This resource is hosted by the Nelson Mandela Foundation, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.
27 Aug 1992: Keys, Derek
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POM. Mr Keys, I've had a number of conversations over the years with economists around South Africa, with your predecessor Barend du Plessis, and generally found an air of pessimism and every year I come back the economy appears to have deteriorated more. Is there a real danger of South Africa becoming one of Africa's economic basket cases?
DK. Yes I think so. In fact we've gone quite a good way down that road. The economy has been fairly far from the number one priority in this country for many years now. It was harnessed to the idea of repelling the total onslaught, directed to producing a situation of self-sufficiency or at least adequate self-sufficiency so that one could resist demands from outside, so that one could weather sanctions and that wasn't the high growth path for the economy. This tendency isn't over yet because one sees the ANC and COSATU still wanting to use the economy to meet specific non-economic ends. The objective of the economy ought to be to increase everybody's wealth but in fact the economy has been (one doesn't want to use language that's too emotive) but battened on by the different political forces including the government in order to try and make it serve particular ends. In the course of that its performance, its growth performance, its ability to grow at all has been seriously impaired and if we simply go on with existing trends then we will be well into darkest Africa before the year 2000.
POM. One thing I'm struck by is the number of strikes that are going on at any given time and one finds it hard to differentiate between what one might call a strike for legitimate grievances and a strike that's really a political strike or not really a strike dealing with work situations. Is there a culture developing in the labour movement which can become a demanding culture, an entitlement culture that because people were so deprived during apartheid that great leaps forward in wages must be made and this really reduces or slows the productivity of the economy, that the rate of wage increase is always above the rate of productivity increase?
DK. Yes, but it's come from both sides. You put your finger on the one side which is the demand side that people simply feel that they ought to be better off than they are. But it's also come from the employers side, that as gold broke out of its $35.00 an ounce stranglehold at the end of the sixties the gold mines became very profitable here and led the way in terms of rises in real wages for their employees at a far greater rate than what would have happened under normal bargaining situations. So from both sides really a kind of culture has been established that workers ought to be better off in real terms each year, which is a form of indexation of course and which has contributed to our problems in slowing our rate of inflation.
POM. Someone said to me that the real divide in South Africa now is not between blacks and whites but between the employed and the unemployed.
DK. Yes.
POM. Is the gap between what unionised black workers are paid and what white workers are paid in profitable jobs closing?
DK. Yes. That gap is more or less closed. Most firms you will find are on a wage curve with sort of 15% differences between about 15 or 16 grades of job and that more or less defines the wage curve and you won't find blacks and whites on the lower part of that curve, which is where you find the admixture, you won't find them distinguishable in terms of what their wages are. So that's been closed all right but then below that, as the start of your question implied, there's a huge gap to what people who aren't unionised employees can earn.
POM. Now when the ANC was unbanned two years ago there were a lot of nervous noises about its radical economic policies, its emphasis on nationalisation and socialism and there has been an evolution in their thinking over the years. Do you find their thinking now on economic matters broadly similar to your own?
DK. Yes I do. There's been a tremendous shift in their policy largely because they've taken advice and they've got good advice. I believe they were advised in Beijing not to let the government sector get too big, so even from the most unlikely quarter you can get good advice.
POM. The public sector here now occupies something like 48% ...
DK. I'll give you a better figure. Consumption spending of general government is now about 22% of gross domestic product.
POM. That's already way out of whack with what would be the norm in an industrialised economy.
DK. The United Kingdom is 23% but Japan is 9%, Korea is 10%, Singapore is 11%.
POM. How does a new government simultaneously address these huge inequities and at the same time, I am assuming that in a new constitution existing civil servants will have their jobs entrenched, expand the civil service to bring in their own people in some way and cut government expenditure?
DK. The answer is with great difficulty. This is the main problem to which I'm applying myself. I'm really interested in what the consumption spending of general government will be in the new South Africa. That's almost the most important figure for me sitting where I am. A more important figure is the level of investment. The two, of course, are connected because they compete for the same resources. But I've defined the target in terms of getting the consumption spending of general government down to the 16% area. As I say it's now 22% and this is the plan that I'm interested in and which will take three or four years to bring to a successful conclusion.
