Hello and welcome to the So What podcast, in which political economic analyst JP Landman
discusses the issues uppermost in the minds of South Africans. You can find a written
version of this content on JP's website, jplandman.co.za. I am Ruda Landman and I am your host.
These first few recordings were done at our dining room table, but we will soon be moving
into a studio. Hello and a very warm welcome, as always, to this recording, which accompanies
JP's latest research note. It's dated 27 June 2023 and the title is Integrating Economics
and Foreign Policy. JP, you quote a biographer who wrote a biography of Zbigniew Brzezinski,
Jimmy Carter's national security advisor. He said, the ignorance of geopolitical minds
about economics is matched only by the economics profession's ignorance about foreign policy.
And then you say that's a very apt description of the current debate in South Africa. What
do you mean? Well, what the biographer said was that Brzezinski and other foreign affairs
luminaries like Henry Kissinger and Marlene Albrecht, the names he used, were all people
that were not really very much interested in economics. They were interested in geopolitical
maneuvers. But economics are extremely important in any country. And if you're the world's
number one economy like America, you can probably afford not to worry too much about economics.
When you're a smaller country like South Africa, you actually have to. And what struck me about
that remark by the biographer is simply that in the debate that we currently have in South
Africa about our foreign policy, the relationship with the US, the relationship with Russia
and so on, there is almost a Chinese wall, dare I say, between economics and diplomacy
or foreign policy. And it is as if the two are totally disconnected and not talking to
each other and not the one reinforcing the other. And you believe they should be integrated?
Absolutely. It should absolutely be integrated. And it is just noticeable that even the US
now is moving to a much more integrated economic and foreign policy approach. So I think we
also have to do that. And now the question then arises, well, how do you integrate them?
What in economics is important in foreign relations and the other way around? Now, thankfully,
the Minister of Finance, Inokwa Nungwana, answered this question in parliament. And
he said there are four transmission channels, that's what he called them, determining the
influence of foreign policy on our domestic economy. And those four transmission channels
or four areas is basically the currency, trade and supply chains, investment and liquidity.
And what I do in Inokwa is to take each of these four areas or each of these four transmission
channels, and we look at to what extent foreign policy decisions affect the local economy
via that transmission channel. Now, the first one, if I can just plunge into it, is the
currency. And we saw it immediately when the Lady R fracas, based in the open and became
a hot topic. What happened to the currency? What happened to the round? Well, it depreciated
immediately. It is recovered, then recovered a little bit, but it is still very, very weak.
What was the impact of that depreciating currency? Well, the Reserve Bank increased interest
rates by 50 basis points, while everybody up till that point expected the bank to increase
by 25 basis points. Now, you can say 25 basis points, a quarter of a percent is not a lot.
But if you think that you levy that interest rate charge across the entire economy, individuals,
households, businesses, government itself, and so on, it adds up to a huge amount of
money. So, the transmission channel worked very immediately. The currency depreciated
when there was a foreign policy dispute, and sub-Africans are paying the price through
high interest rates. Simple. So, it was better, it would have been better for us to have a
foreign policy stance that would not have precipitated that kind of currency depreciation.
The second one is the trade and supply chain. This is where the whole AGOA thing, African
Growth and Opportunity Act, where that debate comes in. But of course, it's about much more
than just AGOA. As the minister pointed out in parliament, it's not just trade, which
is AGOA, it's also supply chain. We cannot by any stretch of the imagination produce
everything that we need in the country ourselves. It's not possible. We're using cell phones,
which were imported, we're using software, which are imported, we're using oil, we run
our motor cars, which are imported and so on. So, it's about much more than just AGOA,
it's also trade. And what we did was to look at the trade, comparing the trade of two blocks.
The one is four main Western countries, and those countries are the US, Germany, Japan,
and the United Kingdom. They are our main trading partners.
Japan is an interesting case, because it's not physically in the West, or geographically
in the West, but it's part of the G7 and part of that whole economic block.
