its economic development is an increasingly nationalistic and expansionist posture in international relations, its desire to create a ‘Greater China’.13 In 1995, China’s military spending was more than $30 billion - roughly the same as Britain’s - and is expected to go on rising steeply as it aims to become a modern maritime power with advanced nuclear arms capability.14 Such economic, political and military interests cannot be ignored, and have been perceived as a threat not only by regional powers, but also by the US, Japan, and Europe. S o u t h e a s t A sia

252

T h e IO R a n d t h e S t r a t e g i c I m p o r t a n c e o f t h e In d i a n O c e a n R e g io n

Although the focus o f Chinese attention in Southeast Asia is currently on Taiwan,15 which it wishes ‘returned’ by 2010, it has overtly expansionist aims throughout the region. Much o f this is directed at control over offshore resources - notably offshore oil and gas - that could provoke conflict in the eastern IOR region.16 In 1996 the Chinese government announced that Chinese maritime jurisdiction in the South China Sea had expanded from 370,000 square kilometres to about three million - including areas to which Taiwan, Vietnam, the Philippines, Brunei and M alaysia also have some claim. The Chinese occupied the Philippine-claimed ‘M ischief Reef,’ one o f the Spratly chain in the South China Sea, and there are fears that they aim to create a ‘Chinese Lake’ stretching from Okinawa to the M alacca Straits.17 In this respect, Indonesia is still viewed as a bulwark against the emerging Chinese military threat in the area.18 However, the fears o f Southeast Asia are not limited to the ocean, for China also shares territorial frontiers with many Southeast Asian countries. Indeed, fear o f China is largely responsible for growing arms stocks in the region, in 1996 East A sia’s expenditure on armaments for the first time exceeding that o f NATO and Western Europe combined, with South Korea, Malaysia and Thailand experiencing an increase o f over 23 per cent in their arms expenditure in 1996.19

T a b l e 61 : A r m s P u r c h a s e s b y R e g io n , 1994-620

Region

Middle East & Maghreb East Asia NATO & Western Europe South America South Asia East Europe Sub-Saharan Africa Pacific Russia & CIS Total

1994: Expen­ diture $000s 11.9

36.3

1995: Expen­ diture $000s 14.4

39.0

1996: Expen­ diture $000s 15.3

7.0 9.3

21.4 28.4

8.5 8.6

23.1 23.5

8.9 8.5

23.0 22.0

0.8

2.4

1.5

4.2

1.6

4.1

0.9 1.3 1.0

2.7 4.0 3.2

1.3 0.8 0.3

3.6 2.3 0.8

1.4 1.2 0.7

3.6 3.1 1.9

0.4 0.1 32.7

1.3 0.3

1.0 0.3 36.7

2.6 0.9

0.7 0.3 38.6

1.9 0.8

% of market

253

% of market

% of market 39.6

G w y n C a m p b e l l a n d R .R . S u b r a m a n i a n

T a b l e 62: T o p T en A r m s P u r c h a s e r s , 199621 Country

Country

Arms Purchases ($m)

Arms Purchases ($m)

Taiwan

3,234

India

1,317

China

1,957

Turkey

1,066

South Korea

1,727

Egypt

803

Saudi Arabia

1,611

Japan

679

Kuwait

1,363

Australia

554

T a b l e 63: S o u t h e a s t a n d E a s t A s ia - D e f e n c e S p e n d in g 1995-622

(* current and «probable future IOR members) Country

Expen­

1985-94 -

Population

GDP per person -

diture

real

1994 (million)

average annual %

(US$

change

%

change 1985-94

billion) 58

125

28.3

6

1,210

6.0+

13.4

59

44

6.0+

Japan

45.5

China South Korea Taiwan

2.0-3.9

11.3

13

21

6.0+

North Korea

5.5

-1

23

-0.0

Thailand*

3.4

35

59

6.0+

Singapore*

3.0

91

3

2.0-3.9

Malaysia*

2.7

14

20

2.0-3.9

Indonesia*

2.3

-27

192

4.0-5.9

Vietnam

0.9

-73

73

4.0-5.9

67

-0.0 -0.0

Philippines

0.9

37

Myanmar*

0.4

-35

46

Brunei*

0.2

-13

0.3

-0.0

Cambodia

0.1

n.a.