POM. Are the ANC in general agreement?
DK. They don't dispute the necessity. They hope that before they come into government most of the painful decisions will have been taken.
POM. Well let's assume they come into an interim government some time in the next year, do you ...?
DK. Then I would be submitting to them the programme in order to do exactly that. At the point that they lost interest in that then I presumably wouldn't be of much further use to them.
POM. The interim period will be a period of power sharing?
DK. I don't know. We'll have to see. I assume there are still acceptable policies and unacceptable policies in the power sharing arrangement so one will just have to see, but my mandate, my main interest is to create a situation in which there's a possibility of satisfactory growth for this country and you can't achieve that if you don't discipline yourself, keep government consumption spending within certain limits.
POM. OK, I'll ask the obvious question: how do you propose to do this? What are the major elements of it?
DK. Well there's a lot of scope for it because the proliferation of governments that's been created during the apartheid, and to homelands, separate development era, has created an enormous number of overlapping structures and through a process of rationalisation of those structures you could have the best of both worlds. You can have regional governments but they have to work within an overall framework. There has to be one tax collecting body. There has to be a fiscal council where the overall level of government spending is agreed. There has to be an agreed formula in terms of which you define how much of the country's annual income is going to be applied to education, to health, to housing, whatever. There has to be agreement about what will be spent by the central government and what will be spent by the regional governments and, of course, there has to be agreement about how the amount that would be spent by the regional governments is divided between them. So you need an entire framework, mental framework, which becomes common property and which is, I suppose, enshrined in the constitution.
POM. You believe that the economic parameters should become part of the constitution itself so that one has to keep to this path.
DK. Absolutely. I think that would be the best guarantee of good government.
POM. I was just thinking as you were listing out these things that the more emphasis that's put on a very strong federal system where the regions have great autonomy or great powers argues in a way against what you are saying.
DK. In a way it makes it more important that you should have that. In other words the greater the autonomy - if you don't have very strong powers in the regions then you always have the possibility open that the central government could grip things and do things but as you go for stronger and stronger regional governments the importance of having an over-arching agreement on these fundamental factors becomes greater.
POM. It has surprised me during CODESA, at least the information that I received whether here or from news reports or clipping service or whatever, the lack of attention paid to economics.
DK. It's an old South African tradition. I used to say that sound money was priority number 247 for any South African government, so we've always worked that way.
POM. How do you see this being enshrined in the constitution? What kind of provision, what form will the provision take?
DK. Well, if you take the Federal Republic of Germany, the way in which the different lenders are keyed in, there's a provision in terms of which there are funds collected from the richer ones and distributed to the poorer ones and that's all in terms of agreements arrived at at the time of the formation of the state.
POM. This is similar to the Economic Community's regional fund?
DK. Yes, except I don't know as much about that so I can agree with you in general but I'm not sure of the particulars. In any federation where you are federating unequal partners you have to have fundamental agreement and the stronger the regional governments become the more important that agreement becomes. And I think it's a hard case to resist that there's a need for such a thing.
POM. This would require, would it not, that you have to define the regions before you can define the parameters that you would specify becoming ...?
DK. You could define the principles of the parameters before defining the regions but before actually fixing them you would have to know what was in the different regions. It relates to things like how much you are going to spend per capita on health, how much you are going to spend per capita on education, how much you are going to spend per capita on housing. All these regions will have taxing powers of their own. That gives them a certain degree to which they can differentiate their spending power but then all of them will have some relationship with the central government and those relationships will have to be spelled out before one signs.
POM. Would the provisions specify that the government's part of total consumption must fall within ...?
DK. So many per cent of gross domestic product? Yes.
POM. The other daunting figures that I hear now, every figure is daunting, but one out of ten graduates this year will get a job and that if the Nedperm economic scenario of you were going to need three miracles, a social miracle, a political miracle and an economic miracle, that in order to stay even, for you not to decline, you have to have a growth rate of about 5½% a year which South Africa in its history hasn't achieved except for a very brief period during the late sixties or early seventies. How do you jump start the economy in some way to that level, particular with this massive unemployment?
