Anthea Jeffery: Economic needs must trump anti-western ideology

By Anthea Jeffery*

Dr. Anthea Jeffery is Head of Policy Research at the IRR and author of Patents and Prosperity: Invention + Investment = Growth + Jobs, published this week by the IRR and available on the IRR website.
Dr. Anthea Jeffery is Head of Policy Research at the IRR.

The ruling African National Congress (ANC) seems intent on alienating the West and adopting a rigid pro-Russia and pro-China stance. However, the Western countries it is busy targeting have long been South Africa’s most important investors, whereas investment from China and Russia has thus far been very limited. With zero economic growth evident so far this year, ANC ideology should not be allowed to trump South Africa’s economic needs and the plight of the 8.4m people now unemployed.

The United States (US), along with the United Kingdom, the Netherlands, Germany and other European countries, have long been the source of most foreign direct investment (FDI) into South Africa, along with the great bulk of indirect investments (mostly in the form of equity and bond purchases).

As at December 2013, the cumulative value of FDI in South Africa from the West (excluding Canada and Australia, along with countries such as Japan and Taiwan) stood at more than R1 350bn out of total FDI then valued at some R1 600bn. Western FDI thus made up 85% of this total. By contrast, cumulative FDI from China amounted to R59bn or 3.7% of the total, while FDI from Russia was still more limited.

Figures for indirect investment paint a similar picture. By December 2013, cumulative indirect investment from the West amounted to some R2 435bn (or 90%) out of a total of roughly R2 695bn in such investment. Indirect investment from China amounted to R14.7bn or 0.5% of the total, while indirect investment from Russia was again even more limited.

These figures underscore the importance of FDI and indirect investment from the West. They also show that such investments cannot easily be replaced – and certainly not by investments from China and Russia.

The ANC has nevertheless recently embarked on a propaganda offensive against the US. It has also terminated seven of South Africa’s bilateral investment treaties (BITs) with key European countries, and is busy replacing these agreements with the flawed provisions of the Promotion and Protection of Investment Bill of 2015 (the Investment Bill).

Take first the ANC’s propaganda offensive against the US. Though the value of FDI (R98bn) and indirect investment (R967bn) into South Africa from the US now totals some R1 065bn, the ANC’s invective against Washington has recently reached new heights. This is evident from a policy discussion document drawn up by the ruling party for a meeting of its national general council in October this year.

According to this document, the US has “declared a cold war” against both China and Russia. It is trying to portray China as “the world’s worst polluter”, to suggest that it is “a paper tiger whose economic rise is not sustainable”, and to launch a “repeat of Tiananmen Square” by depicting “counter-revolutionaries as human rights activists”. The US is also taking advantage of China’s disputes with some of its neighbours to “build an anti-China alliance of Asian satellites that will take its orders from Washington”.

Russia too “has not been spared the wrath of US-led Western imperialism”, the document continues. Hence, Russian leaders are constantly portrayed “as monsters abusing human rights”, which is part of “a clear plot to…contain the rise of Russia globally”. This plot is also  evident in the “war in the Ukraine”, which is really targeted at Russia. Adds the document: “Pro-Western satellite states are being cultivated or…invented” (as in the Ukraine) to “encircle Russia”. This will allow “the deployment of NATO’s hostile military hardware, faced in the direction of Russia”. The overriding aim of “these Western manoeuvres” is to ensure that “there will be no Russia or China to challenge the US hegemony”.

As regards Europe, the Government has already terminated seven BITs, including those with:

  • the United Kingdom, with FDI into South Africa now valued at R773bn and indirect investment amounting to R873bn, giving a combined total of R1 646bn;
  • the Netherlands, with FDI valued at R268bn and indirect investment amounting to R19bn, giving a combined total of R287bn; and
  • Germany, with FDI valued at R76bn and indirect investment amounting to R46bn, giving a combined total of R122bn.

According to the Department of Trade and Industry (DTI), European investors from these countries have no reason for concern because the Investment Bill includes and “codifies provisions typically found in BITs”. However, this claim is false.

The Investment Bill reduces the protection available to future British and European investors in (at least) three important ways:

  • it allows international arbitration to settle disputes only with the Government’s consent, rather than by right;
  • it limits compensation on expropriation to something less than market value and warns that this amount could be reduced in the light of the Government’s “available resources and capacity”; and
  • it makes the right to repatriate capital and its returns dependent on “taxation or other applicable legislation”, a formula which gives investors no guarantees at all.

Both the ANC’s invective against the US and the cancellation of the European BITs in favour of a flawed Investment Bill are likely to damage investor confidence in South Africa throughout the West.

Yet South Africa’s economy shrank by 1.3% of gross domestic product (GDP) in the second quarter of 2015, effectively cancelling out first quarter growth of an equivalent proportion. In these circumstances, the ruling party cannot afford to put anti-Western ideology before the urgent needs of the economy. Nor should it assume that China and Russia – both of which are themselves in increasing economic difficulties – will be able make up for the Western investment now being put at risk.

* Anthea Jeffery is the head of policy research at the Institute for Race Relations. She is also the author of People’s War: New Light on the Struggle for South Africa and BEE: Helping or Hurting?