10

2.0-3.9

Laos

0.1

54

5

2.0-3.9

Some economists, including Krugman and Rohwer, consider that Chinese imperial pretensions pose a major problem to the political and economic future o f Southeast Asia.23 Certainly ASEAN views regional security primarily in terms o f Chinese expansion,24 which has also prompted its re­ cent moves to incorporate as ASEAN members all ten Southeastern countries lest they be absorbed into China’s informal empire.25

254

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T a b l e 64: T o p D e f e n c e C o m p a n ie s o u t s id e t h e U S A a n d E u r o p e ,

199526 (* = IOR Member; • = Potential IOR Member) Company

Country

Mitsubishi Heavy Industries

Japan

Defence Revenue (US$bn) 2.22

Kawasaki Heavy Industries

Japan

1.51

Mitsubishi Electric

Japan

1.05

Israel Aircraft Industries

Israel*

1.02

NEC

Japan

0.71

Denel

South Africa*

0.70

Ishikawajima-Harima Heavy

Japan

0.55

Toshiba

Japan

0.49

Hindustan Aeronautics

India*

0.37

Tad iran

Israel*

0.37

Industries

Fear o f Chinese expansionism, and the reactions to the latter by the US, and Japan, was also largely responsible for the creation in July 1994 of the ASEAN Regional Forum (ARF). In many aspects the ARF may be considered a modified version o f the Southeast Asia Treaty Organisation (SEATO), the collective defence system established from 1954-77. The ARF established annual regional security meetings that bring together ASEAN members, its seven dialogue partners (Australia, Canada, the EU, Japan, the Republic o f Korea, New Zealand and the US), its ‘consultative partners’ (China and Russia), and observers (formerly Vietnam and Laos who are now full ASEAN members, Cambodia, Papua New Guinea and since 1996 India). The ARF thus incorporates all major countries in the Asia-Pacific region in dialogue on security issues in an attempt to defuse potential crises - all ASEAN members have signed the treaty for a Southeast Asian Nuclear Weapons Free Zone,27 but the ARF’s main focus has been the conflicting claims to the maritime (fishing and oil/gas) resources o f the South China Sea.28 However, the ARF has made little headway to date. The main reason for this is that meetings include Japan, the USA, China and the EU which means that ARF discussions are almost always vague. In January 1997, Japan announced its wish to elevate its relations with ASEAN to a summit-level forum that would, in addition to trade and investment, regularly discuss security. However, whilst welcoming the large Japanese development assistance to the region, ASEAN leaders remained wary o f entering into a special security relationship with Japan lest such a relationship antagonize China. The

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M alaysian Prime Minister, Mahathir Mohamad wishes rather to establish regular summits involving ASEAN, China, South Korea and Japan, but Japan is opposed to the exclusion o f the USA.29 Whilst China is nominally the major focus o f attention, one result o f stalemate at the regional level has meant that the ARF has started to engage in a debate - forbidden in the ASEAN charter - about the internal security o f its member countries. Thus the dictatorship in Myanmar and the Cambodian coup formed the main points o f discussion at the A R F’s July 1997 meeting which was largely confined to discussing questions o f internal ASEAN security like M yanmar and Cambodia.30 However, such debates remain within the framework o f keeping M yanmar and Cambodia free o f Chinese influence, which in turn has meant the increasing engagement in the ARF o f the US - the ultimate stalwart o f defence against China.31 Following the Tiananmen Square protest o f June 1989, Sino-US relations deteriorated to the point that Singapore Prime Minister Goh Chok Tong spoke o f the development o f a new ‘Cold W ar,’ which tension over territorial disputes o ff Taiwan and the Philippines elevated to new levels in 1996-7. There is a possibility that the current tension between the United States and China could escalate in scale, but Sino-US tension has been reduced by the visit to the US o f Chinese president Jiang Zemin in October 1997 which led to agreement on regular meetings between the two countries, the establishment o f a presidential hotline, and to the Chinese limiting nuclear trade with ‘rogue states’ in return for an end to the US ban on the sale o f non-military nuclear reactors to China.32 At present, Sino-US disputes are unlikely to build up in the Indian Ocean where the US, as the sole superpower with an armada o f navies, currently operates freely. However, like France, China possesses the nuclear capability (including nuclear powered submarines that could launch ballistic missiles capable o f delivering nuclear weapons on target) to intervene in the region, and its ties to Pakistan and growing involvement in the Gulf, both areas that could ignite wider conflict, could cause Sino-US relations to deteriorate rapidly.

T a b l e 65: In d i a a n d P a k i s t a n - A r m e d F o r c e s , 199533 Armed

Combat aircraft

Armed helicopters

Tanks

forces India Pakistan

1,145,000

912

107

2,400

587,000

434

13

2,050

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T h e IO R a n d t h e S t r a t e g ic I m p o r t a n c e o f t h e In d i a n O c e a n R e g io n

T a b l e 66:

E s t im a t e d P a k is t a n i a n d In d i a n N u c l e a r C a p a b i l it y ,

