Multilateralism and Middlepowership in South Africa’s foreign policy

How does a multilateralist foreign policy agenda (in theory) help South Africa meet its international objectives?

South Africa since 1994 been a very active and eager player in international relations. This eagerness has at times been misinterpreted or perceived as being in fact an expansionist and aggressive policy now focusing not in the security but in the economic profit. There has been a good degree of continuity in the central pillars and principles of South African foreign policy cutting across Mandela’s and Mbeki’s presidencies (Cornelissen 2006:29).

Multilateralism at the regional and global level can serve to incrementally “gain the support of developing countries” (Cornelissen 2006:33) and advance an alternative agenda for combating poverty and fostering development. In theory, multilateralism can be able to “multiply influence and leverage while minimising exposure and risk on sensitive issues” (Black 2001:77). For example, stabilizing and improving security in African countries by means of a multilateral approach (underpinned by the AU, UN, regional bodies or other partnerships) can increase the legitimacy of the action whilst spreading the degree of responsibility in the eventuality of a breakdown. This provides a safety net but can bring about the dilemma of incentives for committing resources and energy in consensus building.

The adoption of multilateralism is also essential in the emerging strength of “south-south cooperation” whereby developing nations seek to find among themselves less North-dependent solutions to their problems (Melville & Owen 2005).

Since 1999, wealth creation and security have jumped to the top of the agenda in South Africa’s foreign policy (in detriment of human rights and democracy) (Black 2001:84). These two objectives benefit from multilateral solutions as has been argued by Alden when he calls for a Pretoria-Abuja axis to lead the continent into peace (Alden 2005). In addition, there is the obvious dependence of South Africa in positive economic performances of its peers in Southern Africa that can benefit from multilateral initiatives.

Provide examples of key multilateral or middle power initiatives undertaken by South Africa since 1994. What do these suggest to us of the use of the future direction of South African foreign policy

The Ottawa and Kimberly processes are generally regarded as the pinnacles of South Africa’s multilateral policy. They were of a genuinely global nature but were also of particular significance for South Africa and the African continent as it has been the continent most ravaged by the horrors of mines, small arms and light weapons and by the deals surrounding blood diamonds. In addition, in the case of the Kimberly process, South Africa also has a lot to benefit from a “healthy” diamond industry and the certification programme being as it is a major producer.

In 2001, the NEPAD initiative that South Africa embraced from the start represents so far one of the success stories of African multilateralism and puts South Africa as a major participant in devising a more sustained and coordinated policies when it comes to tackling the interlinked issues of conflict, bad governance and underdevelopment. The organization seeks to go beyond looking at development on a region-by-region basis and devise a vision that attaches the success of the foreign policy of its members, namely South Africa, to its ability to reach out to policies that benefit the continent as a whole. The policy is not however without controversy as NEPAD is also very intimate to western-led efforts of development in Africa and, through budget and political pressure, can sometimes come in the way of South Africa in its more encompassing efforts of transforming the structural relations of power at the international level (Nathan 2005: 372).

In terms of major challenges, South African foreign policy has sometimes been caught adrift between Middlepowership multilateralism, its commitment to democracy and its over-personalization of foreign policy (Nathan 2005: 372). The juggling between these styles of foreign policy has been successful in some cases as in Libyan and East Timorese mediation affairs and not so successful in other cases such as in South Africa’s “silent diplomacy” towards Zimbabwe, in the DRC’s peace negotiations and in the Nigerian debacle. The latter made South Africa thoroughly rethink its way of doing foreign policy becoming less prone to heroic unilateralism and investing more on preparation, consultation and canvassing for its causes.

Multilateralist polices have been guided by a strong will of South Africa to achieve greater leverage at the international stage as a viable, effective and leading deal-broker and agenda-setting power.

The current middle power initiatives tell us that South Africa’s self-identification as a Middle power also helps in defining nature of its role-playing in the international stage and the direction of its policies. For the country to consolidate and further its status it will need however to improve in the quality of its bureaucracy, expertise and human resources comprising the ranks of its foreign office. It probably will do so and it seems that more and more economic and security practical imperatives will also take precedence to what are sometimes the broad and impractical pushes towards advancing human rights and democratization.

What insights can we gain from South Africa’s post-apartheid foreign policy behaviour to analyse and evaluate other developing countries’ foreign policy? Explain your answer.

Looking at South Africa’s foreign policy with the objective of drawing elations about the foreign policy of other developing countries can be problematic if one considers the particularity of the South African political and economic structures that setting it apart from most other countries in the continent.

The story of South African foreign policy in the 1990s reminds us of the importance of a shared memory and tradition of bargaining and negotiation in the international stage. The lack of this shared socialized memory of negotiation within the setting of international institutions was one of the reasons for some friction with the rest of the developing world (Cornelissen 2006:34).

South Africa’s presses towards debt-forgiveness is better understood not just as another “good Middle-power” multilateral initiative but one that has an underlying South African interest in the regional market whose vitality is essential for South African exports. Understandably, neighbouring developing countries have been reactive to South African Foreign Policy as the major regional player and an essential section of their foreign policy concerns the regional agenda of SADC.

