Kenneth A Rodman. Political Science Quarterly. Volume 109, Issue 2, Summer 1994.
This article examines the role of nonstate actors in U.S. economic statecraft toward South Africa, both as constraints on state initiatives and as autonomous actors capable of directly influencing world politics. In so doing, it challenges one of the central premises of the dominant realist approach to international relations—that is, that states are the only significant actors in the global arena and that all other actors can only have significant influence through the intermediary of states. Part I calls into question a state-centered approach to the study of economic statecraft, first by exploring how the growth of the multinational corporation (MNC) has limited the ability of states to mobilize economic resources for political ends, and second, by examining how nongovernmental actors, such as the anti-apartheid movement, can provide an alternative sanctioning framework through circumventing states and directly pressuring the corporation. Part II demonstrates the degree to which the behavior of these nonstate actors had a significant impact on the economic viability of apartheid independent of the sanctions imposed by the United States or other governments.
During the 1990s, South Africa witnessed a number of dramatic changes away from apartheid, culminating in the election of Nelson Mandela in the country’s first multiracial elections in spring 1994. According to most observers, the economic sanctions imposed by the international community played a role in this transition, because the combination of economic pressure and international ostracism ultimately convinced white South Africans that change was less risky than the continuation of the status quo. The most significant formal sanctions were imposed in 1986, when most countries adopted trade sanctions and restrictions on new investment and credits. This included the United States when Congress overrode President Ronald Reagan’s veto of the Comprehensive Anti-Apartheid Act, effectively overturning the administration’s policy of constructive engagement, which had sought to encourage trade and investment with South Africa as a means of promoting liberalization through economic growth.
Yet what is striking about this change in economic statecraft toward South Africa is how the actions of governments were overshadowed by those of nongovernmental economic and political actors. First, multinational banks inflicted the greatest damage on the South African economy when they called in their South African loans as they came due in July 1985—more than a year prior to congressional sanctions. This triggered a financial crisis that led to the collapse of the rand, a drying up of new loans and investments, and a wave of withdrawals by some of the most prominent American investors. Second, nongovernmental anti-apartheid organizations compounded the costs and risks of normal business relations with South Africa by forcing corporations to incorporate political criteria into their economic calculations. Yet, unlike traditional interest groups, their greatest successes came not from lobbying the federal government to legislate restrictions, but rather from directly confronting the corporation with boycotts, stock divestments, shareholder activism, and through persuading state and local governments to link municipal contracts to withdrawal from South Africa.
Multinational Corporations and Constraints on Economic Sanctions
Most of the debate surrounding South African sanctions centered on the question of whether economic pressures were the most effective means of eliminating apartheid. This debate generally assumed that the U.S. government was capable of controlling economic transactions between its firms and other states. The growth of the MNC, however, called this assumption into question by placing an increasing proportion of U.S. business activity outside the territorial boundaries of the United States. This process of internationalization impeded public attempts to use business as an instrument of economic statecraft because host countries have increasingly resisted American attempts to exercise extraterritorial control over foreign affiliates, and corporate perceptions of interest have increasingly diverged from those of foreign policy officials.
First, the U.S. government had difficulty extending its laws to U.S. overseas affiliates either in South Africa and or in third countries. For direct investors in South Africa, local law often negated the intent of U.S. government restrictions. For example, when the U.S. Congress and Treasury Department tried to investigate allegations that Mobil’s South African affiliate had illegally transshipped oil to Rhodesia, they ran into the constraint that Mobil’s subsidiary was licensed in South Africa and subject to local law. South Africa’s Official Secrets Act, which prohibited disclosure of information on “munitions of war,” such as oil, prevented Mobil, S.A., from opening its books either to the U.S. government or to Mobil’s New York headquarters.
Internationalization also complicated U.S. government attempts to enforce the United Nations arms embargo by controlling the strategic sales of American firms. In 1978, the Carter administration banned all exports to the South African military and police and compelled American firms to guarantee that any of its products manufactured in South Africa with U.S.-origin content would not be resold to these proscribed agencies. South African law, however, made monitoring and enforcement of these regulations very difficult. The Protection of Businesses Act, which barred firms from releasing information about their operations without government approval, prevented South African private firms or civilian parastatals from revealing relevant information. Also, under the National Supplies Procurement Act, the South African government was able to commandeer any goods and services produced in South Africa regardless of a company’s intentions or policies, and could have ordered that the transaction be kept secret. These laws called into question any commitment made by American firms to prevent the illegal end-use of their production. It also shielded the companies from legal liability, because they bore no responsibility for end-use unless they knew of its destination beforehand.
