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 It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.
10 Jul 1998: Keys, Derek
POM There are some questions I want to clear up from our last interview which was marvellous in the way you explained, and you have a gift for explaining, what exactly are the economic points that must be looked at as distinct from going into long diatribes about this, that and the other. I am going to ask you a question, or begin, I figured how would I approach this, would I go in softly or go in the hard way.
DK Tell me which it is.
POM Well I'm going in the hard way, get rid of it first, out of the way. You were here during all the years of apartheid, your company certainly was one, or at least Gencor was one of the beneficiaries of what you described in our interview before as the way the labour system worked and the lack of productivity and whatever. Was it not impossible for you not to know what was going on? If you have a black person arrested every three minutes for a violation of the pass laws, when you have nine people in two weeks who somehow slip on a bar of soap and disappear out the window of John Vorster Prison, would you not even enquire as to what brand of soap they were using, or did you kind of say I will get on with my life and that you, or the business community in general, instituted a kind of denial of what in many senses must have been obvious?
DK The system gradually developed of course and the point at which it became perfectly clear to me that we reached the indefensible area was when the concept of total onslaught was generated and then put about as being the situation we were facing, and total onslaught like unconditional surrender is the sort of term that crops up which is intended to justify anything. So I saw a clear connection between those. Once you have made that identification the question still was what do you do about it? It had been clear more or less since the start of apartheid but it crystallised about the middle of the fifties that if the system was going to change for the better it was going to have to be changed by the Afrikaners. That's the line along which my efforts went.
POM De Klerk in his book, he still holds this point of view, he said that:
"The people who structured apartheid and put it on the books were not evil people. Apartheid was in its idealistic form a plan to make all the people of SA free. The Afrikaner fought the first anti-colonial war in modern history in Africa against Great Britain so Afrikaners have a deep understanding of the need of a people to be free."
DK Well that's the standard line.
POM Yes it is but did you when it was happening, or prominent people in the business community, accept that or did you say this is wrong?
DK I think basically the business community gave the NP government, initially, the benefit of the doubt. What the business community was always clear about was that the economic policy was wrong. The economic policy involved border development of industries, in other words you would have a large area like the Transkei, you wouldn't have any businesses established inside the Transkei, they would be established on the border. This was the Tomlinson Report period. Does that ring a bell? The Tomlinson Report was a great 22 volume report commissioned in the fifties. That was really like the good face of apartheid except it was economically wrong because it worked out where you could have self-governing authorities, whatever they were going to be called, and the government interpretation of that was, fine you would have these places and then you would get the whites to establish their industry in the white area but close enough to the black area so that labour could move, etc., etc. I was then working for the Industrial Development Corporation which was led by a great South African called Van Eck, Henry van Eck, and he and Verwoerd had an open exchange about this with Van Eck saying that this was an incorrect policy, that you had to have one economy, whatever political things you might make you had to have one economy. It's not popular to say this but Verwoerd himself as the architect of grand apartheid started by saying to his colleagues, "I want to take the injustice out of the system." You have to remember we haven't had apartheid for fifty years, we've had apartheid for 350 years and Verwoerd was a sociologist, who started, as I say, with this statement.
POM He did, I think, his PhD thesis in Holland on it.
DK "I want to take the injustice out of the system." Well starting from that, if you grant him that, starting from that high point we just had a long period of steady deterioration until, as I say, I think about 1984 or 1985 or 1986, this total onslaught.
POM It was Magnus Malan, PW.
DK That's right. By that stage it was perfectly clear that war was being conducted inside and outside the borders.
POM But did it trouble you? What I'm trying to get at is, I've talked to, including FW de Klerk on three or four occasions and going back to this, and the late Johan Heyns about whether there was a perception that this was wrong, evil or to follow the direction of, as I followed Verwoerd's thinking, was that he was saying other colonial powers are disengaging and leaving countries in a mess, what we're going to do is we're going to set up separate countries for the various tribes so it will be much more contained and it will be much more just. So in fact the idea came out of good, given the time it came from it was.
DK OK, but I mean by the middle of the eighties, whatever that date is, I was perfectly clear that there was massive injustice being perpetrated. So you then move to the question of what do you do. At the point that I was asked in 1991 by De Klerk to play that Finance Minister or Economic Co-ordinator role this was one of the things I had to take into account. Is the good of what I'm likely to achieve in getting through to the transition sufficiently great to compensate me, if you like, for having to work with this collection?
POM Did you raise these questions with him?
DK I didn't have to. I am sure he knew exactly what I knew.
POM How was the business community in general, did you discuss it?
DK The business community was rather engaged on the COSATU front. Insofar as the business community got into politics, because businessmen generally cherish the idea of not being involved in politics, insofar as they got into politics it was through their involvement with COSATU which was unavoidable. Can I just say that there was a positive development which started in 1976 and which, if you like, represented something good going on while this deterioration was taking place in the security forces and that was the legalisation of unions and particularly as far as this industry was concerned, the National Union of Mineworkers, the role played by Cyril Ramaphosa which represented a positive development through that period and in fact made COSATU into the powerful player that they were by the time we got to the nineties.
