This resource is hosted by the Nelson Mandela Centre of Memory, 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 It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.
20 Aug 1991: Zille, Helen
Change of Gears scenario
HZ Hello, Padraig.
POM Hello Helen, how are you?
HZ I'm alright, how are you?
POM I'm fine, even though I did an interview this morning with Leon Wessels, and there was a glitch in my recording device which I only discovered after I finished talking with him.
HZ Oh dear, and you lost him?
POM I lost everything.
HZ That's dreadful.
POM So, it wasn't a great way to start the day, however, the machine is working now.
HZ You can't recapture Leon Vessels, can you?
POM I'll have an attempt, but I am doubtful.
HZ So, I'm sorry about that.
HZ I have a bad cough Padraig.
POM Ay, you sure do.
HZ I hope I don't blow up your recording device.
POM You are going to talk about the part of the economic scenario that's not on tape. The part of the presentation ...
HZ That's what you want to talk about?
HZ Right, well let me be quite brief. In the text that you recorded, they spoke about two possible scenarios for South Africa: one called the upside scenario, one called the downside scenario. Both of those were deemed to be so unsatisfactory that the team, the scenario team that was investigating these scenarios, drawn from a full range of perspectives in the South African context, decided that both were not options for South Africa if we wanted to make a successful transition, and they decided that we needed to look at a completely new scenario that would be a structural break from the past.
Now the starting premise of this change of gear scenario, as they call it, is that unless we get the economic and social aspect of transition right, the social and economic aspects of South Africa during this period will derail the political transition. They caution that transition should not only be seen as a political concept, but that it's a process that involves political aspects, social aspects and economic aspects. And, unless we get the social and economic aspects right, they will derail the political transition. And they reject the conventional wisdom that we won't be able to deal with economic and social aspects of our context unless we get the politics right. They say that unless we get the social and economic aspects at least addressed immediately, the politics can't come right.
Now they look at the aspects, the forces driving the social and economic context of transition, and they look at the social aspect as being the increasing disintegration amongst many of the communities, the social disintegration leading to the phenomena that the Americans call the underclass in many communities, although not seen as a universal phenomenon, but a growing phenomenon and worrying enough to place very significant social strain on South Africa's transition. The growing underclass, alienated and marginalised youth, disaffected, lost to the so-called culture of learning, easily mobilised for violence, numbering from three to five million people, that's the kind of estimate. So a very, very major social threat and a risk of the creation of an underclass which in the American experience is a very difficult phenomenon to turn around.
In the economic context they look at the critical variables there, and they determine the key force driving the system as the economic strategy that will be pursued by government and by the major economic actors, primarily business and the trade unions. And they say that that is an absolutely critical variable because it opens up a whole area of choice. And the economic strategy that is pursued by the major players will determine whether we make a successful transition in the economics here. Then they look at projecting where we are now, and determine two scenarios: an upside and a downside scenario.
In short and to summarise very crudely, the upside scenario projects possible growth of roughly 3% in the economy per annum. That is given a set of variables that are enumerated that basically even if we achieve the upside scenario we will be practically standing still. Because our population is growing at 2.6 % per annum and if you look at a growth rate of 3% per annum as the very best case, in the best possible scenario, under current circumstances, we will be standing still. We won't be growing economically.
The downside scenario projects zero economic growth during the transition, which effectively means that we are going backwards by 2.6 % per year with very dramatic consequences. The downside scenario means that by the time the political transition has to take place in 1994, which is when the new election has to take place in terms of the South African constitution, so that basically means that when the political transition has to take place, there will be an unemployment rate of 7.2 million people, and in the best case scenario, which they say is extremely unlikely because it would entail three miracles to happen, I'll spell those out in a moment, in the very best case scenario, given current economic policy and projections, then the unemployment rate will be 6.5 million people by 1994, which is when the critical date is for the political transition, when the new elections have to be held in terms of the constitution. That's September 1994, or March 1995 if there is an agreement to postpone it. That's as long as it can be postponed.
