Category: International

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Current International

Big Impact

When fighting climate change, the focus often is on the small changes instead of supporting industries that would make a big impact. In this article I suggest three industries which I believe could make a decisive impact on climate change and which need to be supported.

Making rational decisions is one of the most complex tasks humans face. We tend to base decisions on emotions, which comes more naturally. Emotions evoke compassion, and it is this compassion that has driven the success of the human species. We get others to co-operate and help, because we have arguments that arise similar emotions in others, who sympathize and would give time and effort for same causes.

This led everybody to demonstrate, sometimes violently, against nuclear power in the 1980’s, especially in the wake of the Chernobyl disaster. It was right to voice anger at the neglect and incompetence of the Russian nuclear operators and politicians; it was wrong to advocate shutting down all Nuclear reactors. It slowed down the development of safer, more advanced Nuclear power stations and lead to the exponential increase in coal power stations, suffocating the rest of the world. Now countries, that did not benefit from the abundance of cheap dirty coal-generated electricity have to bear the effects of global warming caused by the steep rise in CO2 those powerplants spew out.

The same emotional decision making caused an uproar against the use of fracking to extract gas from bedrocks. Horror stories of contaminated groundwater and earthquakes circulated on social media, and therefore many politicians were slow to support any fracking. Yet, the USA has probably peaked in CO2 emissions in 2006, even with Donald Trump, and his love for coal, at the helm. The drop was due not because of the electric car, nor the solar power stations, but fracking. The widespread use of gas, which often can be used instead of coal to fire power stations, was the main driver in the reduction of emissions in America.

The list goes on and on. Plastic straws are a swearword these days, and plastic shopping bag are frowned upon. Yet McDonalds in the UK instructed its outlets to discard the paper straws with the general waste because they are so hard to recycle. Multi-use shopping bags need to be used 140 times to negate the negative environmental impact of producing them. Even though I do think that it is right to look at alternatives to plastic, especially single use plastic, I do think we are forgetting about industries that can make a real change.

So what are the three industries I am backing? Wood especially CLT, Hydrogen propulsion and urban farming. I think each of them would could cause a substantial change to our environment and to our way of life. Here are some of the reasons why I chose those three industries, starting with wood.

Humans have used wood for millennia to build everything from ships, to carriages and houses. It has great properties. It was easy to work with, it floats, it was strong and had great insulation properties. But it had a big downside. It burns. Many great cities were partially wiped out because the fire spread easily. Think of London in 1666, San Francisco in 1851 or more recently how the Notre-Dame de Paris burned relentlessly. But in the 1990’s a technology called Cross Laminated Timber (CLT) was developed, which enhanced the properties of wood dramatically. The fire resistance of the wood is now far superior to concrete and steel structures in catastrophic fire events. CLT panels are also extremely strong, with a very favorable weight to strength ratio. Researchers have also established that it has excellent seismic resilience, with no residual deformation. CLT wood is now being used to build an 84-meter-tall building in Vienna, called the HoHo. Construction is much quicker than conventional concrete and steel construction, and alterations will be a lot simpler.  The foundations didn’t need to be as massive as normal because the weight of the building is a fraction of what a similar concrete and steel structure would have been.

But the biggest benefit of using wood in construction is the CO2 footprint. While trees grow, they absorb a lot of Carbon Dioxide and emit Oxygen. When a tree is fully grown the absorption of CO2 is dramatically less. Given the shedding of leaves or Pinecones, a mature tree is more or less carbon neutral. Therefore, sustainable forest planting and harvesting is a certain way to absorb some of the Carbon in the Atmosphere.

The second industry is the automobile propulsion industry. Elon Musk made one genius decision – to make eclectic cars less extravagant and more normal. They look like conventional elegant well-designed cars and their performance matches the looks. Before then, electric cars looked very much like something from the future, full of compromises. The electric car has a few critical flaws though, where a solution seems to be years if not decades away. The first problem is that cars take a long time to charge. Part of the problem is that lithium-ion batteries tend to get hot when they are charged too quickly. Since lithium is one of the more volatile elements, the batteries tend to catch fire if they are getting to hot. That’s why Samsung had to re-design their phones after a few caught alight.

The second problem is that some of the materials used to make the batteries are from some of the most volatile places on earth. Cobalt for example is mainly sourced in the Democratic Republic of Congo.  They are more known for their extremely violent never-ending armed conflicts. Those are not the best conditions to build a mine which is supposed to supply a steady stream of material. The commodities used in the batteries were in such demand recently, that the miners struggled to mine enough of the commodity. That it drove prices ever higher. With the global electric car production was not even 2% of total global car production it is hard to see where the supply of raw materials should come from if electric vehicles dominate global car production.

