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 It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.
05 Aug 1997: Keys, Derek
POM Mr Keys, just to go back a bit in time, in Patti Waldmeir's book there's a reference to your painting a picture of the economy for Trevor Manuel which he in turn relayed to Nelson Mandela which at the time Mandela said frightened him. Could you describe what that picture was and whether you in fact conveyed the same picture to the National Party so that both were equally aware of what the cost of suspended negotiations were?
DK Sure. To answer the second question first, it was precisely the same presentation that I had made to the cabinet at one of the bosperaad in the middle of 1992 that I was able to make to Trevor Manuel in August 1992 at a presentation which I attended of the Montfleur Scenarios which were economic scenarios, four of them, that had been prepared fundamentally by the University of the Western Cape plus ANC, plus shell thinkers, and it so happened that that presentation ended in the early afternoon and I was there and I had the same material with me that I had given to the cabinet six weeks earlier and so I was then able to give that to the assembled gathering with the most important person there being Trevor Manuel and it was that message that he then carried to President Mandela and which produced the reaction that Patti Waldmeir has recorded in her book.
The picture was a perfectly simple one and it's remained just as simple ever since, and that was that with an annual investment rate of the order of 17% of gross domestic product the country would not be able to grow. The reason for this, and I think I'm probably going over ground that we've been over before, but the reason for this is that you need 15% of GDP simply to replace the capital that's been used up, if you look to think of that as being the equivalent of the depreciation charge in company accounts, well perhaps that makes it clearer. That means that if you're only investing 17% you're investing net 2% and you have only two sources of growth in GDP, one is an improvement in productivity, in other words existing agents in the economy are going to work more efficiently, and the second one is yield on net new investment. Now typically your yield on net new investment is of the order of 25% to 30%, so if you take 25% to 30% on a net new investment of 2% you get something like ½% and your growth in productivity in most countries in the world over time struggles to be much above 2%, so your total growth then is probably limited to something like 2½% on average. You can have years in which commodity prices are particularly good and the gold price is particularly good then you'll show a growth of more than 2½%. On the other hand you will have other years in which you have droughts and when the commodities cycle is not in your favour and then you will have difficulty in showing growth that's much higher than 1%.
And so what I was reflecting in the material that I presented was that due to the very high level of consumption in this country, which is the other side of the 17% that can be directed to investment, you only have two things you can do with income and one is you can consume it and the other is you can invest it, or if you like, save it which is the same thing. Due to the very high level of consumption in this country to which we had built up over the preceding twenty years this country was not able to develop a sustainable long term growth rate much in excess, if at all, of its growth in population.
POM Now that was 1992? This is 1997. What has materially changed in those five years?
DK Well what materially changed was that first of all the problem was properly diagnosed, if I may say so, for the first time. Secondly, there was adherence by the De Klerk government and in due course by the Mandela government to the fact that it would be wrong to let government consumption expenditure grow in real terms, the hope being that as the economy grew at this then 2½% average rate that by keeping government consumption expenditure, which is about a quarter of consumption expenditure overall, by keeping that level one would be reducing the level of consumption of GDP in the economy in percentage terms and allowing the difference to be invested to a greater and greater extent. This was very successful particularly during the term of office of my successor as is shown by this graph. This is, I hope, government expenditure and you will see that - this is really my period which was, as you can see, not particularly successful, but this is the period of my successor, Chris Liebenberg, in which it was maintained at the same real level. Now unfortunately this is the period of his successor from which you can see that the battle to maintain government consumption expenditure at a flat level in real terms has now apparently been lost and with that I think probably the last realistic hope of changing the nature of the beast.
POM Given the fact that you're entering election mode.
DK Even more so yes perhaps.
POM There will be a little extra spurt on the expenditure side.
DK There could also be. So it now appears to me that we have to settle for the fact that we're going to continue to be a high consumption economy with a very low level of domestic savings and of course this makes us vulnerable to swings of mood as far as the rest of the world is concerned. If you have a high level of domestic savings supplemented from time to time by foreign direct investments well then if you go through a period of unpopularity it's not critical. In our case, unfortunately, that won't be the case.
POM So you're saying two things, that number one the savings ratio that would be needed to sustain a long term sustainable growth of 4% or 5% is simply not there.
POM Two, that the foreign investment that the country has been seeking, trying to attract for the last three or four years, is not forthcoming in the amounts that make an appreciable difference.