POM There are a couple of things I wanted to just go back on from a previous interview that could be either mistyped, but I didn't quite understand. You were talking about that you need 15% of GNP simply to replace the capital that's been - replacement capital. This means we're only investing 17%, which means a net investment of 2% and you have growth comes from two sources, one is an improvement in productivity and the other is the net yield on capital. There was a report from the Reserve Bank, just their last report, which says that labour productivity from 1993 to 1997, leaving out the agricultural sector, has been growing at the rate of 3.5% while over the same period unit labour costs in real terms decreased in 1993 by 3.1% and last year by almost a full percent so that productivity has exceeded real wage increases in four of the last five years. That's what the Reserve Bank says. And yet labour is continually blamed, the excessive demands of labour are continually blamed for some of the defaults in the economy. Is this a misreading of the situation?
DK No, I think the various bits are consistent. There has been a massive decrease in the number of jobs over this period.
POM About 100,000.
DK Yes. That decrease would have been smaller and you might even have got into a positive thing if you hadn't had the level of wages that you had. The positive developments are there. That's mainly come about because in the old protected days when we lived inside a cocoon here, particularly in siege period, which also more or less coincides with the total onslaught period and so on, it was possible always to raise prices in order to cover excessive costs, it was generally possible to raise prices, hence those very high inflation rates that we showed through that period. That was how businessmen did their business. It was dangerous for them to resist wage increases and so they just let this escalation of wages go on. What we are now busy with is the effect of opening up the market to world forces and the gradual depression of real wages to get back onto a reasonable level.
POM This is happening from 1993 through 1997 where the unions are still held up there as the scapegoat for a lot of the problems.
DK I don't know whether we got on to this in the last interview, but I'm very critical of business's attitude towards unions, towards COSATU.
POM Yes you mentioned it but you didn't expand upon it. I would like you to expand upon it.
DK OK, well fundamentally what happened was this, if I go back to 1992, in 1992 the then Minister of Finance left the job in a situation where COSATU and he were at total loggerheads.
POM This was Barend du Plessis?
DK Yes. They had established a complete loggerhead position so that I was forced if I wanted to make any progress, I was actually forced, I wanted to anyway, but I was forced to actually make policy with COSATU and COSATU was actually given a choice by me before my first budget was finalised between different budgets. This is not generally known but that's the extent to which we went in terms of collaboration and co-operation. Then as you know I wanted to run an all-party economic policy from day one so that involved bringing in the ANC and the COSATU/ANC alliance was very close at that stage because they had this common enemy. So I worked with those chaps on everything, on renegotiating the bank standstill, on the IMF facility for the drought that took place, on our response to the Uruguay round. There wasn't a single major decision that had to be taken in that period that wasn't taken in close collaboration between government and COSATU and business. We had the National Economic Forum and the purpose for the NEF was to do that. So we had common discussion of the problems and the evolution of solutions on a common basis. This is what took place in practice. When the transition took place the funniest thing happened, completely unforeseen by me. Government didn't feel it necessary, they had taken a lot of COSATU people into parliament, the government didn't feel it necessary to collaborate particularly closely with COSATU. They were now in. And business having got a constitution which guaranteed property rights and a market friendly approach and so on veered off into a sort of laissez-faire position where they expected government to discipline labour and resented every aspect in the economy which didn't allow them to operate like Victorian capitalists.
POM Why would business - ?
DK Business wanted to increase its freedom of action. It didn't want to work in a corporatist environment. You have all this free market talk going on and so on, you know and I know that the world in fact doesn't quite work that way, but this is the plot and that's what they wanted. They thought, OK, we've got a good constitution now and government should be in a position seeing it's got the alliances on, government should be in a position to control COSATU and so we're going to go for the greatest freedom of action that we can possibly go for. And that certainly didn't involve working in a collaborative way with COSATU. So you had COSATU stranded in the middle and the fact that today they are developing an alternative economic policy with the Communist Party is the direct result of that.
POM Do you believe that when Mandela and Mbeki addressed their congress that they laid down the markers that either you follow government policy or in fact we're willing to ditch you? In fact that the alliance which people said would hold through the elections but after that it's like open season?
DK Politically they need each other.
POM Right now, do the SACP realise that if they quit the alliance they effectively marginalise themselves to such an extent that they become nothing? They are the only party in the world that still calls themselves a Communist Party.
DK China does still.
POM Well China, if you've 1.1 billion people it's easier to call yourself what you want to call yourself.
DK No, I don't see the alliance breaking up easily, not at all.
POM Are there more cracks there than there were a year ago?
DK There's the position where Shilowa has nothing, he has no fruits, he's not involved.
POM Well Mbeki will take care of that by promoting him next year and giving him the Ministry of Labour.
DK Then there will still be a head of COSATU won't there? COSATU is an important body. I think SA is made for the Swedish mix that worked for them for thirty years. That's what we need.
POM In a way do you see that given the weakness of opposition parties, the fact that they really can't affect policy in any meaningful way, that the ANC is its own opposition, that it's the elements within the ANC whether they're conservative or to the left, and this is where the argument should take place?
DK It must take place and it takes place in parliament. The parliamentary committees have changed out of all recognition. The parliamentary committees are now where government proposals are subjected to rigorous examination by other ANC members or by bodies in which ANC members have a majority and that's been a great addition to our community organisation. They call the ministers in and they call the senior civil servants in and they subject them to pretty effective scrutiny.
