Monday, September 18, 2017

Gold, BitCoin and the Dollar.

Connecting some scary dots in the undercurrent of market turmoil.












Are we seeing signs of a return to gold backed currencies? It’s a valid question in the light of a deal now being implemented between China and Russia. China, the world’s biggest oil importer is de-dollarizing its oil bill with its biggest supplier, Russia, by paying in Yuan that can be converted into gold. That, in effect, means gold backing for a major currency in a highly significant international transaction and which will be extended to cover the total $116 billion p.a. Chinese oil bill.

China is expected to buy 1000 tons of gold this year, India a further 900 tons, and Russia has been consistently topping up its gold reserves from an average 715 tons to more than 1700 tons in the last quarter. Together, these three countries have been absorbing gold nearly equal to annual newly mined gold. In addition, China has launched Yuan denominated gold contracts in exchanges in Shanghai and Hong Kong.

These developments have hardly featured in explaining gold’s 11-month high in past weeks, focusing rather on geo-political tensions. It’s another reflection of the short term perspective of derivatives and paper trading which now set a global gold price totally removed from physical supply and demand. This graphic by the London Bullion Market Association published by Zero Hedge and the Bullion Star shows that 15 000 times more unallocated gold is traded than there are reserves. 





















Following derivative short-term thinking, gold seems for the most part to be viewed as a palliative for paranoia, ignoring its significant monetary potential as an alternative to paper currencies, especially the United States Dollar.  Yet, how strong is the mighty greenback? And can deliberate de-dollarization by large countries be ignored?

Recent market trends reflect again a simple link between Dollar strength and the performance of the American Economy. GDP growth is the ultimate rain-maker and statistical indicators move markets in short term bursts. Largely ignored is the most important ultimate health of an economy and strength of its currency – the national debt. In the wake of hurricane havoc, $15 billion in victim relief gave good cause to waive the United States government $20 trillion debt ceiling until December. The fact that U.S. Federal government debt has nearly tripled in about 10 years, with little prospect of a slowing down in the next five, must pose a threat to the country’s long term health.

Debt creation is contained by raising interest rates. But that means a substantial proportion of government revenue has to go to debt servicing. (A 1% increase in rates adds $200 billion to interest payment.) It also curtails consumer demand and therefore economic growth. Until recently the Federal Reserve Board has been acting completely counter-intuitively to that but when you approach zero interest rates and keep on adding more debt, you have clearly reached a cross road. The hesitant and modest Fed rate hikes reflect the difficulty in reversing that trajectory.

And then there’s the diminutive bitcoin, now in its third bubble deflation/burst/correction in as many years and punching way above its weight in terms of public attention. It’s a bit sad, really, because it detracts from its still promising potential of revolutionising money. Paul Donovan of UBS Wealth Management believes that it never had and never will have that potential (See Moneyweb Article here). Others, such as J.P. Morgan’s Jamie Dimon and our own Mike Schussler, have weighed in on its alleged fraudulent nature.  

Howard Marks, The Oaktree Capital co-chairman shared that view until a few days ago when he wrote: "Bitcoin fans argue that it qualifies as a currency under these criteria: most importantly, it's something that parties can agree to accept as legal tender and a store of value. That actually seems right."

But then he comes to the crunch: “… I found myself admitting that much of the criticism I had levelled at bitcoin is applicable to the dollar as well.”

The two main functions of money, a stable means of exchange and store of value are flawed even in existing fiat currencies, and crypto has already shown that an alternative is possible. The current rush reflects, at least in part, growing distrust in alternatives. People confuse “store of value” with “appreciating investment”. Store of value simply means being able to store and preserve the value of your cow, chicken, or labour in a safe way. Only then does it live comfortably with means of exchange. When it is subjected to speculative investment its M.O.E status is disturbed, but not necessarily lost.

Crypto is such a new, complicated phenomenon that any speculation about transaction costs, booms and busts, bubbles and bursts, usage, security, ultimate winners and losers, regulatory framework, taxation and indeed the real value of the crypto itself is premature, albeit valuable to its development. With its widely trusted block-chain technology, bitcoin may well morph into something different, or even be replaced. But it will be difficult to replace the decentralized nature of bitcoin. Control of money through central banks, banks and governments is simply no longer trusted. Likewise, central control of a crypto currency will suffer the same fate.

Despite extreme volatility, bitcoin’s price has clearly shown explosive demand. Until one can clearly determine where that demand is coming from, how long it will be sustained and at what price, can one start predicting and charting its course. The same goes for the plethora of other cryptos, some good and some absolutely rotten, that enter this space and dilute the offering.