A solution that is just as environmentally friendly, but in my opinion more scalable are hydrogen powered cars using fuel cells. Hydrogen, probably the most widely available element is liquified and using a fuel cell technology is converted to electricity which then powers the electric motors of the cars. The only thing leaving the exhausts is essentially water vapor. Hydrogen is a very effective storage of power, but also faces some technical issues. There is a lot of energy loss in through the various stages of the supply chain. These challenges should be easier to resolve, than trying to build another 20 mines in a war-torn country with no infrastructure.

The technology has got very distinct advantages. To start of with, you can drive up to a filling station and fill up in the same time as you would using the conventional fossil fuels.  The power generated is also substantial. Toyota said that all their buses made for the next Tokyo Olympics will be powered by fuel cells. Other commercial vehicles like trucks and possibly planes could be powered by fuel cells because they will be able to generate enough power and the time re-fuel is not different from what they are used currently (which is important for industries where the assets constantly need to be productive). Hydrogen could also be produced almost everywhere. Filling stations could produce it themselves or be supplied through the same supply chain they currently use. It is probably easier to develop new more effective processes to liquify Hydrogen than it is to make Lithium less unstable.

The third new industry is urban farming, which incorporates everything from a basic DIY hydroculture set-up to vertical farming. (Sophisticated vertical farming start by breeding insects, which are fed to fish, who’s excrement is used as the enricher for the water for the plants.) It is all based on the principles of hydroculture, which essentially means that plants grow without the need of soil, but the water is enhanced with the minerals which the plants would normally extract from the ground. This also means that plants can be grown closer to where their produce is demanded; one could imagine a grocery shop producing their own veggies on site in the future. That would reduce the need for a sophisticated just-in-time transport system for fresh plant produce.

There are many more advantages for our environment. Hydroculture uses 80% less water than conventional farming. Since the plants are grown in a controlled environment, there is no need for pesticides, saving the ground from being drenched in poison and saving the insects from dying out. The freed-up farmland can then be used to restore nature, possibly by planting native trees.

There are obviously many more industries that impact positively on our environment, but these three, if embraced, will surely have a big impact on our environment. Best of all is that they already exist, mostly in their infancy, but with a bit more backing could get traction. They don’t life on futuristic hopes and dreams but on realistic technologies and practicalities.

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Current International

Go big and go home

Today, the 12th of September 2019 the governing council of the European Central Bank (ECB) will meet for the last time with Mario Draghi at the helm. It may just be his most important meeting ever.

Mario Draghi took over the leadership of the ECB at a very precarious time. Europe was in the grip of a financial crisis. Banks balance sheets were stuffed with government bonds which were priced for a European Union break-up. Populism across Europe was on a rise and hardly any politician was courageous enough to push through desperate needed reforms. The northern states didn’t want to share the debt burden racked up by the spendthrift southern cousins (even though they benefitted from the relatively weak Euro).  Instead, austerity was the default policy, and Germany was leading the pact. This obviously did little to revive the economy. Step in Mario Draghi.

From the start of his term he made it very clear that his priority was to defend the Euro, and by implication the Euro area. He famously said that “he would do whatever he can” to defend it. To the horror of the German government, Draghi did start a quantitative easing program, which essentially meant that the ECB would buy government bonds, up to 33% of the issuance. This pushed the long-term interest rates down, freeing up clogged banks balance sheets and spurred them to lend out again. The economies started to recover, and the normally muted German property market experienced a boom, fueled by cheap funding.  Now, at the end of his term, Mr Draghi is faced with another crucial challenge, and the outcome would probably shape his legacy.

European economies have mostly recovered from the Global Financial Crisis of 2008 and the European finical crisis thereafter. Eastern European countries have been doing particularly well. Unemployment figures are at all-time lows or getting there. But it seems that the upswing has turned now, not only in Europe but globally. The manufacturing sector in Germany is essentially in a recession and growth in industrial output across Europe is waning. Exports are affected by the trade wars between China and the US.  

As signs of a looming recession are becoming clearer, something needs to be done. Just what? Super Mario, as mr Draghi is affectingly known among the investment bankers, can either commit to pull out the big guns and kickstart the quantitative easing program again. Alternatively, he could do nothing, since many of the northern Bonds are trading at negative interest rates, and the Mediterranean equivalent are also trading at record lows.