POM One thing has struck me significantly in the last maybe couple of years that I have begun to concentrate on it not just with regard to SA but with regard to the world in general and that is the impact of globalisation. It would seem to me that in policy making this vast movement in terms of globalisation was largely left out of the equation, that the concepts of national sovereignty, just as you're gaining independence and sovereignty, is that concepts of sovereignty are going out the door.
DK We're all becoming provinces of the Roman Empire, Great Britain.
POM Back to Gibbons.
DK Exactly. I think we're still fifty or sixty years from the start of -
POM Are you in a situation where, we'll get into the rand in a couple of minutes.
DK I've no doubt.
POM You were waiting for that! Where the impact of globalisation in terms of the effect it has on economies like SA is (a) not sufficiently taken into account.
DK By whom?
POM By South African policy makers, (b) that you have less control over your own economic fate than you ever thought that you would have.
DK Compared with what we had in the past?
POM That you had, and that's growing all the time. (c) That it's still export based, commodities and commodity based and you've no control over commodity prices, that by and large no matter what policies you put down on paper they are subject to global forces that can toss them right out the window.
DK The only point on which I would disagree with you is that it's not realised. We have an ANC government which is toeing the line on the Washington Consensus down to the last little jot and tittle.
POM But it's not working.
DK It's not working in terms of giving us a fast rate of growth, correct, because the Washington Consensus in fact doesn't do that. It's a necessary but not a sufficient condition for economic growth.
POM Just before we get back to globalisation, just looking at GEAR itself and its performance, it has met very few if any of its targets.
DK There was no reason to expect that it would.
POM Well we agreed before that it was dead in the water.
POM A couple of things struck me because it refers again back to what you were talking about last year, is that the target set for last year was the real private investment growth aim of 9.1% and the achievement rate was 3%, that the aim of the formal non-agricultural sector was to achieve a 3% rate of growth and it actually achieved a 1% decline, that government to saving the aim was 2.3% and the achievement was 3.8%. Now this all bears in to what you said last year very, very accurately and yet everyone says that the economic foundations of the country are structurally sound. Now being an amateur it would seem to me there is something radically awry here, things are not working and if things are not working you review your policy and adjust it to try to make it work, so in that sense COSATU and even the SACP are justified in their criticisms. If in fact GEAR was working you could say well it's working but if in fact it's not only not working but that this year for the first time you will a decline in per capita income, you will have really negative growth and you had talked last year that even if you get a 1% growth rate at least it's growth, but this year you're going to have no growth, you're moving backwards and yet the government says we're strictly adhering to a policy laid down four years ago which made certain assumptions about the operation of the world economy and the SA economy and none of these things are working out at all.
DK Correct. I'm glad that I'm not responsible for defending GEAR which, as we agreed some time ago, wouldn't do the job. When the statement is made about SA being economically sound I think it's mainly in comparison to the Asian countries as far as the banking system is concerned. This place is more or less as the figures claim it is and there is no funny business, we don't have huge amounts of irrecoverable loans, we don't have banks that are going to go bang, etc., etc., so we've got a sound structure but we don't have a sound economic policy but I think quite a good policy is now being forced on us. If you have a country which largely produces dollar priced goods and at your current rate of exchange you are not able to make a profit then one of the adjustments that's called for, and which every country manages to make in one way or another, sometimes happily and sometimes unhappily, is you have to devalue your currency. Where we are now with the rand it's transformed the gold industry, absolutely. It's taken scores of marginal shafts out of the marginal category and made them profitable.
POM So should the policy be with regard to the rand, let it find its market level and hold it - don't increase interest rates?
DK No, have no policy as far as the exchange rate is concerned.
POM When I realised that I should begin speculating, which as an academic one only does on occasion, that was when the rumour went out that (whether it was a rumour or not a rumour I don't know) that the Federal Reserve Bank in the USA and England were stepping in to shore up the rand, and it indicated (i) that things were worse.
DK It wasn't so, you know that?
POM It wasn't so, yes, but the rumour went around and that was enough to fuel another round of speculation. The second thing is that the lesson from speculating as to European currencies in 1992 was that sterling - you had the lira and then you had the ... took on the franc and even the German Federal Reserve Bank stepped in and couldn't hold the franc and then the pound went.
DK They held the franc. The pound went. The gripe in Threadneedle Street was that they let the pound go but they defended the franc.
POM Well that's because the English are so anti-European, they said, "Get them!" With the limited foreign reserves that this country has, to throw those reserves into defending the currency is kind of a guarantee for losing your reserves and you're going to lose the battle too. It was better to say hold on to our reserves and let the currency just work out its own level and in time things will balance out. Do you agree?
DK Yes, there is a case for smoothing but then you have to know the point to which you are smoothing and they thought they knew the point to which they were smoothing and in fact the point was much lower than they thought. In the meantime they spent some reserves.
POM One of the few things you were slightly off the mark on in six years is that you said the value of the rand was increasing last year.
DK Maybe it was at that time.
POM But again you have no control over it.
DK No, no, it's capital flows.
POM I come back to the question of how do you develop economic policies that will generate growth with jobs, the two are separate because we've gone through the growth without jobs, without job creation, when increasingly you are hostage to economic forces, global forces that are totally out of your control?
