The tendency comes from two sessions I recently conducted with Western embassies in Pretoria. I asked them both whether they had foreseen the Arab Spring coming and they said no. I then asked whether in retrospect there were flags they missed. They said yes: abnormally high youth unemployment in all the countries affected by the Arab Spring; combined with growing alienation from the state by young people; combined with active social networks. South Africa has all three factors present and is therefore one random event away from its own version of the Arab Spring.
Clem Sunter: The latest South African scenarios
Johannesburg: Against the backdrop of the global economic scenarios I outlined last week, what are the possibilities for South Africa? Here are the latest scenarios for the next five years which Chantell Ilbury and I are offering our clients in South Africa.
The International Institute for Management Development, based in Switzerland, publishes a list of 59 nations in its annual world competitiveness report. The list comes out every May and in 2012 South Africa was ranked 50 having risen from 52 last year. Before then we were in the 30s and 40s, which is where we should be as the 32nd largest economy in the world. So we are now accorded a deep discount and the reason given is that foreign investors are deterred from investing in South Africa on account of policy uncertainty here. This has not gone away as can be seen by the fact that a third of the SKA telescope project was awarded to Australia as a hedge against betting the whole shop on South Africa.
Thus, in the ‘Premier League’ scenario we manage to get our ducks in a row and achieve much greater policy certainty. We return to the mid-30s where we rightfully belong as both overseas and local companies invest the large hoards of cash that they have been accumulating on the side-lines in our economy. They trust the rules of the game will not change.
In the second scenario, we do not get our ducks in a row and uncertainty continues. Consequently, we slide down into the ‘Second Division’ where the bulk of the Third World is located – poor but peaceful. Companies will still make money in South Africa as they do in many Third World economies, but for the government it is a disaster. They won’t get the tax revenue that they enjoy in the Premier League; and they won’t have the same access to foreign capital just when Eskom needs another R500 billion for its next generation of power stations – and if you believe the figure, we need another R750 billion to sustain our water supplies.
We will probably be kicked out of G20 and replaced by Nigeria which could overtake us by 2020 to become the largest economy in Africa. Nigeria already has an economy two-thirds the size of the South African economy and is currently growing by 7% p.a. versus our figure of 3% p.a. That is a differential of 4% p.a. BRICS, which we have just joined as the fifth member (alongside Brazil, Russia, India and China), will probably become BRINC!
We have three flags for deciding whether we are going back up into the middle of the ‘Premier League’ or sinking into the ‘Second Division’. The first one is around inclusive leadership. We looked at nations that have done well in the ‘Premier League’ and invariably they have had spells of inclusive leadership where the President or Prime Minister of the country has acted successfully in bringing the majority and minorities together into a cohesive team.
In soccer, the most successful team as a global brand is Manchester United and it is largely due to Alex Ferguson keeping them united. Here we are in a hiatus as the top leadership in the ANC is engaged in internal politics leading up to the contest in December. Can you imagine what would happen to the performance of Manchester United in the next season if Fergie was diverting most of his attention to family squabbles?
The second flag is about pockets of excellence of which this country has many examples. If they are used to raise the performance of the nation as a whole, that is a great flag. If they are dumbed down in a bid to eliminate anything that appears elite, that would be one of the worst flags of all. We have 28 000 schools in South Africa of which 5 000 are reasonable to excellent and 23 000 are dysfunctional to shocking.
If the model of the 5 000 is used to raise the performance of the 23 000, that would be excellent. If the 5 000 are dumbed down, that would be the worst flag of all in terms of our long-term competitiveness. Seeing that the principal variable in a school’s prospects is the principal, an academy for principals would be a step in the right direction.
The third flag is around the creation of a balanced economy: an outward economy that earns us enough foreign exchange to pay for our imports and an inward economy that creates jobs and makes a significant dent on our hideous unemployment rate. As far as the outward economy is concerned, you have to play to your strengths to win in the ultra-competitive game that now exists. There are three spaces we can dominate on the global stage:
- resources. Despite the decline in production of gold and diamonds, we are still No. 1 in platinum, manganese and chrome and have plenty of high grade iron ore and coal. Where we can we must go downstream and add value before we export our resources;
- tourism. We are a relatively cheap destination, besides which we have never built on the extraordinary success of the Soccer World cup in 2010 (when amazingly the nation came together for one month and crime fell to an all-time low). Now is the time to offer ourselves as a real value-for-money tourist attraction;
- the gateway into Africa. We are the largest and most advanced economy in Africa and Africa is opening for business. According to the World Bank, six of the top ten fastest growing economies in the world over the next five years are in Africa. We are the natural place for Western multinationals to kick off their campaign to access the continent’s market as Walmart is doing right now.