Go big or do nothing – that is Mr Draghi’s dilemma.

He is not alone facing this challenge. The Chinese central bank has just loosened reserve requirements of banks, because their economy is slowing quicker than expected. Japan and South Korea have their ongoing spat, causing strain on their economies. Even the USA seems to show the first cracks. Even though retail sales and some service sectors are booming, the underlying sectors are struggling. Manufacturing is sluggish, impacted by higher costs and the China–US trade war. The Fed already started to cut rates, although it is debatable if it was due to the relentless political pressure of the Donald, or if it was because of economic growth concerns.

As I wrote in an article some time ago: “the time will become known as one where central bankers did too much, and politicians too little”. Central banks mandates differ from country to country; they are always broadly around two themes; 1) keeping price stability and 2) encouraging economic growth leading to lower unemployment rates.

The reality though is that they are only truly effective servicing the first need, less so addressing the second. There is only so much they can do to drive economic growth. Not so for governments. They have the power to lower taxes, educate their population, keep them safe, keep them healthy and uphold the rule of law. They have far greater powers to encourage new investments.

It is now time for politicians to be bold and courageous and implement reforms that will make their labor market more efficient. They must embrace progress in technological innovation which makes their economies more competitive. Politicians should look at cutting taxes and encourage more businesses to start up. They should stop fighting egocentric spats, stop blaming history and others and stop making unrealistic populist promises. Mr Draghi has done well, but there is only so much a Central bank can do to encourage economic growth. It is time for politicians to take their responsibility seriously.

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Current International

When the joker takes control

I am not talking about the psychopathic supervillain, who was disregarded by society as he terrorised Gotham City, but about Boris Johnson, the newly elected Prime Minister of the UK. He has not been to Gotham City, but was the Major of London. In fact Boris has (hopefully) very little in common with the supervillain except for the fact that both are goofy pranksters, and both do like to dramatise everything. Boris Johnson though has been the joker of the Conservative party, somebody who is widely adaptable to mould himself into the solution for any given problem.

He is seen as the savior against the sudden rise of Nigel Farage’s Brexit party popularity. He is seen as anti-establishment, even though it was the deepest establishment that voted for him. He seems to model himself on Churchill. Johnson is charismatic and proudly English, able to connect with a wider audience and not shy to stretch the truth to make his point. All those are qualities the previous Prime Minister, Theresa May didn’t have. His performances of his previous two official posts though were in stark contrast with another.

Boris Johnson did remarkably well as Major of London. He was not only well liked but also seemed approachable and normal, often cycling to work with an ill-fitting helmet. But his chaotic nature superseded any other trait when he was the Foreign Secretary. He failed to gain any respect among his European colleagues and proved to be largely ineffective. That surely only hardened his stance as pro-Brexit. These days he seems so determined to leave the European Union at any cost, that a no-deal Brexit seems to be his base case.

Because of this, he, more than anybody else, would be able to get the Europeans to agree on more concessions. Let’s see if the Boris show is all about the art of negotiations or just showmanship. If he doesn’t get a better deal, the government could collapse, and he would go down as the shortest serving Prime Minister of the UK.

Should he succeed in finding a palatable compromise and thereby saving the UK from economic self-mutilation, he could go on to be a memorable Prime Minister – provided that he surrounds himself with the most talented and hardworking executive to make up for his short coming.

It will be interesting to see, if the second Prime Minister chosen in the last 3 years, not by the people, but rather by a few old men is able to turn this democracy around.

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International

Brexit negotiations – what can we learn from them?

The ongoing Bexit negotiations led by Theresa May hold valuable lessons for future negotiations, mostly on how not to do it.

During her time as home secretary she made a name for herself as a prudent and competent operator. Even though she campaigned for the UK to remain within the European Union, surely she would be savvy enough get a good Brexit deal approved by parliament.

Mrs. May entered the negotiations overconfident, mistakenly thinking that the UK was in the stronger negotiations position and drawing red lines that were in her mind non-negotiables.

As a Brexit secretary she chose David Davis, for no other apparent reason than that he was one of the strongest Brexit supporters. But he resigned after only a year in the job, which he never seemed to take seriously in the first place. But he was not the only one to resign from team May – she has had 37 ministers resign (and counting). That is more than any other UK Prime Minister has ever had.

