Challenging Apartheid's Foreign Debt¶

Literature › Works

Jeff Rubin (1997). Challenging Apartheid's Foreign Debt. Report for the Alternative Information & Development Centre (AIDC), Cape Town. Alternative Information & Development Centre.


Type	report
Scope	Economics and economic history of apartheid
Method	policy analysis
Period studied	1946–1997
Regions	South Africa, Namibia, Zambia, Britain, United States, Switzerland, Germany
Themes	sanctions divestment, macro fiscal finance debt, transition post apartheid, business and state, politics ideology elections
Citation key	`rubin1997`

Argument¶

The report argues that the c.$18.7-20bn (about R90bn) foreign debt inherited by democratic South Africa should be cancelled under the legal Doctrine of Odious Debt. Apartheid was illegitimate, and creditors (the IMF/World Bank, private banks and high-risk speculators) knew it and kept lending. It recounts the IMF's favourable treatment of Pretoria. It also describes the banks' lenient 1986-89 rescheduling of the 1985 standstill, and the role of short-term loans and trade credits in sanctions-busting. It proposes negotiated cancellation backed by international anti-apartheid solidarity, with unilateral repudiation as a fallback. It also criticises GEAR and 'investor-friendly' policy as failing to deliver capital or benefits for the poor. It is a campaigning policy document, not an academic study.

Evidence and method¶

Secondary sources only (South African Library and UCT library): Adams on odious debt, Hirsch, Leape/Garner, Padayachee, Goldin and Harris on debt and IMF/World Bank links. Also US GAO (1990), press reports (Financial Times, Guardian, Finance Week, Cape Times), UN/ICJ legal documents and one personal interview (Crawford-Browne).

Place in the debates¶

Effectiveness of financial sanctions and the role of banks in sustaining apartheid (see Finance, capital flight, the 1985 debt crisis and banking). 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.
Whether post-apartheid South Africa should honour apartheid-era foreign debt (odious debt doctrine vs. sanctity of debt) (see Finance, capital flight, the 1985 debt crisis and banking). 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.
Neo-liberal macro policy (GEAR, IMF/World Bank influence) and dependence on foreign capital (see Post-apartheid economic policy, governance and corruption). Strongly critical: says conciliating foreign capital has failed, since inflows were small and short-term, and alternatives exist (wealth tax, prescribed assets, exchange controls).
Whether the debt burden is a problem (mainstream debt-to-GDP/export ratios vs. social costs) (see Finance, capital flight, the 1985 debt crisis and banking). Rejects the mainstream complacency: R90bn is about half of the 1997-98 national budget, and the balance of payments is fragile.

Findings¶

Headline size of the inherited foreign debt, stated as a burden for poor South Africans. (p. 1)

South Africa has inherited a foreign debt of $18.7 billion (some R90 billion).
Reserves were thin and repayments were bunched, creating balance-of-payments risk in the 1990s. (p. 5)

Current gold and foreign exchange reserves provide cover for only about 1 month's imports.
The IMF lent heavily to Pretoria in the mid-1970s, including after Soweto. (p. 11)

IMF assistance to South Africa in the two years 1976-77 was in fact greater than the combined assistance to all other African countries for the same period.
The 1982 IMF loan was approved despite wide international opposition, backed by the US, Canada and major West European countries. (p. 11)

Sixty-eight countries did indeed subsequently oppose the loan while a further nine countries called for its postponement.
IMF seal of approval drew in other transnational bank lending, which doubled in the early 1980s. (p. 11)

Between December 1981 and September 1984, transnational loans to South Africa doubled from $9.9 billion to $19 bn.
US banks led by Chase Manhattan withdrew short-term credit in July 1985, precipitating the debt crisis. (p. 12)

On July 31st, Chase Manhattan announced that it would neither extend credit on maturing short-term loans to South African borrowers, nor advance credit to South African new private borrowers.
The Third Interim Arrangement (Oct 1989) was lenient on repayment terms and ignored the political conditions sought by anti-apartheid groups. (p. 15)

