The Political Economy of Sanctions Against Apartheid 9781685855741

Citation preview

The Political Economy of Sanctions Against Apartheid

The Political Economy of Sanctions Against Apartheid Haider Ali • Khan

I .y n ne R i e n n e r Publishers

•

B o u l d e r «Sc L o n d o n

Published in the United States of America in 1989 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU ©1989 by Lynne Rienner Publishers, Inc. All rights reserved Library of Congress Cataloging-in-Publication Data Khan, Haider. The political economy of sanctions against Apartheid / by Haider Ali Khan. p. cm. B i b l i o g r a p h y : p. Includes index. ISBN 1-55587-145-3 (alk. paper) 1. Economic sanctions—South Africa—Econometric models. 2. Apartheid—South Africa—Econometric models. 3. Boycott—South Africa—Econometric models. I. Title. HF1613.4.K47 1989 337.68—dc20 89-34521 CEP British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1984.

To my mother in memoriam

Contents

List of Tables and Figures

ix

Preface

xi

1 Introduction

1

2 The International Political Economy of Apartheid

5

3 The Logic of Sanctions and Some Modeling Issues

21

4 An Analysis of Trade Sanctions

31

5 Disinvestment

61

6 Conclusions

73

Appendix

79

References

107

Index

113

vii

Tables and Figures

Tables 2.1

Wage Structure for Nine Sectors

16

3.1 3.2

A Basic Input-Output Transaction Matrix Extension of Input-Output Transaction Matrix to a SAM

27 28

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13

Current Western Sanctions Against South Africa Format of the South African SAM Total Output Multipliers for Nine Main Sectors Total Employment Loss for $1 Million of Export Embargo Impact on Employment of R1 Million of Export Embargo Scale of Percentage of Employment Loss for Export Embargo Impact of Sanctions on Capital and on Categories of Labor Impact of Sanctions on Household Income Distribution South Africa's Major Exports and Imports, 1986 Concentration of South Africa's Trade Individual Countries' Exports to South Africa Individual Countries' Imports from South Africa Schematic Representation of Endogenous and Exogenous Accounts in a SAM

32 38 42 43 44 45 47 49 54 54 55 55

U.S. Companies That Have Ended Ties to South Africa Investment and Financial Sanctions of Selected Nations

62 66

Schematic Diagram of Economic Sanctions

75

5.1 5.2

55

Figure 6.1

ix

Preface

This book revolves around two themes. One is how to think about economic sanctions and their impact in general. The other is the question of what impact economic sanctions might have on the apartheid system in South Africa. Like many of life's small adventures, writing the book was the result of a series of incidents apparently unconnected. Alan Gilbert, at the University of Denver's Graduate School of International Studies, first stimulated my interest in analyzing the apartheid regime in South Africa some thirteen years ago. Contact with a number of African students and scholars led to a deepening of my interest over time. Later, when I returned to GSIS to teach, George Shepherd encouraged me to develop my ideas regarding economic sanctions and South Africa. While I was at Cornell, Erik Thorbecke and I worked extensively with the Social Accounting Matrix-based models, and it occurred to me then that here was a tool that could be used to study the impact of at least some kinds of sanctions. Quite accidentally, at Sapporo, Japan, in the summer of 1986, I met David Mullins, who together with a U.S. team led by J. Eckert had succeeded in constructing the first SAM for South Africa. I waited impatiently for the SAM to be cleared by the government in Pretoria; by the time it was, I had in mind a good outline of the conceptual and empirical aspects of the project, and went to work as soon as the SAM was in hand. Since then so many people have helped in so many ways that it is impossible to mention them all by name. I must acknowledge, though, the group of people who have been especially supportive and have helped with constructive criticisms: at G S I S , George Shepherd, Ed Hawley, David Levine, Alan Gilbert, Mustapha Pasha, Oscar Plaza, Eiichi Hoshino, and John Grove participated in seminars and discussions about the project. Oscar Plaza also provided valuable research assistance. Charles Becker and William Kaempfer, at the University of Colorado at Boulder, read parts of the various

xi

xii

PREFACE

draft manuscripts. Tom Willett at Claremont Graduate School encouraged me to present the results of my research in 1987 at the Western Economic Association Conference. Steven Keuning went to the trouble of sending me his comments from the Netherlands. On several occasions I discussed my research with James Mittelman and Linda Yaar, both of whom made helpful comments. Dean E. Thomas Rowe of GSIS attended cheerfully several of my Economics of Sanctions seminars at GSIS. Finally, comments from an unknown referee were helpful in preparing the final version of this book. Part of this and my other research on South Africa has been supported by a Ford Foundation grant to the University of Denver. I am grateful for the financial support. The staffs of university libraries often go unacknowledged for their crucial but silent help. I am especially grateful to all those at the Penrose Library who gave me the resources they had to offer. Lynne Rienner and her staff were most helpful. I am truly thankful to them. This book addresses the immediate question of the impact of economic sanctions on South Africa; I hope it also breaks new ground in analyzing economic sanctions in general. A novel rationale for sanctions is presented: the concept of the induced effects of sanctions should be helpful in understanding what sanctions can or can not be expected to accomplish. The economic aspects of the link between economic sanctions and political change are addressed via the use of some economic models, notably the one based on the Social Accounting Matrix. Economy-wide modeling is a new and promising area, and models based on a SAM can be particularly valuable for the amount of detail available. I hope that my research in this area will generate further studies of the impact of sanctions in an economy-wide setting. It should be pointed out that the SAM framework can be and has been used for other purposes. For example, it can be used to estimate the impact of various social welfare policies on various target groups. My hope is to see the SAM increasingly used to enhance the quality of life of all South African people. —Haider Ali Khan

Introduction

This book is about economic sanctions and their effects. The starting point is the recognition that realistic economic models based on reasonable theories of the economy are necessary in order to analyze the effects of sanctions. Pursuing this point of view leads toward the formulation of some new models for understanding the impacts of trade and investment sanctions. Throughout the book, the methods and models are applied to one particular country—the Republic of South Africa. To a pessimist, the debate on economic sanctions against South Africa might have the appearance of a Nietzschean eternal recurrence. The phenomenon seems to return with a remarkable regularity; the issues debated previously reappear and are discussed with high moral passion until all is quiet again, and then reemerge. It looks as if nothing can ever be resolved. In 1964, in the introduction to a volume titled Sanctions Against South Africa, the editor remarked that until then: Most exponents . . . of economic sanctions—as most antagonists— were issuing proclamations from postures of principle. Those who wanted sanctions dismissed all arguments against them as trivial or irrelevant, while those who opposed such action denounced it as illegal, impractical, and economically calamitous. 1

By that time, the question of policies against apartheid had already been on the U.N. agenda for more than ten years. A look at the present debate on the same issues shows that the passage of time—in this case more than two decades—has not diminished the fervor of these ex cathedra sermons. Yet much work has also been done, and some of it has generated light as well as heat. Consequently, one need not fall into the commonplace cynicism, plus ça change plus c'est la même chose. It must be admitted, however, that even now there are some important lacunae in the literature—lapses best revealed in the public debate on sanctions. Groups both inside and outside South Africa argue for and against l

