The Emerging New World:
The BRICS, South Africa and New
Models of Development
Dr Martyn Davies
CEO, Frontier Advisory
January 2013
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The Emerging New World: The BRICS, South Africa and New Models of
Development
In 2011 South Africa became a member of the
new emerging economic power grouping
known as the BRICS – Brazil, Russia, India, China
and now South Africa. We are the default
choice representing the African continent. After
much lobbying by Pretoria to the Chinese
government, South Africa was extended an
invitation to join the BRIC grouping from
Beijing.
What began as a loose grouping of emerging
and populous economies is rapidly morphing
into a more coherent power grouping that
reflects the shifting balance of power in the
global economy – away from the traditional
world to the new. This is the post-crisis new
economic world order and the BRICS represent
this new reality.
It is more than one year since South Africa
joined the grouping. We must now figure out
how to leverage our relations with our BRIC
compatriots in order to align “SA Inc.” to the
respective commercial interests of the other
BRIC countries in our own neighbourhood,
Africa.
Political and economic interests in joining
BRICs
But does South Africa “deserve” inclusion into
the BRICs? Goldman Sachs – the creator of the
BRIC acronym – thinks not. Goldman Sachs’ Jim
O’Neil says that South Africa’s economy is
limited in size, it lacks long-term economic
potential and its population is too small to
quality as a BRIC. Other countries are perhaps
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more deserving based on their size as well as
economic merit – Indonesia, Turkey, Mexico,
Nigeria and South Korea could be new letters in
the acronym. As the grouping expands, it will
become impossible to retain the simplicity (not
to mention the ability to pronounce an
expanded acronym) of the word “BRICS”.
Perhaps a more accurate and ultimately more
inclusive title will be the “E5” – i.e. the
Emerging Five or E5, E6 etc. BRICS has become
the global ranking standard for the first tier of
emerging markets.
But beyond long-term growth forecasts, the
BRICS club will increasingly take on a political
form – an emerging bloc representing the
interests of the developing world. As the BRICS
summits become more institutionalised it could
well become a counterweight to established
(traditional) western interests. We heard at the
BRICS summit in Delhi in March 2012 of the
need for a restructuring of the global economic
architecture, one that takes into greater
cognizance the needs of the developing world.
South Africa’s inclusion was driven by political
interests – Pretoria wanting to punch above its
weight and be regarded as a leading emerging
market. Thabo Mbeki was always in his element
when engaging with the developed world.
Jacob Zuma is more comfortable associating
with the developing nations. I believe that
when one looks back at the Zuma Presidency,
its greatest foreign policy success will be South
Africa’s inclusion into the BRICS.
For international investment capital, “Big is
Beautiful” – larger populations are most
attractive to business chasing market share in
growing consumer markets. South Africa’s
renewed drive to push for enhanced regional
integration is arguably a consequence of it
joining the BRICS – a pressure to increase its
market depth through integrating the SADC
economy. South Africa is now describing itself
as the gateway to the region.
But beyond the new orientation of our foreign
policy we need to think how to address the
commercial imperative of membership of the
BRICS club.
But when one strips out the political rhetoric, it
is ironic that South Africa’s strategic political
partners in the BRICS grouping are also its
greatest commercial competitors. This is
especially the case with China (manufacturing)
and India (services) – the management of our
commercial relations with both powers will be
a delicate balancing act in the coming years.
The South African government and organised
labour represented by the Congress of South
African Trade Unions (COSATU) are finding it
difficult to come up with pragmatic policy
responses to this rising competition. Rigid
ideological positions will further hamper our
ability to compete against this growing force.
A priority of South Africa’s Department of Trade
& Industry (DTI) is to push regional integration
in and beyond the Southern African
Development Community (SADC) – a region of
15 member states with a combined population
of over 250m. On paper we are bigger than
Brazil, Russia and Indonesia but poor
government-to-government coordination and
inadequate infrastructure does not allow the
exploitation of opportunities presented by
trade liberalisation in the region. But Pretoria
needs to make the benefits of integration more
apparent to its neighbours. The “S” in BRICS
could ultimately stand for SADC. But it is as
much a political sell as it is an economic one. An
integrated regional market would strongly
bolster our credibility as a fully-fledged
member of the BRICS.
Competition among BRICS countries on the
African continent
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A major thrust of South Africa’s foreign
commercial policy at the Delhi summit was to
encourage local beneficiation of the country’s
resources. Brazil and South Africa share a
common situation – both being exporters of
mostly raw materials to China whilst importing
large amounts of value-added manufactured
goods. China is now both South Africa and
Brazil’s largest trading partner. Whilst we have
benefitted from China’s (insatiable) demand for
resources over the past decade, South Africa
and Brazil have experienced de-industrialisation
through trade. Policy has often been nonreactive and implementation lacking. Another
hindrance to creating new economic value
through the beneficiation of resources has
been the disconnect between the South African
state and its business sector. Our low-trust
political economy will continue to hamper our
economic progression, both within BRICS and in
Africa. It is a consequence of our history but
also all too often confrontational positions
adopted by the various stakeholders in our far
too racialised political economy.
