Bullhorns of discontent.

Threatening the unifying potential and benefits of a radical economic overhaul.

Radical economic transformation (RET) has been around for about half a decade although the need for it has been evident for decades more. This time it has come with a fanfare of bullhorns, town criers, aspirant emperors and empresses; and some hysteria in a clear strategic attempt to recapture political initiative; to unify a fractured ruling party and deflect attention from its beleaguered leader.   

The timing is unfortunate. Trust between government and the private sector has broken down and investment confidence is all but shattered. With full co-operation between the state and the private sector, RET could be a unifying force. Instead it is becoming divisive and polarising. It is creating consternation on the one hand and false expectations on the other; unleashing forces that could devour each other in a downward spiral that arguably has already begun with downgrades and investor flight -- until sober minds see through the mist of rhetorical mischief and conclude that it’s not new; it’s not unique and it need not be frightening. Indeed it could be an exciting and galvanising mission that makes South Africa a metaphorical Asian tiger instead of a Venezuela.

We are not exceptional. Blaming it on the past or racial imbalances is creating a false notion of solutions and deflecting effort from where it is most needed. The problems are much bigger and the world is itself facing radical economic transformation. Indeed it has already begun. So let’s tick the boxes in a severely redacted swoop of global concerns. They have all been documented broadly in Moneyweb and other news coverage, obviating the need for detailed substantiation.

·       Concentration of Economic power or monopoly capital. Large corporates domestically and globally have grown to the point where the negative impact of their power and influence now far outweighs the purported advantage of capital efficiency. The financial industry, banks and financial markets in particular have become a force that can virtually dictate the economic destiny of countries and the globe. With their influence on the state they have become “the establishment”, now under attack in many forms, including at the ballot box. (See Moneyweb Article here).

·       State capture. The above clearly leads to inordinate self-serving influence on the state in the form of oligarchs; family wealth; the elite; powerful vested interest lobbies; bribery and corruption. The news is full of it and as oligarchs go, the Guptas are a rather clumsy lot with the beneficiaries in Government being extraordinarily and dangerously naïve; compared to those that have existed in Russia, Ukraine, Latin America and many others. Such is the power of the “establishment” that it has recaptured Donald Trump who became president on an anti-establishment ticket and has now clearly flip-flopped.

And then there are the Chaebols of South Korea, consisting of old family business empires such as Samsung, LG and Hyundai and controlling some 80% of economic activity with government involvement. Their success in making South Korea one of the most powerful of the Asian tigers was simple: a community and customer focus overriding profit and self-gain.

·       White monopoly capital. This PR concocted phantom has been unpacked many times, but whatever substance there may be it is simply and self-evidently one of the oldest ploys of political expediency: create an enemy, identify and personify it, and blame it for your self-created mess. There is some truth to disproportionate white involvement and ownership in the economy but it cannot be shown to be malevolent in intent, action and effect. Even if it were possible to simply change the “colour” of this “monopoly” overnight, there is no evidence that this will benefit the masses. Indeed, disrupting a fine balance between capital, skills and competitiveness could be devastating in a tough global environment.

·       Black Monopoly capital. If we define “capital” in the broadest sense of deployment of money in an economy, then one can argue that government at all levels is a much bigger player than any other single entity. (Mike Schüssler puts it at about 44% of Gross domestic product.) It is in itself a true monopoly and owns the only real uncompetitive monopolies in the form of state owned enterprises and their trillions of rand in assets; it has the biggest single investment arm through the PIC, and it can dictate and has dictated the rules of the game through regulation.

·       Radical Government transformation (RGT) is the elephant in the room. Radical economic transformation (RET) has to start with RGT first. Can anyone doubt that we would have been in a “radically” different position if government at all levels, did what it was mandated and paid to do: efficiently, effectively, prudently, and devoid of corruption, patronage and self-gain; compounded now by party discord impacting all arms of the state?

·       Inequality and unemployment. Remember the startling Credit Suisse findings amplified by OXFAM that the wealth of world’s richest 1% equals that of the remaining 99%?  Here’s some country comparisons.

Not only do we rank well below those with the biggest disparities, but we are also below the United States. Of course that is arguably still unacceptable, and even more so when one looks at income disparities rather than the above assets gap. This is a metric minefield (see different measurements here) but it cannot be denied that South Africa has one of the highest income differentials in the world. That is largely a function of high unemployment. While the latter is of less concern in some countries, it certainly remains a key concern in many parts of the world – including the stagnant state of the middle class, and the job displacement threat of technology.

·       Inclusivity. All of the above can be captured in this one key issue. “Around the world, no bigger policy challenge preoccupies leaders than expanding social participation in the process and benefits of economic growth” – World Economic Forum.