DK Well it's worse than that. You cannot in fact run an economy entirely dependent for its net new investment on foreign capital, 4% is more or less the upper limit of what you could depend upon. So we're therefore in an economy which is, and this may be a perfectly correct political decision, we're in an economy which can't reform itself to become a sustainable high growth economy and which is therefore going to go on dealing with its problems against the background of an average growth rate of probably 2½% a year.
POM Which given the population -
DK Well the population figures are not so bad. Since we last spoke four million people have disappeared! So perhaps our growth rate in population hasn't been anything like what we've suspected and if that's the case, if our population growth rate is only 1½% and our average growth rate of GDP is 2½%, well per capita incomes can rise by 1% per annum which isn't paradise but at the same time it's not that bad.
POM If I hear you correctly you're saying that for all intents and purposes GEAR is dead in its tracks?
DK Yes, GEAR won't happen.
POM Now this comes back to the question I ask you every year, the impact on employment. My amateur reading of the situation would be that the situation is probably getting worse in the sense that you have companies now downsizing to become more efficient to compete in the international economy and that more people are being thrown out of jobs than are in fact being thrown into jobs.
DK I think the worst of the downsizing is probably over. I think most businessmen got the message some time ago and have acted accordingly. We're not now in the situation that we were in four years ago where the corporations were really fat with people that they didn't actually need and could cut them down. But certainly in terms of creating large numbers of new jobs we won't be able to rely on the growth rate as such to do that.
POM So how does the government deal with the biggest socio-economic problem that it faces which is this massive unemployment and poverty which by both your analysis of the capacity of the country to grow and the capacity of the budget, or of the government to spend, are constraints on two ends, it's not just one end, one constraint, it's two constraints.
DK It's actually one constraint but it shows itself in two ways. I don't know what they're going to do. It's not obvious what the solution is otherwise I would have propounded it long ago. I think in earlier meetings that we've had I've talked about the fact that there is a correspondence between what unskilled males can be taught to do in six months and what communities need. In other words you can teach people to lay bricks, put on roofs, dig trenches for cables, etc., etc., in a reasonably short space of time. But what we always lacked, and what I've never been able to identify satisfactorily myself, is the mechanism that you would use to bring this correspondence to some fruitful outcome. At one time I thought it might be the army but the army doesn't seem to be in any way geared to be able to carry out this task. Certainly it's not the police. By the time you've eliminated those two you've really eliminated your nation-wide administrative structures which are capable of organising a task like this.
POM In an odd way the economy from being on the front page for so long with the various attempts from the RDP to GEAR to whatever, seems to have fallen into the background, it's not debated as much. Is it that there is an acceptance of the inevitability that there's going to be very little change and not much can be done about it?
DK Could be. The market is always ahead of the analysts.
POM Do you find less discussion of it among your colleagues than before? You said now there's an acceptance.
DK There's always been a micro area as compared to the macro area and the macro area is not that promising. In the micro area there are still plenty of opportunities of course as there always have been.
POM Is South Africa moving in a direction of where the degree of inequality between, in a way, the developed sector and the undeveloped sector may be just increasing because of forces that are - ?
DK Just remaining. I don't think it's increasing, I think it's just as it was.
POM So this means government commitment to eliminating or trying to reduce poverty, creation of jobs, on the housing front.
DK There's been a certain amount of redirection of government expenditure.
POM But they're redirecting less of it, right?
DK Well there's less to redirect, I mean there's not that much to redirect but there has been a certain amount. The water initiative seems to have been quite successful doesn't it? And no doubt when they get their act together the housing redirection will be quite substantial because those funds will have to come from somewhere else in the budget because we're adhering to the Washington Consensus of how a country should be run fairly strictly, bringing down the deficit and so on. So there's been a certain amount of redirection of expenditure. There's no doubt that in the higher income areas the roads are less well repaired. To that extent there is some progress in redistribution to be shown but I don't know that it goes much further than that. Then of course there is the huge psychic dividend of being on elected bodies and being in the majority on elected bodies as far as the previously disadvantaged were concerned and that's a dividend on which it's got some tangible value.
POM People who benefit from it.
DK Sure, and even to those who elect them.
POM I suppose what I'm getting at, I'm trying to lead you there, is a picture of stagnation in a way.