But it’s a huge playground, as shown in this table of investment and speculative deployment of money. It was extrapolated from a graphic worth looking at here, and published by the Visual Capitalist. The figures are not fully comparable with each other because I updated some of them.











One simply cannot begin to calculate crypto-currencies’ share or potential share of the total and much of the criticism levelled at crypto currencies can be levelled at many of the instruments shown. But connecting some less apparent dots creates a much more disturbing picture: the overwhelming weight of finance over the real economy, which is GDP and key influencing factors such as debt. Clearly finance is no longer being informed and driven by GDP, but is driving it! And in the worst possible way of trying to extract maximum short term, speculative gains! It reverses an old and wise economic law – enterprise leads and capital follows.

It explains a lot about what is wrong with the world.


Monday, September 4, 2017

An age of economic soul-searching.

Was the great recession a bigger game changer than we realise?














In women’s month, on a cold Sunday night in the farm-workers’ compound, cheap wine-fuelled joviality again turns to discord. A stone is thrown in drunken fury. A skull is crushed. A young women dies. A young man ends in jail. One life is ended, another destroyed. Neighbours and co-workers become sworn enemies. Tranquillity in the small community is shattered.  

A few more decibels are added to the clamour about gender violence. Another line is written in the tome of hazy hopelessness that is the life of a very large part of a young generation. And just as many in the final generation, those whose formative years were marked by much post-war deprivation but large promise of “never again”, reflect sadly on what has been done to that promise. It’s a global story. The content may differ, but the context is the same: a fractured, disconnected, economically malfunctioning world.  Is the new normal, as Dutch economist, Servaas Storm says: “radical inequality, suffocating debt, job uncertainty, secular stagnation and a vanishing middle-class”? Theories abound. Purists argue that their elixirs were never purely administered. Solutions exceed the problems themselves, but none has proved to be a lasting absolute truth. Some hope that the current few green shoots in the desert will still the dissent.

We are not too afraid of “unchartered waters”, drawing some comfort from history that we have been in unfamiliar places before, and somehow emerged with new approaches and discoveries. This time is no different. But perhaps it is in the scale and depth of questioning all assumptions about economics and about ourselves as a species. The view increasingly being seen is through an evolutionary rather than the traditional reactive quantitative lens – do we evolve or construct on statistical models? This lens is being captured in research directions and discoveries within evolutionary economics and complexity economics, and driven by a number of institutions and scholars.

Eric Beinhocker Executive Director of the Institute for New Economic Thinking at Oxford University, believes the financial crisis of 2008 and the momentous global political shifts last year, have heralded a collapse of major economic-political ideologies that have dominated the 20th century. Older economies in particular are searching for a completely new paradigm that can show a better way for all. Such as the OECD’s NAEC (New approaches to Economic Challenges) which says: “We need a full re-vamp of our analytical frameworks and the assumptions that we make, to better capture the reality. Economic models that rely only on inputs such as GDP, income per capita, trade flows, resource allocation, productivity, representative agents, and so on can tell a part of the story, but they fail to capture the distributional consequences of the policies we make, and do not address the  fact that the growth process has only benefited a few.”

It will be a mistake to see these shifts in economic introspection in an ideological context, and brand them as “socialist” or “left”. Indeed our sometimes powerfully drawing biases are the biggest barriers to discovery. According to Beinhocker, it’s time for new economic thinking based on the best science available, not Ideology. “It should be highly interdisciplinary” he says, “involving not only economists, but psychologists, anthropologists, sociologists, historians, physicists, biologists, mathematicians, computer scientists, and others across the social and physical sciences”. He notes that over the past several decades a number of Nobel prizes have been given to researchers working in what today might be called the new economics tradition.

Beinhocker reflects a common thread followed by economic evolutionary advocates in developing a view of the economy as an evolutionary system of cooperative problem solving. Prosperity is seen as “solutions to human problems” and cooperation is the key to solving more and more complex problems thus increasing prosperity.
“Economics has painted itself as a detached amoral science, but humans are moral creatures. We must bring morality back into the centre of economics in order for people to relate to and trust it,” he says.

Oxford and Cambridge Research Associate, Kate Raworth in following that thought in her latest book, suggests dumping GDP as the holy grail and setting a “far more ambitious and global economic goal: meeting the needs of all within the means of the planet”. She then explores a seven step approach to achieving that.