2

HAIDER AU KHAN

sanctions in almost an empirical vacuum; to say that empirical analyses of sanctions are rare is an understatement. Recent research, however, has begun to change that; for example, work by Becker, Kaempfer and Lowenberg, and Merle Lipton. 2 Such research fills many important gaps—and points to further investigation of economic impacts. The urgency of the situation in South Africa makes it imperative to investigate the empirical issues as comprehensively as possible. A number of economic and political economic models on sanctions are now available, and these are discussed or referred to in this book at appropriate places. Many of them reach interesting conclusions regarding the rationale for and the impact of sanctions. However, they suffer from two major limitations. One is the schematic nature of the models: because they are usually two- or three-sector models, any detail within the sectors is lost. Second, they are neoclassical models with full employment, complete substitution of factors, and utility-maximizing consumers. If the model is to reflect reality, many or all of these assumptions must be relaxed. Spandau, a South African economist, relied, in 1979, on an input-output analysis in the open Leontief framework and reached conservative conclusions regarding the impact of sanctions against South Africa. 3 In the same year, Richard Porter, an economist from the University of Michigan, published an article on the subject, 4 using a different model and different data; his conclusions, not surprisingly, are very different from those of Spandau. In this book, I have used a model that is a generalization of Spandau's approach. My data, though more consistent and recent than Spandau's, are similar to his in terms of categories covered. My conclusions are markedly different; if they are correct, trade and investment sanctions could inflict considerable damage on the South African economy. I derive theoretical and empirical results from several other models as well, allowing both more detail and a check on the particular biases of a single model. A few words about method may be helpful to the reader. In studying sanctions, my approach is one of descending from the abstract to the concrete and from the general to the particular. That is why, after a brief background chapter in which apartheid is defined and the reasons for its existence are explored, I first deal with the question of the political economy of sanctions in general. Toward the end of Chapter 3,1 introduce one of my specific modeling devices—the Social Accounting Matrix (SAM)—in order to study a specific type of trade sanction, namely, boycotting South African products. This is the first published SAM for South Africa. In the next chapter, the fixed price model based on the SAM is used to examine the South African case. In addition, the question of sanctioning exports to South Africa is taken up in the context of several analytical models. The same kind of analytical work supplemented by recent disinvestment data forms the core of Chapter 5.

INTRODUCTION

3

Chapter 3 develops the idea that past thinking about the effectiveness of sanctions has been extremist, in the sense of setting goals that are too stringent for sanctions to accomplish. That is, holding sanctions directly responsible for the undoing of a set of policies may have led to the dominant view that sanctions do not work. Setting less lofty and more indirect goals for sanctions in general, and economic sanctions in particular, might change that. I argue that, indeed, that is the proper perspective to take, that sanctions may have indirect political effects in inducing the target country to negotiate: the political impact of sanctions follows their real or anticipated economic effect. The induced effect can then be turned to good account through skillful diplomacy. The logical first step in this kind of approach is to investigate potential economic impacts, and that is what this book sets out to do. It turns out that, in the short run, banning exports will harm the South African economy substantially; the overall multiplier impact is about four, which can be interpreted as one dollar's export ban leading to almost four dollars' decline in output in South Africa. Corresponding decreases in employment and incomes will follow. It is important to note that all groups within South Africa will suffer. In terms of loss of income, however, capital will suffer more than will labor, and white workers will lose more than will the Africans. The details of modeling and a large array of quantitative estimates of the impact of sanctions are given in Chapter 4. These quantitative results, as well as a critique of earlier analyses, show that trade sanctions will probably be much more effective in the case of South Africa than has been previously assumed. Analysis of the recently available data on disinvestment shows the shortrun economic effect of this type of sanction is dubious. By and large, the form of disinvestment used so far has done little to harm the South African economy. In many cases, it has enriched white South African managers and entrepreneurs. This is not to say that disinvestment has had no symbolic value. However, inasmuch as it has had so little economic impact, the option of deploying an argument for creating short-run economic motivations for change in South Africa through disinvestment is foreclosed. There may still be noneconomic effects, but these are outside the scope of this book. In the long run, even the current set of policies will harm the economy. Hence, efforts to convince South African policymakers that apartheid should be dismantled by pointing out the long-run consequences of disinvestment will be well taken. Finally, there is the issue of how economic effects of sanctions are linked to political responses in South Africa. There are actually two parts to this issue: On the one hand, there is the question of how the various groups in the society at large are affected, including various strata of Afrikaners, nonAfrikaner whites, and the majority group—the Africans themselves.5 On the

4

HAIDER AU KHAN

other hand, there are the ruling groups and parties in the government. Responses at the level of both state and society in general are relevant. This kind of analysis is really the more difficult task, and the problem may easily become intractable. This book stops short of an extensive political investigation. The economic analysis, however, can be viewed as providing the necessary data that any future political (or politicoeconomic) study of sanctions against South Africa will need to take into account. The economic results presented here are rigorous, and based on the most comprehensive and consistent available data set. Using these results as premises, we can deduce one interesting inference regarding the response to sanctions: Contrary to the claim that economic sanctions may lead to an isolationist South Africa, such a response is highly unlikely given the economic implications of isolation.

Notes 1. Ronald Segal, ed., Sanctions Against South Africa (Baltimore: Penguin, 1964), 7. 2. C. Becker, "The Impact of Economic Sanctions on Southern Africa," World Politics (January 1987): 147-173; W. H. Kaempfer and A. D. Lowenberg, "A Model of the Political Economy of International Investment Sanctions: The Case of South Africa," Kyklos 39 (1986): 377-396; Merle Lipton, Sanctions and South Africa: The Dynamics of Economic Isolation (London: Economist Intelligence Unit, 1988). 3. A. Spandau, Economic Boycott Against South Africa (Capetown: Juta, 1979). 4. Richard C. Porter, "International Trade and Investment Sanctions: Potential Impact on the South African Economy," Journal of Conflict Resolution 23, no. 4 (December 1979): 579-672. 5. In offical parlance within South Africa, "Asians" and "coloureds" are separated from "blacks." Here, I have called all of them Africans. Later, when official statistics are used, the official categories become unavoidable. It should be understood that such later use is in no way an endorsement of such categorization.

2 The International Political Economy of Apartheid

How did the economy of South Africa develop the system of apartheid? It is an important question to ask. Not only can the answer serve as necessary background for the later chapters in this book, but, more importantly, an analytical answer can clarify considerably the prospects for success or failure of economic sanctions in the South African case. In the first part of this chapter, a historical sketch of the development of the South African economy pinpoints the formation of the system of apartheid over time and helps define apartheid as a concrete set of economic, political, and social practices. The second part continues the analysis, emphasizing the role of domestic and international forces operating in the South African economy and the implications of those forces. The Development of Apartheid: A Historical Sketch The system of apartheid in South Africa is unique in the contemporary world in its use of legal, institutionalized segregation by race in order to organize society by a racial-ethnic hierarchy at every level. Any attempt to analyze this social order must come to grips with the question of how such an arrangement could develop and sustain itself. At the outset let me borrow from Merle Lipton a definition of apartheid that is sharp and clear. She has identified four defining characteristics that separate apartheid from arbitrary developments of various discriminatory practices: First, it is the hierarchical ordering of the whole social, economic and political structure of South African society on the basis of statutorily defined race. . . . Secondly, apartheid involves systematic political and economic discrimination against all blacks, but particularly against Africans. Thirdly, it involves segregation of the races not only politically and economically but also socially, particularly in housing and social services, including education and health care. Fourthly, apartheid is the

5

6

HAIDER AU KHAN

l e g a l i z a t i o n and institutionalization discriminatory and segregated system. 1

of

this

hierarchical,

Underlying the hierarchy are the historical facts of the development of capitalism, the political domination of the African population by the Afrikaners, and the influence of racist ideologies. The first important factor—a necessary condition—that plays a role in the series of developments leading up to the present state of affairs is the amalgamation of white and nonwhite peoples in Southern Africa. The peculiarities of the conflicts between the earlier Dutch settlers and the latecomers from Britain defined part of the political dynamic leading to the present system as well. How did it all happen? I can only sketch an answer to this large historical question, but there are many books, covering both general and specific aspects of the history of South Africa, that the interested reader can consult.2 An initial difficulty in presenting the story is that the early history of the people of Southern Africa is not chronicled indigenously.3 However, ethnologists and historians have used linguistic and other evidence to piece together a fairly accurate picture. On the basis of such evidence, it appears that "Bushmen" and "Hottentots"—two early groups of indigenous people indentified by researchers—were not always distinct in terms of physical types, language, and economy. Elphick points out that physical anthropologists debate about how to separate the two groups. He also shows that the two economies overlapped. Anthony Lemon adds: Equally mistaken is the assumption that Hottentots, Bushmen, Bantu and Europeans each occupied, at least in the seventeenth and eighteenth centuries, a specific area, where they remained isolated from the others. Such territorial separation was equally uncharacteristic of physical, cultural and linguistic groups. The assumption that it once existed appears to reflect present-day preoccupations with race and the existing social structure rather than historical reality. 4

