‘David and Goliath’ reach a gentleman’s agreement

The matter of South Africa’s economic dominance of Botswana and other Southern African Customs Union (SACU) member states has boiled under the surface of various meetings between the regional neighbours over the decades.

COVID-19 sharply brought the debate to the fore.

The pandemic devastated supply chains, exposing the under-industrialisation of countries such as Botswana, while hiking unemployment, particularly amongst the youth. As regional neighbours re-engage face to face, leaders are under pressure to ramp up their efforts towards the attraction of investment, industrialisation and the pressing priorities of both greater self-sufficiency and employment creation.

While the SACU investment roundtable held in April generally skirted the issue of historical economic imbalances in the region, the matter appears to have been well debated formally and behind the scenes of the recent high level engagement between presidents Mokgweetsi Masisi and Cyril Ramaphosa and their respective public and private sector teams.

“As would be appreciated, it is a worldwide conceptual commonplace, that products from bigger and more industrialised economies will dominate trade markets of the non-industrialised countries,” Masisi said at the event, held to mark 28 years of diplomatic relations and focussing on the economic relationship between the two countries.

“It is, however, my ardent hope that the monopolistic industrial and commercial dominance will not persist indefinitely in the international markets or become the dominant factor in the relations between sisterly nations such as our two countries.

“Hence, the trade landscape between Botswana and South Africa that remains skewed in favour of the latter should drastically improve.”

The challenge is much easier described than resolved. From Masisi’s own figures, between 2017 and 2021, the value of goods Botswana imported from South Africa was nearly seven times what the country exported to its neighbour.

The numbers become more lopsided across the various indicators. South Africa’s economy was measured at about $420 billion in 2021, compared to about $18 billion for Botswana. In fact, for 2020, South Africa’s economy was about nine times the combined size of Botswana, Namibia, Eswatini and Lesotho, the other four SACU member states.

In terms of Foreign Direct Investment (FDI), South Africa attracted US$2.5 billion worth of inflows in 2019, compared to US$492 million for the other four states combined.

Emerging from their recent meeting, both countries appear to agree that even after adjusting for their different population sizes, the mismatch in the level and pace of industrialisation between Botswana and South Africa needs to be confronted urgently.

The two ministers charged with sorting out the imbalance, Mmusi Kgafela and his South African counterpart, Ebrahim Patel, reported having “frank discussions” and “blunt talks” in their recent engagements.

The idea, the ministers said, is to move away from competing for investment, a game Botswana has lost consistently over the decades, to rather cooperating in areas where each has a competitive edge.

“We know the importance of industrialisation for Botswana and also for South Africa, so how do we move away from a zero-sum game in which the benefit of the one is to the detriment of the other,” Patel said at a briefing last week.

“How do we find ‘complementaries’ to move forward together?”

For Kgafela, a gentleman’s agreement has been reached with South Africa.

“We are quite aware that when you put a strong economic side by side with a weaker one, you run the risk of under-industrialisation and we have come to terms to say that is a challenge we have faced for some time and we must seek to reverse the situation.

“Patel and I have come to a gentleman’s agreement that we are going to assist each other to industrialise, meaning we are not going to compete with each other in areas where we are strong.

“That also means making it easier for products from here to find access in South Africa, by removing barriers for our products to them.”

The agreement, the minister say, means that rather than competing, the two countries will identify sectors and areas where each country has a competitive advantage and the other will allow the stronger to take the lead. Based on a set of factors known as the Big Five, the agreement involves working together on identifying the export destinations, identifying the products required, value chains, logistics and investment planning.

For Botswana, the automotive components and plastic products sector is seen as a key starting point for the cooperation, where major investment has already been made by companies such as Kromberg & Schubert as well as Flotech.

“In the automotive value chain, even though we have a very large sector, a significant part of the components are still imported from countries outside Africa,” Patel said.

“That represents an opportunity to replace that and we are going product by product.”

The challenge for both countries, particularly in the post-pandemic period, is around high unemployment, especially among youths. While South Africa’s economy looms over Botswana and the region, about 11.5 million people are unemployed in that country and the youth are becoming increasingly frustrated with the pace of job creation.

Botswana faces similar struggles, with the unemployment rate for those aged 18 years and above rising from 21.9% in December 2019, before the pandemic to 25.8% in December 2021.

Both countries face rising inflation and while Botswana’s situation is made worse by under-industrialisation, South Africa also has to content with rising civil restlessness and an upsurge in violent crime.