In this article, David Wilson, renowned biologist and anthropologist at Binghamton University, suggests not only that Adam Smith’s invisible hand is dead, and always fails, but that the metaphor itself has caused much harm. “We are different from other primate species,” he argues, “because we are so cooperative. Why are we so cooperative? Because it is so easy to regulate each other’s behaviour in small face-to-face groups.” Wilson’s brave challenge of the “invisible hand” has another context: Smith’s assumption of high moral standards in humanity, which precluded seeing “the hand” as an instrument of pure self-gain and unbridled selfishness.

“Moral systems evolve in societies because they enhance group cohesion and survival.
Implications of evolutionary thinking for economics and the social sciences have only partially been explored.” (Geoffrey M. Hodgson, research professor at Hertfordshire Business School, University of Hertfordshire, England.)

One of the more telling indictments of orthodox economic models is from complexity economics of which Steve Keen, Kingston University economist and author of Debunking Economics is a leading advocate. He believes economists have to embrace complexity to avoid disaster and the fact that they don’t, explains why most were caught flatfooted by the speed, depth and length of the great recession. “Macroeconomic models are painstakingly derived from microeconomic foundations, in the false belief that it is legitimate to scale the individual up to the level of society.” Using his own simulations, Keen shows a number of cases (see essay here) where generally accepted assumptions at a micro level, including important ones such as price and demand, simply don’t hold true at a macro level.

It is extremely difficult to do this important subject justice in a broad sweep such as I have made here. Essays and articles on the website evonomics.com bear testimony to the weight, depth and breadth of a perspective that is perhaps not new but compelling, profound and refreshing in today’s context. It does offer a framework of thought for South Africa’s own Radical Economic transformation, but with a huge caveat – the need for a trustworthy government. I have frequently argued that radical government transformation is an absolute prerequisite for RET. (See article here.)

What remains unchallenged and perhaps gains significance is that economics itself is built on the enduring principle of adding value to each other’s lives. This should put business and companies at the core of any economic construct seen through any lens.

From a relationship point of view, they are after all, and irrespective of motive, an inclusive collective of people serving people. 

Monday, August 21, 2017

Destroying company relationships.

By having absurd theories, abstracts and aggregates define them.














If economic theory holds true, you could have a good business selling Johannesburg big Mac hamburgers in New York. For the latest Economist big Mac Index shows that New Yorkers pay about twice as much than Jo’burgers, and that’s a healthy margin by any standards.

Of course, even the most ill-informed will protest that it is much more complex than that. It may not be the best example, but it is some reflection of how often theories, abstracts and aggregates lose touch with underlying complexities, when a macro-assumption not only does not fit a micro situation but its imposition as an absolute can cause more harm than good. The best examples we have are the dominant drivers of economic policy such as Gross Domestic Product and the Consumer price index.

Markets are messy. People are messy. They become even messier when you add to the mix those powerful intangibles and immeasurable such as hopes, fears, expectations and aspirations. These are the real driving forces behind human behaviour and simply cannot be captured by an economic model or economist’s spreadsheet. It has given birth to a recent serious field in economic study called complexity economics, which is questioning many of the assumptions of neo-classical economic theory. The driving forces behind human behaviour are not shaped by these theories, or even the way we try to construct and institutionalise them. They are shaped by relationships at many different levels and in different forms and that are seldom, if ever fully recognised in the way we understand and measure business specifically and economies generally.

Recognising, understanding and shaping the relationship dynamics in companies could hold much promise in solving many of the issues confronting them. I can remember in my early days of financial reporting being troubled by the bland way company figures were presented and the failure to reflect behaviour and relationships that were the real essence behind the figures. In the early 80’s I was exposed to the U.K. accounting format, the Value-added statement, which went quite a way in doing that, but still did not seem to appropriately reflect the relationship between the main role players or stakeholders. But a significant conclusion that could be reached was that the value-added measurement itself not only reflected a figure (income less outside costs), but a magnificent metric of contributory behaviour. To repeat a previous postulate: adding value is the oldest activity known to man. It is also the most powerful business principle.​
·        It is behind all positive transformation
·        It is the source of wealth
·        It measures contribution
·        It measures reward
·        It links contribution and reward
·        It drives all contributory behaviour
·        It is the base of GDP, the nation's wealth
·        It is the source of profits, wages and taxes
·        It affects all company measurements

By way of illustration, I’m including the Contribution Account© that I extrapolated and indexed for the mining industry.


