How the nation is shaping up

Starting 3 years ago, the Presidency annually releases a set of development indicators measuring how SA is shaping up. 76 indicators, grouped around ten areas of our national life, are measured and compared over time. (www.gov.za).

SA must be one of the few countries in the world taking stock of itself like this. The stock take may be uncomfortable, but it enables us to be better informed on what we achieve and what we don�t. We can look beyond the screaming headlines of the day to the more important underlying trends in our society. That is the value added by the Indicators - they enable us to measure progress or regression in a systematic and holistic way.

Strikes and unrest - SA�s winter of discontent

The combined effect of strikes and social unrest has attracted the attention of all, including the international news networks.� Lets analyse them separately as they are driven by very different circumstances and causes.

Strikes

Traditionally the SA winter is the time when most wage negotiations are conducted and thus also when most strike action occur.� The record strike years during the last 25 years were 1987 (Mr PW Botha was still in charge & Mr Mandela in jail) and 2007 (then Mr Mbeki was in charge and Mr Mandela in retirement).�

In 1987 9 million man days was lost through strike action, and in 2007 12,9 million man days.� (There were at least 5 million more people employed in 2007 than in 1987, but ignore that.)� The 1987 numbers were influenced by the mineworkers� strike when Cyril Ramaphosa made his name, as well as by a big strike in the transport sector.� In 2007 the entire SA public service (including white, Afrikaansspeaking teachers) went out on strike for the first time.

The average man days lost per annum for the 15 years of democracy comes to 2,5 million.� If we ignore the highest- and the lowest-scoring years, we end up with an average of 1,8 million man days lost per annum for the remaining 13 years.�

Till the end of June, 500 000 man days were lost due to strike action in 2009, according to the respected strike report from Andrew Levy and Associates.� From our own preliminary research we expect a further 1,5 million man days in the second half of this year, giving us a forecast total of 2 million man days lost for 2009 - slightly higher than the 1,8 million but less than the 2,5 million.� It thus looks like an average year.

Not that much more

In the last big strike year, 2007, average settlements were around 7%.� Inflation then, like now, was running at just over 7%.� For the lower income groups inflation is now running at 9% (food and transport are the sticky items that impact more on the lower incomes).�� Settlements of 10% are therefore not so outrageous.

There could also be something else at work.� For 14 of the 16 years from 1992 to 2007, settlements were below the inflation rate.� Hard to maintain your living standard, let alone improve it, if year after year you get less than inflation.

These numbers may also explain why household consumption as percentage of total GDP has slipped from 63% in 1997 to 61% in 2008.� That is in spite of about 4 millions jobs being created in that period.� One would have expected consumption to keep pace with growth in the economy, but it has not.

Social unrest

These are generally seen as protests against �poor service delivery� and thus as an indictment of government.� No doubt this is the case in many instances.� But I would suggest two other interpretations are also applicable.�

Democracy more than delivery

The first is the Steven Friedman argument that unrest is also due to �too little democracy�.�� There are cases where residents protest because they do not like or want the services that are being delivered to them - e.g. re-locating them from a squatter camp to alternative accommodation so that the squatter camp can be upgraded.� In both the Western Cape and Gauteng this has led to protests.�

Clearly the issue is not service delivery, but engaging with people.�

The same goes for protest actions in Mpumalanga where the premier of the province did not arrive for a meeting with residents after he had promised to do so.� This is not about service delivery but about listening to people and engaging with them.� In this respect Mr Zuma is setting a good example by making his unannounced visits to Balfour and Mr Sexwale by staying overnight in Diepsloot.� Political leaders must be seen to feel the pain and joy of the ordinary people.� Lula da Silva has put that to good use in Brazil, Bill Clinton in the US.� Sometimes people want recognition more than delivery.