American policy makers were also unable to extend controls to operations of American firms in third countries in Western Europe, Latin America, or Canada. These host countries have rejected American presumptions of extraterritorial control, arguing that American affiliates incorporated within their territory were local firms subject to local law. Moreover, since the 1970s, they were more assertive and successful in blocking U.S. attempts to assert extraterritorial control. The most dramatic example of this was the Reagan administration’s inability to extend the pipeline sanctions to the European affiliates of American firms.
Since allies and neutrals generally implemented less comprehensive sanctions than did the United States, foreign affiliates provide a conduit through which U.S.-based MNCs could have legally circumvented U.S. government sanctions. For example, since Ford’s South African operation was an affiliate of Ford-Canada, Commerce Department regulations regarding strategic sales did not apply as long as less than 20 percent of their content is of U.S. origin. The Investor Responsibility Research Center (IRRC) notes that many U.S. investors in South Africa consciously sourced imports outside the United States to avoid a potential conflict of laws in case the United States tightened its controls. The strategy made sense for risk-averse managers, but it limited the range of corporate behavior that Washington was able to control for strategic denial or other forms of economic statecraft.
Second, this problem was compounded by changes in corporate perceptions of interest. In the past, corporate managers ethnocentrically identified with U.S. diplomatic aims and tended to voluntarily cooperate with American embargoes and export controls. By the 1970s, however, MNCs increasingly objected to and resisted the injection of foreign policy considerations into their business dealings. In part, this was due to the process of internationalization; as overseas operations became more important to the firm, its managers came to identify more closely with host country rather than home country alms. This has also been due to the emergence of a self-conscious ideology of “business internationalism,” which “elevates trade, finance, and investment as a social good which should not be tampered with lest that tampering produce distortions that would be even more harmful than the original problem.”
In line with this business internationalist ethic, corporate officials characterized their South African operations as apolitical and contended that they were being held responsible for injustices beyond their control. They further argued that neutrality with respect to local political conflict was essential for corporate survival given the diversity of governments with whom they do business. Hence, they consistently objected to the extension of U.S. law to their South African operations as a means of using American business as “an enforcement arm of American foreign policy.” As one Citicorp official noted, “there is one rule for American multinationals wherever they operate. This rule is: Hands off.” Similarly, MNCs with affiliates in third countries increasingly sided with host countries in objecting to the extraterritorial extension of American laws. Given this corporate outlook, the U.S. government was less able to extend its laws to or obtain the voluntary cooperation of the foreign operations of American MNCs.
The Anti-Apartheid Movement: Sanctions Without States
One of the implications of the discussion above is that nonstate economic actors (MNCs) have achieved a degree of independence that constrains the state from effectively implementing economic state-craft. Nonstate political actors, such as the anti-apartheid movement, are not generally considered significant actors in foreign policy or economic statecraft. Within the state-centric tradition, such actors can only influence world politics as a pressure group, lobbying the state to exercise direct control over business. In other words, they can influence economic statecraft only by using the intermediary of the state.
Yet pressure groups generally have a great deal of difficulty in penetrating foreign policy decision making, which resides in relatively insulated arenas, such as the White House and Department of State. This is a particular problem for human rights groups, since they tend to rely on outsider strategies of media exposure and grassroots mobilization, which are more influential vis-a-vis public opinion and Congress rather than the executive branch. Even in Congress, this influence is limited by the remoteness of foreign policy issues from the average citizen and the resources expended by foreign governments and American corporations to persuade legislators to minimize impediments to normal economic relations with human rights violators. Finally, even if they succeed in inducing the state to adopt their preferred strategy, public efforts will be subject to the same constraints with respect to MNCs delineated in the previous section.