DK You're familiar with the whole north/south debate and the Brandt Commission, Willie Brandt, the chairman of the commission. This is going back years but it's a problem that's been with us for a long time now and that is that basically the developed world has worked out a way to improve its standard of living partly at the expense of countries like this.
POM There seem to be two things happening as I read the economic situation, that within countries, even within the USA is that the disparity in incomes is increasing. The rich are getting richer and the poor are in fact getting poorer and the middle class is getting squeezed, so you have one thing happening within countries and then you have the north/south situation.
DK Well the north/south is an international example of what's happening inside a developed country.
POM So what must be done, what's the role of the IMF and the World Bank in situations like this, that you can't have growing and perpetual inequality because one of the results of it will be that you're going to have countries like Pakistan and India and every other country that can grab nuclear technology, grab it and at some point use it as a way of forcing concessions out of the developed world?
DK I don't answer the question because -
POM It's just rhetorical.
DK I've spent decades looking for that answer. But another thing that you have to take into account is that the nature of industrial growth today, if you can call it that, or the nature of value enhancement today doesn't allow for the establishment of branch activities in under-developed countries. It's because of globalisation of course but you actually don't need very much on the ground here for the whole IT revolution that's taking place. In the days when producing textiles was the big thing you could have looms and so on here and train people to do it and this, that and the other, but most of the growth in the world, the rapid growth in the world now is taking place in industries which don't lend themselves to labour in under-developed countries. As opposed to that you have to take into account the fact that my credit card account is processed in India where they have literate, numerate labour available on the doorstep at very low cost. Part of the answer may be to try and develop that. You can't, I don't think, create a subsidiary Silicone Valley in Franschhoek, in the Stellenbosch area, which is the nicest place in SA to live. The industry doesn't lend itself to that. The undeveloped world is in serious trouble and growingly more serious trouble.
POM But there doesn't, again as an outsider who follows it sporadically or whatever -
DK You're on the right side of the tracks.
POM - it would seem to me that there is not sufficient acknowledgement of this by the developed world.
DK No the developed world is as greedy as hell. They have all the basic capitalistic instincts. The developed world has developed what is now called 'donor fatigue'. They never found the way to make the donations in a productive way in the first place but they're now cutting down on that. There have been recommendations about what percentage of GDP from developed countries should go to the undeveloped world and as far as I know I think only Norway has -
POM American aid has been way cut back.
DK You don't talk about American aid.
POM I'm Irish, I have to keep repeating that to protect myself from these kinds of global onslaughts.
DK I'm not anti-American, I love the Americans but -
POM Let me go back for a minute to the rand. There was this article by, it could be totally off the mark, it was the Mail & Guardian last week, 3 - 9 July, by a woman named Donna Bloch, it said, 'Blame it on the banks'. She made a number of remarks, she quotes other people, so I'd like you to comment: -
"Ruben, (this is the Secretary of the Treasury - why am I telling you?) a former currency trader himself is well known for having little time for emerging market countries blaming their woes on outsiders. To the shock of his business student audience in Bangkok this week he said speculators were not to blame for the Asian crisis. The role of speculators will be found to have been relatively small and transient. His view echoes the findings of a recent report by the IMF which says speculators indeed made large bets that Thailand's currency would be devalued in 1997 but so did many other investors. Leading the herd were not the hedge funds that are so popularly blamed for the world's currency calamities but major international banks."
Part of what she is saying is that even here banks lend money to people to speculate against the rand.
DK Or against any currency. That's right, it's part of having a free capital market that you have the ability of people to take views.
POM This part I liked because there is an irony to it. It says, and it may be true or not true since one doesn't know. She is talking about George Soros:
"The Hungarian financier cum philanthropist who was credited with the currency crisis in Britain in 1992 and the Asian currency crisis in 1997. Soros' Caribbean based Quantum Fund & Revco Fund have been specifically named by traders as having taken positions against the rand since the current crisis hit in May but his funds are not the only ones active here and may not be the biggest players. Several others, mainly banks such as JP Morgan out of New York and Bara-Julius(?) Bank out of Switzerland have also got into the rand game. SA banks have given a hand by facilitating the international deals through lending the speculators the money they need to run on the currency."
DK Free capital.
POM Yes. Now what I find interesting is that, the irony is that when President Mandela made his speech at the 50th Congress of the ANC when he lashed out at everybody, it was like total - give me a target over here and I will just move all the way across the table. The only person he had a good word to say for was George Soros, the only person he quoted was David Rockefeller and George Soros as examples of good capitalists, while George Soros is speculating against his currency. Is there an irony there?
DK This only shows that Mandela agreed with Ruben that the activities of speculators aren't all that important. They certainly aren't crucial in determining what the value of the currency is.
POM OK, what is important?
DK I'm just looking around for a piece of paper.
POM The last time you drew a diagram for me it sounded terrific on tape but since I didn't have the diagram it made no sense at all.
