The Implications of Pulling Out

For the past 20 years--and particularly since the Soweto riots of 1976--the actions of activists challenging U.S. corporate involvement in South Africa have frequently grabbed headlines in the nation's press. Candlelight processions, violent demonstrations, and even occasional institutional decisions to divest have kept the issue continuously, if sporadically, in the country's news. Yet determining the effects of this activity has been difficult at best. Has the movement simply sparked public awareness and soul-searching, or has it really affected American corporate involvement in South Africa?

In 1982, the Investor Responsibility Research Center (IRRC), a Washington D.C. based think rank, studied the history and development of the debate in the U.S. examining, among other things its impact on corporate behavior. During the course of the study, IRRC interviewed representatives of nearly every major activist group, several banks, a number of companies active in the Sullivan Principles effort and many state and national officials involved in the debate. The report, entitled Two Decades of Debate: The Controversy Over U.S. Companies in South Africa, was released earlier this year, Following is a summary of its conclusions on this issue:

If success is measured solely in terms of getting U.S. companies to withdraw from South Africa or to stop selling strategic goods to Pretoria, the anti-investment activists have not fared well. Fewer than five companies have credited the debate with playing a role in their decision to sell off operations in the country, and few companies have gone beyond the U.S. Commerce Department restrictions on sales to the South African government. Moreover, available evidence suggests that the debate has not limited business's decisions to expand in the region. In the 15 years from 1966 to 1981, for example, the value of U.S. corporations investment in South Africa more than quintupled--a rate of growth exceeding that of total American investment throughout the world.

This does not, however, mean that corporate policy has remained unaffected by the divestiture debate. Once decisionmakers within banks and corporations began to examine internally the issues raised by the public debate, they instituted a number of changes in policies and practices. Thus, the debate served more as a catalyst in focusing the attention of corporations of conditions, in South Africa and the proper role of U.S. companies there than as a source of pressure demanding a particular response.

For many American companies with subsidiaries in South Africa, the major outcome of the debate has been the signing of the Sullivan Principles of equal employment opportunity. With varying degrees of commitment, more than 140 companies are now participating in the agreement, which sets minimum labor standards and allows their progress to be evaluated by Arthur D. Little consultants each year.

The companies' continued adherence to the Sullivan Principles can be explained in large part by their desire to defuse pressures for U.S. corporations' withdrawal from South Africa. Nevertheless, the agreement itself has some affect. Since their introduction in 1977, the principles have been amplified three times and rating criteria have also been made tougher. Many of the companies pledged to the effort have opposed both these moves, but only one company has elected to remove its name from the list of firms included in the agreement.

The Sullivan Principles may also have a small but significant impact on internal corporate debate. In discussions with managers of American firms in both the United States and South Africa. IRRC found several who said the principles gave them leverage within their own companies when arguing for more progressive labor practices. The argument that "we have to do it to get a good Sullivan rating," while by no means totally persuasive, tipped the decisionmaking scales at times.

In addition, many companies new disclose an unprecedented amount of information on the labor practices of their subsidiaries in South Africa. Several firms release periodic reports detailing their South African subsidiaries' wage scales, Black training and advancement programs and support for projects in the Black community. Frequent meetings with shareholders concerned over the South Africa issue have at times resulted in disclosure of additional information and have exposed management to alternative viewpoints.

Finally, the portion of the debate focusing on the question of foreign loans to South African borrowers has affected a number of U.S. banks. While no major bank has gone as far as the activists would like and adopted a policy eschewing all South African loans, several have gone part of the way by formally agreeing not to lend to the South African government and its public corporations. Others are de facto following the same policy Significantly, U.S. banks have not publicly singled out the government of any other foreign country in a similar fashion. These new lending policies have contributed to the fact that U.S. bank loans to the South African public sector are at a lower level today than in 1977.

(Editor's note David P. Hauck, director of the IRRC's South Africa Review Service, notes, however, that U.S. bank loans have also been constrained by two additional factors: heavy borrowing by the South African government in the early 1970s which pushed loans at several U.S. banks to their ceilings, and a feeling after the Soweto riots in 1976 that any loans to the country were a high-risk proposition. In the last year, as much of the previous debt has been paid off and the memory of Soweto has dimmed, bank lending has begun to creep upward again.)

The Reagan administration's recent easing of several of the restrictions on trade with South Africa has also had repercussions on the debate and corporate involvement. For business, the word from Washington is that sales to South African government buyers are no longer automatically considered to provide support for apartheid. Although the dollar value of sales affected by this shift may be small, it provides a great boost for those who argue that U.S. firms can be in South Africa and not contribute to the maintenance of apartheid.