And the argument is that no government, however democratically elected, will be able to sustain that kind of strain and survive in a stable form and turn the situation around and create economic growth. By then the situation would have deteriorated to a point that it will be very, very difficult to turn around, and most certainly, those kinds of economic conditions are projected as derailing any hope of a successful political transition. So that is the kind of background to why the scenario team decided it was critical to look at a different scenario in which we could get South Africa off the current economic strategy part in which, and if one has to summarise it in its most simple form, we have a very small enclave economy. A predominantly white, first world economy obviously employing a lot of black labour, inward looking, furiously selling to itself in an inward economy in which the market isn't growing in anyway at all, watching a bottom line, swallowing up competitors to continue monopolisation of the economy, relying very, very largely on the export of raw materials which are a no growth factor in the world economy, artificially pushing up the exchange rate, which means we price our manufactured exports out of international markets, and getting into a period of stagnation from which there is no recovery, given current economic strategy.
And the change-in-gear scenario argues that this has to be broken. And it has to be broken, primarily, by an economic strategy. If we are to save South Africa's political and social coalition, we have to get the economics right and we have to get it right, NOW before the political transition. Because if we don't, we've got a small window of opportunity of 18 months at the most, if we don't start getting it right, right now, it's not possible to have a successful transition, a successful political transition.
Now the change-of-gear scenario has two key components. The first component, well let me just say something about the two key components. They're called "phases of the change-of-gear scenario" but in a very real sense they have to take place simultaneously. That means that both phases have to start immediately but they will bear fruit sequentially. The first phase will bear fruit before the second phase but they are absolutely crucially necessarily sequentially to compliment each other. The first phase of the change of gear scenario involves massive social investment, primarily in the black community. Massive social investment not only to correct the structural inequalities and imbalances of the past, but to stimulate immediate economic growth and also provide visible redistributive results to deprived communities.
And the key component, of Phase 1, I'll spell out to you in a minute, but Phase 2, which I should mention right now, Phase 2 involves a very dedicated strategy to boost manufactured exports. To boost manufactured exports, which are the high growth area of the international economy. And unless South Africa can become competitive in manufactured exports there is very little chance of sustaining the kind of economic growth that we desperately need to absorb the work seekers and the population increase in our society.
The idea would be that the massive increase in social investment, and I'll spell out the elements of that in a moment, would result in the significant economic upswing with visible redistributive results immediately. Because that would run out of steam by about 1994, and by that stage, the new thrust towards manufactured exports would take over and sustain economic growth over the long term.
Now the first component, which is massive social investment, really involves a few main components. The first is housing, which is one of the key needs of the majority of South Africans. Housing and electrification. The second element of the first phase of the change-of-gear scenario, is investment in skills and education. The third component is the creation of a job core, primarily aimed at reincorporating into society the marginalized youth.
Now let's look at these components one by one:
Why housing? Housing is obviously a key need, but is a major economic generator, as it were. Now we're not only talking about housing provisions, we're talking about home ownership. And obviously, home ownership is the first step in the rung of the process of creating wealth and of creating stable societies that have a chance of improving themselves and increasing their wealth on the basis of home ownership. And then quantifying whether it is possible to make a meaningful impact on home ownership, the scenario team looked very closely at the available resources in South Africa and determined that it was possible by 1994 to make sure that every family had a piece of serviced land. Serviced means storm water, sewage, water, and electricity, the kind of services that are basic to a reasonable standard of healthy living and that the state should provide that by means of a wealth of capital subsidy. That you probably know about from the IDT, that is becoming kind of policy that is being implemented through the Independent Development Trust but isn't universal state policy at this stage. But that a wealth of capital subsidy should provide a service site for families who need a home. Obviously, the R7500, or R6000 capital subsidy that is envisaged by the scenario doesn't cover the full cost of a service site in many areas of South Africa, but it goes a long way to subsidising the cost of getting land, serviced land to families who need it.
The next part of the housing process would be to bring the financial institutions into the low cost housing market. They are not in that market at the moment. They are not in that market for two major reasons. The first reason is that it is not profitable to lend money below R35,000. It costs more to administer a bond below R35,000 and they get full interest rates payments on it. And the second reason is that they are terrified of the bond boycott that we've been having in South Africa, in which the way communities protest against any issue is to stage a boycott. And it's been a very successful tool against the government. But when you're using it against private institutions they just back off. They back right off the market. Many financial institutions try to enter the black home loans market and are backing straight out of it again because of the phenomena of the bond boycott.