Since the federal government may be unwilling or unable to control foreign corporate activities, some human rights groups have sought to alter corporate behavior through bypassing the state and directly pressuring the corporation. Such strategies may be effective, because corporate managers often behave more as risk-minimizers than they do as global profit-maximizers, particularly large diversified firms for whom the stake in question is a minor part of its global business activity. In such cases, nongovernmental strategies may be able to redefine the corporate incentive structure by raising the costs and risks of defending the right to engage in business as usual. These strategies are also available to the state, although it may be more reluctant to employ them, since its corporations are defined as instruments of foreign policy and domestic growth.
An illustration of this is the role of nonstate actors in enforcing a United Nations code of conduct governing the aggressive marketing of breast milk substitutes in the Third World—a practice that contributed to increased infant mortality due to illiteracy, poverty, contaminated water, and the absence of facilities to sterilize and refrigerate. In a 1986 study, Kathryn Sikkink found that the infant formula code was enforced primarily by a transnational coalition of grassroots nongovernmental organization (NGOs). Through consumer boycotts, shareholder resolutions, and adverse publicity, these groups were able to “alter the interest calculations of companies” by imposing costs in terms of direct sales, executive and boardroom time, and corporate image, which were disproportionate to the market. In January 1984 they succeeded in inducing the largest company, Nestle, to implement the voluntary code. What is noteworthy about this outcome is that it occurred despite minimal direct enforcement by governments and the opposition of the most powerful industrial state, the United States.
As in the infant formula case, corporate practices in South Africa were challenged primarily by a loose transnational (though mostly American) coalition of nonstate actors. These included students, churches, human rights groups, African-American organizations, labor unions, and institutional investors. While there was some diversity among these groups, their preferred strategy of economic statecraft was one of economic warfare comparable to the comprehensive sanctions imposed on the white minority regime in Rhodesia from 1967 through 1979. As one sanctions advocate noted: “Only after the regime is weakened by sanctions and other factors—internal strife, boycotts, strikes—is it likely to begin serious bargaining.”
Another parallel is that in both cases, NGOs achieved influence less through lobbying governments than through directly confronting the corporation. Prior to the 1980s, anti-apartheid groups had negligible success in moving the United States toward their preferences. At the same time, they directly confronted firms doing business with South Africa through consumer boycotts, stock divestments, shareholder resolutions, and pressure on state and local governments to deny municipal contracts to firms “doing business with” South Africa. As these pressures intensified, corporations voluntarily attached social criteria to their South African dealings to deflect pressures for withdrawal. These included ending sales to the South African military and police, adopting the Sullivan Principles which committed signatories to nondiscriminatory hiring and workplace practices, and funding community development programs that provided housing, education, and legal services to nonwhites.
These changes, however, fell far short of the preferences of most anti-apartheid groups. From their perspective, corporate social responsibility might have improved working conditions for some blacks or led to modest reforms, but it did not alter the structure of apartheid. A continued corporate presence in South Africa, moreover, strengthened that structure directly through taxes, technology, fuel, and continued economic growth, and indirectly through telling whites that they need not change because whatever the West says about its abhorrence for apartheid, it would always find South Africa to be an acceptable business partner. Consequently, anti-apartheid groups intensified their pressures for disinvestment.
A final similarity between the two cases is that the stakes in question for most firms represented only a small fraction of their overall economic activity. In the Nestle boycott, NGOs were able to induce a change in corporate policy by imposing a level of cost and risk on defending a corporate prerogative which represented only 4 percent of global sales. Similarly, in the mid-1980s South Africa represented only 1-2 percent of the worldwide assets and sales of most American firms and roughly 0.5 percent of the loan portfolio of the U.S. banks. Hence, the South African case provided an arena in which a similar strategy of inducement can be examined.
U.S. Government Policy: From Constructive Engagement to Sanctions
During the 1980s, the contest within the U.S. government over public strategies toward South Africa was fought between the Reagan administration’s policy of “constructive engagement” and congressional advocates of economic sanctions. Constructive engagement endorsed cooperation rather than public pressure as the best way to encourage an evolutionary process of reform. The economic statecraft employed in this strategy saw the free market as an instrument of legitimation: increased foreign trade and investment would contribute to an expanding economy which in turn would improve economic opportunities for blacks and give the whites the security they needed to begin to move away from apartheid. Sanctions, on the other hand, were opposed because they would impose costs that would increase the likelihood of repression and revolutionary violence. Even modest sanctions would create a diplomatic climate of confrontation and impede the reform process. Two concrete examples of this new approach were the relaxation of the Carter administration’s restrictions on strategic sales and strong support for a $1.1 billion International Monetary Fund (IMF) loan in November 1982 after a sharp decline in the price of gold.