In recent months there have also been indications that some participants in the debate may be moving in a new direction. Since 1979, a series of legislative and policy changes by Pretoria have created new opportunities as well as new obstacles to companies acting as a progressive force in South Africa. On the one hand, the government has begun to seek the counsel of the business community and has repealed many of the regulations blocking Black training and advancement and trade union organization. Yet, at the same time, Pretoria has proposed harsh new laws restricting even more the movement of the majority Black population within the country and has adopted a new constitutional plan that includes some coloreds and Asians in the Parliament, but adamantly excludes Blacks.

In addition, the Black labor movement has emerged as a major force in the nation's factories and some members of the South African business community have begun to speak out for liberalizing reforms.

A few American companies have paid close attention to these developments. During 1982, several of the company representatives most committed to the Sullivan effort begun to discuss among themselves whether they should become more active on issues that until very recently were considered non-business matters. They sensed an opportunity to join with and contribute to the lobbying effort begun by progressive South African businesses--an effort that some American businessmen are coming to believe would be in their own long-term interests.

But this tentatively merging position in the debate may never pain widespread acceptance. In the first place, the majority of American firms are not likely to abandon their apolitical stance in South Africa. While they perceive the possibility of long-term risks to their investments if change does not come, they also believe that painful short-term costs may ensue from antagonizing Pretoria. In addition, because nearly all institutional investors appear to be satisfied with rather straightforward policy guidelines on the South Africa issue--including adherence to the Sullivan Principles, and refusal to make loans directly to the South African government--it is unlikely that they would become a major source of pressure on companies to move toward this new position in the debate.

At the core of the divestiture debate lies a fundamental question: What is the impact of U.S. corporate involvement in South Africa and what would be the effects of withdrawal?

In 1977, the Rockefeller Foundation formed a commission to study U.S. policy towards the country. Comprised of industrialists, academics and a labor unionist, the commission was chaired by Ford Foundation president Franklin Thomas. Its principal advisors included G.A. Costanzo, vice chairman of the board of Citibank: William Sneath, chairman of the board of Union Carbide Corporation: former Secretaries of State Henry Kissinger and Cyrus Vance; and Donald McHenry, former United States Ambassador to the United Nations.

In 1981, the commission published its findings in a report entitled: Time Running Out: The Report of the Study Commission on U.S. Policy Toward Southern Africa. The report eventually recommended against U.S. corporate withdrawal, instead urging a policy of nonexpansion, increased corporate philanthropy for Black South Africans, and more effective monitoring of the Sullivan Principles. On the way to reaching this conclusion, however, the commission provided substantial information on U.S. corporate involvement from which the following is drawn:

More than one-third of American investment in the African continent is concentrated in South Africa alone. American corporations pay taxes to the government, and foreign loans help finance South Africa's purchases abroad. In addition, although U.S. investments account for a relatively small proportion of total foreign capital in the country, it is concentrated in a number of key industries: oil (constituting about 44 percent of the petroleum industry), automobiles and trucks (33 percent), and computers (roughly 70 percent). All of these industries, advocates of divestiture argue, are critically important to the South African government's capacity to maintain control and develop its economic and military strength.

On a different level, U.S. corporate involvement may provide important moral and political support for the apartheid regime. The presence of foreign capital, divestiture proponents argue, protects South Africa against international economic sanctions. In addition, the argument continues, the South African government's aggressive foreign borrowing, despite record foreign-exchange earnings from gold, allows it to maintain a high profile in Western credit markets.

The impact of U.S. corporate involvement on Black South Africans is a subject of fierce debate. Opponents of divestiture argue that foreign capital is beneficial to South African Blacks and that withdrawal would harm them more than whites in the country. There is, these people emphasize, a considerable trickle-down effect from foreign investment that benefits at least those members of the Black labor force who work in the modern sectors of the economy. Economic growth and prosperity will open up new and more skilled jobs for Blacks, produce better wages, and narrow the Black-white income gap, in addition, it is argued, U.S. firms can set an example by following good labor practices and affirmative action policies.

Those favoring divestiture contend that the flow of foreign capital has not improved conditions for Blacks in the country the gap between white and Black wages was not significantly altered during the years in which economic growth was fueled by foreign investment. Moreover, few Blacks have been accepted in managerial positions in commerce and industry. In some cases increased American investment has made industry more capital intensive and actually reduced the number of Black employees. And, during the period of great economic growth. Black political rights have, if anything, been reduced by the growth of discriminatory and repressive legislation and the implementation of the homelands policy.

Opponents of divestiture argue and the Rockefeller commission concludes--that, for divestiture to have any chance of being effective, it would have to be supported by the other major foreign investors in South Africa. Britain, whose withdrawal would be particularly important, simply cannot afford divestiture. And government and business leaders of other European countries, although not economically constrained, told the Rockefeller commission unequivocally that divestiture was out of the question. If the United States were to pull out one its own, the vacuum would probably be filled by foreign and South African firms eager to expand their market shares.

(Editor's note: Others disagree with this assessment, pointing to the concentration of American capital in key South African industries and arguing, in addition, that American withdrawal would have a profound psychological effect on the apartheid state.)