199534 India

Pakistan 9

Nuclear power reactors Heavy water plants

8

Plutonium reprocessing plants

4

2

Uranium enrichment plants

2

1

Research reactors

9

1

Fast breeder reactor

1

Power reactors

1

1

S o u t h A sia

Chinese claims in the South China Sea, justified on the basis o f ‘historical’ claims dating to a brief period o f maritime supremacy between 1405 and 1433, could as well be extended to the Indian Ocean, which at that epoch was also dominated by the Chinese fleet.35 China possesses in the IOR region not only considerable fishing interests but also a large and economically important diaspora.36 Moreover, the IOR region has areas o f local friction that could escalate to the point o f inviting outside intervention, notably in South Asia and in Africa. A major regional tension in South Asia involves the Tamil Tigers’ rebellion in Sri Lanka, but the one with the most danger o f escalating is the long-standing Pakistani-Indian border dispute. India and Pakistan have fought wars, in 1947, 1965 (2) and 1971, and have come close to war in 1987 and 1990.37 Cheema contends that it was a feeling o f acute insecurity in the face o f overwhelming Indian military power during the early years o f independence, and a perception that India would seek all means including force to achieve re-unification, that at first prompted Pakistan to seek allies in the West. This move was welcomed by America which viewed Pakistan as both part o f its overall system o f alliances, but also as a possible influence with the Muslim world. However, it threatened India’s perception o f itself as the major Asian power, and triggered its alliance with the Soviet Union and led to rapid arms escalation in South A s ia .3 8 Pakistani ties with China in the 1960s aggravated the situation, and cemented the Indo-Soviet alliance.39 It was in this context that two IndoPakistani Wars were fought within a decade, in 1965 and 1971. Despite defeating Pakistan in 1971 and assertions by the then president o f Pakistan, Zia-ul-Haq, that Pakistan did not wish to engage in an arms race, India continued to believe that Pakistan aimed to one day renew conflict.40 The rise o f Kashmiri insurgency and the savage military reaction by India

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aggravated the situation. At the same time, India became a nuclear power, first exploding a nuclear device in 1974, and at the close o f the 1970s, the USSR invaded Afghanistan, thus imperilling Pakistan’s already precarious security situation. The Indian naval build-up in the 1980s - a reflection of its attempts, in alliance with the Soviet Union, to boost its world status - served to reinforce fears in Pakistan. In consequence, it strengthened its alliance with the US and stepped up its armaments programme, becoming a nuclear power in 1987.41 War with India was narrowly averted in 1987 and 1990.42 Unlike other countries in the IOR region, the end o f the Cold War has done little to relieve tension in the region, in part due to ethnic and sectarian conflict - the incidence o f which accelerated in the 1990s - but in the main due to the Kashmir question.43 The collapse o f the Soviet Union has removed India’s traditional major ally, but in 1996 it rejected US pressure to sign the Comprehensive Test-Ban Treaty on the grounds that China is permitted nuclear capability.44 In consequence Pakistan, which is currently building a reactor at Khushab, south west o f Islamabad, that could provide plutonium to build compact missile warheads, has retained its nuclear programme, reportedly with equipment and designs supplied by China.45 Whilst in India, which in 1996 spent $ 1,400m on arms (compared to $ 1,000m in 1995) defence accounts for less than 8 per cent o f total government spending, in Pakistan it accounts for 25 per cent.46 The opportunity costs o f the Indo-Pakistani arms race are thus far greater in Pakistan. Moreover, conflict has led to a dramatic rise in cross border drug traffic - in 1992, Pakistan’s illicit drug trade was estimated to be worth $13 billion (compared to the country’s GDP o f $51 billion) - and in illicit small arms trade.47 In addition, India has a long-standing dispute with China over a common 5,400 km long border (much longer than the Indo-Pakistani one o f 2,700 km).48 The dispute erupted in a war in 1962 in which India was defeated.49 China has continued to consolidate its position in Tibet, which it colonised in 1950-1, through a policy there o f Han Chinese settlement50 and India also feels vulnerable due to a revolt by nationalists in Assam, close to India’s north east frontier with China, that has been smouldering since the 1950s.51 Thus, whilst Indo-Chinese relations improved in the 1990s, India’s defence programme, notably its nuclear element, continues to be shaped by the perceived Chinese threat.52

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T h e IO R a n d t h e S t r a t e g ic Im p o r t a n c e o f t h e In d i a n O c e a n R e g io n

T a b l e 67: A s i a : T o p D e f e n c e S p e n d e r s (US$ (* = IOR Member; • = Potential IOR Member) Country

Defence Expenditure

Country Oman*

pe r c a p it a ),

199353

Defence Expenditure

Kuwait*

2,680.62

Qatar*

2,137.30

Singapore*

783.80

Saudi Arabia*

1,338.21

Taiwan

491.42

Israel*

1,334.80

Bahrain-

462.10

UAE*

933.40

Austral ia*

389.40

930.10

T a b l e 68: A s i a : T o p D e f e n c e S p e n d e r s ( a s p e r c e n t a g e o f GDP) 199254 Country