Radical economic transformation is nothing more, and nothing less than promoting inclusiveness and a response to the greatest global challenge of our time. Of course there are some circumstantial differences, but exceptionalising, politicising, radicalising and polarising them is suicidal and way beyond reckless. It needs a partnership of all interests. The principles of having a common purpose and sharing a common fate that I have advocated in companies (see here) can stand outside political and ideological rhetoric. It means holding hands in the good times and the bad. Those that rely solely on economic growth as a magic wand are too readily discounting some very ominous storm clouds gathering on the global horizon.

The real question is how flexible, united and prepared we will be when that storm breaks?

The forgotten value

And its increasing relevance in our political and economic circumstance.

“I don’t care!”

That’s how Net1 CEO, Serge Belamant responded to a question on whether the national budget could accommodate an increase in their charges for extending the SASSA social security payments.  “It’s not my problem,” he told an eNCA reporter.

Those first three words not only tarnished his own brand, but added a further blemish to business generally. They were more harmful than the racial spats and social media furore around colonialism because they played into the hands of anti-free enterprise rhetoric where they added another layer of fabricated malevolence to the “white monopoly capital” bogeyman. In turn they make populist politicians increasingly immune to the fragile business, fiscal, monetary, and investment environment.

That is the first context: the need for business leaders at any level to be aware of the extent to which business itself is in the middle of a deepening populist political divide that has become detached from logic. Frankly, business should have been outraged. That it was not, speaks to the second context: which is confusion around purpose.

For decades since the early 80’s business has adhered to a near exclusive profit purpose in line with Milton Friedman’s statement that: "There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits." Belamant could clearly argue that he stuck to that guideline. The fact that his main shareholders – Allan Grey at home and the International Finance Corporation in Washington took issue with him, demonstrates a new business context reflected in King IV: creating value for all; inclusivity; and stakeholder cohesion. In the Contribution Accounting Methodology, I argue that even those dimensions are subservient to one super-ordinate existential purpose: that of serving customers. Here Belamant breaks a cardinal rule by implying that a customer’s problem is not his or his company’s. Compounding the irony is that his major shareholder represents organisations who profess to be guided exclusively by the customers’ needs; in this case social grant recipients.

This gives another intriguing context, or question. Is there a continuing rift between shareholders and the executive? Are they caught on opposite sides of the short term profit maximisation requirement and the longer term sustainability argument?  As long as executives reflect an agency system with skewed short term incentives, that ambivalence will remain. It then spills over into forked-tongue messages between executive and staff and between the company and its customers.

All of the above can be captured in the most important and overriding context of all: the human moral compass and the values it reflects. Here we can find a peg to the values fought for in the French revolution and that informed many a modern constitution, including our own. The clarion call for: Liberty, equality and fraternity, inspired many subsequent civil uprisings and rings familiar in South Africa even today.

Each element can be unpacked from various perspectives, which is way beyond the confines of this article. What is the most intriguing is the near exclusive attention given to the first two tenets – that of liberty and equality – and the third, fraternity, is seldom discussed or aspired to. It can be described as the forgotten value. That is most likely because it has been seen in a narrow context of “brotherhood; solidarity or comrades-in-arms.” It finds further succour in collective identities such as nations, patriotism, race, teams, families, etc.

But of course it can, and should be extended to give it far greater validity and relevance. The French, and other revolutions, would have gained much credibility and aspirational clout by embracing empathy as a whole, and indeed replacing the word fraternity with empathy.

The fundamental importance of empathy to human survival has been argued over centuries. It is self-evident that without a very large measure of empathy between our fellow creatures, humanity would simply self-destruct. I have argued the business case for decades, including in my last two books. The power of caring in business – as a sound business principle and not merely as P.R. spin – has been virtually ignored as companies hold on to familiar shareholder value criteria. The exasperating mischief that they then continue to make, is to argue that caring in business somehow implies sacrificing profitability. That is such nonsense. It ignores that value-added, or wealth creation itself, is the outcome of contribution to another – irrespective of the motive of the contributor.

We are faced with two business perspectives: one that leans towards profit and survival, and the other towards service and empathy. One based on a profit/cost understanding and the other on a Wealth creation/distribution paradigm. A comparative analysis between the two was done in this Moneyweb article. There is clearly a lack of appreciation of the benevolent existential underpinning of all transaction. Indeed, counter-intuitively to that, much effort has been expended on arguing the case for the self-gain/profit driver as the catalyst for success.

What is missing is comprehensive research and analysis on a global scale of the calculable harm that this driver has done – harm that could have been avoided and massive costs saved by applying empathic, values driven criteria. It certainly could have saved Net1, Ford, Samsung, Volkswagen, Barclays, and many, many others, much soul-searching, financial losses and brand tarnishing. (See Fortune magazine scandals of 2016 here.)

The fact that without empathy or caring for each other, our species would become extinct should inspire us to pursue it as a value at all levels in our existence.

