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This resource is hosted by the Nelson Mandela Foundation, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.

Towards a socialist economy: Observations from abroad by Michael and Idrian Resnick


The purpose of this paper is to enter the debate/discussion in the African Communist on the topic of "Towards a Socialist Economy", using as a departure point the impressive paper by trade unionist Alec Erwin on "Economic Reconstruction" (AC, 2nd Quarter 1992). While neither of the present authors claims to be an expert on South Africa, together we have over 50 years of experience working for progressive Third World governments and non-governmental organisations in confronting multinational corporations and in devising alternative development strategies.

Our interest in entering this debate is twofold. First, as socialists, we believe the issues raised in the debate are not just confined to South Africa, but are world-wide. A discussion needs to be conducted on an international basis. Second, and more immediately, as long-time activists in the US anti-apartheid movement, we were both invited as resource personnel to a conference held in New York City "in support of the ANC and other democratic forces for a new South Africa" (November 13-15, 1992). We participated in two days of work-shops on the key issue of "Investment Policy and Economic Development", and quite frankly were deeply disturbed by the conservative political tendencies within this workshop. (It needs to be pointed out that many of the participants were members of the African-American and black South African bourgeoisie).

Most strikingly, workshop participants seemed to have a lack of under-standing of the real nature of international capital and its goals regarding South Africa, as well as a very strong focus on an external strategy as opposed to the kind of internal strategy more implicit in Alec Erwin's article. But, even in the latter, we find certain ambiguities that, in our opinion, could lead to misconceived strategies. So, in the spirit of friendly and constructive debate, we offer the following observations based largely on our own experience as inter-national consultants and as analysts of economic development and international capitalism.

Our observations will be organised along three lines. First, an overview of problems of dealing with international capital, with particular focus on South Africa. Second, a brief conceptual discussion of the nature of what an "inward strategy" would involve, as opposed to focusing on foreign investment and an export strategy. Finally, an analysis of the extent to which one can harness the two strategies in today's world, particularly in South Africa.

1. Problems in dealing with international capital

The confusions which exist about the role of international capital, in our opinion, stem partly from the fact that progressive/revolutionary political leaders' experience too often does not equip them to deal with international capital. By way of example, in the New York conference workshops mentioned above, which in general had a very positive approach toward international capital invested in South Africa, we raised the following comment/question: "The problem is not that international corporations are evil, but the logic of profit maximisation in Third World countries, which requires investors in places like South Africa to seek profit rates on their investment of at least 20 percent a year. Moreover, by the magic of compound interest, or more concretely, of capitalist accumulation, this means that for every one dollar that a foreign company invests, over a twenty-five year period it will make a profit of 95 dollars. Given this, we ask, is it worthwhile to obtain an initial one dollar of foreign investment?"

Our question drew two types of responses from the panellists. One argument was along the lines of, okay, maybe the foreigners do make a profit of 95 dollars, but they generate economic growth which is good for the country. A second line of argument was that, while progressive South Africans are aware of the dangers of big multinational corporations, they are looking for investment in South Africa from small and medium-sized firms, particularly those of African-Americans, perhaps backed by US government support.

The problem with the first argument is that not only does the foreign company seek to make a profit of at least 95 dollars for its initial one dollar investment, but in addition it normally seeks to take its profits out of the country in the form of foreign currency as rapidly as possible. Thus, the growth of foreign investment inevitably leads to negative pressures on the country's balance of payments, wh ich in turn act as a major constraint on the domestic economy. Insofar as foreign investment normally tends also to be located in sectors of the economy such as mining and manufacturing, which re-quire large imports of capital goods, this further intensifies balance of payments pressures. Finally, the tragedy of the situation for a country like South Africa is that new progressive economic and social policies will be seen by foreign capital as a threat, and therefore it will seek an even higher rate of profit and a faster repatriation of capital to offset the "risk" of investment.

As for the argument that South Africa's hope lies in attracting investment from small and medium -sized businesses, we believe this is at best naive. Experience shows that such firms are no less rapacious than large multinational corporations.

We might note that many panellists seemed to assume that simply transfer-ring resources from the major white conglomerates which own the country now to small and medium-size black business (possibly through the mechanism of anti-trust, which was favoured by a number of speakers) would he a solution to the problem of foreign investment.

While such a "solution" might simply be seen as self-serving, it overlooks the historical fact that simply switching from white capital to black-owned capital (which in fact often may be fronting for whites), even if it could be achieved, exacerbates the internal class conflicts within the country, between the indigenous bourgeoisie and the working class. Moreover, Third World experience has shown that money has no colour nor loyalty to the nation. Down the road, if a progressive South African government would attempt to curb its black capitalists, we are sure that it would then see a flight of black capital as great as that by white capital.