Mrs May stuck to her lines and was uncompromising in her approach. She came up with one deal, that was voted on by the members of parliament a few times, and every time defeated by record margins. Even some of her own executives voted against her. Predictably, she ran out of time, and had to go and beg for more time from the increasingly impatient EU.

So, what can we learn about her disastrous negotiation skills?

Firstly, don’t start the countdown until you have a comprehensive plan. It was up to the UK’S Prime Minister to start the two-year period by triggering article 50. When the UK Brexit negotiators met the European negotiators for the first time, they seemed woefully underprepared. If one has the ability to start the clock, make sure you know exactly what you want to achieve in that time period, with different options at hand should the negotiations become deadlocked.

Secondly, make sure that your whole team sings from the same hymn sheet. As the Prime Minister lay out the objectives of the negotiation, and then come up with a strategy on how to accomplish them. Make sure that you have the buy-in from your closest colleagues, so that they can spread one uniform message with the same objectives in mind. Also select team members you get along with. You don’t need to be friends, but you need to be able to spend countless hours working together. Complex negotiations take time, make sure your team gel and don’t get pre-occupied with infighting.

Thirdly, when you draw lines in the sand (or red lines like Mrs. May referred to) make sure that it is out of a position of strength. More importantly make sure that they are realistic. It didn’t help that Mrs. May chose targets that are only of benefit to the UK, not the Euro area. She completely overestimated the UK’s position of strength and didn’t analyze the alternative.

Forth, be flexible. A trait all great leaders had was to be flexible. Changing your point of         view slightly doesn’t mean that you are not fulfilling your objective. It also shows that you are willing to compromise and work towards a solution. Thus your negotiations partners knows you are working with them, rather than against them, leading to a friendlier working environment which has been proven to yield better results. The trick is to list as many objectives as possible, so that the negotiations don’t get stuck on a few major elements, but that it is a fluid motion of give and take. Theresa May is stubborn, uncompromising and inflexible. That caused her to stumble in the negotiations and be defeated in parliament.

Fifth, make sure that you have the numbers behind you. The conservatives had a small lead in parliament when Article 50 was triggered, but the party was split between strong Brexiteers and “Remainers”. Therefore, Theresa May would need the support of some of the opposition party members of parliament. Instead of reaching out to them, she decided to hold a snap election in which she lost the majority in parliament. The results were a clear indication that the not even the public approved of her work thus far. Yet she still didn’t reach out to the main opposition parties to come up with a deal that would pass parliament. Instead Mrs. May continued to thrash out a deal with the European Union, which when it was finally ready to be voted on was defeated by the biggest margin ever. It is simple math’s. If you don’t have a clear majority in parliament, and you don’t have your whole party behind you, your deal will fail, unless it is a combined effort of all the parties involved.

This also leads me to the last point. If you enter negotiation, make sure that your objectives are the objectives the majority of your team, in this case the British parliament, approves of. Once you have that, it is time to start the clock and negotiate with the opposing party.

The Brexit disaster has been a tragedy that is still playing out. The parliament are making a fool of themselves. The debates remind of a tired yawning soap opera that seems to be never ending. The politicians seem to thrive in endless posturing and biggotting. But I not sure if doing what is best for their community is a high priority.

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International

Economics 100

The world economies are getting ever more sophisticated and inter-reliant. Some countries struggle to grow their economies, while others prosper. Few politicians seem to be able to come up with the right economic policies to achieve long term social goals.  It may help to rewind and look at macro economics in it’s simplest form.

The simplest question one needs to answer is: “How do you create wealth?”

Contrary to some conspiracy theories, wealth is not created out of nothing, it is not some abstract bubble that will burst at some point. To analyse it correctly, one would need to look at the world thousands of years ago. Just imagine a world which is divided into countries. Each country has a human population, and although smart and intelligent, are nothing more than cave dwellers. Each country has two forms of capital. The first are the natural resources. They include everything from the wild crops, to the animals and mineral deposits (such as copper and iron ore). Some countries have got more of the one or the other, but each country has got natural resources. The second form of capital is the human capital. The distinguishing feature between us humans and the rest of the animal kingdom is that we have far superior cognitive abilities, making it possible to think in abstract terms and thus create something not by chance but on purpose.

If the humans decide to gather the seeds of crops growing in the wild and grow them in fields that are easier to cultivate, resulting in higher yields, each human will have more to eat. It is not at the expense of the other humans, thereby making the society as a whole richer. It is the combination of human intellect and the natural resources, that creates a wealthier society. This process is repeated over and over again. They would build man made shelters out of natural stones, and thereby were able to live in areas that previously lacked shelter.