POM The bond boycott, what does that mean?
HZ You know housing bond? The mortgage bond? So if people get a mortgage bond and they refuse to pay the mortgage repayment, that's the bond boycott.
POM Yes, I could see how that would frighten them.
HZ So it gets them straight out of the market. So that would make it very, very difficult if you're trying to promote a home ownership process. We're not talking about the state providing rental accommodation for everybody. We're talking about promoting home ownership. And so the scenario team proposes that to boost the housing component of the first stage of the change of gear scenario, financial institutions be compelled to make a certain percentage of their turnover available in the low cost housing markets. It's no good leaving it to choice because no one institution can go into that market and take the risks involved in doing so and the cost implications involved in doing so if they are sticking their necks out and going out on a limb alone.
So it would be prescribed investment in low cost home ownership. That's what they are proposing. Now that is just one of the proposals that would limit and cut the costs of the entirely free market mechanism which is why this scenario is such a departure from a traditional establishment view that you leave politics to government and the economy is left to the market. The scenario says that won't work!
And in the change of gears scenario phase one, they are saying, as far as housing is concerned, the private sector there will have to be prescribed investment in low cost housing ownership. But they also critically talk about the notion of a social compact. They say everybody has to bring something to the party to make this work. The state has to get its policies right and provide capital subsidy on land, on serviced land. The financial institutions have to lend money in their sector and have to be forced to do so. The community has to also support the scheme and has to be committed to the programme. The trade unions equally and that means broad agreement not to enter into bond boycotts and to move into the scheme of try to have some kind of community agreement to help make it work. So they talk very strongly about a notion of a social contract which is often known as a social accord, but basically saying that no one actor can get it right on its own. It's going to take the range of actors working together towards a common objective and each bringing their own part to the party to make it succeed, and I hope I've spelled out how that would work in the housing component in phase 1 of the change-of-gear scenario.
The other components are education and creation of a job core. Very briefly on education, the scenario argues that the state spend 6.5% of gross domestic product or 19% of the budget on education. And that is as much as any country can sustain. So they are not proposing an increase in educational expenditure by the state. They are proposing a redirection of resources, and they are also proposing a very major role for the private sector in secondary education. They say that the state's resources should be pumped into primary education, free, compulsory primary education. They say that the World Bank has irrefutable evidence that you get the maximum social return from primary education. And with the massive demand on educational resources in South Africa given the huge population explosion, they're saying that that needs to be directed at making primary school facilities available and installing free compulsory primary education.
They say that secondary education has to be conducted as a partnership by the state and the private sector. More and more secondary education will have to be skills directed and would have to be done by means of specific taxes on the private sector, or the private sector undergoing significant in-house job training schemes to train people and either employ them afterwards, or simply train them for the excess capacity they have in their enterprises, to become competent, skilled workers in whatever field.
So they are looking at increased taxes on the private sector to support post primary education, plus massive in-house training schemes, and they are proposing that that kind of process should proceed. I haven't got all the details in front of me, but that's the broad answer of what they are proposing.
In terms of a job core, which is the third component of phase one of the change-of-gears scenario, that would be primarily aimed at the alienated, marginalised youth who've really dropped out of society, who have very little education, who have been marginalised from the culture of learning, who have massive expectations, who are easily mobilised for violence, and for whom the kind of values of discipline, pride and structure are just non-existent in their lives since quite an early age.
They are looking for a strategy here to redeem those people into society, to reinstall the values that I have been talking about and to give them skills at the same time. And to do this, they are proposing what they call a JOB CORE, which is a very structured, in-house experience lasting two years, in civilian institutions in which people do useful work, and get board, lodging and a small salary, plus training. And after two years of this residential experience, they are given job placement counselling, etc., in order to help them make their transition. So highly structured experience, drawing on the marginalised youth, to help them in this particular process.