Perhaps we are similar to India where business
generally prefers to operate independent of
government. The differences to China and
Brazil are quite stark in that they enjoy more
coherent positions where relations between
state-owned and private enterprise and their
governments are far closer. This has supported
the growth phenomenon of their economies.
This alignment and coherence of interests and
intent is also resulting in an enhanced ability of
these countries to compete in the realm of
foreign commercial policy.
Intense competition from both Chinese and
Brazilian firms – both supported by their own
versions of state capitalism – are being
experienced by South African corporates across
the African continent. Chinese state-owned
construction firms all but dominate the African
infrastructure sector with Brazilian companies
also particularly pervasive in Angola and
Mozambique. The rapid movement of BRIC
firms into Africa is challenging “SA Inc.’s”
presence in the region. Sectors bearing the
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brunt of competition are construction, mining,
engineering, chemicals, pharmaceuticals and IT.
There will be an increasing inclination at BRICS
summits to discuss the alignment of strategic
commercial interests of South Africa and other
BRIC economies in the region, in particular
China.
As BRIC companies expand their presence in
Africa, the interests of China and these (often
state-backed) firms will increasingly intersect.
For South African business, the BRIC’s move
into the continent poses a major strategic
consideration. As their firms gain market
traction and build a presence in Africa, their
interests will increasingly intersect with those
of “SA Inc.” in the region. Chinese and Brazilian
firms have rapidly established themselves in
markets which South African firms have been
relatively slow to expand into – Angola for
instance. Perhaps the question of the previous
Government in Pretoria is “who lost Angola to
China and Brazil”?
South Africa’s countermeasures
South Africa’s foreign commercial policy in the
SADC region will increasingly become cognizant
of the BRIC’s presence in the region. Pretoria’s
primary vehicles of engagement will be the
development finance institutions (DFIs) such as
the Development Bank of Southern Africa
(DBSA) and the Industrial Development
Corporation (IDC) – the tools for an
emboldened or “developmental state” as it is
labelled. Under Jacob Zuma, the ANC
Government regularly describes itself as a
“developmental state” – a state that seeks to
be more proactive in driving growth.
Government policy-makers, some of whom
may have a pre-existing ideological suspicion of
“the market”, are all too ready to embrace a
new model that supposedly offers a new way,
one that places the state as the driving force of
growth. But what will the balance be between
state intervention in the economy and the state
enabling private sector-led growth?
The role of the so-called “developmental state”
in South Africa is being considered in the light
of the success of Asia and the economic rise of
the BRICS. With China’s economic success story
over the past three decades and in light of the
discrediting of the liberal economic ideologies
of the Bretton Woods institutions since 2008,
there is a questioning of “market
fundamentalism” amongst the South African
leadership and its applicability to developing
world economic models. This is playing out in
Pretoria’s thinking and policy regarding
economic management. Of increasing appeal is
China’s own developmental experience.
Joseph Stiglitz, Nobel Prize economics laureate,
visited South Africa in May 2012 at the
invitation of Government Minister for
Economic Development Ebrahim Patel – a
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proponent of the state-led developmental
model that Pretoria is espousing. Even Stiglitz
endorsed the government’s new model
supporting a state-driven “demand side” rather
than “supply-side” approach to growth. I would
argue that South Africa’s new emerging model
of a state-first approach to growth is both a
response to the recessionary state of its
traditional (western) investment and still
largest trade partner, the European Union,
whilst also an attempt to emulate the BRICS
high GDP growth performance which is at least
perceived to be state determined. The
questioning and maybe even discrediting of
market fundamentalism is now allowing the
ruling ANC and it political allies to finally
develop a statist economic model that has
always held ideological appeal. This is largely
centred around an infrastructure-driven growth
model with increased centralisation of control
over state-owned enterprises (known as
parastatals in South Africa).
Pretoria’s support for the creation of a BRICS
Development Bank which is likely to be used for
increased state-driven infrastructure spend
around prioritised regional corridors in SADC is
intended to draw in its BRICS partners into
South Africa’s foreign policy design for the
region. China’s leading policy bank, China
Development Bank (CDB), announced at the
BRICS Sanya Summit in March 2011 a RMB
10bn loan facility for the BRICS’ development
banks to tap into. China’s foray into Africa over
the past decade has been financed by its policy
banks. The state-supported nature of Chinese
finance in Africa may be distorting the capital
raising market for large infrastructural and
commodity finance projects on the continent.
The nature of these financing structures with
their higher tolerance of risk is a potential game
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changer in developmental finance in Africa’s
economies. In the same way as China and
Brazil’s development banks have served as
foreign policy tools, so will South Africa’s, albeit
with a regional focus.
The BRICS may have common strategic macro
interests but how the South African
government manages its relations with BRICS
business interests in Africa will be a delicate
balancing act in the coming years.
th
This article was first published in the BoAo Review on the 25
November 2012 – the official publication of the BoAo Forum,
China
About Frontier Advisory
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their competitiveness in frontier and emerging market economies. We work with the leadership of
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Contact the Author
Dr Martyn Davies
Chief Executive Officer
Frontier Advisory
T: +27 11 447 8038
F: +27 11 447 8439
E: [email protected]
W: www.frontieradvisory.com
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