Monday, March 18, 2013

The magic of markets.

How being market driven can make South Africa a winning nation.

It was a chance remark on a TV news bulletin by an energy expert that reminded me again of how little we appreciate the magical power of markets. He was lamenting the fact that the solar heating manufacturing industry had failed to live up to expectations of wealth and job creation because of cheap Chinese imports.

Of course, there’s the first problem right there! Failing to meet expectations of making money and creating jobs is the major concern, and letting down the South African consumer is not even mentioned.

Customer neglect by the industry was made clear in a previous report by Dominic Goncalves, Africa Energy and Power Research Analyst that in the initial stages after 2007 the industry was “plagued by malfunctioning products, fly-by-night companies, and incorrect installation and application of the products”.

Like in so many other cases in South Africa, the absolute sovereignty of the consumer and the need to be driven by his or her needs is lost in the obsession with profits, wages, and state action. It is basic economics that the latter can only be the result of allegiance to the former, and yet we keep on blunting our market focus by relying on state subsidies, legislation, trade restrictions, lack of domestic competitiveness, commercial xenophobia, a cheap rand, low interest rates, 30 year plans, systems, and wage extortion.

They may work in the short term, but if the umbrella provided does not lead to improved efficiencies and global competitiveness, and continues to protect mediocrity, then we are wasting money and effort and heading for eventual asphyxiation in our own pathetic little economic laager. In its early post war industrialisation, Japan protected local industries only if they could show they would no longer need protection and would be globally competitive within a few years. Australia experienced a similar miracle after opening its economy during the Hawke-Keating Government in the 80’s.

Take the debate on beneficiation and adding value to our commodities for export. It’s a discussion that has gone on for decades, and I remember the then Minister of Economic affairs, Jan Haak, pleading this case way back in the early 70’s. If we were finely tuned to the needs of the global market we would have had a viable global jewellery industry decades ago, or we could have been the first designers and manufacturers of auto catalytic converters that use platinum. Selling gold is being market led. Selling jewellery is being market driven. We seem to have the research, technology and innovative capabilities to be a world player. What we lack is the ability to translate that into actual production and sales.

World trade is full of unfair practices, protectionism, collusions and barriers that severely tarnish the ideal. Do we have to be part of it? And to what extent? We can only answer these questions comfortably if we have a clear conscience about our own dedication to that ideal…not in our own interest but in the interest of customer sovereignty and the buyer’s freedom of choice.

19th century French Economist Frédéric Bastiat said it best: “If you wish to prosper, let your customer prosper. When people have learned this lesson, everyone will seek his individual welfare in the general welfare. Then jealousies between man and man, city and city, province and province, nation and nation, will no longer trouble the world.”

The macro evidence of our trading unfitness is revealed in the latest Global competitiveness report and the latest OECD survey. We seem to be quite good at certain controls such as auditing, banking soundness, and the legal framework – but very poor where it really counts such as domestic competitiveness, stability, education and training, and labour market efficiencies. We are good at making the rules of the game, but terrible at playing it! The latest alarming R25bn trade deficit shows how reliant we have become on imports and less adept at exports.

The top five competitive nations of Switzerland, Singapore, Finland, Sweden, and the Netherlands confirm World Bank findings of some decades ago, that the key to national prosperity lies in having an external focus and developing people. Switzerland’s consistency in top rankings never surprises me – after all, their best known export is the Red Cross. It’s actually a very simple formula: surpluses and prosperity are created when people by and large are giving more than they are taking. Deficits and poverty are created when people by and large are taking more than they are giving. You can never achieve the former if you are primarily focussed on the latter.

We are simply not market driven. That statement alone is bound to bring out the ideological super heroes in their different capes – left and right, capitalists and socialists!

But being market driven is not about a system. It is about behaviour. It is about an attitude. It is about being seriously concerned about the other, and putting their interests above all else within the rules of legitimate transaction. Being profit driven is the opposite. So too is being wage driven. At every turn in South Africa today, there is an incessant and hysterical babbling about getting; about profits, wages and hand-outs; a near exclusive focus on wealth distribution and redistribution, rather than wealth creation itself. The latter comes from being market driven and the former comes from the latter.

We don’t need all the scientific evidence to prove that this is so. Just follow events and the debate around us; or refer to Felicity Duncan’s article on lack of competiveness in our businesses; and just think of how we are treated as consumers, as customers, as citizens, as people, by our institutions, both public and private.

Our destiny as individuals, as companies and as a country is locked up in one fundamental axiom: that our true value lies in our capacity to make a contribution to others.

Above all else, that’s what gives us meaning.

That is the real magic of markets.

Monday, March 4, 2013

Are we hooked on hand-outs?

Pravin Gordhan’s 2013 budget reflects the difficulty of reversing the growing addiction to the welfare drug.

When my friend, Yvonne, had to have something done at the local municipality she was told that the official was out collecting her “all-pay”, the term commonly used here for the social grant.

In line with civil service pay nationally, Swellendam municipal officials are by far the best paid people in the dorp, which explains the incendiary comedy we had here not so long ago, when cadres tried to unseat the Town Council by, amongst some other mad abandon, burning down the local bottle store after it had been emptied of all of its stock. No certificate of competence is needed here. All you need is a bag of cheap wine, a match and a can of petrol. But not content with milking local ratepayers, it seems as if the same officials have found an extra teat on the tax-paying cow via the social grant.