The South African experience shows how multilateralism can be put to use in order to try and achieve “broad foreign policy goals” (Nel et al 2001:5). Developing states can take the South African example in its dynamics, and particularly its learning curve and sets of continuing dilemmas (multilateralism vs. democracy building; rebel vs. reformist) and draw lessons in how to practice foreign policy that simultaneously fosters development at home and calls for structural change in global order. In this sense these lessons can actually be more valuable for other emerging middle powers such as Brazil and India in that some of the dilemmas in the foreign policy interaction between these actors and the West are similar (Melville & Owen 2005).

In sum, understanding South Africa’s foreign policy can help us understand other emerging middle powers foreign policy, the foreign policy of those countries that cooperate and bandwagon with South Africa in its causes as well as the antagonism in the foreign policy of some developing countries towards what they sometimes consider a “state in Africa but not of Africa” (Hamil& Lee 2001: 50)

References

Alden, C. & M. Soko, 2005. ‘South Africa's economic relations with Africa: Hegemony and its discontents’, Journal of Modern African Studies. Vol. 42, No. 3
Black, D. 2001 “Lever or Cover? South Africa, Multilateral Institutions and the Promotion of Human Rights” in Nel, P., Taylor, I., and Van der Westhuizen, J. South Africa’s Multilateral Diplomacy and Global Change: The limits of reformism. Aldershot: Ashgate
Cornelissen, S., 2006. ‘Displaced multilateralism?’ South Africa’s participation at the United Nations: disjunctures, continuities and contrasts’ in D. Lee and P. Williams (Eds). The new Multilateralism in Post-Apartheid South African Diplomacy. New York: palgrave
Hamill, J. and Lee, D., 2001. A Middle Power Paradox? South African diplomacy in the Post-Apartheid era’. International Relations, Vol. 15, No. 4
Melville, C. & Owen, O. 2005 China and Africa: a new era of “south-south cooperation” Open Democracy www.opendemocracy.org [11May 2007]
Nathan, L., 2005. ‘Consistency and inconsistency in South African foreign policy’. International affairs, Vol. 81, No. 2
Nel, P., Taylor, I and Van der Westhuizen, J., 2001. ‘South Africa multilateral diplomacy and global change: The limits of Reformism. Aldershot: Ashgate

Multilateralism and Foreign Policy

What is meant by multilateralism and, according to some, what role does it play in international relations?

According to Carporaso the study of multilateralism has been underrepresented in the academic world of international relations. Reasons seem to vary. An argument put forward is that actors in International Relations simply tend to not to practice multilateralism (Carporaso 1993:52). Although the years of the Cold War might have justified this reasoning, post-Cold War events in the world stage and the new agendas of economics, environment and complex peacebuilding seem to have altered the nature of files, meetings and cocktails in foreign offices around the world. Has interdependence brought about a definite diffusion of power in international relations and created the perfect environment for multilateralism?

Conceptually, multilateralism fundamentally opposes other ideologies such as: unilateralism, imperialism and regionalism (Nel et al 2001: 5). It is the norms guiding foreign policy, not the number of actors that matter. In practical terms however the practice of foreign policy is messier and the case is more often than not that states in the international system administer packages that mix these modalities in their foreign policy.

The practice of multilateralism privileges issues of time and trust as relevant factors in determining the success of norms, socialization at the international level and cooperation. Under this rational, actors are less likely to free-ride or defect if they know they will lose out in the long run. Hence, the answer to Carporaso’s (1993:55) question of whether multilateralism is a means or an end in international relations is that it can actually be both. It exists at the international realm both as an ideology and as a strategy.

The concept in itself can assume rather different meanings which are important to differentiate in order to correctly read and understand the rational behind the actor’s specific use of the concept. While actors such as Putnam, Ruggie and Keohane recognize the eclectic nature of multilateralism and its meanings they have different takes on their approaches to its role in international relations. These different focuses are condensed by Carporaso into three strands. Keohane’s formal analysis of multilateralism goes beyond the realist-inspired and state-centric 1st strand – the individualist paradigm, adopting the 2nd strand of multilateralism: the social-communicative approach. His Neo-liberal institutionalism updates the systemic “stiffness” of Waltz and focuses on the consequences of the practical rules and norms that multilateral institutions have brought attributing some significance to aspects of communication, language and persuasion.

Ruggie instead seems to adopt the third strand of the institutionalist approach. He instead sees the concept itself as an ideological modus operandi and as having an important role - both in defining and understanding sets of international relations. These sets of international relations that multilateralism comprises go beyond the rigidity and formality of monolithic institutions and have as corollaries indivisibility and diffuse reciprocity (Ruggie 1993: 11). The actors in the international system are actually understood as having the potential to discuss and interact in a forum rather than invariably competing in a “chess-board”. While in a forum, actors constantly recreate themselves, adapt and alter the rules of the game in contrast to the strict relative-gains rules of the Realist game of chess.

