SAR, Vol 15 No 2, February 2000
IN DEBT TO APARTHEID
BY DAVID HEMSON
David Hemson works in the social policy program at the University of Durban-Westville.
The international debate about the nature of the Third World, the reverse flow of finance capital from the Third World to the First, and the demands for its cancellation all bear on arguments about South Africa's development. Although South Africa with its developed money markets and industry is far from a typical Third World country, the experience of its decolonisation has some important parallels. Most of the debt, which so devastatingly drains the resources for poverty alleviation in South Africa, is locally held by the government itself and finance institutions. However, the room to manoeuvre, the constraints of policy, are set internationally in the relationship with international finance institutions and with the current neo-liberal assumptions and prescriptions.
In the last phases of the CODESA negotiations, it was clear that there were important concessions made by the ANC in relation to the old ruling strata, not least, a guarantee of the jobs of existing civil servants. Tied to this was the over generous pensioning off of the blood-soaked generals and civil servants. The nature of the various `sunset clauses' has never been fully exposed and possibly includes a wide range of secret agreements, central to the negotiated settlement.
It is precisely this contradiction between resources and poverty, between a surplus of money which sloshes around the stock exchange incessantly seeking a profitable home and the moneyless world of the rural poor, between over-capacity and cruel under-utilisation which is most sharply marked in South Africa.
Internationally the Third World debt issue has been forced into open public debate by the Jubilee 2000 campaign which aims to bring about the cancellation of Third World debt with the beginning of the millennium. In a recent BBC phone-in program campaigners and a World Bank representative carried out a debate which showed the World Bank now taking a position, in principle, in favour of relieving the debt burden of the poor. It was mentioned that the growth in Third World debt has doubled since 1985 to $209 billion and that these debts had been repaid many times over with interest.
The solutions to this problem are, however, polarised. Jubilee 2000 feels that the banks have been paid and that the issue of debts should be closed. More radical voices argue that there should be a repatriation of the servicing of loans and capital amounts for loans which were secured during the colonial period, as in the case of southern Africa.
The measures devised by the World Bank, however, serve to illustrate the tendency of the international finance institutions to operate as the international guarantors of odious, risky, and even fraudulent loans to the benefit of banks in the First World. Critics of the World Bank argue that the radical restructuring of economies takes place more with an eye to securing the financial viability of those banks which made the loans than the economic future of those countries `assisted'.
The solution devised by the international financial institutions is to sell off the gold holdings of the IMF which has had the effect of precipitating the deepest fall in the gold price to the disadvantage of South Africa and many of the most highly indebted countries.
In short, the World Bank and IMF are not prepared to grasp the nettle of Third World debt and act decisively to break the stranglehold of debt over development.
The nature of apartheid debt
Although the South African state is said by representatives of the Department of Finance not to have a serious debt problem in terms of the proportion of debt to the Gross Domestic Product (GDP), nobody can believe that the second largest item in the budget is not a serious matter. GEAR, which is the present `non-negotiable' policy of government, is based on the reduction of the budget deficit, i.e. increasing debt. The interest on government debt amounts to 22.2% of the last budget, just short of Education with 22.4%. That such a colossal proportion of the budget should go not to social expenditure or necessary infrastructure but to institutions and individuals already overburdened with money is a matter for the deepest concern.
This concern is amplified when it is realised that most of the huge public debt of R343 billion was incurred before the present government came to power. According to Professor Ben Turok, Chair of the Parliamentary Portfolio Committee on Finance, one third of the debt was incurred before 1990, one third between 1990-94, and one third in the period 1994-96. The enormous increase in debt from 1989 onwards was marked by political factors, the extraordinary costs of the military and police - much of which was aimed at destabilising the mass democratic movement - and the costs of securing the civil service and guaranteeing its pensions. The latter required extraordinary expenses in the development of the state pension system to make it possible to retire many civil servants. As Turok has argued: "These people want security and you can't take it away; these are powerful people." Although this was not an explicit part of the constitution, it was an aspect of the Sunset clause handout: an insurance policy for civil servants. Generals of the apartheid army retired with millions (one with R2 million). The state had to borrow extensively to pay them off.
In the period 1991-92 the state's contribution increased from R4.4 to 11.6 billion to provide pension insurance for civil servants. The pension fund assets grew exponentially from R31 billion in 1989 to R136 billion in 1996 a dramatic super contribution by the state. This debt was incurred by issuing bonds to Public Investment Commissioners (PIC) to invest in the state's pension fund. The total debt has now risen to more than 60% of GDP - which is up from 40% in 1990.
Unfortunately nothing is firm in discussion of the debt statistics. In most countries financial accounts of the debt which the government owes itself (as in the case of the liability of the South African state to its employees) is not included in the national account. In South Africa, this large amount is distorting a crucial financial indicator. If the PIC element in national accounts were removed, the proportion of GDP taken by debt would be reduced from 60 to 36%.
However the statistics are drawn up, servicing the debt is a central fiscal concern. The entire proceeds from personal tax amount to just over R46 billion, yet R48 billion is allocated to pay interest on the debt.
This is an alarming proportion and appears to the ordinary citizen as a colossal waste of resources. The punishing level of interest rates has made servicing the debt much more expensive over time and a recurring drain on public finance. Under apartheid, the state exercised strict capital controls and, specifically, required institutions to hold government debt; banks were thus ready buyers for bonds even if interest rates were low. There was a tacit agreement between the government and banks that they should buy government bonds. In the 1980s the government began to eliminate these requirements and started to increase the interest paid on debt. If these regulations were still in place the existing debt could be cleared quickly, but neo-liberal policies insist on restraining the capacity of government to tap into private resources.