They are not alone. Many employers here have adjusted their work schedules to accommodate absenteeism on “all-pay” day, and having a communal babelas (hangover) the following day – while ouma waits for some left overs for her children’s children in her care.

This is just a small drop in the vast ocean of global abuse that nullifies a substantial proportion of any welfare system, from subsidies to means tests to food-stamps. Redistribution is by far the most inefficient way of sharing wealth. It severs completely the vital link between wealth distribution and wealth creation itself or the link between contribution and reward.

And in turn this is only one tiny thread of Mike Schussler’s recent dramatic adieu to the welfare state. His warning of an economic tsunami approaching South Africa should not go unheeded. An ever increasing number of people (15 million) relying for sustenance on an ever decreasing number of people (6 million) is clearly a road to ruin. And when the government budget continues to reflect highly inefficient redistribution of wealth more than creating the conditions for an efficient private sector creation of wealth, the tax paying cow is simply going to dry up. Those who believe that milk comes in government moo-juice boxes are in for a rude awakening.

Schussler calculates that our 70% of budget spending (after interest on debt) on welfare proportionately makes us one of the biggest welfare states in the world – about 15% of GDP, compared with a world average of 8½%. This does not include the often ignored NGO spending of some R20bn per annum (ironically less than 70% of what is lost annually in state maladministration and corruption).

We are no longer a welfare state, but a dependency state. We seemed to be hooked on hand-outs and the peddler equally so to ensure that the addict does not go into violent withdrawal and exact revenge in the streets or at the polls. So every year a large part of government revenue is little more than a “tik-tax” as it were.

Gordhan’s huge dilemma is reflected in his own statement that “social spending is not a substitute for job creation”. The critical question is to what extent does the one frustrate the other. After giving encouraging detail of government efforts to promote growth, he also announced increases in the social wage. While he sees it as complementary, this may again be a case of not fully accounting for individual behaviour and expectations.

The bottom line is that we have had economic growth and employment feature in many recent budgets, yet unemployment has risen and the social wage has increased by an average of 11% a year in the last three years.

The indefinable yet important and profound difference between a welfare state and a dependency state prompted me to engage Mike Schussler electronically on an exact definition of a welfare state.

The “welfare state” is a multi-layered institution of different permutations, compositions, features and approaches that strongly resist a single universally applicable definition. In a future article I hope to do greater justice to that analysis which gives a far clearer assessment of our welfare effort and should have even the most avid champions of a welfare state, mixed economy, or socialism concerned. It is critical to be able to encourage remedial action across all of our many ideological and political differences, without getting hung up on slogans, rhetoric and semantics.

The term “dependency state” is a more appropriate definition of the state we are in, rather than welfare state or socialism which are deeply imbedded in the concrete of political bias.

A number of issues illustrate the difficulty of soliciting an across the board applause for the “death of the welfare state”.

· All nations have a degree of welfare spending in their state budgets. Like the Nordic countries and many others show, the size of that spending, either as a proportion of the budget or of GDP need not be a telling issue. But affordability determined by the broadest tax base is.

· A very critical consideration is government efficiency in both delivery and administration. Maladministration and corruption can make the whole effort toxic to an economy.

· The composition of welfare spending is very important. Effective education and skills development are arguably as desirable as investment in infra-structure, giving a longer term positive return on that investment. The former is an investment in people and the latter in fixed assets and structures.

· Spending on poverty relief and social grants on the other hand, can be a far greater threat to a healthy economy. It is also the exponentially addictive component in welfare spending.

· It’s a mistake to assume that “welfare-ism” or even socialism unequivocally imply a reduction in economic freedom. The Nordic socialist model is in many respects closer to laissez-faire economics than the United States which is severely allergic to welfare spending.

· What’s happening with welfare states in some parts of Europe may not imply a kind of Berlin wall catharsis. It could simply be a mature rolling back of welfare spending in countries needing austerity. It could indeed be a precursor to a healthier flexible approach to welfare. We are clearly no-where near being able to do that in South Africa, where the reverse is happening.

So the most important features of welfare are its financing and structure, and the above few points alone are a startling critique of our version of a welfare state, even given the social backlog that most are sympathetic to. The answer is, of course, broadening employment, which Gordhan certainly has not ignored and which I dealt with at length in my last article.

But in the end, numbers, definitions, plans, policies and systems become irrelevant against the overwhelming force of individual behaviour like that reflected in my introduction.

Or like the email I received this week from industrial psychologist and management consultant, Fayruz Abrahams asking why immigrants from Zimbabwe and Somalia show such entrepreneurial flair; and why South Africa’s absenteeism is the worst in the world.

Or the experience of Gielie, the citrus manager here, who was confronted by a group of workers about to get a pay increase to bring them in line with the minimum wage. They wanted to know how their work schedule would be reduced to minimum work for the minimum wage.

Or violent labour disputes which contributed substantially to the R16bn reduction in state revenue.

We all experience these life bites daily. Anecdotal they may be, but they make us all much more aware than any esoteric treatise or a budget speech can, that something is wrong.

The one incident that said it all for me was a TV interview with a new matriculant job seeker who said: “Now that I have my matric, they must not expect me to sweep floors and clean toilets!”

Yes something is very wrong, and we cannot ignore the possibility that it is both a cause and an effect of our increasing addiction to hand-outs.