essay.doc - TPP-PED

Name: Naomi Hirst
Degree programme: MSc Migration Mobility and Development
Course: Political Economy of Development
Essay No: 1
Seminar Tutor: Mr Marco Boffo
Seminar Group Number: T1/15
Essay Title: Examine the process and the economic and social effects of
trade liberalisation in one developing country.
Submission Date: 10th January 2011
Word Count: 2999
Trade liberalisation is above all things contested: debated in its adoption, tested in its
practice, disputed in its theory and undecided in its results. Taking this lack of clarity
as a starting point this essay will examine the process and effects of South Africa’s
entrance into the global market by assessing the emergence of neoliberal trade
policies in the context of the nation’s post-apartheid political settlement and by
reviewing South Africa’s trade performance, assessing the extent, changes and
social costs of trade liberalisation in the textiles sector. I argue that trade
liberalisation has embedded South Africa’s unemployment deeper within its
economic structure. In addition the political ramifications of this process have been
manifold: greater unemployment has gone hand in hand with the derogation of the
political power of unions and the labour they represent.
From nationalisation to liberalisation
Although atypical compared to many other liberalising developing economies South
Africa makes an interesting case study both because of its combination of
comparative advantages and because at no point did South Africa have to liberalise
its trade. Trade liberalisation has been embraced, not enforced: this short assay into
the tale of South African trade liberalisation is thus a story of the encroachment of
neoliberal rationality onto a polity previously defined, among other things, by its close
relationship to labour.
In 1990 Nelson Mandela assured the nation that the ANC anticipated the
“nationalisation of the mines, banks and monopoly industry” and that a “change or
modification of our views” would be “inconceivable” (Marais 2001:122). In 1994 he
was able to declare that the economic polices of the ANC contained not a single
reference to “things like nationalisation”, that there was not “a single slogan that
[would] connect us with any Marxist ideology” (Marais 2001:122). This volte-face in
economic policy reflected the sea-change in influence that now held sway in the
upper echelons of the ANC. The change took the government, and eventually the
nation, from a Confederation of South Africa Trade Unions (COSATU) policy, which
advocated state planning and growth through redistribution, to the ANC flagship
economic programme of 1996: ‘Growth, Employment and Redistribution’ (GEAR),
which predicated economic growth from a menu of fiscal austerity, wage restraint
and trade liberalisation in which redistribution was predicated on growth. GEAR’s
affiliation to the Washington Consensus was thus characterised both in its policy
recommendations and in the way it which this ‘reform from above’ was declared ‘non-
negotiable’ by the Finance minister Trevor Manuel (Marais 2001:162). In 1996 the
message to the unions and to the government was that there was no alternative. The
only path to sustainable growth was to free the market from the binds of the state
and the tyranny of labour.
Neoliberal foundations: a critique
When the ANC was unbanned in 1990 it had no economic policy, only slogans and
broad statements of principle in lieu of an economic brief. A historic neglect of
economic policy opened the way for a stream of foreign experts to court their
unformed heterodoxy (or ‘macro-economic populism’) with an assortment of
seminars, workshops, briefings and conferences, commissioned and paid for by
foreign and local business development agencies (Marais 2001:125). Envoys of the
mainstream created histrionic scenarios depicting the unsustainability of the ‘growth
through redistribution’ pathway and in flamboyant language cast ANC economic
policy as an Icarus jeopardising growth with state-oriented policy1 (Marais 2001:126).
The foundation upon which GEAR was built was heavily influenced by these paeans
to free enterprise. In the context of the collapse of the Soviet experiment and the
daunting task that unprepared policy actors faced, the rhetoric of neoliberalism
proved seductive. At the theoretical core of the pronouncements that predicted
redistribution through growth was the neoliberal faith in the market as the single most
efficient allocator of resources. In this framework the liberalisation of trade is cast as
the means to growth: an open market free from tariffs will necessarily lead to the
more efficient allocation of resources between sectors and nations as each comes to
realise their comparative advantage in producing and exporting commodities
particular to their national resources. In an open market static and dynamic gains will
proliferate: one-off efficiency gains, ongoing economies of scale and the persistent
pressure to innovate are made possible in a global marketplace of competitors
integrated with one another in the absence of state interventions.
