Thursday, January 29, 2015

Trust crisis deepens

Number of trusting countries falls to lowest level – survey.

One could be forgiven for believing that the world is at war. Not a conflict between major powers but a war of many battles with many different contexts. As an avid follower of news for at least half a century, I cannot remember a time when news was so preoccupied with such a widely scattered number of violent conflicts, protests and public disturbances.

It is tempting to see each in isolation and disavow a broader common context. But that could be a mistake. Groups are to an increasing extent being marginalised and polarised and while each conflict arena takes shape in its own context, the thing that they all share is that radicalisation is for the most part rooted in despair, in frustration and in an environment where aspirations become increasingly difficult to achieve, while expectations are inflamed by a variety of forces, the most attractive of which is religious fundamentalism.

So it was not surprising that the 2015 Edelman Trust research just released at the WEF in Davos, found that the number of trusting countries fell to the lowest level ever recorded by its barometer, with informed publics in only six of 27 countries surveyed expressing trust levels above 60 percent. Once trusting countries, such as Malaysia and Canada, fell into neutral, and the U.K., South Africa, Hong Kong and South Korea slid from neutral to distrusting status. “Among the general public, the trust deficit is even more pronounced, with nearly two-thirds of countries falling into the distruster category”.

South Africa has maintained its dubious position of having the biggest gap between informed trust in business and trust in government. This has widened again with trust in business improving marginally to 64% and trust in government falling to 16%.


According to Edelman government was the only institution to gain trust in 2015, after improvements in 16 countries. India gained nearly 30%; Russia, 27%; and Indonesia, 19%. Despite its overall rise, government is still the least trusted institution globally. Informed publics in 19 of 27 countries distrust government to do what is right.

At the other end of the spectrum, NGOs saw the largest decline in trust. NGOs maintained their status as the most trusted institution, but what is clear, says Edelman, is that the trust is fading. In 70% of surveyed countries, trust in NGOs fell or remained at equal levels to the previous year.

Trust in business varies among different types of business – and developed versus developing countries. In developed countries, family-owned businesses outrank big business in trust by nearly 30 percentage points. In contrast, in developing countries, big business is more trusted than a family-owned enterprise by six percentage points.

The media, the second least trusted institution, also experienced a decline in trust coupled with a continued greater dispersion of sources. In 15 countries, media experienced declines, with some as sharp as 18 percent (Hong Kong), 14 percent

(Argentina) and 11 percent (Canada and Singapore). While trust in media increased in 12 countries, no country registered gains as great as these losses. Years of newspaper layoffs and staff buyouts are taking their toll on public trust. Trust in search engines outranks traditional media sources by 8%.

When it comes to individual source credibility, experts and a “person-like-yourself” are twice as credible as CEOs. Government officials and regulators are the least trusted of all individual sources. In three-quarters of countries, CEOs are not viewed as credible spokespeople. This is particularly pronounced in the developed world, where trust levels hover 10 points below the global average. Here, 70 percent of respondents do not perceive the CEO to be a believable source of information about a company. The picture is far different in the developing world, where CEO credibility is 30 points higher, at 61 percent.

This year’s survey report focused specifically on innovation and technology. Surprisingly it found that for the most part today’s pace of development and change by business and industry is perceived as being too fast -- 51 percent say innovation is too fast; 19 percent feel it is just right. At least 55% agree that new developments are not tested enough. However, trust levels vary widely. Trust in electronic and mobile payments is 69 percent, as compared to trust in genetically modified foods, which is just above 30 percent.

Building trust confirms my often repeated message of having a purpose other than pure profit maximisation. Edelman says: “Approximately half of respondents attribute increased trust in a business to the fact that a business enabled them to be a more productive member of society. Forty-seven percent say it is because the business contributed to the greater good.”

Monday, January 12, 2015

Moments of madness

Some economic foolishness we subject ourselves to.

It certainly is a strange, strange economic world we live in.

Take Britain’s ousting of France as the world’s 5th largest economy as an example. It did so just after Christmas by recalculating its national accounts, specifically Gross Domestic Product. Not much wrong with that: after all Nigeria did something similar earlier to overtake South Africa as Africa’s largest economy. What makes the British move a bit strange, if not bizarre, is that in order to qualify for that position it included the proceeds of prostitution and drugs in the numbers, boosting GDP by some £12½bn. According to The Telegraph, France will not do the same on moral grounds – which must be another first: France taking higher moral ground than Britain.

