You are currently browsing the category archive for the ‘Economics’ category.
I will make a decision on the caption competition soon, but meanwhile here is my latest news update and summary – the Madonsela story continues to grow and, frankly, should be encouraged to.
The Public Protector clashes with Zuma’s security chiefs
On Friday state security agencies abandoned their urgent interdict in the North Gauteng high court attempting to prevent the Public Protector Thuli Madonsela from a limited release of her report into the R206 million upgrade of Jacob Zuma’s Nkandla private residence. However Nathi Mthethwa (Minister of Police), Siyabonga Cwele (Minister of State Security) and Thulas Nxesi (Minister of Public Works) have indicated that they still expect Madonsela to bow to their various ‘security concerns’ – something the feisty Public Protector is unlikely to do. (She was speaking a few minutes ago, bemoaning the fact that she ever handed the report to this cluster of … securorats? … catch a preliminary reports of that here.)
Madonsela has used the security cluster intervention to ensure that a new key piece of evidence becomes public, namely that Jacob Zuma privately appointed Minenhle Makhanya Architects (who had no security clearance) to run the Nkandla project, but that the company was paid (upwards of R18 million) by the state. It will be increasingly difficult for Zuma’s security chiefs to sustain the argument that their ‘real’ concern about the report relates to whether it (the report) compromises the president’s security or, in fact, that the upgrade was essentially or mainly about the president’s security.
Jacob Zuma might be the quintessential survivor, but in the lead-up to a national election the strong indication that he and his family have personally and directly been the recipients of irregularly redirected state resources could be a serious problem for him and his party. The Sunday Times (17/11/2013) lead editorial is headed: “A suspect president and his questionable lieutenants” … the degree to which Jacob Zuma’s excesses make the ANC look bad is the degree to which he is vulnerable.
The EFF – running out of red berets just as Julius Malema goes on trial for fraud and corruption
The dilemma faced by Julius Malema’s new Economic Freedom Fighters (EFF), is that while the new party appears to be performing well there is a real possibility that some of the leadership could be in prison before the 2014 election. City Press, in its front page lead story (17/11/2013) reports of the growing EFF support: “(t)hey can be seen wearing their red berets on street corners, in public places, hangout spots and even at funerals where they go to recruit new members”. The Sunday Independent, however, points out that Julius Malema will go on trial for fraud, corruption, money-laundering and racketeering at the Limpopo Magistrates Court today – and that 3000 EFF supporters were expected outside the court.(Julius’s case has since been postponed till September next next year – which means he will be firmly in the running next year.)
I have had to constantly upgrade my estimates of how the EFF might perform in the 2014 election. I previously indicated my rough forecasts and promised that from time-to-time I would update my view. Well, here is my latest guesstimate:
To do as well as I indicate here the EFF would have to pick up previous ANC defectors (from Cope and the UDM) as well as a significant number of first time youth voters. The EFF remains the part of the story about which I am least confident – although strictly none of these figures can pretend to any scientific validity. A strong performance by the EFF (built as that party is around a rejection of Jacob Zuma and a rejection of the economic status quo) could set off a shockwave in the ruling party.
Cyril Ramaphosa on a ‘social compact’
Cyril Ramaphosa gave an interesting address to the Mapungubwe Institute for Strategic Reflection (dated November 17 and available as a pdf on Mistra’s website) where he usefully summarised government’s and the ANC’s position on economic development – namely that ‘a social compact’ is required.
The full address is well worth reading, but the essential point (from a financial market perspective) is the statement that:
“Significantly, perhaps most importantly, business needs to focus on building an economy that delivers sustainable returns to all stakeholders over a longer term, eschewing the chase for high profits in the next quarter.”
Earlier, he says:
“The commitment to greater capital investment demonstrated by government needs to be matched by a similar commitment from the private sector to invest in productive capacity and to contribute to employment creation.”
Ramaphosa’s ‘social compact’ is another, perhaps more sophisticated, version of mining minister Susan Shabangu’s comments during an exchange with Gold Fields CEO Nick Holland at a recent conference in Australia:
“Investors must realise they have a responsibility to the country and cannot work to a bottom line that has no heart or soul at all … They have to understand there are various socioeconomic needs of the various partners … If investment will not improve the quality of lives — and recognise that workers also need to live decent lives — it will not be able to bring stability in South Africa … We are a country that, in the past, saw investment coming in that never contributed to ensure that the future of workers would be better.”
Shabangu’s and Ramaphosa’s comments indicate an economic strategy that consists primarily of insisting that private business surrender up the investment, employment and social spending that it is, supposedly, withholding. It indicates a poverty of economic understanding in government and the ANC that is deeply unsettling.
Bits and Pieces
- Next weekend the Democratic Alliance meets in a special federal council during which the party is expected to attempt to deal with tensions around support or otherwise for the Employment Equity Amendment Bill. As the DA’s black membership grows the party will come under ever greater pressure to support both employment equity and black economic empowerment more generally. It is my view that this is a baseline assumption in South African politics – and the DA either will not break through its racial ceiling or it will shift on this policy matter.
- Winnie Mandela, in an interesting interview in the Sunday Independent (17/11/2013), claims that Nelson Mandela has lost his voice – and is only able to ‘communicate with facial gestures’. She also said “the “poorest of the poor are seething with rage and whether our government is aware of the anger of the people, I do not know.” She also said: “I can’t blame Julius for what he has done because we, the ANC, are responsible for that … we would be foolish to think he is not a player or that he is not changing the political landscape … these are very dangerous and worrying times.” Winnie Mandela’s political affiliations are a good weathervane of the degree to which the ANC is – or isn’t – fragmenting. She is likely to stay within the ANC, at least while her ex-husband lives.
- The Business Day today (18/11/2013) reports that moves are afoot in Cosatu to suspend or expel the National Union of Metalworkers of SA (Jacob Zuma’s key critic in Cosatu and Zwelinzima Vavi’s key ally). If the Jacob Zuma aligned faction achieves the objective of getting rid of Numsa and Vavi it is likely to precipitate the formation of a competing union federation and, possibly, a new political party of the left. The moves against Numsa seem like the actions of a weak and authoritarian core and are unlikely to achieve a unified and strong ‘ruling alliance’. In fact I suspect that the opposite will be the case.
As promised some comments on the politics of Pravin Gordhan’s medium-term budget … but first forgive me for expressing some of my irritation at two of his (Gordhan’s) recent statements.
That will be followed by some of the bits and pieces I found interesting in the weekly newspapers – if you didn’t see the ‘Zuma gaffes” selection in the Sunday Times and City Press I reproduce some of them here.
Look I am not yet ready to start calling him a tubby little tyrant with the charisma of a mud prawn but Pravin Gordhan has been saying some things that are not hugely endearing.
First he told a joint parliamentary committee that negative news flow from ‘the media” was partly responsible for sovereign downgrades of South Africa’s debt. So what, he thinks Moody’s, S&P and Fitch get their understanding of government policy from the Sunday Times? It is just a stupid thing to say and makes him sound just like a National Party ministers circa about 1986. Catch that here.
Secondly, responding to the flurry around South Africa’s cancellation of its bilateral investment treaty with Germany he “blamed lawyers serving the private sector for increasing uncertainty in South Africa’s investment environment” – catch that Business Day story here .
I didn’t personally hear Gordhan in either of these instances but there might be a pattern emerging:
Okay, I am glad I got that off my chest – on with the rest.
Political messaging and the medium-term budget – all good
If political messaging was all that we were looking at in the MTBPS then we would have to conclude that Pravin Gordhan’s performance was overwhelmingly financial market positive. Obviously ‘messaging’ doesn’t determined the price of eggs or the price of much else. The believability of Minister Gordhan’s various estimates and projections is ultimately more important for determining sovereign risk, but the overt politics of the message indicates a more confident government prepared to stand on organised labour’s toes to reassure global capital markets (and other investors).