The origin of trade policy as prescribed by GEAR and espoused by international
financial institutions lies with Ricardo’s theory of comparative advantage: it is of
mutual benefit to each country participating in trade to specialise in the good in which
it has a lower relative cost and exchange it with the other (Patnaik 2005:31). The
As in the Mont Fleur scenario
benefit arises from an actual physical increase in total output owing to specialisation;
and this is a truth, deduced from an impartial observation of reality and universal in
its applicability – “a perfectly general argument” (Patnaik 2005:32). As Utsa Patnaik
points out however, this is a ‘perfectly general argument’ only in so far as all nations
to which this ‘law’ applies could be said to be blessed by a ‘comparative advantage’
drawn from greater military might and diplomatic surety. The Britain that Ricardo
drew upon was a nation lent advantage in woollen cloth over a militarily and
diplomatically subdued Portugal; the advantage was military and the benefit
unilateral. Set in its historical context and read as a social construct Ricardo’s market
necessarily loses the glossy sheen of objectivity neoliberal ‘truths’ seek to confer.
This weakness within the central tenets of neoliberal advocacy of trade liberalisation
is echoed in empirical analysis: the effects of open trade on growth, productivity,
technological change and efficiency are at best ambiguous (Fine Deraniyagala
2001). Yet orthodoxy persists: a neutral trade regime is seen to increase labour
intensive production, an increased demand for unskilled labour along with an upward
pressure on unskilled wages is predicted and lauded as route to reducing poverty
(Deraniyagala 2005:104). Trade liberalisation was instigated by the drastic reduction
and simplification of tariffs, as a result of GEAR the South African economy became
more open. However, the links between trade and poverty reduction and
employment, between growth and redistribution have not been clear.
South African trade liberalised
Under GEAR a number of tariffs were simplified or reduced or removed. The market
became open to imports and under the rubric of trade theory specialised exportorientation was expected to counter the increased domestic competition from
imports. This statement of fact and statement of prediction is about as clear as any
one can make about trade liberalisation in South Africa, even the pronouncement
that ‘since the early 1990s South Africa has made good progress in liberalising its
trade regime’ with reducing the average nominal protection in manufacturing falling
from 23% in 1994 to 8.2% in 2004 (Dunne Edwards 2005:1) can be contested: “ the
much hyped liberalisation of SA economy in 90s has not been fully realised”
(Fedderke Vaze 2001:436). Some sectors have experienced increased protection in
the years since GEAR was implemented (finance, insurance, agriculture, gold,
uranium) whilst liberalised sectors have been shown to account for just over 15% of
total GDP (Fedderke Vaze 2001:445).
These contrary claims are the tip of the
iceberg, there is not only substantial debate as to the extent of liberalisation and its
links to increased import penetration and export orientation, but arguments too as
regards the empirical means used to ascertain such data (Edwards 2006:234).
However a hazy picture does emerge and it is one that throws South Africa’s 25.5%
unemployment rate and comparative advantages into stark relief. Under a liberalised
trade regime South Africa’s comparative advantages are twofold: compared to
developed countries it is abundant in unskilled labour, compared to developing
countries it is abundant in skilled labour. Although trade has had a net positive effect
on employment since 1994 at 0.6% per annum (Edwards 2005: 245) this has lagged
behind population growth, the employment currently generated through trade being
insufficient to offset unemployment. Over the past three decades employment growth
has been biased towards skilled labour (Edwards 2005:244): the period 1994-2002
saw net trade raised amongst that demograpihc by 0.8% pa against 0.4% pa
amongst unskilled labour. A partial explanation for these figures can be found by
considering the regional composition of South Africa’s trade.