Lesson from China

In 1994 China experienced 10 000 incidents of public violence.� In 2004 the country experienced 80 000 such incidents.� Think of it, more than 1500 protests a week!!�

Yet, in the ten years separating those two numbers China made enormous progress with growth and development: jobs created, poverty rolled back, infrastructure developed�� However, that growth and development (or �service delivery� in SA parlance) did not stop the unrest.� In fact, unrest in China got worse - from 10 000 to 80 000 incidents per annum.

It seems to me the lesson from China is that progress is no guarantee of an end to protest.� Progress is uneven in societies going through profound transitions like China and SA.� Not everybody is happy, resulting in social unrest.�

SA�s own experience confirms this.� Two years ago we had xenophobic violence, yet it was also year four of 5% p.a. growth.� Growth is no protection against unrest.

Stability

There are no indications that the protest and strikes in SA undermine political stability.� On the contrary, Mr Zuma and several ministers have come out quite strongly against violence and misbehaviour.� They are quite careful to defend the right to strike and/or protest, but also condemn unacceptable behavior.�

So What?

�          This year�s strikes are not outside the norm of the last 15 years, although TV images may suggest otherwise.

�          Social unrest is a feature of a society in transition and more democracy, or connection with the voters, is needed in addition to efficient service delivery.

�          Like China, SA is a society in transition.� Social unrest will occur.�

On a recent swing through London talking to analysts and journalists I was struck by how much people wanted SA to be a success.� Not that SA is top of their minds with the global meltdown on the one hand and the shenanigans of British parliamentarians� expense claims on the other.� (The fury around the latter was quite palpable).�

There were, of course, also the few that insists on seeing SA through the prism of a Zimbabwean analysis.� They usually became unstuck with the counter-question what are the similarities with Zimbabwe?� The discussion could then revert to a more thoughtful level.

Whose success?

The areas where those I encountered wanted SA to be successful are also the areas where South Africans themselves want to see success:� unemployment, poverty, health, education, crime.� There is not much difference between what most South Africans want and what well wishers overseas want.� There was a nuanced understanding of the importance of social development.� I had the obligatory few things to say about crime, but even that took a back seat to the imperative of social development.�

The focus, domestically and globally, is increasingly on the results of democracy and not so much the miracle of democracy.

Against this backdrop the successful hosting of the IPL cricket tournament, the Confederation Cup and the British Lions tour of SA could not have come at a better time for this country.� Talking is one thing, actually delivering something else.� And on these matters SA has delivered.� The benefits for South Africa in terms of social as well as financial capital are obvious.�

Growth

The one question that kept on popping up (and again, it is also a question we ask ourselves here) was what our growth expectations are for the next few years.�� It seems as if everybody is on Joseph Stiglitz�s wavelength:� �Without growth there cannot be sustainable poverty reduction�.� High growth is important for social progress and social development.� One cannot have the one without the other.� It is thus understandable that the question keeps popping up.�

In response, I always played our growth prospects down because I think the international environment is going to be tough for quite a while.� Thus I suggested around 2,5% to 3% growth per annum over the next few years.�

If one compares that with a population growth of less than 1% p.a. the sums add up quite surprisingly.� Over the 15 years of democracy our per capita incomes have increased by some 30%.� At a 2,5% growth rate that figure can again be achieved over the next fifteen years.� Nothing like putting one foot in front of the other and just carrying on, regardless.�

There is another reason I played SA�s growth prospects down.� Globally we have entered a period of state capitalism.� Stiglitz summarized it well:� �Old style Communism won�t be back, but a variety of forms of excessive market intervention will return.� And these will fail.� The poor suffered under market fundamentalism� -� we had trickle-up economics, not trickle-down economics.� But the poor will suffer again under these new regimes, which will not deliver growth.� Without growth there cannot be sustainable poverty reduction�.��

Ambition

This brings to the fore what our economic ambitions are.� Are we happy with 2,5%?� Or do we want to achieve more?� Do we want to be like Botswana and South Korea?� Or are we happy to be like Brazil in the 1980s or India in the first 30 years after independence?