Congress reacted to this change in emphasis by introducing measures designed to steer U.S. policy away from constructive engagement and toward the application of economic pressure. In November 1983 it passed an amendment that instructed the Treasury delegate to the IMF to vote against any new loans to South Africa unless there was significant progress toward dismantling apartheid. It also introduced two bills that would have banned new investments, loans to South African public sector, and the import of Krugerrands, as well as mandate that U.S. direct investors adopt the Sullivan Principles.
The momentum for legislated sanctions increased with the escalation of violence in late 1984 and Pretoria’s declaration of a State of Emergency in June 1985. But the inability of various groups in Congress to reach consensus on the purpose of sanctions—that is, mandating corporate responsibility, sending a signal, linkage to specific reforms, economic warfare—held up the passage of a bill. In the fall of 1985 President Reagan preempted congressional action with his own milder measures. The administration’s declared aim was not to impose economic costs, but to present a “symbolic and tangible” signal of disapproval while continuing to pursue constructive engagement.
As the violence and repression escalated in 1986, Congress passed a new sanctions bill and overrode a presidential veto. The main features of the Comprehensive Anti-Apartheid Act (CAAA) of 1986 were bans on imports of iron, steel, agricultural goods, coal, uranium (after 90 days), and textiles; exports of crude oil, refined petroleum products, nuclear technology, and computer sales (to the government); new bank loans; and new investments with the exception of the reinvestment of profits from South African subsidiaries. Despite the disparate preferences of members of Congress, they succeeded in replacing constructive engagement with a concrete strategy of linkage—specifying the conditions for the removal of sanctions and promising additional measures if no substantial progress was achieved. In Anthony Sampson’s words, it was “almost a complete alternative foreign policy.”
This alternative foreign policy, however, faced many of the same constraints that limited the scope of previous sanctions. While some European states (most notably the Scandinavian countries) adopted a tougher policy than the United States, the European Community (EC) avoided a ban on coal imports and only recommended a ban on new investments and bank loans. Looser third-country controls implied that the U.S. government could not effectively enjoin the overseas behavior of its corporations and banks. Since the sanctions lacked extraterritorial reach, American firms were able to channel investment funds into South Africa through subsidiaries in third countries with looser controls. The restrictions on sales to the South African military and police only applied to U. S.-origin components and technical data; American firms that sourced their parts outside the United States were exempt from the restrictions. Finally, the failure to achieve a multilateral ban on bank lending implied that public officials lacked control over the offshore activities of American banks lending in syndicates with foreign banks.
Private Economic Statecraft
In sum, the CAAA’s restrictions of American MNCs were less than airtight. The prohibition on new loans and investments could have been legally circumvented because of the global spread of American business and banking. But despite the potential loopholes, much of what could have taken place in theory did not for the most part take place in practice. The primary reason for this was not the formal legislation; strictures on new loans and investments merely ratified what had already taken place. The real actors who overturned constructive engagement were not public, but private—namely, U.S. commercial banks and foreign investors responding to economic and political risks and nongovernmental anti-apartheid organizations that magnified corporate responses to those risks.
Foreign investors and banks. The most significant private economic actors were the international bankers who virtually cut South Africa off from international capital markets after mid-1985. This outcome emerged out of a July 1985 decision by Chase Manhattan to stop rolling over its short-term loans as they came due and to freeze unused lines of credit. Chase’s decision triggered a chain reaction among U.S. banks as they sought to decrease their South African exposure. This led to a weakening of the rand and a “massive drain” on South Africa’s reserves until 1 September, when Pretoria declared a unilateral moratorium on debt repayments and imposed exchange controls. The end result was a crisis of confidence in which the banks refused to extend additional funds without assurances of fundamental political reforms. Cut off from foreign capital, South Africa faced persistent foreign exchange shortages that threatened its ability to achieve economic growth and political stability. As the Financial Times editorialized: “The handle of powerful economic sanctions is being thrust in [the West’s] hands whether they like it or not.”