The full strength of this form of accounting is the way it defines relationships – first between the enterprise and its market, where it creates and receives value, and then between labour, capital and state, where that value is shared. It is in that relationship where things can be contaminated and logic lost. I was reminded of this by a comment to my recent article “Debunking monopoly capital” where the reader equated debt with equity to satisfy the conventional abstract of “providers” of capital and, of course, sustain the myth of the supremacy of capital. To be fair, the UK VAS format does this as well, but in the European format interest paid was moved to “outside supplies” in what became known as the Cash value-added statement.

The latter format also moved depreciation and amortisation to outside supplies. Both not only make technical sense, but even more so from a contributory relationship point of view. Allocating depreciation to outside costs is based on the logic that the item being depreciated was invariably purchased from an outsider, but the cost advanced is set-off over time through the balance sheet. Regarding debt, no-one can logically see interest paid as anything but a cost. A lender’s relationship is as a supplier of a service – the use of money, and seldom, if ever extends beyond that. The risk of advancing that money is covered in the interest rate.

Equity also cannot be generalised as a single abstract called capital. It can have many forms such as owner’s money, crowd funding, inherited funds, use of friends’ and acquaintances’ money, majority and minority shareholders, holding companies and institutional investors. All have different relationships with the enterprise. Many will take no heed of esoteric formulas such as capital or labour productivity. When these are imposed as rigid benchmarks they often disturb and sour relationships. There’s also a stark relationship difference between retained income and dividend, with the former being a commitment, and the latter a cash receipt. As a shareholder, you don’t get a debit card to draw on the company’s savings. The relationship between retained earnings and dividends, or dividend cover, speaks volumes about company intent.

I used the Cash value-added statement as the basis for the Contribution Account©, simply to reflect its behavioural qualities. More recently I have moved personal income tax from labour to state, again as an accurate reflection of the relationship between state and the enterprise. One could argue that the state itself should be viewed as an outside supplier, but apart from its variable share of wealth, the state generally does not (or should not) create wealth in its own right and relies on that created by others for its income.

But here’s the exciting part – nothing prevents or should prevent stakeholders or contributors from defining their relationship with the collective and between themselves. Of course all have a specific context for their existence, but their validity and ultimate strength lie in a common value creating purpose and to be as free as possible from external prescriptions and pressures. Even then, relationships with anything or anyone are still highly manageable and flexible and are defined by expectations which in turn are self-defined. Increasingly companies are starting to see that.

What hinders this process are the absurd theories, abstracts and aggregates that we try impose upon them.

Monday, August 7, 2017

Symphonies of endeavour.

A different view of the context for a stable and sustainable company.













There’s been quite a change in my little space in paradise. What was once largely untouched natural habitat between my home and the creviced Langeberg Mountains, has been replaced with regimented vines and a wine cellar a bit further on. Apart from having a serene space invaded, there was that tug of outrage again at man’s encroachment of nature – the inexorable march of plantation over forest as commerce sweeps it sickle.

One mellows somewhat with the thought that even regimented vines have their beauty. I’m by no means a wine connoisseur and my knowledge of wine did not progress much further than a brief unhappy get together with Lieberstein. But I can appreciate that very few products unlock in such a fine multitude of styles, the mysteries and complexities of nature. But of course it is still man that plays the dominant role: largely responding to the call of commerce and controlling and manipulating inputs and outcomes to achieve maximum returns.

But Olivedale Wine farms is different. Here the enigmatic founder and architect, Carl van Wyk, is allowing indigenous weeds to grow between the rows of different cultivars planted in different selected types of naturally enriched but virgin soil. It’s just one of the many different ways he allows nature to dictate the outcome to produce a symphony of its own. Weather changes or other elements do not concern him, but rather prompt curiosity at what difference it will make to the wine. It’s totally counter-intuitive to conventional winemaking, where markets dictate most of the process; and even differs from organic or “green” wines which adhere mostly only to an avoidance of chemicals in the various stages of wine production.

In this, Carl reflects those creative virtuoso’s in society that are aloof to, yet respectful of market whims and commercial constraints. They seem to operate in a world of their own and follow a code unique to them. It is the one thing that economic theory can neither capture nor explain, yet they represent not only the true spirit of free enterprise but are essential to its success and very often create huge shifts in its destiny. There have been many throughout history, more recently the late Steve Jobs and currently Elon Musk, who has been described as someone “destined to change the course of humanity.” While Carl’s efforts on a much smaller scale can be called symphonies of nature, they create unique symphonies of endeavour.