Firstly, Gordhan was on message with regard to the Employment Tax Incentive Bill. This is the latest manifestation of the youth wage subsidy and has been bitterly opposed by Cosatu and, to some degree, by members of the SACP (for reasons that I have explained elsewhere). It is unclear whether the policy will make a significant dent in South Africa’s serious youth unemployment problem (which deputy minister of Finance Nhlanlha Nene recently put at 42% for those aged between 19 and 29) but what the rating agencies have been looking for is signs that the ANC and government can forge policy independent of, especially, Cosatu – and in this confident assertion by Gordhan they have their signal.
Secondly, the Finance minister cast the MTBPS – and, in fact, all future budget statements – as the accounts of the National Development Plan (NDP). Again, the NDP is bitterly opposed by Cosatu – and is less than warmly regarded by the SACP. It is a confident Jacob Zuma that backs his Minister of Finance to define government budgeting as : “(t)aking the National Development Plan as the point of departure”.
The NDP is little more than a shopping list and a general statement of intent but it generally conceives of the market as the appropriate mechanism for the allocation of capital (at least more so than the New Growth Path and the Industrial Policy Action plans do). It also puts the infrastructure plans and improving capacity and accountability of the public service as key planning objectives. There is no evidence that the ANC and the Zuma administration is going to succeed in moving beyond planning to implementation, but Gordhan made the right noises in his speech.
Thirdly Gordhan pressed every conceivable button in his attempts to tone down excesses in the executive and the public services. He placed a number of ceilings on luxuries, cars, travel, catering, accommodation, use of credit cards – and amongst the Twitterati the cry went out: Gordhan derails the gravy train!
Again this is good form but we have to keep an eye out for the content. After all this is a government led by a president deeply implicated in the ambitious abuse of various privileges. It is going to take a more than fine sounding words to convince the country that the gravy train has, in fact, been delayed let alone derailed.
Fourthly the key political aspect of political risk in relation to the budget is the commitment to restrain growth of the public sector wage bill and social grants – two pillars of both political stability and continued electoral support for the ANC. Obviously the minister (at this stage the apparently tough and skilful Lindiwe Sisulu) in public service and administration will have to hold the line in public sector wage negotiations – we will have to wait to see how that plays out, but Sisulu is the right person for the job of holding that thin red line.
Loud and widespread muttering about power struggles in the Democratic Alliance
It should probably be seen as a sign that the Democratic Alliance is on the verge of breaking out of its previously narrow ethnic base that the fine details of its internal power struggles are becoming a matter of national public debate. All the major weeklies discussed a putative succession struggle between the DA’s national spokesman and candidate for Gauteng premier, Mmusi Maimane and the DA parliamentary leader Lindiwe Mazibuko. The point being that Maimane’s supporters are pushing for him to be on the parliamentary list so that if the DA does not win Gauteng next year (dah!) he will still get into parliament.
Obviously the Democratic Alliance believes that it needs a black leader if it is to make a serious dent on ANC support in 2019 – but the matter is not so pressingly urgent that they are likely to dump their extremely successful and popular leader Helen Zille any time soon. I still think there is space for an amalgamation of the DA and AgangSA after that new party performs adequately but fails to shoot out the lights in 2014. That will leave the tantalising possibility of Mamphela Ramphele finding her way into the top leadership of the DA some time in about 2016. So of the three potential black leaders of the DA, Maimane probably has most township credibility and would represent the DA going out there head-to-head with the ANC for the African vote. Lindiwe Mazibuko would be the most palatable for the DA’s traditional support base (yes, we all know who I mean). And Ramphele, with her struggle credibility and achievement in academia and business seems like a perfect – and heavy hitting – compromise. She might need a charisma injection, but that is purely a personal observation.
Mozambique – Renamo rears its scarred and ugly old head
The Mozambique army overran a key Renamo base in central Sofala province on Monday last week and Renamo guerrillas hit back on Saturday by ambushing a minibus, killing one person and injuring 10 more.
This might seem like small cheese, but Monday’s government attack has forced Renamo opposition leader Afonso Dhlakama to flee into the bush and has raised the spectre of the restart of the 16-year civil war which ended in a 1992 peace pact that established multi-party democracy in Mozambique. Renamo has lost every election since 1992 but Dhlakama’s party said on Monday it was abandoning the peace agreement. In and of itself what has happened over the last week is not huge, but in the context of the hopes for Mozambique’s economic growth as that country emerges as a natural gas giant, Renamo becomes a significant risk that needs careful attention.
The Cosatu vortex is sucking in everyone in – this is a clear and present danger
This weekend the national general council of the powerful South African Democratic Teachers Union lined up in precise opposition to Numsa in the on-going and bitter struggle taking place in Cosatu. Sadtu backed the disciplinary process against Zwelinzima Vavi, it vigorously opposed the holding of a special Cosatu conference and it unequivocally backed the ANC in elections next year.
My own (perhaps counter-intuitive) view is that the only way for Cosatu to remain as a functional federation and part of the ruling alliance is for a special congress to be held during which Zwelinzima Vavi wins the popular vote, escapes disciplinary action for his various infractions (both the real ones and the made up ones) and Numsa decides to stay in the federation. However, it is looking increasingly like the ANC loyalists are going to force Numsa, Vavi and their various allies out of the federation. Note that Sadtu itself is facing something of a minor palace revolt after receiving threats from some of its own members who are angry at the suspension of the union’s president Thobile Ntola for supporting Zwelinzima Vavi. Yes the key Zuma and ANC allies in Cosatu can force the leftist critics out of the federation but that will lead to a split – and, in my opinion, cascading instability throughout the labour sector as Numsa and others compete in every workplace against the incumbent Cosatu union. This outcome is closer than ever and it appears to me can only be averted if a special Cosatu congress is allowed to take place and that a likely democratic victory by Numsa and Vavi is allowed to carry at any such conference. It would stick in some ANC craws, but it would re-establish the status quo of a restive Cosatu that remains a faithful, if critical, ANC ally.
Jacob Zuma provides some light relief
Politicians often say things that outrage some and delight others by providing grist to the social satirist’s mill.
Jacob Zuma provided a gem last week when he said:
“We can’t think like Africans in Africa, generally; we’re in Johannesburg (the N1 is) not some national road in Malawi”.
(Gauteng ANC manifesto forum – October 21 2013)
This provided the opportunity for several journalists (most notably Gareth Von Onsellen in the Sunday Time and Carien Du Plessis in the City Press) to aggregate some of Jacob Zuma’s more illuminating gaffs from the last several years. Here, purely to save you from having to dig into the papers yourself, are some of those:
“I’ve always said that a wise business person will support the ANC … because supporting the ANC means you’re investing very well in your business”
(ANC 101st anniversary gala dinner in Durban – January 12 2013)
“Sorry, we have more rights here because we are a majority. You have fewer rights because you are a minority. Absolutely, that’s how democracy works”
(President’s question time in the National Assembly – September 13 2012)
“Kids are important to a woman because they give extra training to a woman, to be a mother.”
(SABC interview with Dali Tambo August 19 2012)
“Even some Africans, who become too clever, take a position, they become the most eloquent in criticising themselves about their own traditions and everything”
(Speech to the National House of Traditional Leaders November 1 2012)
“When you are carrying an ANC membership card, you are blessed.”
(Address to ANC supporter in Easter Cape – February 4 2011)
“The ANC will rule South Africa until Jesus comes back.”
(Gauteng ANC special council – March 15 2004)
We don’t want to review the Constitutional Court; we want to review its powers.
(Interview in The Star Newspaper – Feb 13 2012)
When compared with other famous presidents Zuma’s gaffes are fairly benign … (hmm I am no longer as sure that those are quite as benign and cute as I thought they were when I wrote that early Monday morning … but I will let it stand for now.) What is interesting is how socially conservative some of his off-the-cuff comments are. It gives some insight into the gradually building pressures in the ANC with regard to appealing to an urban professional class versus traditional rural groups. There is no question that Zuma represents only one of those choices.
