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 It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.
04 Oct 1999: Keys, Derek
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POM. First of all I will take the broad question, the World Economic Outlook last week published its report, the IMF/World Bank have come in with their judgements and most seem favourable to SA, at least for next year. This year is kind of written off, 0.7% growth perhaps, next year it will be at 3.5%, inflation according to Alec Erwin last night is over, at its lowest level in 30 years and interest rates are falling, the rand has stabilised around six to the dollar and the price of gold has surged to over R300 an ounce. Except for one factor that unemployment continues to rise all seems ship-shape except that the poor get poorer. What does it all mean in a context?
DK. Just a day ahead of the IMF report UNCTET produced its report.
POM. That was on foreign investment?
DK. That was the one in which they made the point that globalisation so far has been a bummer for the less developed world and it's good finally to have from that kind of source that statement. At the time I was in government the Uruguay Round was being finalised and it was awfully difficult to get reliable estimates of what was likely to happen as trade was liberalised on a grand scale and eventually I did get the figures and they were the less developed while the developed world was going to go up massively in terms of well-being, the less developed world was actually going to suffer a decline which when everything had been sorted out and the whole system was working perfectly, they would recover from. Subsequently there have been a couple of World Bank working papers on the Uruguay Round and its actual effects and it's confirmed that statement. So far the south, or the rest if you prefer the distinction between the west and the rest, so far the rest has had a thin time of it.
POM. They've had a tough time of it.
DK. And we're part of that. We're perhaps a slightly exaggerated part of that because we did have part of our employment creating world that was created because of sanctions and which the whole armaments industry, for instance, and a lot of other secondary industry which was feeding that, benefited from that and that provided quite a lot of jobs. Then we also had what was described to me at one stage as the most complicated tariff book in the world apart from Nepal and it was possible to shelter a lot of jobs and activities behind that screen. Now that's all either going or already gone. Even if those two factors had not been there we, along with any other country at our stage of development, would be struggling today to maintain jobs, never mind create them. Goods flood in in the form of imports, the capital market is strong enough to provide the funds for that to be financed, so in a sense you can get away with having a negative balance of trade.
POM. That's being paid for by?
DK. By overseas investment of whatever kind, portfolio or anything else.
POM. But it's mostly portfolio?
DK. Correct. So that's happening all over the world and we're struggling with that and, frankly, I wouldn't know what to do. The ultimate answer is, of course, that each country, as you move towards free trade, each country should be able to develop the things in which it has a comparative advantage. The huge block in the way of that is the agricultural policies of the developed countries. We should be providing the food which we can do. We're not as well placed as some other countries to do it but there's a lot there.
POM. A lot of the burden of this would rely on the economic community and it's virtually protectionist policies particularly towards French agriculture.
DK. Absolutely, all the farmers. I love the French countryside, it suits me that the French are so pig-headed because heaven knows what France would look like if they didn't have that, or Ireland for that matter. So the theoretical systems prevent it from working. We've got from a job point of view the worst of things and it's not just agriculture, things like Ferro-alloys, there shouldn't be a single Ferro-alloy plant in any developed country. They're bloody awful from a pollution point of view. There shouldn't be a mine, there shouldn't be a coal mine in Germany. That coal costs I think, I don't know what the figure is, four times as much as our coal costs. This is a problem that not just SA is struggling with.
POM. SA is really operating in a regional part of the world context and it's in a way similar to, and I think we discussed this before, that the disparity of income in the developed countries between the richer 20% and the poorer 20% or 30% or 40% is growing not decreasing. Was it that same report that gave data on the - the UNCTET report on direct foreign investment?
DK. No I think that's a separate report. That was earlier again.
POM. That report, as I recall, indicated that the bulk of direct foreign investment went from developed country to developed country.
DK. Who is the biggest recipient of capital inflow in the world? The United States.
POM. But this would be direct, direct investment. In Africa the biggest contributor, foreign exporter of net foreign investment is SA. SA last year was below Zimbabwe, Egypt, I think even Sudan in terms of direct foreign investment. Again is the systemic - or why is it that a country like Zimbabwe with a political system that's in disarray, on the verge of imminent collapse if one just reads the papers, soaring inflation rates, can attract more direct foreign investment than a country like SA that has brought its interest rates down, that has brought its tax rates down, that has brought its inflation rates down, that has following the IMF and the World Bank prescriptions probably more dutifully than any country in the world and yet has been so poorly rewarded in terms of direct foreign investment?
DK. First of all I don't know if your figures are billions of dollars or percentages of GDP of the recipient country.
POM. There are dollar/rand terms.
DK. Then I'm actually quite surprised at that. I'll have a look at that myself. The only distinguishing thing that I can think of is that with foreign investment figures, if a business is owned by a foreigner the profits that it retains are counted as additional investment and of course everybody in Zimbabwe has got to retain profits because they can't get them out. You're asking me what the difference is. That is the only difference that I can think of whereas as far as we're concerned of course they can repatriate freely.
POM. The obvious reasons given here is: "The decline of SA's foreign direct investment is also attributed to the slowdown in investment from Asia, particularly Malaysia, which had become an important source of direct foreign investment." The things that are told to you
DK. The Washington Consensus?