But at some point, the human capital would have reached its physical limit, because a highly intelligent farmer can’t be much more productive than an average farmer. There are only so many hours of sunlight to work the soil, and even though the highly intelligent farmer would be more productive, there is a physical limit on how much earth he can turn in an hour. But the humans then specialised on one activity, because the concentrated knowledge makes them more productive. The highly intelligent human would stop growing crops and rather invent farming tools, which the farmer would use to be even more productive. As a medium of exchange, money is created. The farmer is able to pay for the farming tools because he has a higher crop yield. Since it is more efficient to trade the crops with somebody who needs crops, he would trade the crops for money and give the inventor money for the farming tools. Using money as a medium of exchange is just the most efficient way of trading, and again, the society as a whole benefit and gets wealthier.

Fast forward a few centuries, and the repeated process of using the resources more efficiently generates wide spread wealth. But the constraint to this growth is the ability of using the current countries capital in a more efficient manner. So it would be a function of furthering the human knowledge, and trying to use every incremental increase to somehow make a better use of the countries natural resources.

Enter a third form of capital, namely foreign capital (both as human capital and natural resource capital – or the mean of exchange, i.e. money). With foreign capital the country doesn’t need to wait until they have generated enough surplus capital (i.e. wealth) to, as an example, build a mine. They can do it straight away. This encourages growth beyond the natural ability of a country to grow. It makes the country wealthier and its citizens more prosperous.

So what lessons can the politicians draw?

To grow the economy, the government should always focus on three aspects: Firstly, do the policies encourage further development of human capital? Does our population become more knowledgeable and more intelligent? Secondly, do you encourage companies to use the natural resources in the best possible way? Thirdly, how do we attract the most foreign capital, both human and resources (i.e. money).

Focusing on those three areas will deliver the highest possible economic growth, which in turn will generate more taxes to be spent on the poor.


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International South Africa

Long Term review

As the last post of 2018, I thought of giving a long term review instead of the year in review.

South Africa is in and out of a recession, but that should not come as a surprise to anyone who has looked at the underlying strength of the economy. Has SA reached its growth potential?

Ramaphoria seems like a distant dream, almost a fairy tale on how president Ramaphosa has taken the helm and in one swoop turned the stuttering economy around which his catch phrase “please send me”. His state-of-the-nation address was heralded as the start of a new era, and we can finally, unshackled of constant Zuma cronyism interference, proceed to grow again. With enthusiasm abound, investment banks rushed to upgrade their GDP growth forecast. But only 7 months later, the reality check: we slipped into a recession. While the rest of the world is growing strongly, we don’t. But to anyone, who looked rationally at the underlying capabilities of the South African economy, this should not have come as a surprise.

What might have surprised those number crunchers is how long the party seemed to continue. Looking at the performance of the JSE, as a measure on the strength of the economy, it would seem that South Africa is capable of keeping up with the best Asian Tigers. We would lead the African renaissance, famously proclaimed by the former president, Thabo Mbeki. But the reality is that we have been living on a toxic cocktail of steroids that mask the true performance of the economy, and therefore misguide on the potential for the medium term.

The JSE’s stock exchange index has increased by about 375% over the last 15 years (in Rands). That is a truly spectacular performance, and anybody who invest in shares would have done well. But that was just the index. Looking at the different components of the index, it becomes clear that we have had thee super phases, in addition to one over-arching theme.

Start with the three super phases. Firstly, we have benefitted enormously from the commodity boom of the mid 2000. China consumed almost all commodities quicker than anybody could produce, causing all commodity prices to rally sharply. That was a bonanza for the mines, which was reflected in their share prices. But South Africa had severe export transport constraints, and the throughput of Richards bay coal terminal and Saldana has hardly increased. Our mines were earning more Rands and Cents, but they struggled to push through the increase in volume they would have liked to. So what happened to the mining shares since then? Only the best managed companies managed to keep the share price at some reasonable level, many (especially SA focused mines) however are down more than 80%, a few collapsed totally and are no longer listed.

The second phase was the construction boom, spiced up by the Soccer World cup in 2010. There was a deadline, and plenty of projects had to be completed, almost at any cost. Luckily, the South African government had competent finance ministers and a very efficient tax collecting machine. We could afford it, and for the greatest show on earth, South Africa did deliver. This phase went on for a bit longer, because it partly coincided with the third phase, the retail boom, and the mushrooming of shopping centres. But the music has stopped, and the sector is down about 76% since its heydays. In fact, the share prices of most construction companies are down more than 80%. Well known ones, like Basil Read have gone into business rescue.

