Date: 10/09/2009
Source: South African Reserve Bank
Title: SA: Mboweni: Speech by Reserve Bank Governor at the 10th Annual Steve Biko Memorial Lecture reflecting on some economic and social developments in the last 15 years, University of Cape Town

I wish to express my gratitude to the Steve Biko Foundation, the Biko
family and the University Cape Town for extending this invitation to
deliver the 10th Annual Steve Biko Memorial Lecture. I am
particularly humbled to belong to the club of those who have
previously addressed this august gathering.

September 2009 marks the 32nd anniversary of the murder in
detention of Bantu Stephen Biko. It is, therefore, a fitting tribute to
Steve Biko to hold this event in September, South Africa's heritage
month. This is particularly so because the threat of forgetting who we
are, where we come from and how we got to be where we are looms
ever larger, particularly for the younger generations.

I never met Steve Biko personally, having been a teenager in
Limpopo by the time he departed this world. His teachings, though,
had a profound influence on me. That was the period historians
referred to as a period of political lull. My ultimate involvement in
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politics stemmed, in part, from some of those efforts of the black
consciousness movement to "conscientise" the masses and revive
political activism. Indeed, as Archbishop Desmond Tutu writes in his
preface to Steve Biko's I write what I like:

"Black Consciousness sought to awaken in us the sense of our
infinitive value and worth in the sight of God because we were all
created in God's image, so that our worth is intrinsic to who we are
and not dependent on biological irrelevancies such as ethnicity, skin
colour or race. Black Consciousness helped to exorcise the horrible
demons of self-hatred and self-contempt that made blacks suck up to
whites whilst treating fellow blacks as the scum they thought
themselves to be. Black Consciousness aroused in us the
knowledge of our share in what St Paul called the glorious liberty of
the children of God, urging us to enter into that splendid heritage1."

Inflation
To break a bit with tradition, the thrust of my address tonight will be
on economic issues. In particular, I will share a few observations and
thoughts on selected macroeconomic developments in South Africa
in the past 15 years. From 9 November 2009 I will no longer be
allowed to comment on monetary policy. As the outgoing governor,
however, I will take advantage of this platform to remind you of a few
truths, one being that no central bank worth its salt can ever tolerate
high inflation. Price stability may not be a sufficient condition but I

1
Steve Biko, I write what I like, A selected of his writings
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maintain that it is a necessary condition for a solid foundation for
sustainable growth and prosperity.

I would like to believe that Steve Biko would have been gratified by
the fairly contained pace of inflation over the past 15 years, knowing
the dire consequences of inflation for the poor - those who are
usually least able to hedge against inflation - in particular. Since
1994 average headline inflation has amounted to approximately 6,5
per cent per annum. Over the preceding 15 years, 1979 to 1994, it
had averaged almost 14 per cent per annum. Inflation has been
uneven over the period, though, induced typically by significant
changes in key exogenous drivers of inflation, such as oil prices.

Secondly, the recent upsurge in strike action has led to some
commentators describing the wave as a ''winter of discontent''. In this
regard, I would like to comment on some worrying trends in the
settlements reached. Wage settlements above the projected rate of
inflation and in excess of productivity gains tend to undermine the
fight against high inflation. They lead to labour cost increases way
above those of trade competitors and, therefore, loss of
competitiveness.

Though I will discuss the labour market in much depth later, I need to
refer briefly to our labour laws. Many commentators have described
the labour market as rigid and inflexible. As the country's first post-
1994 Minister of Labour, some of the blame has been pointed in my
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direction. I am the first to admit that some things could have been
done differently. Hindsight, however, is useful only when it improves
our foresight. I would like to take this opportunity to espouse some of
the theoretical and philosophical underpinnings behind the Labour
Relations Act. The labour movement regarded me as a hero then.

Social ills
The break with tradition, however, cannot be complete when
addressing such an established forum. I will, therefore, digress
slightly and venture an opinion on a few matters not related to
economics and central banking. The shameful xenophobic
tendencies we witnessed last year should have caused all South
Africans to exclaim: "Oh, beloved country, what would Steve Biko
have said?" At the height of the attacks on foreigners most of us
were notable by our silence and inaction. Sadly, such indifference,
anger, hatred and violence towards foreigners, particularly black
Africans, still finds expression among many South Africans.