While readers of the African Communist undoubtedly are well aware of these general dangers of foreign capital, still there seems to be a persistent belief that, first, you can't do without foreign capital, and second, somehow you can tame it and put it to your own uses without serious negative effects. In our view, these increasingly widespread beliefs among progressive forces are mistaken, and the result of two recent events.

First, the collapse of the actually existing "socialist" world has meant that the belief in socialist planning has been greatly weakened. In fact, more than this, the absence of socialist states which could provide an alternative source of external capital to newly progressive nations, means that the focus of potential foreign capital has switched to western industrial countries. Second, and related, the collapse of the socialist world has obscured the fact that the capitalist world itself is going through an enormous structural crisis of stagnation, and in our opinion is just entering the early stages of basic decline. Failure to correctly assess these developments, in our opinion, has led to illusions among progressives about the nature of the new world order, and hence to incorrect strategic decisions.

For example, Alec Erwin, in defending his basically correct "growth through redistribution" strategy, has argued:

. "I have little doubt that a revival of the growth rate is important...Indeed, experience elsewhere shows clearly that it is best to restructure industry on the upturn of the economic cycle, not on the down-turn.

. "But is a growth revival possible? The answer must be yes. It will result from the so-called 'apartheid dividend' (the benefits that will flow from the demise of apartheid)...

. "Political stability will have a positive impact on business confidence and will open access to international assistance. Increased tourism could also have beneficial growth effects." (pp.21-2)

The errors of Erwin's analysis here are twofold. First, particularly within the framework of Erwin's belief that there is a need to "expand exports of manufactured products in a way that sustains the long-term viability and competitiveness of the South and southern African economy within the world economy" (p.21). We believe that here Erwin has not fully comprehended the nature of the current world-wide capitalist crisis. This crisis is tending to drag economies around the world down rather than up, and it is a long-term structural problem, and not a short-term cyclical one. This means that in today's era of international economic stagnation, export-oriented strategies are doomed to failure.

Second, Erwin's analysis mistakes also the basic nature of international capitalism, which is unalterably opposed to progressive governments successfully developing independent kinds of strategies, because such success would threaten international capital's hegemonic rule in all other Third World countries.

Thus, as Noam Chomsky has so brilliantly shown, the underlying US goal has been to destroy the economy and society of any country that attempts to challenge its hegemonic position. Thus, he argues, in important ways the US really won the Vietnamese war, because it so destroyed the Vietnamese society and economy that they were forced in recent years to turn toward a market economy. Similar US "successes" were achieved in Angola and Mozambique, El Salvador and Nicaragua, and this is still the bipartisan (i.e. both Republican and Democratic) goal of US policy to-wards Cuba. Thus, in our opinion, to believe that "international assistance", which normally means "aid" from either the governments and multi-national corporations of the industrial countries, or their instruments, the World Bank and the IMF, will be forthcoming for a socialistically-oriented South African government seems dangerously naive.

Another point with which we would take issue is the whole notion of a "growth" strategy. We believe that the fundamental goal is to have a successful "development" strategy, which may or may not involve "growth" in the normal sense of an increased gross domestic product. A brief discussion of this point will serve as a useful introduction to our analysis of some appropriate concepts for an "inward" development strategy.

The fundamental problem with "growth" strategies is that inevitably and implicitly they assume growth in some numerical quantity which can be measured by market values. "Growth" in a diverse economy implies that you have some method of adding up all the different components of that economy, and that is usually done by valuing each component in market terms. This is the only way that one could give meaning to the statement, for example, that if the gross national product in South Africa increased from $84 billion to $90 billion, there was a growth of 7 percent. Underlying this growth approach also is the assumption that monetary demand is the best measure of human welfare.

There are two fundamental errors in this kind of approach. First, such market calculations omit numerous variables, such as quality of life, the environment, and all sorts of human activitieswhich do not enter into monetary relationships and are, therefore, not re-corded (e.g., household labour of women is not counted as a plus in gross domestic product, while depletion of non-renewable natural resources and the environment is not counted as a minus). Second, even if things measured by monetary demand were the most relevant ones, still there is a crucial assumption hidden under the claim that a market economy maximises human welfare that the distribution of wealth is a just one. Thus, the most that the market ideologist can show is that for a particular distribution of wealth, free trade and competitive markets will lead to the maximum welfare possible with that distribution. It does not say a word about whether one distribution of wealth is better than another. And we hardly need to tell South Africans that the maldistribution of the world's wealth is a central problem, and is far more unequal than the more widely commented on maldistribution of income.