DK In terms of transformation of the society, yes, which is what the Deputy President has been talking about, absolutely.
POM It's not going to happen in the very near future.
DK Well it's not going to happen of itself. It's going to require a definite, if you like, intervention.
POM I was talking yesterday to Mr Motlanthe, the Secretary General of NUM, and we were talking about Afrikaners in 1948 when they took over and the takeover here and he said one of the things that he admired was the enormous determination that they put into transforming themselves, that true transformation took place within a very short period of time and that that seriousness of intent is lacking here. He had said to me the previous year that we shouldn't be talking about a forty hour week, we should be talking about a forty-eight hour week with eight hours devoted to community service, we should be looking for first world standards. He says COSATU, even though he's a member and he's a communist, he says it's politically immature, it can't go on making these kinds of demands. Why is labour unable to get it?
DK Fundamentally they felt rejected and as a result of that the remaining doctrinaire socialists have acquired greater power and are pursuing an agenda which has actually nothing to do with a free market type of development, so they therefore provide academic, intellectual solace for the wounded feelings as a result of being excluded which the natural leaders of the labour movement feel. I think business has been short-sighted in terms of not working with labour to try and analyse what the problems are and what the solutions could be. They have slipped, I would say, with some pleasure into an adversarial role with labour and in the course of doing this they have made the government's situation, of course, more difficult. The idea of the golden triangle I think is more or less done with because of this, because of the adversarial role.
POM Does the adversarial relationship in part grow out of the fact that the economy is not growing at a rate that will substantially - ?
DK No I don't think so. It's simply growing out of the fact that the cultural background of the business leaders is a Friedman/Hyack/Thatcher one. That's the literature that they read and that's the kind of thing that appeals to them and so on and that the government having committed itself to, as I say, the Washington Consensus approach to life is really unable to say to them that they are in error and it's then left with trying to propitiate an important member of its alliance, it's electoral alliance, COSATU, without really having any assistance from the business side in terms of doing so. The comment that you reported, the forty-eight hour week type of thing, that is not a suggestion which can find suitable soil in which to grow in this environment.
POM But the transformation, the larger thing with the transformation of the society along the lines envisaged three or four years ago, the total transformation of every aspect, can't take place unless there is dynamism among the people themselves to will it and be determined to work for it.
DK You can't just expect them to generate that themselves, there has to be a receptive environment within which to take that approach. I don't think that environment has been there.
POM Then if this is a question that you don't wish to answer, don't bother. It always struck me that when it comes to economic affairs that President Mandela has been peculiarly silent, that he would go out and talk about reconciliation and the need for us all to live in harmony and peace and that we are all one race and one nation and whatever but he never says unless we generate the wealth to give to our people it's going to be perhaps not after all the struggle that went into creating the nation, not be very much of a nation.
DK I'm quite happy to comment on that. First of all I have to say that he has never given anything other than unstinting support to his economic ministers, including me in the first period and my successors since then, so that it's not that he's not on side. I would say that from the point of view of myself and my successors we haven't been able to generate the kind of eye-catching slogan about this that he would have been happy to disseminate. In other words I certainly feel in my own case I wasn't able to generate the raw material that a leader of his stature could have propagated. His own economic philosophy is extremely simple and can be summed up in what's often referred to as a Chinese proverb which says: he doesn't mind whether the cat is white or black as long as it catches mice. In other words he's not anti-socialism, he's not anti-capitalism and so on as long as it does the trick.
POM I want to go back to the question of the capacity of the country to achieve meaningful redistribution. If you have let's say at best a 1% growth rate -
DK In real terms, per capita.
POM Per capita.
DK For a country with a growing population. So this is not negligible. A country with a growing population has more and more infants so to expect it to increase its productivity fantastically while it's doing that per capita is quite a high demand.
POM And that the developed sector and the undeveloped sector will roughly maintain the same ratio between them and that there's a limit to the amount you can redistribute from the developed sector to the undeveloped sector because, I think you said it before, last year, that for blacks there's not going to be a hell of a lot of change and for whites there is a hell of a lot of change and you're caught in the paradox of the two which leads to stalemate or checkmate.
DK This is not a bad country in which to live, regardless. If you're going to be poor this is a good country in which to be poor.
POM Why? A good country in which to be poor, given people's expectations of what they should have as distinct from what they do have.