Defence as %

Country

Defence as % GDP

GDP Kuwait*

42.79

Yemen*

12.35 11.77

N. Korea

26.25

Saudi Arabia*

Iraq*

21.11

Israel*

11.39

Oman*

17.54

Jordan*

11.14

Qatar*

14.00

Vietnam

10.97

Th e G u l f R e g i o n

Another IOR sub-region o f high tension is the G ulf where military disputes centring on Iran and Iraq, both suspected o f having developed a nuclear weapons capability, and their neighbours, have almost become endemic.55 Traditional disputes over the capitalist-socialist ideological divide have ended, but those involving oil production and distribution have not. The Middle East produces 30 per cent o f the world production o f oil, and possesses over 50 per cent o f world reserves56 and disputes over oil have ensured that the Middle East defence expenditure relative to GDP (6.8 per cent) is the highest in the world - in 1996 comprising 40 per cent o f global arms purchases, well ahead of Southeast Asia (26.6 per cent).57 Moreover, as has been illustrated by the petrol crisis o f 1973, the IranIraq War (1980-8), the G ulf War in 1990, and the October 1997 decision by Iraq to bar US nationals from the UN team of inspectors sent to investigate its arms programme, dispute over oil can invite outside intervention.58 Traditionally, such a threat originated mainly from the US, which alone consumes a quarter o f world petrol production, backed by Europe. There is a powerful Western military presence in the area - notably the US military

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base at Diego Garcia, and the French base on Djibouti considered essential to survey the commercial routes between Arabia and Southeast Asia.59 However, China, where petroleum consumption is rising rapidly, poses a new threat.60 In 1995, China negotiated with Saudi Arabia for the establishment o f oil-refining joint ventures in Shangdong and Guangdong provinces,61 but it also has vital energy interests to the hinterland o f the G ulf where for some landlocked CIS states the Indian Ocean forms the nearest accessible sea - via Iranian railways.62 To their east, the CIS states border China which, beating competition from Amoco and UNOCAL, has not only negotiated with Kazakhstan an exclusive right to exploit the Uzen oil field on the east Caspian Sea coast, estimated at 130-200 million tonnes, but also wishes in view o f the independence movements (of Kazakhs, Tajiks, Kyrgyz, and Uighurs) in its ‘autonomous’ region o f Xinjiang, through which pipelines will carry some oil east to the industrial heartland o f China, to ship some o f the oil by tanker across the Caspian Sea to Iran, from where it would be shipped on.63 This will ensure considerable China interest in security in the Middle East. There can be no doubt that by the twenty-first century, China will be a major industrial power that will need to ensure that its oil supertankers have a safe passage, a factor which in turn would mean an increased role for the P eo p le’s Liberation Army (PLA) navy in the Indian Ocean. China possesses 113 conventional and six nuclear powered submarines ~ albeit obsolescent ones by modern standards - and is the one Afro-Asian country that can challenge the nuclear power o f France or the United States in the region.

A n IO R

r e g io n a l

D e f e n c e O r g a n is a t io n ?

The IOR region as a whole possesses no military defence network. Australia wished to include defence on the IOR agenda at the outset, pushing for the adoption o f its UN project for the establishment o f an Indian Ocean Zone o f Peace (IOZP).64 This was successfully opposed by the other initial IOR members, notably India and South Africa, who thought that any discussion o f defence would turn the IOR into an arena for sub-regional disputes which, like that o f Pakistan and India, would polarise members and paralyse economic co-operation. However, given its burgeoning economy, its considerable reserves o f strategically valuable natural resources, its numerous zones o f insecurity, and the current and imminent military interest in the region o f major outside powers, it could be to the IO R’s advantage to include defence on its agenda. Most conflict in the region is at present land-based, although the protection of sea lanes and disputes over marine resources might well form areas o f future

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conflict. Howard considers that ‘normal conflicts o f interest at sea as on land are an inevitable part o f international relations and so long as they can be settled by peaceful means they can be subsumed by the rubric o f order.’65 One solution would be to hand over policing o f the IOR region to the US which is rapidly gaining what looks like an unassailable lead or ‘information gap’ in its defence programme due to the application o f information technology (in gathering, processing and acting upon intelligence).66 However, such an option is undesirable. Not only does it imply loss o f sovereignty for the region to the US which might use its advantage ‘to shape the world, rather than to react to it,’67 and its allies within NATO, but superior technology might be insufficient for the US to prevent the outbreak o f conflict or, if it chose to intervene, it’s ability to win in a guerrilla style war or against an enemy that might decide to use chemical or biological weapons.68 Moreover, there exists the potential to manage future conflicts in the region within the ambit o f a growing economic co-operation, notably the IOR initiative, rather than through intra-regional military engagement that might invite external intervention. One such method might be that proposed by Australia for a triangle o f security linkages between South Africa, India and Australia despite their traditional mutual mistrust and suspicion over defence issues whereby these ‘middle powers’ might configure a regional balance o f power.69 Only by the process o f constructive engagement can the non­ nuclear weapon ‘middle powers’ provide a meaningful mechanism for confidence building measures in the IOR. Such an arrangement would have several key components. Until 1987, Australia considered Indonesia to constitute the greatest threat to security in the eastern part o f the IOR but it now concurs with the US view that the major threat there is China. As the ARF includes China, it cannot be a means o f providing regional security against China. It is partly for this reason that Australia would like security to be integral to the IOR process, and why it has boosted security through its membership o f a number o f other defence pacts: the Five Power Defence Arrangements (FDPA) that links it to, Malaysia, Singapore, New Zealand and the UK70 and the related Integrated Air Defence System (IADS),71 bilateral defence accords with Indonesia - signed in December 1995 much to the surprise o f other ASEAN members72 - Thailand and Papua New Guinea and Malaysia. Indeed, in security terms, it is extremely important that both Indonesia and Malaysia have become IOR members. Indonesia, by far the largest ASEAN member, is the IOR ‘middle power’ with the most reason to be concerned at the growth o f the Chinese navy, for the archipelago is located strategically near the mouth o f entry o f the South China Sea towards which China has pretensions. It is within this context that its considerable naval presence must be viewed, for it needs to secure its sea-lanes o f communication.

