How to fix SA – a MUST read

How to fix SA

There is considerable talk on what is going wrong in SA, and to fix things we must (i) ‘stop this’ and ‘stop that’, (ii) change the leadership, (iii) fix education – and then it should be plain sailing. Clearly it is much more complex than that! The article below by Peter Bruce (long – 4000 words) is a GOOD read and gets to the heart of some of our peculiar and unique complexities and challenges.

It provides much food for thought and much subject for dinner-party debate!

A MUST read! (Comment by Steuart Pennington)

by Peter Bruce

Leaders are talking about how to repair what Jacob Zuma has broken. But while change must come, we dare not turn a blind eye to economic reality, writes Peter Bruce in this manifesto for economic reform. It’s a plan that cuts through populist and conservative shibboleths alike in a quest for inclusive growth based on the give-and-take and, above all, the trust among business, labour and government jointly drawing up a map for renewal.

The air is thick with anger and threat. 2017 in SA was always going to be a dangerous year. The ANC elects a new leader in December. That person will probably be the next president of the country after national elections in 2019. December’s going to be big.

Do we keep drifting or can we save ourselves? As President Jacob Zuma contorts our politics to ensure his personal survival, many sections of our society are coming together to talk — not so much about how to stop him, but what to do once he goes.

What kind of society do we want? Can we agree what it means to be a South African? Is trust possible between business, government and labour? Between them and the poor and the destitute? If you don’t care, consider emigrating.

SA urgently needs economic reform. Call it radical economic transformation if you’re a desperate ANC leader, or its distant and superior cousin, inclusive growth, if you’re in the real world. But change must come.

No stable society can live with our levels of poverty. And we have been given, by Zuma, not an engaged and constructive government but an object lesson in incompetence, greed and corruption. Fortunately something that is innately South African, that cuts through all the things that divide us, is rebelling against it.

It’s that innate thing we must reach for now. We are a decent people, most of us. We come from different and difficult pasts but we want the same future — security, prosperity and liberty. The passing of the Zuma era is a wonderful opportunity for renewal. It is a time to get it right.

SA is blessed with real leaders. Cyril Ramaphosa is a genuine reformer. So is Mmusi Maimane. So is Julius Malema. These are patriotic and authentic citizens who, between them and despite their differences and constituencies, have the good of the country at heart.

The best place to start is to ask “what works?” Malema knows more about the poor than most politicians. Ramaphosa blends our histories in the best possible way. Maimane is the living embodiment of reform, of transition — a young black man leading a party of anxious and experienced white people and a growing throng of young and progressive black people.

Deputy president of the ANC,Cyril Ramaphosa.Picture: ESA ALEXANDER 15/02/2013 SundayTimes

Cyril Ramaphosa. Picture: SUNDAYTIMES

But at the heart of our difficulty now, because the state is so distracted by its own corruption, is trust. It is our missing ingredient. And you can’t invent trust. Just like you can’t invent a “black industrialist”. You have to work at trust.

To do that constructively you have to think about the two core questions in any political economy — how do we create wealth, and how do we distribute it? The answers dictate where you end up.

They aren’t academic questions. You can’t simply stand up and declare yourself a “developmental” economy if the tools of development don’t work or are used for the enrichment of a few. This is not la-la land. This is a serious economy. You have to make smart choices.

Take Australia. It is much richer than we are. Its GDP in 2015 was US$1.34 trillion (a trillion is a thousand billion). Ours was $312.8bn. This coming October, the last car ever to be made in Australia, a Toyota Camry, will roll off a production line — the end of a fiction that said a small economy at the bottom of the world could really be a serious manufacturer of vehicles.

The point is to leave no-one behind. We will be an inclusive economy when every South African has a stake in the country’s success

The Australians have the luxury of choice now because they made good policy in the past. We don’t have the luxury of deciding we don’t need to make cars any more because we’ve made a mess of our economy. And it started long before 1994. We’re trapped. We need to make cars here, just for something to do; and we have convinced ourselves for years that we can become an industrial economy again, fired by a mighty Eskom and a vibrant string of state-owned giants.