The PIC, which oversees the pension funds, does not dictate how money is used. Rather, these funds are directed by trustees who, it seems, are now moving these monies into the Johannesburg Stock Exchange to support black empowerment groups on the stock exchange.
These pension funds and their deployment are crucial to the economy, but are enormously difficult to cost accurately. Because of the uncertainties of the transition, the old political parties supporting the old civil service and the civil service unions have insisted on the pre-funded system which was set in motion in 1989. In this system, both the government and employee make contributions and a deferred benefit is provided for any civil servant after reaching retirement. The lump sum is exempt from tax and the contributions from the state are now down from 18 to 15% of salary paid and employees contribution 7.5%. Given its pre-funded nature, there is a guarantee that the pension fund will have enough to pay the retiree a pre-determined amount. At the moment, the pension is 71% funded and civil servants are anxious that it should stay there and that any changes in the system should be available to fund salary increases.
The alternative to the pre-funded scheme is the "Pay as You Go" scheme, which would bring the pension system back to the previous system whereby the state would fund pensions out of revenue. This is the method many governments adopt internationally, but it is resisted by civil servants who remain uncertain and lack political confidence in the government. Pension expenditure would not be from assets but on the basis of an "unfunded promise."
Those who support the pre-funded system argue that a change in the pension schemes simply cannot be sold politically. Yet the Constitution only provides for a `fair pension' and not a definite proportion of salary or amount. The pension item is no small matter as some retiring civil servants are only 50 years old and have secured a pension for life.
GEAR is based on the strategy of reducing the budget deficit. Again if official statistics were to reflect the liability of the state as in other countries (i.e. by excluding the pension commitment) the deficit would already be down to a phenomenal 2%! This is considerably smaller than many OECD countries and shows the extent of the monetarist preoccupation of government policy.
Finally there is the question of the foreign debt. Again there is an argument about figures. The Ministry of Finance argues that the foreign component is `only' 5% or R15 billion of the total debt and not worth the problem of renegotiating. Yet these figures do not include the apartheid foreign debts of the parastatals (such as Transet, Escom, etc) and other institutions which the government has guaranteed and which are now the responsibility of the Reserve Bank. The point is that this debt was knowingly entered into by banks who were well aware of the international anti-apartheid campaigns and the immorality and illegitimacy of the apartheid regime.
In many ways this is the simplest issue from a political and moral perspective. Most of the external loans were secured in spite of the noisy campaigns of anti-apartheid movements who researched and agitated against any loans to the apartheid regime. The nature of apartheid, the use of parastatals to preserve white privilege and to act as an arm of the state against the resistance, was crystal clear. The risk they were incurring was also beyond doubt, and there is little argument that that risk should be realised.
Ending the debt burden
At the moment, all policy is being built around the idea that there should be `value for money'. No wasted expenditure is being tolerated. But there is colossal waste built into international markets, and phenomenal losses reducing countries to ruin as speculative funds flooding through financial markets seek profit. It is these speculative binges which have wasted tremendous resources. At the Conference on Apartheid Debt, it was reported that the Reserve Bank, in the course of unsuccessfully defending the rand, had spent more in a few days than the entire amount ever expended on the RDP. With interest payments at present levels, South Africa is undoubtedly entering a debt trap, i.e. the state borrowing just to service debt. This is such a huge waste. The odious debt, which was incurred in defending an indefensible system, should be ended.
What is argued here is that there is a critical problem with government debt, that interest repayments are on the point of becoming the largest item of budgetary expenditure, and that this debt is directly related to the apartheid period. The Ministry of Finance officials argue that there is not a debt problem and that there is not much that can be done about it anyway.
South Africa undoubtedly has a serious debt problem, which is slowing transformation. There is a sharp conflict between necessary social expenditure and the burden of debt repayment. It is argued that morally this debt can be repudiated, but opponents of Jubilee 2000's position argue that this would bring destabilisation and the most horrendous retribution by the international banking system. It would be counterproductive if this were so, but it is necessary to raise the matter in the international forums in the IMF and elsewhere, to work together with campaigning groups in the North and to mobilise civil society here. International campaigns against the appropriation of assets of victims of the Holocaust have been successful, and there is no doubt sympathy for the battle to bring an end to paying interest on apartheid debt.
Campaigning groups in Europe are working together with activists on the debt question to secure debt cancellation and the refund of interest paid. This is viewed as the most appropriate strategy to unite campaigns in southern Africa and internationally. The strategy is to reclaim the capital and interest for a Social Fund for the development of southern Africa. The present government has taken the lead, in a sense, by cancelling the Namibian and now the Mozambican debt. This has set the example internationally of what should be done in relation to debts incurred during the period of destabilisation and war within the region.
The focus is now on how the Ministry of Finance and the government as a whole will take a stand on the transactions under apartheid which secured the oppression of the majority and the privilege of the minority. Activists argue that if South Africa took a stand on the apartheid debt it would clarify the political and moral imperatives around business transactions.
The question of the debt held nationally is obviously more complex, but not impossible to raise and bring to a successful conclusion. Unlike bank loans, those who bought government bonds in the apartheid period have probably sold them to other holders of bonds. But it should be argued that those who benefited from the loans undertaken by the apartheid government should have to pay them back. Professor Michael Samson argues in relation to the national debt that there should be debt, monetary and taxation policies in place to make sure that the debt is ultimately paid back through a taxation policy directed at those who benefited the most.
The position on international debt is clear: these were instruments entered into for the preservation and extension of the apartheid apparatus in war with the people. These loans were secured against the will of the people and with the vociferous opposition of anti-apartheid movements. These loans should be repudiated.
The challenge is for the government to respond to the campaigns against apartheid debt, to take action to break the burden of debt and prioritise spending on the areas where it is desperately needed. The alternative is to see our development program nullified by the market.
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