I view them with some pique. They tend to challenge my perhaps dogmatic view that economies are nothing more than an unwritten contract in which people serve people, and great companies are those that respond to the needs and wants of others. But if the latter thought irritates those who champion the profit motive and self-gain as the true driver of success in business, then the virtuoso’s outright disprove them. Indeed, one could argue that many, if not most of humanity’s ground-breaking achievements have emanated from them. I simply cannot imagine Elon Musk pondering over Harvard’s reverse income statement to justify his promise to take two tourists to the moon next year.  Not understanding true entrepreneurial genius caused former Apple CEO, John Sculley considerable discomfort after firing Steve Jobs. 

That points to a critical element of survival and sustainability for companies in these times of high volatility and uncertainty: the extent to which they can explore and nurture those attributes within their ranks, not always present in one person, but sometimes found in groups and teams. The modern company is beginning to look very different from its predecessors, or, as the Economist once put it: “disrupters are reinventing how the business works”. Organisational theory is not catching up with this trend, and for the most part company systems and structures are not only outdated but tend to strangle those very attributes that will keep them relevant and sustainable.

In a recent essay, Eric Lieu, founder of Citizen University in the US, and Nick Hanauer, venture capitalist wrote: “Markets are a type of ecosystem that is complex, adaptive, and subject to the same evolutionary forces as nature.” This perspective, in the view of a growing body of experts from different disciplines, can be applied to economics as a whole, and challenges most conventional theories and ideologies.

The emergence of “disruptor” and “insurgent” company models reflects this and means that companies are not simply legal entities with structures, prescriptions and procedures, but that they are human eco-systems that constantly evolve as humanity itself evolves. It’s both an intriguing and inspiring thought because it allows a refreshing relationship between companies and their external environment: being shaped by it, but also contributing to it. It also gives a new and refreshing context for company analyses and investment advisors – the kind that can tap seriously into Beta potential. 

Companies today have to cope and interact with an unprecedented multitude of complexities and variables, and stability can no longer be found simply in structures, systems, procedures and planning. Their survival and sustainability lies in the paradox of finding stability through flexibility.

Tuesday, July 25, 2017

Debunking “monopoly capital”.

Refocusing on the essence of creating wealth and value for all.












One cannot legitimately apply the word “monopoly” to generic concepts such as “capital”. I’ve been guilty myself, and it’s nothing more than sloppy thinking or emotive spin if it is aimed at the multi-dimensional accumulation and deployment of money. That has many forms: governments, central banks, financial services and banks, institutional investors, holding companies, multi-nationals and very large companies. If “monopoly” means being a protected sole supplier, that certainly cannot apply to the above, apart perhaps from the first two. Ownership is even more widely dispersed than control.

The real issue is the increasing concentration of capital control in fewer hands, with most behaving in the same way and to the extent of exacerbating inequality, exclusion and social discord under the pretext of an academic hallucinogen that capital is scarce. (See article here). This has been covered many times. Enough to be confident with the generalisation that in rent seeking and chasing capital gains, many players have diverted efforts away from funding the production of goods and services, or value creation. This has virtually closed the taps of “trickle down” and advancing inclusive economic growth. It has spawned another fanciful folly – that monetary machinations and policies can generate prosperity.

Small wonder then that most believe that if you control capital, you control everything, including the destiny of a country. That reflects a basic misunderstanding of wealth creation itself: that it is about printing money; or the outcome of a lucky strike at a hedge fund casino; cooked in a financial advisor’s brew; or that it is solely embodied in profit. And then we miss the majesty of economics: that wealth is created by usefulness to others and concretised in legitimate commercial transaction.   

We do not need scare tactics and deflections of “radical economic transformation” to reboot our economy. As I wrote in my previous article, a giant leap can be achieved by radical government transformation. But capital concentration certainly also has to be addressed to promote inclusive growth. That’s being interrogated on a global scale, including global finance, fickle capital mobility and tax evasion. It would be wise to tap those experiences before rushing to controls and prescriptions with a giant meat cleaver in the hands of a predator slashing at some personified spook.

In retelling the untold story of the ancient and still benevolent design of the wealth creation process, I have extrapolated a Contribution Account© or Inclusivity Statement© for the mining industry, based on the PWC 2016 survey. I have had to make some assumptions regarding personal income tax and depreciation, and roughly rounded the figures to make indexing to R100 easier. None detract from the essential conclusions. 

MINING 2016 (INDEXED)
Revenue
R300
Outside supplies
R200
Wealth created
R100
SHARED
Employees
R53
State
R22
Reinvested
R21
Owners’ dividend
R  4

Mining is volatile but the picture has not changed all that much since the decline in commodity prices. In addition, in my own experience over many years with many companies, as well as the national statistics, the principles can be applied at a national average. The conclusion is quite simple: in most cases owners as a group receive the least cash benefit from an enterprise.