POM. It just is not paying off in terms of
DK. Erwin says it is paying off, the statements to which you referred which were made last week, he says everything is going to be great.
POM. Well he says everything is going to be.
DK. Sure, he says it is paying off. I think we've been over this ground before but SA doesn't have great advantages as an exporting base unless you're keen to export to the rest of Africa where of course you always have payment problems.
POM. "The largest African recipients of direct foreign investment in 1998 were Nigeria, followed by Egypt, Tunisia, Algeria, Zimbabwe, Angola and South Africa."
DK. I don't think that necessarily means in billions of dollars, maybe as a percentage of each country's GDP. I would find the fact that in absolute terms they got more money in as incredible as you do. But why don't we get more direct foreign investments? Have we covered this before, that SA is geographically the country in the world furthest removed from a major market?
POM. No, OK.
DK. There is no country in the world that is further away from a major market than SA in terms of miles.
POM. So transportation.
DK. Well it's not just transportation but this just isn't a natural if you want to export into some identified major market the answer South Africa never comes up. You want to export into the Far East and you want an old Commonwealth kind of lifestyle Australia wins hands down. The United States anywhere else is better, easier. If you want to export into Europe, Ireland is far better. Morocco is far better in terms of the kind of treaty that it has with the European Union which it only got, of course, because they don't want Moroccans in Europe. We don't have attraction benefits and we don't have threat benefits. The Zulus will not arrive in Paris whatever we do and whatever they do.
POM. Just to follow that thought through. We've talked before about the capacity for economic growth depends on government savings, private savings and net inflow of foreign investment and net inflow of foreign investment, it would appear, is not going to be the paean it was supposed to be, not going to be the miracle that's going to jump start the economy to a 5% or 6% rate of growth.
DK. It's going to be modest.
POM. Government saving is still improving.
DK. Improving fantastically, beyond my wildest dreams.
POM. The private sector is still just, no savings rates to speak of.
DK. Well corporate saving is improving but that's because of tax rates, corporate tax rates are down.
POM. Are corporate profits here retained or are they exported?
DK. The tax saving hasn't come through in dividends. Basically it's gone in to retain profits. Companies tend to
POM. So if you were looking at the trends over the next five years how would your prognostications for the economy differ than they would have been over the previous five?
DK. Not much. Basically this is still the same economy that we've had in my lifetime. It's good when commodity prices are up and the gold price is up and it's lousy when commodity prices aren't up and the gold price is down. You carried your analysis, when you said we have to have saving, all right, I would say we have to have investment and therefore of course we have to have saving, and you carried it through to the point of OK, maybe there will be enough funds for investment. We're still faced with the problem investing in what? Now I was faced with that problem as an employee of the Industrial Development Corporation in 1958. The IDC had established various textile plants with overseas partners and they played a role, largely passive role, in the establishment of SASOL and they helped to finance Phalaborwa copper mine, Rio Tinto, and they were then, they had a very dynamic leader and so on, faced with the problem, what the hell do we do next? When the country really started on the road to what was called import replacement investment and the way in which you got investment then was you got the government to promise you an adequate tariff. Of course this process became easier as sanctions built up. You got the government to promise you an adequate tariff, you were located what were we doing here and we took in our own washing. That's what then started to happen.
POM. I think I recall in 1989 Barend du Plessis being quite proud of the fact that the way the country handled sanctions was simply to replace them by home grown industries, but of course when you entered a more liberal economy those industries went right out the window.
DK. Right, right. But the problem that we have now, investment in what, is the same problem that I faced in 1958. I didn't find the answer then, I didn't find the answer when I was in government and I don't know what the answer is today. I suspect that because of the diversion of investment towards the knowledge industries, I suspect we're even worse off today in terms of being able to do things here competitively than we were then, but that's just a feeling.
POM. You talked the last time about this, like in a pre-industrial age you don't set up branches in overseas countries, that Silicon Valley is not about to move to Franschhoek, it doesn't need to. Countries like Ireland have benefited enormously from being able to attract IT companies to establish themselves there.
DK. What is the literacy percentage in Ireland?
POM. Pretty high, at least they can talk, I guess we can write too.
DK. The best writers of English in the world.
POM. So we're talking about skills.
DK. If our skills were as great as Ireland's then would someone come here in preference to Ireland? Probably not.
POM. Well if you were in Ireland you would be inside the European Union and you've a market at your disposal.
DK. You'd be inside the bargaining mechanism that's driving down world commodity prices.
POM. I want to talk about two things, (i) about the world commodity prices and moving to that, (ii) about the price of gold going down, and the IMF was announcing it's intentions to sell off more gold and the Bank of England was selling off gold and it looked as though the price of gold would fall to the bottom.
DK. Aren't you impressed by what our funny little missions to the IMF and to European central banks and so on achieved? I am.
POM. But they're at the expense of whom? They're at the expense of poorer countries?
DK. No, no.
POM. If you're limiting
DK. No, listen, the forgiveness of debts doesn't require gold sales. If you want to forgive debts, forgive them. Bear a little pain yourself. If you don't want to forgive them, don't forgive them. But don't forgive them at our expense.