The early hunters and gatherers, who had no collective name for themselves, suffered from two major epidemics of smallpox in the seventeenth century. Incoming Europeans and East Indian slaves absorbed the survivors through miscegenation. Today, racially mixed descendants are classified among the "coloured" population by the government. The two major linguistic groups among Africans—Nguni and Sotho— and the two minor ones—Venda and Tsonga—seem to have migrated to present-day South Africa a long time ago. Wilson has presented detailed evidence disproving the earlier theory of a recent migration of the Nguni and other African groups from Central to Southern Africa.5 Thus, by the time Jan Van Riebeck arrived in 1652, there were groups

INTERNATIONAL POLITICAL ECONOMY OF APARTHEID

7

of indigenous people in Southern Africa, with distinct but overlapping cultures. At first, Riebeck's presence was not a colonizing move—his company merely wanted a supply of water, vegetables, fruit, and wine for crews en route to the Dutch East Indies. However, company employees established a virtual colony, spreading into the interior. In addition to the existing Africans (called "Hottentots" and "Bushmen" by the settlers), slaves were imported from Malaya and other Southeast Asian countries. Further interbreeding took place, so that by the end of the eighteenth century there already existed a multiracial society—where, needless to say, not everybody was equal. The white settlers, be they Dutch, German, or French Huguenots (two hundred of whom emigrated to South Africa between 1688 and 1700), tended to gravitate toward uniformity. By 1866, the Cape colony contained 76,865 people, of whom 26,568 were whites, 29,861 slaves, and 20,436 "Hottentots." 6 The importation of slaves is an important factor in the shaping of the "white South African economy." The availability of skilled slaves prevented the Dutch from seeking urban trades. As a result, the tradition of Afrikaner as landlord became entrenched. The further inland they spread, the more isolated from urban influences did these farm owners become. The British occupied the Cape for more than 100 years from 1806. With the arrival of more British settlers in 1820, there developed a further cleavage between the earlier settlers (known later as Boers) and the new white arrivals, though the new regime allowed the use of the Dutch language and Roman Dutch law. Other than some conflicts in the economic domain, the major institutional change was the abolition of slavery in 1834. However, it was not long before a serious schism developed between the early settlers—whom we shall call Afrikaners—and the politically dominant British colonists. In the wake of the emancipation of slaves, many Afrikaner families moved to the interior, in an exodus known as the Great Trek. The Voortrekkers, as these Afrikaners were called, eventually came in contact with the African tribes living farther inland. Contact soon turned into violent conflict, and the Africans were gradually driven into the so-called "reserves." The consequences of the Great Trek are fundamental to an understanding of present-day South Africa. First, it led to the culmination of the evolution of the Afrikaners into a cohesive group, a closely knit people who came to value tenacity, endurance, and self-respect—and also land. In isolation and in conflict with the natives, the Voortrekkers showed a narrow-mindedness and contempt for people they regarded as inferior that foreshadowed the present system. Second, conflicts became widespread as the frontier between the Afrikaners and the Africans widened to a horseshoe-shaped curve, which stretched for more than 1,600 kilometers. This expansion proved important for subsequent developments. The Afrikaners successfully pushed the African

8

HAIDER AU KHAN

tribes from the high veld to the arid western or malarial northern peripheries. The political and military successes of the colonizers led to the occupation of the "richest parcel of real estate in the world,"7 which to this day forms the economic, demographic, and political center of South Africa. The Voortrekkers founded two independent republics: the Orange Free State and Transvaal. From the beginning, their constitutions adopted a discriminatory stance toward the natives. The Afrikaners had moved into Natal as well, but in 1843 this area came under British control. The British, in their turn, imported large numbers of Indians to South Africa, mainly to work on sugar plantations. Indian immigration continued from 1859 to 1911; the Indian traders who followed the workers completed the human topography of early twentieth-century South Africa. In 1910, a little over a decade after the end of the Boer War, the Union of South Africa was formed. Although the British intentions in transferring power appeared at the time to be somewhat liberal, later events were soon to lead toward the present configurations. As a South African economist describes it, the Afrikaaners' fight against "British imperialism" continued and was inspired by the generation and maintenance of an atmosphere of dogged resistance against forces which were held to be threatening "die Boerenasie" (the Boer nation). The Nationalist Party achieved power and have sought to maintain themselves permanently in power by indoctrination through education, by exploitation of nationalist emotions and by the maintenance of a continuous atmosphere of emergency and struggle against the "external enemies." 8

It is during this period that segregation, combinining a system of reservations (later named Bantustans, and then homelands) with economic, social, political, and residential discrimination, gradually coalesced into the politicoeconomic system of apartheid. The Commitment to and the Struggle Against Apartheid Various explanations have been offered in the scholarly literature for the emergence of apartheid. Earlier explanations—such as the peculiar Calvinist fervor of the Afrikaners—have by now been discredited. Most recent explanations are based on underlying economic causes, or political dynamics, or a combination of both. I argue for a multicausal explanation of the apartheid system, which gives due emphasis to the economic, political, and also cultural factors, broadly defined. Unquestionably, economic interest played a major role in forming the union, for example, between the Afrikaners in agriculture and the mining capitalists, as well as garnerning white mine workers' support for policies such as the job color bar. As we shall see, economic interests do

INTERNATIONAL POLITICAL ECONOMY OF APARTHEID

9

undoubtedly explain much of the support for features of apartheid at various stages of the development of these policies in the twentieth century. However, the coming to power of the nationalist government in 1948 brought into sharp focus the political interest and ideological commitments of the right-wing Afrikaners. My intention here is not to classify all Afrikaner politicians as a monolithic group; sophisticated analysts of the political development of South Africa have observed the phenomenon of "lost Afrikaner leaders" such as Jan Smuts. Yet, there was in 1948 a consensus leading to a coherent monopoly by a racial-ethnic oligarchy composed of mainly Afrikaner white elites. Although it is true that the Afrikaner consensus was not very stable to begin with and has broken down recently, leading to both reformist and ultraright-wing tendencies, 9 and although by the end of the 1980s much of the economic rationale for apartheid has eroded, the ideological commitment to apartheid of a group of minority whites continues unabated. The political dominance of Afrikaners and their reasons for enforcing the apartheid laws are crucial to understanding the institutionalization of apartheid. However, by themselves they are inadequate because they appear to be arbitrary and even irrational from the economic point of view. To resolve this paradox, I propose that an analysis of the underlying economic forces can show the rationality of apartheid during much of the historical period when it developed.10 My major hypothesis here is that a necessary condition for apartheid was the contradiction between the need for continuous accumulation in a developing economy and the existence of the free labor market, given the structure of the South African population. Despite the political and ideological reasons for the rise of apartheid in the specific context of the South African society, without this fundamental contradiction other, and more competitive, types of racist economies would have been possible. But before developing this thesis, let me briefly deal with some of the important existing works on the apartheid economy. There are two broad strands of the "economistic" explanation of apartheid. The first strand may be called the liberal school; it is represented by writers such as G. V. Doxey, D. Hobart Houghton, R. Horowitz, and W. H. Hutt—to mention a few of the scholars in this tradition.11 Although there are differences regarding the explanation of specific instances of apartheid among the various authors cited, they agree fundamentally that the apartheid system is a product of state intervention. Furthermore, that intervention really has been in favor of white wage earners (or a particular subgroup among them) against free competition in the labor market. The causal role, ironically, is not played by economic forces in the final analysis. The prejudices stemming from the ideology and psychology of the white workers have been successfully transformed into apartheid through state policies.

