Finance, capital flight, the 1985 debt crisis and banking¶
What caused the 1985 debt crisis and capital flight, should exchange controls be kept, and how did banking and monetary institutions shape the economy?
Works engaging the debate: 22
Positions¶
- Debt crisis political vs economic or mismanagement causes
- Capital flight structural (Fine and Rustomjee, Khan) vs political-risk driven (Fedderke and Liu)
- Banks acted politically (Sampson) vs commercially
- Apartheid debt as odious vs honouring it; banking cartels and gold-standard politics
Evidence base¶
The debate rests on two largely separate evidentiary bodies. For the 1985 debt crisis and capital flight, the backbone is the South African Reserve Bank Quarterly Bulletin and associated balance-of-payments series. Kahn (1987a) and Kahn (1987b) build a Table 1 of dollar and rand foreign debt, debt/GDP and short-term share for 1980-85, plus charts of current and capital accounts, gross reserves and the trade-weighted rand. Hirsch (1989) uses the December 1987 Bulletin to show short-term debt rising from 49% to 72% of total foreign debt between 1980 and 1985, with debt reaching about 50% of GDP. Harris (1986) draws on the December 1985 Bulletin for a reserve fall of R1.5bn in the third quarter of 1985 and end-1984 foreign assets of $12.4bn. Padayachee (1988) adds an OECD Financial Statistics table of medium- and long-term bank credit, together with BIS maturity shares reported second-hand through the Financial Mail. Around these few series the crisis narratives are built from financial journalism (Euromoney, Financial Times, Financial Mail, New York Times) and from anti-apartheid research compilations (Lind and Espaldon, Militz, ICABA bulletins, leaked End Loans documents). The quantitative capital-flight literature uses international datasets. Rustomjee (1991) compares South African-reported trade with partner reports in IMF Direction of Trade Statistics and adds IFS errors and omissions for 1970-88. He arrives at $37.1bn in current prices ($55.3bn in 1988 prices), about 7% of GDP a year, and a 1985 commodity-level comparison with the US. Mohamed and Finnoff (2004) applies the Boyce-Ndikumana residual method to IFS, WDI, GDF, DOTS and SARB data for 1980-2000, finding flight of 6.6% of GDP overall, 5.4% for 1980-93 and 9.2% for 1994-2000. Coulibaly (2005) combines SARB net capital inflows and foreign-liabilities series with the TIPS investment, capital-stock and output database to compare 1976-84, 1985-93 and 1994-2001. Bowman (n.d.) compares relative GDP from Penn World Table 6.2.
The banking and monetary-institutions strand is archival and much older in coverage. Verhoef (n.d.) uses Standard Bank Archives minutes of the 1912-13 general managers' conferences, the 1934 London Agreement and ROCO Inter-Bank Standing Committee minutes for 1964-73. She also draws on Volkskas, Netherlands Bank and Treasury correspondence and SARB statistics for 1940-47. Ehlers (2007) uses Standard Bank general-manager correspondence, 27 rural branch inspection reports from 1928 into the 1940s, National Bank minute books and the Association of Trust Companies minutes. Arndt (1928) compiles Cape and republican archives, Colonial Office records, banking statutes, the 1919-20 Gold Conference and Select Committee evidence, the Kemmerer-Vissering report, and branch and balance tables for 1914-27. On the gold standard, (Breckenridge (1995)) uses Barlow Rand and Chamber of Mines files, Mint records and 1992 oral histories. Mazanderani (2012) relies on SARB governors' annual addresses, the 1920 Currency and Banking Act and De Kock's estimates of 1931-32 capital flight. Jones (2009) and Bond (1998) are syntheses that rest mainly on published bank histories. The odious-debt position (Rubin (1997a), (Rubin (1997b)), (Truth and Reconciliation Commission, Reparation and Rehab... (1998)), ((organiser) et al. (2008))) is argued from legal precedent, TRC hearings, the 1990 US GAO reports, secondary debt compilations and one interview with Terry Crawford-Browne. It adds no new lending data.
Contested evidence¶
The sharpest disagreement over shared evidence concerns the debt-maturity figures. Every side cites the rise of short-term, largely inter-bank debt to about 72% of the total by 1985. Hirsch (1989) and Padayachee (1988) read it as structural balance-of-payments dependence compounded by lax Reserve Bank forward-cover policy and reporting. Harris (1986) uses the same structure, plus the absence of asset freezes and only modest net credit withdrawal, to argue that banks behaved on normal prudential criteria. Bowman (n.d.) instead stresses timing: the June 1985 House sanctions vote preceded Chase Manhattan's refusal to roll over. He reads the crisis as political anticipation, but has no lending records. Hirsch (1989) sits between these positions, inferring political motive from US banks' early, short-term-heavy exit using Lind and Espaldon's exposure shares. The same 1986-89 rescheduling record that Harris treats as commercial pragmatism is read by Rubin (1997a), (Rubin (1997b)) and Truth and Reconciliation Commission, Reparation and Rehab... (1998) as proof that the banks, including the Swiss, sustained apartheid. None of these readings is based on bank-level decision documents.