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M alaysia is under similar pressure to demonstrate its naval deterrence to the Chinese. Another pact, the Pacific Security Treaty, (‘ANZUS’) links Australia to New Zealand and to the US who in July 1996 agreed to a substantial enlargement of US-Australian security ties. This has been generally welcomed by Australia’s Southeast Asian neighbours who are nervous about Chinese expansionism, but India would only consider security co-operation with Australia on condition that Australia relinquish its American extra low frequency (ELZ) communication facilities at Fremantle and Cockburn Sound, designed to despatch signals to US nuclear submarines in the Pacific Ocean.73 India has the potential to play a considerable peace-keeping role in the IOR. It possesses the world’s fourth largest navy, and should its policies o f economic liberalisation achieve their objective of a growth rate o f 7-8 per cent, India’s military, especially the navy, which presently accounts for a mere 13 per cent o f the defence budget, could be further modernised through the development o f nuclear powered submarines and aircraft carriers. The naval capabilities of India were once perceived by Australia, Malaysia and Indonesia to be threatening, but they have recently changed their attitude in line with the opinion o f Booth and Dowdy that ‘India will retain its lead as the premier naval power in the region, although in most circumstances outside contiguous waters this will not represent useable power.’74 Australia now wishes to co-operate with India in peace-keeping in the IOR. However, for India to play a significant defence role in the IOR, it first needs to peacefully resolve its differences with Pakistan. There are hopeful signs. The US, which was largely responsible for fuelling the arms race between the two countries in the 1980s as it provided arms to Pakistan as its front-line ally against the USSR in Afghanistan, has since the withdrawal o f Soviet troops from Afghanistan, cut its arms supplies to Pakistan. At the same time, the fall o f the USSR meant that India’s arms supplies were no longer cheap.75 Following the last war scare in 1990, the US has applied pressure on both countries to reduce tension by advance notice o f military exercises, the establishment o f a hotline between military commanders, and an agreement not to attack each other’s nuclear facilities but this has not worked.76 South Africa is the only one o f the three pivotal IOR members to have witnessed recently a considerable decrease in military tension in its area o f influence. The end o f the Cold War and the peaceful transition to democracy in South Africa were major contributory factors to the end o f civil war in Mozambique and Angola. However, civil wars are being fought in at least ten African countries,77 causing political insecurity that has occasionally involved outside intervention, notably from the US (e.g. Somalia 1993) and from France which not only has formidable military capability, with the

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desire to emulate the US in military technology, but still has an imperial approach to countries in Francophone Africa. Although it has resisted involvement in the Comoro Islands, France maintains a strong military and naval presence on Réunion (from where it controls minor bases on islands around Madagascar - Trolein, Iles Glorieuses, Mayotte, Juan de Nova, Bassas da India and Europa),78 which it considers vital to assure oil tanker and other strategic communications lines around the Cape o f Good Hope. Indeed, the strategic importance o f South Africa for Western powers has in no way diminished since the end o f Apartheid and o f the Cold War and should instability within South Africa grow to the point o f threatening communications around the Cape, both the US and France might be tempted to intervene.79 It is largely for this reason that France currently holds joint military exercises with the South African defence forces.80 However, the creation o f an IOR grouping is not necessarily commensurate with the interests o f France. There is little doubt that South Africa could play a major role in establishing an IOR defence grouping in collaboration with India and Australia. The large, innovative and technically sophisticated arms industry developed under Apartheid has, with the exception o f its nuclear power component, maintained arms worth 1.03 billion rand constituting South A frica’s second largest manufactured export in 1995-6. The US and France are pushing the idea o f a South African managed ‘African Crisis-Response Initiative,’ a peace-keeping force comprising African troops trained by Western powers on the lines o f projects already established in Senegal, Uganda and Malawi. However, the South African government remains aloof from US and French plans for an African peace-keeping force,81 and has made clear that it wishes to adopt a military and arms sale stand independent o f the West.82 Once it has resolved the problems associated with the merger o f its own hitherto racially distinct and opposed armies, it would be in a position to consider more closely the possibility of establishing an IOR defence grouping. The potential for initiatives like the IOR to manage regional disputes could be undermined by the continued naval presence o f powers, external to the region, like the US, France and China whose capacity to militarily intervene in the region is growing. However, the US and France are unlikely to act counter to the combined wishes o f major democracies - South Africa, India and Australia - that are committed to both democracy and economic liberalization. China, which has hitherto not acted against the collective interests o f Third World states, is similarly unlikely to act against the interests o f the Indian Ocean littoral. South Africa, which engages in joint military exercises with France and whose navy has paid friendly visits to China, thus has the potential to act as a link between any IOR defence

