INTRODUCTION

South Africa has formally endorsed the Charter of the Indian Ocean Rim Association for Regional Co-operation (IOR-ARC),¹ a new initiative that primarily seeks to promote economic liberalisation - freer and enhanced flow of goods, services, investments and technology - among some 47 IOR countries without negating the principles of multilateralism enunciated in the GATT treaty.² Should it have done so? And on what basis?

South Africans involved in the IOR-ARC process have greeted the concept of regional co-operation with unguarded optimism and, so far, any attempts to locate its practice in a critical context are, at best, inadequate. While a fairly strong case for participation in the IOR-ARC has been established from political, historical, cultural and other perspectives, it is argued that, from an institutional point of view, South Africa's enthusiasm is naive and misplaced, and that, economically, this was not necessarily a positive move.³

The South African government has embraced an open, wide ranging foreign policy. It is committed to the Organisation of African Unity (OAU), the Southern African Development Community (SADC), the Southern African Customs Union (SACU), the World Trade Organisation (WTO), the south-south concept and non-alignment, among others. Although South Africa has not adopted an explicit strategy on the IOR, its support for the concept rests on the belief that participation in this forum will attract capital and technology, as well as promote trade which, in turn, will boost the national Growth, Employment and Redistribution (GEAR) strategy.

Believing that the IOR will enhance economically less developed countries of the Southern African region and benefit its weaker members, the Department of Foreign Affairs is interested in establishing the viability of "carrying the region into the IOR-ARC."⁴ Another arm of government - the Department of Trade and Industry - believes that the concept will promote employment creation, increased investment, improved trade performance, and enhanced productivity.

The South African Foreign Trade Organisation (SAFTO) supports the IOR idea on the basis of two principles. It argues that, from South Africa's trade experience with sub-Saharan Africa, it is not always sound policy to target continental neighbours as export partners. More explicitly, South Africa's potential trading partners on the African continent do not provide the common features and cohesion expected in a single viable market. Disintegrative and trade constraining features include:

the multitude of languages including French and Portuguese in which South African businessmen are incompetent;



limited historical, cultural and ethnic ties with South Africa;



intense conflict prevailing between individual African countries;



poor physical infrastructure; and



the severe and chronic imbalance of payment problems many African countries experience.

The second principle is that, geographically, South Africa is the hub of the southern hemisphere, linking South America with Australia. As a result, the IOR seems to offer South Africa an attractive alternative to redefine its target market.⁵

In justifying its stance, SAFTO identifies the more powerful alliance inducing features common to South Africa and the IOR countries as:

an historical heritage of trade and cultural exchanges;


ease of access by land and sea;


political progress;


conducive conditions for exchange in agriculture and mining;


co-operative research in education, telecommunications and the environment; and


above all, technology transfers.

Many academics have also shown a high degree of expectation, emphasising that there are "enormous potential benefits" to South Africa arising from closer IOR co-operation:

some of the IOR countries belong to the group of Newly Developed Countries which have surplus capital to invest and technology to transfer outside their own countries;



IOR countries constitute huge populations which represent key potential markets for South Africa; and



the Association offers South Africa a means of escaping the risk of being marginalised 'in world terms'.

Additionally, for Southern Africa, the IOR-ARC offers a solution to the fear of increasing economic domination by South Africa within the region - a "surer path to economic development and political stability."⁶

IMPLICATIONS

For various reasons, these contentions are too simple, inaccurate and superficial to be taken seriously as a basis for a national strategic stance. Firstly, South Africa's poor investment rating cannot be obviated by its membership of the Association as long as multilateralism offers a wide range of alternatives to potential investors. Besides, the critical issue about technology is not the lack of providers, but the cost and conditions of transfer. The Association becomes irrelevant if it fails to offer conditions that contribute significantly to augmenting the country's poor indigenous technological capability. Secondly, underlying the optimism is a lack of understanding of the new rules of global competition and competitiveness: primary goods have ceased to be a source of comparative advantage for sustainable competitiveness. For example, the growing competitiveness of the United States is reflected in the broadening of the economy from primary and secondary goods to technologically intensive tertiary goods and services. What advantages does South Africa derive from a regional alliance that is likely to perpetuate its exports in primary goods? Finally, the argument that South Africa runs the risk of being marginalised from global society cannot be supported by current geo-political developments, and it is incomprehensible why the replacement of South Africa's economic domination of the Southern African region by other countries of the Association is a more desirable alternative.