What the economists would call our trend line growth rate (a rate at which we can grow consistently without running into boom and bust cycles) is probably around 3,5% pa.� Well, if we grow at that rate and not at the 2,5% that I hung my hat on, we can cut five years off the 15 years needed to increase per capita incomes again by 30% - the number achieved during the first fifteen years of democracy.�

Or to put it in a different way, at 1% extra growth per annum we can add one million extra jobs to the economy over a six to seven year period - slightly more than the lifetime of a parliament.� Given that one job supports at least 2 to 3 people, it means a difference to the lives of 2 million to 3 million extra people.� Not bad for just 1% growth.

If in the mean time we chip away at the constraints that inhibit our growth potential, that 3,5% ceiling can in due course be lifted.� And so we can end in a virtuous circle.�

But it is all dependent on our ambition.� It is a conscious choice.���

Planning Commission

Perhaps this is where the new Planning Commission can play a role i.e.� to set a vision and a growth target for our economy, backed up by a credible plan and actions to achieve that growth.�

Let �s not forget the constraints that we must systematically chip away to lift our growth potential.� That will mean that we must commit ourselves to an ongoing program of reform as we learn from our experience.

The ANC�s election manifesto of making unemployment and decent jobs a top priority is now, correctly the goal of the government.� The question is how to change that manifesto promise and government goal into reality.� �Employment opportunities� created under the public works scheme, important and useful as that is for poverty relief and giving hope, cannot compete with sustainable jobs created by sustainable economic growth.� We need more.� Stiglitz again:� �Without growth there cannot be sustainable poverty reduction�.�

Learn from the BRICs

A study of the remarkable economic turn around and take-off that took place in Brazil, India and China (Russia is a bit of its own story) reveal some common experiences.� Those countries embraced openness and an export orientation; and used markets cleverly to achieve high growth rates.� I am fairly certain a study of Botswana�s remarkable success would reveal the same.�

In the BRICs there was no slavish devotion to neither free market fundamentalism nor to socialism.� Rather, there was a search for what works and what can make the difference.� Thus Deng Xiaopeng�s famous �What does it matter if the cat is black or white, as long as it catches the mice�.�

India escaped from three decades of low growth and took off after the 1991 reforms of the Rao government which embraced more openness and an export orientation.� Brazil scuttled its decade old policy of import substitution and upped its growth rate from 0,3% p.a. in the 1980s to eight times that in the 1990s and fifteen times that in the 2000s. China�s story is well known.� Suffice to say it came from nowhere and is now on its way to reclaim the position of a few centuries ago when it produced 1/3 of the world�s GDP.

Some people argue that the growth-through-export economic model is dead as a result of the current global crisis.� Under pressure, certainly.� Dead, no.� Tourism is a form of exports, so is hosting cricket, the Confederation Cup and sport tours.� There is also the natural market in Sub-Sahara Africa with which we trade to mutual benefit.� Protectionism can of course kill an export orientation, but fortunately we are not quite there yet.�

There is no reason why SA cannot set itself the goal, in pursuance of its job creation and anti-poverty goals, to double the size of the economy, create millions of extra jobs, lift incomes and hit poverty for a six.� It all comes down to our ambition.

Jobs and promises of jobs - beyond the noise.

In his recent State of the Nation address pres Jacob Zuma promised that 500 000 'employment opportunities' would be created before the end of the year. This was translated as '500 000 jobs would be created' and it caused quite a stir. The president's promise was shot down quite quickly by various commentators as unachievable.

Indeed, 500 000 is a stretch. But what did the president actually say?

In his speech to Parliament president Zuma referred to 500 000 'employment opportunities'. Those were the words he used. The media then translated that into 'jobs'. Normally one should be skeptical of claims that 'the media' has created this or that impression. But in this case various media unanimously replaced 'employment opportunities' with 'jobs'.