The fact is that the apparent democracy of the market system is in fact the tyranny of the oligarchy the market is a democracy only in the sense that one dollar has one vote. Thus, in the US one family, the Walton's of Walmart stores, has twenty-six billion votes as to how society's re-sources should be used, or more votes than mil-lions of poor Americans. Surely the maldistribution is even greater in South Africa, when one compares the wealth of the Oppenheimer family with that of the masses of black people. On a world-scale, when one considers that six Japanese banks have total assets of $2,500 billion, which is far greater than the market value of all the wealth of all Third World countries, one can see clearly how under the market economy the deck is stacked against the claims on resources by poor and Third World people. And this is the case even though Japan could not survive for one week without the Third World's various agricultural and mineral resources.

We do not wish to preach to anyone. But as progressives who have lived in the "belly of the beast" and who have confronted international capital daily, we need to stress how important it is for progressive South Africans to under-stand the present nature and power of international capital. South Africa today is at one of those pregnant moments in history in which the degrees of freedom are considerably greater than they are after foreign capital has a firm foothold inside the country. Making the right decisions now can greatly increase the chances for successfully protecting the interests of workers and impoverished South Africans. Making the wrong decisions now can create conditions in which it becomes virtually impossible to overcome the power of foreign capital.

The multinational corporations will make tempting offers that create the illusion that there are quick solutions to South Africa's economic and social problems. However, the negative consequences of pursuing fast solutions can take decades to repair and some of them are irreversible. For example, building airports and tourist facilities can create employment in the construction industry and the promise of foreign exchange earned by the expected tourists. How-ever, tourist industries in developing countriestypically spend large amounts of foreign exchange on food, alcohol, transport and fixtures, considerably reducing the net foreign exchange receipts. Apart from creating a servant class, the society has created an industry that is highly sensitive to economic conditions in the industrialised world, and will be faced with weighing the consequences of internal economic and social policies in terms of their potential impact on the tourist industry.

Quick solutions lead to mistakes. For example, several projects may use the same water resources in their calculations. Unless these are seen and evaluated, the fact that there is not enough water for all of them will not be seen until after the project construction. Failed projects and drawn-down water tables can be the result. Rapid project development can put unforeseen burdens on infrastructure, resulting in long-term damage or the need to lay in changes so rapidly that they can neither be planned efficiently nor can their technical consequences be evaluated. Obviously, each choice that is made limits other choices than can be made. But this simple economic principle can have disproportionately high consequences when global corporations are involved, particularly when they are producing for export.

Indigenous human and material re-sources have to be allocated to support these investments, to make them profit-able. While providing such resources would be required for any industrial or mining activity, in the case of foreign corporations the decisions whether to remain or close their operations are made on the basis of considerations rarely fac ing national (and relatively small) corporations. The United States has scores of cities and towns that paid vast sums for infrastructure to support global corporations which eventually moved out, leaving empty factories and destitute workers and communities.

Global corporations are not accountable to the governments and people of the countries in which they are operating, except within legal and contractual limits. They make their decisions on the basis of the global interests of their companies, which are often for short term profits, rather than long term development, for less than full capacity out-put, and for the production of product lines that do not compete with those of other branches of the company. It is not difficult to see how such decisions could be in opposition to the interests of the South African people and economy.

But this opposition of interests can be masked by the myth of the "progressive" corporation that seeks to build the new post-apartheid South Africa. Global cor-porations' power allows them to have a disproportionate influence on decisions affecting them, such as the shaping of labour and environmental laws and regulations. And this influence grows as their workers, technical personnel and managers, often paid wages and salaries in excess of local averages, develop into a labour aristocracy whose interests are linked to those of the corporation rather than those of the nation. Thus, the myth of the progressive foreign multinational will only be revealed when it uses its power to block legislation, or break and circumvent existing laws, or when it abandons the country.

2. An alternative "inward" strategy

But, the reader may say, is there an alternative to opening up the country to international capital? We believe the answer is yes. To begin with, we have to note that the global political and economic debate for more than seventy years has been in terms of capitalism vs. communism. At this juncture in history, it is fair to say that both systems have failed for the same reason: the interests of those in control were antagonistic to those of the people as a whole. It seems to us that the right question to ask now is: can a society be shaped, and an economic system constructed, based on the interests of the vast majority of the people?

What kind of economy would such a system be likely to produce in South Africa? What goals would a South African population that was allowed to speak be likely to articulate? We can imagine people saying that they want a chance to work, to have food, decent housing, clothes, items for their houses, good medical care (preventing as much sickness as possible before it occurs), clean and accessible water, full and choice-expanding education, opportunities for cultural expression and development, and a healthy environment for themselves and their children. The production of the low-cost, high quality goods and services that such a list of material goals implies, could structure the economic development agenda for the country for at least a generation.