How you understand the reasons for states to behave in a multilateral way also has an important role in defining what your understanding of the nature of international relations is. A structural explanation of multilateralism will be markedly different from a functional one. In a structural explanation multilateralism will be seen as the independent variable while in a functional analysis multilateralism comes as the product of rational-actor behaviour that minimizes information costs and curbs inefficiency.

Overall, the strength of looking at international relations through the lenses of multilateralist approaches is that you are better equipped to understand and analyse the dynamic processes of socializing occurring between states and other international actors.

Is there a relationship between middlepowership and multilateralism? If so, how and why?

Some of the first questions that arise when going through the literature on middle powers is a question about its utility. What is it for? So what if a state is a middle power? What is the use of classifying a country as a middle power and give it an ambiguous definition such as “states that are neither great nor small in terms of international power, capacity and influence, and demonstrate a propensity to promote cohesion and stability in the world order” (Jordaan 165: 2003)? Who decides and how consistent is the consensus over which states are middle powers or not?

The answers to these questions are difficult and problematic however one of the definite uses for the topologies of middle powers is in analysing the empirical products of multilateralism. Indeed, the sub-categories of middlepowermanship advanced by Jordaan and Cooper are useful analytical tools for analysing international relations. Classifying middle powers by “their foreign policy behaviour” (Jordaan 166) can, however be problematic. Evidence is on the three possible approaches to the concept. There are some alternatives that offer an alternative conceptualization of middle power: functional and hierarchical approaches (Chapnick 1999). These compete with this behaviour approach for explanatory power. The behavioural approach appears to be the most nuanced approach despite having to put aside essential players in the international domain such as China and India, discarding them as not being middle powers by summarily describing them as economic deviants and non-Western nuclear powers respectively. (Jordaan 2003:167) This subsequently ignores their important role in bringing about a more multipolar and multilateral-based world. The hierarchical and functional takes on middle powers in effect reject the basic link that Jordaan establishes between middle powers and multilateralism (the practice of multilateralism turns you into a middle power if you are benevolent and influential enough) and see instead its practice, not as a pre-condition for being a middle power but instead, as a likely behaviour and a useful tool for the success of emerging powers. (Chapnick 1999)

If one accepts the behaviouralist approach, in a post-Cold war era the more established middle powers become in the international system the more prevalent multilateralism seems to become (Cooper 1997: 4). The motives for this have to do with how at ease middle powers are in adapting to a multi-tiered international realm where issues do not concern solely security and power anymore. Middle powers thrive in niche diplomacy and have a recognizable role in their respective regional slots (which are not always bounded by geographical proximity), often standing as Cox observes “in the middle in situations of conflict” (1989:244). Overall, domination is less clear-cut and hardly absolute in an interdependent world. A power may even be a leading figure in the military sphere while simultaneously difficulties in the economic and cultural sphere undermine its international projection.

The case of Portugal is illustrative. Although its status as a middle power is again disputable (as is actually the case for most middle powers), it undoubtedly seeks to affirm itself using multilateralism and improve its international status. If one looks at Portuguese foreign policy since the end of the 1980s one can observe that the country has aimed at creating in the CPLP (Community of Portuguese Speaking Countries) a niche where it can affirm itself distinctively vis-à-vis other European Union powers. The CPLP as an organization constitutes an example whereby Brazil and Portugal in particular strive to enhance their international leverage in term of economic competitiveness and political standing. They do so by creating foreign policy synergies at the economic and political levels by means of a common cultural platform – in this case a shared language.

At a more global level, the push towards multilateralism can most obviously be noticed in the current pushes by middle powers such as South Africa and Brazil towards a reform of the United Nations Security council. This leads to the last link of “how” multilateralism and middle power are linked. Institutions have traditionally be seen as one of the “vehicles through which middle power initiative help form such world order” (Cox 1989:250). Brazil’s and South Africa’s pushes towards reform fall into the will of middle powers to set up an international architecture of power that is “forum-like” and fosters cooperation and solution-making as opposed to zero-sum moves in an international chessboard. This represents the essence of multilateralism.

References

Carporaso, J. 1993 ‘International Relations theory and multilateralism: the search for foundations’ in J. Ruggie (ed.) Multilateralism Matters: The theory and Praxis of an Institutional Form New York: Columbia University Press
Chapnick, A. 1999 “The Middle Power” in Canadian Foreign Policy Vol. 7 No.2
Cooper, A. 1997 Niche Diplomacy: Middle Powers after the Cold War New York: St. Martin’s press
Keohane, R. 1990 ‘Multilateralism: an agenda for research’ International Journal, 45, 4
Nel, P.; Taylor, I.; van der Westhuizen, J. 2001 “Reformist Initiatives and South Africa’s Multilateral Diplomacy” a Framework for Understanding” in Nel, P.; Taylor, I.; van der Westhuizen, J. South Africa’s Multilateral Diplomacy and Global Change: The lmits of reformism Aldershot: Ashgate
Ruggie, A. 1993 “Multilateralism: the anatomy of an institution,’ in J. G. Ruggie (ed.) Multilateralism Matters: The Theory and Praxis of an Institutional Form New York: Columbia University Press
Jordaan, E., 2003. ‘The concept of a middle power in international relations: distinguishing between emerging and traditional middle powers’. Politicon. Vol. 30, No. 2, 165-181