This is at a time when we seek to accelerate economic integration in
the SADC region, with all the lofty ideals of establishing a free trade
area by last year (2008), a customs union by next year (2010), a
common market and a monetary union by, respectively, 2015 and
2016. The ultimate objective of SADC is to build a region in which
there will be a high degree of harmonisation and rationalisation to
enable the pooling of resources in order to achieve collective self-
reliance and improve the living standards of the people of the region.
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At central bank level, an important milestone has been the completion
of the drafting of the proposed SADC central bank model law, which
will pave the way for the harmonisation of legal and regulatory
frameworks.

Steve Biko observed that the most potent weapon in the hands of the
oppressor is the mind of the oppressed. Indeed, the liberation of the
oppressed is not only political, economic and social, but involves
psychological liberation as well. Can we claim to have liberated our
minds when the daily statistics of rape and other forms of violence
against women and children leave us questioning the very essence of
our humanity? This cannot be what Steve Biko envisioned when he
wrote: "We have set out on a quest for true humanity, and
somewhere on the distant horizon we can see the glittering prize. Let
us march forth with courage and determination, drawing strength from
our common plight and brotherhood. In time we shall be in a position
to bestow upon South Africa the greatest gift possible - a more
human face2."

Delivering this lecture three years ago, Archbishop Emeritus
Desmond Tutu asked: "What has come over us? Perhaps we did not
realise just how apartheid has damaged us so that we seem to have
lost our sense of right and wrong, so that when we go on strike as is
our right to do, we are not appalled that some of us can chuck people
out of moving trains because they did not join the strike, or why is it

2
Ibid
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common practice now to trash, to go on the rampage? Striking
municipal workers empty trash on the streets, other strikers break
shop windows, loot and trash the premises? Even our students on
strike will often destroy the very facilities they need for their studies.
What has happened to us? It seems as if we have perverted our
freedom, our rights into licence, into being irresponsible. Rights go
hand in hand with responsibility, with dignity, with respect for oneself
and for the other3."

We can pose exactly the same questions today when the Bus Rapid
Transit system, a bold attempt to improve public transport, leads
commuters in Johannesburg being inconvenienced by a stayaway
from some in the taxi industry hell-bent on holding the country to
ransom whenever they are not having it their way and perceive a
threat to shrink their market share. They will even go to the extent of
firing live bullets at buses ferrying commuters. We are witnessing
social ills that are partly rooted in our history as well as in unintended
consequences of policy interventions during the post-apartheid
period.

Health professionals abandon the sick in dire need of medical
attention. Teachers abandon learners in favour of this it the other
demand, usually very close to exams. Shopping at malls has
become risking life and limb as marauding mobs, armed and ready to
shoot to kill, strike brazenly and with such frequency. Striking

3
Steve Bantu Biko Memorial Lecture, delivered by Archbishop Emeritus Desmond Tutu, University of
Cape Town, 26 September 2006
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municipal workers still trash our cities. Soldiers - those entrusted
with the defence of the country and the constitutional order - disobey
a court order and run riot near the Union Buildings, some of them
armed. The scenes - the resultant mayhem and police firing at
soldiers - would make responsible citizens to be very afraid and
exclaim: "Oh, beloved country, what would Steve Biko have said
about all those developments?"

Economic growth
Having been willing to give everything for the ideal of a democratic
society, Steve Biko would have observed the progress of the country
since democracy was introduced in 1994 with the greatest interest.
In fact, he would have done more than that: he would certainly have
been leading rather than observing, shaping events rather than being
shaped by them.

In reviewing the past 15 years in the South African economy, and
with the wisdom acquired over the years, he might have chosen to
draw up a balance sheet of assets and liabilities, the positives and
the negatives encountered over this period.

