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"SOUTH AFRICA TWO YEARS AFTER THE ELECTION: ECONOMIC AND POLITICAL PROSPECTS"

It is indeed a great honour for me to be able to deliver this key-note address to the Gulf Economic Forum. As you may know, I had wanted to address the Forum at its meeting last year, but circumstances unfortunately made this impossible.

My presence here this morning is a reflection of the degree to which the world has changed in recent decades. On the one hand, it reflects the historic transformation that has taken place in my own country during the past six years. I shall deal with this transformation at greater length later.

On the other hand, this Conference is an indication of the degree to which this region and the world itself have been transformed during the past few decades. There are some important common threads in the changes in my country and the changes that we see reflected here:

both our regions are now free of great power domination;
countries in both our regions are drawing closer to one another in new regional formations - you in the Co-operation Council for the Arab States of the Gulf (GCC) - and we in SADC, the Southern African Development Community;
both our regions have traditionally been dependent on the export of our mineral wealth - in your case oil and in ours, gold, coal and strategic minerals. In both our regions we are trying to diversify our exports, particularly in the field of manufactured products;
the Gulf and Southern Africa are now important emerging growth points in the Indian Ocean region - you at its apex, and we at one of its bases;
in both our regions one of our key priorities is rapid and sustained economic growth; the basis of such growth is political and economic stability; and its purpose is the provision of a better life for all our peoples.

This morning I should like to give you some perspectives from the South-Western corner of the Indian Ocean triangle on how we are dealing with these exciting challenges of change in our region.

South Africa is now approaching the end of the first phase of our new democracy. This stage will close in a month or two when we adopt our new and final constitution. We have already reached consensus on most of its provisions. At this very moment negotiators from our main political parties are hammering out agreements on the final outstanding points of difference. We hope that we will have reached consensus before the deadline of 9 May which is set by the present interim constitution.

We South Africans have amazed the world - and often ourselves - with the successes that we have thus far achieved in resolving the conflicts of the past and in building our new rainbow nation. Many observers find it difficult to believe that, for the past two years, parties with such different points of departure as the ANC, the National Party and the IFP have succeeded in working together, by and large effectively, within a multi-party Government of National Unity. They find it equally surprising that the widely differing peoples and races of South Africa seem to be co-existing in relative harmony, while so many other societies with far less complex ethnic problems are plagued by conflict. They wonder what the reasons are for this remarkable performance.

I should like to mention a few points in this regard. Despite our great cultural, ethnic and political diversity there are important factors that bind us together as South Africans:

Firstly we understand the need for continued peace and stability in our society. All of us realise that conflict between us would result in untold catastrophe for all of us. We accordingly have a strong common interest in devising the mechanisms and approaches that will enable us to manage our complex society in such a manner that we will be able to continue to live together in peace and harmony;

Secondly, whatever our economic condition we all have a clear interest in rapid and sustained economic growth. In the post 1989 world we all accept, regardless of our ideological predilections that there is only one broad set of economic principles that will assure success. We have committed ourselves to policies based on these principles and are implementing them successfully;

Thirdly, and regardless of our political affiliations or economic class we all accept that we must improve the day to day conditions of the millions of South Africans who still live in circumstances of unacceptable poverty.

There is, of course, considerable debate on how we should achieve these broad objectives - but there is very little difference of opinion on our underlying goals.

The first goal that unites us as South Africans is our common commitment to peace and stability. The basis for the success that we have achieved so far has been:

the sensible interim constitution that we adopted in December 1993;
the relative effective functioning of the Government of National Unity; and
the new spirit of nationhood that has begun to take root since 27 April 1994.

Our interim constitution makes provision, inter alia, for:

the establishment of a Rechtstaat - a state based on the rule of law in which the Constitution, the Charter of Fundamental Rights and constitutional principles are supreme;
an independent Constitutional Court which has the power to overrule any legislative or executive act of any level of government which is in conflict with the Constitution, the Charter of Fundamental Rights and the constitutional principles.
a multi-party democratic system based on proportional representation.
the separation of powers between the legislature, the executive and an independent judiciary;
regional governments with significant autonomous powers and functions, and
a variety of checks and balances to prevent any form of discrimination, domination or abuse of power.

I am confident that these principles will also be included in the new constitution which is currently in the final stages of negotiation.

Another basis for stability has been the Government of National Unity, which represents 92% of the electorate. The Government of National Unity is working reasonably well.

Decisions are mostly taken on the basis of consensus. Thus far we have succeeded in reaching such consensus on almost all important issues, particularly in the economic sphere. All this is contributing to a spirit of co-operation.

A third element that has helped us to maintain peace and stability has been the remarkable goodwill between our various population groups before and especially during the past two years.