One wonders what the suits at rating agencies Moody’s, S&P and Fitch are going to do with this. Will they be checking the veracity of these numbers by visiting some shady places in London? The more serious question, of course, is how long policy-makers will continue to slavishly follow this ridiculous GDP metric. Are we at a point where junkies and Johns can affect interest and exchange rates? A bit of a stretch, I know, but an illustration of the weird world we live in.

And then there’s oil. Commentators have justifiably been stretched in trying to explain the sharp drop in the oil price on the basis of increased production and lower consumption. A mere five years ago it averaged $35 a barrel; then shot up to $110 within a year or so to fall dramatically in the last few months. This can only be explained by speculation and possible price manipulation way beyond production cartels, and in financial markets estimated by the Economist more than a year ago to involve some 200 billion barrels, valued at about $20trn.

Be that as it may, the oil price prompted economist Mike Schussler to pen some satire on social media during the holiday season.

Part of it read: “The oil price is on trend for free oil soon. Saudi Arabian sand exports will outperform oil revenue then. Camels will make a comeback in the Middle East as the major transport mode. The EFF will nationalize SASOL in time for investors to say ‘thank you for bailing us out’.

“The last South African tax payer leaves in May 2016 as debts pile up and Juju shouts at investors ‘pay back the money!’

“’Which money’ they whisper back. ‘You just took the mines and Sasol’.

"’Yes but there must be money as we are paying for this nationalization;’ says Julius as the government is forced to pay employees with no money coming in as oil is now free and gold and platinum prices are less than Eskom power prices!”

The full impact of what’s happening in the oil markets is far more pervasive than most in the mainstream media have been covering or can even hope to cover. When an important international price moves dramatically, most cannot see much beyond celebration on the one side, and lamentation on the other – depending on whether one is a consumer or producer.

But oil is more than a tradable commodity. Not only is it by far the world’s biggest in value, but price volatility can disrupt stock markets, government finances, trade balances, currencies, exchange rates, interest rates, a whole array of financial instruments including shale junk bonds, and demographic and political stability. All of these are linked and individually fragile.

Then I came across another piece of economic absurdity: the reduction by the American city of Detroit of city pensioners’ incomes in an attempt to resolve its financial crisis. What at first seemed to be a rather remote and perhaps not such a newsy event, took on another dimension when I realised that this one city was something of a microcosm of our Western economic system.

The once thriving world vehicle manufacturing centre is insolvent. The city has 9,700 workers, with 21,000 retirees drawing benefits. Its population has declined by 63% since 1950, and unemployment has tripled since 2000 to nearly 20%. It is not undue exaggeration to see this replicated through much of the Western world. The trend of the past thirty years is culminating on the one hand in rapid inflation of assets and financial instruments such as property, stocks and bonds and on the other deflation of production such as commodities and manufactured goods, as well as average individual incomes.

Apart from exacerbating income disparities, the concentration of wealth in financial services has become exponentially incestuous, largely failing to translate into greater consumer spending and production of goods and services. All of this rests on a debt ridden monetary system that is persistently debasing our means of exchange.

2015 is already shaping up to being a year of disruption. This will not only be in markets but in economic paradigms that we have held for many decades. At least we are beginning to understand what does not work and hopefully we could see a return to classical economic theory and the rules of transactional correctness.

Wealth simply cannot be created through money or debt. Tangible value is always created by production. Consumption merely confirms it.

Monday, January 5, 2015

A tale of two loaves

The scary prospect of having fewer choices

It was by chance recently that I came across the President’s parable. Many of you may know it, and many will most likely not want to know it. But it is an analogy that President Jacob Zuma seems to favour and has repeated a few times since offering it at the launch of his call centre in 2009. (Is it still functional?). That’s when he asked: “When you are given two loaves of bread and someone says to you one is from government and the other from the private sector, which one would you take?”

It is, of course, a no brainer, given the latest power cuts and research last year that showed South Africa as having the biggest gap between trust in government and trust in business. Only 17% of informed South Africans taking part in the Edelman poll said they trusted government to do the right thing, compared with 63% who said they trusted business to do so. But leaving the obvious and ironic aside, it could be one of the most insightful questions to ask in these times – albeit unwittingly.

This could be the era when conventional theories will be rewritten about government involvement in economies, free enterprise, private initiative, mixed economies, and developmental states; as well as the role of money and debt. We appear to be well into an extended period of deflation, adjustment and low economic growth; a time during which, in true Keynesian tradition, governments expand while private enterprise contracts. The behaviour of large corporate business especially in the financial sector, profit obsession and shareholder-value frenzy, as well as widening income disparities have encouraged popular clamour for government intervention.