One of the highlights of the performance of the country has been the
unprecedented levels of economic growth attained since the turn of
the century. Calculated at constant 2000 prices, real gross domestic
product per capita rose by more than 28 per cent, from R20 214 in
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1994 to R25 897 in 20084. Similarly, real gross national income per
capita, which also allows for the effect of changes in the terms of
trade on real income, rose by more than 29 per cent over this period.
The level of real gross domestic product expanded by 63 per cent
over the period 1994 to 2008, giving an indication of how much the
overall cake had grown on a cumulative basis. The pace of growth,
however, was uneven.

Economic growth, however, has not yielded the most desirable
results as far as employment creation is concerned. Researchers
assert that improved income levels since 1994 were more driven by
welfare transfers than labour market absorption. Up to 2005, growth
in employment largely tracked real GDP growth, albeit at a less than
sufficient pace to meet the rapid growth of the labour force. The
revised Labour Force Survey estimates, for instance, reveal that
between March 2001 and March 2007 the absorption rate trended
downwards from 45,8 per cent to 44,1 per cent5. Even more
disheartening is the number of discouraged job seekers which grew
from 1 725 000 to 2 511 000 over the same period. Females were
more adversely affected than males by all these disappointing labour
market outcomes.

Even though the demand side of the labour market has been
disappointing, some strides have been made in enhancing the quality

4
Unless stated otherwise, data is from the Quarterly Bulletin of the South African Reserve Bank (various
issues) and the SARS Customs and Excise database.
5
Statistics South Africa. Labour Force Survey: Historical Revision March Series 2001 to 2007, Pretoria,
August 2008.
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of labour supply. This, however, has not been even throughout all
education levels. The proportion of the population aged 20 years and
older without any schooling dropped from 19,1 percent in 1996 to
10,3 per cent in 2007, while the share of those with some secondary
education increased from 33,6 per cent to 40,1 per cent6.

At the post-matric levels, however, the improvements are less
dramatic. Over the ten years starting in 1996, the population over 20
years of age which completed higher education grew marginally from
7,1 to 9,1 per cent7. Sadly, reality dictates that it is the quality of
labour that determines employability. Evidence shows that growth in
inequality is partly attributable to the fact that skilled workers were
more favoured by growth in job opportunities.

Since the beginning of the new dispensation, our school system
performed better in producing standard grade than higher grade
matric passes in mathematics. Standard grade passes increased
from 75 543 to 123 813 between 1997 and 2007. Higher grade
passes dipped from an initial 29 475 to 19 327 in 2000 and recovered
to 25 415 passes in 2007. Although the total number of graduates
increased from 578 134 in 2000 to 741 380 in 2006, the share of
science, engineering and technology graduates moved marginally
from 25,5 per cent to 28,5 per cent over the same period8.


6
Statistics South Africa. Community Survey 2007, Pretoria, 2008
7
Ibid.
8
The Presidency, Republic of South Africa. Development Indicators 2008 (www.thepresidency.gov.za),
2008

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Opening up to the international community
Increased globalisation has been one of the defining characteristics
of the world economy over the last two decades. The advent of
democracy in 1994 ushered in a new era in South Africa's economic
history. At the heart of this process was the integration of the
domestic economy into the world economy.

Prior to 1994, apartheid South Africa faced large-scale international
financial sanctions and isolation. This stifled economic activity in
numerous ways. For instance, access to foreign sources of finance
was blocked in the mid-1980s, resulting in a debt standstill in 1985 as
South Africa could no longer roll over its foreign borrowing and
honour its commitments. Unable to tap foreign savings, South Africa
had to finance all its investment from its own domestic savings, and
was therefore forced to run surpluses on the current account of the
balance of payments. This, in turn, implied generally strict economic
policy settings aimed at moderating domestic income and
expenditure, thereby reducing imports.

With the transition to democracy, international sanctions were lifted
away as the global community embraced South Africa. Whereas
from 1985 to 1993 net outflows of financial capital averaging 2,4 per
cent of gross domestic product were recorded, financial inflows have
subsequently been registered in every year but one. The average net
inflow from 1994 to 2008 amounted to 3,2 per cent of gross domestic
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product, augmenting domestic savings and making it possible to
import more and grow faster.

