Here is my opinion piece co-authored with Dr. Mzukisi Qobo in South African Newspaper The Sunday Independent 6 June.
South Africa has stated its strong preference for building relations with emerging economies of the South rather than singularly focused on established powers from the North. This is one of the important lessons that the global financial crisis, as well as the Eurozone crisis has taught many countries in the world – to diversify economic relations. Crafting a strategy targeted at emerging powers, generally known as South-South strategy, is in line with the reality of global power shifts from the West to the emerging Asia and Latin America. Zuma’s state visit to India should, therefore, be seen as an important step in consolidating South-South strategy.
The level of importance attached to this India visit is demonstrated by the size of the business delegation, which has over 200 participants. This powerfully underlies the fact that foreign relations today are no longer just a matter of deepening political relations, but the touchstone of their endurance is the extent of commercial relations between countries. Economics, and not just politics are the essence of international relations in the 21st Century global system.
There is a lot that the two countries share in common. One of the most influential and dynamic minorities in South Africa has an Indian lineage. It was India that was a prime mover in cutting diplomatic ties with the apartheid South Africa in the late 1940s. When the winds of change swept across the country, India was quick to extend a hand of friendship in 1993.
Then India’s Prime Minister, Shri Atal Vihari Vajpayee, was one of the first leaders that the then South African President Mbeki consulted with over the formation of a club of influential developing countries from the South, the G-South in 2000. This was a group of like-minded countries that were to counter-balance the G8 and push for the reform of the global economic order - an idea that never took off at the time, but was later realised in the form of the India-Brazil-South Africa Forum (IBSA).
As a rising power that has strong historical affinities with South Africa, India should thus occupy an important place in South Africa’s foreign policy. Indeed, trade and investment activity between these two countries have been on the rise for the past 3 years. There are commercial flows in both directions, with big Indian companies making their presence felt in South Africa; and South African businesses involved in a diverse range of sectors in the Indian economy, including in financial services, property development, and energy.
Trade between the two countries current stands at US$4.5bn, and with massive potential for further growth. This falls short of the US$7bn target that was set three years ago. Nonetheless it is much higher than when India renewed diplomatic ties with South Africa in 1993. At that time, trade between the two countries stood at US$45 million. Investment stock is at US$6bn, with companies Tata, CIPLA, Mahindra&Mahindra having established their roots in South Africa. On the South African side, groups such as Nandos, Tiger Brands, SAB Miller, Bidvest, Old Mutual, Standard Bank, and the First Rand Group have cast their net in India’s market.
To give effect to the goal of strengthening ties between the two countries, deepening trade and investment ties dominated much of the discussions at the Mumbai meetings between the Business Unity South Africa (BUSA) and its Indian counterpart, the Confederation of Indian Industries during Zuma’s state visit.
What these meetings yielded include the signing of the new terms of reference between the two business groups, with the CEO Forum co-chaired by Patrice Motsepe and Ratan Tata relaunched. Further, in a business-like fashion, one-on-one meetings took place between business leaders covering sectors such as finance, maritime and construction.
It is clear to South Africa that engagement with India has to be raised to a much significant level. President Zuma has set the target of growing trade flows to US$10bn by 2012, and with the export basket on the South Africa side composed of value-added goods, an objective that is in line with South Africa’s trade and industrial policies. This is one of the factors that make pursuing commercial relations with emerging economies more attractive over established industrial countries – they can generate better market opportunities for diversified products. India’s massive growth potential, the stability in its political system, and commitment to the rule of law makes it all the more attractive.
The Minister of Trade and Industry, Rob Davies invited Indian companies to set up manufacturing units in green energy, automobiles and pharmaceuticals. South Africa being the country with largest cases of HIV/Aids would benefit immensely from advances in Indian pharmaceutical industry especially their cost advantage. Technology spillovers can also be harvested.
Similarly, Sasol’s coal-to-liquid fuel technology can revolutionize the Indian energy sector considering India’s growing energy needs and its dependence on coal for energy. Accordingly, Sasol has entered into a joint venture with Tata Steel for $10 billion, and the venture would be operational by 2018.
Indeed, since launching its major economic liberalization in 1991, India’s economy has been on the upward rise. Some estimates suggest that within two decades it could overtake China’s economy as the high performing emerging economy. As the Goldman Sachs 2007 Report, ‘India’s Rising Growth Potential’ points out, ‘the 21st century is set to become India’s ‘urban century’, with more people living in cities and towns than in the countryside for the first time in history’. India has 10 of the 30 fastest growing urban centers in the world, and with an estimated 700 million people moving to cities by 2050. This certainly signifies a huge market potential.
Driven by its buoyant services and skills-intensive manufacturing sector, and a fast growing middle class, India is sure to make a splash as a motor of the global economy. It is a country that South African cannot ignore. However, problems abound in both countries. While India’s investment climate has improved significantly compared to two decades ago and infrastructure is being rehabilitated, India is not an easy country to do business in.
India ranks poorly at 169 in the World Bank assessment on the ease of doing business. South Africa is at a much better level at 32, and not without its own regulatory constraints in the area of network infrastructure. In India constraints in the business environment is further compounded by bureaucratic corruption and regulatory burdens. Caps on foreign direct investment in certain sectors dampen business confidence. For example, some critical services sectors are overlayered with restrictions with regards to the percentage of foreign ownership caps: it is 26 percent in the insurance sector; 49 percent in telecoms; and 49 percent in banking. Some sectors are impenetrable fortresses.
Similarly, the Broad-based black economic empowerment programme (BBEE) in South Africa does not lend itself to easy grasp by foreigners, and is often seen as a cost to doing business. The inefficiencies in the Company and Intellectual Property Registration Office (CIPRO) do not suggest a propitious business climate. South Africa is also not immune to the disease of corruption. Indian business people face visa problems. Recently India has also made its visa procedure stringent. The problem of high crime levels is an investment deterrent that cannot be underplayed.
Despite these challenges, both countries boast a stable political environment, a predictable macro-economic environment, and commitment to the rule of law. No doubt, there is a lot that the two countries can benefit from increased trade and investment relationship, especially if two major hurdles can be addressed. The first has to do with clarity on the status of South Africa’s bilateral investment treaty. In the past two years the South African government has been reviewing conditions under which it signs up to bilateral investment treaty.
As such signing new bilateral investment treaties has been put on ice until Cabinet approves the proposed policy framework before it. Indians have been insisting on signing a bilateral investment treaty with South Africa so as to lend a strong weight to the stated commitment between the two parties. The sooner a new framework is approved the better.
The second challenge has to do with the stalled SACU-India bilateral trade relations. It is difficult to see major improvement in trade and investment relations whilst these two instruments are still mired in ambiguity. In the case of the SACU-India preferential trade agreement, South Africa’s economic sovereignty is constrained, as it has to work through a tortuously slow SACU process, and be dictated upon by smaller countries such as Botswana, Lesotho, Namibia and Swaziland in the ‘democratised’ SACU arrangement.
This creates serious competitive disadvantages for South Africa in a dynamic global economy that will not wait for it. SACU is an impediment that South Africa may need to cast away so that it can be free to strongly reorient its global strategy towards emerging economies, and play fully on the global economic stage. Such a move holds better prospects for increased trade and investment opportunities. Hopefully, Zuma’s trip to India will create a new sense of urgency in defining a clear and coherent South-South strategy.
Mzukisi Qobo is Head: Emerging Powers and Global Challenges at the South African Institute of International Affairs (SAIIA), and a member of the Midrand Group; and Vineet Thakur is a Researcher with the Foundation for National Security Research and a doctoral student at the Jawaharlal Nehru University, India.
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