A similar retrenchment occurred among direct investors. The most visible example of this was the disinvestment of over 200 American firms after the eruption of political violence in 1984. Less visible, but probably more costly, were the efforts by firms to lower their exposure by reducing, if not cutting off, new capital flows to their South African affiliates. As the rand depreciated, some business journals noted that MNCs were transferring funds out of the country by over-invoicing imports, under-invoicing exports, and accelerating dividend payments abroad.(39) In effect, the financial crisis enlisted “even those firms uninterested in opposing apartheid to take actions desired by the sanctions campaign.”
With a few exceptions, corporate officials attributed their withdrawals to economic factors rather than political pressures. Even prior to Chase’s decision, banks and firms faced an uncertain political and economic environment in South Africa. The growing unrest in the black townships since 1984 decreased the prospects for long-term stability and increased corporate perceptions of risk. Compounding this, the economy was in the middle of a severe recession brought on by drought and falling gold and diamond prices. The result was a depressed market and declining profits for many of the manufactured goods produced by U.S. firms.
These conditions contributed to a loss of business confidence, particularly on the part of banks that had lent substantial capital to South Africa’s private sector since 1982. This heavy short-term borrowing produced a liquidity crisis; by the summer of 1985, external debt had doubled to $24 billion, with $14 billion due in the next twelve months. Moreover, much of this lending was based on the assumption that the economy would rebound and that Pretoria was in control of events. By 1985, it seemed less probable that South Africa could quell the violence either by legitimizing reforms or by achieving economic growth sufficient to counter growing black unemployment. All of this decreased the banking community’s confidence in South Africa’s long-term ability to service its debt.
The Anti-Apartheid Movement. A number of business journals and Reagan administration officials ironically interpreted these private sanctions as a vindication of constructive engagement. The judgments of the marketplace, they reasoned, were a more effective and constructive prod than were punitive sanctions or forced disinvestment. If Pretoria wanted to restore business confidence, it would have to reform apartheid and give international business the prospect of the long-term stability it needs to venture its capital. And, unlike legislated sanctions, marketplace pressures would not arouse South African nationalism and provoke a political backlash.
But explanations solely at the level of external risk do not seem to justify the magnitude of corporate retreat. For the banks, South Africa’s problems were serious, but not critical. It had an excellent repayment record, large reserves, a strong payments surplus on its current account, and a relatively low debt-service ratio. For direct investors, political and economic instability in South Africa and elsewhere was not new, and they had usually maintained their stakes in order to retain market access when financial and political order was restored. Even if a revolution occurred, the experience of Gulf staying in Angola after the fall of Portuguese colonialism convinced many investors that if they stayed, they would still be able to do business with a black successor regime.
A complete explanation of corporate behavior has to take account of the sustained efforts by various anti-apartheid groups to sway the commercial judgments of American corporations. In the 1980s, these groups expanded their activities. By 1986, they had persuaded over twenty state governments and some prominent institutional investors to divest their pension funds of stocks from companies operating in South Africa. Shareholder resolutions became increasingly prominent and garnered the support of a growing number of institutional investors. As in the Nestle case, these efforts contributed to what some corporate executives called the “hassle factor.” For most American firms, South Africa represented a small part of worldwide operations. Yet these firms were obliged to devote a disproportionate amount of executive and board time to defend their continued presence in what was a decreasingly profitable part of their global network. At some point, the opportunity cost in terms of energy diverted from more lucrative endeavors or more serious threats was no longer worth it.
A more important development was the adoption by over 140 states and local governments of ordinances which condition eligibility for city purchases or contracts on various forms of corporate noninvolvement in South Africa. Unlike stock divestments and shareholder resolutions, these measures had a direct quantifiable impact on the corporate balance sheet. Since many firms generated far more revenue from municipal sales and contracts than they did from all their business in South Africa, these actions have made disinvestment an “unpleasant, but economically rational decision.”
Public Sanctions and Business Confidence
Even though U.S. government actions were limited in their ability directly to command corporate behavior, they were not wholly superfluous to this process of disengagement. Public sanctions, actual and potential, indirectly influenced corporate behavior by increasing private perceptions of risk. In South Africa, corporate managers faced a decision environment fraught with uncertainty. More restrictive sanctions could be imposed if the situation deteriorated or even stayed the same. Under such conditions, prudent managers generally minimized their vulnerability to worse-case scenarios.