Significant reform of our trade policies has resulted in trade as a ratio
of GDP increasing from around 40 per cent in the early 1990s to
around 70 per cent in 2008. The nature of our trading relations has
also changed significantly. In the early to mid-1990s, the developed
countries - most notably those in Europe - accounted for around 60
per cent of South Africa's trade. Since then our export markets have
diversified, with countries in Africa and Asia gaining in prominence.
Around 25 per cent of our total exports are sold in Asian markets.
India and China's rise in the global economy has been one of the
main reasons for the rise in the demand for commodities. The two
currently account for around 13 per cent of South Africa's exports.

The normalisation of international relations also involved a
programme to gradually phase out exchange control. Up to March
1995 the so-called financial rand system applied to investment by
non-residents. This not only inhibited outflows of financial capital,
but also inflows. With the abolition of the financial rand system in
March 1995, the country moved from two prices for foreign currency
to a single price, thereby removing a dispensation prone to abuse,
fraud and corruption. Moreover, while the door was opened for capital
movements in both directions, it so happens that, subsequently,
inflows have exceeded outflows quite substantially. The confidence
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in ourselves which was demonstrated by liberalising capital flows has
been rewarded.

Further exchange control reforms of the past 15 years include
allowing South African individuals to invest money abroad, or as
foreign-currency denominated investments with South African
institutions. The applicable allowance was raised over time and
currently the maximum amount per individual is R2 million. A more
liberal approach has also been adopted as far as investment by
South African companies abroad is concerned. Such investments
have contributed to development, competition and growth on the
African continent and elsewhere. Furthermore, a number of
prominent South African companies have been allowed to shift their
primary listing to foreign securities exchanges, thereby making it
easier for them to borrow money or issue shares in those markets.
People who had previously illegally built up foreign assets were also
granted amnesty to declare and legalise such asset holdings.
Numerous persons made use of this opportunity.

South Africa seems to have benefited considerably from the greater
freedom - with greater responsibility - which its citizens enjoy in the
international arena. Both foreign assets and liabilities have risen
considerably. Foreign currency markets have become more liquid.
Under these circumstances the South African Reserve Bank has also
been able to work down its oversold forward position in the market for
foreign currency - its international liquidity position has changed from
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a negative US$25,2 billion at the end of 1994 to a positive US$36,9
billion at present. Apart from this, imports of goods and services
have risen from 20 per cent of gross domestic product in 1994 to 38
per cent in 2008, while the corresponding ratio for exports has risen
from 22 per cent to 35 per cent over the period.

Government finance: Reallocating resources to social spending
In the area of government finance remarkable progress has been
made over the past 15 years. In 1994 expenditure by the South
African government had a significant racial bias. While significant
additional expenditure was called for to correct this imbalance,
government faced significant constraints: national government debt,
for instance, was 50 per cent of GDP and debt service costs
absorbed a considerable amount of funds.

Mindful of the need to structure national finances in a sustainable
way, government decided to do the right thing rather than go the
macroeconomic populist route. Government expenditure and debt
were kept under control, the capacity of the South African Revenue
Service to collect taxes efficiently was enhanced, and an environment
conducive to economic growth was fostered. Progress was made on
all these fronts, with the growing economy expanding the tax base
and the formidable Revenue Service ensuring that the fiscus received
what was due to it. The buoyant tax revenue growth over the past 15
years made it possible to raise government expenditure and transfers
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quite substantially while, at the same time, keeping the budget deficit
small enough to reduce the ratio of government debt to gross
domestic product to 24 per cent in the second quarter of 2009.

This prudent approach paid off recently when the international
economic crisis led to a contraction in economic activity in South
Africa. Low levels of government debt made it possible to adopt a
much more expansionary fiscal policy stance under the
circumstances, despite subdued tax revenues. Although this is set to
raise the government debt ratio over the next few years, such
increase is warranted in the interest of supporting economic activity
and employment.