DK. In this country you can only do it by hooking in to the export market in a much bigger way because the export market opportunities dwarf what we can do. In other words there isn't a problem of there isn't an adequate market. And as you know we've been starting down that road for the last couple of years and the results are quite promising so we've just got to do far more down that route, fundamentally taking off on top of what we are currently exporting, trying to go down the value added chain. We're exporting manganese, ferro-manganese, want to go further than that going into different kinds of special steels and so on and so on.
POM. You're facing this challenge in the face of a world-wide recession.
DK. Depression. Yes but you see penetrating export markets isn't the real problem for us. It's a problem doing so profitably but actually penetrating the market isn't a problem because we are so small that we don't get countervailing duties imposed on our stuff straightaway and so on. Our steel makers are dumping all over the world, our paper makers are dumping all over the world and so on. They meet a certain amount of resistance as a result of that but basically it's still a perfectly feasible operation and we just have to expand the range.
POM. That takes time. This is kind of a long term plan. I suppose my questions are semi-political in a sense that how do you satisfy short-term?
DK. You don't. You don't. You try to find an accommodation with the black elite and you do your best to keep the black people whose expectations are unfulfilled quiescent.
POM. Is that possible?
DK. Who knows.
POM. If you were a black person living in, say, Soweto or living in a shack what would you reasonably expect after four years of "your government" being the dominant partner of a coalition?
DK. Well whatever you might expect you would have to accept what you could get. There's no way round this problem.
POM. Do you find recognition with ANC economists at least that there is no way around it?
DK. Mm. (Yes)
POM. But there doesn't seem to be any attempt at all to educate the people to the fact that changes take time.
DK. There is quite an attempt I think on the part of a chap like Trevor Manuel to bring this home to people and secondly, of course, they're all fighting elections at the moment. The election that's going to take place in 18 months time started about five months ago so you won't see much realism injected into the different constituencies and all the black groups are uncertain about what the strength of their constituencies is.
POM. So in a sense they have to make promises that they can't keep?
DK. Well they certainly don't feel they are obliged to confront people with reality.
POM. Devaluation as a way of stimulating exports, is that a policy option?
DK. We don't need it at the moment. The guys who can export are exporting. We have a very health trade surplus. The weakness in our balance of payments is on the capital account not on the current account and I don't see that if we devalued the rand that we would become a more attractive haven for funds.
POM. Just in your experience as Finance Minister, what have you found in the international community regarding foreign investment in South Africa given the competition for capital that exists?
DK. I don't think competition is such a big factor. The prospect of investing here is just unacceptable in terms of the level of violence and the unsettled political situation. I've hardly applied my mind to what kind of financial or tax incentives we would have to provide in order to get people to invest here because it just isn't an option at the moment.
POM. So would you see a two-phase period, an interim government takes over, the country begins to get more stable, foreign investors will still do nothing in the interim phase. We then move to your Constituent Assembly and whatever constitution is either amended or redrawn or whatever but you emerge out of it and you turn that into a new parliament or you have another election, but now the international community again wants to wait to see what happens?
DK. Absolutely.
POM. So one could be talking four, five, six years before ...?
DK. Easily.
POM. In the absence of any investment from abroad how do you prevent the economy from continuing to slide, both black and white incomes deteriorating?
DK. Well if there's no confidence to invest then one doesn't prevent it. Then we just continue on down the slippery slope. So you have to try and create a situation where people have sufficient confidence to invest or you have to invest yourself, of course, which I'm very reluctant to do in view of government's bad record in picking good investment.
POM. South African investors are very loathe to invest?
DK. I'm loathe to see government making the investments.
POM. Because?
DK. We've got such a poor record. We haven't picked things with a very high yield. Mossgas.
POM. If we're talking about the optimistic scenario, that if we get through transition and proceed to the second phase in four or five years minimum, nothing is going to come in during that period even if everybody behaves?
DK. Nothing's going to come in from outside?
POM. Yes.