In the above example, 2/3rds of the revenue goes to outside suppliers – creating multiple opportunities for others. Then, for every R4 investors receive in cash, workers (including management) get R53, and the state receives R22. There’s always some ambivalence around “reinvestment” which technically belongs to the owners, but it has a contributory nature in ensuring sustainability.

What is the thinking behind the proposed mining charter in trying to mess with that model? What possesses organised labour to be oblivious to the delicate balance of wealth distribution and its impact on wealth creation? What tempts policy makers, sometimes with the blessing of organised commerce, to hamstring it with invasive transformation surgery and prescriptions? And wherefrom the populist business bashing rhetoric?

By their very nature, private enterprises are the most inclusive of all collectives. They can be made even more so if the participants decide by themselves and for themselves how wealth creation should be distributed. They have more power to do so than they may believe, and where not, should be demanding it.

That’s not to say that within the model itself there are no legitimate concerns about its make-up and behaviour – including pay disparities, people development and empowerment, and demographic representation. But if those concerns threaten the viability, flexibility and sustainability of the model, it will destroy wealth creation itself. Then prosperity and jobs evaporate. It also goes some way in explaining why capital finds more attractive suitors than investment in productive capacity.

But that’s not the whole truth. Business too has failed to subscribe fully to the wisdom of ages that contribution creates reward. It defines and motivates itself by maximum reward, adding insult to injury by narrowing that focus to one stakeholder, the shareholder. In that it has invited a considerable degree of constraining prescriptions; business bashing and declining sympathy of common folk who, at one time or another have experienced the blinkered business view as customer neglect or exploitation. The damage has been substantial – in reputation, unrealistic expectations and flexibility.

But that can be turned around quickly and effortlessly by adopting the principles of a common purpose in service to customers and a common fate in sharing the fortunes that befall it. On the contribution side, the disastrous monster of the 80’s – the agency model, which encouraged executives to “think like owners” and rewarded them excessively for doing so – can be converted into “think like customers”. That supports income or turnover in most non primary producers. If you add a further discipline of prudence in outside purchases, you have created the most powerful dynamic of increasing wealth, and therefore rewards for all. You can see this dynamic work in the first three lines of the above table: increase revenue by 10%; decrease outside costs by 10%, and wealth creation jumps by 50%!

But the real problem lies in wealth distribution. Obsession with reward turns the model on its head, and invites all kinds of external and powerful prescriptions from government, organised labour and capital.  It then becomes inflexible and often parasitic.  There are two simple conditions for optimal wealth distribution – meet the legitimate expectations of all of the stakeholders and ensure continued contribution. (See graphic example here). These can be managed and indeed, in my experience, are quite malleable if the decisions are left to the stakeholders themselves. Emphasis on wealth creation before distribution, and making the latter as flexible and sustainable as possible, is the most promising inclusive solution to job creation and retention.

At the very least, it will detract from the misguided notion that owning or controlling capital creates wealth.

Monday, July 10, 2017

The hole in the jobs bucket.

And the three dimensions of radical government transformation.















If you promised the Government that you could create 48-thousand new jobs in a few months they would dance at your feet. Yet, that is the number of jobs that were lost in the formal non-agricultural sector in the first quarter of this year, according to the latest Quarterly Employment Survey.

What it reflects is that counteracting all the efforts to create jobs, are those being lost where they exist – like filling a bucket that has a big hole. It underscores the fallacy of focusing on job creation rather than job retention and being caught in an endless spiral of creation and destruction. If you understand why jobs are being lost, you will know what prevents you from creating more. Job retention demands a shift in policies, approach, attitudes and behaviour at many levels – all of which imply sacrificing some vested interests and political capital. The main causes behind job losses are systemic and behavioural in both the public and private sectors, as well as a volatile external environment. In responding to this environment, the two indispensable, mutually supportive keys are flexibility and tempered expectations. 

Global financial headlines remind us daily of a world undergoing radical economic transformation. The anti-establishment uprising seen in many countries is challenging the legitimacy of both government and economic power and has blurred ideological divisions as well as theoretical prescriptions for the role of the state and the private sector, particularly capital concentration. For a long time, it seemed to have been a stunning omission of the ruling party, not to have connected these dots to its own radical economic transformation agenda, and instead made it a spectre and divisive project.