For a nation, international competi-tiveness means many things, but particularly the ability, under open market conditions, to design, produce and market goods and services better and cheaper than foreign rivals. Factors affecting productivity, the most important determinant of international competitiveness, include the skill of workers and managers, investment in plant and equipment, the scale of operations, technology and management-labour relations. The relative importance of each factor varies among different nations and changes over time. The evidence, however, is that South Africa has performed rather poorly in the factor (capital and labour), non-factor (product variety, speed of product innovation, product quality, reliability of delivery, inter-firm product development), and social productivity (the efficiency with which resources are used to meet basic needs) sectors.⁷

The experiences of Japan, consistently ranked as the most competitive nation in the world, and other successful economies of the West, show that competitiveness is founded predominantly on manufacturing excellence and technological capability and flexibility, whatever the socio-political context. Liberalisation of regional economic relations, as envisaged in the IOR-ARC Charter, potentially stimulates and accelerates technological diffusion through patents and licences, skills transfer, trade in machinery and related products, and foreign direct investment. However, mere technological accumulation without the indigenous capability to access, absorb, adapt, add to, and effect efficient use of, invariably fails to enhance competitiveness.⁸

Indigenous technological capability, in turn, is dependent upon institutions at the inter-organisational level, that facilitate change, making it acceptable to agents of the economy and motivating them to take part in the change process. Ultimately, therefore, international competitiveness arises primarily from the nature of institutions and institutional change.

Institutional change may direct technological diffusion and promote economic competitiveness in two ways: a quick continuous institutional adaptation, learning and innovation; and, in the long run, a slow process of research and social learning.

To assimilate imported technology in a positive manner and create new, or indigenous technological knowledge, requires technological infrastructure to support basic research and information, provide training in specialised disciplines, and link pure research with industry. The slow rate of technology application in South Africa is attributed to two other factors:

the lack of local and international competition in the past, which encouraged the use of obsolete processes; and



insufficient expenditure on research and development (R&D) by the private sector, which accounts for the bulk of manufacturing.

This short-coming can be traced to the large minimum scale of R&D needed and the high incidence of foreign ownership in South African industry. The skewed pattern of ownership, in turn, provides private sector firms with the incentive to rely on new technology from their overseas holding companies rather than develop a local technological base.⁹

South Africa's support institutions - firms, occupations, patenting systems, government bodies and universities - which should foster technological change, lack the form and effectiveness to bring about improvements in the country's comparative advantage and international competitiveness within the IOR-ARC. In fact, the opening of the South African economy to the IOR-ARC will unquestionably put significant pressure on this weak institutional support system. As a result, the country will fail to respond quickly to the technological dynamism of the alliance's more rapid industrialisers, diminishing South Africa's ability to compete successfully in regional trade. This means that South Africa's peripheral position vis-à-vis technologically superior countries in the region is not likely to change, but its central role in relation to the less developed countries could also be successfully challenged.

An empirical study which identifies, for the years 1991 and 1993, the relative competitiveness of Southern African Customs Union (SACU) countries in relation to other potential trading partners within the IOR, shows South Africa's trading status to be peripheral to the rest of the region as a whole and, specifically, to that of Australia, New Zealand, Burma, Thailand, Malaysia, Singapore and Indonesia.¹⁰

This may be interpreted to mean that South Africa would import technology from these countries and export commodities intensive in labour, physical capital, as well as inputs from the primary sector. The implication of these results is that South Africa's participation in the Association will most probably not contribute to a change in existing patterns of comparative advantage.