Only 19% of the outstanding debt was required to be paid during this extended period.
The foreign debt shifted sharply to short-term interbank loans, which were hard to trace and so served as a sanctions-buster. (p. 15)

rose from 49% at the end of 1980 to 68% in 1984 and to 72% by the end of 1985.
Trade credits financed the bulk of South African trade and so kept credit flowing despite bank bans on loans. (p. 16)

The bulk of South Africa's trade, which in the late 80s amounted to between $10bn and $12bn per year, was financed through trade credits.
Creditor concentration: British, German, French, US and Swiss banks held most of the debt, so these governments are the likely targets of solidarity action. (p. 18)

At the end of 1990, 87% of South Africa's outstanding debt was owed to the banks of 5 countries
Post-1990 capital outflows were very large, undermining the case that foreign capital would flood in after apartheid. (p. 22)

the hardly insignificant R3.7bn that left the country in 1992 increased 440% in 1993, when it totaled R16.3bn.

Evidence ledger¶

Sources used¶

Source	Kind	Period	How used
Adams (1991) Odious Debts: Loose Lending, Corruption, and the Third World's Environmental Legacy (Probe International)	secondary literature compilation	1898-1991 (Cuba, Soviet, Costa Rica cases)	Supplies the legal precedents (Cuba 1898, Soviet 1918, Sack, Taft's Costa Rica arbitration, 1982 bank-lawyer warning) that ground the Doctrine of Odious Debt.
Padayachee (1992, 1991) on the IMF and World Bank in South Africa	secondary literature compilation	1946-1993	Source for the World Bank loans of 1946-67 and IMF lending to South Africa, including the 1976 and 1982 loans and the 1983 US veto.
Hirsch (1989) 'The Origins & Implications of South Africa's Continuing Financial Crisis', Transformation 9	secondary literature compilation	1985-1989	Source for the 1985 crisis, short-term debt, trade credits and high-risk money inflows.
Leape (1991, 1992) / Garner & Leape (1991) LSE research papers on South Africa's foreign debt and the standstill	secondary literature compilation	1980-1991	Source for the debt-maturity profile (short-term share of 49%, 68%, 72%), creditor-country shares at end-1990, and details of the rescheduling arrangements and bond deals.
United States General Accounting Office (1990) South Africa — Debt Rescheduling & Potential for Financial Sanctions: Briefing Report to Congressional Requesters	commission or official report	1990	Source for SWIFT and CHIPS information and for the Third Arrangement's terms and its description as favorable to South Africa.
Harris (1987) 'South Africa's External Debt Crisis'	secondary literature compilation	1985-1987	Source for Leutwiler's role, the clerics' proposal to freeze assets, and the short- versus long-term debt ratio.
Goldin (1992) External Financial Assistance & Post-Apartheid South Africa	secondary literature compilation	1983-1992	Source for the IMF's role in rand liberalization, VAT, and short-term debt of three-quarters of the total in 1990.
South African Reserve Bank Quarterly Bulletin, December 1996	official statistical series	1996	Cited with Finance Week and Millward & Pillay for scheduled foreign debt repayments of $1.5bn-$2.6bn a year until 2001.
Newspapers and periodicals: The Star, Financial Times, Guardian, Cape Argus, Cape Times, Finance Week, Business Day, Sunday Times, Financial Mail, Euromoney	newspapers periodicals	1985-1997	Document specific events and quotes: the JSE fall, Chase's refusal, Rubicon, bank and clergy statements, Third Arrangement reactions, capital outflows and Namibia debt cancellation.
Fergusson-Brown, 'The Legality of Economic Sanctions against South Africa in Contemporary International Law', S. African Yearbook of International Law 14	secondary literature compilation	1988-89	Source for apartheid's violations of international legal obligations (self-determination, human rights, destabilization, non-intervention).
UN General Assembly Resolution 2625 (Declaration on Friendly Relations); UN Charter; ICJ Advisory Opinion 1971 on Namibia; ICJ Nicaragua case 1986	legislation gazette	1945-1986	Establishes the legal grounds on which apartheid's illegitimacy is asserted.
Crawford-Browne (1997) personal interview, Cape Town, January 1997	interviews oral history	January 1997	Supports the claim that seemingly innocuous loans, such as home financing, were recycled into sanctions-busting.
Cape Times, 24.2.1997 (R1.242bn Namibian debt cancelled by South Africa); Poland/Egypt debt relief sources (Foreign Trade Research Institute 1994; Mesjasz 1995; Moye 1997)	secondary literature compilation	1981-1997	Provides precedents of debt cancellation on non-commercial grounds.
National budget 1997-98 and RDP cost estimates	official statistical series	1997-98	Illustrates the scale of R90bn against budget lines and RDP costs.