Absolutely. Yeah, you're quite right. It's located in the East, but it's part of the
West. One of the things one must remember. And it is very clear that we export much more
to the four Western countries than what we export to the BRICS. So, in terms of bringing
money into the country by selling our goods, our main clients are sitting in the West,
not in BRICS. In fact, the relationship is about two times. We export twice as much to
the four Western countries than what we export to the four BRICS countries.
If you move to the import side or the supply side, you find much the same thing. We import
much more from the BRICS countries than what we import from the four Western countries.
And 70% of the BRICS imports really come from China. I must just put that as a sub note.
So it's not so much Russia, Brazil, even India. China is the main provider of imports into
South Africa. But here is the point. We run a trade surplus with the four Western countries.
We run a huge trade deficit with the BRICS countries, which basically means a deficit
with China. Now, if you're a capital scarce country like South Africa, it is better to
have a surplus than a deficit. Deficit has to be paid for. So we run a deficit with BRICS
and we run a surplus with the West. You can clearly see that the surplus of the West is
helping to pay for the deficit with the BRICS countries. And again, if that is where your
clients are, if that is where the people are who buy your goods, it is appropriate, I think,
to treat them with respect and maintain good relationships.
I just want to point out to the listeners that those of you who are interested in the
hard data do go to the written note. There are very clear figures which illustrate everything
that you have just said.
Yes, indeed. And that may be very useful. We're just talking conceptually. And while
we're on it, can I recognize the contribution that was made by Peter Roo in the research
for this note? He's the one who worked on the numbers and compiled the numbers. So there
are four transmission channels, so four areas of impact. There's the currency. We talked
about that. There is trade and supply chain. We talked about that.
Just before we move off trade and supply chain, it is quite clear if you look at the fact
that we export about twice as much to Europe or to those four countries rather than what
we export to BRICS. It is quite clear that it is much easier for sub-African exporters
to get their products into those countries than to get their products into the BRICS
countries. So there's clearly a whole area of work that needs to be done.
And one who would like to see the Department of Foreign Affairs, instead of embarrassing
us internationally, rather help our exporters to get their exports into countries like China
and the other BRICS countries.
The third transmission channel is investment. And here we're talking about foreign direct
investment. And again, the numbers, which are in the written piece, are simply overwhelming.
We get three times as much investment from the four Western countries that we refer to
than what we get from BRICS. And that would make sense. The BRICS countries, even China,
are developing countries and they would have less capital available. China may be the outlier,
while the developed countries, the four countries that we're looking at, are mature economies
and they have more capital that they can disperse.
So we get three...
They look for investment opportunities outside of their own borders.
They do. And increasingly, Indian and Chinese companies are also doing it, but there are
many more European countries or companies from those four countries investing in South
Africa than they are from the BRICS countries. But the bottom line of this paragraph, for
purposes of the audio, is three times more. We get three times more investment from those
four Western countries than what we get from the four BRICS countries.
And the last one is liquidity. And liquidity is an interesting one, because liquidity is
a little bit like your bank account. Sometimes you are overdrawn because you have to pay
medical expenses or you buy furniture or you buy a car or whatever, and you need credit.
You need a bank overdraft. Now, the same goes for the country. When the country runs a current
account deficit, it needs to finance that deficit in one way or another. You need a
positive inflow on your capital account to pay for a deficit on the trade account.
Now, South Africa, generally speaking, is a current account deficit country. We're not
there every year, and there are now in COVID and so on times where we were not a deficit
country. But generally speaking, we are. We're a capital scarce country. And when you need
that overdraft, when you don't have capital to finance your needs, that's when you need
liquidity. Now, where does the liquidity come from? It comes from essentially international
private sector companies like pension funds, like insurance companies, like banks, who
advance money to two countries. They make what is called portfolio investments, or they
can also make direct loans in the case of a bank. Into South Africa, that is how money
comes in, and you use that money to finance your deficit. Now, these are not governments
providing the money. I think that's very important to say. It's private companies that provide
the money. And funds, pension funds. And pension funds.