We believe that South Africa has, or could readily develop, the resources, capital and skills, for such a development process. It already has industries producing enough foreign exchange to purchase the imports required for such a strategy. Of course, using resources to develop the industries (most of them small scale) to meet such goals would preclude both the development of an advanced capitalist economy and significant levels of foreign investment.

There would be other consequences of choosing this internal development path, especially for most white South Africans, and those others who have gained a stake in the economy/society as it is now structured. The volume and composition of consumer goods avail-able to the middle and upper classes would be drastically curtailed. It is not that foreign global corporations would be prohibited from coming to South Africa. It would simply not be worth their while, having little to contribute to the domestic product mix, and not being allowed to develop resources for export beyond the need for foreign exchange to support the national economic strategy.

We are not implying that such a strategy would be without problems. The need to save, to invest, to wait, would have to be explained to the people in such a way that they could choose howand when to do that. Mistakes will be made, but if the decision-makers at every level of the society are responsible to those affected by their decisions managers to workers, doctors to patients, etc. people will be able to uncover mistakes and correct them.

In such a system, we can envision the people deciding to save the bulk of South Africa's natural resources for future generations, rather than developing and exporting them now. Proposed investments will be evaluated in terms of whether and how they meet articulated goals, rather than in terms of projected rates of return. Exports will be chosen in terms of targeted foreign exchange needs. We can see a period in which South Africa concentrates almost exclusively on domestic needs, gradually expanding its horizon to southern Africa.

3. Towards a dual path

In the final analysis, however, it will undoubtedly be necessary in the transition stage to have at least some interactions with foreign capital. But, dealing with foreign capital on the basis of the mind-set that says it will be a beneficent part of a "mixed economy" is very different from adopting what we believe is the correct attitude namely, that foreign capital to a healthy economy is like cancer cells in a healthy body. The goal should be to minimise them, to prevent them from metastasising, and to cut them out as quickly as feasible.

To successfully implement this approach requires first a comprehensive and concrete analysis of the nature of the particular foreign capital investment that is potentially available, and second a sophisticated strategy for utilising the investment while minimising the inevitable change.

By way of example, we draw on our experiences in the international fuel and minerals industry. The usual way that a foreign energy or mining corporation comes to a country like South Africa is with an offer to make an investment under which it either pays income taxes on its profits, or else forms up some kind of joint venture with the government. In either case, the goal of the multinational company is to make a profit rate of at least 20 percent per year over a 20 to 25 year period, which, as we have noted above, means that, in effect, it will be taking out $95 for each one dollar it invested.

For a progressive government, rather than passively accepting these choices, a better way is to start by recognising that what the foreign company can provide, namely capital, technology and markets, are normally all separable. By "breaking up the package" into its components, one can bargain with all of the players which provide each of these components, in order to drive down the profits that they can get from entering into a deal with your country.

By way of a concrete example, when a big oil company like Mobil or Shell seeks a contract to explore for oil, it will typically seek a profit rate of at least 20 percent per year on its investment. It will justify this high rate on the basis of the "risk" involved. It will do so despite the fact that exploration is the only really risky part of the process, and typically accounts for only about 10 percent of the company's investment in an oil field. Thus, once oil is discovered, the 90 percent of the total investment required for developing the field should receive a relatively low profit rate because it bears little risk.

In this case, breaking down the package into separate exploration and development would allow the government to negotiate with companies who are willing to take the risk of exploration, and offer them a relatively high rate of profit on their relatively small investment. But then, if oil is found, contract for the massive development expenditure at low rates of return. History has shown that such large amounts at low rates of return would be available, for example, from industrial countries in Western Europe and Japan, which lack their own oil re-sources and strongly desire to have assured supplies of crude oil.

Many examples could be given from other fields of mining and industry in which similar strategies of breaking down the package would be useful in minimising the amount of profits that foreign companies can take out. In addition, as part of the negotiating process, the government could obtain technology and training of its own nationals, so that the country could develop a long-run mastery over the industry.

In conclusion, we would argue that there are many forms of economic development, even those utilising capitalist methods. The one offered by an open economy and relatively unbridled foreign investment is the one that broughtthe South African people to where they are today. An alternative must be found and followed, or South Africa will merely be changing the residence or the skin colour of its oppressors. The struggle to define those alternatives, in general and in concrete specific cases, is the central challenge for socialists all over the world today. We hope that our article will provide a constructive step in what must be an ongoing discussion among all progressives of goodwill.

Drs Michael Tanzer and Idrian Resnick are prominent US economic consultants. Both have had years of experience in advising progressive Third World governments, including Algeria, Angola, Cuba, Jamaica, Nicaragua and Vietnam. Tanzer is on the Board of directors of the independent socialist publication, Monthly Review (New York).

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