Political Risk Analysis - Theory and Case Study South Africa

Political Risk Analysis - Case Study 1
Theoretical Component 2
Political Risk and Political Instability - A differentiation 2
Linking political risk and country risk 3
Understanding Macro and Micro risks 4
Conceptualizing political risk 5
Forecasting and Predicting 5
Assessing Quantitative and Qualitative Research 6
Practical Component – Risk profile of South Africa 9
Executive Summary 9
South Africa in the near future 9
Political Stability in South Africa – an assessment 10
Prospects for Economic Growth 11
Investor’s checklist of key political risk indicators in South Africa 13
References 17






Theoretical Component
Political Risk and Political Instability - A differentiation

Political risk differs from political instability in that political instability can be one of many characteristics of an environment whose levels of political risk are being analysed. Hence, political instability refers to the characteristics of an environment while political risk is a property of business. Political instability is usually associated with the political climate of a country, namely the workings of its body politik. For example, analysing the recurrence of conflict in a given place and its subsequent levels of violence constitutes an example of an assessment of political instability. An analysis of the political risk of a place is more comprehensive, encompassing not just political instability but also other factors such as economic and financial prospects, the impact of the places’ rule of law on business, the government’s attitudes as well as actions towards investment, particularuly foreign investment. In sum, it is a “catch-all term for risk dimensions of political events which have an impact on business decisions” (Sethi & Luther 1986:58). I comply with the tradition of catch-all conceptions of political risk and define it as the likelihood of you getting what you want, where you want it, how you want it.
A way to distinguish the two is by realizing that it is possible to have a place characterized by low levels of political instability that, nonetheless, holds a high level of political risk. A dictatorship can provide a very stable investment environment but if the state collapses impact on business will be very strong. This is also the case because political risk encompasses all those micro-risks that are peculiar to one particular business or to one particular investment area. Imagine that you are a diamond industry investor and a given country shows a flawless record of political stability and good governance, the country however simultaneously retains highly protective and traditionally hostile policies towards foreign investment on national mines. This represents a case where you have satisfactory levels of political stability (at the macro-level) that are however not enough to ensure a full-on safe, low-risk investment climate (at the micro-level of your sector). A case in hand is the one of Portugal, with impressive levels of political stability but at the same time showing low levels of economic and relatively rigid labour markets, offering an environment that is not always ripe for attracting foreign direct investment. Brink (2004:2-6) argues that, “risks should not only be avoided at all times, but actually be exploited and profited from (…) a low-risk environment might actually pose a risk in itself”. In my perception however risk in itself is not attractive, what is attractive is the possible profitability that is associated with it. What attracts in a Casino is not the probability to lose but the probability of winning a lot that is associated with the probability of losing.
Having said this, the element of political stability alone offers a very incomplete picture of the concrete investment environment of a place whereby political risk has the potential to provide with a much more comprehensive image.

Linking political risk and country risk

Country risk consists on a financial evaluation of a country’s financial strength or liability. It has been traditionally associated with credit risk, i.e. the likelihood that loans given to a country will be returned in due time. It is therefore restricted to the macro-economic affairs of a sovereign state. Political risk on the other hand is much more encompassing. Again, country risk can be one of the components of a political risk analysis. Country risk is contained inside political risk in that it represents a more basic evaluation of the risk of a place. Country risk collects a number of factors which put together are a subgroup of political risk. Political risk analysis goes beyond country ratings. Country risk analyses are traditionally characterized by being more of an instant “snapshot” of a country’s financial status vis-à-vis its lenders. Having low levels of country risk analysis can increase the likelihood of having low political risk but not necessarily. The dimension we are provided with is the state of the country’s “purse”. As so, we are not shown how the situation of a country’s finances is actually reflected on the day-to-day investment environment of the country. Moreover, because it reflects the country’s inability or unwillingness (Brink 2004: 20) to pay loans, it is from the start a negatively biased concept. It focuses on what a country will not be capable to provide financially and not on what it can potentially provide at other levels.
It is important therefore to understand what are the practical significance of the numbers and the levels of indebtedness on the daily practical affairs of the country. This will give us a much more substantiated awareness of what are the real possibilities for sustainability and stability of our investments.
Political risk is a critical and analytical assessment of the country’s situation that can comprise both quantitative and qualitative methods. It draws tools not just from the disciplines of economics and finances but also finds sociology, political science, international relations and other social sciences useful. These have therefore the potential to make the political risk report as complete a portrait of the political environment as possible by means of a holistic approach.
Also, it is possible to have high levels of country risk with high levels of indebtedness and an unstable financial system and yet retain fairly satisfying levels of political stability. This would be the case for example if a developing country has proceeded with a vast process of structural adjustments that has increased its levels of indebtedness but has meanwhile been able to politically stabilize itself and offer positive signals of economic growth. This has namely been the case with Mozambique in the last couple of years (MBIA 2007).