DK You can take this with you. The current account movement is exports and imports. So if you can run your country in a way that it had to be run when we were under siege so that you have a permanent export surplus then you have a little to assist your currency all the time because people are paying you more dollars than you're using to buy your goods, just assuming we take the dollar as being the rest of the world's currency. When we were not part of the world capital market this was very important for us, exports and imports. It really determined what was going to happen to the currency. We couldn't borrow any money and so on so we just had to get by. Now as we've got back into the capital market you've got capital flows and the first one that you've got is the flow into shares, people decide to buy SA Breweries and so on.
POM Non-wealth producing.
DK Well it all helps because it raises the market here, it makes it easier to float new companies here and so on. So there's no bad capital provided you've got a positive inflow. So you've got a certain amount of activity in shares and it becomes OK for world-wide portfolios to have the shares of SA companies again now that we're back in the fold, etc., etc., so we've had a positive impulse from that. Then you get bonds and this is much bigger than that, much bigger than the flow in shares. The flow in bonds, the money that can move into the bond market here exceeds by a factor of several times the money that goes into shares and comes out of shares. The bonds are either ESCOM or government, both of which are regarded as being default free and when people decide to take a view on the currency they can do it through making bond purchases or bond sales but the big driver there has been the real rate of interest, so at the point that the SA inflation rate is 5% and these bonds are paying 15% the calculation that's made is that there's a real rate of return of 10% and that has been a very high real rate. So you get a big inflow here. Now over and above that you get the currency traders, people simply buying the rand or selling the rand. There may be transactions in bonds that take place as a result of them doing this but there's no actual movement otherwise and certainly not by the hedge funds or the currency traders. What these chaps exist to do is simply to try and estimate what is happening to these three.
POM Just name them again so that - these three on the table.
DK The exports/imports balance, the probable movement of capital into shares or out of shares, the probable movement of capital into bonds or out of bonds. So a currency trader, and you can call him a speculator if you like, exists and survives if he makes good guesses about what's going to happen to those. Those are the fundamental things that determine what your currency does and this is embroidery. It may accelerate the movement downwards. It may, for a time, stop the movement from going as far downwards when you get a profit taking and technical correction and so on, but it doesn't determine the ultimate value of a currency. At the point when the embroidery is over, when in fact the whole market has the same expectations and so there's nothing for the currency traders to take advantage of, they're out of the game.
POM Do the currency traders look at the level of foreign reserves that a country has to defend its currency?
DK Absolutely, and not only that, they make a study (now I'm putting in the Reserve Bank) they make a study of how they think the central bank is likely to react and so on. So all of those factors go into their thing but the classic view of speculators in any market is that they smooth out the processes, they smooth out the bumps and so on and they sometimes accelerate movements and they sometimes decelerate movement. Now our currency was in trouble because with the Asian crisis and so on our exports are going down, there is no sign that our imports are going down. If anything our imports are going up and with the general malaise about emerging markets and, I hope it hasn't died, I was going to say the death of the emerging market fan club, but there has been a sharp decrease in their numbers, the likelihood was that the shares would be going down and with the response to those two movements being higher interest rates that decreases the value of your bonds in anticipation of that, money flowed out of bonds. So all three factors were in favour of a depreciating rand and this is what I call the embroidery area.
POM Which one? Call it again to describe it to the machine.
DK What the currency traders and the central bank involved do falls into the embroidery section on top of these basic underlying -
POM A perfectly understandable map!
DK There was every reason for the rand to decline.
POM On the other hand there's a school of thought that the rand is severely under-valued.
DK Sure, on a purchasing power basis which the capital market dwarfs concern, the purchasing power basis applies to this line, it's relevant to that line.
POM That's to the export/import.
DK Export/import balance. It has no relevance as far as capital movements are concerned whatsoever and capital movements absolutely swamp the current account.
POM So given that there is a crisis in the rand -
DK Crisis? Yes all right. I don't think in those terms. I don't think in terms which include the term 'crisis' over the value of our currency.
POM Given that there's a problem.
DK Well there's a sharp decline in the value of the rand.
POM A sharp decline in the value, given that this is again part of the worldwide flow of capital where what happens in Tokyo or in Thailand or in South Korea is as important as what happens here on the street, given the rapidity with which capital can move from one place to another at just the push of a button, given that this has resulted in not an increase in exports which would improve the first side of your equation -
DK It is not resulting in an increase in exports. Quite substantial. As I say that's all the marginal gold mining shafts moving into profit.
POM But one of their biggest markets was in south east Asia who can no longer afford to -
DK The gold market is there, it's a terminal market, it doesn't depend to that extent on Asian off-take.
POM But you had said earlier that exports were going - is that an arrow that goes up or down?
DK That is what was happening with the rand at the old value. I was explaining why the rand was ripe for a devaluation. Now that it has devalued that arrow will turn around.
POM The export arrow will turn around. Given that imports are going to be more expensive and therefore inflationary.
DK The imports will turn down. Yes the inflation, my packs of Bicycle cards will cost more.
POM Given that this is, I think, the third or fourth quarter in which economic growth has been below 1%, around .7% this year, it might even out at 1.7% at best or maybe 2%, given the figures you quoted before last year about taking into account population growth even though it's not that important but this being a consumption society it would appear by all standard yardsticks that the country is slowly heading towards a recession not of its own making necessarily but it will be part of a recession that's going to be worldwide.