Based on the Big Five factors, the two countries have identified their export target.

Rather than bilateral competition for investment and industrialisation, a situation Patel likens to “eating each other’s little breakfasts,” the bigger prize is to mount a joint effort to replace Africa’s imports by leveraging on the Africa Continent Free Trade Agreement (AfCFTA).

The continental trade deal provides easier trade access to the different countries and both Botswana and South Africa are pushing for rules of origin that give preferential access to African products.

Botswana is currently finalising its negotiations with African Union Commission on tariffs, rules of origin and trade in services.

“Just looking at South Africa and I’m sure Botswana and other African countries have the same situation, but there’s a high level of imports from Asia, the Americas and Europe,” Patel said.

“For South Africa, that represents about R8 trillion of imports with only R1 trillion coming from African countries.

“Instead of seeking to solve our 11.5 million job problem by squeezing the remaining factories in Botswana and trying to get that production taken away to South Africa or Botswana trying to address its challenge of a quarter million young unemployed people by trying to see how to displace a South African factory, there is a net R2 trillion that Africa is getting from the rest of the world.

“How do we coordinate across borders, networks, value chains, investment and product analysis?

“There are areas to work on and we have started to work with each other on the AfCFTA, thinking through our relationship and how we can do more in ways that grow both economies.”

According to Patel, while Africa accounts for 17% of the global population, it only contributes less than one percent of vehicle manufacturing and steel production. The continent also accounts for only three percent of the global economic output.

“We are not going to change this by eating each other’s little breakfasts but by changing our industrial capacity to tap into this massive market.”

Partnering with South Africa around value chains such as in the automotive sector in order to tap into the African opportunity appears a “cure-all” for both countries’ job creation and industrialisation aspirations.

However, in Botswana, the stain of South Africa’s industrial “betrayal” in previous years remains among many who follow developments around trade and industrialisation. The events of January 2000 when 900 citizen jobs were thrown onto the street after the inglorious closure of the Hyundai assembly plant in Broadhurst, remain fresh in many minds.

Hyundai was hailed as the country’s first efforts into higher tech industrialisation, an opportunity for the country to utilise the same SACU access South Africa had been enjoying to push its products into fellow member states. However, South Africa reportedly filed a rules of origin complaint arguing that because the plant used Semi-Knocked Down kits, the vehicles it produced did not qualify for favourable SACU duty provisions.

After the local plant closed down, insult was added to injury when, in September 2014, a new Hyundai assembly plant was opened in Benoni, Gauteng with officials there hailing the massive job creation it would lead to.

Kgafela appeared to acknowledge the sensitivities around the new cooperative approach being taken with South Africa.

“We have agreed with my colleague (Patel) that gone should be those days where it is felt that a larger market is preying on a smaller one or that a larger market has a tendency that when a smaller one is looking for investment, it then entices that investment to itself.

“I have had a blunt discussion with my colleague and it was about speaking freely.

“I informed him that this is the general perception and I am optimistic that relations are going to improve.

“We are going to see friendlier interactions with South Africa.”

Coincidentally, like the tensions around the Hyundai assembly plant, one upcoming test for the renewed “friendlier” relations is set to come as both countries position themselves for the growth of the electric vehicle market.

Botswana intends to participate in the industry through producing the raw materials for batteries such as manganese and high purity battery grade nickel and cobalt salts. Kgafela also wants to see the automotive components’ manufacturers pivot to the demands of the electric vehicle industry.

South Africa, meanwhile, is battling to transform its fossil-fuel-based vehicle manufacturing sector to an electric vehicle industry, as it runs the risk of losing lucrative export deals to markets such as the European Union which is rapidly transforming.

Kgafela says the slower both countries collaborate to tap into the manufacturing potential, from components level to final vehicle output, whether this is targetted at Africa or international export, the greater the threats for industrialisation.

“What we should guard against, and this is likely to happen, is that we may see a sudden surge in the carbon propelled vehicles from the developed countries coming to be disposed in Africa because we are always the destination of the unwanted.

“I am quite prepared to work with my colleague to come up with strategies and policies to avert this sudden surge because it is likely to retard our efforts to industrialise and that’s a conversation we are having in the region.”

From the disappointment of vehicle assembly in Botswana, the same sector could ironically lead the planned wider industrialisation push by the two countries, a development none of those who were rendered jobless 22 years ago could have envisaged.