Bits and pieces
- Pravin Gordhan’s medium-term budget statement received both criticism and praise. Cosatu’s spokesman Patrick Craven described it as “a conservative macroeconomic framework predicated on a neo-liberal paradigm”. Piet le Roux, the senior economic researcher at Solidarity (coming, in some ways, from the other side of the spectrum) said Gordhan’s mini budget was based on an “unsustainable model of deficit spending, mounting government debt and onerous taxation”.
- The Association of Mineworkers and Construction Union (Amcu) announced on Friday (25/10/13) it would consult its members on a possible strike after it received a certificate to strike at Impala Platinum (Implats) when wage negotiations deadlocked. Amcu is demanding a basic salary of R12 500 a month for underground workers and R11 500 for surface workers.
Forgive the dearth of postings here … I was brought low by some late winter dreaded lurgy and as a result my life came to grinding halt for almost two weeks.
The big story (which I will deal with later today or tomorrow) is the astonishingly decisively manner in which the ANC and its government is blocking Cosatu on a whole range of policy issues … immediately prior to an election.
Later today I will attempt to assess whether the medium-term budget policy statement holds the same line, particularly with regard to the public sector wage bill. If it does then I am going to have to start reassessing whether Jacob this-isn’t-some-African-shithole Zuma is quite as soft-in-the-middle on policy as I have previously asserted. The implications of the putatively shifting position are huge and, I suspect, driven by a complex and contradictory set of factors.
Meanwhile here is an excerpt from my weekly news commentary describing the rising decibels and pitch of the moan coming from business and its representatives (and from financial markets in general) around policy, especially policy related to the labour market. The ascending pitch and loudness of the whine are undoubtedly two of the factors pushing Zuma’s showdown with Cosatu – but I think it would be premature to think of the president’s actions as primarily about bowing down to business and the diktats of global capital markets.
South Africa deteriorating investment destination
Complaints about South Africa’s hostile policy environment are getting louder.
Pepkor chairman Christo Wiese added his voice to a chorus complaining about a hostile investment environment in South Africa. In other African countries “infrastructure is improving, border crossings are becoming easier, more property development is taking place and, in some cases, they are offering more opportunities.” But in South Africa government is “certainly not cooperative” and “one is left with the impression that government sees business as the opposition, not as a partner … you can’t have German rules because we can’t administer them,”
The wizened and iconoclastic Christo Wiese held up Angola, Nigeria and, especially, Rwanda as improving business destinations. South Africa’s labour regime, according to Wiese, is becoming one of the greatest inducements to invest in other African countries. (Wiese was quoted in an interesting interview with Chris Barron in the Sunday Times 22/10/2013 – here’s a link to the republished article in Business Day … Barron is always interesting and not to be missed in your weekly news read.)
Wiese’s comments came soon after Moody’s Investor Services said in a credit opinion on 12 October that South Africa’s elevated strike activity continues to affect the investment climate. “BMW’s announcement that South Africa has been removed for consideration for the new car is tangible evidence of the negative impact that the increase in work days lost to strikes in the past two years is likely to pose for the medium-term outlook of the economy … Such decisions are likely to be repeated by other companies when such significant losses are incurred -” Bloomberg and Moody’s Credit Opinion 12/10/2013.
In the same week Amplats CEO Chris Griffith said (after the company was again battered by strikes) that it “is not possible that we can continue with these kinds of strikes, which are having an effect not only on the mining sector but all sectors of the economy. It’s hurting the economy … It is impacting jobs” – Business Day 16/10/2013.
From extensive plans to cut 230,000ozs of achievable platinum as well as 14 000 jobs announced in January this year, Amplats appears to have been steadily successfully bullied back by unions, government and the ANC from doing what it initially intended.
Read against South Africa’s scores in the recent WEF Global Competitiveness Report 2013 – 2014 (click here for a full copy) some of this anxiety seems justified. While South Africa is ranked 53rd this year out of 148 countries, the quality of the educational system is very poor at 146th, as was labour market efficiency at 116th – and ‘hiring and firing practices’ and ‘wage flexibility’ at 147th and 144th respectively. The ability of the employer to respond quickly to changing production needs for skills and size of workforce is called ‘labour market flexibility’- and aggregating our performance in these categories suggests a serious deficit compared with our peers.
Okay, so that sets the background for a follow-on post (today or tomorrow) dealing with the now unavoidable conclusion that Zuma’s government appears to be risking the wrath of its left-wing allies with regard to a range of policy measures. The important question to answer is ‘why’ is the ANC drawing the line? And why now?
I was looking for a shorthand way of summarising what I thought were the main political risks that are in the minds of investors in South African financial markets.
Note that the emphasis here (in what appears below) is what I think is an appropriate prism for investors in financial markets, and specifically those with an horizon of a maximum of 5-7 years.
If I was looking at broader security issues, particularly with regard to the stability of the state and ruling party, I would have had a significantly different emphasis – and have aspects that are both more negative and more positive than that which appears below. Hopefully, at some time in the future, I will post here a more general threat or risk analysis that would be of more specific relevance to South Africans who hope to live and work here.
Finally, before I get on with it, I do not explore the potential for an upside suprise here … but there does appear to me to be a slight accumulation of good news, albeit against a dark background.
SA Politics and financial markets – 3 risks
- Unpredictable and/or negative government economic policy interventions: Medium seriousness. Medium likelihood. Short- and medium-term duration (next few months to five years);
- Escalating social unrest – perhaps leading to “Arab Spring” type event: Very serious. Very unlikely. Medium- to-long duration (five to seven years);
- Ratings downgrades and tension between ambitious government plans and narrowing fiscal space: Serious risk. Medium likelihood. Short- and medium-term duration (one to three years).
Unpredictable and/or negative government economic policy interventions
Medium seriousness. Medium likelihood. Short- and medium-term duration (next few months to five years)
What it’s about: Most obvious are new interventions in the mineral and exploration sectors (including new taxes, price setting, beneficiation requirements, export restrictions, uncertainty about licence conditions and significantly increased ministerial discretion via the Mineral and Petroleum Resources Amendment Bill), but there are comparable interventions across the economy, as indicated in the ANC’s Mangaung Resolution and in a range of proposed regulatory and legislative changes, including those relating to telecommunications, liquid fuels, the labour market, employment equity and Black Economic Empowerment (to name just a few).
My view: Since 1994, it has generally been the case that markets consistently overestimate the risk that the ANC and its government will take significantly populist policy measures. The best example of this was in July 2002, when exaggerated targets for black equity participation in the mining sector where leaked and R52b left the JSE resources sector in 72 hours – a buying opportunity of note. However, the traction Julius Malema was able to achieve with disaffected youth post-2009 and the implicit defection from the ANC and its allies in the platinum strikes last year have catapulted the ANC into something of a policy scrabble. While nationalisation is off the agenda, it has been replaced by a policy push that hopes to deploy private companies, through regulation and other forms of pressure, to achieve government (and party) targets of employment, revenue generation, service delivery to local communities and infrastructure build. Increases in the tax take look likely – it’s purely a question of ‘how much the market can bear’.
Government intervention, per se, is less the issue here but rather the confused, generalised and uncertain nature and intent of the interventions. If the interventions do not have the desired results (growth, employment and equality), the risk is that government does not reassess the wisdom of the intervention, but instead uses a heavier hand.
Financial markets: Policy uncertainty puts downward pressure on investment, employment and output in all sectors. In South Africa, these negative impacts will be felt most keenly by companies most exposed to government licencing and regulatory power, or most exposed to government’s political prioritisation. Resources, telecommunications and agriculture all fall into one, or both, of these categories.
Escalating social unrest – perhaps leading to “Arab Spring” type event
Very serious. Very unlikely. Medium-to-long duration (five to seven years).
What it’s about: Significant and consistent (apparently linear) growth in service delivery protests, combined with growing levels of industrial unrest (in 2012, anyway) seem to imply that such unrest could continue to escalate until it reaches a point of ‘phase state change’ (as in thermodynamics, referring to changing states of matter – to/from solid, liquid and gas). Thus, the risk is of a sudden systemic shift from unstable to revolutionary/insurrectionary.