Yeah, that's what I mean by private. Pension funds, insurance companies, banks, and so
on. Rich individuals, family offices, that sort of thing. Now, these people operate much
more on optics. They obviously do their fundamental research, but optics affect them. And if you
do silly things that make them risk averse, that is the term, and they become risk averse,
then they don't supply you with the money. And you don't have liquidity. Now, what happens
if you don't have liquidity? Well, you absolutely slow down the functioning of the economy.
That is what happened in South Africa after 1985, or in 1985, when P.W. Borda made his
famous or infamous Rubicon speech. Just before they made the speech, Citibank said they're
no longer going to supply South Africa with liquidity. They stopped our credit lines,
and we were forced into a dead standstill. Other banks, of course, other institutions
followed Citibank. And from 1985 to 1993, basically a period of eight years, we struggled
with liquidity, and you see it in our economic growth numbers. Growth simply slumped, because
what normally happens when you don't have the capital available to finance a deficit,
it's like a household as well, you're forced to go into a surplus. You're forced to lower
your expenditure so that you generate a surplus. Now, in economic terms, the way you do it
is you force down GDP growth, you make the economy smaller, literally, so that it needs
less capital, and then you are in a position where you're not dependent on foreign capital.
We were there for eight years, 1985 to 1993. It's not a comfortable place to be. And what
we must understand is not just about foreign direct investment, which is the third transmission
channel. It is also about this fourth transmission channel, which is liquidity, or think of it
as a bank overdraft. So these are the four areas where the Minister of Finance said there
are clear avenues, or as he called it, channels through which the economy gets affected. And
I find it a very useful frame through which to look at our foreign policy.
But if one listens to that, it just really sounds as if our Department of Foreign Affairs
is, it is almost not understandable what they do. But then you put the other side on the
piece of paper, and that is geopolitics, and you say, no, we have to also look at South
Africa's position in the world. And there is a rationality to their actions.
No, absolutely. That is what Brzezinski's biographer said. He said the ignorance of
the geopolitical minds about economics is matched only by the economics profession's
ignorance of foreign policy. And I think it's a beautiful summary, because if you now look
at South Africa's foreign policy stance, what is it? Well, the first point to factor in
is that South Africa accepts that the world is busy breaking up into three blocks. There
is the Western Bloc, which is led by the US, and one can basically say the G7 countries,
plus some smaller players like Australia and New Zealand and so on. And it's not the West,
because it includes, as you've pointed out, Japan. It includes Australia, which sits in
the East. That's the G7 Bloc. The second Bloc that's forming in the world is China, and
the country is very dependent on China, very much in the influence sphere of China. Now,
the China Bloc is not as cohesive and as strong at this stage as the G7, but it's forming.
