Wednesday, March 23, 2016

Our triple deficits

The most important is not about metrics but about behaviour.

This may be a case of shooting the messenger, and heaven knows South Africa certainly needs as many messengers of caution as it can get. But I am not easily drawn into the public hysteria that is sparked by the activities of the three main credit agencies, nor the “shaking in our boots effect” of Moody’s latest reconnaissance. This despite their negative impact on the domestic economy. These have been well covered and will not be repeated here.

It seems somewhat incongruous that the triad of S&P, Moody’s and Fitch can have such sway over sovereign economic destiny. These agencies have arguably not fully shaken off some of the mud flung their way after some inflated ratings that supported investments in dubious instruments, leading to S&P specifically facing a $5bn lawsuit a few years ago. It is a rather restricted club whose services are paid for by the debt issuers. (Although, of course one could argue this would tip the balance in favour of the issuer in the event of massaged ratings.) Admittedly too, the behaviour of rating agencies has been tempered more recently by regulation, the threat of law-suits and more agencies entering the field. Whether additional competition will blemish ratings to favour paymasters, remains to be seen.

However, this is not a repeat of a Moneyweb article of about a year ago when I wrote: “It is a moot point whether these agencies are comfortable with their power. But they have it. Whether they deserve it or should have it has become academic but under such circumstances they can expect their credibility to be constantly challenged, sometimes unfairly, but also with some justification.” 

That power is sourced not by their findings, or even their impact on investment decisions, but the inordinate effect on the domestic mood in turn fuelled by at times hysterical knee jerk responses. It is rare to see a sober overview of credit ratings as this one by Moneyweb’s Hanna Ziady. For the most part, credit ratings are greeted with much, often ill-informed, fanfare. Even the language can be emotive and sometimes dramatic. The word “junk bond” alone, instead of the term “sub-investment grade”, “evokes thoughts of investment scams”, according to Investopedia. But then it goes a step further. Sloppy journalism invariably uses phrases such as “South Africa will be downgraded to junk”. And from the mouths of politicians, one can even hear terms such as “we are now a junk country”; consigning the entire nation to junk. Some have even gone as far as to warn of a “failed state”, showing little understanding of what failed states such as Libya or Yemen really look like.

Credit ratings also become a political football with expedient politicians and other vested interest using them in an often highly dramatized fashion. We saw much of that prior to the last budget, leading to the firm conviction that Finance Minister Gordhan’s primary, if not exclusive budget task was to avoid a negative response from a bunch of suits across the Atlantic. That pressure no doubt also came from within the ruling party itself to sway the less economically informed of the executive, including the President himself, of the need for fiscal discipline.

So it was not surprising to hear the first question asked by reporters soliciting comment on the budget and Gordhan’s recent spin effort abroad: “Did he do enough to avoid junk status?” All of which led to something of a conundrum captured in Moody’s response that there should be more emphasis on economic growth. That’s a bit of a contradiction to fiscal austerity, albeit not totally unachievable, perhaps even quiet feasible with more effective spending and less waste.

The need for being an attractive and favoured destination for capital can never be understated, and credit rating agencies have to be wooed as a significant factor in achieving that. For a significant part they, and most economic analysts, look at the “twin deficits”: that of the budget, which is simply the difference between Government revenue and expenditure accumulating in our sovereign debt; and the balance of payments which is the difference between what we spend and earn with other countries and of which trade in goods and services, or the balance of trade, is the most significant. The latest figures reflecting all of these can be found here, and I will not clutter this column with statistics.

Because the most important deficit of all cannot be captured in hard numbers. It is the trust deficit, or the credibility gap. As Gordhan himself put it “the economy and South African society needs to win back credibility”. This credibility is the outcome of our behaviour as a nation, and has the most profound impact of all on the numbers, not only in terms of their actual state but also how they are assessed by others.

Numbers are always the outcome of behaviour. Our sovereign debt is a good example. At about 46% of GDP, it has solicited much concern. But it pales into insignificance to Japan’s 230%, which has an A+ stable rating. One reason is that Japan’s debt is mostly funded domestically, but then South Africa only has a 10% foreign component to its central government debt. The real difference is Japan’s credibility, or simply put, the faith people have in the country to meet its commitments. One could also argue that Japan therefore still has a trust surplus.

It is in that trust gap where South Africa has its biggest problem. We are a long way from defaulting on any of our debt commitments. What concerns most, including no doubt the credit rating agencies, is the behaviour of leadership and political and social stability. We rank as one of the lowest countries in the world in trust in government, which must spill over to global perceptions.

There are so many negative experiences on a daily basis that the accumulative effect on sentiment and perceptions both here and abroad must be devastating. They emanate from behaviour at many levels, including individual, institutional and other collectives, and from racial tensions, violent student protests, labour disputes, civil unrest, the current Gupta debacle and corruption and governance. All blindly follow their own narrow agendas with little regard, or even only remote knowledge of their effect on how we are rated as a nation.