For example, South Africa's importance vis-à-vis India is likely to diminish with open regionalism following protectionist practices by both countries. Although South Africa has a fairly developed industrial base, India's manufacturing base is extremely wide and varied, and it is the only country within the region with a large and widespread small enterprises sector excelling in the development of appropriate technologies in which South Africa is very deficient.

Other likely developments are that trade with countries such as Zimbabwe, Uganda, Malawi, Zambia, Ethiopia and Sudan, which are experiencing declining purchasing power and in relation to which South Africa currently enjoys a central position, will worsen. South Africa is likely to face strong competition from Australia, for instance, in the export of agricultural products to countries with a strong purchasing power such as Yemen, Saudi Arabia, Qatar, Bahrain and Kuwait. The advanced or rapidly industrialising countries are likely to use their superior technology and other competitive advantages to displace South Africa from its central role with respect to its continental trading partners, as well as partners such as Pakistan, Bangladesh, Sri Lanka and the Maldives.

South Africa's successful participation in the IOR-ARC hinges on congenial conditions for technology transfer and accumulation being negotiated at government level.

The purpose of negotiations would be to produce enforceable codes of technology transfer that would facilitate access to and assimilation of technology at reasonable cost, as well as regulate commercial practices. There are six issues that should be addressed:

the technological monopoly of multinational corporations, which involves the centralisation of research and development and concentration of innovation;



the inadequacy of transferred techniques - there is a clear lack of appropriate technologies and capital intensive techniques, while technological priorities are dictated by the supplier;



the high, and often prohibitive, cost of modern technologies and excessive transfer cost;



technological dependence, where economic control is exerted by the foreign holder of technology;



restrictive practices - there are often restrictions on the use, commercialisation and re-export of technologies, as well as the obligatory purchase of supplies; and



the absence of training, which leads to the creation of pockets of technology, numerous foreign personnel and little use of intermediate technology.

This type of intervention underlies the industrial successes of the newly industrialised countries of Asia, a number of which are located in the IOR. However, its limitations arise with compliance and monitoring.

CONCLUSION

The South African reaction to the IOR concept is seen as characterised by a lack of critical, strategic appraisal of the benefits of open regionalism between countries of unequal levels of economic development, as well as failure to take into account the potentially divisive issues of security and the economic realities of international competitiveness. Given the current state of comparative advantages and IOR-ARC arrangements, any significant economic benefits in the form of trade and technology diffusion arising from South Africa's inclusion in the alliance are not foreseen.

The results of the 1995 study underscore this assessment of South Africa's prospects within the Association in two ways: it exposes the South Africa economy as unprepared to be integrated successfully into the alliance without preconditions, and cautions optimists against vain hopes that prospects will improve with admission into the group.

From a strategic point of view, the state may intervene to foster capability and competitiveness in several alternative ways. These include:

compelling changes in industrial structure to stimulate the competition necessary to induce R&D activities on a wide scale;



state provision of information dissemination and local linkage networks;



the financing of mission-orientated research; and



the establishment of institutions to promote particular strategic technologies.

It is, however, difficult to protect local enterprises from competing technologies coming from overseas. Nor can it be guaranteed that technology suppliers will comply with an 'international norm' that ensures fairness to purchasers. For example, multinational corporations in the micro-electronic industry, including those from IOR countries, have a history of unwillingness to transfer technology. They fail to invest sufficiently in R&D, having found South Africa a safe market but not a source for their products. And, whenever they transfer technology, the conditions imposed are not conducive to effective dissemination.