Employment opportunities

What then is the difference? 'Employment opportunity' refers to low-paid, temporary and at best part time jobs, created under the government's public works scheme. In the official jargon the public works scheme is known as 'EPWP' extended public works scheme.

It was first launched in 2004 by then pres Mbeki and the target was to create 1 million employment opportunities (that is where the formulation comes from) within 5 years. In fact, the 1 million target was reached after 4 years and a total of 1,4 million employment opportunities were created over the five years. Well known projects run under the public works programme include 'Work for Water' and 'Work for Fire'. A large number of such jobs have been created around construction activities. (Noticed those men and ladies standing on road construction sited operating the 'stop/go' signs?)

The distinguishing feature of these 'jobs' is that they yield low productivity and thus low pay; and they are mostly not permanent. The intention is to provide people with some basic skills and contacts so that they can enter the formal labour market.

Public works is thus more poverty relief and training than job creation. The HSRC has found from research that a typical public works job is worth about 1/3 of a full-time job. That illustrates the difference between a job and an employment opportunity.

However, Trevor Manuel did argue in a parliamentary debate that these jobs pay more than some farm workers earn. At the bottom end of the labour market there is probably an overlap between low-level formal employment and these public works jobs.

Ramping it up

With the success of the public works programme since 2004, an expanded programme was launched for the period 2009 to 2014 and Trevor Manuel increased the budget allocations for it to R4,1 billion.

The target now is to create 4 million job opportunities by 2014. The interim target is 500 000 employment opportunities by December 2009, which is also where the president's target comes from.

This strikes me as a stretch and I would expect the 500 000 to be reached by the end of this fiscal year, which is 31 March 2010. Either way, it would be a solid performance.

Two aspects distinguish this phase from the previous phase of public works. The non-state sector, like community organizations and the private sector, can now also access funds and initiate public works programmes. This will create more operators and help to extend the programme.

Secondly, an incentive bonus is now offered to municipalities and provinces to undertake infrastructure projects that create employment opportunities. This will cover labour intensive projects that also create infrastructure like roads, parks and buildings.

Decent jobs

All of the above should not be confused with the 'decent jobs' so prominently propagated in the ANC's election manifesto. The manifesto defines decent work as both the quantity and quality of work.

Pres Zuma repeated the pledge in his State of the Nation address: "The creation of decent work (my underlining) will be at the centre of our economic policies and will influence our investment attraction and job-creation initiatives.

'Decent jobs' has also been Cosatu's mantra for a long time. Unlike the ANC, however, Cosatu does not emphasise the quantity aspect of decent jobs too strongly, they just focus on their demand for 'quality jobs'.

It was thus interesting to read that the former Cosatu leader and now cabinet minister Ebrahim Patel recently said decent jobs is 'a process' . That seems to me like a bit of a come down from the pure view of quality jobs only. It also reflects the more realistic view of Trevor Manuel that job creation is difficult enough all on its own, without ruling out some jobs as not good enough.

Decent jobs can only come from a long period of growth with ever increasing levels of skills, technology and productivity. That takes us to the 'normal economy' with the 'normal labour market'.

Normal jobs

The 'normal' labour market consist of about 13,6 million people of whom some 70% work in the formal sector; 16% in the informal sector; 5% on farms and 9% as domestic servants in private households.

In the first quarter of this year 179 000 people lost their jobs (taking the total down from 13,8 million to 13,6 million ). More job losses will occur before this recession is over and the economy starts growing again. That will probably only be by 2010. Not only are we losing a year's growth (in the last four years before this recession we created 500 000 jobs per annum) but we will also lose jobs already created.

Assuming (say) 400 000 jobs lost this year plus the 500 000 not created, leaves one with a shortage of 900 000 jobs. Assuming 3% growth, it will take about four years to make that up.

That is quite a price to pay for the shenanigans of bankers in the developed world!

In the short term, and until economic growth resumes, the only job creation of note will be taking place through the 'employment opportunities' of the government public works scheme.

So What?