Sensitivity to the U.S. foreign policy aims and to the likelihood of sanctions played a particularly important role for private commercial banks. Under the supportive aegis of constructive engagement, banks were willing to commit capital to the South African private sector. Their expectations were rewarded in November 1982 when the Reagan administration strongly supported a $1.1 billion IMF loan to tide over payments difficulties associated with the declining price of gold. This gave the banks a measure of predictability and sparked a substantial increase in short and medium-term lending until the summer of 1985. Similarly, the civil unrest following the Sharpeville and Soweto massacres produced a severe, but temporary flight of foreign capital. But the restoration of political order through repression and financial order through the IMF restored the confidence of banks to resume normal lending practices.
As Congress played a more assertive role, that confidence disappeared. By legally barring the administration from supporting a comparable rescue package, it removed a financial safety net for the banks and contributed to the decision of the U.S. banks to preemptively repatriate their capital. Moreover, the concrete actions that the Congress took and was likely to take further weakened South Africa’s ability to service its debts. For example, the ban adopted by the United States and other states on the export of oil to and import of coal from South Africa was partially circumvented, but according to some studies at a cost of $2-3 billion per year. The possibility of future sanctions deterred many foreign businesses from investing in South Africa’s export industries, which, with the depreciation of the rand, would have been more competitive. All of these outcomes depressed South Africa’s export earnings and impeded its ability to service its debt. The banks recognized that only by removing the threat of further sanctions could South Africa’s creditworthiness be restored. Consequently, the banks hinged economic normalization (the resumption of normal lending) on political as well as economic reform.
Sanctions also influenced the calculations of direct investors. For example, the Rangel Amendment, which denied tax credits to the South African operations of American firms, induced a number of withdrawals, the most prominent of which was Mobil, by decreasing the profitability of equity holdings. Even the prospect of future sanctions made disinvestment a more attractive option. A 1981 survey of corporate managers found that they saw little need to respond to private disinvestment pressures, because they discounted the possibility that the U.S. government would find sanctions in its interest. As one respondent observed, “South Africa is a classic case of people who want something done that they can’t get through government.” But, as the violence escalated, it began to enter the realm of possibility that Washington might impose sanctions or mandate disinvestment. In such circumstances, U.S. firms stood to lose considerably because they would have been forced sellers with South African buyers having little incentive to pay anything resembling market value. Recognizing this, Business International advised its readers that if they were considering disinvestment, it would be more profitable to act before the likelihood of sanctions increased.
Constraints
In sum, the disengagement of American corporations from South Africa was not a simple response to the marketplace. If that were the only consideration, business confidence might have been restored through macroeconomic reforms and the restoration of order, even through repression. Private pressures and uncertainties regarding public sanctions reinforced marketplace indicators and redefined corporate perceptions of interest. Corporate decision makers were thereby coopted as instruments that would impose costs on South Africa and incorporate political criteria as a precondition for the removal of those costs.
Yet, strategies of economic statecraft that induce rather than command MNCs are limited in what they can achieve. While they can increase the incentives for disengagement, MNCs remain independent actors, which can autonomously choose the form of disengagement that best serves their interests. And, some forms of corporate disengagement not only failed to impose serious costs on South Africa but also worked at cross purposes with some of the values of the anti-apartheid movement.
The clearest example of this was in the area of corporate disinvestment. Virtually all of the firms that liquidated their direct investments in the late 1980s continued to do business with South Africa. Most companies sold their affiliates to local management or third parties, often lending them the money they needed to buy the operation. After the withdrawal, the American parent continued to sell services, technology, and trademark rights through licensing accords. These often included buyback options, which enabled the American firm to return if circumstances improved. In most cases, only the name of the company changed; the management, workers, and product stayed the same.
For American firms, this provided a way to deflect popular criticism while still profiling indirectly from South African operations. In some instances, they improved their profit margins by selling off money-losing affiliates and receiving something for their assets. The shift from direct investment to arms-length contractual relations also left these firms less vulnerable to politicization from future sanctions.
These actions did impose some level of cost on South Africa. The departure of such staunch opponents of disinvestment as IBM and GM was a powerful symbol of changing business attitudes. The sales also placed an added drain on the South African economy by forcing it to expend capital resources to buy existing operations rather than create new ones. For the most part, however, they did not produce the costs one would expect from a punitive sanction. White South Africans suffered little economic hardship. And the symbolic effect of signaling South Africa’s moral isolation was vitiated because South African consumers could still buy the same American goods that were available prior to disinvestment.