We have succeeded in a relatively short time in bridging many of the divisions that developed between us over more than three centuries.

President Mandela, through his consistent support for national reconciliation, has been an important factor in making all of this possible. Our successful rugby, soccer and cricket teams have also helped to create new focus points of national pride.

The second goal which unites us as South Africans is our acceptance of the need for rapid and sustained economic growth. We also accept that the only way to achieve this goal is through the implementation of sound and pragmatic financial and economic policies. After two years of working together with all the parties in the Government of National Unity, I am convinced of our common commitment:

to reducing our budget deficit;
to holding the line on corporate and personal taxation;
to progress with privatisation, or what we call "the reorganisation of state assets";
to the final elimination of all remaining exchange controls;
to funding social spending in a fiscally responsible manner; and
to adopting economic and trade policies that will promote investment and economic growth.

The fact is that governments simply no longer have the option of choosing their economic systems according to ideological predilections. There really is only one way to achieve sustained economic growth - and that is through the tried and tested mechanisms of the free market. Prosperity can be achieved only by adhering to universally valid requirements. All the parties realise this - even those with a history of being anti-free market.

They know that

our success as a society will depend to a large degree on our ability to generate, through economic growth, the income and wealth we require to meet the social needs of our people; and that
the key to higher economic growth lies in the implementation of sound economic, fiscal and monetary policies; and that
central to these policies will be the creation of an economic climate that will attract foreign and domestic investment and increase our exports - particularly our exports of manufactured and semi-manufactured products.

This broad economic approach has begun to bear fruit:

inflation was down to 8.6% in 1995 - the lowest figure in 23 years;
we are reducing our budget deficit;
we expect a growth rate of almost 4% this year;
Fixed investment has risen at an average real rate of approximately 9 per cent per annum over the past two years, with by far the biggest increases recorded in the private sector;
we have had a relatively massive inflow of foreign capital since 11 May 1994.

The third national goal that unites us is our common commitment to the improvement of the living conditions and prospects of millions of impoverished South Africans. This we intend to do through the implementation of the Reconstruction and Development Programme.

The RDP is the centre-piece of the policy of the Government of National Unity. It envisages a broad interlocking programme that will address the total spectrum of socio-economic needs - from the creation of jobs to the provision of housing, primary health care, water, electricity and improved education. All of the parties in the Government support its main provisions, including the requirement that it should be funded in a fiscally responsible manner.

The success of the Government of National Unity - and, indeed, of our new constitutional dispensation - will be judged by the degree to which the RDP succeeds in improving the living conditions of millions of South Africans. We have already made considerable progress in increasing social spending in a responsible way:

After substantial increases already during my Presidency, expenditure on social services has risen at a real rate of nearly 2 per cent per annum over the past two fiscal years - even though total government expenditure decreased in real terms during this period.

The share of social spending in total spending, excluding interest on government debt, increased from 53,1% in 1993/94 to 56,8% in 1995/96.

Expenditure on education amounts to approximately 7,0% of GDP at present one of the highest figures in the world.

Despite this progress, the RDP has yet to make a substantial impact on the problems of poverty in South Africa. A great deal of preparatory work was, however, necessary and we are confident that we will soon be able to begin with significant delivery of benefits.

These then are the foundations for our surprising performance so far. What are the prospects for the future?

As with all societies, we have our problems. Increasingly, however, these are now the type of problems that confront many normal societies. They are no longer the kind of seemingly insurmountable problems that faced us seven or eight years ago:

We have the challenge of reaching an acceptable agreement on our new constitution, one that will incorporate the best elements of our present interim constitution and will also create sufficient breathing space for all our cultural communities.

We face the great challenge of poverty. At its core lies the problem of unemployment which is compounded by the failure of our growing economy to create new formal sector jobs. At the heart of this problem lies the rigid labour system that we have developed during the past few years.

We face the challenge of reducing our budget deficit before borrowing. Although we have succeeded in bringing it down from 8% to 6% during the past two years, it is still too high. At the core of this problem lies our unacceptably high government consumption expenditure which, in turn, is caused to a large extent by the size of our public service.

We face the challenge of competing, head to head, in global markets and increasingly in our domestic market as we open our economy to foreign competition in terms of our GATT commitments.

I am confident that we will be able to meet these challenges and that we will succeed in creating a situation where we can fully capitalise on many of our natural advantages:

We have an excellent infrastructure, with a system of roads, railways, harbours and telecommunications which can compare with the best in the world.

We have a well trained and effective managerial base.

We are richly endowed with natural resources which include substantial proportions of the world's reserves of a variety of strategic minerals.

We have the second cheapest electricity in the world with substantial surplus generating capacity.

