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CIAO DATE: 01/02
Big Business and the Wealth of South Africa: Policy Issues in the Transition from Apartheid
Andrea E. Goldstein
December 2000
Introduction
The large-scale corporation is at the core of the process of introducing new technologies, developing new organizational and managerial methods, and commercializing new products and services — in plain English, of creating the wealth of nations (Chandler et al. 1997). The manner and extent to which corporations will promote a country's economic and social development depends largely on how well the institutions of the market, on the one hand, and of government, on the other, work together in that country. Modern history suggests that such firms emerged and evolved differently in various economic, political, and social settings. Many thought that trade opening, capital market liberalization, and the convergence in consumers tastes and economic ideologies would lead to a convergence in the forms of organizing, managing, and financing business activity. Nonetheless, even in OECD countries, globalization has not brought about the expected convergence of institutions towards a unique model of interrelations between business, governments, markets, and the society at large. This outcome strengthens the hand of those arguing that purely economic, technological, or legal explanations fail to explain the contours of big business and their behaviours. This is almost a truism in all countries, but it appears particularly challenging in analyzing changes in emerging countries undergoing a series of deep economic, political, and social transformations.
South Africa is certainly one such country. Resource endowment already had a tremendous impact in skewing corporate power in South Africa towards a handful of large-scale mining corporations. The apartheid system, in turn, gave rise to a peculiar business environment. On the one hand, firms were sheltered from the rigors of market forces throughout capital controls, external trade policies, and domestic impediments to competition; on the other hand, the strategy of economic self-sufficiency encouraged pervasive state ownership and concentration of financial wealth in the hands of few large-scale diversified economic conglomerates. Moreover, despite the country's relatively developed financial markets, corporate control was entrenched though an opaque ownership structure, that developed partly in response to South African peculiar history. The opening of the country's political system following the election of a government of national unity in 1994 has brought about important changes — privatization, regulatory reform, and financial liberalization — in the policy environment in which firms operate. Moreover, in view of the heritage of the past — most visibly the fact that South Africa disputes with Brazil the dubious distinction of the world's most unequal distribution of income and wealth, and that this closely follows racial lines — black empowerment has been a explicit policy objectives since 1994. Such changes, in turn, have led firms to adopt new strategies such as concentration on core business, demutualization, and primary listing on foreign exchanges (mainly London). As ownership becomes more diffuse, institutionalized, and foreign, South African firms are obliged to follow the new global management mantra of shareholder wealth maximization. The corporate governance code, based on the report of the King Committee in 1994, has made South Africa one of the world's earliest country dealing not only with general business, ethical and environmental standards, but also tackling critical social issues such as affirmative action.
This study explores the political economy of South Africa under apartheid, its legacy, and the policy stance taken by the new authorities (sections 1-3); analyzes the interaction between the broader transformation of the political economy of South Africa and the institutional, legal, and statutory changes affecting corporations, in particular as concerns ownership and competition policy (sections 4 and 5); studies how these factors percolate on financial markets and the functioning of the market for corporate control (sections 6 and 7); and provides some policy recommendations for tackling persisting policy shortcomings. A note on method. This exercise is not driven by normative objectives, but rather tries to explain why the political transition of South Africa has so far produced the framework for big business which is depicted in this paper. However, the underlying hypothesis is that market failures were at the roots of the model of corporate ownership and industrial organization that had characterized South Africa until 1994, at least, and that recent trends must be assessed against the benchmark of finding an efficient solutions to such failures.
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