10

HAIDER AU KHAN

Thus, even though the policies of apartheid undercut economic efficiency, 12 and are thus suboptimal, somehow the state has been willing to enact these against the interest of both capital and labor, broadly defined. It is not out of place to mention some more recent liberal contributions by scholars in North America, such as Kaempfer, Lowenberg, and Hazlett.13 Within the framework of the public choice approach that is used by these authors, different interest groups are distinguished from one another. The state is dominated by a group that seeks to maximize the probability of its staying in power. A consequence of this is the imposition of an "apartheid tax," which raises firms' cost of hiring black labor. Thus, the rationale for apartheid is political, not economic. The achievement of maximum political efficiency leads to a reduced economic efficiency.14 The second school that upholds the economy as a causal factor is the Marxist school. Work by Wolpe, Legassick, Johnstone, Curtiss, Davies, and others can be cited to illustrate the view taken by the Marxists. Again, there are differences among different authors, but, with some exceptions, they all attempt to offer both a critique of the liberal position and an alternative explanation of apartheid. Some Marxists, such as Davies, claim that "the liberal interpretation of South African history has been identified as a form of bourgeois ideology."15 He is careful to add: This is not to say that all writers within the liberal problematic were necessarily mere apologists for the existing practices of particular bourgeois interests. . . . Rather it is to say that the objective role of the liberal analyses has been, quite independent of the conscious intention of any individual writers, to conceal or obscure the fundamental relations of capitalist exploitation in the social formation and the fundamental contradictions (between capital and black workers) arising therefrom. 16

The problem with the ideological critique is that it rests on certain assertions that are themselves in need of further justification. What does it mean, for example, "objectively" to serve to "obscure or conceal" the "fundamental" relations of "capitalist exploitation"? All these terms need further elaboration, and some are quite problematic in the ordinary sense. To use such terms without further clarification does not really advance the critique very far. The more fruitful critiques of the liberal explanation begin by identifying genuine difficulties in the liberal paradigm. Chief among these is the problem of why apartheid has lasted so long if it is economically so irrational. A particularly illuminating aspect of the best Marxist analysis is that it draws attention to the fact that racism and ideology, instead of being explanans, are themselves explananda. That is to say, they themselves need to be explained as features that arise out of the historical conditions in South Africa.

INTERNATIONAL POLITICAL ECONOMY OF APARTHEID

11

A complete discussion of the development of apartheid in the twentieth century is beyond the scope of this book. (The reader will find Merle Lipton's thoughtful and synthetic analysis particularly useful. 17) I concentrate here on several developments both of moves toward apartheid and of the struggle against it in this century, in order to illustrate how economics, politics, and ideology operate together in the context of apartheid in South Africa. The rationale for apartheid can be found in each of these spheres. It is not surprising, therefore, that the struggle against apartheid must also have economic, political, and ideological dimensions. In the economic sphere, the rationale for apartheid, as suggested earlier, can be found in the usefulness of an unfree labor market for capital accumulation in South Africa. I demonstrate this for the mining industry, which formed a large part of the capitalist sector of the economy historically, and offer some evidence to show that this was in all likelihood true for the other emerging capitalist sectors as well. Any observer looking at the South African economy historically is struck by the feature that capitalism was already in full bloom by the beginning of this century. In large part, foreign investment was responsible for this development. Starting with the mining industry, the direct and indirect effects of foreign investments led, by the first quarter of this century, to widespread capitalist activities in both agriculture and industry—though the extractive industries continued to be the backbone of the South African economy. Politically, the South African government, headed by Afrikaners, did not object to foreign capital, in spite of occasional nationalist protestations. Transformation of agriculture was influenced politically by the domestic struggle between Boer landlords and Africans ("squatter" peasants). 18 The major groups in South African politics at this time were hegemonic mining capital (mostly foreign owned), small industrialist capital, and agricultural capital. There developed also a powerful white working-class bloc in the mining industry. It can be argued that during the formation of this capitalist economy African and white workers became differentiated through a process that is very different from the homogenization one would expect to follow from the prediction of neoclassical economic theory. Not only were there differences in skills, with whites having access to the higher-skilled jobs, but there were also differences between blacks and whites within the same category of skill. For example, according to the available data from various reports for the mining industry between 1902 and 1908, about 5 shillings per day was the average actual wage paid to single unskilled whites. Adjusting for an allowance for family subsistence led to varying estimates between 10 and 16 shillings per day. The average African wage, estimated by taking cash and inkind payments, amounted to between 2 shillings and 2 shillings and 8 pence only. 19 This was well below the 6 to 8 shillings per day minimum level to

12

HAIDER AU KHAN

which the costs of family subsistence could be driven under the existing conditions; and the calculations of this "subsistence" wage level by the Transvaal Indigency Commission took only food and rent as relevant expenditure items. It has been argued correctly by some economists that in measuring wage differentials due to racial-ethnic discrimination one should separate out the differences due to characteristics other than race, such as age, experience, and skill differences. 20 This point gains force the closer to recent history one looks. Thus, in 1975, in the survey quoted by Knight and McGrath, the deskilling of blacks had proceeded to the point that the major form of discrimination appears to have been in terms of access to certain occupations; they point out that whites dominate the managerial, semi-professional and technical occupations. Africans and "other races" (Asians and Coloureds) in the latter category are largely school teachers and nurses; there are very few with other professional qualifications and even in the technician and the technical assistant grades whites predominate. 21

However, during the early phases of accumulation, as the documents in the mining industry during the late nineteenth and early twentieth century show, the productivity of the unskilled or semiskilled white workers was comparable to or even less than that of the black workers in similar categories. The wage differentials quoted previously and in Houghton and Dagut22 clearly show that they led to a greater accumulation per worker than would have been the case in a free labor market—where the equilibrium wage rate would certainly have been greater than that paid to the Africans in mining and elsewhere. The extensive microdata collected in the three volumes of Houghton and Dagut's Source Material on the South African Economy confirm the above argument. The authors of this compendium have gathered data on various aspects of the economy from 1860 to 1970. It is clear that there were strong economic reasons for "a Movement towards Federation." 23 In the same volume, the data cited on sugar milling, fisheries, tanning, salt production, fruit preserving, and wool washing, among others, do not show lower productivity for blacks than for whites in similar jobs. The wages and rent figures for the Western Cape in 1860 show higher wages for skilled craftsmen and lower wages for unskilled, but a much lower wage differential within the same category between Europeans and non-Europeans. However, with the discovery of diamonds and the transition to a modern market economy with large-scale enterprises, wage differentials begin to appear more frequently and are institutionalized and legally enforced.24 The Report of the 1914 Economic Commission, discussing wages and conditions of nonwhite labor, admitted frankly that

INTERNATIONAL POLITICAL ECONOMY OF APARTHEID

13

the population consists of two races in industrial partnership with nothing in common in their tradition and standards of living. They form distinct social strata, and there is a gap between them very imperfectly filled by whites who have abandoned white standards of living (known as "poor whites"), by half-castes or coloured people, educated natives, and a few Indians. There are manifestly many differences between these conditions and those of an all white community for in the latter every social class shades off into others. 25 In the same report, there is a graphic description of tasks and wages for native laborers that admits that in some jobs, such as hammer work, natives got paid according to capacity whereas in others they did not. I cite the relevant passage: Native labourers on the Witwatersrand may be roughly classified into 1) hammer boys, 2) machine drill boys, 3) lashers and trammers, and 4) surface boys. The hammer boys are on piece-work, and after a short probationary period a minimum task of 30 inches is demanded. Should a boy not drill this minimum he is liable to be given a loafer's ticket which means no pay. For 30 inches he receives Is. 3d., and over 30 inches up to 35 inches l/2d. extra per inch; for 36 inches he receives 2s., and again l/2d. an inch extra up to 41 inches; for 42 inches the sum of 2s. 6d. is paid, and Id. per inch for additional inches. According to the conditions of the stope the native may be limited as to the depth he may drill. Should he start a second hole and not reach the minimum of 30 inches his additional work may be lost to him. Hammer work, notwithstanding its strenuous nature, is popular with the natives as they make much more than the average rate of wages, and are paid according to capacity. To work a machine drill two natives are required, one called the handle boy and the other the spanner boy, who are paid Is. 9d. to 2s. per shift. Here again a minimum task is fixed, which is usually four holes. If more is done a bonus is often given of about 3d. or 6d. per hole. Should machine boys fail to drill the four holes they are liable to be given a loafer's ticket. The amount of extra pay they can receive is indirectly limited by the arrangement made between the mines and the Native Recruiting Corporation, with which most of the mines are associated. If in any mine the average wage earned by the machine boys is higher than 2s. 3d. per shift the mine is liable to penalties, and the wages of the natives are naturally cut down so that on the average they do not exceed the 2s. 3d. per shift. In lashing and tramming a gang is sometimes given a task, and if that task is exceeded the boys in the gang may receive a bonus. 26 The report went on to observe that native labor was considered so cheap that it was put to extravagant uses. The commissioners emphasized correctly