There was also an underside to this retrenchment with regard to anti-apartheid values other than economic warfare, because devolving ownership to local management removed the operation from the former parent’s commitments to social responsibility. First, once cut loose from the MNC, the South African offshoots were no longer bound to uphold the workplace reforms of many of their predecessors. In fact, only one of these new firms allowed independent on-site inspection of its workplace practices. Second, local management was less constrained by adverse publicity in the home country from dealing harshly with black trade unions. Third, disinvestment, according to an IRRC study, led to a substantial reduction in corporate funding of community development programs and organizations that challenged apartheid. Finally, the new South African company is no longer barred by U.S. law or its former parent’s policy from sales to the South African military and police.
One reason why the anti-apartheid movement was unsuccessful in preventing these outcomes inheres in strategies that rely on inducements rather than commands. Nongovernmental pressures succeeded to the degree to which they increased the costs and risks so that corporate withdrawal became a self-interested option. Yet, even when this aim was achieved, MNCs still remained autonomous actors that could choose the form of withdrawal which best served the corporate balance sheet.
The preservation of nonequity ties can therefore be understood as a means of allowing the MNC to maximize the income it earned from South Africa after withdrawal. For the departing firm to simply sell off its plant and assets and completely withdraw was economically unattractive. First, the firm would have been in the position of a forced seller, greatly depressing its market price. Second, South Africa’s two-tiered exchange rate system forced the foreign firm to repatriate the proceeds of the sale through the artificially depressed financial rand. On the other hand, licensing arrangements increased the value of the plant and equipment to South African management or third parties and increased the selling price. Moreover, payment for technology and services (as opposed to the sale of assets) took place at the higher commercial rand rate. As a result, the strategy of retrenchment that best served the investor’s economic interests was the one that minimized costs imposed on South Africa.
The negative consequences for corporate social responsibility can also be understood in terms of corporate self-interest. The new South African firm had a compelling economic interest in maximizing cash flow to repay the loan it used to buy the company. Moreover, it was no longer able to sink into the deep pockets of a global company–something that allowed the affiliate to accept political obligations even while operating at a loss. Since it had to pay greater attention to the short-term balance sheet, it had more of an incentive to abandon those obligations which reduced short-term profits, such as funding projects which do not yield income or abjuring lucrative sales to the apartheid-enforcing agencies.
Such changes also served the interest of the former parent. MNCs accepted the obligation of social responsibility as a means of deflecting home state pressures for disinvestment, which was seen as the more costly option. The anti-apartheid movement succeeded when it made staying the more costly option. But once that occurred, the firm lost its interest in preserving its obligations after disinvestment. In fact, its economic incentive was to reverse its reforms since that improved the economic health of an enterprise to which it had generally lent significant capital and which continued to market its products. As a result, few departing firms conditioned their sales to local management on the continuation of “political” obligations which might have impeded cash flow.
GM’s sale of its manufacturing facilities to its South African partner, Delta, provides a case in point. Delta’s first actions were to cut wages and lay off workers at its Port Elizabeth plant. When the black trade union responded by going on strike, Delta promptly fired the workers and ordered the police to remove the picketers. To further maximize its cash flow, Delta reduced funding of community development programs and resumed sales to the military and police. In effect, disinvestment allowed former affiliates to take economically expedient actions that would have been politically difficult for an American firm.
A further constraint lies in the decentralized nature of nongovernmental economic statecraft. If the state’s central decision makers decided to tie contracts to corporate behavior, the regulations would apply to the entire federal government. Private efforts to achieve the same end relied on a large number of separate campaigns to persuade state and local governments. Often, these efforts failed to achieve a full adherence to the movement’s maximum aim of economic warfare.
For example, in January 1987 five major anti-apartheid groups met to denounce disinvestment as a corporate “shell game” and to expand the definition of “doing business with South Africa” to include franchising, licensing, and management accords. By January 1988, however, Los Angeles and San Francisco had been the only major municipalities to target nonequity ties. Unlike the infant formula case, there was less of a consensus concerning what form of corporate compliance should be demanded to serve anti-apartheid aims. As a result, most municipal regulations conditioned contracts and purchases only on adherence to the Sullivan Principles, the termination of direct investment, or the absence of dealings with the South African state. MNCs were consequently able to satisfy the regulations of state and local ordinances with something less than total withdrawal.