DK. No, I'm talking about local investment. All I'm saying is I don't want the local investment to be investment by government.
POM. What I'm asking you is, could you generate sufficient local investment to produce a growth rate given the way the growth of population would result in rising incomes?
DK. No.
POM. So. This is getting very depressing. So in the face of declining incomes, attempts to redistribute and given the parameters set on the share of government spending in a declining GDP.
DK. It won't be declining.
POM. It won't? OK.
DK. Only declining per capita.
POM. Again, how do you pull these together and create - it would seem to be that the constraints will create a condition that will result in increasing uncertainty because the whole mass of the unemployed who are now enfranchised are going to be up, if not literally in arms, in rhetorical arms at least?
DK. As I say, you will have to come to an accommodation with the black elite and you have to keep the black proletariat or, if you like, the uncoloured proletariat, quiescent. It's what you have to do.
POM. How do you do it?
DK. Most political solutions have that character, don't they?
POM. I suppose I see it as being - the liberation movement since the Freedom Charter has harped on one thing. If you look at whites being imbued with the total onslaught and still see a communist behind every tree, you have blacks who believe that everything is going to be righted when 'their' government gets to power. Now you are saying not only will everything not be righted but in the short term, which may be up to at least five, six, seven years, things are going to get worse.
DK. No they're not going to get noticeably worse. You know that in the last five years the only income per capita that's dropped is the white income per capita because the rate of redistribution has been fast enough to in fact give blacks, Asians and Coloureds, to use our old categories, increases in income per capita. They haven't only had increases in income per capita, they've had fantastic increases in psychic income in terms of getting into a position where they can negotiate for power and become part of the government or perhaps the whole government, this, that and the other. And the people who have left the farms and come to the cities, whether employed or unemployed, are probably better off than they were on the farms in terms of level of income. So the disaster scenario so far on a per capita basis has been a white disaster scenario.
POM. So black income even though unemployment is increasing at these drastic levels overall and the economy is reducing a negative growth rate, within that per capita income among blacks is rising?
DK. Yes. Speak to Merton Dagut, Professor at Wits and you will find it in his book, The New South Africa. His book, I think he's a co-author, called The New South Africa which gives a lot of these figures. Some of them wrong.
POM. Looking at just employment which would seem to be to be the most serious immediate threat that a government must do something about, can you begin massive public works programmes, building houses, infrastructures and whatever? Would these have to be financed from the private sector or in a partnership?
DK. There's no problem with the finance. Government has large sums of money unspent on housing. The fundamental problem with housing at the moment is the question of getting the community's acceptance, getting the ANC to collaborate, getting a co-ordinated all community programme which aims at getting the job done. I'm sure you've spoken to the IDT and anybody else involved in housing and you will find out that in fact there's tremendous resistance built in from the community side, or from the comrades side or from whoever's side, the kind of people that wanted to get in the way of the foreign loan for the IDT's housing scheme. So I'm not too worried about where the capital will come from for housing. I'll worry about that at the point that we get a housing programme going. We have to have a housing programme.
POM. Someone told me there were twenty-six different housing agencies?
DK. Oh more. If we get a housing programme going it'll be a great psychological boost, it'll help to counter this lack of confidence which led you into your fit of depression a moment ago and at least initially you will be using unemployed resources to such an extent, cement plants or steel works or whatever, brick works and of labour that the kind of capital absorption of that thing will be fairly low. In other words it won't bleed you dry of capital.
POM. Would there be sufficient skills at each level of ...?
DK. You don't need much skills for low cost housing. You can train people in six weeks.
POM. Nationalisation as an issue is by and large a dead duck?
DK. Haven't heard it mentioned for ages.
POM. The thing about conglomerates, of four major companies owing 80%, which is the opposite of what free markets are all about. In fact I have been using a taxi driver and he told me he had this idea of where he was going to organise a little company that would transport soldiers from their bases to their homes throughout the year and it would cost them R100-00 or something and when he went for permits and whatever it was all turned down because he was told that it would ease into somebody else's business. Restrictive trade practices seem to be prevalent. What is the prevailing sentiment regarding these huge companies and their dominant position in the economy which basically can influence any decision government takes about it?