Understanding Macro and Micro risks

Macro-risk consists on generic risks that have the potential of affecting the great majority of businesses regardless of their sector specificities. Micro-risks in turn are all those risks that directly affect the particularities of your business (Fitzpatrick 1983:249). These are specific risks that threaten your individual sector, company or area. Micro and macro-risks interact with each other in providing the setting for aggregate risk levels. Macro-risks can be trigger causes and provide “clues” for the emergence of micro-risks. For example, broad social upheaval and rioting due to the macro-risk levels of social inequality can later lead to governmental policies of nationalization of specific areas of the economy (such as the mineral extraction industry) that only affect your sector and as such increase the levels of micro-risk. This also works the other way around: several crises arising at the micro level can lead to broader problems and bring about new macro-level risks or further exacerbate previously existing macro-risks. Macro and micro risks interact and affect each other in a dialectical way but overall micro-risks remain pivotal – micro-risk conditions are usually the ones that will have the deciding leverage in the final decision-making outcome because they are those more immediate to your particular venture.

Conceptualizing political risk


My conceptualisation of political risk is the following: how likely you are of getting what you want, when you want, where you want it. The fact that it is a rather fluid and adaptable abstract provides it with the ability of being able to adapt to changing environments, situations and “clients”. Its parsimony means that it is effective and practical in delineating the problem-solving challenge of risk assessment. These challenges are different for governments, multinational corporations, NGO’s or regional organisations but they still share the same will to understand what are the factors affecting the likelihood of success of your investment and how is it that these factors can work. This conceptualization retains therefore a good degree of flexibility while maintaining the ability to express the central reason behind the ethos of risk assessment: coming closer to the likely possibilities of success or failure of investments in a set environment and timeframe. All risk assessments are born out of a “wish to invest”, to “bet” on a strategy and therefore “wish” for a positive outcome. This broad desire of investment is reflected in the verb “to want”. The subcategories “where”, “how” and “where” are broad subheadings under which the different factors of risk-analysis can fall under. These categories can remain unaltered across time and space while the conceptualization of the factors needs to be regularly updated and revised in order to keep up with the rhythms of change.

Forecasting and Predicting

While predicting entails categorical claims or guesses about the future, forecasting alludes to possible outcomes and it is not its objective to accurately guess an exact outcome. Forecasting consists on an exercise of prospective somewhere into the future that will allow you as a decision-maker to carry out better informed actions, it is exercises the “eventuality of discontinuity” (Fitzpatrick 1983:250). It allows for anticipation of alternative outcomes in the sets of relations between different actors and forces composing the place and time-frame of the political risk analysis. Forecasting/prospective analysis contain in themselves both a logical, conceptual and methodological preoccupations but also an “artistic” side to it. “Art” in the sense that the risk analyst equipped with foresight tools will weave them together in a subjective and non-absolute way, this ability is innate to human beings. This however is not a justification for methodological sloppiness or disregard for systematic and well-grounded analysis. Exploring the future been becoming more and more fundamental in dealing with an increasingly competitive world. There is not one formula to exercise the future but the process of doing so can, according to Alvarenga & Carvalho (2007: 3) should assume a set of characteristics, namely:

• Organised and Flexible (for example, conceiving and implementing modular processes through multiple tools according to defined objectives and available resources).
• Systemic (searching to categorise and to interlink the different relevant elements for the analysis) and Systematic.
• Consistent and structured (searching and justifying the coherence of combination between different elements: trends, uncertainties, wildcards, weak-signals, etc.).
• Intuitive and Logical (combining intuition and creativity with rigor and logic).
• Useful (lighting up the present and identifying challenges for the future, stimulating decision-making and framing the implementation and monitoring of strategies).