Now you're the government and you're entering an election year, you haven't delivered on many of the promises that were made in 1994, expectations of course have gone down but the proportion of the GDP that is taken up with government consumption is rising not falling, at the same time there are less resources there to redistribute, what kind of mess are you in? If I was now President Mandela sitting opposite you, and I asked you an awful question the last time I was here, that if you were on your deathbed and President Mandela came in and asked you with your dying whispers what advice did you have to give to him on economic matters, what would you say to him? What would you advise now? Where is SA getting stuck? I'll come back to Mbeki's speech because I want to talk about his two nations, disparities are increasing not decreasing, the effectiveness of black empowerment and things like that, but that's just a little later on. Without economic growth, democracy really can't take hold in this country in a significant institutionalised way?
DK I'm not sure about that. That equation has been made throughout this whole period of transition but I think our democracy is fairly well established and I don't think economic growth is essential if people have to be bribed into being democratic by the promise of goodies. So apart from that it is a stark picture. All I can say is provided our currency stays at its present level -
POM That's around six rands to the dollar.
DK Yes, but taking into account a continuing decline, a lot of the businesses that would have been closed here will not be closed and in fact SA's cost competitiveness position of course has been quite sharply improved. Gencor or Billiton is in all these businesses because that's the smart place to be. We're going to establish a zinc smelter in the Eastern Cape because the two best locations from a cost point of view for establishing a zinc smelter based on a worldwide independent study turned out to be Peru and South Africa.
POM Which study was this?
DK An internal one which we commissioned. If your currency goes down by 20% and your wages only go up by 8% you've improved your labour cost position by 12%.
POM Is the government at fault in not getting its message out?
DK First of all it's a very difficult message isn't it? It's a message associated - you come down to this, after you've analysed the fact that we're in a poor position along with a lot of other developing countries and that our fate is being decided, let's just say for shorthand purposes, in Washington. After you've done all that and so on and you come to one inescapable conclusion which ties up with everything that we've talked about in the past and that is that if you cannot say, if you cannot acquire capital, your own capital, out of your current level of earnings to a sufficient degree you remain a powerless pawn in the worldwide game. Now do you want to be independent? Now we're talking politics. Do you want to get people to create an internal level of saving which involves sacrifice and do you have what it takes to do that, and if you don't then you make the best of where you are.
POM We talked about this a little bit last year in terms of there being no national cohesiveness, no willingness to say we're building for the next generation, all of us have to sacrifice in the present. It's more like I'm all right Jack.
DK The Masakhane campaign doesn't do it.
POM It hasn't worked. To contrast that, say, with South Korea where you see television pictures of people lining up and handing in their personal jewellery and whatever to help the economy recover or to give something back.
DK A monk in Thailand, he appealed to people to give their personal possessions and produced three million dollars for the Thai government.
POM That would never happen here, would it?
DK Absolutely not.
POM Is this a cultural difference or is this the experience of a country going through a certain form of transition where all authority is suspect even if it's your own authority?
DK I don't know. But I don't expect it to change.
POM You and your friends, you said to me one year and it has stuck with me and I tell the story over and over again, was that you said it's the wives who really make the decisions, it's the wives who go out and have lunch and they talk about crime and what's happening and this and that and then they come home and when their husbands come home at night they relay the stories and that sinks in to the CEO's brain.
DK That's right.
POM At cocktail receptions and things that you go to, what does the flow of conversation move around when it comes to the economy and where the country is heading?
DK I think basically as far as businessmen are concerned there are still ample opportunities for profit making and they are being pursued and people generally are taking the sort of precautions that give them peace of mind in their personal lives.
POM Is crime still the number one issue with which the government must contend or is it slowly getting it under control do you think?
DK Well you will know more when you've talked to Fivaz.
POM But in your circles what's the perception?
DK Basically the attitude in my circles is that we've taken the precautions that are necessary to live with the current state of affairs and we're sleeping at night.
POM Which are like what?
DK Like which roads you use and which roads you don't use, whether you have a driver or not, whether you go to a certain restaurant or not. The lore builds up fantastically quickly.
POM But is there a lack of confidence in the ability of - ?
DK There's a widespread perception that there won't be a noticeable improvement in the short term or perhaps even in the medium term.
POM Cain said in the long run we're all dead, so where do we get from - ?
DK You will find this in one of our previous interviews because I've said it so often, the three major problems that this country has are the educational system, the health system and the police system, all take a generation each to solve. The extent of the police corruption is becoming apparent as various cases come through.
POM Is corruption, President Mandela in particular used to lash out at the media when they would uncover stories of corruption and say that corruption in the apartheid era was far greater than any new corruption going on now and yet he's now switched, I notice a switch in his entire approach. He says now there are comrades who are dipping heavily into the - is corruption becoming a real problem? Is there a danger - ?
DK I think the corruption that takes place is in many instances coming to light sooner often because the methods are much clumsier.
POM You mean there's room for sophistication here?
DK One's bound to see that. The corruption in the police force is not a racial thing at all, it goes right across, it takes no regard of colour.
POM One hears the phrase all the time, it's used in a pejorative way of South Africa of the rest of Africa, become one of these junket states. Is there a possibility of that happening unless there are severe crack downs? One can look at Mpumalanga, one can look at Gauteng, one can look at the Northern Province, one can look in all of these cases there are severe problems.