My view: Increasing protest and industrial unrest are normal – and fairly consistent – features of South African political life and have been since at least the mid-1970s. Even before 1994 there was no real expectation that unrest would lead naturally to insurrection. A rapid phase state change, like an Arab-spring type event, requires (perhaps indirectly) contesting political formations and ideologies as well as the widespread failure – or absence – of social institutions (parliaments, courts) that direct, mediate and give expression to grievances and/or conflicting group interests. South Africa is rich in such institutions and there is no evidence that large groups of dissenting voices have permanently failed to find expression in society’s normal processes and institutions – even when some of those processes include robust forms of public dispute. However, South Africa does have some comparable features to countries that have had ‘Tunisia-moments’ – including high and growing youth unemployment, high levels of visible inequality and serious government corruption – so we would keep an eye on the escalating ‘service delivery protest’ trends, as evidenced in graphs from Municipal IQ below.
Industrial relations unrest is slightly different from – and more negative than – the question of social unrest as a whole. Trade unions are strong and growing in South Africa, and contestation between them is vigorous, even violent – as we saw in the platinum sector in 2012. Trade unions are businesses with an enticing annuity income flow – and this will drive their contestation. The collective bargaining system in South Africa is functioning sub-optimally for a number of reasons – including inappropriately high levels at which automatic recognition kicks in – and the disarray in the system also drives unrest. This conjunction of subjective and objective conditions means I am less sanguine about industrial relations stability (than about stability per se) and expect this to remain a negative investment feature for the next several years. I am specifically negative on public sector industrial relations stability for 2013.
Thus, I do not think unrest and social discord will lead to any radical policy or political discontinuities, but will remain a constant drain on confidence. I also think this phenomenon will tempt government into keeping spending (on the public sector wage bill and on social grants) at above-inflation levels – helping to feed uncertainty and unpredictability in state finances, inflation, the currency and the bond markets.
Additionally, I think labour unrest will remain a seriously destabilising factor of production – including via disruption of services in public sector strikes.
Resources, agriculture and construction are most exposed through their reliance on large, aggregated and often low-skilled/low-pay labour forces. The financial services and retail are less exposed to (but not immune to) the negative effects of industrial action.
Ratings downgrades and tension between ambitious government plans and narrowing fiscal space
Serious risk. Medium-likelihood. Short- and medium-term duration (one to three years).
What it’s about: The ruling party is facing something of its own ‘fiscal cliff’. The ANC feels itself in danger of losing some support because of failure to deliver employment growth or adequate reductions in poverty and inequality. Foreign investors agree this is a risk, but will not necessarily agree to fund the gap. This tension is among the reasons that all three major rating agencies (Moody’s, Fitch and S&P) downgraded SA’s sovereign rating in 2012 (Fitch in January this year) and both Moody’s and S&P put SA on watch list for future downgrades. The ANC secures political support, at least in part, through spending on the public sector wage bill and on social grants – which together now make up more than half of annual non-interest government spending. Additionally, the ANC has occasionally shown itself hostage to the views of its alliance partners or popular opinion in its spending and revenue plans (Gauteng toll-roads, youth wage subsidy). The ratings agencies don’t like the tension and I expect the bond markets won’t either.
My view: South Africa maintains respectable debt-to-GDP ratios, although these grew to 39% of GDP by end-2012, substantially higher than the 34% for emerging and developing economies as a whole. When Fitch downgraded SA earlier this year, it specifically mentioned concerns about SA’s rising debt-to-GDP ratio, given that the ratio is higher (and rising at a faster pace) than the country’s peers.
South Africa is uniquely (eg in relation to its BRICS peers) exposed to foreign investor sentiment through the deficit on the current account combined with liquid and deep fixed interest markets. SA’s widening deficit on the current account is a specific factor that concerns the rating agencies and is one of the metrics the agencies will use to assess SA’s sovereign risk in the near future. Further downgrades are the risk – potentially driven by foreign investor sentiment about political risks. Non-investment grade (junk bond status) is not an inconceivable future rating.
Financial markets: A significant sell-off in the rand, coupled with persistent currency volatility and reduced foreign capital inflows. Traditionally this scenario would mean investors look for rand hedges and attempt to get exposure to export-orientated sectors, including manufacturing – and to stay out of the bond market. Offshore borrowing costs will be raised for domestic companies – as well as for the country as a whole. This risk has an internal feedback loop (downgrades make debt more difficult to pay, leading to further downgrades) and naturally feeds other political risks, including in relation to taxation, clumsy government intervention, social stability and property rights.
Nedbank chairman Reuel Khoza provides the lead headline in today’s Business Day as “warning of a rogue state future for SA”.
So imagine if you could, for a moment, that you are playing a sports game.
As in a dream, you suddenly realise you don’t know the rules; you don’t know how to score, who’s on your side or what the parameters of the field are.
This could be a comical situation – and I am sure I remember boys from my school days whose mystification on the rugby, cricket or hockey fields would bring a gentle smile to our (his team mates’) faces.
But this is also the stuff of nightmares: an inscrutable world where what happens happens for reasons entirely mysterious, where people are motivated by incomprehensible impulses and the dread of the unknown builds and builds.
I am sure I am not alone in having worked in a dysfunctional institution?
I mean something worse than a j0b in which you are poorly paid and have a psychopath for a boss (entry level experience requirements for human adulthood as far as I can make out).
A dysfunctional institution is one in which the sum total of what the organisation achieves appears to be at-odds with its explicit mission.
I am suggesting something worse than an organisation that doesn’t achieve what it is designed to achieve. I am suggesting that in some instances a deeply dysfunctional organisation can, when everything is aggregated, achieve the very opposite to its stated purpose is.
Which brings me to the institutions of the South African state.
I am occasionally lucky enough to get hold of some excellent economic commentary written by Sanlam Group Economist Jac Laubscher and published on that company’s website. In his most recent contribution (which appears here) he takes some concepts from Why Nations Fail: the Origins of Power, Prosperity and Poverty by Daron Acemoglu and James A Robinson (book I haven’t yet read, but will do so on the back of Jac’s comments) and hints at how they might be applicable to South Africa.
According to Laubscher, Acemoglu and Robinson suggest that the dominance of “inclusive institutions” over “extractive institutions” is the difference between success or failure of nations.
Inclusive institutions harness and unleash human creativity and incentivise citizens and workers to give of their best.
As Jac Laubscher summarises:
Inclusive institutions are characterised by guaranteed property rights (vital for investment and productivity growth), an impartial legal system that upholds contracts, the effective provision of public services to create a level playing field, space to create new businesses, and the freedom to choose one’s career.
“Extractive institutions” in the words of Jac Laubscher:
… are aimed at extracting income and wealth from one section of society to the benefit of another section of society, usually the elite. In fact, extractive political institutions are the means by which the elite enrich themselves and consolidate their political dominance.
It is a fairly simple matter to demonstrate that to some degree key state and semi-state institutions and processes in South Africa have become mechanisms for extracting wealth by the politically connected elite.
But a key qualifier here is “to some degree”. I don’t think the state has yet, unambiguously, become an extractive tool of the political elite. But it is obvious that at least part of the political elite is struggling mightily to shape our institutions to and for that purpose.
Yesterday I listened to Trevor Manuel deliver the National Development Plan to a joint sitting of parliament. At the same time the the Constitutional Court was hearing an application by the Treasury and Sanral to set aside the April interim interdict granted by North Gauteng High Court halting e-tolling and mandating a full review of the system.
My views on both Trevor Manuel and e-tolling are ambiguous – they both have their good and bad points – but I appreciate the subtlety and complexity of what the National Planning Commission has tried to achieve … and I celebrate the fact that we have a Constitutional Court we can trust with decisions like the one it was busy with yesterday*.
But the institutions of our society are not yet the corridors of the predators’ labyrinth – but we’d be foolish to ignore the signs.