POM. That's right. If I've learned anything from you it is that businessmen don't think in terms of forgiveness, they think in terms of profit and some way to get even what's almost irretrievable back.
DK. We're back to Charles de Gaulle in his autobiography. "During the war I learned the law of great states. Nothing for nothing."
POM. What does the surge in the price of gold mean, again in real terms?
DK. In real terms it means that several shafts that would have closed here won't close.
POM. So some jobs will be saved?
DK. Some jobs either now or in the future will be saved, no question.
POM. But at the same time as the surge in the price
DK. Not only in this country, in other gold producing areas.
POM. At the same time as the surge in the price of gold perhaps due in part to the success of your little missions to the EU and to the IMF and to a sufficient amount of dignified begging, these conditions can change.
DK. It wasn't dignified begging if I can just explain. It was bringing the holders of gold to their senses in terms of what the sensible way to market gold was. If our arguments hadn't awakened the self interest of the hearers we would never have succeeded.
POM. So your arguments were?
DK. You're selling gold at $50 - $60 below the price at which you could otherwise sell it if you did it in a responsible and balanced way.
POM. A gradual way.
DK. Hence the European central banks are saying we won't sell more than so many tons a year for the next five years. Boom! Up goes the price. If the Arabs can do it, you would think that the European central banks could work it out.
POM. What you're saying is you restrict the supply and you keep the price up rather than unloading all your supplies and driving the price through the bottom of the barrel.
DK. Exactly, so that you can make the appropriate accounting entry and tell your own electorate that forgiving the debts hasn't cost anything and we will now be able to sell more beads to the ignorant natives.
POM. Just looking at the economy as a whole in the context, you put it very succinctly at the beginning that when the price of commodities and gold is up, the economy is up and when the price of commodities and gold is down, the economy is down. These are largely factors outside the control of SA policy makers.
DK. Yes, and we're prohibited by the developed countries' legislative threats from organising the same sort of controlled supply of our commodities that OPEC has managed to do as far as oil is concerned. The oil producers get together and decide that they're going to restrict the production of oil and the price doubles and the west takes it, but you can't do that with Ferro-chrome.
POM. Why?
DK. And you can't do that with platinum, because you'll be threatened with
POM. Retaliatory tariffs.
DK. Yes.
POM. So why would the Europeans, for example, take one position with regard to oil and another position with regard to ?
DK. They just don't feel powerful enough to handle the oil producers with whom they have to stay on a good footing anyway.
POM. So in that case
DK. They get away with it.
POM. Despite the fact of SA's presumptions to being an emerging world power, it's still a rather small fish.
DK. Of course.
POM. So if I asked, from a policy making point of view, and I know this is a difficult question to answer, there's no quantifiable result but just put parameters on it, of all the variables that affect the economy, what are the ones that actually lie within the control of policy makers here?
DK. Well productivity of course. I wouldn't say policy makers but of the community generally. We can enhance our productivity and we are enhancing our productivity quite substantially. The only problem is that as you enhance productivity you're faced with an inelastic market and you'll lose jobs.
POM. Is enhancing productivity coming at the substitution of technology for labour?
DK. Or even just working more sensibly. I'm sure I've given you the underground mining example, how we used to mine and how we mine now.
POM. Yes.
DK. Your limiting factor is what the shaft can take up so that limits what you can take out of the mine each day and if you can do it with half the workers then half the workers aren't needed. That's an extreme example but it's the same principle.
POM. You had also in past interviews, conversations, mentioned that the only sector which provided opportunity for job growth was the informal sector and that in a sense more should be done to encourage the entrepreneurs in the informal sector even if it's only to the degree that a poor person makes on a daily basis enough to sustain himself or herself or their family, they're not starving. This is where I come back to the hawkers, the hawkers on the streets. I went through Braamfontein last week and got stuck in a mire and I asked what's going on and the taxi driver said, "Oh they're moving out all the hawkers." And there were Casspirs and I guess there was teargas and I said, "Gee, this is like the old days! Skills long forgotten are invoked again. Move them!"
DK. I'm sorry to be so uninformed about this but I assume that there are areas in which hawkers can hawk, or sites.
POM. But they haven't built them yet.
DK. Or side-walkers can sidewalk. I assume it's part of some major plan and, as always happens with major plans, some things get done.
POM. But in the meantime these people, their means of existence is being taken away.
DK. I'm on your side. I don't know. I know nothing about this.
POM. Do you really believe, if I came in to you and you're a City Manager or whatever and I said, "I have come up with a brilliant plan. I know how to re-attract investment and business into Johannesburg and once again make it the hub of SA and what we do is we get the damn hawkers off the street, we clean up the pavements." Would you say to me, "Brilliant!"
DK. If I was the City Manager?
POM. Yes.
DK. No of course I wouldn't. We've got an excellent City Manager, Ketso Gordhan, and I don't know what's happening there. Don't look to me to tell you.
POM. OK. If I asked you what was the single biggest challenge facing SA as it enters the next century (I've abandoned the word millennium), what would you say it is?
DK. I would say it's equipping the work force with the skills that will be wanted.