A final limitation has to do with the diversity of targets faced by the movement. In the infant formula case, NGOs confronted a single industry and focused a consumer boycott on the clear leader of that industry to stop an action that all relevant actors saw as directly related to the problem. In South Africa, anti-apartheid groups faced over 300 American firms (and many more non-American ones) ranging from banks to oil companies to computer and automobile manufacturers. Given the large number of corporate targets, effective action implied the concentration of resources on the most critical areas. In 1987, top priority was given to placing pressure on international oil companies. There was considerable transnational support for a consumer boycott of Shell, a company which maintained a direct stake in South Africa and had been accused of regressive labor practices and the illegal trans-shipment of oil. As a result, firms that disinvested and maintained licensing accords were not as high a priority to the anti-apartheid movement and were relatively immune from protests and consumer boycotts.
Conclusion
In the traditional practice of economic statecraft, the state regulates corporate behavior to promote a conception of public interest defined by policy makers. Nonstate actors, such as the divestment movement, challenge this traditional relationship by attempting to alter corporate policy, not through the political system, but through directly pressuring the firm. Writing in 1978, David Vogel observed that while these “citizen challenges” have had a discernible impact on some corporate practices, they have not been able to alter this fundamental relationship. This is because nongovernmental actors lack the capacity to command a privately-owned firm not to behave according to the logic of capital accumulation. That can only be achieved through the direct intervention of the state. Hence, he concluded that “whatever success [nonstate actors] have had in changing corporate decisions is due almost entirely to the exercise of public authority.”
While economic statecraft may be a prerogative of states, their ability to exercise commands over corporate decision making has been limited by the growth of the MNC. In the United States, executive and congressional initiatives intermittently sought to pursue economic strategies toward South Africa, such as workplace reforms, strategic denial, and linkage. But governmental strictures lacked effective extraterritorial reach. South African law made it difficult to monitor compliance with controls on strategic sales while the CAAA’s ban on new lending and investment could not have prohibited the channeling of capital and resources through nonboycotting countries. This effectively left economic statecraft to private economic actors responding to the opportunities and risks of the marketplace.
In the South African case, the most significant nonmarket influence on corporate behavior came not from public actors but from private political actors. Their successes came not from limiting the autonomy of firms to act as profit-maximizers but by redefining what firms calculated to be profitable. A declining economy and unstable political conditions also played a major role. In the past, however, firms have not disengaged so dramatically because they have wanted to preserve their stakes when the situation stabilized. Anti-apartheid pressures magnified the corporate response to these adverse conditions and made them more difficult to reverse. And in the case of the private credit boycott, they contributed to a retrenchment, which imposed severe costs on the South African economy.
State policies also played a role in this disengagement. As long as corporate managers believed that the U.S. government would support IMF arrangements or oppose economic sanctions, they felt little pressure to disengage. But once it became clear that the United States would no longer play a supportive economic role and that punitive sanctions were possible, if not likely, disengagement became a self-interested option for risk-averse managers. What is noteworthy about this is the most effective public policies came not through the direct exercise of public authority over business. As with nonstate actors, they were those measures which induced corporate retrenchment through increasing the cost and risk of continued lending and investment.
Yet political strategies that rely on inducements rather than commands are limited in what they can accomplish. While they succeeded in changing the incentive structure for their corporate targets, those targets remained autonomous actors. These limitations were most evident in the practice of corporate disinvestment, which, unlike the private credit boycott, did not impose serious costs on South Africa and undermined social accountability and strategic denial objectives. The anti-apartheid movement had difficulty overcoming these limitations given corporate (both MNC and the local offshoot) self-interest in those arrangements and the multiplicity of targets (both MNCs and municipal governments) which they had to persuade. Preventing such outcomes would probably have required the exercise of public authority. Yet given the global reach of American business, this would have necessitated multilateral cooperation. In the absence of such actions, NGOs amplified marketplace pressures for retrenchment, but could not ensure that the form of that retrenchment would be compatible with their aims.