Of course it is demeaning to kowtow to strangers. But we should not be doing things to please them. We should be doing them because they are the right things to do.

Tuesday, March 8, 2016

Outsourcing: friendly trend or foe?

The changing building blocks of the modern company and implications for labour.

There is a strong ironic link to university student protests and their cause against outsourcing of certain tasks on campus. Those very students who so vehemently protested against outsourcing are most likely going to enter an environment where they too may be “outsourced”, joining the so-called “precariat class”. In that world they can either see themselves as victims or masters.

The transition from sheltered and largely legally protected employment to an independent supplier is not easy. After leaving a fulfilling and secure career in broadcasting and then founding the company transformation consultancy Schuitema Associates with two others, I quickly discovered the fine dividing line between being self-employed and unemployed. This was even more onerous when one, in the early years at least, was the main source of income and sole financial risk taker for others.

But what really sustained us then, and what constantly fuelled determination and hope for the future, was that we knew we were doing something that could make a difference to others lives. It is that force, so often absent in the day-to-day life of the average worker, that really defines the difference between a job and work.

Ultimately there may be fewer jobs, but there will always be work. It is the ability to focus on the latter, rather than the former, that will be the hallmark of a successful productive life. Indeed, one could argue that it always has been. But it has become severely muted as employees, over time, have become conditioned into the belief that a successful career follows a simple path of rungs on a corporate ladder.

Inexorable forces are radically scrambling the parameters of organisational theory. Modern trends may not change the principles at stake, but will certainly change conventional company structures. And by the looks of it, they could spell a change of organised labour’s role as we know it, while the latter tries to cling to outdated theories that are rapidly becoming irrelevant. We can see evidence of this tension not only in public debate, but in megatrends of technology and mechanisation; declining labour participation rates; new company structures; inequality and the explosion of financial services.

A recent insight into how the modern company is reinventing itself was given in this article in the Economist. They use services such as Uber, AirBnb, and cloud computing as examples of where “across industries, disrupters are reinventing how the business works.”

The appeal of the “insurgents’ model”, the Economist says, is partly a result of the growing dissatisfaction with the public company. “After a century of utter dominance, the public company is showing signs of wear. One reason is that managers tend to put their own interests first. The shareholder-value revolution of the 1980s was supposed to solve this by incentivising managers to think like owners, but it backfired.”

The article argues further that in insurgent companies there is a much tighter link between ownership and responsibility, and founders, staff and backers exert control directly. “It is still early days but, if this innovation spreads, it could transform the way companies work.”

The insurgent model implies a flattening of hierarchical structures, a much slimmer and streamlined organisation, greater participation by employees, incentivising them with ownership stakes and performance related rewards. Keeping the organisation tight means buying in services as and when needed, in turn relying far more on outsourced services.

In short, these forces imply using traditional labour to a much greater extent as outside suppliers in the creation of wealth, rather than partners in it. That’s a rather oversimplified mental graphic based on the conventional understanding of wealth creation and completely ignores all the behavioural nuances that are forged in that model. But I’m using it to illustrate that in theory at least, a shift of labour from partner to supplier should not impede wealth creation itself which is ultimately measured in Gross Domestic product. What it does mean is that the combined value-added is more fragmented. There are many pros and cons to that, but most are the effect they have on behaviour which is a subject on its own.

Given the increasing shift away from large corporate and company structures as we know them, the increased use of outsourcing and with it the much maligned labour broker, seems inexorable. Insisting that companies cannot outsource when it makes business and sound supply chain management sense to do so will be highly counter-productive. It will clearly impede the “insurgent” model, new start-ups, and SME’s – all of which are the way of the future. Large companies and corporate structures encourage large and powerful labour organisations. They find far less sustenance in lean, streamlined operations where there is a high degree of employee operational involvement or even ownership.

The key strength of these new organisations is their very high level of flexibility. If organised labour facilitated the same degree of flexibility in conventional organisations, they will ensure their continued relevance in a rapidly changing world.

While still mostly subtle and gradual, outsourced activities, despite their multi-facetted nature, should be approached as a new sector, worthy of its own institutional constructs, legislative protection, umbrella organisations, and developmental support that can even explore its role in import replacement and establishing new training platforms. In particular, concerns about the treatment of labour in these services have to be addressed. Large companies using outsourced services can adopt a highly supportive and developmental role towards these suppliers.

Instead of seeing outsourcing as a threat, it could become a new and vibrant sector which is an incubator for entrepreneurship, SME’s and co-operative type ventures. It not only fits in with employment needs of our time, but with the creative and adventurous spirit of the new generation.