There's no question about it. And the third block is what is loosely referred to as the
Global South. Now, who is the Global South? Well, it includes South America, the continent
of South America. It includes Africa. It includes the Middle East. It includes India and even
China. So you can see that that is by far the biggest block in the world. It's also
the least cohesive. Now, South Africa is part of the Global South. We are there by way of
tradition. We follow the principles of the Bandung Conference of 1955, the non-alignment
conference that was held there. And we basically say the world cannot be unipolar. South Africa
is very much against the unipolar world. And we would like to see a multipolar world where
everybody is treated with respect and dignity. And this Global South position that South
Africa have will not be abandoned and it will not move over into the G7 Bloc simply because
the G7 Bloc is South Africa's most important economic partners, more important than the
BRICS partners. So economically, we belong with the G7. Politically, we belong with the
Global South. We want to stay clear of China. I think that is very clear. South Africa is
one of the few countries in Africa where there are no Belt and Road Initiative projects. The
same logic. If you're against a unipolar American world, you're also against the unipolar Chinese
world. So we very much see ourselves as part of the Global South and that position South
Africa will not give up. So now the trick is to integrate these two things. Economically,
you belong with the G7. Politically, you are part of the Global South. And then you want
to maintain good relations with China because they're a huge export market, but they're
also a US supplier of goods in your supply chain. So we want to be friends with everybody,
which is a perfectly legitimate and laudable stance. But then your foreign policy must
reflect the fact that you want to be more or less friends with everybody. And you say
it is possible because Brazil and India have given us examples. Yes, that's the important
learning point. What I've done in the note is to compare South Africa's behavior with
Brazil and India. Why Brazil and India? They're both part of the Global South, like us. They're
both democracies, just like we are. They're both against the unipolar world, just like
we are. But they behaved very differently in the UN Security Council in votes and resolutions
on the Ukraine war. They took a very different stance from what we did. We did not display
the nuance of Brazil and India. India, by the way, played the game very cleverly and
they have a very clear idea of what is their national interest. Why do I say that? Well,
they refused to impose sanctions against Russia and in fact they went and they bought oil
from Russia, but they bought it at a huge discount. When the market price was running
at about $80 a barrel, they were buying for 45. Now that's a lovely discount to get for
your country. More than that, they paid for it in rupees. To such an extent that Lavrov,
the Russian Foreign Minister, had to travel to Delhi and he admitted, you can see the
video on YouTube, he admitted that the rupees that the Russians now own, which sit in the
Indian banking system, are of no use to the Russians. You know, what do you do with a
rupee? Well, you can buy some Indian goods and then the surplus. So the Indians have
got a very clear idea of what is in their own interest and they pursued it. They didn't
impose sanctions, bought the oil, paid for it in rupees in terms of their own national
interest. Now I don't detect that strong push for South Africa's national interest in our
foreign policy. If you compare our position to Brazil, Lula from Brazil is very clear.
He condemned the Russian invasion, but he also condemned the Western NATO specifically
for stoking the war and by implication for supporting Ukraine. This was a while ago already.
His foreign affairs advisor recently said, a lovely description, he said, you cannot
judge the Ukraine war by the last one and a half years. It is a product of the Cold
War. Ukraine is a victim of the Cold War. Now I haven't heard the South African government
or Durko saying Ukraine is a victim here. We've bought into the binary position. It's
either NATO and the US or Russia. My view from the beginning is what about the 43 million
people who live in Ukraine? What about the 43 million Ukrainians? Do they not count?
Are they of no relevance? It's not a binary story. It is much more complicated than just
binary. Now the Brazilians clearly understand that and say it in public. We haven't said
it in public. So if you compare our behavior to the behavior of India and to the behavior
of Brazil, our diplomatic behavior that is, then clearly we're not as non-aligned as they
are and not as firm in our own independent thinking and in our own independent search
for what is in our national interest, like the Indians have done. It looks like people
are thinking in terms of us and them. Yes. And that's not good enough in a tri-polar
world where you want to have relationships with anybody. You cannot afford the luxury
of us and them. That's lazy thinking as it is in normal life. Have we seen knock-on effects,
for example, in the relationship with the G7? Yes, we have seen knock-on effects. This
year for the first time since the time Thabo Mbeki was president, we're talking over 20
years here in total, South Africa was not invited to the G7, annual G7 summit. Even
President Zuma went to all the G7 summits. President Ramaphosa went. This year the invitation
did not arrive. Now you can say that is just coincidence. You can say Japan, who was the
host this year, preferred to have the chairman of the African Union there. And I'm not persuaded
at all because the African Union has been around for a long time and other host countries
do not invite the chairman only. But while we're on the point, inviting the chairman
of the African Union is actually, I think, not in Africa's best interest. What happens
when you go to these summits regularly? Well, you develop a relationship with the other
leaders. You can build trust. They can understand where you come from. You can continuously
clarify misunderstandings. You become part of a network. If you have a rotating chairman,
every year there's a new EU chairman, and if you have a rotating chairman now coming
in and disappearing and coming in and disappearing, how do you build a network from which Africa
as a continent can benefit? So I will never know. We will never know whether there's a
link between our foreign policy missteps and the non-invitation to the G7, but I think
it is something to take note of, and I think it is we bluff ourselves if we say, oh, it's
only because Japan wanted to invite the whole African Union and not just a particular African
country. But on the other hand, you do say that the United States may be overplaying
its hand. Absolutely. Look, this whole note is about balance. It's about integrating
ostensibly opposing things. It's about doing what is right, but in a way which takes you
forward. Now, what we've seen in the US in the way that they handled the Lady R story,
in the way that they sanctioned a private flight school in Oudtsweren, I mean, Oudtsweren
of all places, you know, I come from that part of the world. It is really deep rural.