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grouping and external powers. At the same time, in order to defuse any possible confrontationist approach towards the US, France and China in the Indian Ocean, it may be fruitful to grant them observer status in future IOR deliberations. This has been intimated in the March 1997 meeting which, however, turned down the Malagasy request to include French as a working language o f the IOR.83

C o n c l u s io n Although the US and western sponsored military alliances o f the Cold War era have now lost their raison d ’être, the potential for confrontation in the IOR region remains. This is particularly the case in the Indonesian archipelago, South Asia and the G ulf region, where there exists a real danger o f intervention from outside powers like the US (and its ally Britain), France and China. In this context, it is desirable that the ‘middle powers’ o f the region, notably South Africa, India and Australia, act as a bridge between countries o f the region and external powers. ASEAN together with Australia are relevant foci for meeting any future potential threat by China. However, there is a distinct need for the establishment o f an IOR regional security grouping which could liaise with ASEAN, and engage in direct negotiations with France, the US and China. In sum, the geopolitics o f the IOR need to be restructured and tailored to the geo-economic needs o f the new economic relations being built in the region.

N otes 1 2 3 4 5 6 7

Feme A. Vali, Politics o f the Indian Ocean: The Balance o f Power (New York: Free Press, 1976), p. 149. L.H. Glenn and D. Dingham, Why South Africa will Survive: A Historical Analysis (London: Croomhelm, 1981), pp. 187-9. ‘Indonesia Survey,’ The Economist (26 July 1997), p. 3; ‘Indonesia,’ The Economist (3 August 1996), pp. 21-3. S.C. Saxena, Political Conflicts and Power in Africa (New Delhi: UDH, 1985), p. 104. Pierre Maurice and Oliver Gohin (eds), International Relations in the Indian Ocean, (University de la Réunion: Cerigoi, 1944), p. 16. Nouvel Observateur, Atlas Economique Mondial, 1998; Larousse, Faits et Chiffres, 1995 (Paris: Larousse, 1996). Nouvel Observateur, Atlas Economique Mondial, 1998; Larousse, Faits et Chiffres, 1995.

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8

9 10 11 12 13 14 15

16 17

18 19

20 21 22 23

24 25

Pervaiz Iqbal Cheema, ‘Arms Build-Up in South Asia: Impact on the Process o f Peace and Development’ in L.L. Mehrotra, H.S. Chopra and Gert W. Kueck (eds), SAARC 2000 and Beyond (New Delhi: Omega Scientific Publishers, 1995), p. 51; Jasjit Singh, ‘Arms build-up in South Asia: Impact on the process o f peace and development in the region’ in: M ehrotra et a l (eds), SAARC 2000 and Beyond, pp. 73-6. ‘C hina’s fitful sleep,’ The Economist (19 July 1997), p. 56. ‘World Trade - all free traders now ?,’ The Economist (7th December 1996), p. 24. Lynne O ’Donnell, ‘Australia to stake claim in China wheat m arket,’ The Economic Times, Bombay (8 December 1995). ‘Will the World Starve?,’ The Economist (16 November 1996), pp. 24, 30. ‘A Survey o f China,’ The Economist (8 March 1997), p. 3. ‘China - Price o f power,’ The Economist (6 March 1997), p. 72. ‘Stay back, C hina,’ The Economist (6 March 1996), pp. 13-14; ‘A sia,’ The Economist (16 March 1996), pp. 61-3; Henry Kissinger, ‘Il y a toujours des risques dans une moitié du m onde’ in L ’Expansion, L'Atlas de la croissance 543 (20 février 1997), p. 106; ‘A Survey o f C hina,’ The Economist (8 March 1997), pp. 4-5. ‘Asian Security,’ The Economist (23 December 1995 - 5 January 1996), pp. 69-70; ‘Terrific Pacific,’ The Economist (20 July 1996), p. 53. ‘Les nouveux conquérants,’ Challenges 100 (février 1996), pp. 80-1; ‘Terrific Pacific,’ The Economist (20 July 1996), p. 53; ‘Seas o f troubles,’ The Economist (25 May 1996), pp. 66-7. ‘Indonesia Survey,’ The Economist (26 July 1997), p. 3; ‘Indonesia,’ The Economist (3 August 1996), pp. 21-3. Courrier International 366 (6-12 novembre 1997), p. 41; Jacques Isnard, ‘Les Etats du Golfe et d ’Asie totalisent les feux tiers des commandes,’ Le Monde (16 novembre 1997), p. 2. Courrier International 366 (6-12 novembre 1997), p. 41. Jacques Isnard, ‘Dure compétition entre les industriels de l’armement réunis à Dubai,’ Le Monde (16 novembre 1997), p. 2. ‘Asian Security,’ The Economist (23 December 1995 - 5 January 1996), p. 69. See e.g. ‘Asian powers - Tigers and dragons,’ The Economist Review (16 December 1995), pp. 5-6; ‘Central Asia - China’s strike,’ The Economist (16 August 1997), pp. 49-50. ‘The tigers lose their grip,’ The Economist (19 July 1997), p. 14. ‘Indonesia Survey,’ The Economist (26 July 1997), 16; 25 ‘The tigers lose their grip,’ The Economist (19 July 1997), p. 14.