They are also looking at tax rebates for business or large properties that employ any youth that left school between 1976 and 1990 just to give that particular generation the chance of re-entering society at some level, given some kind of basic training, and resocialisation if one can call it that, into the values of structure, discipline, organisation, value pride, achievement. Really, underlying the whole thing is the psychological gear shift, if you will, of regarding all South Africans, insisting that all South Africans across the board, see themselves as producers and not consumers. In very many sectors of South African society, the whole notion of expectation of being consumers of goods, services, largess from the state, whatever, has become a kind of a kind of dominant ethos. And it is not anything that's confined to any one racial group. It's a very predominant phenomenon except amongst some working groups who really extracted gold from the mines and used a lot of their labour to build up major industries in this country. But across the board, and often including in white society, there's a strong consumer ethos. And underlying this scenario, is the idea that that ethos has to change radically.
In South Africa, where they are furnishers of businesses, whether they are school people, they have to see themselves as producers of results, not in this case as consumers of education. It will require a massive psychological gear shift by all South Africans.
So, there's my three major components of phase one of the change-of-gears scenario.
They are also proposing electrification, which although it is consumed, has a massively positive effect on productivity for a whole number of reasons and quite obviously has a significant economic multiplier effect. So they are saying, with all of that, and especially as the provision of housing is labour intensive, does not require imports and can be done with our own resources, with an economic multiplier of between 1.8 and 3, you have a situation in which you could have a massive kick start to the economy. A kick start to the economy which would essentially amount to growth through redistribution, less of investment in the black community but that this would run out of steam by about 1994-1995, it couldn't be sustained. And then at that point you would have to have something else to sustain economic growth over the longer term.
And what they are proposing in that context is a very sharp focus on increasing South Africa's manufactured exports. They do a long economic analysis which you heard, basically arguing that the one growth area in the international economy is in the manufactured exports. As any country that has shown economic growth or significant economic growth in the last decade, has done so through competing effectively internationally on manufactured exports.
They realise that South Africa has missed out on that wave completely, primarily as a result of being a resource rich country in primary resources such as gold, which has very negative influences on the manufacturing sector.
First of all, the economy becomes sluggish and reliant on a primary export such as gold, which artificially boosts the exchange rates and therefore, forces manufacturing out of the world market because it is uncompetitive because of an artificially high exchange rate.
So to ask the question whether gold is a blessing or a curse, and I think that the implicit answer is that it has been a curse because it has prevented the manufacturing sector from developing in South Africa, because it was non-competitive, given the artificially high exchange rate, and now that the lustre is falling from gold, or the sparkle is leaving gold, we haven't got the economic engine that can carry us through. It is absolutely critical that we develop it.
So they are proposing a major manufacturing study that would identify the key markets, the key spaces, the key openings, and what kind of areas South Africa can successfully compete in and how they could do that as a matter of absolute urgency so that it can stimulate a manufacturing sector. That would obviously require some structural adjustments which would be, for example, lowering the exchange rate would be an absolutely key one. Removing protection on the internal economy. Stimulating an economy that did not look inward to a limited, small first world enclave market. And really saw the world as its market, that we could absorb the broad spectrum of South Africans into creating a strong manufacturing oriented economy. And if it could do that in the critical space available before the political transition we could be lifted by a wave of manufacturing or export manufacturing led recovery which would be sustainable over the long term.
So that's the critical argument that they use. They say in the transition we have to maintain fiscal and monetary discipline. You can't obviously just start printing money wildly in order to finance expenditures. You cannot borrow furiously and get into massive debt. And you cannot tax people beyond their capacity as producers. So you have to maintain the macro balances of the economy, but they argue that this could really turn it around and it would make a fundamental difference and give us a quantum leap and give us a head start that would make the political transition a success which neither the upside nor the downside scenario of "business as usual" will achieve. That means just carrying on with our economy and our social development the way we have been in the past. They say that that is a recipe for disaster even in the best case scenario. And they argue that the best case scenario of 3% growth is highly unlikely.
It would require what they call "three miracles". A social miracle meaning after three more years of social disintegration that we're seeing in the townships, people would be dedicated to trying to make the country work and would not be mobilisable for violence and would be committed to pulling their weight and modifying expectations. I mean, that's just a non-option.