Despite its comparative advantages the sector composition of South Africa’s
manufactured exports is similar across regions, with basic chemicals, iron and steel
(reflecting South Africa’s natural resource endowment), machinery and equipment,
and motor vehicles dominating exports to most regions (Edwards 2006:241). The
result is an imbalance and one that does not strike an accord with neoliberal
pronouncements; from 1994 growth in net trade has been shown to be biased toward
skilled-labour-intensive sectors with rises in export orientation most concentrated in
chemical and metal product sectors. In the same period less-skilled-labour-intensive
sectors have experienced poor export and strong import growth: with textiles and
footwear facing significant import penetration compared to other sectors. Despite an
abundance in less skilled labour South Africa has been unable to compete with
China and India in sectors such as textiles, leather and footwear; the result of this
failure is mass unemployment amongst South Africa’s alleged comparative
The substitution of capital for labour, the effect of biased tariff reductions and the
resultant import penetration on domestic demand for manufactured goods all give
vital context to South Africa’s 25.5% unemployment rate. Analysis conducted by
Lawrence Edwards and Paul Dunne has shown how liberalisation, as mandated by
GEAR, has disproportionately affected manufacturing; though tariffs still remain high
in certain sub-sectors, manufacturing underwent the sharpest decline in nominal tariff
protection between 1994 and 2004 (Dunne Edwards 2005:2). Over the same period
employment growth within manufacturing stagnated with total employment within
manufacturing declining by 10%. Growth in openness is negatively correlated with
growth in employment, with the biggest falls occurring in industries experiencing the
largest reductions in tariffs – showing both that reductions in protection were biased
towards labour intensive sectors and that liberalisation has reduced the demand for
unskilled labour relative to capital.
I will later examine the effects of liberalisation on the textiles sector to further
illuminate the social costs of South Africa’s commitment to open trade; however at
this juncture an assessment of how the faltering performance of manufacturing is
figured within the neoliberal paradigm sheds light not only on neoliberal theory, but
illuminates in turn the process by which the alliance between COSATU and the ANC
was eroded and in turn replaced by what COSATU, in the second resolution of their
9th National Congress, identify as the “dominant influence of big business on the
policy direction of our country and the marginalisation of representative institutions
from decision-making” (COSATU:2006). Dani Rodrik’s analysis of South Africa’s
‘economic puzzles’ claims that had their been a decline in the real wage at the low
end of skill distribution the shrinkage of the manufacturing sector may not have been
so severe. However this he claims was “an unrealistic option in view of social
expectations and political realities created by democratic transition” (Rodrik
2008:772). There was, and evidently still is, a widespread assumption amongst
mainstream policymakers and economists that South Africa’s labour market is
primarily defined by its inflexibility.
The marginalisation of labour
In a neoliberal framework trade unions represent an inefficient market intervention
and in the journey towards GEAR labour representatives were hounded by business
interests, conservative thinktanks, experts and advisors for the supposedly stultifying
effect of unions on growth. The election of the ANC with the support of COSATU and
the passing of labour legislation on 1995 that codified the right to collective
bargaining was the end, rather than the beginning of labour’s political power in South
Opposition to the neo-Keynesian policies that figured the state as the protector of
labour standards and progenitor of growth had long been derogated2. In 1996 The
South Africa Foundation, an association of South Africa’s largest corporations and
major multinational companies, issued an attack on the state, lauding government
intervention as the inhibitor of natural growth. Their paper ‘Growth for All’‘ pinpointed
the industrial council system and its contribution to the inflexibility of the market as
one potent source of unemployment: high wages made South Africa uncompetitive in
global trade. Despite the fact that this line of reasoning was thoroughly discredited by
the ILO’s report to the Labour Review Commission later that year3 the inflexibility of
labour was accepted and codified. The release of GEAR augmented this rhetoric
through the ambivalence with which the language of flexibility was deployed4. Within
the context of its macro-economic strategy, the vagueness of GEAR’s prescriptions
for the labour market created space for opponents of a ‘rigid’ labour to translate
GEAR into a programme in favour of de-regulation (Bezuidenhout Kenny 2000:11).
The labour market debate had shifted: from issues of inequality to a focus on
flexibility and efficiency to promote competitive advantage.
The textile industry
This short case study will illuminate the ways in which liberalisation has altered the
modus operandi of textile firms and impacted upon workers. Textiles can be exported
at any stage of their production; it is thus a sector especially sensitive to trade
liberalisation and it is one that has been in long term decline since the 1980s.