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26 ‘Global Defence Industry Survey,’ The Economist (14 June 1997), p. 15. 27 In December 1995 - ‘Asia,’ The Economist (16 December 1995), pp. 63-4. 28 ‘The tigers lose their grip,’ The Economist (19 July 1997), p. 14; ‘Will East Asia keep its balance?,’ The Economist (26 July 1997), p. 49; Foo Siang Luen & John Rocha (eds), Singapore 1995 (Singapore: Ministry o f Information and the Arts, 1995), pp. 52-3; W. McLennan, Year Book Australia 1996 (Canberra: Australian Bureau o f Statistics, 1996), p. 49; ‘Terrific Pacific,’ The Economist (20 July 1996), pp. 53-4. 29 ‘Japan and Asia - not so fast,’ The Economist (18 January 1997), p. 61. 30 ‘The tigers lose their grip,’ The Economist (19 July 1997), p. 14. 31 ‘A SEAN,’ The Economist (2 August 1997), pp. 48-9. 32 ‘Ziang Zem in’s Visit,’ The Economist (1 November 1997), pp. 50, 57. 33 ‘India and Pakistan,’ The Economist (16 December 1995), p. 67. 34 Cheema, ‘Arms Build-Up in South Asia,’ pp. 52-3. 35 ‘Seas o f troubles,’ The Economist (25 May 1996), p. 67. 36 See Gwyn Campbell, ‘Introduction. The Indian Ocean Rim (IOR) Economic Association: history and prospects’ in this volume; ‘Indonesia Survey,’ The Economist (26 July 1997), p. 11; K.S. Jeong, ‘Les réseaux branchés de la diaspora chinoise,’ Challenges (février 1996), p. 80; Bernard Dorléans, ‘L ’irrésistible ascension mondiale de la diaspora chinoise,’ Le M o d 11209 (30 novembre 1996), pp. 58-60; ‘La revanche des coolies,’ Challenges (février 1996), p. 101; ‘Fissiparous fortunes and family feuds,’ The Economist (30 November 1996), pp. 73-4; ‘A Survey o f China,’ The Economist (8 March 1997), p. 4. 37 Singh, ‘Arms build-up in South Asia,’ p. 68. 38 Cheema, ‘Arms Build-Up in South Asia,’ pp. 47-8. 39 Cheema, ‘Arms Build-Up in South A sia,’ pp. 48-9. 40 Cheema, ‘Arms Build-Up in South Asia,’ p. 48. 41 By the end o f the 1980s, the USSR was supplying 82 per cent o f India’s arms imports - Cheema, ‘Arms Build-Up in South Asia,’ p. 49 - see also ibid., pp. 48, 50, 73. 42 Singh, ‘Arms build-up in South Asia,’ p. 68. 43 Cheema, ‘Arms Build-Up in South Asia,’ pp. 48, 61. 44 ‘Thawing out the Indian subcontinent,’ The Economist (28 June 1997), p. 68; Jeffrey E. Garten, ‘India and the United States: Ending the Era o f Missed Opportunities,’ address to the Asia Society, Washington DC, 20 January 1994, p. 11. 45 Cheema, ‘Arms Build-Up in South Asia,’ pp. 52-3; ‘India and Pakistan,’ The Economist (4 May 1996), pp. 59-61; ‘The test ban treaty - India

