Economic Sanctions against South Africa and the Importance
of Switzerland
In 1986 – about 40 years after the beginning of Apartheid – South Africa’s most important trading
partners (the USA, the EC, and Japan) imposed economic sanctions. During the course of the
1985 debt crisis, the time seemed to have arrived to finally force the Apartheid regime to its
knees by economic sanctions. Switzerland did not abide by the sanctions. The study examines if
the fact that Switzerland did not take part in official economic sanctions delayed the political
transformation of South Africa.
Economic Sanctions against South Africa
Sanctions imposed
The economic sanctions covered trade and finance. In the trade sector, the EC and Japan sanctioned
import of the Kruger rand and certain steel and iron products, whereby Germany and
Great Britain in part merely made recommendations and imposed no binding sanctions. The USA
too embargoed importing the Kruger rand and certain steel and iron products. The sanctions also
covered import of products from partially state-controlled enterprises, uranium, coal, textiles,
agricultural products, and food as well as export of petroleum products. The most crucial trade
sanction was OPEC’s oil embargo, though it also had loopholes.
One must distinguish between direct, portfolio, and other investments (credits/loans) in regard
to financial sanctions. Foreign direct investments were defined by their goal: establishing a longterm
relationship with the target firm abroad and assuring an important influence on business.
If the shares held exceed 10%, investments qualified as FDI. Those below 10% count as portfolio
investments. Other investments included credits in particular. The EC sanctioned new direct
investments but left it to member states to declare if the sanctions would be binding. The two
major investors (England and Germany) failed to impose binding sanctions. The USA also sanctioned
new direct investments and was the only country to impose sanctions on portfolio investments
and credits/loans.
In general, sanctions imposed against South Africa were very limited and indicate numerous
loopholes and exception clauses. One reason for the limitation surely lay in the fact that the
heads of government in Britain, the USA, and Germany did not regard sanctions as the correct
means of prompting political change in South Africa. Since the “constructive engagement“ approach
favored by them (stabilizing South Africa, which would strengthen the will of South Africa
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to reform) but did not lead to ending Apartheid for many years, advocates of sanctions could ultimately
prevail.
The economists’ public-choice theory argued for this reason that economic sanctions often have
so minimal an impact because they are selected primarily to suit the economic interests of the
sanctioning countries and only secondarily consider the costs on the country sanctioned. In the
case of South Africa, the choice of sanction sectors confirmed this thesis. In the USA, for instance,
there were interest groups that profited from sanctions on South African coal and food.
Accordingly, these sectors were sanctioned by the USA, but not by the EC or Japan. For its part,
the EC sanctioned steel. Since this was one of the EC’s most highly protected sectors, sanctions
helped European producers get rid of one of their strongest competitors at the same time.
Switzerland’s position
Switzerland maintained its basic stance of rejecting sanctions in the case of South Africa as well.
The 1986 position of the Federal Council stated that it disapproved of economic measures to
achieve political goals. Nevertheless, politics also intervened in economic ties. A ban on public
loans to South Africa was enacted in 1978. From 1974 on, the government set a ceiling on certain
capital exports requiring licenses. During the course of other countries’ economic sanctions,
statistical monitoring also took place from 1986 on. In addition to monitoring capital exports, it
covered all sectors in which the most important industrialized countries enacted congruent economic
sanctions. Sectors were also statistically monitored in which converging sanctions had not
been imposed or were at least subject to heated dispute (e.g., direct investments). These
measures were intended to have prevented Third States from circumventing sanctions through
Switzerland.
Costs of trade and financial sanctions imposed on South Africa
Capital outflow and its causes
During the sanctions period (4th quarter 1986 – 1st quarter 1991) South Africa suffered a net
capital outflow of 16.2 billion rands, which corresponded to an annual average of 2% of GNP.
However, the net outflow of foreign investment had already begun before introduction of the
sanctions. South Africa suffered its greatest net capital outflow, which led to the moratorium on
debt, in 1985, one year before imposition of economic sanctions.