14

HAIDER AU KHAN

that the industrial prosperity of South Africa depended largely upon the organization and use of this cheap native labor. Thus, within the structure of the labor market, the ultracheapness of African workers was a strong inducement toward keeping the status quo in wage differentials. The mining industry recognized this quite frankly and argued, for example, in 1913, that employing whites at 7s. 6d., instead of using Africans, would have the effect of closing down sixteen mines.27 Thus, a combination of existing economic interests, continuing political domination of the Africans by Afrikaner and foreign capital, as well as the racist ideology in existence, have to be drawn together in order to understand why the economically accidental features of wage differentials at the beginning of the century became the permanent features of an apartheid wage system. On the political side, there was a clear understanding on the part of mining capital that working-class combinations across races were to be avoided. Thus, a mining director records for us, if a large number of white men are employed on the Rand in the position of labourers, the same troubles will arise as are now prevalent in the Australian Colonies, i.e., that the combination of the labouring classes will become so strong as to be able to more or less dictate, not only on the question of wages but also on political questions. 28

It is interesting that in this early period a significant number of influential members of the power blocs in agriculture, industry, and commerce favored an extension of unskilled white employment in the mines. 29 There was also a period following the 1907 elections when the political representatives of the Het Volk party defeated the representatives of the mining interests among the progressives. Mining capital was thus forced to experiment with white labor. "Studies" were conducted to see if the "more intelligent and naturally hardworking" whites could be productive in keeping with the higher wages they received. It turned out that the productivity differential was lower than the wage differential.30 In the final analysis, these experiments confirm my earlier hypothesis that there was a contradiction between the accumulation of capital in the South African economy and the functioning of a free labor market. In particular, during the first part of this century there was a contradiction between the accumulation of capital in the mining industry and the employment of unskilled whites outside of a narrow range of job categories. Fortunately for the mining capital, the Het Volk government quietly shelved the recommendation of the Majority Report of the Mining Industry Commission of 1907-1908, which advocated a progressive imposition of a "white labor policy." 31 Whereas previously "a white Rand" was seen as a

INTERNATIONAL POLITICAL ECONOMY OF APARTHEID

15

solution to labor problems, now there was recognition of the "danger of bringing down the structure upon our heads by tampering with the foundations." Thus, the interests of mining capital were heeded, and the particular ideology of apartheid was reaffirmed politically and became splendidly suited to serve the purpose of accumulation of capital in South Africa. The need for African labor also led to enactment of the Native Land Act in 1913. This act prohibited Africans from buying any further land outside the reserves. Even more stringently, it forbade them to hold such land as the tenants or partners of white farmers. Although a Bantu Trust and Land Act was passed in 1936, releasing some regions, the "scheduled" and "released" lands amounted to just one-eighth of the area of South Africa. 32 Ironically, as the economy grew so did the instruments of violence and oppression over the African masses. With the further growth in the manufacturing industry, the country adopted a uniform pass law using the Native Urban Areas Act of 1923. Section 10(1) of the amended version of this law prohibited people classified as "Bantu" from remaining in an area for more than seventy-two hours unless they were born there or worked there. Both the influx control and the restriction of black property rights put severe economic restrictions on the employment and mobility of the African population.33 These restrictions make the economic content of apartheid very clear: Africans are a cheap reservoir of labor, they are to be tolerated only as low-wage workers when and where needed. The infamous pass laws became part and parcel of the administration of the African labor market. With industrial development, the wage structure of the mining sector was carried over to other areas. Thus, Steenkamp—in a study of wage differentials between whites and "Bantu" in 1962—drew comparisons from 1935-1936 up to 1970. The study reveals uneven changes in wages and always an average ratio of about 6-to-l between white and "Bantu" wages. Steenkamp admits that the "situation calls for a larger rise in Bantu real wages than European real wages." 34 According to Davies, in mining the ratio of white to black wages was 11.2:1, and it grew to 19.4:1 by 1970. 3 5 The overall wage gap also increased during this period, so that by 1970 the corresponding ratio for manufacturing was 6:1. 3 6 Table 2.1 shows the differential wage structure by racial-ethnic groups for 1978. Again, one has to agree with Knight and McGrath that not all of the differential can be attributed to discrimination. However, the conclusion is inescapable that both job discrimination and wage discrimination are regular features of the South African labor market. The upshot of the analysis so far, then, is that apartheid, particularly in the economic sphere, was already in place by 1948. What changed in 1948 was that a more ideologically entrenched position was articulated by the nationalist government in an all-embracing manner. Here, economic forces

16

HAIDER AU KHAN

Table 2.1 Wage Structure for Nine Sectors (average wages in 1978 R/year)

Agriculture (1976) Gold Other mining Textile Food Apparel Leather Wood Chemical

Whites

Coloureds

Asians

Blacks

3,811 10,276 9,771 8,457 7,838 7,567 6,637 7,648 8,900

327 4,261 2,628 2,056 1,800 1,525 2,090 2,250 2,897

1,287 3,900 4,184 2,520 2,970 1,861 2,286 3,210 3,679

199 1,399 1,449 1,453 1,604 1,077 1,721 1,325 2,416

Author's calculations based on South African Statistics.

also played a role. The 1940s were a period of remarkable economic expansion for South Africa. The number of manufacturing establishments and persons employed rose from 8,505 and 245,457 respectively in 19391940 to 12,517 and 497,887 in 1949-1950. Urbanization increased correspondingly. Thus, the need for cheap urban workers increased even more. The number of African workers in private industry more than doubled, from 126,067 in 1938-1939 to 345,928 in 1950-1951. These economic forces made it even more necessary than before to control the African workers through political coercion. At this point in the development of the current system of apartheid, the role of the state became as important as that of the economy. This view is reinforced if we recall the definition of apartheid cited from Lipton at the beginning of this chapter. Itself a product of the racially hierarchical, segregated society, the state in turn has crucially affected the situation by enforcing apartheid laws. The last characteristic of apartheid (its legalization and institutionalization) discussed by Lipton requires a willing and repressive state apparatus. Furthermore, by progressively excluding all blacks from the vote, the apartheid state left only the politics of violent protest as the means of expression for them. Economically, the hated pass laws and job color bar severely restricted black mobility. It is not surprising that apartheid has had significant impact on the occupational structure. All the available data published by the South African government itself, including those of the most recent years, show a huge number of blacks locked into unskilled jobs with low wages. Income distribution is correspondingly skewed in favor of whites. Trapped in low-paying jobs or outright unemployment, barred from democratic expressions within the polity, forced to undergo social segregation in a country where they are the majority, blacks opted, in the 1960s, for armed struggle against the regime. The growing national and international unrest forced even Verwoerd, the leading theorist of apartheid, to declare political rights for and economic concessions to the blacks. However, an