But it will never happen. The costs of keeping car companies producing here is eye-wateringly high. We pay them to stay because they create jobs. Then we kid ourselves that if only we could “beneficiate” our own minerals rather than allow foreigners to mine them and ship them out we would be able to remake ourselves. The exact opposite is true. With every passing day our industrial future becomes more bleak.

As China walks away from unprofitable sectors, other countries in Asia are picking them up. Some shreds of the textile business may come Africa’s way but the industrial world is shrinking. It is being replaced by intellectual products that always rely on a huge internal market to gain traction. We don’t have the scale in SA. And, in dollar terms, the cost of our labour simply cannot compete. We have priced ourselves out of manufacturing.

Beneficiation is a cruel mirage. We should instead stick to what we’re good at — mining, farming and food processing. And in the process we should raise the royalties mining companies pay for extracting “our minerals” and encourage them to extract more and faster and get as many citizens as possible farming quality and exportable foods.

We turn a blind eye to economic reality at our peril. We are what we are, a prisoner of our sins. One of them is open land. So much emptiness lying there unused and wasted, whether in the middle of nowhere or near big cities. How is that possible?

But our greatest sin is our inability to understand why we cannot grow; to assume that if you say you want “radical economic transformation” it will somehow happen and will magically produce the growth you seek.

Sadly, answering the core questions about how we create and distribute wealth is career-limiting in politics (ask Chris Malikane, new adviser to finance minister Malusi Gigaba). Few people want, in public, to put meat on the bones of “radical economic transformation”.

Some try to spin it by saying it’s just another way of describing inclusive growth but that’s rubbish. Inclusive growth is complex and difficult. Radical economic transformation is simply a change of ownership of the big economy. Zuma assumes black capital would behave better than white and he’s profoundly wrong.

But we are in a season of hope. Leaders are talking about how to fix what Zuma has broken. Others want a new dialogue, a new Codesa (Convention for a Democratic SA). Wise heads warn that you don’t start a dialogue you can’t control. But something has to change. Are we as tough and resourceful as we think we are?

And what do you mean, people ask, when you mention radical economic transformation or inclusive growth? What might a map for economic reform look like? And, as any answer rolls out, ask only two questions of it. Does it encourage inclusion? And will it help economic growth? We have nothing to lose by trying to find some answers. The only thing I know for sure is that the best way to build trust among people is to do difficult things together.

Try to imagine the start of a dialogue between government, business and labour that requires each to bring to the table a concession or concessions that they offer in return for the promise of some stability and more prosperity in our lifetimes.

We would need to start with a difficult proposition. While our private sector is the glue that keeps the economy afloat, even today, it is also a fact that our capitalism is a menace to itself. It is greedy, self-serving, Victorian and subversive of trust. A government leader of any quality would long ago have begun talking to business to take them along a better path.

Fundamentally, there are three reforms to which business needs to accede to. First, it must work much closer with labour. Second, it needs to begin to think and behave long-term rather than chase quick results. Third, it needs to create an immense pool of capital from within its own resources with which to help repair the country.

Government should talk to business and labour about adopting the German model of mitbestimmung or co-determination, in SA. If either resists, simply impose it. Basically, the German model in companies is to have two boards, one executive and one supervisory. The supervisory board has rank and comprises shareholder and worker representatives 50:50, with the chairman always coming from the shareholder side and having a casting vote in the case of a tied vote.

It forces the two fundamental arms of capitalist economies to get along with each other. It builds consensus and trust exactly where it is required. In many cases worker and shareholder representatives take sides with and against each other, as recently occurred at Porsche. The system means labour gets the same information as shareholders and at the same time. It democratises the real economy and that’s how you grow strong and resilient.