* The Concourt matter is important for a number of reasons, but the aspect that interests me professionally, is part of what is happening is driven by the fact that the Treasury feels the need to defend its credibility as a borrower. I suspect that the rating agencies are happy that the Treasury is fighting this matter but are anxious that they might lose. The lender wants to be certain that the entity to whom it lends is properly able to make the agreement to pay the money back. The Treasury is ultimately arguing that the North Gauteng High Court ruling means no lender to the South African government can be sure that the courts might not declare, in effect, that government was legally incompetent to make the decision in the first place – significantly increasing default risk.
It is no easy matter to explain how a paragraph from Michael Ondaatje’s poem “The Cinnamon Peeler” speaks to me about the ANC’s economic policy process.
The poem is a sensual delight – quite unlike the ANC’s policy discussion.
Anyway … here is the relevant paragraph:
what good is it to be the lime burner's daughter left with no trace as if not spoken to in the act of love as if wounded without the pleasure of a scar.
(Catch the whole poem here – you will be glad you did)
Who could have believed anything other than that the ANC’s recent policy conference was a momentous event, a sharp delineation between one stage and another?
The promise was in the ‘economic freedom in our lifetime’ campaign, the calls for nationalisation of land and mines, the National Development Plan and the ANC’s policy discussion documents themselves.
The sense that some big change was imminent built towards the conference and then the news flow from the event spoke of deep geological shifts; shudders that shook the body politic.
And then … nothing.
Or rather the shifts were so subtle that it all felt like a new version of Kremlin watching (that popular art – masquerading as science – peddled by professional Western political analysts and historians circa 1955-1988 of predicting the future of global politics from who stood where on Soviet platforms).
Carol Paton, writer at large at Business Day, covered the recent ANC policy conference in a piece that should be required reading for anyone who wants to understand the subtleties – and intrinsic weaknesses – of the process.
She argues that little has actually changed in ANC economic policy since the first conference after the unbanning in 1992 – and what has changed is slight and nuanced.
Paton’s more general point is that the discussion is inherently flawed:
Economic debate in the ANC occurs in a strange, abstract and ahistoric vacuum without reference to what really happens in an economy. For most of those involved in the discussion — who are delegates from branches but also often public representatives — the sole reference point for how change might be effected in society is through the exercise of political power.
Paton argues that almost none of the ANC members and leaders involved in policy discussion “have had the experience of running or managing an operational business or even of operating in the economy in any way other than as a public representative or government official.”
The article is well worth a read – catch it here.
For me the important bit is the disjuncture between the promise/threat of radical change and the actual outcomes.
As we head towards Mangaung it is likely that noise arising from the ANC internal politics will once again begin to imply that we might be heading towards some radical discontinuity in economic policy.
Obviously our markets will be weaker than they otherwise would have been because of this sense of uncertainty.
I am fairly certain that come the morning after Mangaung we will comb our body for a trace of the change we thought must be a consequence of that event that presents itself as so profound … but we will find that we have been wounded without the pleasure of a scar.
But unlike kid’s telescopes – which, like kid’s microscopes, were blurry and disappointing and stupid – the kaleidoscope was a device of astonishing power and beauty.
The simple expedient of twisting one end caused visions of astonishing, luminous, grandeur to pour out the other.
I can still feel that tingling as if I was balanced on a precipice, reaching out to shape a whole universe; causing tectonic shifts in the intrinsic structure of reality … okay, maybe not that last bit … but you get the point.
Such power … and I had absolutely no idea how it worked.
My “device of power and beauty” was a semi-rigid cardboard tube with loose coloured translucent beads or pebbles in the end and two mirrors running lengthways up the inside, duplicating images of the transparent junk that tumbled as the tube was rotated.
My first kaleidoscope wilted in my sweaty, meglomeniacal hands a few hours after I had torn it from its pretty wrapping – and I cut myself on a broken piece of mirror as I desperately pounded it to make it continue producing those wondrous images.
Which brings me to my worries about ANC policy making.
I am slightly more worried today than I was when I wrote the piece below (July 2) just after the conference.
That is partly because I have thought further about some of the issues and partly because the consensus points within the ANC seems to be slippery – and therefore uncertainty is rising.
In short my worry is that the ANC is approaching more vigorous economic intervention with the enthusiasm and growing expectations of my six-year-old self after he first looked through his pretty new cardboard tube.
I think the likelihood of this all ending in tears in increasing exponentially – and the reasons are not very different from those that caused the ruin of my first kaleidoscope and my cut finger.
I will pursue this theme (the threats involved with increasingly desperate state interventions – especially those that worsen the problems they promise to fix) in future posts, but first my initial take on the conference; written just after having read the particularly awful English language Sunday newspapers of July 1:
Much ado – and confusion – about the ANC policy conference
The teams of journalists from the political desks at the Mail & Guardian, the City Press, the Sunday Times and the Sunday Independent could have been covering different conferences given the divergence of their understanding of what went down at Gallagher Estates in the Midrand from Tuesday to Friday last week.
This is my first attempt at a distillation of the main points – partly of the coverage, partly of what was supposedly being covered:
- Debates about policy and the struggle over who will be elected to the top positions in the ANC at the National Conference in December became blurred, to the detriment of both.
- The “Second Transition” concept became associated with Jacob Zuma (even though it was penned by his factional enemy, Tony Yengeni) and its rejection by most commissions at the conference was interpreted as a set-back to Zuma’s re-election campaign.
- The power struggle obscured the fact that there was general consensus that transformation is “stuck” and radical and urgent action to hurry the process along needs to be taken if the ANC is to keep the trust and support of its majority poor and black constituency.
- The report-back to plenary of the key breakaway commission on mining became the most blurred moment, when Enoch Godongwana presented a summary of the views on the state’s proposed involvement in the mining sector – with pro-Zuma provinces KwaZulu-Natal, Mpumalanga and Free State tending to go with the SIMS compromise and the other six provinces tending to support the ANC Youth League in a strengthened nationalisation position.
- When consensus is finally reached, it is likely to include an even stronger role for the state-owned mining company – perhaps giving it the right to take significant stakes in all future mining licenses issued. Absolute taxation levels might be an area of compromise between the state and the mining sector in negotiations about this matter in the final lead-up to Mangaung where policy will be formally decided.
- There was broad consensus that the state could and should force the sale of farmland for redistribution purposes and that an ombudsman be appointed to determine ‘a fair price’ – to prevent the process being frozen by white farmers holding out for better terms. It is not clear whether this would require a constitutional amendment.
- There was general consensus that the Media Appeals Tribunal is no longer necessary, that the number of provinces needs to be reduced, that the proposed Traditional Courts Bill is reactionary and against the constitutionally guaranteed rights of women and children in rural areas, and that the youth wage subsidy (as a tax break to employers) had to be sweetened, or replaced, with a grant directly to young job seekers.
- The push for “organisational renewal” will require a number of changes: a probation period of 6 months for new members, a 10 year membership requirement before such members can be elected to the NEC, a reduction of the size of the NEC from 80 to 60 members and a downgrading of the status of the Leagues (women, veterans and youth) so they more directly serve the interests of the mother body.
So if this was a soccer tournament, what is the score?
The City Press led with “Tide Turns Against Zuma”, but frankly I think this is more about that newspaper’s preferences than anything else. The ideological disputes in the ANC are complicated but broadly follow an Africanist/nationalist group versus a SACP/Cosatu/anti-nationalist group. Neither Jacob Zuma nor Kgalema Motlanthe are clearly in either camp (but Zuma tends towards the former and Motlanthe towards the latter). Only one potential challenger, Tokyo Sexwale, is firmly in one group (the nationalists, which is the ideological home of the ANC Youth League) and he has more chance of passing through the eye of a needle than winning this competition.
Only Motlanthe could seriously challenge Zuma in a succession race and despite all the rumours and leaks it is by no means clear whether he has any intention of running – or, if he did, whether he would have a significantly different policy agenda than that being pursued by Zuma and his backers.
It’s tempting to focus on the ANC as if its history and prospects are a proxy for the history and prospects of the country as a whole.