While an expansionary fiscal policy stance can bolster economic
activity, it is crucial to simultaneously ensure that the expenditure
incurred is productive. Much can and must still be done in this area.
For instance, as highlighted by ANC Secretary General Gwede
Mantashe in an address on 2 September, the micro-organisation of
school education leaves much to be desired, with actual teaching in
township and rural schools averaging only three-and-a-half hours per
day. To correct this is not rocket science, but would need sustained
good organisation and discipline. Throwing money at the problem
would not in itself be helpful.


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Financial sector developments
In the area of finance the period from 1994 onward brought numerous
opportunities, as major impediments to the majority of the
population's interaction with the financial system were removed. The
demise of racially-based restrictions on the ownership of real estate,
for instance, opened avenues for borrowing towards home-ownership
and farming, and for using such fixed property as collateral.

However, the removal of legal impediments alone is not enough to
move rapidly to a satisfactory state of affairs. As the saying goes, the
only place where one would find "houses" before "jobs" is in the
dictionary. While considerable progress has been made with the
extension of home and land ownership through government
programmes and initiatives in the private financial sector, not enough
jobs (and accompanying remuneration flows) have been forthcoming
to support sustainable home-ownership on the larger scale needed.
This has also held back the extent of deposits or investments with,
and borrowing from, the financial sector. Nevertheless, the extent to
which jobs were created and to which previously "unbanked" persons
became "banked" was sufficient to raise considerably the amount of
money and bank credit in the economy relative to the nominal gross
domestic product. For instance, in 1994 the broadly defined money
supply, M3, amounted to around 47 per cent of annualised nominal
gross domestic product. Currently the same ratio is approximately 83
per cent.

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The many South Africans who did get a job frequently found that, in
the wake of their new salary or wage flows, they received numerous
offers to take up credit. Many of them became overextended, as
suggested by the increase in the overall ratio of household debt to
annualised disposable income from 56 per cent in 1994 to more than
76 per cent by mid-2009. So much friction was generated by this
dispensation and government had to introduce the National Credit Act
in 2007 to improve consumer protection. This is accomplished
through measures such as enhanced disclosure in credit contracts
and thorough screening of prospective borrowers' ability to repay
debt before granting a new loan.

Fixed capital formation
It is gratifying to note the considerable strengthening of fixed capital
formation in the South African economy. In 1994 capital expenditure
was barely 15 per cent of gross domestic product. It took a long time
to gain the momentum and put in place the processes necessary to
raise capital spending, but since around 2003 this has started to
happen. Currently fixed capital expenditure amounts to almost 25 per
cent of gross domestic product. This says much about the self-
confidence gained by South Africans and about the forward-looking
focus of our society - characteristics which Steve Biko would have
embraced and promoted with tireless energy.



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Socio-economic trends
South Africa has come a long way in terms of rebuilding and healing
from the legacies of the apartheid past. We all recognise that a lot
still needs to be done. However, we can only learn by replicating
what evidently works and reviewing what does not. A clear message
emerging from socio-economic trends in the post-1994 period is that
we should pay closer attention to policy implementation in terms of
sequencing and understanding complementarities between
macroeconomic and sectoral interventions.

From the socio-economic point of view, we can point out with pride
that significant ground has been gained in improving the living
conditions of ordinary South Africans. After the turn of the century
the overall levels of poverty showed a definite downward trend, albeit
gradual. The proportion of the population living below the Income
and Expenditure Survey poverty line of R250 per month (at constant
2007 prices) increased from 31 per cent in 1995 to 38 per cent in
2000, and dipped thereafter to 23 per cent in 20059.

Similarly, the levels of inequality peaked in 2000 and began to decline
somewhat thereafter. The total Gini coefficient rose from 0,672 in
1993 to 0,685 in 1999 before trending downwards to 0,660 in 200710.
Inter- and intra-racial trends, however, remain worrisome. Although
inequality has eased somewhat since 2000, among Africans it
remains the highest compared with other population groups.

9
Ibid
10
Ibid
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Furthermore, according to the All Media and Products Survey data,
notwithstanding the low base, the share of income accruing to
Africans marginally gained ground against that of other population
groups, rising from nearly 32 per cent to 39 per cent over the 10-year
period between 1994 and 200411.

