Despite various strikes and downgrades by rating agencies, the South African stock exchange continues gaining upward momentum. Resources continue to climb and capital inflows rise. This seems at odds when you look at the the way investment firms value risks. Movements in the Resources Index might make slightly sense as South Africa is a price setter for platinum and arguably for gold. Cut supply and prices are surely set to rise. What puzzles me is that the entire JSE ALSI rose during this period. Perhaps the returns still outweigh that of other countries and that the risks in SA are perhaps more muted than European markets who struggle on in trying to find solutions for their ailing economies. My only guess is that fundamentals prevail despite all the rhetoric about political instability. Thus, the noise in this equation is perceived as small in investors' decision making process. This is clearly demonstrated as bond yields remain stable.
Sounds like SA is managing its domestic and foreign problems optimally, right? Not really: Have investors looked at the fiscal plans for the next couple of years? Have investors analysed whether people are buying up any new mines or factories? Have investors noticed that government does not deliver books to children in Limpopo even though the education budget is enormous? So, what are the potential returns for the investments government and private business are undertaking?
If you want to get an idea of whether to invest in a country or not just analyse its leaders. Intrinsic valuations focus on a holistic approach to investment. I worry that the current leading party is managing a great country poorly. Government wage growth is ridiculously high compared to government productivity. The Auditer-General's audits on local government reflect incompetence. Political leaders point fingers to Apartheid for its failures. It comes then as no suprise that we witness violent strikes, the violent opposition of unions and the crime levels in South Africa.
The country seems to be heading down an inevitable path directed by leaders who are self-serving. My prayer is that things will change immediately before anger and frustration leads to something far worse. The proletariat will rise against this incompetence, but unfortunately their anger will be misdirected towards those not responsible for their poverty.
People are not oblivious to this crisis. Holding on to a historical occurance seems to disable them from changing. Patterns are hard to break and the biggest obstacle is trusting previous oppressors. People need to find the courage to vote with their heads and not their hearts. Inherent biases lead to sub-optimal voting strategies. The majority of black people refuse to vote for a white leader party. These potential voters either continue to vote the ANC into power, or simply stay away from voting. Things could be different...
SA has spent the last 18 years identifying structural problems. Some are being addressed and others are available but leaders lack the will to implement them. I will list some of the constraints (mainly regarding labour) and talk about the solutions that exist:
1.) High levels of unemployment: This is due to regressive employment conditions such as Broad Based Black Economic Empowerment (BBBEE) that hinders the fair employment of good managers. Just have a look at the recent Commission of Employment Equity (CEE) report. The appointment of black managers in the private sector has been rising. The story in the government sector is that black management completely dominates. I am very careful not to hint at anything particular here, but BBBEE has replaced many white skilled managers. Some of the provinces need a bail out from national government (which is against the law btw.) because they managed their finances poorly. Conditional grants (which are mainly for investment purposes) are not being spent (only about 70%). No wonder that some of these provinces look absolutely horrible when driving through them. Insanely enough, local government "efficiently" spends its bonuses (which does not really seem to be linked to any productivity) and its wages. SORT OUT THE BAD MANAGEMENT OF GOVERNMENT!
Private companies are becoming increasingly more capital intensive. The share of capital to output has been increasing while the share of labour to output has been decreasing. This implies a couple of things that are pretty standard in economics: (i)The wage rate is too high and thus the labour supply curve moves down (less employment), (ii) Labour laws are too stringent (recent talks about disbanding labour brokers are not helping), and the World Bank's cost of doing business survey indicates a worsening in the ability of businesses to perform their tasks. (iii) The marginal product of labour is negative - employing an additional person in your firm does not create more output, but is instead an addition fixed cost, (iv) The skills are insufficient to service the needs of a specific company. Unions hinder the implementation of a youth wage subsidy that will provide the young unskilled population an opportunity to get employment experience, and hence, become more employable in theory.