On capital flight, the estimates are not directly comparable. Rustomjee (1991) treats the whole mirror-trade gap plus errors and omissions as flight, while Mohamed and Finnoff (2004) uses a residual method with a conservative misinvoicing adjustment. Their period averages (7% versus 5.4% of GDP) therefore partly reflect method rather than behaviour. Interpretation diverges further. Rustomjee and Mohamed attribute flight to conglomerate structure in Fine and Rustomjee's sense, but that attribution is asserted from the commodity mix rather than shown with firm data. Mohamed's finding that flight was higher after 1994, despite stability, undercuts a pure political-risk reading. Yet his own motivational explanation, white discomfort with majority rule, rests on one secondary source. Kahn (1987a) reads the post-1976 jump in errors and omissions as evasion of exchange controls, an indirect proxy, and uses it to argue for retaining controls. Gidlow (2008) counters with an unsourced counterfactual that controls and the 1972 ownership rules made foreign banks' exit easier. Coulibaly (2005) treats 1985-93 as exogenous financial autarky and dismisses political instability using Erb-Harvey-Viskanta risk ratings, without formal controls for gold prices, drought or unrest. For the gold standard, (Mazanderani (2012)) credits imperial-bank lobbying for the 1920s delay. Breckenridge (1995) foregrounds mine owners' sovereign wage payments and migrants' preferences. Both, along with Bond (1998), agree that mining houses switched in 1931 for profit, but Mazanderani cites no Chamber minutes while Breckenridge does.
Underused and missing sources¶
The decisive evidence on why creditors withdrew in 1985 is absent from every work. That evidence would be bank-by-bank exposure and maturity data, BIS banking statistics by creditor nationality, credit-committee records, and Reserve Bank and Treasury files on the standstill and the Leutwiler negotiations. Harris (1986), (Hirsch (1989)), (Padayachee (1988)) and Rubin (1997b) each identify this gap explicitly. The End Loans to South Africa archive at the Bodleian appears only in the planning notes of Effect of Sanctions on South... (n.d.), although it could contain creditor correspondence. The same is true of the De Kock and Franzsen commission reports, the Kemmerer-Vissering report, Euromoney, the Financial Times and the Standard Bank Archives. The Standard Bank Archives are exploited only by Verhoef (n.d.) and Ehlers (2007), and not at all for the 1980s. For capital flight, firm-level customs and exchange-control transaction records would be needed to test misinvoicing attributions and the conglomerate hypothesis. Portfolio or survey evidence on who moved money would be needed to adjudicate between structural and political-risk motives. The evidence ledgers contain no work by Fedderke and Liu, so the political-risk position is not documented here. Kahn's distributional claim about exchange-rate undervaluation could be tested with wage-share and profit-share series from the national accounts, but this is never done. Similarly, the cartel's economic effects claimed by Verhoef (n.d.) and Jones (2009) lack interest-rate, margin and profit series.
Strength of key claims¶
| Basis | Share of key claims |
|---|---|
| Systematic data | 9% |
| Partial data | 53% |
| Illustrative or anecdotal | 20% |
| Asserted | 18% |
Comparative figures for all debates are on the Literature overview.
Best-evidenced works¶
Rustomjee (1991), Mohamed and Finnoff (2004), Hirsch (1989), Coulibaly (2005), Verhoef (n.d.), Breckenridge (1995)
Most-used primary sources¶
Holdings are matched by machine against the archive's file manifest; a dash means no match was found, not that the project certainly lacks the source.