We have a well developed banking and financial services sector. The Johannesburg Stock Exchange, with an estimated capitalisation of over $200 billion, is one of the twelve largest in the world. It is about the second largest emerging market after Hong Kong.

We have several indigenous banks, insurance companies and multi-national corporations that are large by any standard. They can hold their own in any international company.

We have developed sophisticated technology in some areas - particularly in mining and medicine. We have even developed a highly competitive attack helicopter.

We are quite highly industrialised. Manufacturing accounted for 22,3% of our GDP compared with an average of about 10% in other sub-Saharan African countries.

We have more than 625 000 small black businesses in our informal sector, providing employment to millions of people.

We have tremendous tourist potential. We have an exceptional climate and a beautiful country with world-renowned game parks, beaches, mountains and wine lands.

We are, for all of these reasons, keen and ready to compete in the international market place.

The stage is set for us to play a particularly significant role in Africa - and particularly in Southern Africa. South Africa is the natural gateway to Southern Africa:

We are already at the hub of the transportation networks of the region. This has long been the case with regard to road and rail transport. It is now increasingly true also of air transport - with a bewildering array of new airlines choosing Johannesburg as their main African destination.

For this reason, many foreign companies are now using - or establishing - their bases in South Africa with a view to penetrating markets beyond the Limpopo River.

The southern African market now includes more than 110 million people. As peace takes root in key countries and as southern African governments continue with democratic and economic reforms, we can expect this market to offer increasingly exciting opportunities.

With relatively little expenditure we could extend our electricity grid to many of our neighbouring countries. There is also great potential in making use of the abundant water resources of countries to the north of us.

All of these factors make South Africa an important potential partner of the Gulf States.

Up to 1990 political and economic links between South Africa and the Gulf were non-existent because of sanctions. The Gulf States were unknown, even alien, to most South Africans, apart from the Muslim community which has for a long time been making annual pilgrimages to the Holy Places in Saudi Arabia.

This has changed in a very short space of time. South Africa now has resident missions in Bahrain, the UAE, Saudi Arabia and Iran and has established diplomatic relations with all the Gulf States.

Although the Gulf is small in terms of population, it has the highest per capita income in the world, making it one of the most important markets for luxury goods. Since 1991 this has become one of the most exciting areas of trade growth for South Africa and opportunities for South African companies are vast.

South Africa's most important exports to the Gulf are base metals and minerals, machinery, mineral products, fruit and vegetables, chemicals, plastic and rubber products and prepared foodstuffs.

Exports from South Africa to the Gulf Region have grown from virtually nothing in 1991 to about $200 million in 1994. However, this is still a drop in the ocean for a region with imports of $100 billion a year.

South Africa's relationship with the Gulf States is of strategic importance, primarily because of the complementary nature of our economies. We are a reliable source of agricultural products, consumer goods and technology at reasonable prices.

The Gulf Region, in turn, is a source of crude oil and potential investments and possible assistance to our Reconstruction and Development Programme. An uninterrupted supply of crude oil from the Gulf Region over the long term is vital to our interests.

Our Departments of Foreign Affairs, Trade and Industry and other institutions are co-operating to promote trade with the Gulf, as well as inward investment from the region. We are also exploring possibilities for the transfer and sale of technology.

Relations with the Gulf can be summarised by the four big "T's": They are:

Trade. The full potential of the Gulf export markets should be realised. Trade promotion is viewed in tandem with attracting investments, also for RDP projects.

Technology. The Gulf States offer opportunities for South African technology and expertise. Research and technological institutions, such as our Council for Scientific and Industrial Research, Atomic Energy Corporation and the Water Research Institute can become further involved in large-scale projects in these countries.

Transport. The expansion of direct air links with the Gulf States will further strengthen economic ties.

Tourism. South Africa can become an alternative holiday option for tourists from the Gulf Region, including the large expatriate communities, to escape the summer heat of the region.

As this millennium closes our regions stand at the threshold of a new and exciting era. We believe that the new millennium will see the countries of the Gulf and Southern Africa beginning to take their places among the fully developed nations of the world.

It will witness, in particular, the emergence of the countries of the Indian Ocean rim.

The countries that border the Indian Ocean include almost one third of the total population of the world.

They include major emerging economies such as those of the Gulf States and South Africa, Malaysia, Indonesia, Singapore, India and Pakistan.

The region also includes countries which contain much of the world's oil and strategic mineral reserves.

The potential for the Indian Ocean region is enormous and virtually untapped. We in Southern Africa and the Gulf States will play key roles in realising this great potential.

Let us join hands and work to improve the relations between our regions and to achieve the enormous potential of the Indian Ocean Rim. And let us pursue between us the four big T's - trade, technology, transport and tourism. Opportunities abound.

<EOD>