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46 47 48 49 50

51 52 53 54 55

56

57 58 59 60 61 62

63 64

65

says no,’ The Economist (17 August 1996), p. 36; ‘Treaty troubles,’ The Economist (31 August 1997), p. 52. ‘Pakistan’s false dawn,’ The Economist (11 January 1997), p. 16; Isnard, ‘Les Etats du Golfe et d ’A sie,’ p. 2. Singh, ‘Arms build-up in South Asia,’ p. 72. Singh, ‘Arms build-up in South Asia,’ pp. 65-6. Cheema, ‘Arms Build-Up in South Asia,’ p. 48. ‘China looming,’ The Economist (17 August 1996), 13; ‘A bomb in Beijing,’ The Economist (15 March 1997), p. 63; ‘A Survey o f China,’ The Economist (8 March 1997), pp. 6, 9; ‘Tibetans - Who murdered the m onk?,’ The Economist (16 August 1997), p. 49; ‘China’s rebellious province,’ The Economist (23 August 1997), pp. 43-4. ‘Chute des blocs: un nouveau type de conflits,’ Science et Vie: L'Atlas 96, p. 131. Cheema, ‘Arms Build-Up in South Asia,’ p. 51; Singh, ‘Arms build-up in South Asia,’ pp. 73-6. Singh, ‘Arms build-up in South Asia,’ p. 66. Singh, ‘Arms build-up in South Asia,’ p. 70. ‘Le nucléaire: une arme incontrôlable,’ Science et Vie: L'Atlas 96, p. 129; ‘The next nuclear revolution,’ The Economist (18 October 1997), p. 18. ‘Le pétrole: une richesse maudite?,’ Science et Vie: L'Atlas 96, p. 116; Yves Debay, ‘Les forces françaises d ’outre-mer (2) - les unites de la zone sud de l’ocean Indien,’ Raids 129 (février 1997), p. 10. ‘Emerging Market Indicators,’ The Economist (18 October 1997), p. 132; Isnard, ‘Les Etats du Golfe et d ’Asie,’ p. 2. ‘Iraq - Deep waters,’ The Economist (1 November 1997), p. 47; Debay, ‘Les forces françaises d ’outre-mer (2),’ p. 10. Debay, ‘Les forces françaises d ’outre-mer (2),’ pp. 8-9. ‘Le pétrole: une richesse maudite?,’ Science et Vie: L \Atlas 96, p. 117. The Economic Times, Bombay (8 December 1995). Thus the annual transit trade from the CIS through the Irani G ulf port of Bandar Abbas trebled from 1994-6 to 1.5 million tonnes - ‘Iran and Central Asia,’ The Economist {21 June 1997), pp. 59-60. ‘Central Asia - China’s strike,’ The Economist (16 August 1997), pp. 49-50; ‘A Survey o f China,’ The Economist (8 March 1997), p. 6. McLennan, Year Book Australia 1996, p. 48; for a comparison with the situation in East Asia see ‘A sense o f security,’ The Economist (14 June 1997), p. 14. Michael Howard, ‘Order and Conflict at Sea in the 1980s,’ in Jonathan Alford (ed.), Sea Power and Influence, Old Issues and New Challenges (Farnborough: Gower Publishers, 1980), p. 76.

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66 ‘The future of warfare,’ The Economist (8 March 1997), pp. 15-16, 21-4. 67 Admiral William Owens, former vice-chairman o f the US chiefs o f staff quoted in ‘The future o f warfare,’ The Economist (8 March 1997), p. 24. 68 ‘The future o f warfare,’ The Economist (8 March 1997), p. 24. 69 IFOR, ‘Global and Regional Security Arrangements and Security Characteristics o f the Indian Ocean,’ Working Paper 4A (Perth: IFOR, 1113 June 1995), p. 14. 70 Luen & Rocha (eds), Singapore 1995, p. 85. 71 ‘Hands acros the Timor Sea,’ The Economist (23 December 1995 - 5 January 1996), p. 73; McLennan, Year Book Australia 1996, pp. 42, 45; ‘M alaysia,’ The Economist (12 April 1997), p. 61. 72 ‘Indonesia Survey,’ The Economist (26 July 1997), p. 16. 73 The Anzus Treaty (1952) formed a defence pact between the US, Australia and New Zealand. However, following the 1984 decision by New Zealand to ban entry to its territory to nuclear powered warships, or ships and aircraft carrying nuclear weapons, the US withdrew its obligations to New Zealand. Anzus still operates bilaterally, linking New Zealand and the US to Australia. - McLennan, Year Book Australia 1996, p. 50; ‘Australia,’ The Economist (3 August 1996), p. 55. 74 Ken Booth and William Dowdy, ‘Structure and Strategy in Indian Ocean Naval Developments’ in William Dowdy and Russel Trord (eds), The Indian Ocean: *Perspectives on a Strategic A rena’ (Durham NC: Duke University Press, 1985), p. 93. 75 ‘India and Pakistan,’ The Economist (16 December 1995), pp. 66-7. 76 ‘Thawing out the Indian Subcontinent,’ The Economist (28 June 1997), p. 68. 77 ‘An African Answer to African wars,’ The Economist (18 October 1997), pp. 55-6. 78 ‘The future o f warfare,’ The Economist (8 March 1997), pp. 15, 22; Debay, ‘Les forces françaises d ’outre-mer (2),’ pp. 8-9. 79 Robert Jaster Scott, The Defence o f White Power South African Foreign Policy Under Pressure (London: Macmillan, 1988), p. 6 80 Debay, ‘Les forces françaises d ’outre-mer (2),’ pp. 7, 11. 81 ‘An African answer to African wars,’ The Economist (18 October 1997), pp. 55-6. 82 ‘South Africa - Arms for Syria?,’ The Economist (18 January 1997), pp. 44-5. 83 ‘ 1st ministerial meeting o f the IOR Association for Regional Co­ operation, M auritius,’ 5-7 March 1997 - items 20 and 27.

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