DK. I'm relaxed about them. Of course I come from one of them as you know and while I was at Gencor I launched the idea of unbundling Gencor, splitting that corporation into five corporations and it's perfectly feasible and we ran that group on the basis that that was perfectly feasible. So the answer there really was it was the management structure that made that possible. But it would be just as possible for Anglo to do the same thing. What you've achieved by doing it I'm not too clear about because they don't in fact have companies that ought to be competing with themselves. They have one large company of each kind. They have a large paper company, Anglo, called Mondi. Gencor has a large paper company called Sappi which has become one of the unbundled sections of Gencor. It's unconceivable to me that Sappi and Mondi would behave any differently having been unbundled than the way they behave today which is that they compete flat out and they export. So I'm a sceptic on the question of breaking up the conglomerates. I'm not quite sure what it achieves. I can see one value for it and that is that if the ANC thought that this was a terribly valuable thing to do, well that would be an easy thing to concede because it wouldn't do anybody any harm. I keep telling people, the Rockerfellers didn't get poorer when they broke up Standard Oil. Just as the Oppenheimers won't get poorer when they break up Anglo.
POM. So have you seen in the last 2½ years significant shifts in any of the economic policies of the ANC?
DK. Yes.
POM. Do you see that matched by a willingness on their part to accept that for a number of years what they call the wealth and privilege of whites is not going to be redistributed in some magical way?
DK. No, no, there's still a lot of talk about redistribution. There's talk about capital gains tax, there's talk about a wealth tax, there's talk about a land tax and so on. I imagine we will get a full panoply of these kind of socially orientated tax ventures. I don't think it will make that much difference in the end.
POM. Given those kinds of economic problems, and this is speculation, I'm asking you to speculate, do you think that the ANC alliance in government can remain an alliance or that the special interests of each group at some point come into such sharp conflict and with the issue no longer the toppling the regime which are now part of the regime, that the pressures ...?
DK. I want to quote for you that nice phrase of ... when he was in one of these Caribbean islands that had become independent and he was talking to the Prime Minister and he said he sensed a certain melancholy which he had seen before which was the result of somebody having exchanged the security of agitation for the insecurity of power. You'll have plenty of that.
POM. Nicely put.
DK. There will be plenty of different interests and so on.
POM. Would you see this kind of, that the labour would go off on its own and a Labour Party developing maybe, perhaps COSATU along the British Labour Party, the SACP having to go it alone?
DK. I don't know. One has to respect the ability that the ANC has shown to encompass all these disparate elements.
POM. That's easier when there's a common enemy.
DK. That is easier when where's a common enemy but it could also be done by a common objective.
POM. Let me put the question in a slightly different way. If one looks at Poland you have the Solidarity movement which held together, withstood all kinds of attempts by the state to oppress it, finally wins the day, accedes to power and splits into so many groups that the country has become virtually ungovernable. It's a greater mess now than it was under socialism.
DK. Well that kind of thing could certainly happen. But I'm not that well acquainted with black political groupings. I know a few of the people fairly well.
POM. Who impresses you among them?
DK. Cyril Ramaphosa, but he's also the chap I know best. he's a very good guy.
POM. And you believe that he knows in his head that all these variables mean a kind of harsh future?
DK. Yes I think so. He's very intelligent.
POM. Yes I've done a couple of interviews and he struck me as very insightful. So you are optimistic about the future are you?
DK. I'm a Christian. I have hope and I never saw a situation yet that couldn't be improved, so that's what I'm busy doing here.
POM. OK. I'll leave it at that. Next time I'll come back to you based on the responses. But if I was summing up I would say that the economic constraints built into the constitution, an acceptance that the magic of foreign investment was not going to materialise for several years, rough times are ahead, a cut in the size of the public sector.
DK. A planned and designed cut, yes.
POM. In the public sector and the launching of a massive housing programme, perhaps it's one of the most visible things that can be done to show that things are changing.
DK. Coupled with a strong export drive.
POM. Coupled with a strong export drive.
DK. That's the best we can offer. Today anyhow.