Every year in May the International Institute for Management Development based in Switzerland publishes a list of 59 nations in its annual World Competitiveness Report. In 2013 South Africa fell to 53rd position (from the previous year's 50th). It could be argued that emerging economies in general remain highly dependent on the global economic recovery; however within the other BRICS countries, there was some impressive upward movement. Russia rose from 48th to 42nd and China rose from 23rd to 21st. South Africa has previously been in the 30s and 40s, which is where it should be - as the 32nd largest economy in the world. So the country is now accorded a deep discount, and the reason given is that foreign investors are deterred from investing in South Africa on account of uncertainty surrounding future government policy in key areas like mining and land ownership. In addition, there are worries concerning the future of institutions such as South Africa's justice system.
Against the backdrop of the global economic scenarios, what are the possibilities for South Africa? Here are the latest South African scenarios for the next 5 years:
In this scenario South Africa manages to get its ducks in a row and achieve much greater policy and institutional certainty. It returns to the mid-30s in the World Competitiveness Report, where it rightfully belongs, as both local and overseas companies invest large amounts of cash they have been accumulating on the sidelines into the country's economy. They trust that the rules of the game will remain stable and fair.
South Africa reflects other Premier League countries in this scenario, meeting, to varying degrees, the characteristics of a winning nation; namely:
a good quality of education,
a strong work ethic and spirit of entrepreneurship,
a high rate of savings and easy access to capital for businesses that require it,
adequate infrastructure to support a high growth economy,
being an export-orientated global player that supplies goods and/or services to foreign markets that cannot obtain those goods and/or services elsewhere,
a dual-logic economy where big and small business work in a constructive partnership with one another,
competitive personal and company tax rates,
social harmony where citizens feel that they are part of one team with a common vision of the nation's future,
an attractive environment for foreign direct investment, and,
an effective government.
In this scenario, the ducks are not in a row...they're all over the place, and uncertainty continues. The country slides down into the Second Division where the bulk of the Third World is located - poor but peaceful. Private companies will still make money in South Africa - as they do in many Third World countries - but for the Government it is a disaster. It won't get the tax revenue it enjoyed in the Premier League, just when it has to finance the National Development Plan and National Health Insurance; and the country won't have the access to foreign capital, just as Eskom needs R500 billion to complete its new generation of power stations, and another R750 billion is required to sustain the nation's water supplies over the next 50 years.
The threat looms large that South Africa will be kicked out of the G20 and replaced by Nigeria, which is on track to overtake South Africa by 2020 as Africa's largest economy. Its economy is already two-thirds that of South Africa, and is growing at a rate of 7% p.a. versus South Africa's growth rate of less than 3%. BRICS may become BRINC!
Whether South Africa glides upwards in Premier League or sinks into Second Division will be heralded by the rising - or not - of three flags:
Inclusive leadership. Yet leadership in South Africa is currently divided. There are divisions within the tripartite alliance, and distrust between the Government and business leaders and civil society, which has a limited voice and is not actively or constructively engaged by the powers that be. For South Africa to stay in the premier league of nations it needs leadership that brings the country together as a coherent team. An example can be drawn from Sir Alex Ferguson who won the most trophies in football because he kept Manchester United united. Lee Kwan Yew did the same thing in Singapore by putting a huge emphasis on education and law and order, and in 2013 Singapore was ranked number 5 in the World Competitiveness Report. Nelson Mandela was an inclusive leader of note, and South Africa requires more of his ilk. No nation can last long in the Premier League if it is divided.