Assessing Quantitative and Qualitative Research

As an information-seeker a quantitative method in analyzing risk in a place is more time-effective and ideal for quick on-the-go decisions. Numerically comparing risk values/factors and scaling the measurements can undoubtedly be a very powerful tool. However, only with the help of qualitative information can a more sustained and comprehensive picture of the investment environment be drawn. Qualitative analysis will enlace and explain the causal mechanisms linking quantitative data. Not only can it do that but it also can provide with a critical analytical risk assessment of its own. Including aspects of anthropology, sociology, environmental studies, development studies and cultural studies can complete a richer picture of your investment environment by alluding to the place’s cultural traditions and social ambience and also allowing for an historical approach to the study of trends. This ability is very important as a comprehensive understanding of the history of your investment target will “make trends more obvious” (Brink 2004:28). Accounting for this strictly through quantitative data is problematic if not impossible.
Quantitative research usually starts with a pre-set hypothesis, this means that objectives are often stipulated from the start and several components of the process are standardized and numerical. It aims at being objective and have the ability to generalize and replicate its findings as widely as possible. It has the goal of being systematic but it also means that quantitative research sometimes struggles with some levels of rigidity and inadequacy in adapting to a changing environment. It suits macro-analysis a lot better since it can sometimes be “over-econometric” when dealing with the peculiarities of the micro-level (Simon 1984). Qualitative research on the other hand tries first and foremost to capture and discover meaning. It attempts to do so by collecting elements of analysis in an ad hoc manner. The research procedure is particular and circumstantial, constantly adapting to its surroundings and going beyond rigid numerical snapshots. Its strength relies in its potential to provide a thorough and comprehensive ambience of the study object, often in an inductive way (Neuman 2000).
Overall, assuming one of the two as the better method can be highly problematic. More and more the two techniques are becoming interdependent. Comprehensive and serious political risk reports will necessarily incorporate aspects from both. Different combinations of the two methods adapt better to each situation, as so, retaining an open mindedness in respect to the two and being aware of their strengths and weaknesses is important.
The incorporation of non-business risks is double-edged. If on the one hand it gives the analysis a more ample edge it can also potentially lead to more analytical subjectivism and imprecision since it is not just these non-business risks that need to be operationalised but also their connection and impacts on the environment of the business. Qualitative analysis is flexible and more inclusive than quantitative analysis, it goes into more depth and detail of its study object however its finding are usually much harder to systematize. (Babbie 2001: 77)
One runs the risk of being overwhelmed by information. Both in quantitative and in qualitative approaches it is essential to meticulously collect and select your information. Quantitative analysis is particularly prone to reliability and validity problems whereby reports can fall into rushed conclusions over the causal mechanisms of the risk levels. The risk values can consequently incorrectly reflect the risk levels of the investment environment.
There is not one solution to the methodological problems of political risk analysis. At the end of the day, it is the responsibility of the risk analyst to be aware of the methodological weaknesses of its approach and instead of hiding them, make them explicit. Providing clients with content holding valuable and determinant information that is simultaneously methodologically honest is the first step towards sound political risk analysis.





Practical Component – Risk profile of South Africa
Executive Summary

South Africa’s growth rates have been fairly positive recently but this does not allow for a lax focus on economic transformation. The greatest challenges it now faces are improving on its competitiveness in relation to other global actors and in its domestic economic strength. These material improvements are dependent on how South Africa will tackle other issues such as: the pressing HIV AIDS and insecurity crisis; land reform; education and training of its workforce; workings of its rule of law; de facto assurance in the separation of powers between the executive and the juridical branches; the development of its infrastructure; and its central role in influencing regional stability in its continent.
If the urgent challenge of HIV aids and the agitating levels of raging inequality are progressively dealt with, and a stable, united and constructive social and political arena arrived at, South Africa’s prospective for economic growth are excellent and its investment environment second-to-none in the African continent.

South Africa in the near future

In the beginning of 2007 South African hearts and minds are already well focused on a set of events set to take place in the medium term. First of all, the country is preparing to set the stage for the 2009 presidential elections scheduled for April. These elections are still covered in uncertainty due to substantial internal splits within the ANC between Thabo Mbeki’s and Jacob Zuma’s factions which has left South African’s dominant party with a problematic credibility and succession crisis in its hands. The outcome of these elections will go a long way in determining if South Africa’s stride towards consolidating its democracy is successful. The hype behind the controversial personality of Jacob Zuma in particular and the outcome of the legal suit involving him in corruption charges will also be a major decider of the future of the ANC as a party.
Adding to the usual debates over aids, crime and the economic affairs of the country a great testing events looms in 2010 for South Africa in the form of the Football World Cup. Discussions over South Africa’s readiness to stage such a grandiose event are daily in particular when it comes to the infrastructure and security demands that need to be met under strict timelines. South Africa’s success or failure in hosting the 2010 World Cup will undoubtedly go a long way in shaping the psyche of South Africans when it comes to their country and in testing the practical vigour of South African Economic Growth in the first decade of the first Millennium.
The evolution of the Broad-based Black Economic Empowerment Act of 2003 and how it evolves in its economic, political and social dimensions will be important to observe. The act forms the backbone of South Africa’s struggle to overcome the legacy of apartheid and the structural inequalities along ethnic lines that still cut across the country’s economy and politics. The impact of the act in the mining and finance sectors in particular has already been felt, other sectors will soon follow suit (Armstrong et al 2005).

Political Stability in South Africa – an assessment

South Africa is currently politically stable but its stability is however not consolidated. South Africa’s legendary democratic transition has not yet come full circle. South Africa holds a bicameral parliament with a 400-member National Assembly and a 90-member National Council of Provinces. It is a democratic system but also a system characterized by single-party dominance. This one-party dominance is the distinguishing trait of South African party politics and is the fixture under which the strengths and weaknesses of the political architecture of the country lie. Looking back at the last 13 years these have been positive. Positive both in its economic performance and in improving political participation, however South Africa’s political stability longs for improvements in several aspects. After the democratic transition in 1994, the ANC emerged as the catch-all party incorporating a rather diverse spectre of political strands and ideological sub-groups. Since then, it has pretty much governed uncontested. This looks like a sustained trend in the political dynamics of South Africa as the second biggest party, the Democratic Alliance party did not go beyond mere 14.8% of the vote on the last 2006 general elections. This lack of party competition and absence of rotation in office dually offers a substantial degree of political stability but also sometimes brings about the problem of accommodation of the main party to power and a lack of de facto healthy party competition and rotation in office.
South African media is mostly government-controlled yet its fairness and impartiality is satisfactory. Freedom of press and expression is a reality in South Africa, a country that holds one of the most comprehensive constitutions in the world when it comes to protecting individual human rights.