In SA, though, neither business nor labour is keen. Business thinks the very thought of those chaps on the board is, well, appalling. Labour worries about being “co-opted” or selling out. But the evidence that it works, over time, is clear in comparisons, among developed industrial economies, of German productivity.

Just the diversity inherent in co-determination offers established business a new future. Look at what diversity did to Silicon Valley. There was a fine piece in the Financial Times by a former banker, Philip Augar, recently, arguing for greater diversity on the boards of British companies.

“Britain has a much praised system of corporate governance, often described as world-class,” he wrote. “It does indeed look fine on paper, but when important oversight bodies such as audit and remuneration committees are formed of like-minded people unlikely to challenge each other’s beliefs, the system falls down.

Barge in and break them

“To live up to that world-class billing, governance in practice needs to match governance in theory and for that to happen it needs to open up to diverse voices.”

In the face of a decision by Prime Minister Theresa May to put worker representatives on British boards, writes Augar: “A subsequent British government report expressed concerns that worker directors would lead to greater conflict in board discussion, slower decisions and ‘the risk of decision-making shifting away from the boardroom and into less formal channels’.

“It was an insight into the kind of boardroom thinking that seeks any excuse to avoid challenge from those with a different perspective. The message was that ‘we want to continue with things our way and if you make us have these people on our boards, we will simply have the real discussion behind their backs’.”

Established white boardroom attitudes in SA are going to be similar, if not worse. But there is no need to respect them. Barge in and break them. Real diversity, not the polite version, works and it works for everyone.

The second thing business has to do is to stop chasing quick executive enrichment. It widens inequality and threatens the long-term survival of our market economy.

For decades most listed SA companies have chased half-yearly earnings targets, a practice that almost all modern literature agrees is useless. In the race to meet a target the CEO will often spend a month a quarter on one form of roadshow or another, trying to convince institutions to buy or at least hold his company’s stock. So at least 25% of the CEO’s time is not focused on strategy or performance of the business. It is focused on the price of the CEO’s share options.

And for too many, much time is lost poring over the details of the company share incentive scheme in order to get as much money out of it as quickly as possible. Weak SA boards are bullied by greedy executives. Our CEOs think rather a lot of themselves, but for the most part they run established companies started by long-dead entrepreneurs who did all the real work.

The fight against short-termism is conventional in the rest of the world. Larry Fink, CEO of BlackRock, the world’s biggest fund manager with $5 trillion invested, begs the CEOs of the companies he invests in not to chase quarterly earnings targets. Rather, he says, chase your strategy; tell your board what it is at the beginning of the year and tell them every quarter how you’re doing.

Finance minister Malusi Gigaba could strike a real blow, in his first budget, for strategy over enrichment by hitting the proceeds of the standard three-year incentive scheme with a punishing 75% tax and rewarding six-or seven-year schemes with tax rates below 20%. It’s time CEOs ran their companies and not their incentive schemes.

Equally, he could reward shareholders who offer companies the stability to grow jobs and make profits by holding their shares for longer and punish those who pressure CEOs into panic cost-cutting, which almost always means job losses.

That said, there must also be rewards for enterprise. There are still people running businesses they started. They are remarkable. The state should appreciate the power of the family business generally and encourage them. There are no share schemes and people work for each other. The family business, the Mittelstand, is the heart of the German economy and, there, too, co-determination rules. The workers sit on the supervisory board and so, almost always, does the company’s main banker.

Finally, business should revisit an idea one of its own, Jacko Maree, had years ago. If every company on the JSE were to issue, over a period of two years, new shares equivalent to 1% of its market capitalisation they would raise, at the current JSE market cap, about R140bn. Company share prices can move either way by more than that on any one day and no-one turns a hair.

This would be pooled into a development trust, run purely by the private sector. Trustees would not be paid and their remit would be to spend it fast. Ask the state what it needs. Fix the hospitals? Sure, but what the trust spends its money on, it gets to manage. Deal?

