Thomas White Global Investing
South Africa
South Africa Stamp
February 24, 2012
A Postcard from the Middle East and Africa
South Africa: Resource nationalism gaining political currency

Resource Nationalism in South Africa

Gold mine head and production facility near Johannesburg, South Africa. Demands for increased government control over the mining industry are becoming politically more acceptable in the country, which has one of the largest mineral deposits in the world.

When the Occupy protestors were building their camps in New York and other major U.S. cities last fall, a South African youth organization also staged protest marches in the country’s biggest city, Johannesburg. Like their American counterparts, they were agitating against high unemployment and income inequality. If the protestors on Wall Street wanted income redistribution through higher taxes on the rich, the South Africans asked their government to appropriate the mining assets and farmlands from their private owners and use those resources to help the poor. But, unlike the Occupy organizers who were not part of mainstream political parties, the South African protests were led by the youth wing of the ruling African National Congress (ANC). That was enough to make the country’s large mining industry fearful about its future.

Admittedly, the protests did not have ANC’s blessings. The ANC had in fact warned its youth wing, then led by its militant leader Julius Malema, not to organize the agitation. Malema has since been suspended from the ANC and important party leaders, including former finance minister Trevor Manuel, have spoken against nationalizing mining and other assets.

However, there are signs that some of Malema’s populist demands are gaining support among sections of the ANC. Reports in South Africa’s Mail & Guardian and other newspapers suggest that ANC’s research unit has submitted discussion papers that propose increased government intervention and control over the resources sector in the country. Apart from taking majority ownership of some of the largest mining corporations, the proposals include new taxes on mineral exports and mining profits as well as price controls on minerals sold to domestic industrial consumers. It is indicated that these discussion papers, if approved by the party’s national leaders, will be presented at a major policy conference scheduled later this year. While the South African government has not yet endorsed the plans, it has not moved to counter growing talk of nationalization proposals, as The Economist pointed out recently.

The less aggressive proposals by the ANC research unit evidently acknowledge that it won’t be easy to gain support for radical moves such as those espoused by Julius Malema, especially since South Africa attracts a lot of attention as one of the largest emerging economies. Hence, instead of complete nationalization, it is proposed that the government become a significant shareholder and wield influence over large corporations. The government can either acquire the shares directly or through government-controlled pension funds such as the Public Investment Corporation of South Africa. The proponents reckon that, along with higher taxes, this will yield sufficient financial resources to expand public spending.

However, there are potential risks even in this softer approach to resource nationalism. Mining requires heavy upfront investments, first for exploration and subsequently for setting up production facilities and transportation links. Total investment in a large mining operation could run into billions of dollars. While it may be easy enough to attract capital during periods of high commodity prices, the investments have to be sustained even during lean periods. Governments of most resource rich countries may find it difficult to continue investing when commodity prices are low during an economic downturn, as their financial budgets are likely to be severely constrained.

In addition, mining operations need to constantly improve processes and technology to ensure operational efficiency and commercial viability. This is becoming increasingly relevant as mineral deposits that are relatively easier to extract are hard to find. Most of the recent discoveries are buried deeper under the earth or are in remote locations. Without sophisticated mining technology or large investments in transport infrastructure, it may be difficult to successfully develop such deposits.

Increasing government control over natural resources is not a new trend. Governments in most emerging countries, including established democracies such as India and Brazil, directly or indirectly control most of their mineral resources. But in the case of South Africa, the consequences of such decisions can reverberate far and wide. The country has one of the world’s biggest reserves of natural resources, currently valued at $2.5 trillion. Efficient extraction of these deposits is highly important, not just for the South African economy, which is heavily dependent on mining, but also for the global economy with a seemingly insatiable demand for industrial commodities. Perhaps it would benefit everyone if the South African leadership ignores short-term political equations and formulates a policy that will ensure the sustainable development of its natural wealth.

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