Prospects for Economic Growth

South Africa is the powerhouse of its continent. Its GDP is second to none in its region with figures of $576.4 (2006) and its investment environment has recently been reported as the most attractive in Africa by the UNCTAD World Investment Report (2006).
The broad picture of the South African economy has been one comprised of two parallel images: the first, comprising a developed and competitive economy underpinned by a knowledge-based sector and relying on top-notch financial institutions and liberal policies to support economic growth; the second, comprising the large numbers of low-qualified labour earning low wages in the parallel economy and in labour intensive sectors such as the mineral and agricultural ones. Broad policies of economic liberalisation have connected South Africa to the global economy and have in the long run progressively reduced the budget deficit. In effect, “the budget deficit decreased from 9, 5% of Gross Domestic Product (GDP) in 1993, to 1,5% in 2005” (DTI 2006). International bilateral agreements with, for example, the EU and the US for example have also been important. The evolution of the African Growth and Opportunity Act (AGOA) and the related most-favoured nation tariff that South Africa has enjoyed with the United States is one example. This framework has enabled South Africa to fare rather well in terms of economic growth and development for the last few years. Since 2003 inflation has been under control and so have real interest rates, allowing for a cut in the interest rates. This in turn has created a great consumer boom as can be witnessed in the growth of the construction and automotive sectors. The South Africa Reserve Bank has been effective in making sure that the banking service industry has been running smoothly.
Indeed, the positive investment environment in the country is much indebted to the good performance in terms of the financial sector levels of transparency and in the reliability of monetary and fiscal policies. Growth in South Africa has been corporate ridden (Armstrong et al 2005) and a continuation of sound financial policy can keep stimulating growth at the level of the first image economy. This development remains nonetheless conditioned to development in the second image economy and to how policy will be increasingly able to actively reorganise its still uncoordinated workforce, tackling its abysmal figures when it comes to levels of unemployment (25.5% in 2006). An attempt to tackle this reality brought about JIPSA (Joint Initiative for Priority Skills Acquisition) – or in other words the advancement of Higher Education and Information Technology. JIPSA is a fundamental pillar for the success of the Accelerated and Shared Growth Initiative (ASGISA) as it focuses on short supplied yet critical skills that are required for a “skills revolution” in South Africa. The overall objective is to halve poverty and unemployment by 2014. By doing so, South Africa will be able to keep up with the current positive trend of rising levels of foreign direct investment. (ASGISA 2007; Vardy 2007; Mlambo-Ngcuka 2006)
Synergy between the financial, industry, labour and the educational sectors is on top of the agenda for South Africa. This synergy will be highly enhanced if partnerships with experienced foreign higher education institutions, in training and qualifying the labour force and in Research and Development are developed. All of this, while taking into account the problem of brain drain
In this context, how issue brought about by COSATU (Congress of South African Trade Unions) of subsidies for first job entries in the labour market unfolds will be important in determining the development of the labour market in South Africa.
Economic prospects remain positive if political stability is favourable. Its thriving natural richness in wildlife makes it one of the most exciting settings for anyone interested in investing in the different modalities of the tourism industry. Moreover, South Africa’s lands have materially gifted her with a remarkable wealth when it comes to natural resources. In effect, South Africa still holds: 80% of the world’s reserves of manganese ore; 88% of the world’s reserves of platinum group minerals; 45% of the world’s reserves of gold; and 73% of the world’s reserves of chromium (DTI 2006). All of this combined with good infrastructure (some of the lowest electricity prices in the world), attractive policies in terms of corporate tax and, due to the peculiarities of the two-images mixed economy labour costs that are cheaper than those from other emerging markets.

Investor’s checklist of key political risk indicators in South Africa

As an investor in South Africa a few peculiar risk indicators assume prevalence, namely:

