Thursday, April 24, 2014

Does size matter?

The questionable criteria used to measure national economies.

We seem to have an obsession with size: from the bedroom to the boardroom and from national accounts to bank accounts.

This fixation is most likely rooted in the belief that size represents power and influence. So it is not surprising that the recent “re-grading” of Nigeria’s economy to being the largest in Africa ahead of South Africa caused some flutter in the media and, as this Moneyweb article pointed out “put a little dent in our national pride”. That article made a good comparison between the key economic indicators of the two countries so will not be recapped here.

The elephant in the room is that based purely on a calculation process of one specific indicator one can dramatically re-position a country’s economy. In this case the indicator is Gross Domestic product, or the value of goods and services produced in a year. A “re-basing” of that measurement in Nigeria’s case has not only put the country ahead of its closest African rival, but a full 1/3rd bigger. At a stroke of a pen, it has also reduced the country’s economic growth rate by about 1-percentage point, or 14% in real terms.

This all may seem academic and technical, a view that inappropriately scoffs at the considerable weight that is placed on this one holy cow in economic measurements. It stands virtually alone in driving a large number of very important decisions that affects the lives of ordinary citizens – monetary, fiscal and in company boardrooms. These in turn can affect confidence, investment, credit ratings, taxes, interest rates, exchange rates, prices and jobs.

It’s often been said that if you can’t measure it, you can’t manage it. Against that there is the aphorism often attributed to Albert Einstein but more likely coming from American sociologist William Bruce Cameron, which says: “not everything that counts can be counted, and not everything that can be counted counts”. I’ve often used that quote in relation to our obsession with measurements. What it does not quite cover, and which is very relevant to important national statistics, is that it is not only what is counted or omitted, but also how it is calculated.

A very large number of national statistics are not based on purely scientific criteria like measuring distances or temperature, but on surveys and sampling. While I am not a statistician and perhaps not fully qualified to challenge the veracity of such measurements, the Nigerian re-rating at least points to anomalies in the process of measurement and compilation of data. The rebasing of GDP, which most countries do regularly in at least five year intervals, implied a reassessment of relative contribution and influences of the various components.

While it is clearly impossible to do a fully comprehensive collection of all data, sampling has to rely on a number of complex and difficult criteria that inevitably increase the potential for inaccuracies and flaws. The size of the sample is one and the integrity of the data at source another. Then there is interpretation and adjustment for deviations from the norm, such as seasonal factors, to eventually extrapolate a dubious “average” which can be notoriously misleading.

A good example is the highly important inflation measurements or CPI, which virtually every citizen scoffs at as far removed from their own experience of rising living costs. In the end, no-one and nothing is “average”. Statistics iconoclast and statistics guru in his own right, Mike Schussler, has regularly taken issue with mainstay statisticians on some of the vital metrics that guide our economic destiny, including the GDP holy cow, inequality measurements, unemployment, poverty indicators and many more.

Defensive responses to his postulates ignore the all-important reality that these metrics can be challenged and that they are not infallible or absolute. It’s a bit like the Nkandla affair which has become unashamedly trivialised into a “who-dunnit” to draw attention away from the intolerable hypocrisy of one man’s blatant ostentation in the midst of misery and deprivation. It could, of course, be an indictment of many others here and in the rest of the world, who fail to acknowledge that inequality is perhaps the world’s biggest economic challenge, reaching the intolerable proportions that it did in the 19th century when it led to a rewriting of economic textbooks and spawned the founding theories of conflicting ideologies that threatened to plunge humanity into global conflict.

Perhaps the most important of the many challenges to the GDP measurement goes back more than 4½ decades when US presidential candidate, Robert Kennedy challenged it as “measuring everything except that which is worthwhile.” This raises the question what other “worthwhile” activities should be measured and how should they be interpreted?

It will be something of a contradiction to the theme, if I attempt a list of important national indicators, similar to the quarterly, monthly, weekly or daily indicators which I dealt with previously. Ultimately no indicator or statistic can be seen in isolation. We can expect much of that in the run up to the elections to support either the “good story” or the “bad story”. Virtually any indicator or statistic can be used or misused to support a particular argument, sometimes out of pure mischief or opportunism. Some of those more vulnerable to abuse are the Gini-coefficient reflecting inequality and the Consumer Price index measuring inflation.

At the very least, most of the important measurements that are trotted out regularly should be accompanied by disclaimers that draw attention to other metrics in the background. Here, I would include the UN’s Human Development index which covers life expectancy, education, and income; the WEF’s annual Global Competitiveness report; the Gini-coefficient because of its growing importance as an issue of our time; national debt and inflation. Of course there are many others that may be more relevant to another specific measurement or statistic being focused on.

But the above relate to specific long established criteria of what makes for a winning nation: having an external focus and developing people. These are far more the outcome of a national attitude, willingness and behaviour than they are of policies, institutions and measurements.

Monday, April 7, 2014

The mysteries of mining.

And the hidden curse of natural resources.

It’s been a while since I visited Pilgrims Rest. The picturesque town nestled in the mountains of Mpumalanga has a special place in our history and a visit there takes one back to the mid-19th century – probably more so for members of my generation for whom the heady days of gold rushes and diamond discoveries of a prior era were romanticised in most forms of entertainment and popular fiction.