POM. Now I ask this question of everyone for a reason. I would say it's AIDS. I would say AIDS is the priority of priorities, that given the rate of growth, at least 1500 new infections a day, in fact the British Medical Journal came out with its current issue and says that the state of AIDS in Africa in general is even far worse than heretofore thought, that the life expectancy is dropping dramatically in this country, it will be down to the mid-forties by the year 2010 if things go on unchecked, you will have millions of AIDS orphans, you're developing an entirely skewed demographic base. When you talk about the inculcation of skills half the money you put into giving skills to people they're going to be dead by the time they're in their mid-thirties or whatever. If one had the marginal dollar would one put it into AIDS or would one put it into skill investment?
DK. I suppose you'd split it.
POM. Everyone, and I must say when I talk about AIDS to everyone they give me a nod of the head, pause for ten seconds and say well it's not really in our control, it's an African problem, it's a regional problem, a sub-Saharan problem, but no-one takes it as though what you're facing is not just a pandemic but possibly a plague and is it that people kind of can't see or visualise what the consequences of that might be because it's too horrible to contemplate? Is there any research being done that you know of that will give some estimation of the economic costs, not in health terms or lost work hours, but in a complete skewing of the population base, of the demographic bases of the country, of the absenteeism, of all these other factors.
DK. Various bodies have been involved in this of course. The chaps who started earlier were the Life Officers Association, Insurance companies, for obvious reasons. But the mining industry, the Chamber of Mines has done studies of the effects, etc., etc. Of course in the government there must be several centres of this. I think the government was slow to grapple with the AIDS problem, for what reason I'm not sure, but as you know Thabo Mbeki has been wearing a thing for AIDS.
POM. Yes, but everyone knows that AIDS awareness has absolutely no relationship to HIV reduction, that the promotion of the use of condoms in all countries has proved to be by and large a waste of money and a waste of time.
DK. I didn't know that.
POM. That money spent on media education and expensive advertising campaigns out of which media consultants make millions, they don't change awareness into changing behaviour.
DK. What does?
POM. That's the million dollar question, particularly when you're dealing with a developing society where cultural rights and the like continue to play such a big role.
DK. And myths. The myth that if you have intercourse with a virgin you'll cure AIDS.
POM. We came from the conference in Lusaka, which was very depressing in terms of prognoses being offered. There is still this hallelujah of a vaccine. I heard that in 1985 at the first conference that I attended on AIDS, that a couple of years down that there would be a vaccine. There are now so many different strains of AIDS that the only work that is being done on the development of vaccines into which serious money is being put is where there are western markets, strains A and B. So, you're again a policy maker, you're sitting around a table, you're saying allocation of resources, you're saying we must get a skills basis and I'm saying, well I'm Minister of Health and I'm saying you're investing in skills but by the time the people are skilled enough and experienced enough they're going to be dead from AIDS.
DK. At the same time you're saying you don't know what to spend the money on as far as AIDS is concerned.
POM. How do you develop a strategy or a plan from that basis, from the basis of saying what we have is something that's wiping us out? Again, in terms of concentration of attention and political well, yes Thabo wears his pin, yes Thabo launched the Partnership Against AIDS. Tell me one year later what has the Partnership done? What can it point at? Nothing. The rate of AIDS, rate of infections, rates of everything have gone up not down. Substantial amounts of money increased? No.
DK. Well as I say, if you don't know what to spend the money on there's not much point in increasing the money is there?
POM. This is the answer you're giving me?
DK. I'd look through what the possibilities were, I'd go to a conference about it and come back in your state of mind.
POM. A conference is not going to tell people very much.
DK. So then what would you suggest?
POM. But I'm not as bright or as brilliant as you are, I was never chosen to be a Minister of Finance or never was president of a company.
DK. You're just sitting here going on about a problem which has no particular progressive direction to follow.
POM. Well in the same manner in which the poorer countries at long last have developed a common strategy towards debt forgiveness and have developed at least a united front and appear to be making some leeway, wouldn't it as a minimum be helpful if there was that kind of political leadership throughout the continent that turns to the rest of the world and says
DK. "Sell us AZT more cheaply", which has been said over and over again, but it hasn't happened.
POM. But even if you did make AZT available more cheaply I think one of the results of tests conducted is that even when you give the drugs that are available, available at no price, free to people in communities infested with HIV, that they have to be taken in certain combinations, that they have to be taken on a daily basis, that they have to be taken according to a certain regimen and that the capacity doesn't exist for people to follow.
DK. A certain percentage would follow.
POM. At a community level and build - ?
DK. I don't know but all I'm saying is that the one thing that is known to save unborn children to an extent and that alleviates the effects of the disease and postpones death is much too costly and that there isn't the slightest indication of it being made less costly and it's not produced in Africa and it is profitable, highly profitable.
POM. Well that comes back to the profit motive here, that a vaccine
DK. We're back with the 'west and the rest'.
POM. As you live here and get older and wiser, I'm giving you the benefit of the latter
DK. The two rates are not consistent.
POM. Don't follow the same curve. Do you think that the divide between north/south, the west, is not only increasing in economic terms but that the west in a way is turning inward and is more into providing for itself and maintaining its growth rate and standards of living and if it means ignoring one half of the world so be it. Not in an ungenerous way, they will always give aid but the aid is always insufficient.