In 1993 the left-leaning ‘workerist’ Macro-Economic Research Group’s paper was largely
discredited by the ANC: its endorsement of public works programmes and the introduction of
a national minimum were resisted by the DEP in the same year the ANCissued a letter of
intent to the IMF which which committed the new government to fiscal discipline
(Bezuidenhout Kenny 2000:4)
Guy Standing, Director of Labour Market policies for the ILO: ‘South Africa has a flexible
labour market...It is almost comical to describe SA as having employment inflexibility. Many
workers have little employment protection, retrenchments are fairly easy and widespread,
notice periods are short or non-existent, and most firms can resort to temporary or casual
labour and, if need be, labour contracting...’ (Bezuidenhout Kenny 2000:9)
At this point in the evolution of economic policy COSATU role had already been reduced;
the National Economic Forum of 1992 became the National Economic Development and
Labour Council in 1995, a purely consultative body, no longer the negotiating forum that
COSATU had initially envisaged (Marais 2001:133).
Increased import competition has led to increased export competition, but this has
not led to a necessary and absolute improvement to firm performance; within the
textiles sector there is no necessary relation between exporting and better
performance or growth (Roberts Thoburn 2003:88). It is the motivation for export that
counts: firms reporting the motivation to increase their scale of production as a
reason for export were 50% more likely to have achieved high levels of turnover
growth compared to the 76% of firms that exported for defensive reasons, motivated
both by the threat to the domestic market and the need to maintain their capacity
utilisation (Roberts Thoburn 2003:89). Threats to the domestic market from trade
liberalisation have been the primary driver of growth in production with a strong
association between experiencing a very high impact of import competition and
having made changes in production changes, suggesting that liberalisation has
contributed to production changes and restructuring (Roberts Thoburn 2004:131).
Defensive exporting and specialisation have required firms to invest in new
machinery and to rationalise production. Upgrading and restructuring programmes
have involved significant job losses, as have the defensive cost-cutting measures of
those firms less able to adapt to a competitive market5.
The effect on textile workers has been severe: a 40% drop in the levels of
employment within the industry has been ongoing since the mid 1990s (Roberts
Thoburn, 2004:133-5). Textile factories have closed or have become progressively
more capital intensive, with increases in output possible without much new
employment. Amongst a demographic heavily dependent on wage income,
increasing unemployment has increased the burden for individuals who may find
themselves supporting yet more extended family members. Of workers still in the
employ of the textiles sector, informal work patterns are prevalent; work has become
increasingly casual with fixed-term contracts, home-working and subcontracting
becoming more entrenched in response to vulnerability of the industry since the
onset of trade liberalisation (Bezuidenhout 2007:552). The informalisation of work
allows producers to maximise the flexibility of work and to minimise the costs of
labour; there is no formal security, no legal or social protection. Workers bear a high
risk, but in the textiles sector it is risk or nothing.
The neoliberal claim that blame lies with an unsustainable real wage is given the lie by the
textile firms surveyed by Roberts and Thoburn: their postal survey results showed that firms
did not view wage rates as a hindrance to their competitiveness (
South Africa’s participation in world trade since the early 1990s has been
characterised by a performance biased towards skill-intensive labour intensive
sectors that at its best has led to a negligible net increase in overall employment, and
at its worst has contributed to the increasing unemployment of unskilled labour. The
relative decline of the country’s manufacturing sector has been to the detriment of
vast swathes of unskilled labour and has profoundly altered the texture of
employment itself. Employment has become increasingly informal and insecure and
its political representatives increasingly marginalised, both due to the erosion of
formal labour from within the labour market, but equally due to the political
negotiations that enshrined trade liberalisation as ANC government policy and
It has been beyond the scope of this essay to explore further the precise nature of
South Africa’s trade liberalisation, both in terms of the effects of this highly atypical
economy on African regional trading agreements, and in turn the effect of preferential
trade agreements on the economy’s textile sector. Further study in this contested
field would lead to a review of the effects of the Africa Growth and Opportunity Act
and a consideration of how mainstream economists continue to favour and justify
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