Had South Africa entered the IOR-ARC with its SACU and SADC neighbours and had our assessment of its membership been positive, it would have been argued that any potential benefits would not only spill over into the Southern African region, but also promote south-south co-operation. But this rather pessimistic evaluation and South Africa's decision to go it alone have far-reaching negative implications for Southern African regional integration. The non-inclusion of SADC and, particularly, SACU members creates the perception that South Africa is not committed to regional co-operation. Given the common external tariff among SACU members, any alteration in tariffs arising from South Africa's membership of the IOR-ARC will automatically affect the remaining four SACU members. Where SADC is concerned, South Africa's dominance in the region and its history of destabilisation and hegemony reinforce the perception that it lacks political commitment to sustainable regional partnership. This is a threat to individual national self-interests and has the possibility of fragmenting the region into other possible alliances.

South Africa's trade with the IOR region, in any case, is growing steadily. It is therefore recommended that the South African government's current strategy of active, selective and consistent bilateralism within a multilateral framework is intensified, in gradually and steadily drawing the country into the global economy. This, of course, will have to proceed within the framework of a Southern African reform co-operation.

ENDNOTES

Envisaged Composition of the IOR Alliance States and Foreign Dependencies in IOR, Indian Ocean Rim Littoral (Indian Ocean per se, Arabian Sea and Bay of Bengal): Australia, Bangladesh, India, Indonesia, Iran, Kenya, Mozambique, Myanmar, Oman, Pakistan, Somalia, South Africa, Tanzania, United Arab Emirates, Yemen. Mid-Ocean Island States and Foreign Dependencies: British Indian Ocean Territory (BIOT-Diego Garcia), Comoros, Madagascar, Maldives, Mauritius, Mayotte, Reunion, Seychelles, Sri Lanka

Natural Projections: Malacca Strait: Malaysia, Singapore, Thailand

The Gulf: Bahrain, Iraq, Kuwait, Qatar, Saudi Arabia

The Red Sea: Djibouti, Egypt, Eritrea, Ethiopia, Israel, Jordan, (Saudi Arabia), Sudan

Hinterland: Afghanistan, Bhutan, Botswana, Lesotho, Malawi, Nepal, Uganda, Zambia, Zimbabwe



The Charter was adopted at the first ministerial meeting held in Mauritius, 5-7 March 1997. Fourteen countries, including South Africa, were represented.



I have adopted, for simplicity, Douglas North's definition of institutions as the rules of the game in society or, more formally, the humanly devised constraints that shape human interaction, structure incentives in human exchange whether political, social or economic and thereby affect the performance of economies. See D C North, Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge, 1990, p. 3.



This position was expressed on behalf of the Department by its Director, Mr P J Botha, during his presentation at an Indian Ocean Rim Workshop organised by the South African Foreign Trade Organisation (SAFTO), Johannesburg, 31 May 1995.



D Graham, The Indian Ocean Rim - Opportunities for Exporters, South Africa Foundation Review, March 1993, p. 8.



G R Campbell & M Scerri, The Prospect for an Indian Ocean Rim (IOR) Economic Association, South African Journal of International Affairs, 2(2), 1995, pp. 11-37; M Johan, South African Foreign Policy in the New Era, South African Journal of International Affairs, 2(2), 1995, pp. 1-10.



R J Carbaugh, International Economics, International Thompson, Cincinnati, Ohio, 1995, pp. 10-13.



B Johnson, An Institutional Approach to the Small-Country Problem, in C Freeman & B A Lundvall (eds.), Small Countries Facing the Technological Revolution, Pinter, London, 1988.


R M du Plooy, Productivity in South African Industry, South African Journal of Economics, 56(1), pp. 82-93; S Lall, What Will Make South Africa Internationally Competitive?, in P H Baker (et. al.), South Africa and the World Economy in the 1990s, David Philip and the Brookings Institution, Johannesburg and Washington DC, 1993, chapter 3.



M Scerri, The Competitiveness of the Southern African Customs Union in [the Indian Ocean] Rim, paper presented at the conference on Southern Africa, France and the Indian Ocean, Past and Present Economic and Cultural Relations, Johannesburg, 5-8 September 1995.