Replication of pockets of excellence, as there are many in South Africa, such as world-class companies, private and state schools, as well as universities, business schools and some hospitals. The South African Revenue Services (SARS) is a world-class revenue collector. If pockets of excellence are used as examples to encourage the improvement of poorer performing institutions, and lift the nation as a whole, then it is a positive flag worthy of promotion in the Premier League. If however, obstructions are placed in their paths to reduce the appearance of elitism, it would be a telltale flag of embracing mediocrity - one of the worst flags of all. Of the over 28 000 schools in South Africa, only about 5 000 are considered reasonable-to-excellent, and the balance - some 23 000 - are dysfunctional-to-shocking. If those 5 000 - which are centres of excellence - are dumbed down, the country's long-term competitiveness will suffer a severe shock. A fluttering flag to take note of is the shift in global education patterns and demands. The disconnect between the age of intelligence and the development of skills in South Africa is becoming more apparent. As proof, according to the 2013 Global Competitiveness Index, South Africa is ranked last among 148 countries in terms of maths and science education. South Africa not only needs to try and catch up to the rest of the world, but must proactively harness the entrepreneurial spirit that is evident in the country. It has to develop young people for the global market place that exists today, not yesterday.
Creation of a balanced economy - this is the combination of an outward economy that earns the country enough foreign foreign exchange to pay for its imports, and an inward economy that creates jobs and makes a significant dent in the shocking unemployment rate.
As far as the outward economy is concerned it is critical that the country plays to its strengths to win in the ultra-competitive game which the international arena represents. There are three spaces wherein South Africa can dominate the game:
Resources - despite the decline in the production of gold and diamonds, South Africa is still the number one producer of platinum, manganese and chrome, and still has vast reserves of high grade ore and coal. Where it can, the country must go downstream and add value before exporting resources. This will, however, require, the building of new manufacturing capacity and skills, and having the requisite infrastructure and power to support this initiative. Equally, the mining industry needs to get its act together again on the labour front and achieve policy certainty on mineral rights and state participation.
Tourism - South Africa is a relatively cheap destination with some world-class cities and attractions. Now is the time the country should offer itself as a real value-for-money tourist attraction. Africa on the whole has a window of opportunity as the world shifts its imagination and focus towards the continent. Moreover the country has been discovered by the East, particularly China and India, so it must build on growing demand from that part of the world.
The Gateway to Africa - According to the World Bank, Africa is home to six of the top ten fastest growing economies in the world; and the continent is open for business. As currently Africa's largest and most advanced economy, and with the continent's best banking system and stock exchange, it makes sense that South Africa should be the natural place for Western multinationals to kickstart their campaigns to access Africa's markets. However, the aspiration for the title of Gateway to Africa has been seized by other countries, notably NIgeria and Mauritius; and the uncertainties and bureaucratic red tape that bedevils doing business in South Africa may see the country being bypassed.
As far as the inward economy is concerned we have accorded it only one flag, but it is a critical one: the country's attitude towards entrepreneurs and small business. Both the US and China recognise the importance of the entrepreneur to their long-term economic future, despite having two very different economic models. In South Africa the environment for entrepreneurs is over-regulated, arguably hostile, ranging from unreasonable labour legislation to shoddy treatment by the state, parastatals and big business as clients. Unfair price squeezing and the late payment for goods and services provided by small businesses are real issues affecting their operation and growth. A positive attitude towards entrepreneurs and small business is apparent in the National Development Plan, but the emphasis on infrastructural development means the development of an entrepreneurial culture has been effectively sidelined.
This is worrying because if the country is to provide 11 million jobs - as envisioned by the state - by 2030, and secure an unemployment rate as low as 6,5%, this will not come from infrastructural projects alone. Public works programmes are only a temporary solution although they they can provide transfer of skills. Furthermore, the Government simply cannot afford millions of extra civil servants, and big business, through technology and changing its employment model, is unlikely to be a major job creator. The focus has to be on developing at least 2 million small and sustainable businesses, partially by encouraging big business to subcontract its non-core activities to other, smaller companies. This represents an opportunity for entrepreneurs as does the extension of the franchise system, but regulatory support from the Government is essential for the game to change.
In this scenario, the ducks are in a row, but they're buried six feet underground! This scenario is very real in the world as shown by the likes of Syria, Afghanistan, Iraq and Somalia. It is a scenario riddled with violence even greater than that currently found in South Africa, with its high crime rate. In addition, failed states are characterised by oppressive dictatorships, perpetual civil war, anarchy and even genocide. However, it is a matter of degree; and a Failed State for South Africa could exist. No expert in the field has adequately described what it would look like, nor what the timing and rate of descent would be; but the one thing we can say for certainty is that should the country slip into such a scenario, only a few pariah states would welcome it with open arms, while the rest of the world would abandon it.