INTERNATIONAL POLITICAL ECONOMY OF APARTHEID

17

utterly deceptive program of "separate development" tried to cart off the Africans into barren, fragmented Bantustans. The growing recognition of the inability or unwillingness of apartheid to change has led to successive waves of uprisings. Organized protests against apartheid started both at home and abroad soon after the Second World War and the decolonization movement. In 1945, the elderly South African politician Smuts wrote the draft for the preamble to the UN document on human rights. In hindsight, it must appear as a piece of historical irony. However, during the following year, Smuts was beleaguered with criticisms from the newly independent countries, led by India, regarding his policies toward the South African Indians. India again moved forcefully in condemning apartheid in the United Nations during the height of the civil disobedience movement in South Africa in the early 1950s. Throughout the 1950s, both the apartheid system and domestic and international criticisms against it continued until the system reached a crisis point. March 21, 1960, is a day of tragedy for all of South Africa. The South African poet-in-exile, Dennis Brutus, sums up the impact and significance of the bloody massacre at Sharpeville on this day in his memorable phrase, "bullet-in-the-back day." Similar uprisings took place in Soweto in 1976 and more recently in many parts of South Africa. Violence on both sides has progressively escalated. Since the renewal of intense political activism, the government has been forced to make some concessions. Conservatives in and out of South Africa sometimes claim that these so-called reforms amount to a genuine erosion of apartheid. There have been some moves, mostly prompted by market forces, to use "the rate for the job" instead of the "civilized labor" principle. Some observers also cite the narrowing of wage differentials between blacks and whites. However, such changes are, by and large, not products of a change in the system per se, which still practices discrimination in the labor market. In education, the government has increased per capita expenditures on the Africans, but a substantial gap (6:1 between whites and blacks) still existed as of 1984. The quality of education for Africans still remains inferior. Thus, in spite of good reformist intentions the limitations are clear. Lipton writes: "Despite increasing expenditure and effort to upgrade it, the rapid expansion of black education has brought shortages of classrooms, books, and particularly of trained teachers." She also points out that "since 1984, the schools have also been seriously disrupted by township unrest." Significantly, "the turmoil and upheaval in the schools led to alarm at the prospect of integrated education among many whites, particularly the far right wing, prompting assurances by the government that it did not intend to integrate the schools (let alone residential areas)."37 Thus, apartheid continues unabated in education and housing. Needless to say, in the political sphere there is no intention to share power with the

18

HAIDER A U KHAN

blacks by relaxing apartheid laws. Creation of Bantustans, as mentioned before, failed as a "neoapartheid" political move in the 1960s. In 1984, the white minority government promulgated a new constitution. A tricameral parliament with accommodation for the "Asian" and "coloured" people acknowledged the principle of sharing power, without actually sharing it. Black Africans were pointedly excluded. Most charitably, this can be called offering hope but little else. Subsequent moves by Botha have failed to satisfy anyone. This pattern of "authoritarian reform" cannot be adequate given the gravity of the situation. However, the faltering steps do indicate changes that have taken place within the ruling oligarchy, as well as the political attitudes and organizations representing the antiapartheid forces within and outside South Africa. Within the Afrikaner nationalist group, the monolithic consensus has broken down. The process was in evidence when four defectors from the Nationalist party's (NP) parliamentary caucus formed the ultraright-wing Herstigte Nasionale party. Botha himself gave expression to the paternalistic reformist tendencies in the NP in 1978 with his call for the whites to adapt. In 1982, the right split again, forming the Conservative party under Andries Treurnicht. Today, the government in power is indeed more inclined than any previous regime toward reform. This change of attitude is partly a recognition of emerging tendencies and historical forces. However, the massive struggles from below, pursued with renewed vigor by the people, accelerated the process. The events of the last few years indicate clearly to the more thoughtful sections of the ruling elite that the majority of the people are rapidly becoming ungovernable. The Africans are joined in this struggle by significant numbers from other groups, including whites: a situation in which international pressure may lead to desirable results. Indeed, the prospects for Baldwin's "economic statecraft" may be quite bright. The consideration of the means by which economic statecraft may be pursued leads us to the study of the appropriateness of economic sanctions against South Africa.

Notes 1. See M. Lipton, "Reform: Destruction or Modernization of Apartheid?" in J. Blumenfeld, ed., South Africa in Crisis (London: Croom Helm, 1987), 39-40. Lipton claims a narrowing of wage differentials in mining from 20:1 to 5:1 between 1960 and 1985. Without knowing how the figures were arrived at, it is difficult to evaluate the claim. However, it is true that some narrowing of the wage gap has taken place, though the estimates may vary. My own estimate for 1978 shows a ratio of white and black wages in mining to be approximately 7:1. 2. See, for example, M. Wilson and L. Thompson, eds., The Oxford History of South Africa (Capetown: Oxford University Press, 1969); T. R. H. Davenfort, South Africa: A Modern History (Toronto: University of Toronto

INTERNATIONAL POLITICAL ECONOMY OF APARTHEID

19

Press, 1987). Richard Elphick and Herman Giliomee, The Shaping of South African Society 1652-1820 (New York: Longman, 1979) contains a set of essays on research on the history of white occupation during this period. G. M. Theal, History of South Africa, It ser. l-2s, and 2d ser., 1-6 (London: George Allen and Unwin, 1917) is a monumental study that reflects both the strengths and weaknesses of the old school of history. C. F. J. Muller, ed., Five Hundred Years: A History of South Africa (Pretoria: Academica, 1969) contains essays written by specialists on subjects ranging from "The Arrival of Van Riebeck" at the Cape to "The National Party in Power." 3. There has been some excellent research on the subject, however. See R. Elphick, Khoikhoi and the Founding of White South Africa (Johannesburg: Ravan Press, 1985). M. Wilson and L. Thompson, Oxford History, vol. 1, cite much relevant research for this early period. 4. Anthony Lemon, Apartheid in Transition (Boulder: Westview Press, 1987), 4. 5. Monica Wilson, "The Ngusi People," in M. Wilson and L. Thompson, Oxford History, vol. 1, 49-103. 6. Lemon, Apartheid in Transition, 10. 7. O. Ransford, The Great Trek (London: John Murray, 1972), xii. 8. W. H. Hutt, The Economics of the Colour Bar (London: Published for the Institute of Economic Affairs by A. Deutsh, 1964), 18. 9. See the informative analysis of this breaking down of the consensus by Stanley Uys, "Whither the White Oligarchy?" in Blumenfeld, South Africa in Crisis, 56-57. Also, H. W. van der Merwe, ed., Looking at the Afrikaner Today (Capetown: Tafelberg, 1975), contains a number of essays discussing the evolution of a heterogenous Afrikaner society. 10. This, of course, does not mean that the system of apartheid was defensible according to any moral or political principles at any time. 11. G. V. Doxey, The Industrial Colour Bar (London: Oxford University Press, 1961); D. Hobart Houghton, The South African Economy (New York: Oxford University Press, 1964); R. Horwitz, The Political Economy of South Africa (New York: Praeger, 1967); Hutt, Economics of the Colour Bar. 12. In technical terms used by the neoclassical school of economists, the real wage rate of white workers (or at least some sections of workers) is generally higher than their marginal product, and the wage rate of typical black workers is lower than their marginal product. Thus, a crucial condition for productive efficiency in a competitive economy, i.e., that real wage rates be equal to the marginal product of labor everywhere, is violated. 13. For extensive discussions, please see the following: Kaempfer and Lowenberg, "Political Economy of International Investment Sanctions," and Anton D. Lowenberg, "Towards an Economy Theory of the Apartheid State" (Ph.D. diss., Simon Fraser University, 1984). 14. Douglass C. North, Structure and Change in Economic History (New York: W. W. Norton, 1981). 15. R. H. Davies, Capital, State and White Labour in South Africa, 19001960 (Atlantic Highlands, NJ: The Humanities Press, 1979), 2.