It should become a national aspiration. Because it is the ultimate game changer.

The Gold and BitCoin tussle.

Round one to Darth Vader.

The parody I scripted about a year ago, pitching Darth Vader representing crypto-currencies against Blackbeard the Pirate representing gold, in jostling for position as a viable option to fiat currencies, may have become less sardonic.

The price of one BitCoin has overtaken the price of an ounce of gold for the first time – touching on $1300, with gold at about $1240 on the day. Since then, both have eased, swopping lead positions in a market dance, but with gold being distinctly outpaced. Of course, one can make too much of it. Each market has its own peculiarities and driving forces.

Crypto currencies in particular are still in a very volatile stage. BitCoin rose to record levels on speculation around a BitCoin ETF, and falling nearly $300 on the application being turned down; but bouncing back remarkably to about $1250 this week.  Bitcoin.com points to other supporting factors in “Increased regulation from Chinese authorities, demonetization in India, recently passed legislation in Japan, as well as the general instability of fiat currencies”. Analysts share a wide range of future price predictions. Gold on the other hand, has its own woes with U.S. interest rates, a dance partner it prefers over crypto-currencies and depressing the price to below the $1200 resistance level this week.

The BitCoin/gold paring may deserve more coverage than it has been given in the financial media because of what they have in common – a shelter for flight from our current troubled means of exchange. The picture that I painted of the past and the future doing a dance on the corpse of the present is not as abstract and futuristic as it may first appear. That context deserves repeating.

We now have three potential forms of money, each with their own element of fiction. If you strip gold of its ancient allure, its historic backing of paper currencies and its investment and adornment image, you could certainly posit the Keynes view that it is a “barbarous relic”. If you interrogate BitCoin’s mysterious and anonymous founding, creation structure and block chain security, you could equally have some qualms. But both do not come near the degree of fiction that permeates Fiat currencies. Debt is a fiction. It is nothing more than a promise to pay sometime in an ever-delayed future -- a very empty promise considering the increasing extent to which the gap between debt creation and the means to pay is beyond redemption.

In stating the case for crypto currencies, Bitcoin.com quotes Adam Davies, a consultant at Altus Consulting, saying. “People are unsure about what is going on in the world, and digital currencies unlike the U.K. pound sterling have been hit badly because of Brexit, so people are looking to divest into BitCoin. There is a definitely upward trend. So the drivers will be hedging against currency fluctuations and insecurity in the markets”.

Similar arguments have been made for gold since the world went off the gold standard, terminating its role as backing for paper currencies. But it is still used as a reserve asset by many central banks and private investors. In effect, it is much more than a commodity and has maintained monetary elements. Despite a near doubling of the gold price since the 2007 crash, many have expected much more from gold in a world of escalating financial insecurity. It could certainly be argued that it is under-priced, in part because of market short-term thinking; low consumer price inflation and high asset price inflation, and being overwhelmed by derivative trading.

While a return to the gold standard has solicited much debate, mostly against, the value of such a disciplining instrument in monetary policy may have been vastly under-stated. I came across this graphic compiled by the Bank of England, and included in a report by Chris Dillow on the website evonomics.com.

A twenty year annualized view is useful in suppressing short-lived productivity gains, and highlighting longer term impact. Still, there may be some pitfalls in making too much of this. Co-incidence does not necessarily equal cause and the statistics are U.K. specific. In his accompanying article, Dillow may have connected too distant dots in arguing that it shows that neo-liberalism has failed to make people better off. But it is perhaps more than academic that the decline coincided with Milton Friedman’s influence, Reaganomics and Thatcherism, contrary to their acknowledged short term validity.

An observation that has been made in the Keiser Report may be somewhat counter-intuitive but is far more telling and intriguing: that the decline started shortly after the gold standard had ended. That makes some sense. With gold backed money, ill-discipline and national debt lead to a bleeding of your gold reserves. Without it you have endless money creation based on debt and declining interest rates which is not conducive to long term investment in productive capacity, but rather encourages capital to flow to rental income, assets and capital gains. This is one explanation for the Dow hitting record highs, despite months of declining company earnings.

It is tempting for gold and crypto-currency champions to want greater “official recognition” of these assets in monetary policies like holding BitCoin as a reserve asset. Nothing prevents a big central bank or monetary authority from starting their own crypto currency or asset that can be traded publicly and rival others. That seems unlikely in the foreseeable future, and may even be counter-productive because of the inevitable controls that will be imposed on trading in them. All these assets, including gold, should simply be left to be traded freely.

Their time will come. Perhaps sooner than we may think.

Creating customers creates jobs.

Is the focus on the role of capital too singular and misplaced?

You have to hand it to the capital supremacists. They have convinced many, including a good number of naïve political policy makers, that capital creates jobs, economic growth and prosperity – in its availability, accumulation, concentration, control and deployment.