In the search for instant wealth, rogues rubbed shoulders with the genteel; the cavalier with the cunning; the meek with the brave; and the fox with the lion. Most shared one powerful motive: unbridled greed. A smaller number were in it for the sheer adventure, others through desperation; but there were also those drawn into the frenzy by the power such wealth could bring for themselves, King and country.

Mining and the exploitation of natural resources are strongly woven in the fabric of South African history with names such as “Wheelbarrow” Patterson, George Harrison, Cecil Rhodes, J. B. Robinson, Hans Sauer, and Barney Barnato adding vibrant colour to that fabric. Some were part of the colonially inspired Rand Lords -- villains to some, heroes to others. They went on to dominate gold and diamond exploration and extraction leading to the formation of four large mining houses that for many decades were to play a dominant role in the South African economy, strongly influencing other commercial, industrial, social and even political structures.

It was and still is a rough, risky world both for individuals and investors. Having had one very close call as a mine onsetter in my youth in nearly falling down a mine shaft, I shudder still today when I see TV images of those dark holes that zama-zamas crawl into to claw from the bowels of the earth, some specks of the yellow metal. They may be labelled illegal or even criminal, but to me they display raw courage, albeit inspired by tragic desperation.

In their own, small and individual way, they represent the hidden curse of mining and exploitation of natural resources generally. Find it; get it out, and you have instant wealth. It may have been this spirit that inspired a refrain that my father in his shaft sinking and high speed developer days would chant as they descended into the portals of hell: “Stof en gate, skiet die Engelse klip en ons maak geld!

Completely absent in this spirit is a sense of doing something meaningful for others, the very soul of business. Like some lotto player, the beneficiary has little interest in who pays the winnings. They are simply there, a never ending source of wealth as long as you have a winning ticket. So like a frenzied mob, everyone wants a ticket, even to the point of stealing or extorting it via decree or complicity.

For decades I accepted that this is simply the nature of the beast. The only criticism I could find was that in the exploitation of natural resources we failed to apply enough of the spoils to the development of people. As such, we failed to adhere to the fundamental precepts for what makes a winning nation – having an external focus and developing people.

Failing to do the latter has been a tragedy, but not doing the former has been the more destructive. It is a moot point whether South Africa’s grand lotto of mineral wealth has not inordinately held us back in promoting those principles and becoming a truly winning competitive nation. It is more than co-incidence that by and large the richest nations in the world have limited natural resources, while the converse can also be argued.

When Jimmy Furstenburg, a co-custodian of my consulting work since retirement, asked me where I would place mining in the continuum between survival and empathy, my immediate thought was unequivocally in the survival mode. But on further reflection, I remembered that one of our employee awareness training programmes, People and Wealth, designed specifically to enhance an empathy understanding of business, was first developed at a gold mine. It was a joint project between me and the late Ben Coetsee, the HR manager of WAGM. He lamented the appalling lack of awareness amongst workers of the product and its uses. Morale was not based on any sense of purpose over and above pay and a soldier like camaraderie in the workplace.

Further reflection reminded me of the efforts of the World Gold council, formed specifically in the late 1980’s to promote alternative uses of gold. Perhaps it has been a case of too little too late. Earlier and greater market empathy may have led to more beneficiation and value adding at production source. The wider use of gold as alternative to money, or directly challenging the demonetisation of gold in the 70’s may also have been more actively explored.

In Platinum group metals, a similar council was formed at the about the same time. Individual platinum refineries today are also actively engaged in scientific and market research to promote wider use of the metal. It’s a moot point whether earlier and greater empathy with platinum customers would not have led to the development by the producers themselves of the auto-catalytic converter. Palladium producers had already experienced the futility of trying to dictate price to a dependent market, a policy AMCU now seems keen to revive.

De Beers has also been down this road in the diamond market. It has discovered that its business model of trying to control supply is no longer functional with the CSO cartel label becoming more onerous, more producers entering the market and diamonds being tainted with revolutionary blood. Apart from introducing the Kimberley Certification process guaranteeing a bloodless product, it has for some time now been more actively seducing pretty hands to be adorned with highly expensive trinkets.

Ultimately, it is simply a case of business sense. Being of service to the market does not mean being subservient to it, like a blindfolded cow to slaughter. It’s always been the hallmark of great companies to go beyond simply responding to the needs and wants of customers and to also explore what they could need or want that they are not aware of. Innovation is a natural outflow of empathy.

But what you cannot do is bring your own needs and wants to the market. The concept of empathy applies to the way you approach your market and society, and while it can inform wealth distribution, especially in employment policies, the latter will always be dependent on the former. Put differently, wealth distribution is always dependent on wealth creation. Some of course may retort that “charity begins at home”. It was also a favourite Mafia mantra.

The mining industry is clearly still firmly stuck in a survival mode, perhaps inevitably so in some cases such as in the current platinum labour problems. But one could also argue that having essentially been in this mode for a long time, has contributed to those problems.

Understanding one’s real purpose in business gives a greater sense of meaning for all involved, particularly for employees, but also for serious investors. The need for means is the less significant part of human endeavour. The search for meaning is far more significant.

After all, one of our greatest needs is to be needed.