Five Red Flags
So, is the Failed State a mere cautionary tale or a very real warning? We have five red flags. The first concerns an Arab Spring in South Africa. With the Marikana tragedy ushering in a period of intense industrial turmoil, aggravated by continued unrest around the lack of service delivery; a high youth unemployment rate and frustration among young people simmering across social networks; and a shift in the mood of workers who no longer trust authority; a recipe exists for a revolution that nobody in authority will be able to control. As Turkey and Brazil demonstrated, a Spring-like event can even happen in a democracy.
There are four other red flags that may herald a shift towards a Failed State:
Nationalisation - the flag is down at present, but it hasn't been put away. Debate continues around nationalisation and various measures proposed for the mining industry closely approximate it.
The clumsy implementation of National Health Insurance (NHI) - this would lead to a decline in private medical care and another exodus of young skilled talent from this country. This flag is down at the moment, but the country will have to wait and see how NHI plays out in practice.
Land grabs - this is the most toxic of all red flags as it would immediately divide the nation and even lead to civil war. If it happened, the country would literally hit a wall as international investment would be yanked from under its feet and the Rand would drop to zero, creating hyperinflation. The flag is down, but we have been urging an agricultural equivalent of a Codesa (an Agridesa) for some time - where all major players in the agricultural game negotiate a land transformation programme with a reasonable chance of success. It is a key project for South Africa as a delay is not an option! It is a highly emotional issue.
Gagging the media. One of the pillars of a modern democracy is a free and independent press. As soon as that pillar is removed, it opens the door to a massive increase in corruption and other immoral activities. Checks and balances necessary to run a progressive society are no more. Hence, as soon as the Protection of State Information Bill was tabled in parliament, this red flag started ascending and we assigned a 10% probability to the Failed State scenario. Although the bill has been sanitised - for example the tribunal is now a commission, and whistle-blower clauses are included - journalists feel very uncomfortable that they can go to jail for a lengthy period of time for being in possession of classified information (even if they don't leak it). Nobody has yet defined what 'classified' information is, so we have retained a 10% probability based on this red flag. Our eyes are now on whether or not the bill is challenged in the Constitutional Court.
Conclusions and Probabilities
The whole point about scenarios is to recognise when the chandelier in the room is beginning to tremble. We don't wish to raise the probability of a terrible outcome, but the flags say otherwise; and as such their purpose is to take emotion out of any judgement on the probabilities of desirable and undesirable futures. It is the same as taking the tint out of the windows - whether rosy or dark - and making them as transparent as possible.
We now assign odds of 50:50 between South Africa remaining in Premier League and slipping below the line into Second Division or Failed State. However, it would be foolish for us to continue backing a peaceful decline into Third World status as our favourite downside scenario. Our odds have been amended to reflect an equal split of 25% probability for Second Division and 25% probability for a Failed State. We have added 15% to the latter and deducted it from the former after the events at Marikana.
Hence, South Africa is at a tipping point between Premier League on the one hand and Second Division leading off into Failed State on the other. So, South Africa potentially has a strategic moment ahead of it. The country has to redress the inequality and exclusiveness of the economy. It therefore needs a new economic accord which gets rid of waste, inefficiency and corruption. It also must tighten anti-monopoly legislation to free up space for millions of new small enterprises. At the same time, it has to return to a stable industrial relations climate by creating greater wage parity, better living conditions for workers and a greater sense of common purpose. Employee share ownerships schemes may be critical to achieve this.
Is there consensus about what economic freedom really means, and what measures are needed to make it really happen? What the country doesn't want is to sink into an abyss where 'anywhere but South Africa' is the guiding principle for all foreign investors wishing to bet on Africa; and where it moves from first to last in the minds of the world, with little hope of recovery. We have therefore been recommending an Economic Codesa for some time, where Government, business and unions iron out a new, inclusive economic model.