Through a glass darkly
October 24, 2012, 11:05 am

How does the latest entrant in BRICS fare in intra-bloc trade? Professor Merle Holden explores

Although South Africa is not part of the original Goldman Sachs BRIC classification owing to its small market, low population and low economic growth, it is now a fully fledged member of the political group BRICS.

Given South Africa’s late entry into the group, it is interesting to see how the country stacks up against the other members economically?  The latest GDP figures show China’s growth slowing to 7.6 per cent and India’s to 5.5 per cent. Russia is growing by 4 per cent, Brazil a mere 0.5 per cent and South Africa by 3.0 per cent.

Russia enjoys the largest positive current account surplus as a proportion of GDP (4.4 per cent) with China’s larger absolute balance coming in at 2.8 per cent. Brazil (-2.7 per cent), India (-4.4 per cent) and South Africa (-5.2 per cent) are running deficits. All members are incurring fiscal deficits. India and South Africa have the largest at 5.5 per cent of GDP. Unfortunately unemployment in South Africa surpasses all other BRIC members amounting to a staggering 25 per cent of the labour force.

Trade schematics of SA within BRICS

I think these statistics are important in understanding the role played by China in relation to the other members. China is now the second largest economy in the world. It has a vast appetite for resources to fuel its growth. The availability of Chinese goods around the world is well known.  Large current account surpluses are financing strategically placed foreign direct investments. These have been felt specifically in Africa fuelling a sceptic view that China is a neo-colonial power in the continent. How does this apply to South Africa, the newest member of the BRICS grouping?

The answer to this question requires an examination of trade flows between the members. The expected patterns suggested by neoclassical trade theories shows that South Africa, Russia and Brazil have a comparative advantage in resource type products, while China and India, with their large populations and low wages benefit in labour intensive goods. In India, human capital intensive goods and services such as software and call centres are important drivers of growth and competitiveness.

South Africa exports mineral resource products to China in return for manufactured goods. These comprise textiles, clothing, machinery, automobiles and electronics. Significantly the balance of trade is heavily in China’s favour.

South African trade with India takes essentially the same form as for China. Chemicals, motor vehicles and their parts and electronic equipment are imported from India against exports of coal, iron and steel and mining products with a smaller trade balance in India’s favour. For now, trade between Russia, Brazil and South Africa is low as can be expected by neoclassical trade theory as all three members have an abundance of natural resources so one would not expect them to be trading.

Strong SA-China FDI links

Foreign direct investment between South Africa and the members mirror the trade links. In 2007, the Industrial and Commercial Bank of China (ICBC) made a high profile investment in Standard Bank of $5.5 bn. Standard Bank is Africa’s largest lender and the ICBC justified the investment on the grounds of the level of sophistication and regulation of the financial services sector in South Africa.  In addition, China has made some investments in mining in South Africa but to no significant degree. South African firms have in turn invested in China. SASOL, Naspers and SABMiller are the more notable transactions.

South Africa’s engagement with India has been more muted. Tata, Mahindra and Cipla have invested in South Africa but to my knowledge little corresponding investment has taken place on the part of South African firms in India. Not much cross border investment has occurred between South Africa, Brazil and Russia. This was expected given the low level of trade till now between them.

China replaces traditional trade partners of South Africa

Currently China is South Africa’s most important trading partner surpassing the role of traditional trading partners in the West.  This trend accelerated following the global economic crisis and has been assisted by the continuing Euro crisis. South Africa’s traditional trading partners continue to languish and prospects for the export of South African manufactured goods are consequently poor.

Currently Africa is the flavour of the month. Because South Africa is the largest economy in Africa, other BRICS members view it as the gateway to Africa. Growth prospects for many African countries appear rosy given current levels of commodity prices and South Africa can provide a conduit for conducting trade and financing. This is the subject of much discussion in mineral rich South Africa where the economy has performed so poorly in the face of the commodity boom that has benefited so many other African countries.

Mining activity in South Africa has actually declined so clearly the so-called Dutch disease effects have not been operative. Mining has been dogged by talk of nationalisation and poor infrastructure coupled with rising labour costs. Manufacturing is often described as the missing middle or deindustrialisation that has failed to respond to active industrial policy intervention. Fortunately, the economy has been kept afloat by the growth in services and construction expenditures. Meanwhile the rating agencies have downgraded the public utilities and the banks and recently a sovereign a downgrade.

Amidst social unrest, “Proudly South African” still receives traction

More recently, growing inequality has fueled social unrest and wage demands. This has been reflected in the proliferation of wildcat strikes in mining and transport and the destruction of life and property that have sent the country deeper into a mood of despair.  Political uncertainty and the jockeying for position in the run up to the critical ANC conference in December is adding to the despair felt in the country.

Undoubtedly globalisation in the form of trade liberalisation in the nineties imposed adjustment costs on the economy in the form of declining employment in manufacturing. China’s entry into the global trading system in the new millennium led to an explosion of imports into South Africa establishing China as South Africa’s major trading partner.

Despite the imposition of Chinese import quotas in 2007- 2008, it became clear that other trading nations were willing and able to take up the slack. Trade policy makers have accepted the inevitable as trade policy was determined by bindings agreement at the WTO.  Their efforts are now directed at curbing illegal imports, applying antidumping provisions and active industrial strategies.  Local content provisions receive a great deal of traction, particularly in government procurement, and “Proudly South African” labels abound in the shops.

In my view, South Africa is in a holding pattern until the New Year. It will be interesting to see what agreements emerge from the 2013 BRICS conference in Durban.