Source: South Africa’s balance of payments 1946-2000, South Africa’s national accounts 1946-
1998
The massive outflows of capital could be traced to three factors in particular:
Political unrest
Already in the past the Sharpeville massacre of 1960 and the Soweto unrest of 1976 had
led to far-reaching and long-term outflow of capital (see Illustration 1). The political unrest
that led to the National State of Emergency (20 July 1985: Partial State of Emergency;
12 June 1986: National State of Emergency), was traceable on one hand to the
struggle of the domestic anti-Apartheid movement; on the other hand, there was also unrest
between competing black groups. The unrest reduced investor confidence in the
country’s future.
The poor economic situation
South Africa found itself in a recession between 1984 and 1985, and even after 1986 the
GNP increased less than the population. An important cause for economic weakness was
economic policy, which was closely linked to Apartheid ideology. South Africa had high
and increasing government outlays based on high defense costs among other factors. It
pursued economic self-sufficiency, yet this limited South Africa’s long-term competitiveness
and thus stemmed the flow of foreign investment as well. The country also had to
cope with high inflation, scarce currency reserves, and mounting short-term debt.
Pressure from the anti-Apartheid movement
Foreign and South African anti-Apartheid groups demanded an end to business ties with
South Africa and withdrawal of firms active in the country. The American anti-Apartheid
movement had the greatest success. A few American states and cities exerted strong economic
pressure on the firms, which resulted in their withdrawal. However, the overall
impact of disinvestment on the balance of payments was comparatively minor. It was rather
small and unprofitable firms that withdrew from the market. Moreover, there were
unintended profiteers. Particularly the large South African conglomerates benefited from
American and British sales, since they could acquire divisions of firms at favorable prices.
Sharpeville Soweto State of Emergency
Sanctions
Start of unrest
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The costs of financial sanctions
Officially imposed financial sanctions had comparatively little impact on capital outflow. Or, as
the president of the South African central bank, De Kock, put it in 1986: “The EEC and US sanctions
packages on bank loans and investments do little more than change a de facto into a de
jure situation”. From South Africa’s vantage point, financial sanctions hardly prevented flow of
capital that would have been transacted without sanctions.
This had several reasons. The EC and USA sanctioned new direct investments, though the EC’s
two largest investors, Germany and Great Britain, only enacted voluntary sanctions. Yet, due to
the poor economic situation at the time, new direct investments were hardly transacted anyway.
More crucial was reinvestment of profits, and this most important possibility of FDI was exempted
from the sanctions. More than 80% of all FDI in South Africa during that period originated
from reinvested profits. The existence of reinvested profits also increased during the sanctions
era by about 3 billion rands. This showed that the investors had maintained a certain trust in
South Africa and also expected no sharpening of sanctions. At the same time, repatriation of
profits due to the USA’s lifting of the dual-taxation agreement was not very attractive for American
firms in a business sense.
Only the USA sanctioned other investments (portfolio investments as well as credits and loans).
This capital is more mobile and volatile, and the lack of a supplier can usually be compensated
for without a problem. During the sanctions era, capital was indeed only available in South Africa
under difficult conditions – i.e., at high costs. However, this was primarily attributable to unrest
and the poor economic situation.
All in all, therefore, the costs of the officially imposed financial sanctions for South Africa were
minor. Based on a study by Hufbauer et al. (2001), we estimate the annual cost at less than
0.25% of South African GNP.
Costs of trade sanctions
The costs of trade sanctions were greater than those of financial sanctions. The various trade
sanctions triggered a range of high costs. The oil embargo represented the most painful measure
for South Africa, even if there were significant loopholes. The oil embargo raised the price of petroleum
and thus impacted the total population. The large trading partners’ import sanctions
proved less costly. Either South Africa was able to gain other countries as new or additional
customers (steel and coal) or production could be adapted (gold bars instead of Kruger Rands).
Various other exceptions existed (or were introduced later), which reduced the impact of sanctions.