DK. We have this wonderful thing now called 'donor fatigue'. We have to treat the west very carefully because it's suffering from donor fatigue. The fundamental characteristic of the west is the fundamental characteristic of human beings, it's fundamentally selfish. If it can see that something is to its advantage, even long term, it's possible to move it. If you can't make that demonstration then there's no interest. Its business organisation and everything else is in a way wonderfully designed to ensure that unpleasant bucks can be passed and pleasant opportunities can be seized.
POM. SA in particular in the context of that for the next 15 years, since I think there is some awful estimate that 90% of the people living with HIV in this country don't even know they're living with it. Should there be
DK. Drugs that you can't afford.
POM. Or that they can in some way put you on a regimen or help you get on a regimen that will make you a better and more productive employee while you're alive. Should there be a law that if you are tested for AIDS, you go to your doctor and you ask to be tested for HIV and turn up positive, that the doctor does not have the right to tell your wife or other sexual partners, nor do you have an obligation or duty to? Must there be some abridgement of the rights of the individual to tackle a problem that has such catastrophic social consequences? When does the collective good become more important than individual right?
DK. I can't see any of those things happening unless you go the whole way, castration. You can put in all these hurdles and one thing and another but unless you can get into the bedroom
POM. Well the two factors that stood out in two studies they had done, two in West Africa and two in East Africa, and West Africa had a very low rate and East Africa had a very high rate, and they knocked out all the variables such as condom use, all of these things, and the two factors that came down to be of significance was the degree of male circumcision and the age of young girls at first sexual intercourse and the third thing would be the disparity in age between
DK. That's why people start talking about other problems. It just isn't clear what one can do.
POM. As you know black people call it the white man's disease, but it doesn't affect white people to any significant degree as it affects black people.
DK. Well it doesn't affect them to the extent that they can afford the palliatives.
POM. I'll put this to you and I want to put it in the right way, probably put it in the wrong way.
DK. I'll give you a second run at it if that's the case.
POM. If you are a cold-blooded policy maker you could say there are two sides to this, one side is that we have an increasing level of AIDS and simply don't know what to do, why put it on the front burner, put it on the middle burner.
DK. There isn't the slightest indication that that's involved. The fundamental financing problem is not knowing what to spend money on versus AIDS. That's the fundamental problem.
POM. But you don't know of any study completed in this country that says given these at the moment likely outcomes in terms of number of infections, number of deaths, degree of absenteeism, effects on productivity, cost of health, declining ages of the workforce, skewed demographic base, that even if we were able to attract the direct foreign investment that would generate a 6% rate of growth a year and even if we got sustainable development on its way and galloping along, that in 15 years we're going to have negative rates of growth because of AIDS?
DK. No I don't know of any study that comes to that conclusion.
PAT. Shouldn't it be part of economic forecasting?
DK. It is, I just don't know of it. It's pretty difficult, there isn't a national plan. There's GEAR which is just Washington Consensus stuff put into SA conditions. Basically our economic policy has been trying to get ourselves in line with the way the world runs rather than making 15 or 20 year projections.
POM. But you're making plans as to how the world runs where there's really one huge difference underlying the fundamentals here and underlying the fundamentals there?
DK. Sure. The west has solved the AIDS problem.
POM. Because it was never heterosexual, probably being the biggest one, and (ii) because the gay community was a very tightly organised community that policed itself. Do you, given the nature of African culture and SA culture, you mentioned culture once the last time on something else, do you see that kind of discipline at a community level being able to be imposed?
DK. It's possible in certain communities but it was the nature of apartheid and what preceded apartheid to break down communities. We've got, what's the scientific term, nuclear people apart from the churches I can't think of effective communities. Soweto certainly isn't a community, even portions of Soweto aren't communities. Odd streets maybe but then that doesn't get in to individual behaviour.
POM. Even families aren't families.
DK. Well families are fine.
POM. Yet 30% are
DK. I just mean they are functioning communities, they are damaged but they're still functioning.
POM. Families account for one third, a member against another family member accounts for one third of all crimes in the country. They are not just damaged, they are
DK. They're damaged, but there is still a family there. We have three people who work for us in different capacities and each of them has a large functioning family. There are not too many men around but they are families and they function. The daughters get into trouble and they come home, the little babies are looked after by the grandmother, and so on. Without wishing to minimise in any way the damage that's been done to families and that certain families have done to themselves, at that level you have something.
POM. You have Business Against Crime, do you have any counterpart Business Against AIDS?
DK. Yes there is quite a lot and of course every business itself is working out how it can cope with the effects of AIDS in its own business.
POM. That's when the worker acknowledges that he or she
DK. And for instance the mining industry has this tremendous problem of same sex hostels and how to attack the problem there. So every mining company is deep into that.
POM. Do you know the results of any of these studies or programmes or whether they are proving to be effective or ineffective?
DK. One would have to talk to them.
POM. Let me move: part of last week's meetings between the IMF and the World Bank drawing between the IMF prescription for growth and the World Bank prescriptions for development would be the World Bank being seen as the softer of the two.