The third phase can be described as the retail boom. The index has increased by 325% over the last 8 years but seem to be running out of steam very fast. The start of the run was caused by the sharp increase in social grant beneficiaries. In 1994, about 4 million received social grants, by 2008 it was about 8 million. By 2017, 18 million South Africans received some form of social grants. And they spend it. Companies like Shoprite, Pep and mr Price reported dazzling growth figures.  International retailers like H&M and Zara couldn’t wait to open more stores in South Africa. To turbocharge the trend even more, unsecured lenders were happy to finance the difference between the wants of consumers and their ability to have. But this trend, like the two before, was is not sustainable. Not only is the government constrained by their budget on how much they can expand their social spending, but the boom in the retail figures masked another trend: for the last 8 years, the private sector has been shedding jobs, while the government and state-owned enterprises (SOE’s) have been adding jobs. Overall the unemployment rate, though high, remained relatively constant. In 2016/17, national government spent about 7 out of every 10 Rands on grants and employee compensation. That leaves precious little to spend on project enhancing the competitiveness of our economy, like new highways, schools or hospitals.

And what was the overarching theme of the JSE Index? We have had a few, really big companies doing really well. The JSE is a very concentrated index. If one takes the market capitalisation of the index (the value of all companies listed on the JSE), and then divides it up into three equal “boxes”, then the first box consists of 2 ½ companies, the second of 16 companies and all the other companies (200+) combined would fall into the third box. Clearly, the biggest 10 companies have a far greater influence on the performance of the index than all the other companies combined. Within the top 10, you will find companies like British American Tabaco, Richemont, Naspers, BHP and Glencore. The only thing they have in common is that they hardly earn any money (or in Naspers case – any asset price value) from South Africa. All these companies have been doing well and kept the market at elevated levels, because of their foreign earnings.

So what are the underlying problems of the economy, and is it possible the fix them quickly?

It is complicated. Like the performance of a football team, there are a few quick fixes. But to be consistently winning, the foundation of the team needs to be such that there is a depth of talent. This would give the team the ability to perform well, no matter what challenge is thrown at them. To demonstrate one fundamental problem with getting the South African economy going again, lets look at how the economy developed between 1980 and 2016.

In 1980, manufacturing contributed 22%, mining 21%, agriculture 6% and finance 11%.

In 2016, finance is the biggest sector, contributing 20%, followed by government at 17%. Manufacturing declined to 13%, mining 8% and agriculture only 2%. In other words, the government has shifted the economy from a labour intensive to a skilled based economy. But the schooling and system has not produced more skilled labourers. They are needed in such a skills-based economy, because if you can’t read nor write fluently in English, or compound mathematical equations, you can’t be employed at a bank or as an engineer or similar professions.

According to Stanlib, an investment company, each year there are 1.24 million children starting their school career. By grade 10 there are only 1.11 million scholars. That number gets drastically reduced to 687 000 by the time they write their school leaving exams. Of those, only 270 000 will take the maths exam, and only one in three kids get a mark of 40% or more. So only 89 000 pupils will finish school with a pass in maths of 40% or more, that is a rate of only 7% of those who started school.

The story continues at University. Again, according to Stanlib, only 17% of all students at the public universities will obtain their degree. That is no more than 30 000 graduates each year, far too few to replace the skilled labourers retiring each year. The lack of skilled employees become obvious in all corners of the economy. For example, only 55 municipal technical divisions, out of 257 are headed up by an engineer.

The other fundamental problem of South Africa is that the Unions are too dominant. Their membership has been in decline for years, but they remain just as powerful as before – making up for the lack of new members by using increased violence. Year after year, they have demanded above inflation increases, thereby increasing the unit labour costs. Our average manufacturing wage are now 32 times higher than that of Ethiopia. Not surprisingly, China’s “one road” initiative is focused on countries north of Kenia.

Partly because of the high unit labor costs, industries like manufacturing are increasingly relying on robots (the BMW assembly plant near Pretoria is 95% robotic). Mining are shedding thousands of jobs and closing unprofitable shafts while mothballing marginal mines. Just to underscore the Unions complete lack of business understanding, they have now demanded that trying to keep a company profitable is not a strong enough reason to reduce the workforce. They want to make it even harder to fire employees. An analysis of Impala demonstrates the problem facing South African companies. Over the last ten years, the government got R19 billion, labour R77 billion and the shareholders had a loss of R228 billion (that includes the capital loss of the share price, which is now at levels last seen 20 years ago).