Inference¶

Quantification: Illustrative figures.

A policy-advocacy argument built on legal analogy (the Doctrine of Odious Debt applied to apartheid) and a narrative synthesis of secondary literature and press reports. The author states the study rests entirely on a trawl through secondary sources, with minimal referencing and no original research.

Key claims¶

Claim	Basis	Strength
The R90bn foreign debt is large relative to the social needs of the poor and the 1997-98 budget, and creates balance of payments risk. (p. 5)	Budget and RDP cost figures (unsourced), Reserve Bank Quarterly Bulletin and press for repayment schedules and reserve cover; illustrative comparison only.	Illustrative or anecdotal
The Doctrine of Odious Debt, as established in the Cuba and Costa Rica precedents and codified by Sack, makes apartheid debt unenforceable. (p. 7)	Adams (1991) secondary account of the Cuba case, Sack and the Taft arbitration; UN/ICJ pronouncements on apartheid.	Partial data
Private banks actively sustained apartheid by repeatedly rescheduling the frozen debt on lenient terms (1986, 1987, 1989) despite political pressure. (p. 15)	Hirsch (1989), Harris (1987), Leape (1991), US GAO (1990) and press reports (Guardian, Finance Week, Cape Times).	Partial data
Short-term inter-bank loans and trade credits acted as sanctions-busting channels, with the short-term share of foreign debt rising from 49% (1980) to 72% (1985). (p. 15)	Leape (1991), Hirsch (1989), Goldin (1992), US GAO (1990); statistics taken from secondary compilations.	Systematic data
High-risk speculators supplied hidden loans to South Africa (R800m in 1987; bond issues 1988-91 of $37m to $554m). (p. 16)	Hirsch (1989), Cape Times, Garner & Leape, Goldin, Leape; pieced together from scattered information.	Partial data
South Africa survived the 1985 unilateral debt freeze, implying it could survive repudiation, while World Bank/IMF and GEAR policies have failed. (p. 20)	Gidlow (1989), press reports and Padayachee; no macroeconomic data comparison.	Asserted

The author's caveats¶

The author states the study rests entirely on secondary sources from the South African Library and UCT library, that time constraints precluded original research, and that references were kept to a minimum. He also notes that disaggregating the debt (who lent what, to whom, for what) requires far greater research than was possible, and that the details of GEAR, the failure of IMF/World Bank policy and affirmative action are outside the scope.

Gaps in the evidence¶

The argument that creditors knew loans served apartheid, and that funds were used against the public interest, would need loan-by-loan data on lenders, borrowers, purposes and amounts, plus bank internal records. Such data were not available then and are only partly retrievable from bank, Reserve Bank and Treasury archives. The claim that default would not damage the economy needs counterfactual macro-analysis (capital flows, interest spreads, comparisons with other default episodes). Primary documents on the rescheduling negotiations would also test the claims about bank motives.

Replicability: Data poorly documented.