DK. Their Chief Economist going around criticising the fund, yes.
POM. What's his name, the guy, the Chief Economist for the World Bank?
DK. Stiglitz.
POM. In a study he quotes quite extensively that the level of inflation, unless it gets above something like 40% -
DK. It's quite healthy, yes.
POM. It has no serious impact on capacity for growth. In that sense, why is monetary policy so directed to eliminating inflation when the empirical evidence shows that
DK. Basically because inflation attacks wealth. It's the ultimate luxury for the west if it can eliminate inflation.
POM. For the west?
DK. Yes, because they have the wealth.
POM. But in countries like SA - so when Alec Erwin or Trevor Manual puffs his chest and says we have finally solved the problem of inflation, for whom is he speaking? Has he solved inflation for the better off sectors of society? Is the person who lives in a rural village or the person who lives in a township some place any better off because inflation has been solved?
DK. It depends on what wage increases he can get but to the extent that they're dependent upon government hand-outs and things like that they probably don't go at the same rate as inflation.
POM. So the 30% or 40% who are unemployed or under-employed?
DK. Yes but they're living in families that are drawing the old age benefit, this, that and the other.
POM. If they are buying goods that are locally produced on the street markets, that are not subject to
DK. Inflation is not good for someone who is unemployed. He's not in a good condition without inflation but he's in a worse condition with inflation. Inflation is not good for people who are on fixed incomes and the government transfer payments, which are quite extensive considering we don't have a welfare system, the government transfer payments are basically fixed in money terms. It's not easy to get them increased. So that whole area suffers from inflation but I personally don't have such a rigorous feeling about inflation because I had some interests in Brazil for many years, they had very agreeable rates of growth in the years when they had inflation well above danger point.
POM. Rates of growth of?
DK. Real rates, real rates of growth.
POM. Accompanied by increasing inequity in the society. There's a Gini coefficient but SA, they've lost the Gini co-efficient race. This is an interesting thing, I only picked this up late last night and it explained a lot of things to me. If I said to you, why did the ANC do so well in this election, here it was entering an election where on all the major issues whether it be crime, performance of the economy, provision of housing by their own constituency and yet it comes out with a larger percentage vote than it got in 1994, with a drop in the turnout but then one could never have expected a turnout like what was achieved in 1994. What would you attribute its success to in what some people would consider to be such an arena?
DK. I think people just think that they are making an honest effort, and there's no alternative.
POM. There's no alternative. Now, this is again a question I ask of everybody and when I ask it of them everyone comes up with a reason based on there is no alternative, almost simply that elections here are racial and will continue to be racial for a long time to come and that if you analyse the votes you find that 97% of those who voted for the ANC were black, 99% of those who voted for parties that were non-black were white and that if you did a correlation analysis it would be a most perfect correlation on both sides, that you don't have to look for well one party offered better policies than the other.
DK. Then you've got to ask the interesting question of why within the all black sector no alternative has arisen. Holomisa and Roelf Meyer have tried to create an alternative which is black based but there is no enthusiasm for it.
POM. Well one could say there's no enthusiasm; one could say that they were almost up against insurmountable obstacles in terms of resources available to them.
DK. Well no, they had a bit of backing. They got their message across, they got their posters up. Whether the racial thing is correct or not let's move on to the area of how does the ANC manage to retain its cohesion and you know the whole COSATU/government impasse now is a very interesting factor in that. There isn't the slightest indication, nobody is prepared to say that the alliance is threatened.
POM. Yes, that used to be the mantra for a number of years and now you have total stand-off between the two and nobody says that it's going to lead to any split.
DK. The ANC is going to continue to be the political wing.
POM. Is this in part because the ANC is so successful in co-opting people?
DK. What it is, it's very successful in working with the base. Their decisions are really processed through all levels. There's careful behaviour in the ANC, they're very careful.
POM. It doesn't provide fertile ground for the development of a viable multi-party democracy.
DK. I think there are some grounds for concern there. Of course if you have 70% or whatever it is majority you're going to behave towards the 30% in a different way to what you would if you were 51%, that's inevitable, and there are some signs of that in the way they're dealing with the parliamentary committees and that sort of thing.
POM. The centralisation of power in the President's Office.
DK. There was some need for that.
POM. In a way, at least for the moment, parliament appears to be less of a player in the game than it was in the last government.
DK. Yes, one still has to see how that develops but to some extent that does seem to be the case. In the last government the parliament was the real opposition. You'd get ministers in government deciding on certain things which would then be questioned during the parliamentary committees where the ANC had substantial majorities. That doesn't seem to have happened in this parliament.
POM. What I was going to say, was the interesting thing that I found last night, they did a poll, this was in the winter of 199-(?), and they found out that the poorest of the poor were the most committed in their support of the ANC and as you went up the scale support for the ANC tended to be less intense. They attribute it to that for the poorest of the poor any incremental improvement in their quality of life was a huge increase. Nothing plus a little was a lot, whereas if you add a little to somebody who has quite a bit, it's still incremental which I thought an interesting twist on why the poor would not be those saying the government hasn't delivered.