The party’s centenary celebrations this week will strengthen the sense that this is indeed the case.
The last hundred years of South African history has been about the formal subjugation of the black inhabitants of the country by European colonial powers and settler groups; the fight for national liberation and self-determination; the victory and then seventeen years of the complex process of democratic rule.
Running like a spine through that body of history is the African National Congress - which not without some legitimacy claims to be the organised expression of black people’s struggle to be free of colonial and then apartheid oppression and exclusion.
Then in the same way that the back bone’s connected to the … neck bone it follows naturally that post-1994, given the ANC’s overwhelming dominance at the polls, the party can legitimately be seen as the ongoing expression of black South African’s attempts to govern themselves and use the state to redress the inequalities and distortions caused by that apartheid and colonial past.
So this week the ANC celebrates its 100th anniversary, kicking off with a centenary golf day (for only the luckiest of revellers) and including gala dinners, interdenominational church services and culminating in a public rally in Bloemfontein (Mangaung) on Sunday January 8.
The sense that the ANC is a proxy for the country itself is strengthened by the fact that this year will culminate in and ANC national conference electing a leadership that will, almost automatically, become the leadership of government after the general elections in 2014 – again, given the ANC’s electoral dominance.
Additionally an ANC policy conference in July will pronounce upon a range of matters concerning the role of the state in the economy and it promises to make policy on (amongst other matters) the nationalisation of mines and the expropriation of white owned farm land – with or without compensation.
But hang on a moment …
One of the key tasks of political parties in their struggle to become or remain the party of government is to present their agenda as identical to the national agenda, their leadership as automatically the national leadership and their interests identical to the national interest.
The ANC can legitimately point to how central it is to South Africa’s political and cultural life, but as we wilter this week under the the searing overstatement of that message it is useful to bring a few proviso’s to the front of mind.
We are a country with a small, open economy nestled in the most depressed region of a world overwhelmingly interconnected and subject to monumental forces that grind their way irresistibly through the Ozymandian vanities of governments significantly more powerful than ours.
The more we learn about the world and the history of human societies the more apparent it is that we have been hopelessly overoptimistic about our ability to understand let alone predict how the complex systems of our economies, national entities, ecological systems and cities function, evolve, collapse and change.
I am sure that this week newspapers will be full of huffy assertions that the ANC does not represent “the nation” and therefore treating its centenary as if it was a sacred ritual akin to Fourth of July in the United States (which celebrates independence from Great Britain in 1776) is a travesty.
Quite right too. The ANC has diverted significant national resources to traditional US style pork belly politics but has also made itself guilty of more overt Angolan style looting. All that combines to makes its claim to represent the “national interest” an insulting insinuation about “the nation”.
Also new political forces are emerging and growing – most obviously Cosatu and the Democratic Alliance – that will further erode such ANC claims in future – as will the shifting ethnic bases of parties and groups that contest in the political arena of South Africa.
However, these were not the points I wanted to make – and I am sure they are going to be done to death in the next few days.
My point is that sovereignty itself – and certainly who the ANC elects as leaders and what the party decides vis-a-vis nationalisation of mines and expropriation of land without compensation – will have much less force and effect in determining South Africa’s political and economic future that we might imagine.
Economic policy, laws governing ownership and general “good behaviour” around fiscal and monetary policy are rigidly constrained both by the discipline of global capital markets and by a myriad bilateral and multilateral agreements between countries and blocks of countries.
As I said to clients earlier this week (concerning the ANC centenary):
“Obviously we must continue to watch the ANC as carefully as always in 2012 – but this small open country and economy will continue to be tossed on the currents of the global economy and the various geopolitical, technological, cultural and environmental forces that shape the world. We might miss a trick or two if we lull ourselves into believing the myth that the ANC is a kind of metaphor for the country as a whole.
Two brief thoughts – on a rainy Cape Town Sunday:
Firstly – a by-product of Malema’s (possible) retreat
I have a feeling that debates ranging from mine nationalisation, land distribution and continued white economic dominance in the South African economy have just been saved from the gangsters in the ANC Youth League who have been using these as a cover for looting.
It has been difficult not to lump every statement about ongoing race based inequality with the smokescreen slogans used by the ANC Youth League leadership – and many equally corrupt politicians.
The latest Commission of Employment Equity Annual Report says whites still occupy 73.1 percent of top management positions – and blacks 12.7, Indians 6.8 and coloureds 4.6? Yeah, well they would say that wouldn’t they – after all, that is (one of) Jimmy Manyi’s old outfits and he is the grandmaster of running racial interference for pillaging resources destined for development!
Willing-seller, willing buyer policy of land distribution responsible for only 5 percent of redistribution targets met? Yeah, well, guess who are trying to get themselves a portfolio of farms a la Zanu-PF?
Nationalise the mines? Yeah, so you can rescue your BEE backers and get a piece of the action yourself?
But that was last week.
Those issues are back on the agenda, but this time the discussion might be led by people genuinely looking to harness the country’s resources for development and transformation – not looters, corrupt tenderpreneurs and “demagogic populists” disguising their true intentions.
If anyone thought we could go on with the levels of unemployment, inequality, poverty and racially skewed distribution of ownership and control of this economy I suspect they will find they have been very much mistaken.
One of the consequences of the retreat of the Malema agenda is that we will all have to deal with the issues we have, up until now, been able to dismiss or deflect because they were ‘owned” and propagated by thugs.
Itumeleng Mahabane says it like it is
In a similar vein – and my favourite read of the week – was Itumeleng Mahabane’s column in Friday’s Business Day.
He deals with a variety of aspects of the country’s debates about development and transformation.
In tones that have been tightly stripped – of anger, I suspect – Mahabane appeals for the debate to lose the “prejudicial invectives” and that participants should “desist from creating cardboard villains”.
He makes 4 main points (actually he makes a whole lot more, and it is not impossible that I misinterpret him here – and he is certainly more subtle and nuanced than my summary below – so read the original column – the link again.)
Firstly he suggests (although in the form of a question, not the statement as I have it here) that we have to acknowledge the damage our Apartheid past has done our country, leaving “the inequity of our income distribution and the historic systematic destruction of black capability”.
Secondly he hints that the state cannot assume more economic responsibility before we have fixed accountability – and thereby arrested corruption.
Thirdly he appeals for a sophistication of our views on the labour market – I think by suggesting that a degree of duality is crucial.
But, he warns:
I do not subscribe to the simplistic and questionable idea that the inability to hire and fire people is the core cause of structural unemployment. The balanced high growth would create demand for labour, regardless of labour rigidity.
Fourthly he asked us analysts why:
we casually, without considering the social implications, vilify workers and the working class, making them useful villains for complex economic challenges? We almost never give view to the body of evidence that shows that market rigidity and anticompetitive behaviour is a significant factor in deterring investment and output and that, in fact, it contributes to SA’s excessive business and skilled-labour rents.
Those are important views – and an important corrective to aspects of our debate about development.
You might have picked up from warm and welcoming statements by the Democratic Alliance and a flood of beaming news stories that our Minister of Finance Pravin Gordhan said something slightly more exciting about economic policy than the bland pap from the policy kitchen of the increasingly awkward compromise which is the Ruling Alliance.
But before anyone gets too excited we should look at exactly what he said.
First up, in the main body of his speech to the 14th annual conference of the Board of the Institute of Internal Auditors – a body I suspect has hitherto not been allowed to bask at the centre of an important breaking news story – he suggested as part of his list of things that need to be done to “energetically reposition, restructure and reform our economy” :
Lower the cost of young, inexperienced low-skilled workers for firms to stimulate the demand for labour
That is from the paper as published on the the Treasury’s website – catch that here – it is well worth a read.
Then press stories – this from the New Age – seem to imply that he took things a little further in discussion. I give you the full text below, especially as the journalist has left off quotation marks on the key sentence, making me wonder if this is more a case of hearing what you want to hear than it is an accurate reflection of exactly what the minister said:
The New Growth Path envisages the creation of five million jobs by 2020. Gordhan suggested that South Africa might have to relax its labour laws in certain cases to grow jobs. “We may have to change the way we see the labour dispensation in South Africa,” he said.