The cost of import sanctions especially affected the black population in the form of unemployment.
The cost of trade sanctions against South Africa overall were estimated by one study at
an annual 1.3% of GNP.
Along with the cost of financial sanctions, the cost of economic sanctions against South Africa is
estimated to have approximated 1.5% of GNP. Those affected were largely unqualified blacks.
Even after 1990 the unemployment rate among whites remained insignificant.
Impact of sanctions’ cost on political transformation
A power shift occurred at the outset of 1989 owing to the heart attack of President P.W. Botha. It
forced him to give up chairmanship of the National Party. Chosen as his successor was the former
education minister, F.W. de Klerk. One year after entering office, de Klerk delivered a speech
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on 2 February 1990 clearly recognizing the need for rapid and far-reaching policy reforms and
introducing the political changeover.
Did the economic sanctions directed against South Africa influence political opinion among the
white population to the point that the political transformation was possible or accelerated decisively.
Well-known economists assume that this was not the case.
“Even in the absence of sanctions, apartheid ultimately would have collapsed due to the economic
stresses of a hugely inefficient system. Although sanctions may have speeded this process,
they were not the driving force behind it. … The fall of apartheid was not engineered by foreigners,
nor was it primarily precipitated by foreign sanctions” (Lowenberg and Kaempfer, 1998, 9).
“Economic sanctions can be credited with, at best, a modest contribution” (Hufbauer et al.,
2001b).
Economic sanctions did not trigger the political transformation. The costs brought about by the
sanctions were too meager for that. Yet the question remains open whether stiffer sanctions with
higher costs would have had the desired impact. In any case, de Klerk was not under pressure
from the white population to give in to the sanctioning countries’ demands. One finding resulted
from a survey on the impact of economic sanctions directed against South Africa (i.e., besides the
economic sanctions the debt crisis leading to the credit freeze of 1985, the disinvestment campaign,
as well as the foreign boycott of South African products – especially farm products) that
the population still refused to scuttle Apartheid in 1989 despite these measures. Nor did a majority
want to bow to stronger economic sanctions.
The reduction in economic growth triggered by sanctions was less essential for the political
transformation than the fact that the country’s economic development made the original ideology
of Apartheid impossible. Apartheid’s ideology foresaw a geographically separated development of
various population groups (the so-called “homelands” policy). Already in 1950 the so-called Tomlinson
Commission found that a middle-of-the-road option was impossible, and the country
would have to choose between complete segregation and integration. Yet the high economic
growth of the 1960s and 1970s created high demand for workers that could only be satisfied by
the influx of black employees to the big cities. The government faced the problem of how to cope
with this urbanization.
Unrest and strikes were a visible sign that separation of the population would lead to ever greater
difficulties. The unrest and strikes resulted in high spending on security, reduced investor confidence,
and triggered the 1985 debt crisis among other things. The rapidly growing population
strata would have exacerbated the problem further. Finally the Eastern Bloc’s communist regime
collapsed in 1989. Thus the danger of a communist power takeover in South Africa was
reduced for both the West and South Africa itself.
Particularly these developments ultimately triggered the political transformation.
The importance of the Swiss position
Trade sanctions
Did Switzerland’s behavior reduce the impact of the economic sanctions? As far as trade sanctions
were concerned, Switzerland was hardly an important trade partner for South Africa. And,
from Switzerland’s viewpoint, the volume of trade with South Africa also amounted on average to
0.7% of total Swiss trade (excluding gold, a commodity actually not sanctioned with the exception
of the Kruger rand). However, the trade sanctions of other countries benefited Switzerland. It had
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profited, for instance, from lower South African coal prices owing to the coal sanctions as well as
generated additional income from the expanded oil trade. The sanctions’ impact was somewhat
weakened by this. From South Africa’s viewpoint, however, the additional income from increasing
trade with Switzerland’s small economy was relatively minor. There is also no evidence that suggests
significant third-party dealings over Switzerland. South Africa was able to develop far larger
new markets in other countries.