20

HAIDER AU KHAN

16. Davies, ibid. 17. Merle Lipton, Capitalism and Apartheid (Aldershot: Gower Publishing, 1987); M. Lipton, Sanctions and South Africa: The Dynamics of Economic Isolation (London: Economist Intelligence Unit, 1988). 18. M. Morris, "The Development of Capitalism in South African Agriculture," Economy and Society 5, no. 3 (1976): 272-343; C. Bundy, "The Emergence and Decline of a South African Peasantry," African Affairs 71, no. 258 (1972). 19. R. Davies, Capital State and White Labour, 59. 20. J. B. Knight and M. D. McGrath, "An Analysis of Racial Wage Discrimination in South Africa," Oxford Bulletin of Economics and Statistics 39, no. 4 (November 1977). 21. Ibid., 246. 22. D. Hobart Houghton and J. Dagut, Source Material on the South African Economy, vol. 1 (London: Oxford University Press, 1972). 23. Ibid., 29. 24. Ibid., passim. 25. Houghton and Dagut, vol. 2, 176. 26. Ibid., 176-177 27. Transvaal Chamber of Mines, Statements Presented to the Economic Commission (Johannesburg, 1913), 102-103. 28. Report of the Transvaal Labour Commission (1904), Appendix 3: 65. 29. See the reports of those giving evidence in the Report of the Transvaal Labour Commission. 30. Report of the Transvaal Labour Commission, Minutes of Evidence, Exhibit G. 31. According to a government report, even when fully developed this land could not support more than half the African population. See R. Davies, Capital State and White Labour, 18. 32. See note 17. 33. Surveys of the evolution of these aspects of apartheid occur in, inter alia, Lowenberg, "Economic Theory of the Apartheid State"; W. F. J. Steenkamp, "Labour Problems and Policies of Half a Century," South African Journal of Economics (March 1983): 58-87; Hermann Giliomee and Lawrence Schlemmer, eds., Up Against the Fences: Poverty, Passes and Privileges in South Africa (Capetown: David Philip, 1985). 34. W. F. J. Steenkamp, "Bantu Wages in South Africa," South African Journal of Economics 30, no. 2 (June 1962): 115. 35. R. Davies, Capital State and White Labour, 352. 36. Ibid. 37. M. Lipton, in Blumenfeld, South Africa in Crisis, 41.

The Logic of Sanctions and Some Modeling Issues

If one looks carefully at the diplomatic history of the twentieth century, it becomes apparent that economic sanctions have become a widely used foreign policy instrument in situations ranging from disputes among allies to hostile confrontations with perceived enemies. 1 As an example of the first use, one can recall the U.S.-Japanese conflict over production subsidies to the microchip industry. The U.S. embargo against the Soviet Union is an example of sanctions applied against enemy countries. Thus, sanctions may be viewed as part of the "economic statecraft" of our time. 2 A brief historical introduction traces the thinking on sanctions in the twentieth century, leading up to its resurgent prominence.

Economic Sanctions in Recent History The fortunes of the theory of sanctions have ebbed and flowed. After World War I, there was considerable support for international sanctions as coercive policies that could be substituted for war. The Genevan school of thought in international relations powerfully advanced the argument that the collective security system embodied in an international organization should replace the balance of power system, which was dead anyway. The international organization should enforce international law without military conflicts. How could this be done? The answer was the imposition of international sanctions. This weapon was deemed powerful, effective, and easy to use. Moreover, by comparison with warfare, it was relatively cheap and bloodless. Throughout the 1920s and 1930s, many leading politicians, economists, and legal experts made statements highly favorable to the imposition of sanctions. 3 Woodrow Wilson said in 1919: If any member of the League of Nations breaks or ignores these promises with regard to arbitration and discussion, what happens, war? No, not war, but something more tremendous than war.

21

22

HAIDER AU KHAN

Apply this economic, peaceful, silent, deadly remedy and there will be no need for force. The boycott is what is substituted for war. 4

However, even during this period there were critics of sanctions. It was thought that sanctions could never be complete enough to be effective, and that they would only perpetuate the status quo. It was even asserted that sanctions might extend war rather than localize or isolate it. John Dewey pointed out an interesting contradiction in the concept: The problem of the use of sanctions to achieve a peaceful international organization involves many questions. But two great principles run through the complexity of details and reduce them to clarity and order. The first of these principles is that the use of sanctions is impracticable, so much so that any attempt in that direction is sure to make international relations worse instead of better. . . . The second principle is that even if the use of coercive force by joint agreement were possible it would be undesirable, since resort to force fastens upon us the war system. . . . "Enforcement of peace" is a phrase which combines two contradictory ideas.5

The failure of the league to ensure peace made the idea of sanctions unpopular. However, the resurrection of the idea of an international organization in the form of the United Nations led to the revival of sanctions as policy instruments after the Second World War. Recently, as we move from a bipolar to a multipolar world with a proliferation of nuclear arms, economic sanctions are receiving increased attention as forms of economic statecraft. In this context, the question of the political economy of sanctions has become relevant once again. Critical Review of Recent Developments in the Political Economy of Sanctions

There is a theory of the logic of sanctions that focuses on the interests of the domestic groups within the sanctioning country. The roots of this theory are in the public choice approach to collective decisionmaking. Sanctions are supposed to be public goods. It is recognized that they are distinguished from other public goods, but only in terms of the emotions they evoke. Lowenberg and Kaempfer have pioneered this interesting approach,6 which has two dominant themes. One explains the motivations for imposing sanctions in terms of the domestic goals of interest groups. Some groups may benefit directly from the sanctions: if a ban is imposed on South African wines coming into the United States, for example, there may be quite a few vintners who could temporarily forget the lessons of free trade. There are others who gain the satisfaction of taking a moral stance against apartheid. On the surface, there is nothing wrong with observing and emphasizing these aspects of sanctions. However, in modeling exercises, we invariably

LOGIC OF SANCTIONS AND SOME MODELING ISSUES

23

encounter a utilitarian framework of analysis. 7 Both "positive" and "normative" analyses within the framework of standard economic theory are then carried out. In some cases, as in Willett and Jalalighazar, 8 it is shown that in the absence of substantial market power sanctions will injure the country that imposes them. Thus, under some circumstances, there may be a symbolic call for sanctions without the actual imposition of any sanctions. The second theme in this tradition is that even minimal sanctions may sometimes be effective. As Kaempfer and Lowenberg put it: If we take the same public choice framework which we use to explain the adoption of sanctions in the sanctioning country and apply it to analyze the political outcome in the target country it soon becomes clear that sanctions can communicate signals or threats, not necessarily entailing severe economic damage, which in turn produces policy changes. Thus, even sanctions which have little economic impact in the target country can induce desired political responses if they are designed to selectively affect the appropriate interest groups. 9

While one may disagree with the particular modeling strategies of the public choice approach, it is unquestionable that the motivations of diverse pressure groups in both the sanctioning and the target country are important. Judging from the existing literature on this subject in the field of political economy, it must be concluded that such motivations are not well understood except in a metaphorical sense, the metaphors being utility of interest groups, class interests, etc. In none of the major schools of thought in political economy is there an accurate and reasonable microtheory of social groups and individuals with determinate interests interacting in a determinate manner. 10 The humbling truth is that, at this point in the development of social sciences, we seem to know too little that is reliable about the motivations of political or economic actors. In this book, the focus is on the impact of sanctions rather than on what motivates states to impose them. However, the issue of motivation at the other end can not be avoided altogether, since the purpose of sanctions, presumably, is to motivate change in the behavior of another country. Economic Sanctions as Devices for Changing Policy A useful way of thinking about sanctions is to see them as a device to change the policies of a recalcitrant government. According to this viewpoint, sanctions affect the economy of the target country so severely that there is a high probability of that country's following a more "sensible" policy—sensible, of course, from the perspective of the country applying the sanctions. The following diagram may be helpful. If A is the sanctioning country and B is the country on whom sanctions are imposed, then