Small wonder then that those same policy makers will see control of capital as the quick and easy instrument to uplifting the masses, not only feeding into populist misconceptions, but indeed labelling those who do own, control and manage capital assets as enemies of economic freedom. And if you can put a label to it like “white monopoly capital” you have created a convenient personified demon to become the scapegoat for all kinds of ills. We’ve seen much of that recently, revived under the “radical social and economic transformation” slogan. But it’s a subject rife with alternative facts and misconceptions that have to be challenged and unpacked in all three dimensions – ownership, control and management – and the relationship between them, before embarking on remedial policies.

More worrisome is the persistent notion that redistribution of assets and income is a superior remedy to disparities to economic growth itself. But blame that notion on the success of the capital supremacy spin. To be sure capital is vital to economic growth. It is the air that economies breathe. But economies do not live merely to breathe, and air is simply one enabler for a full economic life. That spin has disingenuously ignored a long standing intuitive truth: “Enterprise leads; capital follows”. And so do skills and other factors without which enterprise will be as hamstrung as it would be without capital.

Enterprise itself responds to the needs and wants of fellow human beings that makes up demand. In meeting those needs and wants it becomes supply, giving rise to another existential truth that supply exists because it serves demand. All I have done in my own writing, is to change the phrase from “supply exists because it serves demand” to “supply exists to serve demand”. That bit of impudence immediately raises the hackles of capital supremacists because it implies that customers rank above shareholders in an enterprise.

Their hysteria then drowns out important appendices:

·        That all transaction has to be guided by the three free-market pillars of supply, demand and price, and invariably problems arise not because the principles fail, but because they are severely warped by behaviour; and

·        That sensible wealth distribution has to meet the legitimate expectations of all of the stakeholders and encourage further contribution.

The ultimate reality is that tangible value, or wealth, can only be created when something useful is made for others – when it makes a contribution to other people’s lives. Wealth creation is indeed a reflection of service to another, and the source is customers, not capital, labour or even government. You can ascribe as many motives to the process as you like, but that existential truth will remain. Customers create jobs. Motives are irrelevant.

Rarely does one see a showdown between customers and shareholders. We witnessed one recently when the big bad builders joined an on fire Economics Minister Ebrahim Patel to announce the ownership and control transformation in the construction industry. Despite soothing platitudes of state/private sector co-operation in doing “the right thing”, which frankly it was, the handful of industry representatives were clearly uncomfortable – more like school-boys in the principal’s office. Patel held all the aces. Not that of judge and adjudicator of their collusive misbehaviour and not even as lawmaker. The ultimate power that he unleashed was that of being by far the industry’s biggest customer and the FOMO on a slice of huge infra-structure spending.

Of course Patel represents a single powerful customer. The power of ordinary individual customers is deeply and widely fragmented. When that comes face to face with large corporate entities driven primarily by shareholder interests, it crumbles and has recourse only to Consumer Protection bodies or courts. South African consumers seldom bother. But occasionally, perhaps not frequently enough, these entities are called to account, and shareholder-value arrogance is challenged. 

We had the perfect case study in the Ford Kuga incident. Those lengthy “procedures-to-be-followed” recourse on car recalls, and the view that recalls themselves are an admission of guilt, are clearly moulded by “cost/benefit” analyses that are such an integral part of maximising shareholder benefit. In the process, a model brand has been destroyed forever, and the outcome can still be hugely costly to the company. We’ve seen much of that globally recently. As clichéd as this may sound, you can never go wrong by doing the right thing. And the right thing is always to act in the customer’s interest first.

And then enter Rand rigging banks. Not a completely new story, and certainly not surprising to someone who has regularly cautioned about the power and potential parasitic behaviour of the financial services industry. But a puzzling, if not bizarre outcome all of these events is the surprising allegiance from the ruling party and even the E.F.F to the protection of free market integrity. Terms such as “break up cartels and collusions”; and “price fixing will not be tolerated”; and “price fixing creates distortions in the economy”, at best indicate some greater appreciation of working with markets rather than trying to control or ignore them. Hopefully it also reflects appreciation of an essential role of government in designing and enforcing the rules of fair play in free and open transactions.

To be sure, all markets are highly contaminated, especially those three essential pillars of supply, demand and price. But here’s the supreme irony: the biggest contaminators of these pillars, especially of price, are governments themselves. In South many critical prices such as energy, rail and road tariffs are arbitrary to say the least. And of course one of the biggest and most important prices in the economy – tax, or the cost of government – is completely removed from individual choice. The real question is whether this seemingly new and modest appreciation of the merits of free enterprise will temper its own behaviour as an important actor in the economy.

Emphasis on wealth distribution or redistribution will always be divisive. Emphasis on wealth creation, which translates into always putting the customer first, creates a common, unifying purpose.