On the inward economy, we only have one flag but it is critical: our attitude to entrepreneurs and small business. In comparing the two largest economies in the world, America and China, they cannot be more different except for one characteristic: their passion for entrepreneurs.
As one young Chinese woman whose father is closely connected to the Politburo said: “The one thing Westerners overlook about China is that Deng unleashed the entrepreneurial spirit in 1978 and that is the force which has carried us to No. 2 today. Outside of Beijing and Shanghai, there is constructive economic anarchy.”
In the US, the respect that Americans have for entrepreneurs like the late Steve Jobs, the founder of Apple, is legendary.
In South Africa, the environment for entrepreneurs is extremely regulated and hostile – ranging from unreasonable labour legislation to shoddy treatment by the state, parastatals and big business as clients. Unfair price squeezing and late payment for services are real issues. Even in the report of the National Planning Commission, the focus was on infrastructure spending while the development of an entrepreneurial culture was marginalised.
Our goal for 2020 should be to create one million new businesses rather than five million jobs. It is the only way to create that number of jobs. Big business has changed its employment model and now subcontracts all its non-core activities to other companies; the government has not got the money to create five million extra civil servants; and public works programmes are a temporary solution.
Hence, our odds on ‘Premier League’ versus ‘Second Division” have changed from 70 : 30 eighteen months ago to 50 : 40 as we feel that the three flags we have selected are indicating the danger of relegation rather than the chances of promotion at the moment. We do not have inclusive leadership; we do not celebrate our pockets of excellence; and we have not changed our mind-set towards entrepreneurs.
Against this, we did rise two places in the ‘Premier League’ this year.
Lying in the wings is a wild card scenario to which we now assign a 10% probability compared to the zero probability we had previously. It is where South Africa joins the likes of Syria, Afghanistan and Somalia as a ‘Failed State’. Obviously, the level of violence here is nothing like it is in any of those three countries. However we have four red flags and one tendency: if any of the flags rise or the tendency turns into reality, the odds on ‘Failed State’ increase.
Our first red flag is nationalisation. It would be seen as a thoroughly retrogressive step by the majority of our trading partners and the question most frequently asked is where the money to pay for the mines and the banks would come from. It would appear that the ANC have come to a similar conclusion as they are now pursuing the idea of a state-owned enterprise competing against the private sector, as well as increasing royalties and other rents. This flag is therefore down at present.
The second flag is a clumsy implementation of National Health Insurance which leads to a decline in private medical care and another exodus of young talent from this country (for whom adequate health care for themselves and their families is a high priority). The Minister is in consultation with the major private sector players which again suggests this flag is down for the time being.
The third flag is a media tribunal with punitive powers which is the reason for our giving ‘Failed State’ a 10% probability. Gagging the media is as bad as undermining the independence of the judiciary. They are both cornerstones of a modern democratic state and any weakening of either institution will remove any remaining brakes on corruption. The government has made some concessions by turning the tribunal into a public commission and putting a whistle-blower clause in the act. Nevertheless, there is other security legislation in the pipeline and the nature of a secret has not been defined.
The fourth flag is the most lethal one: land grabs which will immediately divide the nation and possibly cause a civil war. We will literally hit the wall and be off everybody’s investment agenda. The whole point of identifying a red flag like this is to ask how it can be kept down. We believe that the country needs an Agridesa of all the major players in the agricultural game to negotiate a land transformation programme with a reasonable chance of success. In other words, land grabs should be pre-empted.
The tendency comes from two sessions I recently conducted with Western embassies in Pretoria. I asked them both whether they had foreseen the Arab Spring coming and they said no. I then asked whether in retrospect there were flags they missed. They said yes: abnormally high youth unemployment in all the countries affected by the Arab Spring; combined with growing alienation from the state by young people; combined with active social networks.
South Africa has all three factors present and is therefore one random event away from its own version of the Arab Spring. Again the purpose of putting this tendency on the table is to encourage anybody who listens to do all he or she can to keep the tendency from turning into reality by investigating measures to bring youth unemployment down as fast as possible.
If you add the 40% for ‘Second Division’ to the 10% for ‘Failed State’, we are now in a 50 : 50 position between the good and the bad scenarios. We therefore call this moment a second tipping point as the first tipping point occurred in the early 1990s when we could have tipped into civil war, but were saved from doing so by Codesa 1 and 2 which resulted in a new constitution and an open, democratic election.
We now need a Codesa 3 or Economic Codesa in which the government, the top 100 CEOs in the private sector, the unions and other significant players in civil society participate to create an inclusive economy driven by a new generation of entrepreneurs and industrialists. The Agridesa would be a separate but linked initiative. The outcome would be a highly publicised list of targets and actions to which the participants would be held accountable jointly and severally. Implementation has always been our weak suit and this is one way of making things happen.