On Income Distribution and Economic Sanctions

Abstract

1) ALTHOUGH numerous individuals and organisations have voiced opinions about the impact of economic sanctions on the distribution of in-come in South Africa, there has to date been no attempt to frame the arguments in a theoretical model of any rigour. The purpose of this paper is to present the outline of one possible means of analysis that can be fruit-fully employed to investigate this aspect of the sanctions problem. The approach employed is based on the orthodox neoclassical trade theorem developed by Stolper and Samuelson (1949) in the Heckscher-Ohlin tradition. The appropriateness of using this approach to examine the South African pattern of trade in manufactures and also her overall trade pattern has been examined theoretically and empirically by Holden (1981), Holden (1983) and Roque (1984) who all find support for the explanatory powers of the Hecksher-Ohlin model, albeit in extended form. According to Holden (1984) the empirical findings reported by Ariovich (1980) which repudiate the applicability of this model to South African conditions, do not constitute a satisfactory test of it. Nevertheless, the Stolper-Samuelson theorem does not depend on the validity of the Hecksher-Ohlin theorem. It only depends on how the marginal productivities of the factors are affected, for which incomplete specialisation and different factor intensities are the sole requirements (Chacholiades, 1978). Thus Stolper and Samuelson themselves argue that: 'It does not follow that our results stand and fall with the Hecksher-Ohlin theorem ' (1941, p. 72). As long as there is a fairly consistent relationship between factor prices and marginal products, the theorem is likely to be a good predictor of income redistribution, irrespective of whether the Hecksher-Ohlin theorem holds or not. The standard argument in favour of economic sanctions is that a weakened economy will reduce the absolute income of capital more than labour, which, given the highly unequal distribution of income, has little to lose anyway. In other words, the impact of sanctions is expected to fall most heavily on capital. This isbelieved to be desirable on the grounds that capitalists control the pace of political reform in South Africa. According to this line of reasoning, the pace of reform will be speeded up by reducing profits. But, on the basis of orthodox trade theory, it is not clear why sanctions should imply any loss of income to capital at all. Contrary to popular belief, economic theory predicts that the position of capital is likely to be strengthened, not weakened, by sanctions. If politicians are indeed manipulated by capitalists, the effect of sanctions will be to slow down, not speed up, the pace of political change, whilst making the income distribution in South Africa more unequal still.

Economic Sanctions and Interest Group Analysis: Some Reservations

“…The key variables are the distinctions between producers and consumers and between importers and exporters. In addition, if domestic exporters use more labour relative to capital than the producers of importables, labour can expect to suffer a greater loss from sanctions than the owners of capital (Cooper, 1989). Consequently, the political economy effect will depend on the relative importance of capital and labour in the production functions of export and import-substituting industries and ultimately also on the political power of labour relative to capital owners.…”

Trade Sanctions, Sector ‐ Specific Unemployment and Income Distribution: A Dual Approach

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1) RECENTLY, Black and Cooper (1987), Cooper (1989), Dollery (1989a) and Holden (1989) have applied the two-sector general equilibrium trade framework to provide a formal analysis of the economic effects of sanctions. Holden (1989) argues that unemployment can be generated within a two-sector, two-factor model with capital specificity and downward rigidity of real wages.

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“…The long run assumption of perfect capital mobility is justified as a result of physical capital assets transferring themselves into financial capital over time. 9 Cooper (1989), however, assumes that the impact of sanctions imposed is analogous to an internally imposed trade-eliminating tariff.…”

Economic Sanctions and Interest Group Analysis: Rejoinder

“…While financial sanctions and an embargo on intermediate and capital goods may well have a direct impact on white capital and skilled workers, they are bound to have an indirect though not necessarily less significant effect on "black workers". Moreover, Cooper (1989) has shown that a shortage of capital will increase the functional income share of capital at the expense of labour, implying that such sanctions will "harm" labour and "benefit" capital. Since not all whites (alas) are capitalists, nor all black workers; and since not all whites are pro-apartheid, nor all blacks anti-apartheid; and since not all capitalists are pro-apartheid, nor all workers anti-apartheid, the definition of interest groups is problematic, to say the least.…”