But that may have changed. The strategic outline delivered by ANC NEC member, Nathi Mthethwa at the policy conference, clearly reflected that insight and will hopefully transform the narrative to reflect:
·        The gravity and complexity of a global struggle for inclusivity and fragmentation of economic power; (see previous article here.)
·        The role South Africa can play in being an innovator, contributor and beneficiary of global experiences, which includes inputs from international economic thought leaders.
·        Eliminating race or gender as a contributing factor, albeit a feature (or as Mthethwa put it “form”) in South Africa. Burying the term “white monopoly capital” is a good start.
·        And above all – the need for power fragmentation in both government and the private sector as a key factor for flexibility.

The last point is the difficult one for governments not only to recognise, but willingness to return power to the people in a real and tangible form. The concept that governments represent all of the people, all of the time, is patent nonsense -- even more so in a state where bureaucracy is often driven by self-gratification and power. If fragmentation of economic power simply means transferring power from private hands to government, then on the evidence of both historic and current experience, it will be the greater of two evils.

It is the outcome of that debate that will profoundly affect inclusivity, flexibility and expectations, and the ability to both retain and create new jobs. Although mutually linked, the approaches are different for government and the private sector. This article deals with the former, and a future column will examine the latter.

I am more convinced than ever that radical government transformation has to go hand in hand with RET and can do far more in changing the economic destiny of the country. The fact that we are suffering from economic pneumonia because the ruling party has a Gupta virus, points to a self-evident truth: the inordinate influence, invasiveness and power of bureaucracy. It is excessive even for a developmental state and because of that one can reach another simple conclusion: its bears a large share of responsibility for whatever ails the country. This power has three dimensions:

Physical size and share of the economy. Globally, governments have become “fat and lazy”, according to Economist, Dawie Roodt. With our government expenditure at about one third of GDP we are not amongst the most obese (see World Bank statistics here), and not totally out of line with the world average. Ultimately, size does not matter. It is about affordability and action. We are worse than lazy. There is deeply rooted and debilitating patronage; an oversized cabinet and employee contingent; poor and incoherent leadership; scandals; inefficiencies; flawed service delivery; wasteful expenditure, and corruption. The belief that government must be as small as possible to avoid crowding out private initiative is an oversimplification and not a universal truth. What really counts is whether its actions support private initiative, while still countering social imbalances.

Prescriptions and regulations. These have far greater impact than can be measured in standard statistics. Even a superficial analysis of all bureaucratic impediments is beyond the scope of this article. Even less so, and perhaps more futile, is challenging some of the regulatory holy cows to “correct past imbalances”, and the counter-productive effect they have had on inclusivity and employment. It simply makes no sense to focus on inclusion of one group and discourage others that may have skills, experience and capital and whose deployment encourages further job creation. One recent example is the proposed new mining charter which the industry estimates could see as many as 100 000 job losses.

Political posturing and populist rhetoric. When you have become as powerful and invasive as the South African government has, you simply have to watch your mouth and actions. I would argue that this now overshadows all of the above. You will find the footprint of rhetoric and irrational decisions in most of our recent economic setbacks, including an undervalued currency, disinvestment and ratings downgrades. They are triggered by a loose cannon in the President who does not distinguish between a parliamentary democracy and constitutionalism; a ruling party in meltdown; threatening and divisive interpretations of land reform and expropriation, and constant deflective racial innuendo. Even the more comical kite fliers such as the Public Protector on monetary policy, have a serious impact on economic prosperity. Ill informed Market response to an ill-informed policy discussion about Reserve Bank ownership is another example. The burying of the term “white monopoly capital” may be a reflection of growing sensitivity towards this third dimension. Clearly much more has to be done to change the mood.

A huge, ominous and potentially overwhelming cloud remains. Despite all the arguably good intentions of ANC policy, and a fall back to the more palatable National Development Plan, there is still a massive lack of trust. Trustworthiness is an imperative even for autocratic governments; not only from its supporters but also from its opponents, critics and society at large. The government’s critically large trust deficit (see graphic here) is now at centre stage. It is perhaps even beyond redemption. Opponents may hail this as an opportunity for regime change, but distrust is contagious and not easily restored even after a change in leadership or government. It is also a significant contributor to the hole in the jobs bucket.

It is that which needs radical attention.

Monday, June 12, 2017

Contract and conscience.

What happens when the social contract and laws cannot guarantee protection?