DK There are sincere efforts being made to deal with the problem out there but just how successful they will be - well we'll have to see.
POM Somebody said to me, not somebody, a number of people have said to me that the problem with the government, the state of government: (i) is the government working both at the national level and provincial level and at the local level; (ii) that the government was terrific at producing white papers and green papers and yellow papers and purple papers and whatever kind of paper you want to talk about and the policies all look terrific on paper but there is a lack of willingness to implement, that there is an inability to make tough decisions.
DK I think it's more complex, I think it's a different kind of problem and it has to do with structure. As you know we had our revolution at the top and then we had trickle down. Mandela replaced De Klerk and nothing else at that stage happened and then the provinces replaced the homelands and then the new local authorities started to operate. We're still in the stage where the local authorities are struggling with their problems but it's going quite well in my opinion. The provinces are now in the situation where they are controlled by the national budget which gives them an inadequate level of funding for what the provinces would like to spend and in some cases an inadequate level of funding for what the provinces are already spending. So you get these crises arising in the provinces that suddenly there's no money for pensions. In other words the really tough decisions, you could say the first tough decision was that provinces are only going to get that much money. The resulting tough decisions in terms of where the sacrifices are made have been pushed down into the provinces. Many of the provinces lack what's needed to take those decisions in the best way and in a way which would command some support from the people affected. There are nine provinces and you've got all sorts of different reasons. In some cases perhaps they think that by allowing the crisis to develop they will all get more money from the central government and so that's the smart thing to do. In other cases they simply don't have the administration which allows them to realise that there is a problem coming six weeks away. So that's where the application of scarce means to abundant ends problem is now being faced, it's in the provinces. To that extent the white papers which are done by the national government in fact don't take account of those kinds of problems that now exist in the provinces. Education is a provincial responsibility, health is a provincial responsibility, policing is to an increasing degree a provincial responsibility, so in your tough areas the national government is to some extent de-linked.
POM But Bengu folded his cards and -
DK Yes Bengu at the national level that's fine, this is what the policy is.
POM But then it becomes the provinces that have to -
DK Now implement it, yes.
POM Where do the provinces get the money?
POM Increasingly, and correct me if I'm wrong, it seems that provinces are borrowing from the banks and the banks are loaning huge sums of money to the provinces.
DK About R4 billion net.
POM Who is responsible for it since the limited resources, the provinces do not have revenue generating powers, who is responsible for the repayment of that money?
DK Well in practice it's always been the central government in the end simply because you can't allow that sort of thing to happen. But Manuel he is doing a good job as Finance Minister in rattling his cage.
POM But if I were in a province, a Premier, and I need more money, I borrow and a bank is going to give me the money, is there a possibility of a situation developing where the provinces would be unable to repay?
DK There's always a - take Orange County, there's always a way of re-jigging the finances and so on, you replace one form of debt with another.
POM Yes but aren't you getting into a situation which is putting the banking system, one of the most highly developed sectors of the economy -
DK The banking system will look after itself.
POM But that's what they said in other countries before the banks collapsed.
DK When I dealt with this part of the constitution I forbade the provinces to borrow any money and this was softened by other hands to allow them 'bridging finance', through that gate.
POM I wish I could get that.
DK Through that gate the barbarians have rushed cheering and shouting.
POM So you don't see any - I think ABSA in particular has -
DK There's no problem for the banks, they will get theirs.
POM Just a couple of last questions. One is a thing I'm going to read to you because it was very important, it's about the revolution in mining and you had said : -
"The old system when only whites were allowed to have blasting certificates is what you needed to advance in the mining business. 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 metres, one gang would do the charging, one gang would do the tramming after the exploding, loading up the cocopans or whatever it is you need to get the ore to the shaft, and another three gangs and so on to do their business."
What would the other three gangs be doing?
DK Oh, cleaning up. There's one gang that more or less looked after the miner, made sure he was all right, made his tea and this, that and the other. That's not for me to specify because I'm not a miner. But he had six gangs and the job was broken down into the different bits.
POM "Now the way a mine should work, 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 25 blasts."
DK They don't work on Sundays.
POM "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 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. The consequences of this are 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 place which is taking place which is entirely in the interests of labour and capital."
Just to check there, my arithmetic would say you should be doing 25 blasts.
DK Well you can't get up to that.
POM But you're now up to 16?
DK It's difficult, yes, but with the best practice you're up to 16. Did I give you what deep level hard rock mining, the best analogy for that which Clive Menel, who's now died, used to use particularly for American visitors. He used to say if you want to know what our kind of mining is like you have to visualise that you take the New York telephone book and you compress it and distort it and you keep it under great pressure, and he said our mandate is please remove page 769. Gold isn't laid out in sheets, you just have to take it out.
POM One last thing, you mentioned about Meyer Kahn becoming the - is that working out or is he stuck in a quagmire?
DK I have only one test for this and that's how he looks and whether he's still making the jokes and the answer is he looks good and he's still making the jokes.
POM OK. The other thing is I have been struck, because of having had some experience recently with the way the new labour laws work, are they going to prove to be a real inhibitor to foreign investment?
DK I shouldn't think so.