For example, a balance needed to be found to retain the jobs of the 10,000 people working at clothing factories in Newcastle, KwaZulu-Natal, while still allowing them to earn a reasonable wage and keeping the factories open.
There is no doubt in my mind that the inflexibility of our labour market is partly responsible for the high levels of unemployment in this country.
I have tired of pointing out that as the representative of the ‘already employed’ Cosatu is not to be trusted to talk on behalf of the ‘unemployed’ – with whom its interests often conflict (see here, but a number of other places as well).
The Minister of Finance’s job is to find an economic policy that somehow reflects the national interest – and not the sectional interest of organised labour.
The most important government priority is to find ways to grow the economy in a manner that helps create the greatest number of jobs.
With a government gone soft in the middle, led by a compromised and beholden president, it is a relief to hear someone in power, however tentatively, at least name the nettle if not actually grasp it.
Wouldn’t you want to have a job for life as a public servant, with guaranteed medical and benefits in a parastatal company that government would push up borrowing and taxation to keep afloat no matter what?
Of course you would – any of us would … just like the Greeks did up until very recently.
When Cosatu economist Chris Malekane argued as he did yesterday, stating with imperious certainty that the discussion about mine nationalisation was over – that the ANC NEC was unanimous and that it was not a question of if, it was a question of how – we should not be too surprised.
Malekane was talking the book of a particular faction of Cosatu – and his views are in stark contrast to views that had been expressed by leading member of the National Union of Mines.
While Malekane said Cosatu had encouraged the Youth League to place the debate on the agenda, National Union of Mineworkers president Senzani Zokwana said in November last year that the Youth League was being reckless with the industry and that their call was inspired by rich Black Economic Empowerment recipients looking to get failing deals bailed out by the state. “I believe that there’s no threat to any investor …. I don’t think that view (nationalising the mines) will fly given the facts at our disposal”, he said.
Frans Baleni NUM Secretary General said just a month ago: “It is not only the private sector that has invested (in mines), but the workers with their pension and provident funds have also invested. We should have maturity and the debate should not have political undertones.”
NUM has to care about the the state of the mining sector – it has members who would undoubtedly lose jobs if the mines were nationalised.
Additionally NUM is lead by the ANC/SACP supporting faction of Cosatu – with Vavi and NUMSA increasingly seeking ways forward around and beyond the ANC.
The ANC incumbents have done everything they can to stop or limit this debate – and they have been supported in this by the South African Communist Party. The president, cabinet ministers and senior party officials have argued that it was never ANC policy to interpret the Freedom Charter clause on the nationalisation of mines and “the commanding heights of the economy” in the crude and mechanistic was the Youth League has done.
I am convinced that it is entirely impossible that the ANC will nationalise the mines along the lines proposed by the Youth League. It would cost in the region of $130bn (see excellent Reuters article here) and it would break a long list of formal and informal obligations South Africa has with trading partners – as well as explicit reassurances the ANC gave at the time of the leaked mining charter in 2003. Finally, owning the mines would oblige government to take on the accumulated risks associated with environmental damage those mines have built up over the years as well as the risk associated with volatile resource demand.
Government’s task is to get the best possible value out of the non-renewable resources with which the country is endowed. I don’t see any scenario in which that could be achieved through the nationalisation of mines in the form described by the Youth League or that supported by a faction of Cosatu yesterday.
Capitalism, at its most basic and unbridled, is a system that says: okay, the king is dead and therefore no longer owns all this stuff; take what you can … if you can hold onto it, it’s yours. Oh yeah, and you can pay the people who don’t manage to hang onto any stuff to work yours … because if they don’t they will starve.
On your marks, get set … go!
The system is extraordinarily productive, driven as it is by those gargantuan twin-thrust engines: human greed and human fear (you can keep what you can take/failure means death).
One of the great political achievements of the last 300 years has been the refining, softening and regulating of this system so that it maximises the good it can produce for as many as possible.
But note this: it can’t produce the same amount of good for everybody – because its fundamental driver is that it allows the hungriest, cleverest, most creative and most intelligent to keep what they can take. That’s why those people build the enterprise. So they can keep what they can get out of it. That’s the creative heart of the system.
(One of the many flaws of capitalism is it also allows those who have become powerful for reasons other than those listed in the last sentence to “keep what they can take”. Thus both Apartheid apparatchiks and New Elite cronies are (still) living high on the hog for reasons that have nothing to do with the unleashing of their creative spirit and more to do with their ability to cheat and steal. But that is another story.)
The point I wanted to make, is that in its most basic and unregulated form capitalism will allow the owner of the factory or mine to extract the last drop of blood from the worker – and the last drop of blood from his children, his old mum and his maiden aunt. Without regulation the only thing that will stop the capitalist working the worker to death is the need to have him come to work tomorrow and for his children to come to work in ten years time. The history of capitalism has demonstrated this unfortunate truth about humans time and time again.
Thus we have labour market regulations: minimum wages, basic working conditions, rights to dignity, rights to organise and strike. These are amongst our greatest achievements – and they are all there on the law books of the new South Africa.
But there is a line over which we must not cross.
When the law, in effect, demands that the capitalist share equally the profits of the enterprise with the workers, the enterprise is over.
If local regulation means the capitalist can’t make sufficient profit here he (or she) will go elsewhere or will spend his or her time doing something else. That’s it; end of factory, end of jobs and end of story.
Michael Spicer, as CEO of Business Leadership South Africa, is the perfect person to listen to if you want to get an average signal of what South African capitalists are feeling.
His comment in today’s Business Day about the conflict between the flood of proposed changes to labour and employment equity laws and government’s job creation agenda is well worth a read. Catch it here.
It seems to me we are carelessly testing for the “tipping point”, the point beyond which the capitalists mechanise their plants or leave.
Busy, busy … and everything is slower; the brain and hands struggle with what they did with alacrity before the December holiday.
It is becoming clear that South African Investment Risk is going to be all about the New Growth Path (NGP) this year. So picking up from where I left off from the two pieces I wrote last year about the NGP, here and here – I did promise a third and, I suppose, this is it.
I get irritated by those those interminable news features reviewing or predicting the calender year as if it was a natural unit of history into which discreet trends neatly fit themselves and await their unpacking by news organisations short of December and January copy.
But then that means I failed to point out one of the most interesting features of 2010, namely the peculiar arc described by Jacob Zuma’s fortunes over the course of last year.
Remember how badly the year started for him?
He stumbled from crisis to crisis and the consequences of his sexual behaviour (consequences we are going to feel again this year) began to make even his most fervent backers nervous.
The second phase was the World Cup and the apparent surrendering of his position to Blatter and his merry band of soccer thieves. That phase ended with the gathering woes of the public sector strike and a serious challenge from “the right” at the NGC.
That is the moment he turned it all around, to everyone’s surprise – mine included.
His administration managed to negotiate an end to the public sector strike and secure Cosatu’s aid to stop the political challenge from the right (fronted by Julius Malema, but emanating from higher up the ANC/New Elite food chain – I cover that – exhaustingly if not exhaustively - here.)
As I discuss in the previous link, it is my contention that he secured the victory by making policy concessions to the left and Cosatu (which are essentially contained within the NGP document – clearly not acceding to the left’s full agenda but going some of the way) and this sets much of the tone for a discussion about political risk in 2011.
The New Growth Path (NGP)
The New Growth Path (NGP) document was produced by the Department of Economic Development (23/11/2010), an institution that came into being as a direct reward to Cosatu for having backed Jacob Zuma’s rise to power at Polokwane and which is headed by a minister who hails from the heart of Cosatu’s leadership.
The origins of the NGP might be closely linked to Cosatu, but the fact that it is a real attempt to address unemployment that has been formulated in government (i.e. outside of the priority Cosatu objective of protecting the interests of the already employed) means it is full of suggestions that Cosatu has found itself unable to support.