These trends are due more to the expansion of households receiving
social grants. Whereas the year-on-year growth in welfare payments
before 2000 averaged about 6 per cent, it soared to 40,4 per cent in
2001, thereafter decelerating to around 29 per cent to 2005 and 3,4
per cent in 2007. The total number of social grant beneficiaries
expanded six fold from 2,409 million in 1996 to 12,386 million 2007.
Nearly two-thirds, or just over 8 million of these recipients, were
children12.

While no one can dispute the positive impact social grants have
made on poverty, we need to interrogate the sustainability of the
social welfare grant approach in the long run. I fully appreciate the
need for the state and society to provide welfare support to citizens
who are physically or mentally incapacitated due to illness, disability,
or old age. But when millions of our people depend on social grants
for sustenance, and urban legend has it that teenagers go to the
extent of falling pregnant so as to gain access to grants, we need to

11
Van der Berg, S., et. al. A series of National Accounts-Consistent Estimates of Poverty and Inequality in
South Africa, Stellenbosch Economic Working papers: 09/07, South Africa

12
The Presidency, Republic of South Africa. Development Indicators 2008 (www.thepresidency.gov.za),
2008

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ask ourselves, as I think Steve Biko would: are we not running the
risk of these social grants becoming an end in themselves and thus
nurturing a dependency syndrome, destroying the fabric of our
society?

We have also witnessed notable improvements in living conditions of
households. The number of households living in formal dwellings
rose from 64 per cent in 1996 and peaked at 73,6 per cent in 2004
before moderating to 70,5 per cent in 2007. Access to services such
as water and electricity also expanded. The proportion of households
using electricity as the main source of energy increased significantly
from nearly 58 per cent to 80 percent between 1996 and 2007.
Access to piped water rose from 84,5 per cent in 1996 to 88,6 per
cent of households in 200713. Very commendable.

Conclusion
Steve Biko would be pleased to see South Africa emerging among
the best performing economies on the global platform. He would be
proud with our constitutional dispensation and Bill of Rights in which
the rights for all are enshrined; the emerging Black middle class; the
equitably structured welfare benefits; and the general decline in
poverty. He would frown upon us for the failure to adequately
intervene to address the spread of HIV and AIDS, and many social
ills such as crime and, more specifically, rape and other forms of
violence against women and children; the continuing racial and
cultural intolerance as well as xenophobia. Steve Biko was most

13
Statistics South Africa. Community Survey 2007, Pretoria , 2007
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concerned about our worldview and value systems. For him this was
more than just a manifestation of material well-being.

Ladies and gentlemen, allow me therefore to argue that, apart from
the need to strengthen our family and community systems, we should
not lose sight of revitalising our knowledge systems which are
essentially broader than preparing our children to be economically
productive, asset-backed citizens of the future. Our knowledge
system needs a complete overhaul in which the youth grow to
understand their authentic history (less the romance), their cultural
progressive value system and what it means to be a good citizen.
The groundbreaking work done by such prominent South African
anthropologists as Dr Harriet Ngubane should be celebrated and
replicated.

The growing unemployment rate combined with the partly undesirable
inequality trends can be fertile ground for exacerbating polarisation
among South Africans, leading to social tension across racial, class
and gender lines. The current global economic recession adds to our
woes. It is eroding some of the achievements we have made in
stabilising the economy, broadening economic participation and
improving the living conditions of many South Africans.

In conclusion, the current financial crisis and global recession
nevertheless gives us the opportunity to re-evaluate our craft in dove-
tailing macroeconomic policy with industrial, trade and other strategic
sectoral policies to ensure that future economic growth translates into
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tangible and sustainable well-being for all, especially our rural
communities, women, youth and other marginalised sectors of
society. More fundamentally, we are struggling to realise broad-
based transformation of political freedom into economic, social and
cultural freedom with the required degree of integrity, loyalty and
professionalism. If we can overcome these challenges, we would
have surely achieved some but not all the wishes of our fallen
visionaries like Steve Biko.

"Keep the Faith"!

Thank you