That memorable aphorism: “Man is born free, and everywhere he is in chains”, penned by the 18th century French philosopher Jean-Jacques Rousseau, relates to another creation of the Age of Enlightenment – the Social Contract. That concept has survived centuries and still remains the cornerstone of our understanding of the relationship between people and power; between citizens and government, and between the populace and the establishment.

At a practical level the social contract is enforced through institutions, laws and regulations, or, at a superordinate level, by a Constitution. Yet, there is a far larger dimension that goes beyond a contract and without which the social fabric would simply fall apart. It is that dimension which enables you to trust a stranger in a mall and a handshake on an agreement. It’s a dimension only marginally guaranteed in written law, and explains why even in a high crime country like South Africa, where criminals have an 80% chance of getting away with a reported crime, you have a much lower chance of being affected by a crime.

That dimension is conscience. It may be reinforced through values, religion, and enlightenment, but it is that intuitive, perhaps even instinctive thing that sparks an automated action overriding first thoughts and even feelings. Even psychopaths for the most part pay heed to it, albeit in a rehearsed way. As social beings, by far the majority of people do not want to poop on their stoep. And the more they do, the more laws, regulations and prescriptions pour out of parliament or from the Governance office of Mervyn King. But never will they come near to replacing the vital role of individual conscience, or self-accountability.

Even people accountable only to themselves mostly have it. But you could argue that those entrusted by others to have their interest at heart and to be the custodians of their welfare, have to be subjected to a much higher order of accountability than can be captured in a contract. They include business leaders who can no longer behave as if they are accountable only to shareholders.

As Serge Belamant of NET1 discovered when expressing a callous disregard for the problems of his biggest customer and millions of grant recipients; arguably acting purely on conventional business principles and shareholder interest. He not only unleashed a PR nightmare for himself and the company, but invited the pique of one of his biggest shareholders. And now his departure pay-out raises the critical question: can good governance be served when people are rewarded handsomely for non-compliance? (See Moneyweb article here.)

That applies to the unfortunate, much maligned figure of Brian Molefe, former retired/AWOL/fired GCEO of Eskom. For a moment he seemed to have done the right thing back in November of last year when he “stepped down in the interest of good governance.” Until, of course, it became clear that conscience can be considerably eased by a R30 million pay-out and then later that the stepping down was none such. He could have reinforced his “good governance” act if he refused the pay-out (or most of it) and any invitation to return, but now scuttles any interpretation of noble intent by running to the labour court.

The overriding role of conscience over contract was movingly championed by former Finance Minister Pravin Gordhan, when he spoke at the parliamentary enquiry into Eskom and accused some leaders of not only acting out of blatant self-gain, but simply not caring whether they were seen to be doing so. Few could not have been stirred by his appealing to their conscience, an appeal he has repeated since then.

There is a point at which a position held and influence it has on others, have to stand far above the incumbent’s interests or rights. So SOE minister Lynne Brown was at best expedient by defending Molefe on the basis of “innocent until proven guilty.” When a position itself is tarnished or brought into disrepute, then in the interest not of the incumbent but of the position itself, it simply has to be vacated by that incumbent. A subsequent enquiry can at best clear his or her name, and even ensure some compensation, but a return to that position cannot be automatic.

Such a protocol will ensure a very high regard for positions of authority and a no-nonsense approach to governance and accountability. We simply cannot deny that our tolerance of political and business leadership misbehaviour is extraordinarily high compared with many other countries. Without some form of uplifting the self-accountability expectations from positions of authority, and some real pain in non-compliance, the fight against corruption is going to be extremely difficult.

Zero tolerance and an appeal to the higher order of conscience over contract have to apply equally, if not more so to accusers, investigators and social prosecutors. There is a blatant and astonishing level of hypocrisy and expediency in much of what we are witnessing, including the inordinate, often one sided petty political correctness in public discussion and social media. In the end, it does little to create effective accountability and governance, and simply creates opportunities for deflection by those scrutinised and scrutinising.

While we are witnessing a sterling job by the 4-th estate in the Gupta e-mail revelations, the information explosion and chaotic state of media has aggravated the problem. I dealt with this in my recent Moneyweb article “Believe it or not” which need not be repeated, save to say that it is a proverbial Wild West out there, proliferated with intoxicated, trigger happy gunslingers; spreading more rumour and innuendo than fact.

All of this boils down a key essence, the very glue that holds societies together, and without which they descend into anarchy. That is trust – of outsiders in the country; of people in power, and of individuals in each other. 

As long as we continue to trust our neighbours, there is still hope. We saw the power of that manifest in mutual community support during the ravaging fires of the Southern Cape.