Financial sanctions
While Switzerland played a subordinate role in trade of goods, its importance in the investment
sector was considerably greater.
First, it must be asked if Switzerland transacted important new direct investments. Based on the
material available to us, we find that this was not the case. Illustration 2 shows the net size (i.e.,
inflows in FDI discounting outflows) of direct investments based on Swiss National Bank (SNB)
figures. Since we know of no important disinvestments at the time, they can be equated roughly
with gross inflows in FDI. But the problem is that these figures contain reinvested profits that
were not subject to sanctions. The reinvested profits were identified by the SARB, but the figures
are not easily compared to those of the SNB. The reinvested profits noted by the SARB tend to be
too high in comparison to the SNB figures. However, it can be concluded that the major portion
of the FDI at the time consisted of non-sanctioned reinvestment of profits.
Reinvested profits (SAFB) FDI including reinvested profits (SNB)
Sources: South Africa’s balance of payments 1946-1992 (SARB, 1993), SNB (on request), personal
calculations
Analysis of stockholdings shows that Swiss firms managed to transact certain new investments
nevertheless. However, we cannot ascertain the extent to which this observed increase is attributable
to new direct investments or, say, non-sanctioned purchase of stocks from withdrawing
American firms.
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Other investments
Regarding the extent to which Switzerland undermined the impact of official economic sanctions,
it should still be noted that the other investments (portfolio investments and credits/loans) were
only sanctioned by the USA. The comparison with the EC (Illustration 3) shows that Switzerland
conducted itself similarly to the EC in not imposing sanctions. The USA’s obligations developed
less intensively than those of Europe. However, at least part of these developments can be traced
to the substantially weaker development of the dollar against the rand in contrast to the European
currencies. Thus the USA’s increase in investments tends to be too low, while developments
in Switzerland’s case appear too high, due to the Swiss franc’s strong price earnings. At the same
time, however, economic pressure of American cities and states on USA firms may in effect have
caused increased capital withdrawals. Owing to insufficient data, it cannot be stated with certainty
if and by how much the American capital outflows were greater than those of the EC and
Switzerland.
Switzerland Europe (without Switzerland) USA
Source: South Africa’s balance of payments, 1946-2000 (SARB, 2001)
It can be established in general that Switzerland’s economic conduct during the sanctions period
did not vary significantly from that of the EC. The sanctions indicate numerous loopholes and
also gave other countries the opportunity to invest if needed. Crucial for the investor’s behavior
was the weak economic situation in South Africa, and this made investments no more attractive
for the Swiss than for other countries. The USA behaved somewhat differently, but this was attributable
to the disinvestment campaign and not to the official economic sanctions.
Outlook
The study intentionally confined itself to the official economic sanctions. Considering the very
limited teeth of these sanctions, it can be concluded that Switzerland’s failure to take part in the
official economic sanctions did not prolong Apartheid. This can be explained not least by the
ineffectiveness of the economic sanctions. One question remains open: What would have happened
if the other countries had imposed stricter sanctions and Switzerland had not taken part.
One can still dispute the degree to which economic sanctions can affect political transformation –
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if at all. Economists are rather skeptical in this regard. Experiences to date also show that economic
sanctions practically never summon the necessary pressure for major political changes (as
the example of Iraq indicates). Economic sanctions often punish the wrong party, as also occurred
in South Africa, where black workers especially had to bear the brunt of the cost. In
South Africa’s case the debt crisis had already shown that exerting economic pressure would not
bring about political reforms. It was also feared that the liberal white population with British
passports would leave the country in case of a prolonged economic crisis, while the Boers – usually
supportive of Apartheid – had no second homeland and would also tend to resist outside
pressure on historic grounds. Finally South Africa’s economic collapse would presumably have
led to an economic crisis for all southern Africa.
In conclusion, it must be noted that precisely South Africa’s economic development and industrialization
in and around the whites’ major cities ultimately made the Apartheid system impossible
and led to its fall.
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