It is to be hoped at least that the world will emerge with a renewed commitment to the two primary roles of government:

· to establish optimum conditions for private initiative to create wealth and

· to help those in genuine need of societal care.

The former is far more important than the latter because the latter is totally dependent upon the former. This was a hard fought lesson over centuries of policy experimentation.

Governments can and sometimes do run efficient commercial enterprises. If one added say a German or Swiss government baker into Zuma’s mix, it would be a moot point whether it would not be the preferred supplier.

Wealth is created when two things happen: doing or making something useful to others, and following the rules of free and legitimate transaction of supply, demand and price. This stands independent of and aloof to motive. So to argue that an absence of the profit motive is what makes government fail where private initiative succeeds with it, is shallow and disingenuous. Government commercial ventures fail mostly because of an absence of competition and failure to recognise the cost of capital. It is easy to cover inefficiencies simply by raising taxes. It is not so easy when you are using investors’ funds.

Before South Africa finds even the remotest consolation in the global trend towards bigger government it needs to seriously correct its government performance and accountability. It’s one thing having a big government; it’s another having a highly inefficient and ineffective one. A government that cannot deliver is a huge drag on society, and the bigger it is the bigger this drag. I remember many years ago, coming across a study that compared country fiscal efficiencies. In that study it was mooted that for every tax dollar a country like Denmark gathered, it returned some $0.90 to the populace in tangible value. In South Africa at that time it was only about $0.25.

I would give no credence to such a study today. The variables are just too large and the research too complicated to make a finding valid. But it does pose the intriguing, albeit complex question of what kind of value we are effectively getting for our tax rand. Put differently: what could government cut from its current activities and how effective could it be in doing the rest?

To get some help I approached economist Mike Schussler who is an outspoken thought leader on fiscal affairs. The first point he brought home through a number of charts is the extent of government encroachment. The most telling is one that shows our relatively high tax to GDP rate of 27% -- higher than Sweden at 22%; and nearly treble that of Japan (9.8%) and United States, China, Switzerland and India all at about 10%.

An important consideration is that for their tax dollars, citizens of many countries receive important benefits such as pensions and health care which a large part of South African taxpayers don’t. According to Schussler, South African government salaries as a percentage of GDP were the 6th highest in the world in 2010 and probably higher today. They make up more than 30% of formal sector pay. So his conclusion to the overall question is that the South African taxpayer in the private sector particularly is getting a relatively minor proportion back in tangible value.

From my perspective it means simply that the South African government is overwhelmingly redistributive. This may be understandable and ideologically justifiable. But it is very counterproductive when the redistribution agency soaks up a large chunk of what there is and ultimately threatens what can be redistributed.

So what would Schussler do? Get out of involvement in electricity, air travel, airports, rail, telecommunications, road construction, prisons, and national parks; and streamline government financing institutions such as the Landbank, Development bank and IDC. He also suggests that education itself can reside more in private hands with government vouchers for needy learners – the principle of subsidising a person rather than an institution.

Schussler also has a beef with that other major government impediment to economic activity – rules and regulations. He would like to see far deeper and enlightened oversight on the extent to which they harm or impede private initiative.

Cutting the government is one thing. The real challenge is to ensure maximum efficiency in whatever it does. The government itself has conceded that much work has to be done. But it seems to be losing the battle when the Auditor General’s latest report reflects a more than two fold increase in irregular spending at R62bn. Schussler points out that by far the largest part of government inefficiency is incalculable. It is where the rubber hits the road, where teachers have to teach, police protect, nurses nurse, and municipalities deliver services.

The supreme example of an utterly cavalier view of taxpayer’s money is of course, the State President himself. This is not only in Nkandla. He has surrounded himself with a cabinet of 35 – one of the largest in the world – bigger by far than the United States (16) and China (25), and each costing about R4m a year. Cut that by half (both the number and their pay) and by sheer example alone you will suppress waste substantially.

The economic effects of a big government are obvious: it shifts resources, including capital and skills, from where they are adding value and creating wealth to where they are merely redistributing that wealth. Add inefficiency into that mix and you compound the problem severely.

But the argument against big government is more profound: ultimately you restrict choice. Ultimately you erode freedom. Ultimately you end up with one loaf.

To end on a philosophical note at this time of reflection: I have been writing a lot recently about empathy and survival and a frequent response has been that empathy is simply enlightened self-interest.

Enlightenment is not about practising empathy for survival; it is about not seeing the difference.