THE DISCUSSION of the economic effects of sanctions on South Africa has focused on the long run adjustment of the economy and on the welfare losses incurred. The modelling of unemployment as a result of sanctions has been limited to general statements as to the role of deficient demand, factor market distortions and limited factor substitution (Cooper and Black, 1987). This paper provides a formal, albeit limited, explanation for unemployment within a trade model. Specifically it proposes that unemployment can be generated within a two sector, two factor model with capital specificity and downward rigidity of real wages. The distinction is made between short, medium and long run adjustment of the economy to the external shock of sanctions, and consideration is given to the distributional implications for the factors of production in South Africa.
The Basic ModelAssume that the economy can be described as producing two goods, exportables (E) and importables (M), with two factors of production labour (L) and capital (K). Exportables are assumed to be labour intensive while importables are assumed to be capital intensive (Holden and Holden, 1981). With given endowments of capital and labour the production possibilities of the economy are described by the production possibility curve TT1 (Fig. 1). Community indifference curves show the set of preferences for exportables and importables. Before sanctions are imposed the economy is producing at A and consuming at B. In general, economic sanctions against countries have not been comprehensive and this has also been the case for South Africa. It is well known that sanctions are porous. This means that exporters have had to find other markets, or have used middlemen to launder their goods, in both instances receiving a lower net price. The lower price of exportables will, over the longer term, move the economy to producing at C and consuming at D at a level of welfare represented by CIC0. The change in the terms of trade does not imply a state of autarky for the economy. Trade still occurs albeit at a reduced level for both exports and imports. At C, as at A, there is still full employment of the factors of production. This raises the 1989 SAJE v57 (2) p138 question of how unemployment arises in this model. The traditional Heckscher-Ohlin model cannot answer this question because it assumes full mobility of homogeneous factors of production and flexible factor prices. However, if it is assumed that in the short and medium run capital is specific to each sector, such that Ke and Km are the initial values of capital in exportables Fig. 1 Production possibilities and consumer preferences. and importables, and that wages are downwardly inflexible, unemployment in .the exportable sector can be generated. The specific factors model of Jones (1971) has a factor that is wholly specific to each sector. This factor can be interpreted as capital which is completely fixed in the production of exportables and importables as shown in the Edgeworth-Bowley Box for the economy (Fig. 2 up...