DK. I think we've been over this before. When you've mentioned crime it hasn't got worse for the black electorate. That's the first point so that's not a negative as far as they're concerned. When you mention jobs that hasn't got perceptibly worse for the black electorate. As against that, the psychic charge from having a black government, from having increasingly black control of the local authorities, etc., etc., has meant a fantastic amount. So I don't think blacks went to the polls and voted for the ANC saying, "Pity there isn't an alternative", I think they went quite enthusiastically, they said, "OK we've made the first few steps and now we're on for the rest."
POM. Just a few questions to clear from our last interview.
DK. In businessmen yes, you won't find a statement by the Federated Chamber of Industries saying apartheid is morally wrong.
POM. Because? It would seem to me that then they would be a target of -
DK. Businessmen do what's good for their business, they don't do what's bad for their business.
POM. So they wouldn't put themselves in a situation that might interfere with their getting government contracts if they were to say apartheid is morally wrong, so if it comes down to a question of choosing between money and morality, money wins out most of the time unless morality has a dividend.
DK. We aren't morally superior to the west.
DK. He was Verwoerd's Director General, or whatever the title was then, he was the top civil servant working for Verwoerd. I heard him say that.
POM. You heard him saying it? If I were to quote that, do you have any objection to saying that the source was you saying in a conversation with such-and-such?
DK. No, I had heard him say it to somebody else.
POM. But you were present at the time?
DK. Yes.
POM. Investment as a proportion of GNP, you said, "We're investing about 15% of GNP as replacement investment."
DK. Well we're investing about 15% and there's your investments wear out. Now the exact figure of what you need to replace the wearing out part, that's quite an abstruse calculation and people think it's about 15%, so when you get down to making a gross investment of 15% people think you are more or less just replacing. That may not be quite right.
POM. But the total investment here is about 17%?
DK. Well 15%.
POM. There's a net investment of about 2%?
DK. Except that the 15% of the wearing out side is a very imprecise figure.
POM. Yes, OK. What proportion of GNP do you need to put in investment to - ?
DK. Well now here's a nice calculation. Write this down, it's a nice calculation. If the wearing out thing is 15% and if you invest 24% then the new investment right? Of course this investment is all new investment but this is the marginal new investment. The new investment is 9%. Now you have a capital output ratio. It is generally expressed in a way of you need three bits of capital to produce one bit of output. That's just the inverse of saying that your return before providing for capital wearing out is 331/3 %. So if your capital output ration in the kind of investments that you are making is 3:1 then from 9% new investment you will get 3% income growth. To that you can add your productivity growth which is normally 1% - 2%, giving you 4% - 5% growth.
POM. So we're talking about in the range of about 24%.
DK. Yes, the IMF when I was in government had a target of 25%, etc., etc.
POM. We had covered this I think, "The confrontation between COSATU and government is to intents and purposes over". For the moment?
DK. It seems to be. This lady who's in charge of the government side in the negotiations is reading Lenin, she says she's reading Lenin's advice on how to tackle trade unions. Have you heard a more frightening statement?
POM. You said, "What SA needs the Swedish mix."
DK. Yes, corporatism.
POM. Could you just elaborate a little?
DK. Yes, business and labour and government together deciding on how things should go forward.
POM. We had an exchange which began, we'd been talking about power of, or erosion of, national sovereignty and you said, "We're all becoming provinces of the Roman Empire, Great Britain', and I said, 'Back to Gibbons." "Exactly. I think we're still 50 or 60 years from the start of - " and you didn't finish the sentence.
DK. Start of the decline perhaps. That would follow from your Gibbons, probably got another two generations to go.
POM. Before America goes under!
DK. That's not based on any expert capacity.
POM. "We have an ANC government which is toeing the line on the Washington Consensus down to the last little jot and tittle."
DK. Tittle.
POM. Tittle, you say. This is at a time when the Washington Consensus is coming under increasing questions. I am not a big enthusiast of the Washington Consensus. "It's not working in terms of giving us a faster rate of growth (that's the Washington Consensus), because the Washington Consensus in fact doesn't do that, it is a necessary but not a sufficient condition for economic growth." What is the 'sufficient' condition?
DK. Investment opportunities, population, great comparative advantages, all the fundamental things that you need.
POM. Again looking at Brazil, because you mentioned a reason the US some figures were released recently, I think 5% of the top wealth earners in the country earn more than 100 million workers. Is there any necessary relationship between the alleviation of poverty and rates of economic growth?
DK. Yes, and it's quite well established that countries with more even distribution grow better. I've seen quite a recent report on that.
POM. Brazil would be an example of where the inequity has increased rather than decreased?
DK. Yes, it's not a question of which comes first. The trickle down theory is if you have economic growth then the gap closes. That doesn't necessarily happen, but if you take all the different countries and plot their Ginis against their rates of growth you find more satisfactory Ginis are associated with higher rates of growth.
POM. This is just another reference, you mentioned the Brandt Commission, headed by Willie Brandt.
DK. Oh yes, the north/south thing.
POM. Do you know the name? You said that, "Basically the developed world has worked out a way to improve its standard of living partly at the expense of countries like SA." This is what the report said?