To now say that that flight school is a potential threat to the security of the United States
is simply just rubbish. I'm sorry, but it's just rubbish. Now, the problem with this kind
of overplaying your hand, it looks very arrogant. It looks very bossy, and bossiness and arrogance
can have a political side effect, and the political side effect is us and them, exactly
what you referred to earlier. Plays into the hand of the people who want to mobilize. In
1977, a year after the Soweto riots, South Africa was also in dire straits. And what
did John Foster do? The then Prime Minister, he led the National Party to its biggest election
victory in nearly five decades that it ruled the country. How did he achieve that? Well,
he just ran against Jimmy Carter. That's all. You know, the canvases went up the street
and said, who do you vote for? John Foster or Jimmy Carter? And that's it. He wiped out
the opposition. Same thing happened in Hungary more recently with the Prime Minister, Victor
Orban. He ran against John Soros, who happened to be an Hungarian born citizen, but is now
in the US. And he just ran against against George Soros. Mugabe ran against Tony Blair
in several elections. So be careful for igniting us and them dynamic politics. It may really
backfire against the things that you want to advance. In summary, so what? Well, I think
the summary comes out very clearly. We are economically much more integrated with the
West than what we are with BRICS. As the world shifts towards the BRICS, we will obviously
also become more integrated with the BRICS. And we don't, we simply don't want to choose.
We want to be part of both. But at the moment, we are much more part of the Western of BRICS.
Economically, economically, economically, that's where we sit. Our foreign policy must reflect
that. And if you take our foreign policy and you compare it with other countries from the
global South, then you can see that we've made a couple of missteps that we we could
have avoided. Just compare ourselves to India and compare ourselves to Brazil, those two
other countries from the global South. As the world is breaking up into three blocks,
it is our duty, it is our national interest, in my view, to maintain good relationships
with all three blocks. We're not in favor of a unipolar world. We're in favor of a multipolar
world. But then you must maintain relations with the multipolar world. You cannot say
I will not deal with this one or deal with that one. I think we also, one of the so what's
for me is that South Africa needs to have a much, much clearer idea of its own identity,
what it stands, what it wants to say, and also its own national interest. And for me,
the example remains India. You buy oil at a huge discount and you pay for it in your
own currency. I mean, you know, it hardly can get better than that. But that's because
the Indians pushed for it. They realized the Russians were in a weak position and they
said, yes, we'll buy your oil, but at a discount, then you take our currency. And the Russians
had to do that. So we can do, I really don't care what happens with Russia, but I do care
about South Africa's national interest. And we must have a very clear idea what it is
and then push for it aggressively in all the places where we interact. Essentially, it's
about integrating own interest and international interest, own interest with our partners'
interests, own identity of where you stand in the world. That is really what it comes
down to. Thank you very much for a very clear and fresh look at the whole thing. And I think
a more holistic view of the current international relations problem that we have.
No, we must take our cue from the Brzezinski biographer. It is not just about geopolitics
and it's not just about economics. It's about both. And it cannot be about either one. It
must be about both. Yeah. Thank you very much. Thank you.
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