         The president promised 500 000 employment opportunities under the extended public works scheme by December 2009. The target can probably be met by March 2010.

         In a country with SA's desperate unemployment and poverty every bit helps and public works will certainly help with poverty relief and social stability.

         The ANC's election promise of 'decent work' is clearly being packaged as work in progress which is a healthy correction and will help to promote stability.

         The private sector will only make a contribution to job growth once the recession is over and growth resumes. That will probably only be by 2010 if all goes well.

The Three Tasks

What do the House of Lords and Old Mutual have in common? And how does that commonality influence investors?

Back in the early 1990s, after the release of Nelcon Mandela and with the new SA looming, Old Mutual & Nedcor (as it was then known) sponsored a scenario exercise about different possibilities for the future of SA. It was an impressive exercise led by impressive people. During the deliberations and analyses of the scenarios three tasks were identified for a post-apartheid SA.

The first was to achieve a peaceful political transition. The second was to get the moribund economy going again. And the third task was identified as one of social development: overcoming poverty, creating enough jobs, delivering housing, water, sanitation and the basics of a modern life to as many people as possible. Politics, economics and social development.

That was in the early 1990s. Earlier this year at the House of Lords in Westminster, Mr Zuma addressed a cross-section of Lords. In answer to a question, he explained his approach to his duties as president. Mr Mandela was responsible for the political transition, he said, and made a success of that. Mr Mbeki was responsible for the resuscitation of the economy and made a success of that, Mr Zuma continued. His own task was social development. His focus must be education, health and poverty.

At Westminster, in 2009, Mr Zuma articulated precisely the same three tasks the Old Mutual scenario team outlined more than a decade and a half ago!

From traditionalism to modernity

At BoE we have described these tasks as SA's journey from traditionalism to modernity. It remains a journey, not a destination, certainly for our lifetimes.

The recent elections have again illustrated how far the country has come politically. In spite of dire warnings and predictions that SA was going the way of Kenya, and that violence was going to get out of hand, nothing of the kind happened.

I remember the telephone calls from European journalists last September when Mr Mbeki was recalled by the ANC. Their information was that the country was going to explode into violence, they said, and could I confirm it ....?!

The economic story remains one of consistent progress, as illustrated by the per capita income trends that we discussed with clients on the recent road show. No one can read the future, but with what I will call a 'default' economic growth rate of about 2,5% to perhaps 3%, those trends should continue.

Two tasks achieved. That leaves us with social development. Here the priorities are clear: jobs (which will come from growth), crime, health, education, land reform.

It takes time

The problem with social development is that it takes time. Lots and lots of time. Unlike the political transition and economic resuscitation it cannot be acieved in a decade or so. We are talking about a generational task. And the results are much less visible. So be prepared for a body politic that seems unruly and unhappy, especially during winter, which is traditionally the season of wage negotiations.

Consolidation of economics

As an aside we can note that the Old Mutual/Nedcor scenario team propagated strong public spending financed through a higher budget deficit to achieve the above three tasks. Derek Keys was Minister of Finance at the time and, although sympathetic to the goals, was not too keen on higher deficit spending. The then Nedcor boss, Chris Liebenberg, succeeded Keys at Finance, and he in turn was succeeded by Trevor Manuel.

Manuel came to office with the currency crisis of 1996. The crisis was a salutary reminder that one cannot spend one's way into prosperity. Manuel did the right thing: he brought the deficit down and established fiscal discipline.

It took him about five years to achieve those goals. During that time he earned the scorn of many of his political colleagues and collected many knives in his back. But his approach worked.

By 2000 enough fiscal space had been created to increase government spending. Today SA is enjoying huge capital spending on infrastructure, an expanded public works programme and considerable poverty relief, thanks to economic discipline.

Stable politics, a growing economy (albeit slower than most people expect at our default economic growth rate of 2.5% to 3%) and social development. It seems to me we are moving into modernity, slowly but surely.