It would require an economic miracle in which somehow all the economic sectors would work together which they are not going to do. It would require a political miracle which basically would require that in those conditions of massive unemployment and social turmoil, that the political leaders would be able to carry the support and sustain the support of their constituencies, and convince them not to move into massive resistance, which no party will be able to do. So they're saying, if we carry on business as usual, we can't survive the political transition. So the argument is that you need a fundamental change of gears.
POM This analysis is much closer to the economic trends analysis is it? Like Alec Irwin?
HZ Yes, it would be a lot closer. It certainly does pick up on the debate in a sophisticated way. I don't think there is an agreement on every point. But that's the kind of analysis that there is. Yes.
POM Is there any indication that the government has accepted this?
HZ Well the interesting thing is that Barend du Plessis at the beginning of this year interrupted his holiday to come and see the presentation. And then a short time afterwards it was shown to the full Cabinet and then to the ANC. And although there is a strong debate around the key elements, and people haven't followed it lock, stock and barrel, I think there is general acceptance that unless we start focusing on these particular issues - we still don't know how the government has responded, except that I do know Barend du Plessis, as I understand, was fundamentally affected by the key aspects of their analysis and in fact was instrumental insuring that the Cabinet saw it.
POM Where is it proposed that the funds for the housing trust would come from?
HZ Well they argue, I wish I had the figures in front of me, I haven't got them in front of me now, but they quantify. They obviously say that the state can't provide a three bedroom formal house for everybody. They say that that is completely out of the question and it's not going to happen. But they say that it's quantifiable by saying that if you provide 400,000 serviced sites per year from now until 1994, that will cost something like R2,6 billion per year, which they say is achievable.
POM Out of current revenues?
HZ Yes, current revenues. It's feasible to get serviced land for each family who needs it on the basis of a capital subsidy of R6,000 per family on current revenues. But then the private institutions have to lend for people to build houses in the low income sector.
POM Well, it certainly makes grim listening to.
HZ Well, it is grim. That was comprehensive.
POM It was indeed, it was marvellous.
HZ My chest is giving in.
POM Yes, you have an awful cold.
HZ I've been very ill.
POM Are you taking care of yourself?
HZ Yes, I'm trying.
POM You're working probably 14 hours a day, 16! Yes!
HZ That's the roughest sketch I can give you, that analysis.
POM Yes, that's very helpful, though it makes it kind of glum, gloomy listening to it.
HZ No country in the world has ever made a successful transition starting from the same position as South Africa.
POM Yes, that's quite a statistic.
HZ And there have been forty cases of transition in the last 90 years. And the irony is that economic decline is a major spurt to transition but it's a very real threat to the success of transition. South Africa's economic decline is a very large factor in what's spurred the transition, but they are basically arguing that no country has ever had a successful transition on the basis of a declining income. And in South Africa, that makes obvious sense. Blacks go into transition with massive expectation. If they go into transition with massive expectations and things get persistently worse for them in terms of their living conditions and quality of life, they won't simply sit back and acquiesce, they are going to resist. And once they are being asked to make big sacrifices in terms of what they are accustomed to politically, socially and economically, and if they are asked to make those fundamental shifts and they just get poorer and poorer and poorer every year, they are at the point where they might take skills elsewhere, which will be disastrous for the South African economy. Or, they will also start to resist.
POM The last 90 years and 40 cases of transition - from what to what?
HZ From authoritarian rule to democracy or to attempts at democracy. Many have failed and some have succeeded.
POM But none have succeeded when per capita income ...?
HZ Runs to that similar to South Africa, no.
POM (sigh) That's something to sleep on.
HZ It is.
POM Well listen, thank you ever so much. I really appreciate you taking the time, and it was very comprehensive and very coherent, and I'll probably be over around Christmas or January so I'll call on you again.
HZ Please do! I'll look forward to seeing you. I'll be a bit more rested then. I've been working so hard this year, it's ridiculous.
POM Yes, you better watch it. Yes. OK Helen, thank you ever so much. Bye Bye now.
HZ Take care of yourself, bye.