People say that when Maree had that idea it might have been possible, but that because foreigners own so much of the market here now, it would not be doable. I disagree. Foreign investors know better than we do how important it is to have an SA at peace with itself.

While we’re in the state we’re in, expectations are low. The Zuma administration cannot fix its own malfeasance. Zuma may want to do the right thing by the country but he just does not understand the extent to which he has been adulterated by outsiders, the Gupta family being only the most recent to own him. It’s a sad story but it may one day be our saving grace.

Zuma’s proposals to change the constitution to allow for the expropriation of land without paying for it will spell the end of foreign investment here and, anyway, Gigaba has already, and bravely, ruled it out. The ANC has had 23 years of the land clauses in section 25 of the Bill of Rights to get land right and if they haven’t achieved it yet, it’s because they are just hopeless.

Section 25 spells out how land reform should take place with compensation either agreed or decided on by a court. But clause 8, the final clause in the property rights section, says: “No provision of this section may impede the state from taking legislative and other measures to achieve land, water and related reform.” C’mon, a child could get this right without reaching for the constitution.

We have to assume for the purposes of this manifesto that government is both earnest and honest in its quest for reform, for inclusion, consensus and growth. And the great thing is, if you’re serious, it’s easy.

First, land. Do an aerial cadastral map of the country on which every piece of land, every roof, every pasture will show up. It will quickly tell you what land is being productively used and what isn’t. Unused land is what gets put into the pot. Some of it will be impossible to live on, or just too far from anywhere. Some of it would make excellent grazing, some will be arable.

You don’t need to change the constitution. Pass a “use it or lose it” law on land. It’s a common device around the world. The state owns vast tracts of land it doesn’t use. So does the private sector. Use them and explain, up front, who gets the land and why.

Second, begin work on paying a national basic income grant. There will never be enough jobs in SA for everyone. How much could we afford? Could it replace the current welfare system? The numbers are huge, but so is the R14bn PetroSA lost last year and hardly anyone seems fussed about it. Meanwhile, ensure that everyone over 65 gets a pension equivalent to the prevailing minimum wage. Lots of countries do it.

Then, the big one. Give everything the state owns to the poor, the people you claim to represent. And then rent it back from them and manage it all responsibly. Find a mechanism, be it community trusts or individual shareholders. Give them the embassy in Trafalgar Square in London and the more than 100 huge embassies and ambassadorial residencies we own around the world. Give them the Reserve Bank building in Tshwane, the Simon’s Town naval base near Cape Town, the Waterkloof air base, the Union buildings, the houses of parliament, Transnet, Eskom, Denel, SAA and all the state-owned companies. Give them the Kruger National Park.

We are trying to do the wrong things

It isn’t privatisation, it’s socialisation. Give it all to poor black people exclusively. And rent it back from them and then run “their” assets as though your life depended on it, which it might. Your only promise is that they get a book of vouchers, or coupons, that entitle them to a monthly share of the rent or profits from this package and that if rent or profits are not forthcoming you are there to explain why and to take the political consequences.

I know these things have been tried before — Czechoslovakia got it wrong. We can learn from that mistake.

The point is to leave no-one behind. We will be an inclusive economy when every South African has a stake in its success. But being inclusive isn’t enough. We have to grow the economy as well and that is only possible through greater investment.

Sadly, we have lost scale as an industrial economy. Efforts to win it back are failing because we are trying to do the wrong things. Often this is because the Zuma government is at odds with itself. Eskom’s threat to stop plugging renewable energy into its grid led to the closure of at least one factory (a foreign investment) making solar panels.

And while our industrial policy tries to focus on exports, the fact is our wages and employment conditions are just not competitive in dollar terms, even at R14/$. We will never make a T-shirt or a domestic generator as cheaply as they can in Bangladesh or Thailand. Well, maybe not never, but not for the next 70 years and then only because those Asian economies will be making smart choices like the Australians.