• Competitiveness - The expansion and growth of JIPSA together with initiatives in terms of small and medium-enterprise development will be at the forefront of economic growth. Policies of export-promotion and the empowerment of the unprivileged population still living below the poverty line will also need to take precedence if political stability is to be consolidated. Small business incentives such as the Medium Enterprise Development Programme (SMEDP) in Gauteng province (GEDA 2007) should be further stimulated and adapted to other regions of South Africa. The case of Gauteng includes benefits at the level of micro and macro-risk management:
o Investments grant payable for the first two years on qualifying assets.
o Additional investments grant payable in the third year, based on the ratio of human resource remuneration to manufacturing costs.
o A foreign investment grant limited to US$150 000 per project for investments in new machinery brought into South Africa.
o All agricultural production, manufacturing, agro-processing, aquaculture, biotechnology, tourism, information and communication technology, culture development and business support can qualify
And at the level of micro-risk management in industry specific incentive schemes, including:
o The Motor Industry Development Programme, which encourages the production and export of vehicles and components.
o Rebates and Concessions for the steel industry.
o Science, Engineering and Technology Innovation Fund, which subsidies R&D into new systems and processes.
o Tourism promotion schemes
• Development through international partnerships – Together with pursuing competitiveness as an attracting domain for foreign investment, South Africa should still invest diplomatic and political efforts in establishing favourable economic relations. Considering that South Africa still is a developing country, its relations with the developed world should also explore avenues to strengthen more quickly and effectively key aspects of its domestic economy. A good example of this has been the privileged relations that South Africa has retained with the United States. Take the role of USAID: its achievements in post-apartheid South Africa have been undeniable with programs generating, for example, over 3000 jobs and more than $279 million in sales in the small and medium business and agribusiness sectors. One should also emphasize the important role USAID financing has had in combating HIV/AIDS, promoting sound democracy and governance and increasing access to housing, drinkable water and sanitation to the disadvantaged in South Africa. The investment fund protocol signed between the US and South Africa of $120 million Overseas Private Investment Corporation fund to make equity investments in South and Southern Africa is now bearing fruits, affordable housing is now on the cards for many thousands of people in South Africa. It has helped 350.000 South Africans to obtain mortgages and formed a provision of $300 million of funds. The American Trade and Development Agency has for its part played a crucial role particularly in the technical assistance to big energy projects (namely the Khanya electricity projects in the Eastern Cape and KwaZulu Natal and the Thekwini Electricity Distribution Systems Integration Project). (OPIC 2007; Tobias 2005; USTDA 2007; USAID 2006)

• The economic impact of the HIV-AIDS pandemic - Together with unemployment and income inequality this economic risk constitutes the backbone of South African gravest concerns and problems. South Africa has in its hands a pandemic not just at the national level but also at the regional one. The whole of southern Africa and places such as Swaziland should be included in a regional strategy to tackle the problem. The virus is threatening to take 1.5 million lives in 2010 alone and cost the South African government as much as 17% of its GDP. (USDS 2007)

• The issue of land reform - The South African state has run into trouble in the land reform mainly because it lacks sufficient funds to purchase the necessary property. The possibility of negotiated compulsory purchases is potentially on the cards for the future. This would mean that farmers not wishing to sell their farms to the state would not be able to do it to anyone else. The leakage of a secret land department document also suggests that foreign ownership of land is to be restricted.
• Levels of education - Provincial spending as a share of provinces’ budget has been falling – from 45.7% in 2002/03 to 44.7% the following year. 2008/9 is likely to see a further fall to 42.8%. Problems of large-dropout rates and the time students take to complete programmes are still prevalent but initiatives are being put in place. JIPSA is at the forefront of the government’s grand strategy on education and its outcome will affect all areas of South Africa’s economic life. (Mail and Guardian 2007:10)
• Effectiveness of the Rule of Law – There have been some cases of corporate failure including: Macmed (a healthcare company which collapsed in 1999) because one of its company secretaries was an unrehabilitated insolvent; Leisurenet, a lifestyle and health fitness company that collapsed for fraud committed by the two key executives. Company law should promote simplicity and time-effectiveness in its proceedings. Fraud and corruption situations need to be regulated with adequate legislation and law enforcement. Regulation also requires further improvements on the time-effectiveness of the judicial machine in processing these cases. (Armstrong et al 2005)
• Separation of powers - Further expansion on the division of power between the judicial and the executive powers is desirable and avoid situations such as the constant meddling of government into judicial affairs such as was the case in 2005 when it tabled draft laws to amend the constitution.
• Infrastructure – Transportation infrastructure is excellent but is still recovering from an apartheid bias against townships and non-white rural areas. In these terms, empowering local government with the right tools will be important. In 2005 government announced a boost in infrastructure spending of R372bn so things seem to be going on the right path. (EIU 2006)
• Violent Crime – Security and safety spending is on the rise and the hype over the issue cannot be underestimated. Crime reporting has been contentious. Fact remains that the situation in the whole of sub-Saharan Africa is problematic in particular due to the huge presence of small arms (30 million or one weapon for every 20 people). The particular situation of great inequality in the country is usually seen as the main reason for the levels of crime. Murder rates, one of the highest in the world are presently declining while money is pouring in into safety and security set to rise from R41m for fiscal year 2005/06 to R46.6bn (EIU 2006).
• South Africa’s role in providing Regional Stability – South Africa is the main power broker in its region and one of the main powers in Africa. Its leadership in the African Union and its participation in development initiatives such as the creation of NEPAD (New Partnership for Economic Development) show how the economic and political development of the country is very closely tied down with the faith of the continent as a whole. The unfolding of the Zimbabwe situation will go a long way in determining the faith of the southern Africa region in general and the economic and political development of South Africa within its geopolitical context. Because of its privileged relation and past with Zimbabwe, South Africa’s actions in the Zimbabwe debacle will vastly influence its political legitimacy not just at home but internationally. This is particularly important at a time when the country seeks to emerge as a global power within a new multilateral architecture of international relations.

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