DK Well there are countries, as you know, which have large sections of the population that are poor and that don't have extravagant expectations. Brazil is one of them, India is probably another.
POM Are there extravagant expectations here?
DK I don't think so. I'm hesitant to express any opinion about a part of the population that clearly I don't have a tremendous grasp on, but on the whole question of expectations I'm not sure what the expectations are, how close we are to boiling point. I'm not even sure if there is a boiling point. My best answer on that would be 'don't know'.
POM So what we're seeing, I think, is rather than there having been a revolution there's been kind of a change in administrations and a change in those who wield political power but not a hell of a lot of change in any other direction.
DK If you want to put it crisply, there's been an accommodation of different elites.
POM What about black empowerment? We talked a little about this last time.
DK It's doing nicely in the lower areas. I think, I probably told you before about the revolution in mining?
DK OK. The old system when only whites were allowed to have blasting certificates, which is what you needed to advance in the mining business, was that you had one white miner for 120 metres of face and he would have six gangs. One gang would do the drilling on this 120 meters. One gang would do the charging. One gang would do the tramming, which is after the exploding, loading up the cocopans or whatever it is that you need to get the ore to the shaft, and another three gangs and so on to do their business. Now the way a mine works there should be a blast every day. In other words the face should be advancing every day which means that in the course of a month you should have twenty-five blasts. In fact the average figure was eight blasts. That was the level of productivity. The way things are organised now is that as black miners are receiving their blasting certificates, which is a matter of training and passing a test and so on which they do and which is happening on an increasing scale, instead of having 120 metres of face you can now have 25 metres of face. Instead of the miner, the black miner in this case, having to supervise six gangs which are working part of the time and not working part of the time he now has a multi-disciplined team which is capable of doing all the activities and the consequence of this is that you can double the number of blasts per month that you were achieving before. So now there is a complete revolution at the work face which is taking place, which is entirely in the interests of the labour and the capitalists, producing better results and leading to higher wages because now all of them have a productivity bonus built in and so on. You're changing the entire status of what used to be your, in a sense, lowest level of muscle power and moving them up and directing them on to what is in the best possible scenario a career path that could lead to General Managership of the mine.
POM Motlanthe talks about the mines possibly losing 160,000, 170,000 workers.
DK Well if the gold price drops, but this is at least delaying that process at its worst. But the gold price will come up again. So at that level you are transforming people's lives.
POM How about empowerment, we talked a little bit about it, in companies like NAIL and RAIL and whatever.
DK That's OK but that's really in the sphere of elite accommodation.
POM Is that the difference between what I might call empowerment that is really in terms of stocks and shares and paper or is it empowerment in terms of the business risk taking, creation of wealth? On the latter side is there anything significant happening?
DK There's no discernible contribution yet. At the working face in the mines there is a fantastic discernible change in the level of contribution.
POM Is there a lingering propensity to invest outside of South Africa if possible or within South Africa?
DK There is a great desire by South African businesses to take advantage of globalisation where they can but there's no flight from South Africa. The bigger investors overseas, like Gencor for instance which I can speak about from first hand knowledge, the bigger investors overseas tend to be the bigger investors locally.
POM So in terms of optimism, pessimism, where you've been, where you are?
DK Still happy to be here.
POM What's the balance sheet at this point?
DK I'm still happy to be here but it's going to be a less vibrant economy than one had hoped it might become. The new South Africa economically speaking is going to be more like the old South Africa than one had hoped it would be.
POM You have mentioned that the world money markets took their cue from what happened in the white sector by and large.
DK Yes, the bad-mouthing in the white sector has got less.
POM Has got less. Why?
DK I think the fact that the rand regained some value, the fact that there have been exchange control relaxations which have allowed for a certain amount of dabbling overseas and so on. I think all of those things have played a part. The fact that the last budget was a good budget brought in by Trevor Manuel. I think there have been, all over the place there have been indications that life can be better for white capitalists than they might have assumed.
POM So that they are not worse off than they were under - ?
DK They are still very worried about crime but Meyer Kahn going into the police force, yes, you know? The chairman of one of our most successful industrial companies has taken a two-year job as administrative head of the police force. All those sorts of things help to build confidence, make people feel better.
POM But it's not going to be the South Africa you wished in terms of - ?