The poor education and the ridged labour laws cause a massively dysfunctional labour market. Out of 37.7 million working aged South Africans, 16.4 million are employed. Roughly half of those pay income tax, because most just don’t earn enough. This causes a tight spot for the South African government. They have hardly any room to raise more taxes. Taking into account World Bank indicators, South African tax-to-GDP ratio at 26% is much higher than the world average of 14.5%. In fact, South Africa has the tenth highest tax-to-GDP ratio in the world.  

Under the Zuma administration, South Africa binged on debt, mostly through guarantees to their state-owned enterprises like Eskom and Transnet. They have reached now a debt ceiling where any further increase would surely convince the rating agencies to downgrade the South African debt to junk status. So where to from here? If the government under Ramaphosa is not able to take on massive amounts of debt and spend it on infrastructure projects, what can they do?

Firstly, they need to recognize that they need the help of investors, most of them foreigners. That means that the environment should be as investor friendly as possible. They would, for example, like to have policy certainty. When they make investments where the payback period is 20 years, they want to be sure that the rules don’t change midway through. The returns that they get from their investment should be attractive enough to convince them to invest into South Africa, and not Argentina, Chile, Vietnam or Portugal. The investment world is fluid, and investors are not limited to invest into South Africa – they can invest where ever they want to.

Secondly, they will have to rebuild the schooling system. It doesn’t help that a child in the rural areas will have a 1 in 100 chance of eventually being able to study, not because of costs, but because of their dismal schooling system. It also doesn’t help that all teachers are paid the same, even though the national average of absenteeism of teachers is 40%. Good teachers need to be paid more, and bad teachers (or absent teachers) need to be fired. Mathematics and English are crucial in today’s world and should be compulsory subjects. The pass rate should be calculated on the number of pupils starting schools each year, and the governments target should be for 80% of those to pass matric. The government should also focus much more on early child development (the first 1000 days), thus making sure that everybody gets the same chances in life.

Thirdly, the state-owned enterprises should be freed of corruption and returned to profitability by a management team that is employed based on their merits, not their political affiliation. The tender processes need to be transparent and accessible to everybody. Their debt levels need to be reduced by raising more capital through a partial listing on the JSE. They could contribute greatly to the economy but should not be an expense to the economy. Since the fiscal policy is a zero-sum equation, spending money on bail outs of the SOE’s means that there is less money available elsewhere, for example education or health.

Lastly, the government need to rebuild many public institutions. The Hawks need to be free of political interference and should have the capacity to investigate complex commercial crimes. Currently they don’t. We need more and better policing. It can’t be that the citizens live in fear of violence and crime. The courts need more capacity to hand down judgements quicker and more consistent. The public prosecutors need to operate free of favour and need to improve their competence. Red tape needs to be drastically reduced, and the government needs to be made leaner, more efficient and free of corruption. These are only some suggestions, but they would go a long way towards building a solid foundation for the economy to grow sustainable into the future, and therefor creating jobs and opportunities for everybody. It would raise the GDP per capita and make a real impact on the life of South Africans. They changes will take time to have an effect, but with a strong leadership, it should be possible. Until then, the economy is fragile. It will largely depend on external influences that it has no control over, such as the level of commodity demand of China, the health of European economies and the level of the Rand. Not only would international investors ignore any possible opportunities in South Africa, but talented South Africans would seek opportunities elsewhere.

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International

Down, …. but out? Surely yes

Theresa May has finally come up with a Brexit plan agreed with the European lead negotiator, but as expected, it is of little value for Britain. Is this the final stroke that will end her disastrous term as prime minister?

 

Theresa May did not back the Brexit campaign. She was in favor of remaining in the  European Union, the worlds biggest economic block. But as David Cameron, the previous prime minister, resigned after the referendum, she put her hand up to lead the nation during these daunting times. She suddenly seemed hellbent on fulfilling the wishes of the population and lead the UK out of the European Union. Since she seemed to be the least bad choice, the Conservative Party voted for her to lead the party. But she never had the full backing of her own party. Mrs. May always seemed to want to please everybody in the party, even though they were bickering among themselves. She lacked a vision and clarity, and although she defined “red lines in the sand” they were hopelessly unrealistic. Throughout the whole process the prime minister vastly overestimated the UK attractiveness and economic power. When she finally presented her deal to her cabinet ministers, they were disappointed.