Worse, our domestic market is just too small to allow any industry to scale up here first and then spread around the world.

There are two broad things the state can do to make growth possible and sustainable here. The first is to do its job properly. Investors like efficient states. Build great infrastructure. Build smart cities. Be consistent. Are mining companies once empowered then always empowered? Or not? Why do we still not know? It sounds like a political call but it’s an economic one. Which answer will guarantee more investment?

And I mean foreign investment. It may stick in the craw of some but SA lives off foreign investment, whether we borrow money from foreign institutions or whether they invest it here of their own volition.

And, of course, the best way to get foreigners to bring their money here is as tourists. This is such a slam dunk it is amazing we still argue about it. A tourist dollar is an export dollar. In our hands. And we barely have to move a muscle to get it.

I recently attended the World Travel & Tourism Council (WTTC) summit in Bangkok and, boy, are we South Africans missing out. In 2016 there were 1.2bn tourists in the world. They reckon that will be 1.8bn by 2030. Tourism adds around $7.6 trillion to the world economy every year.

SA recorded 10m arrivals and overnight stays in 2016. But 10m is tiny. Thailand hosted 32m tourists last year and expects that number to grow in double digits for the next decade. Spain last year took in 75.3m and has among the highest foreign-exchange reserves in the world as a result.

We must make a plan, a national priority, to get to 25m tourists here by 2025. We do that by treating tourists like the treasures they are. Don’t hurt or insult them. Don’t steal from them. Don’t take advantage of them. SA is so bountiful that people who discover us will not only come back again, they’ll tell their friends to come too.

Our bad attitude towards foreigners

Our rough politicians hate the idea, of course, of “rich” foreigners treating SA as a “playground” but that is a stupid response to the scale of the opportunity. We have a far, far better chance of radical economic transformation or inclusive growth as a major tourist destination than we ever will as an industrial economy.

Gigaba probably already knows this but he would not have liked what David Scowsill, the WTTC president, had to say in his opening remarks to the summit in Bangkok: “Visa reform is the biggest single step any government can take to increase the number of international visitors. Let’s lose the paper visas. The consular visits. The long queues. The bureaucracy. It took the world’s airlines just three years to move globally from paper tickets to electronic tickets. What prevents our governments from doing the same?”

If we could do tourism as well as we can mine and farm and process food, we’d be good to go. Everything else is a sideshow. I went into Thailand without a visa, spent about R10,000 in three or four days, and left.

There is one final pill government, any government, must swallow. It is immigration and our bad attitude towards foreigners.

We simply have to allow people with technical skills to come and live here, be they white, brown or orange. An economy is only as good as the sum of its skills. Skills reside in human experience inside human brains and the human with the skills has to be present to pass them on. Ricardo Hausmann, the great Harvard development economist and a former Venezuelan planning minister, lectures first-year students on the cases of Ghana and Thailand. In 1963 they were the same size. Ghana produced cocoa and Thailand grew rice.

Today the Thai economy is 10 times larger than Ghana’s. Thai GDP in 2015 was $395.3bn. Ghana managed just $37.86bn. The Thai success was down to just one thing. They allowed skills in and Ghana kept them out. The skills into Thailand came from industrial investors who knew nothing about rice but made everything from computers to fibre-glass canopies for bakkies (of which there are a lot in Bangkok) off relatively cheap Thai labour. It is a huge industrial economy because the Thais decided that what mattered is that things got made in Thailand, not who made them.

Sure, a Chinese carmaker is going to invest R12bn in a new assembly plant in Port Elizabeth. Or maybe not. A Chinese steelplant for Limpopo just fell through. But the PE car plant will be full of robots and probably directly employ less than 1,000 people. It’s not enough. If we could create economic zones where you could suspend or at least ease labour laws, even if you doubled the prevailing minimum wage in return, investors would come.

What we have

Our infrastructure is good and improving. We speak English. The land and the weather are fantastic. And we’re nice people. What more could an investor want?