These four points summarise the major constraints of employing people. Simple solutions exist for each of them. Academics and some business men wrote scores of papers that propose simple and implementable solutions: (i) make sure that wage growth follows productivity growth and not linked to arbitrary measures such as inflation. If inflation is too high, much more than productivity growth, then people are consuming more than they should and possibly on all the wrong things. If wages keep track with productivity then companies can afford to employ people to be more productive. (ii) Unions have a very important function, but in SA they have confused their altruistic purpose with complete anarchy. If they really had the interest of the worker at heart, then they should know basic labour theories about wages and the negative impacts of strikes. This is what you get when you have unions making up political lines. The role of unions need to be minimised and their power should be taken away. They have become corrupt and are not helping the country. I understand the difficulty of balancing the employer's and employee's needs. Fortunately there are many country examples to draw from in getting this balancing act right (a future post on this will come). (iii) Because of all the problems faced by companies and all the labour costs incurred, companies have to think outside the box. We live in a day and age where machines can do the job of ten men. Farmers and manufacturers continue to diversify the means of production. There is very little need for many hands to get a job done when one machine can do the job more effectively and timely. To absorb abundant labour, wages need to be cut or least set to a specified level. Furthermore, foster a hard working culture of learning by doing. Take away the entitlement disease. Everyone is replaceable! (iv) In SA the emphasis is on pass rates rather than quality of education. Universities have a bridging programme to fill the gap left by high schools. Many African country peers (who are all poorer than South Africa) have higher education standards. They have smaller budgets and are yet able to produce better trained scholars. The biggest failure of the state is the education system. Since 1994 little progress has been made to make students better qualified. Every year it is easier to pass matric. Universities also suffer this fate as they are dependent on funding by the state. The state gives universities money in exchange for the number of students who get degrees. Degrees are now dished out. This is a perverted system. Bring back old school standards. Reward teachers based on their results (good quality education) and make sure that there are people who can appropriately evaluate teacher skills. If need be import teachers and replace all the useless and lazy ones. There are many good committed teachers in SA who want to make a difference. Don't treat all teachers the same. What is the incentive then to teach better?
2.) Crime: South Africa has a history of violent crime. Official statistics would have you believe that crime rates are decreasing. What they don't show you are absolute numbers of a crime. If the level of crime is high then any low rate of increase leads to a massive increase in the absolute level of crime. Simply put, the crime statistics are simply misleading. You will be disturbed when you observe the police. What you will notice is that they drive fancy cars sponsered by companies who care. Look at the men and women working for the police. They are all fat (apologies to those who make an effort to stay fit). There is nothing wrong about being over-weight, but the police should be fit people who command a presence of respect. Go to a police station. You'll see them eating all the time. Sure it is a bit of a depressing job that makes you want to nibble away, but you are paid to do a job. They pitch up too late at the crime scene, they don't bother to pursue thieves and just hand you a form to complete so that you can go to insurance companies and claim back money (they charge way above any natural rate). Illegal immigrants flow to SA. Uncontrolled inflow of foreigners will surely be accompanied by crooks who flee their countries. The biggest problem is that the punishment for crime is not severe enough. Rapists, thieves and murderers don't go to jail for long. Simply increase the jail sentence. Cut off the hands of thieves (depending on the severity of the crime) and forever lock away rapists and murderers. The solution is easy: Toughen up the police service. Give them bonus pay for excellent work (cases solved and acts of bravery). Make the punishment fit the crime so that criminals will fear the law.
3.) People don't get what they pay for: How much of your salry goes towards paying taxes? Might be the right number. You see, the state has dual objectives in terms of taxation: Maximise revenue and take care of the welfare of the people. Currently the state is doing everything it can to collect more revenue. Capital gains taxes have increased to broaden the tax base of the rich who were clever enough to transfer funds to these taxes (i.e. the rich pay a lower effective tax rate if they can transfer funds to either a cc or somehow use Capital Gains Taxes). Secondary taxes on companies, now Dividends tax, have increased and there are always talks of a super tax. Now it is ok to pay taxes, but you need to get something in return. Remember that the government is appointed by the people, and it is not the government that should dictate terms. Now let's check what you are paying for: Education, health, wages to government officials and various capital projects and services. Most skilled people pay the largest portions of taxes. It is most likely that skilled people will find higher paying jobs. Labour taxes are progressive (i.e. if you earn more you pay more). But skilled people hardly use public hospitals or public schools. Simply because the standards are too low. They benefit from working condition roads (they might have to pay for that too depending on whether National Treasury wins the court case on e-tolls). You are paying people who are telling you that you should pay more while they simply do not work efficiently. But rich people also pay taxes because they feel guilty that they have a lot more than most. By paying taxes you put your trust in government to distribute some of that wealth. Unfortunately government is not doing a very good job at that. Social welfare spending is super high and some studies show that people abuse this system and disables them from working. I.e. a poor person will take a child grant rather than working. This is perverted! I know, what other choice do you have? Vote differently!
To sum up; people want jobs, they want to feel safe and they want what they pay for. The solutions exist, but South African leaders have a stinking attitude problem. Stop driving your fancy cars and start doing what the people pay you to do. It is frustrating knowing what the potential of this country is and just standing by while things go from bad to worse.
Stop sobbing and realise what is happening. Let it really sink in. Fear will set action into motion. And this action needs to be mobilised to heal a country from its sickness. A sickness that is self imposed by elected leaders who know very little and worse, care very little. If things will inevitably go bust in South Africa, is it not better to fight the system as best you can rather than watching the country burn? The solutions are simple enough and they will work if only you stand up for what you believe.
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