DK Well that was always quite a slim chance which would have required a great deal of national cohesion. I'm not critical of the fact that that chance has been missed. I accept that that chance has been missed for political reasons to which the government had to respond.
POM Political reasons like?
DK The need to spend more in the health service, the need to do more here and to do more there and so on.
POM But in a way I hear from you slightly different messages, that beyond the government being able to control it's level of expenditure you have a population that simply because of its over-consumption habits won't generate the level of savings that must complement government savings and attract foreign investment on its back.
DK No, the private consumption expenditure is not the problem, it's not wildly out of line with similar economies with higher growth rates. It's fundamentally government consumption expenditure that got out of line. In the sixties government consumption expenditure was 9% of GDP. By 1983 it had got to 15%. By the time I entered government it was 21½%. Now if you could just roll it back to the 15% that it was in 1983 you would have enough money to have a level of investment which could produce higher growth.
POM I don't know whether I leave here always depressed or what. Has delivery of services improved?
DK No, for the elite sector it's become less critical because of the fact that through satellites and one thing or another one has been able to by-pass some critical areas.
DK Well, the Internet. So my quality of life has actually improved. My dependence upon what level of service specifically South African utilities could provide has become less.
POM To the townships has delivery of services improved?
DK I'm not sure, I don't know enough about what's happening there. It should have improved. Certainly water should have improved. Electricity should have improved, I think it has improved. Escom has been wiring up 300,000 households a year.
POM You said before that the problem with housing was that people didn't pay their bills.
DK That's the problem in terms of generating a sustainable flow of investment in housing.
POM Is that still the case?
DK New efforts are being made to try and stop that but I don't think it's improved much.
POM Is the culture of non-payment as regards services in general more or less?
DK People are awarding themselves wage increases by deciding not to pay for services.
POM What would you say or what opinion would you offer to look at the Afrikaner in 1948 and the cohesiveness he brought to changing his condition and transforming his life and society and the seeming inability to generate that kind of cohesiveness in black society? Is it because it's too diverse, is it because of the past, the legacy of the past in terms of in so many different directions there were so many attitudes that it's simply not conducive to producing this kind of determination and this kind of attitude?
DK I think that the rifts within black society are much greater, or let's say the rifts within non-white society are much greater than rifts within the Afrikaner community ever were. Secondly, I don't think there is any doubt that forty-five years of apartheid destroyed black communities whereas the Afrikaner community had certainly not been destroyed through it's post-Union experience.
POM So if President Mbeki takes over he faces, it would seem to me, a situation of where this talk of the total transformation of South Africa will have to give way to a far more realistic reappraisal of the reality of things which is they are not going to change that much and the dream of South Africa has been to be the engine of change in the sub-Sahara region.
DK That's still alive because for that you need enterprise of which we have plenty. We are going to transform the Mozambique Corridor, the Maputo Corridor. We will still play a leading role as far as the development of southern Africa is concerned. We just won't be the big capital provider.
POM Yes when I look at the road, if I were a visitor coming here and say I'm coming just once a year for two weeks or something on business and my road took me from Johannesburg to Pretoria and back, the traffic is now almost of American level proportions in terms of back-ups.
DK There's plenty happening.
POM The development of that corridor is incredible in terms of the building of office space that's going on. So what is happening? Is this a micro-level happening that in itself is too - ?
DK If you have in a fair sized economy, if you have 2½% growth in a year, never mind the fact that more babies are being born and therefore your denominator is getting bigger so that per capita it only looks like 1%, it's noticeable. It's not no growth and it's not negative growth. It's growth. That's happening and we're 90% of the combined GDPs of all southern African countries put together so we're still a very important factor for southern Africa and we are growing, and that's what you see. I don't think the sort of things that we're building along that highway are (a) creating a tremendous amount of jobs or (b) putting us into a new position vis-à-vis the outside world, but this is a growing economy.
POM So if you were, God forbid, if you were on your deathbed and the President came in to you and said, "Mr Keys have you one last piece of sage advice you can give me as regards the economy", how would you sum it up?
DK I would sum it up by saying let's try and help people to enjoy what we've got.
POM Well that's a nice way to end. Thank you. You have depressed me. I thought I couldn't be depressed. And the RDP, I have a student over here doing some work and she is very idealistic and has written a whole section about the RDP which I read before lunch and I was saying to her, you're a little bit behind.
DK Just cross out the D and put I.