24

HAIDER AU KHAN

Even this most direct argument for sanctions involves several assumptions and complexities. In the first place, this is a consequentialist argument. 11 In order to accept it, we must be prepared to agree with the validity of this mode of reasoning, at least in this particular case. It may, however, not be unreasonable to do so, if one can demonstrate the link between economic effect and change of behavior in the target country. Here, there are three cases to consider : • Where the changes sought are solely economic • Where they are political • Where they are both economic and political It is relatively easy to argue that certain kinds of economic behavior may be amenable to change as a result of sanctions. For example, if a country engaging in unfair trade practices has a high stake in foreign trade, embargo against it may lead to so much loss that gains from fair trade are recognized to be a better option. One might point to the flexibility shown by Japan visà-vis trade with the United States and Western Europe as a confirming instance of this type of effect of sanctions. Even in this case, however, there are questions of calculations of loss and gain, and of how the sanctioned country discounts the future. If it has a high discount rate (at the extreme, the future is not valued at all), then no matter how great the threat of future loss, we cannot expect a change in its behavior. Therefore, the economic argument can not be applied indiscriminately. In the second and third cases, the links between economic effects and political changes pose a serious problem. We simply do not know enough about these links to arrive at a general conclusion. It may, however, be enlightening to consider a few different possibilities. At one extreme, there is the possibility of sanctions falling on a completely apathetic regime. There is an old joke about the UN: "When there is a dispute between a small country and a large country, the small country disappears. When there is a dispute between two large countries, the United Nations disappears." The ineffectiveness of UN sanctions against some large or even mediumsize countries has been documented by many. There is even the more extreme possibility of "the rally-'round-the-flag" effect, where the objectionable

LOGIC OF SANCTIONS AND SOME MODELING ISSUES

25

practices of the government in question are intensified as a result of sanctions. Some U.S. opponents of sanctions against South Africa have suggested that this may be the only effect of sanctions against that country. Leaving the two extreme possibilities aside, the effect of sanctions may range from some willingness to negotiate to complete capitulation by the target country. In the latter case, the proponents of sanctions may congratulate themselves for accomplishing an important foreign policy objective at a low risk. More interesting and realistic, however, is the situation wherein sanctions induce the target country to come to the negotiating table. This effect of sanctions I call the induced or indirect effect. It is quite different from the direct effect argument in that no immediate (or even future) change in behavior is postulated. All that the sanctioning country hopes to accomplish is to bring the target country to negotiations. The outcome of the negotiations depends on the existing conditions and on the strategies used by both sides. My argument for the indirect effects of sanctions is consistent with the criticism of conventional analyses that declare sanctions to be ineffective. David Baldwin has pointed out that the conventional wisdom defines the goal of sanctions too narrowly. In his vivid words, such unrealistic goals include: Getting Italy to abandon its invasion of Ethiopia after it had already begun. Getting Castro to step down. Getting Israel to abolish itself. Getting Rhodesian whites to accept majority rule. Getting the Soviet Union to change its political system. Promoting economic development and democracy in countries that have never known either. Getting the United States to change its policy of support for Israel in response to a public demand based on an oil embargo. 12

More modest goals would involve induced effects of the type I have discussed before. The rest of the book is concerned about the relevance of economic analysis to understanding the induced effects of sanctions. To this end, a multisectoral approach toward the modeling of sanctions is advocated, especially for the analysis of trade sanctions. The Multisectoral Approach Within a Social Accounting Matrix Two characteristics of writing on sanctions immediately strike the thoughtful observer: first, the descriptive and polemical nature of much of the writing; second—and even when the work is analytical, as in the public choice work cited before—the veil of abstraction over the entire exercise. Economies presumably captured by two sectors are blithely analyzed in terms of the motivations of a few actors. Equilibrium with price flexibility is assumed instead of being demonstrated. To be fair, simplification and abstraction are, at times, necessary evils. However, if the intention is to ascertain how various groups are affected in the target country—an important criterion for

26

HAIDER AU KHAN

evaluating sanctions that all contending approaches seem to agree upon— then one could do much better by looking at the effects of sanctions on the entire economy in as much detail as the data will allow. It is here that the Social Accounting Matrix offers new hope. The key idea of the SAM is to integrate information from various sources to create a detailed picture of the economy-wide flow of expenditures and receipts. It is, in this sense, an economy-wide single-entry bookkeeping system. Graham Pyatt has put it in a simple and elegant way: There is only one fundamental law of economics. It states that for every income there is a corresponding outlay or expenditure. The law is the equivalent for economists of the physicists law of energy conservation. And it plays a similar role in defining the completeness of a model or analytic formulation: no theory or model can be correct unless it is complete in the sense that all incomes and outlays are fully accounted for. 13

The origins of social accounting can be traced back as far as the work of the English clergyman Gregory King in 1681.14 In that year, King made public his pioneering efforts in recording the flow of income in the English economy of his time. His interest in recording economy-wide flows did not quite catch on in the subsequent two centuries, though gathering statistics was increasingly becoming a social practice. Several thinkers gave theoretical expressions to such practice in the eighteenth and nineteenth centuries. The tableau économique of the French physiocrat François Quesnay can be thought of as a precursor to an accounting framework for economy-wide modeling. In the nineteenth century, Ricardo and Marx, among the classical economists, and Walras of the Lausanne school established the need for economy-wide modeling from different vantage points. In the twentieth century, the effort has continued concretely through the work of Leontief and others on input-output matrices and the important contribution of Kuznets and his followers on the National Income Account (NIA). The modem work on SAM, started in Cambridge, England, has built on these works, and one way to understand SAMs is to examine some of these earlier contributions. The measurement of national income and its broad components during a particular time period gives rise to the NIA. The fundamental aggregate is GNP or NNP (gross or net national product), measured as an aggregate of expenditures. The GNP consists of consumption, gross investment, government expenditures, and net exports. Looked at from the viewpoint of income received by the various producers, GNP can be broken down into wage, rent, interest, and profit. Although this is very useful, the lack of detail in terms of types of commodities, or any other categories for that matter, restricts the applicability of this approach. Leontiefs interindustry transactions matrix moved toward disaggregating the production sector. Table 3.1 gives a hypothetical input-output matrix. On

LOGIC OF SANCTIONS AND SOME MODELING ISSUES

27

Table 3.1 A Basic Input-Output Transaction Matrix Industries

12 3

n

Household

Final Demand Government Business

Rest of the World

1 2 3

n

e t¿ 1 0,

Land Labor Capital etc.

the columns are listed industries numbered 1 , 2 , 3 , . . . , « , which purchase inputs from one another. The number in the intersection of a column and row indicates the amount of input bought by the industry in the column from the industry in the row. The incomes are received by various owners of what economists conventionally call factors of production. Total output is divided between intermediate input and final demand. Final demand can be for private consumption or investment, government consumption or investment, or from the rest of the world. Thus, the input-output tables offer much more detailed information than do the NIAs. The SAM can be seen as an attempt to extend this detail to important areas such as the household and business. A detailed classification of households and companies can tell us much more about which units in society receive income and how they spend what they get. The SAM in Table 3.2 shows in schematic terms the wider classification possibilities.15 Rather than going through it in the abstract here, suffice it to say that the disaggregation achieved on the household side is considerable. In the Indonesian case, for example, some SAMs include as many as forty-four different household groups. Khan and Thorbecke show, as well, several other types of disaggregation within SAMs. In the next chapter, the schematic diagram for the South African SAM will give more details, including those accounts that are lumped together as the "Other Accounts" in Table 3.2. What a well-built SAM captures is a detailed snapshot of all the flows from both the expenditure and the receipt sides of the economy. The aforementioned fundamental law of economics, that expenditures = receipts, imposes a consistency requirement. Therefore, a properly constructed SAM offers a consistent framework for studying an economy.16 In the next chapter, we will utilize the structure of the South African SAM in order to show how the effects of export embargoes can readily be determined within a model of sanctions based on this SAM.

28

HAIDER AU KHAN

u u

a w « Q Z w & w

1

o -a i l

8 §

£3 C c 8

•B:a 3-5

3 o X

SJUflHDHiI

> o O

3 9

PO


o •o c UJ

41 Households S o •a

68

•a

J

Companies 69

Production Activities

70

93

Allocation of labor and capital value added to factors

1

2§ oo

Government

ac Capital 3o Account u