POM Let me give you a case in example. An employee in an organisation that I am familiar with reorganised itself, it's an American organisation, it reorganised itself and reassigned responsibilities and the deputy to the Director felt his duties had been down-graded even though he was receiving the same allowance and salary and he said he had not been consulted about the redefinition of his duties so he was taking this to the Labour Court. First of all it went to arbitration, the arbitration made a suggestion, he rejected the arbitrator's findings and is now taking it to the court itself. The organisation in question has to bring in a lawyer from Washington, bring in a local lawyer. They are preparing briefs, they're spending an inordinate amount of time over saying - he's already resigned from the job but they gave him six months to find a new job, so he's getting paid for six months just to find a new job which he also finds inadequate and inequitable. I don't know how long he thinks he should have to find a new job. Their lawyers are going to go into court and say, listen we came over here as an NGO, we hired local people, we sent them to school, we trained them in IT, in all technology skills so that when we leave they will have an opportunity to find jobs in the developed sector of the economy and frankly if we have to go through this with every employee when we make a decision we will make a decision not to hire anybody who is local. We will take one person over from Washington who can do the job of three people. We tolerate inefficiencies in order to create opportunity and we will just say to hell with it. We will say we're not hiring any more local employees, we're firing everybody, we're retrenching everybody saying the policy of our organisation is only to hire Americans. Now why wouldn't an employer who would have to go through that on a case by case basis, looking at the law, implications of the law saying why come to South Africa, my God?
DK Only to make money. It doesn't apply in your NGO case but in the case of typical capitalists or the chap that has to come here only to make money. But businessmen will take care of anything if they can make money out of it. They work out ways to handle the labour problems. Labour problems just don't rank that high for most of the businesses that I am now still in touch with. I asked the top chaps at CG Smith, which is a big food group, how they are going to react to the Labour Equity Employment Bill and so on, and they say they think they're really well ahead of what the Act requires already and it just doesn't represent a problem for them. They've applied themselves in the area. We've had quota hiring by certain companies for years already. When Gencor bought the Mobil business here, Mobil had been changing its demographic composition for some years already, they wanted to get to 40% non-white within five years. In order to get to 40% non-white within five years across the board their hiring practice had to be 80% non-white.
CB This was at what stage, what year?
DK 1983 I think. So at the point that Gencor bought them they had had three or four years already of running that and they made it work. It's a company called Engen today.
POM Engen? It's the petrol stations?
DK That's right, that's the old Mobil company.
POM One last question, the Presidential Review Commission on the Public Service essentially said that the plans to cut back on the size of the Public Service have not worked and even as they cut back on the size I think the salary bill has increased from R35 billion in 1993 to R50 billion in 1997. How do the government deal with the public service unions? Like I said, SADTU, Bengu just folded his cards and said I give in, setting a precedent which other unions will say you push and you get.
DK I don't know how they're going to crack that nut.
POM What would your advice to them be if they came to you and said this is the problem, what do you think we ought to do?
DK Well it was the problem when I was in government and I didn't find a way through it. Just to give you the background, from 1980 the government and the public sector kept rising and employment in the private sector remained constant and then eventually dropped. It fits in with the period of total onslaught, it also fits in with the period in which the homelands were being bribed to accept independence and the bribe was that they could appoint as many civil servants as they liked and that they would all be on parity with the Pretoria civil servants. So the number of public sector employees just kept increasing and when we came to the transition the important thing was to get that through peacefully and so the parties negotiating, ANC, the government and so on, agreed that all of these chaps would be guaranteed their jobs, they would be guaranteed their pensions which were too generous, they would be looked after in various ways and the new government inherited this mess on 10th May 1994 and hasn't been able to do much about it. With the benefit of hindsight and if we'd had the sort of national will whose absence we deplored earlier in this conversation, what the government should have said was as the change in the civil service takes place and the black civil servants come in in the higher reaches and so on their salary level will be three quarters of the existing level because we regard the existing level as being far too high and the country can't afford it. And it would have worked because the step up for the incoming people is great, it would have provided a reason why the too-highly paid people should gradually get out of the way, it would have created a two-tier market, etc., etc. But Mandela and the government generally were just very, very protective of everybody. The whole idea was that nobody's going to be damaged.
POM The win-win. Is this further complicated by the fact that not only is employment not increasing it's decreasing, I think the figure in the private sector is about 100,000 jobs since 1994. Is that as you - that the government becomes the employer of last resort?
DK Oh that was the case I think in this earlier thing. I'm not aware of any examples of hiring simply for the sake of taking people off unemployment.
POM I'm not saying hiring to take them off but it's not retrenching. It's not saying we won't fire.
DK Well there's sensitivity about retrenching but industries have generally managed to retrench and in fact I think there are figures in the public domain about what Telkom and other government bodies what their numbers have come down by and so on. So I don't see much sign of -
POM It's mostly through not filling vacancies rather than -
DK Ideally it's always through attrition but in fact you encourage people to go.
POM Well how much do you have to give them? That has got to come down. Thank you ever so much. It's always lovely talking to you.
DK Nice to see you. You look in better shape if I may say so than the last time you were here. Last time you were here I was afraid that the funds were going to run out and O'Malley was going to run out.
POM Well the funds have run out. I had just come back from Angola and had just had malaria. See you in six months for the last time - well not the last time but the last time on this kind of venture.