Works and their positions¶
| Work | Position |
|---|---|
| (organiser) et al. (2008) | The conference is sceptical of the traditional doctrine and favours ius cogens, agency/constitutional authority and tort routes. The apartheid case is cited as one where the traditional doctrine was set aside for ATCA litigation. |
| (organiser) et al. (2008) | Kaiser and Tariq argue that decisions will be made in parliaments and ministries, not courts, and that campaigns matter more than litigation. |
| (organiser) et al. (2008) | Abrahams notes that apartheid debt was owed to private Swiss, German, US and British banks, which made odious-debt claims hard to bring. The Khulumani suit therefore rested on constructive knowledge and aiding and abetting. |
| Arndt (1928) | Opposes a State Bank (citing the failed Lombard Bank, Free State and Transvaal paper-money experiments and the Vissering report) and favours a privately owned but regulated Reserve Bank; recommends that labour use People's Banks and labour-bank self-help instead. |
| Arndt (1928) | Endorses Grant's analysis that over-issue of paper money, not the exchange balance, caused the depreciation, and judges his reasoning 'sound'. |
| Arndt (1928) | Critical: sides with Dr. Samuel Evans that bank-led credit inflation after 1914 and the abandonment of the Pretoria Gold Conference policy delayed the return to gold; argues the Reserve Bank was adopted too hastily without study of other systems. |
| Arndt (1928) | Argues South African banking has become a potential monopoly of two overseas-headquartered banks through unregulated mergers, and urges Canadian-style consolidated legislation, an Inspector-General of Banks and prior government approval of mergers. |
| Bond (1998) | Bond follows Mabin in arguing that earlier studies of uneven development neglected sectoral switches between productive and financial funding flows. He holds that at particular moments finance becomes dominant and amplifies unevenness, though it is not always the driving force. |
| Bond (1998) | Argues the mining houses used the flight of capital to force devaluation, which was a laissez-faire route rather than the only one. He cites Schumann's view that exchange controls could have kept the country on gold and suggests a public works programme as an alternative. |
| Bowman (n.d.) | Accepts gold-price collapse and unrest as contributing causes. It argues the anticipation of sanctions drove the creditors' refusal to roll over loans. |
| Breckenridge (1995) | Endorses 1933, the end of the gold standard, as a major turning point, but on monetary and cultural grounds rather than the state/class-fraction grounds of earlier Marxist periodisations, which he says are detached from the daily lives of the masses. |
| Coulibaly (2005) | Supports a positive integration-growth link. It argues that using the embargo as an exogenous event avoids the measurement and endogeneity problems of earlier cross-country studies. |
| Ehlers (2007) | Shows rural Afrikaans trust companies using a patriotic 'foreign bank' argument in the 1930s, but notes it never became their primary argument. The imperial banks nonetheless prevailed. |
| Gidlow (2008) | Doubts that disinvestment was purely political. He points to the falling rand and its effect on parent-bank profits, a herd panic after Chase Manhattan's August 1985 call, and policies that had already forced banks to cut their stakes. |
| Gidlow (2008) | Judges the 1972 legislation and exchange controls counter-productive. He argues they retarded capital inflows, facilitated sanctions and left South Africa vulnerable in the 1980s debt crisis. |
| Gidlow (2008) | Argues the policy rests on moral hazard and competition grounds that may justify keeping the big four independent. He still supports allowing 100% foreign ownership, and calls the national-savings argument outmoded. |
| Harris (1986) | Rejects the 'political only' view held by many commentators and bankers; argues political factors triggered it but economic imbalances (short-term debt, recession, gold price fall) predisposed it and partly caused it. |
| Harris (1986) | Argues banks followed financial criteria (asset protection, inter-bank market stability) rather than political objectives, and cooperated with Pretoria; their pull-out was secondary to wider political shifts, but future debt pressure may become effective financial sanctions. |
| Harris (1986) | Holds that reform cannot guarantee the stability bankers seek and may intensify popular struggle, so debt cannot be settled before majority rule. |
| Hirsch (1989) | Grants that weak Reserve Bank oversight and over-liberalised borrowing contributed, but locates the roots in structural balance-of-payments dependence, the gold price and rand collapse, and political unrest. |
| Jones (2009) | Banks were service providers who followed development and facilitated growth, not drivers of it. |
| Jones (2009) | Market-friendly, constitutional British imperial environments produced sound banking. Political interference (US, Argentina) produced fragility. |
| Jones (2009) | Political pressure focused on bank ownership, not functions. Patronage was measured and did not corrupt the private sector, unlike the post-1994 ANC. |
| Kahn (1987a) | Opposes liberalisation. Controls protect reserves in crises, and liberalisation brought debt build-up, capital flight and a credibility loss when controls were reimposed in 1985. |
| Kahn (1987a) | Argues that an undervalued or depreciating rand redistributes income from wages to profits and benefits mining and agriculture over import-dependent manufacturing. |