 

The United Kingdom has in the past produced some of the greatest leaders the world has ever seen, from the military, business and government. But just as they most need to put forward one of their greatest, they instead choose one of their weakest. Great leaders have charisma, they are decisive, have a loyal following, are flexible and able to adjust to changing circumstances and most of all – have a sincere enthusiasm for their cause. Mrs May has none of the above.

 

Predictably, the EU dictates the terms of the exit. Britain is not in a position to state demands, purely because it relies more on the EU than the EU does on Britain. And the EU wants to make it as hard as possible for member states to leave the union. This would act as a deterrent for any other populist politicians to promise paradise outside of the union. After famously stating that “no deal is better than a bad one” it is hard to see how this deal represents a good one for the Brexiteers. None of their promises in the campaign leading up to the referendum have been met.

 

I doubt that the prime minister will manage to convince her own party to back the deal, and that it would be voted down. This will leave Britain with a few options: leave the Union without a deal (disaster), try and hammer out a new deal under a new leadership (won’t happen, there is simply not enough time), call for new elections to get a clearer mandate from the electorate (even worse, because it would surly mean that the far-left socialist, Jeremy Corbyn, who in the past has had a soft spot for violent demonstrations to express his view – would become the prime minister). The last choice would be the only sensible one: hold a new referendum. After all, the first one was based on false promises made by populist self-promoting politicians. Now that the public has got the details of the actual divorce, they are far better informed on what a Brexit would actually entail.

 

That’s is if the public even cares. After two years of constant Brexit bombardment and posturing, they might just be so tired of the topic that they surrender. Besides, they would much rather like politicians to focus on running their communities, their cities and their country again.

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International

Democrats – targeting the boogieman

As the Americans go to the poll today to vote for a new house of representatives and a few senate seats, they have the chance to change the path of current politics. The Republicans have a slim majority in both houses. If the Democrats win either of them, their win would have been because of a rise in the “anti-Trump” vote, rather than a vote for the Democrats. These days Democrats are united because of a common boogieman, Donald Trump, rather than a common ideology.

 

Gone are the days of true liberal leaders who could unite the followers behind a shared vision on how a better future would look like. Leaders who don’t try and win votes by discrediting each other but by convincing you with their argument on how to build a society that you can be proud of. And with such a lack of clarity of what they stand for, it will be very hard to beat a showmaster like Trump. It would be even more difficult to come up with new policies that would convince the electorate to vote for them at the next elections.

 

We in South Africa have a similar scenario. With Zuma removed, the EFF and the DA are struggling to define themselves. Their political visions are confused, and their purpose faded. Who should the voters vote for if they don’t get a coherent message? Not one about removing an chauvinistic, polarizing and corrupt fool, but a idea about what you as a party would do different, to make the lives of your fellow citizens better. It seems like the only leaders in politics these days are populists who win on a message of fear and hate. What a sad state of affairs.

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International

The merits of Capital Gains Tax

Taxing a gain that wasn’t there

The idea behind the capital gains tax is simple: tax any gains on the increased value of capital, as the increase of capital was due to a better performing economy. Whether the capital is in the form of shares or property value, it has benefited from a growing economy, and therefor the value of the capital has risen. The taxes would fall disproportionately onto the rich because they have the excess capital to invest. That sounds like a just idea, but is it?

 

Like so many other countries, South Africa fell over their feet to implement capital gains tax. After all, it would raise more money, which the government could use to fund their social upliftment programs and infrastructure spending. They have raised over R100bl since it was introduced in 2001. During the boom years, there was not much pushback, as it only seemed fair that the capital, that was invested in the South African economy, benefited from the strong growth. As governments invest more into public goods, such as roads, schools and hospitals, private capital benefits by being in the vicinity of it.

 

But now in leaner years, one should question the merits of Capital Gains Tax. The problem is that it is calculated on the nominal value of the increase (the nominal value includes inflation). In countries like the USA or Europe, this is not much of a problem, because their inflation rate is about 1-2%. Our inflation rate is three times higher at about 6%, but our economic growth is much lower than that in the West. The increase is capital value is almost all due to inflation. Why should the investor pay a tax on a gain that has not really been a gain at a ll. In-fact, when there is a recession but high inflation, the capital value might go up, but in real terms the value of the investment has decreased. Yet, you would have to pay tax on that. Is that a fair system?