But Cosatu’s doctrinaire and sectarian self-interest based criticism aside (see those here), this proposal is far closer to the policies of Cosatu than any macro and micro economic framework that has emanated from the ANC and government since 1996 – and this is because the document forms part of the payback to the trade union movement and herein is contained some of the risks associated with the policy.
The Activist Developmental State
The NGP is more than just a statement committing government to various broad economic interventions designed to achieve job rich economic growth. It calls for a fundamentally new approach to the administration of all aspects the economy and is highly interventionist and proposes that the the Department of Economic Development plays the lead role.
One of the most interesting critiques of the policy comes from the Chief Economist of the Sanlam group
It wants to regulate wages and salaries in the labour market, prices in the goods market, the rate of exchange in the currency market, interest rates in the money and capital markets, and dividend policies and therefore by extension equity prices. It even hints at rent control in its desire to reduce rentals for small businesses in shopping centres. (The New Growth Path – Does it really take us forward? – Jac Laubscher, Sanlam Group Economist – 01/12/2010 catch the full text of that interesting critique here).
The premise is that markets left to their own devises will not solve the problems, particularly of unemployment. Unemployment (as well as the full range of social ills in South Africa), in this paradigm (the paradigm of the NGP, not the paradigm of Sanlam or Jac Laubscher!), can only be addressed by vigorous state intervention.
The conventional or orthodox view in economics tends, in principle, to be wary of over regulation of the economy and markets by even the most efficient, vigorous and rigorous state or government agency. The potential for misallocation of resources, bureaucratic drag, distortions and inefficiencies (and therefore reduced growth) must be significantly increased when a new, untested and under-resourced agency nested in a national administration known for high levels of dysfunction is charged with leading interventions at every level into the economy.
Looser monetary, tighter fiscal policy
The stability and predictability of macro-economic policy has been one the great successes of post-1994 policy making in South Africa.
The NGP makes constant reference to achieving a “more competitive” currency – through the mechanism of “a looser monetary policy and a more restrictive fiscal policy backed by microeconomic measures to contain inflationary pressures and enhance competitiveness” (page 16 , The New Growth path – The framework – 23/11/2010).
Thus this policy holds out the hope/promise of stimulating the manufacturing sector (by making exports more competitive) but proposes to help control the danger of inflation inherent in this strategy by reducing state expenditure.
I do not expect government to either change the inflation target for the SARB or its general mandate “to protect the value of the currency in the interest of balanced and sustainable economic growth” (Constitution of the Republic of South Africa 1996/1996/2009-04-17/Chapter 13 – Finance), but the assumption must be – at least – that there will be downward pressure on the currency.
Labour markets and wages – the source of the conflict with Cosatu
What is fascinating about the NGP is that it calls for wage restraint and is, inevitably, starting a serious discussion in government and the ANC about the conflict between “quality jobs” and any jobs at all. Charged with creating employment, the NGP is inevitably going to come into conflict with the labour regime established after 1995 that so profoundly strengthened the interest of workers inside the system against the interests of the unemployed outside the system.
2011 is going to be the year that government finally shifts beyond the set of macro-economic policies enshrined in the Growth, Employment and Redistribution document that defined the Mbeki leadership – and so angered Cosatu, the SACP and the ANC’s own left wing.
Political analysis for this year is going to have a strong economic focus. We will have the national local government elections (the rumour I hear is May 18) and the never ending cycle of tenderpreneurial abuse by party and government figures.
All of that will continue to provide grist to our mill, but the big story for this year is all about government economic policy. Will they go too far for the financial markets and other investors? Can a government, any government, do anything to fundamentally alter the content and direction of economic growth? Can the Ruling Alliance hold itself together if the ANC grasps the nettle of the labour market? These are the big questions for the year.
This is the second of three articles about the New Growth Path (NGP) Framework released last week by the Ministry of Economic Development.
One of the architects (I must assume) of the NGP, Neva Makgetla (an economist long associated with Cosatu and now deputy director general in the Department of Economic Development) recently examined both the Growth, Employment and Redistribution macro-economic policy and the ‘industrial development plan’ alternative usually advanced (in my opinion) by members of the SACP.
Writing in the September 2010 special issue of the African Communist (journal of the South African Communist Party designed as a forum for Marxist-Leninist thought) Makgetla spells out what she thinks are the problems with both polices are.
Her views of what has gone before are interesting because the new policy tries to marry these frameworks by taking only the best of both.
Someone should have warned them that in policy marriages, as in human ones, you take the good with the bad … but more about that in the third post about the NGP which I will probably only get to by Monday.
The ‘anti-poverty framework’ associated with GEAR
“In effect, the transition to democracy built an implicit social compact: business would retain its property rights, and by extension its wealth and standard of living, while government would use its tax revenues increasingly to address backlogs in services for black communities left by apartheid.”
Makgetla sees the 1996 GEAR policy framework as having left in place the basic structure of the Apartheid economy.
Path dependency meant mining and finance continue to dominate and that property relations and inequality remained unchanged.
But the strategy, according to Makgetla, was attractive to successive ANC governments because it was quick to roll out and provided immediate benefits for the poor (particularly through social grants), while (hopefully) stimulating production and generating employment as the poor consume more goods and services.
“(The major benefit of the strategy) from the standpoint of the state was that it did not require explicit intervention in the economy. It relieved the government of responsibility for transforming the economy, with the associated risks of failure and potential conflict with business. Instead, government could focus on the more agreeable task of improving the lives of constituents through the more conventional public functions of providing basic services and housing.”
The risks were largely in lost opportunity – not achieving “new kinds of economic growth and by extension enhanced employment”. Because the strategy was dependent on state revenues, it was ultimately hostage to the booms and busts of the global economy.
Her key assessments of the policy are:
1. the transfers remained too small to provide the hoped improvement in the conditions of life of the poor and therefore the expected increase in demand and economic stimulation;
2. the relatively strong rand meant that new demand for manufactured goods, especially clothing, appliances and household furnishings was largely met by imports, and
3. the poor were ultimately dis-empowered and demobilised by top-down hand-outs that are central to the strategy.
Industrialisation strategy – SACP alternative
This is the policy proposal that ‘stands in’, in Makgetla’s assessment for the traditional left contribution to the policy debate. It is best revealed, in her opinion, by the Industrial Policy Action Plan (1 and 2) of the Department of Trade and Industry.
These strategies are designed to encourage production of manufactured goods, especially for export.
The industrial strategy has the potential, in her opinion, to access larger markets in order to drive mass based production, which in turn will secure more rapid growth and higher employment.
Crucially, the approach is modelled on the relatively rapid development experienced in Asia especially in the 1960s and 1970s.
The version of the strategy she deals with – which is the version in IPAP2 of the DTI – explicitly requires government to change which parts of “capital” it supports i.e. government would need to collaborate more closely with “industrial capital”, while reducing support for mining, farming and finance.
The state should focus its support on conventional manufacturing especially of capital goods, transport, electronics – and to a lesser degree “light industries” like clothing, food processing and minerals beneficiation. The policy tends to assume that services and production to meet domestic demand are inherently less competitive “and hence less desirable.”
Makgetla thinks there is high political risk for government in this strategy. The chances of failure in such an unequal society are high and if government adopts a strategy largely dependent on its effective intervention in the economy, it will get the likely flak along with the less likely kudos.
Risk is increased because the strategy is hostage to global demand for manufactured goods and RSA will be competing with China and almost every other developing country that sees this kind of strategy as central to their development path.
Finally, the industrialisation strategy supports long term economic growth but not employment and equity, which are not automatic consequences of growth. It ignores labour intensive activities like agriculture, services and construction and often leads to proposals to hold down wages to support competitiveness – she was prescient about that, but then she did help write the NGP!
On Monday I will spell out more specifically what the NGP proposes to do and I will make an assessment as to whether the policy will ever be implemented by this government and if it is, what it’s likely consequences would be.
If any of you are still with me by then, I will be surprised and you will probably be slightly sick of grandiose government policy making.