| Kahn (1987a) | Sceptical of the market mechanism in a country facing political and terms-of-trade shocks, citing the Latin American Southern Cone experience. |
| Kahn (1987b) | Kahn opposes liberalisation. He holds that controls give needed protection to reserves in crises, that market-based depreciation cannot be relied on to deter capital flight, and that reimposition in 1985 discredited the policy. |
| Kahn (1987b) | Kahn argues that a persistently depreciated rand redistributes income from wages to profits and favours mining and agriculture over import-dependent manufacturing. |
| Kahn (1987b) | He attributes it to the lax 1981-82 attitude to private foreign borrowing, the shift to short-term debt and the political loss of confidence, not to gold prices alone. |
| Mazanderani (2012) | Accepts the presumptive consensus that FDI is good for growth but stresses the lack of consensus on causality. Proposes a historical case study as an alternative to cross-country regression work. |
| Mazanderani (2012) | Contends that lobbying by imperial banks and then the mining houses, rather than external necessity, drove both the post-WWI inconvertibility and the 1932 departure. |
| Mohamed and Finnoff (2004) | Argues against Fedderke and Liu's focus on political uncertainty and risk. Favours Fine and Rustomjee's structural account, adding the role of capital-flow surges and elite attitudes. |
| Mohamed and Finnoff (2004) | Sides with those finding flight high by international standards, but uses a conservative misinvoicing estimate that assumes none with developing countries. |
| Mohamed and Finnoff (2004) | Argues that capital controls would reduce vulnerability to crises and flight, and criticises the ANC's neoliberal opening to short-term foreign flows. |
| Mohamed and Finnoff (2004) | Treats the 1985 crisis as the result of a surge of short-term lending after the Latin American debt crisis, reinforced by political instability and disinvestment pressure. |
| Padayachee (1988) | Treats the 1985 bank withdrawal as a result of combined internal unrest, disinvestment campaigns and underlying economic weakness. Banks reacted to political risk and economic fragility rather than to moral pressure alone. |
| Padayachee (1988) | Argues that untied bank loans gave the state relative autonomy compared with direct foreign investment or IMF credit. Heavy reliance on Eurobank finance may still create a new 'mortgaged' dependency. |
| Padayachee (1988) | Suggests the 1982 IMF loan reassured private creditors and signalled continued support for the status quo, citing a UN study and Militz. |
| Padayachee (1988) | Stresses 'gross financial mismanagement' by monetary authorities and unsound bank practices as well as political unrest. Reserve Bank liberalisation and forward cover subsidies encouraged short-term foreign borrowing. |
| Rubin (1997a) | Argues banks, the IMF and Western governments propped up apartheid. The 1986-89 reschedulings were lenient and short-term interbank loans and trade credits evaded sanctions. Financial pressure was therefore never fully used. |
| Rubin (1997a) | Holds the whole debt is odious and unenforceable because apartheid was illegitimate and creditors knew it. Seeks negotiated cancellation as reparation, with unilateral repudiation as a fallback. |
| Rubin (1997a) | Rejects the mainstream complacency: R90bn is about half of the 1997-98 national budget, and the balance of payments is fragile. |
| Rubin (1997b) | Rejects the mainstream view that debt-to-GDP and debt-to-export ratios make the debt unproblematic; stresses opportunity cost for the poor and balance-of-payments risk. |
| Rubin (1997b) | Holds that the banks and the IMF/World Bank actively sustained apartheid and undermined sanctions, and that the three interim rescheduling agreements rescued the regime. |
| Rubin (1997b) | Argues for negotiated cancellation under the odious debt doctrine, with unilateral repudiation as a fallback. Rejects 'there is no alternative' to GEAR and foreign-investor-friendly policy. |
| Rustomjee (1991) | Argues official balance-of-payments statistics understate outflows. Unrecorded flight via trade misinvoicing is far larger than other estimates such as Morgan Guaranty's. |
| Rustomjee (1991) | Rejects it as a sufficient explanation, noting flight did not abate when National Party policy liberalised in the early 1980s. Is sceptical that confidence-building measures will stop flight. |
| Rustomjee (1991) | Argues measured falling profitability may be as much a result of flight as its cause, so profitability-based arguments need careful treatment. Implicitly contests Nattrass-type use of recorded profit statistics. |
| Rustomjee (1991) | Questions the good faith of business and financial leaders who argued against sanctions and disinvestment while moving capital out themselves. |
| Truth and Reconciliation Commission, Reparation and Rehab... (1998) | Argues that a legal and moral case exists for claims against lenders, parastatals and mining houses. It concedes that more research is needed. |
| Verhoef (n.d.) | Holds that the banking cartel was stabilising in the interwar period and after the Second World War, but then restricted entry and innovation, 'suffocating' growth until it was forced open. |
| Verhoef (n.d.) | Describes the two imperial banks as the 'epitome of gentlemanly capitalism' in South Africa: cautious, collusive and slow to innovate. |
| Verhoef (n.d.) | Endorses the De Kock Commission view that direct controls drove disintermediation and distorted markets, making ROCO obsolete. |