DK. Yes you should get hold of it, it's get-holdable, get-hold-of-able. Any library if you just give them enough, it dates from the seventies. Ted Heath actually subsequently claimed to have written most of the report.
POM. Heath did?
DK. Ted Heath. He was on that commission.
POM. Again we talked about this and this is that with the IT revolution there's no need for IT companies to set up branches abroad so as we move into a post-industrial age the emphasis here on that there should be an industrial policy is kind of misplaced. There should be a post-industrial policy.
DK. That's a bit strong. There will always be things, industries that we should be pursuing here but it's just not too easy to spot them.
POM. Now I just want to make sure I got this right, this is on loaning money, this is on speculation against the rand. I understood you to be saying that during the dog days here when the currency was being speculated against, that SA banks were part of the problem in the sense that at the same time they were borrowing from the Reserve Bank they were using borrowed money to lend to speculators to speculate against the rand, they were giving credit whether or not it was used to speculate against the rand.
DK. Let me just give you a better understanding of that.
POM. This was driving up the interest rates.
DK. No it wasn't, this had to do directly with the currency. It wasn't that the SA banks were doing it but in terms of the foreign exchange regulations banks could only apply for foreign exchange for trade connected transactions. So if a bank applies for dollars to pay for imports, it's got to be in connection with a transaction and the SA banks were doing that. But they were also the correspondent's of overseas banks and you could get through the SA bank overseas banks taking speculative positions against the rand, in other words selling the rand and making our reserves decline, because you can't police an overseas bank, you can't tell City Bank or whoever it is, "Is your demand for dollars or your desire to sell the rand, is that connected with a trade transaction or not?"
POM. Just to go back to inflation again, is one of the reasons why inflation has dropped been due to the poor performance of the economy. As I understood it, SA has a very high propensity to import so that as the country would move into a growth cycle the balance of payments or the balance of trade deficit would deteriorate so you had to put a brake on growth to control the balance of trade.
DK. There is a correlation there in any country. This is what the nervousness at the moment is about. If you have high rates of growth, as you have had in the US now for such a long time, there's always the threat that that may result in some inflation. So to the extent that it's easier to control inflation in an economy that isn't growing rapidly I think that's correct.
POM. Has the fall in the value of the rand been the key in keeping jobs?
DK. Yes.
POM. So that even a further deterioration would help the employment situation. So in that sense now that interest rates have gone down, there would be less capital inflows in terms of the bond market and the shares market, you could get a situation of the rand actually strengthening?
DK. Yes. I'm sure it isn't government policy to strengthen the rand.
POM. But interest rates going down is a double-edged sword. You maybe get to cut the other way.
DK. Yes, monetary policy is very difficult.
POM. One last question. When you talked about, "We need to get people to save", who are we talking about? At weekends they seem to spend like hell, so there was no end to the good times. I haven't seen any diminution in the numbers in shopping malls. Is that who we're talking about?
DK. We're talking about everybody.
POM. How are poor people supposed to save?
DK. Well you get down to a point at which saving isn't possible, but we're talking about everybody above that point.
POM. Last question. This is the last time, at least for this one. Would you regard the ANC as a revolutionary movement?
DK. as far as that's concerned.
POM. So when they describe themselves as revolutionaries it's just a tag they like to remind themselves of what they would have liked to have been rather than what they are?
DK. They had a long revolutionary period.
POM. The public sector problem, we'll leave that till Geraldine comes out with her report.
PAT. A study of Leninism. You guys will have to go back and read Lenin.
POM. Zola when he was the minister said, "My hands are tied. I can't retrench civil servants because under the new labour laws for every retrenchment the employee has to be consulted and you have to go through a long and elaborate process and in fact the very laws that we have implemented are making it more difficult for us to cut back in the public sector." Would you agree with his assessment?
DK. In the latest Reserve Bank Bulletin there's a graph showing what happened to public sector employment and it came down like that and then it crept up again. It seems to be up where it was.
POM. So she would have a plan for the implementation of
DK. Yes, but she looks the right sort of person.
POM. She did her stint at the Kennedy School of Government, they're good at training people too.
DK. I'm sure.
POM. Thanks ever so much for your time.
DK. It was a pleasure to see you and best of luck and all that. I brought this for you.
POM. Oh yes, I want to get inside of that book.
DK. Because it is about SA and these chaps are at the University of Cape Town. I wanted to show you, first of all I think it's an excellent book. Doesn't that say on the back what the author has been connected with and so on? Just try and find the bit -
PAT. A director and former Research Manager at the Applied Physical Research Centre. Next week we are going, Transparency International and the UN are having the global Anti-Corruption Conference in Durban.
DK. I don't know him, I've only got to know him through this book but I think the book is absolutely excellent. You can buy it at Clarke's in Cape Town. Clarke's is the best bookshop in Cape Town, in Long Street.
POM. Sorry for delaying you from your next appointment.
DK. That's OK, it's only lunch.
POM. So are the Springboks going to win at all? I didn't think their performance against Scotland was very good. Gave up 29 points.
DK. And they won on condition, they were fitter at the end than the Scots and that won't be the case with the All Blacks and the Aussies.