Political risk: Wars with blunt weapons

Lawrence Schlemmer offers an alternative future scenario to those of gossamer optimists and gloomy pessimists.

Summary - The heated exchange between Anglo American CEO Tony Trahar and president Mbeki concerning the level of political risk in South Africa illustrated the extent to which political analysis has become a battleground of sharply opposed and intolerant views that are frequently over-simple and overstated. This polarisation clouds risk analysis and creates uncertainty among potential investors – the last thing South Africa can afford. A cool, constructive assessment of risk, even if somewhat negative, is probably less damaging than hot disagreement between warring camps. Broadly speaking, the combatants can be divided into three groups: optimists, progressives (or radicals) and pessimists. The optimists take the ‘good news’ viewpoint, and received wide publicity as a result of two best-sellers, South Africa: The Good News and More Good News. Concerned about an ‘epidemic of negativity’, the authors collected stories and statistics to prove that since 1994 South Africa has been a huge success story. However, they tend to avoid discussion of endemic problems such as crime and HIV/Aids, and are too uncritical to be credible to tough-minded investment decision-makers. To be convincing, an argument must confront unpalatable realities. The progressives/radicals argue for more pliant fiscal and monetary policies to promote demand-led growth and job creation, and also advocate a basic income grant. They believe that the present economic course is leading to increased unemployment, poverty and inequality. However, they seldom acknowledge evidence that fiscal and monetary discipline has longer-term benefits that outweigh short-term costs, preferring instead to dismiss it as neo-liberal exploitation. The pessimists, or cynics, are also gloomy about the future but for different reasons. Their concerns are burgeoning rent-seeking and crony capitalism, lack of capacity caused by over-hasty transformation, high levels of corruption and crime, skills shortages and deteriorating education. However, they do not acknowledge the pressures on government to balance contradictory requirements. These arguments are so polarised that they do not interact and enrich one another. They result from bad ‘futurology’. Sound scenario planning must deal with contradictions and ironic outcomes. A political risk assessment that may meet these criteria is one of low political risk, moderate economic growth and constrained democracy. The reasoning is as follows… The ANC is likely to continue to enjoy large majority support. Nine million people presently receive social grants. Most of them have never known better times, and although poverty is a potential source of instability, it also creates dependency on, and gratitude to, the government. Also, the tripartite alliance guarantees that no effective mobilisation of the poor against the government will occur. Thus there is little pressure on the ANC to become more populist or to change current economic policies. Big business has effectively been co-opted and is emerging as a useful, even compliant, partner to government in its pursuit of empowerment and transformation. Fears that the government will increase taxes or other penalties on big business are therefore probably misplaced. By contrast, SMMEs, which account for a high proportion of new growth and job creation in other economies, are struggling to meet employment equity and empowerment requirements and high labour costs. Because of this, and the effects of skills shortages, South Africa can expect no more than moderate economic growth. The real threat is to democracy and political pluralism. The government has a strong hegemonic streak, and its ambitious transformation programmes are impelling it towards increasing centralisation and orchestration of public life. The proportional list electoral system accentuates this trend. While this is bad for democracy, it is not an issue for investors if the country can offer them predictability and stability. Over the medium term, South Africa can do so.

A short while ago the CEO of Anglo American offered the innocuous view that South Africa’s political risk situation was improving. On reading the report president Thabo Mbeki appears to have been concerned that political risk should have been mentioned at all and, in the ANC’s weekly online publication, asked sharply what “the so-called risk” was and how it was assessed. A high-level meeting was required to reconcile the two powerful South Africans. Mbeki’s reaction seemed excessive, but his irritation may be due to the fact that much of the debate about political risk in South Africa is repetitive and over-simple.

We are among the many countries in which political analysis has become a battleground of sharply-opposed and intolerant views. This polarisation often clouds the analysis of risk and creates uncertainty among investment analysts — the last thing that a country with a crying need for higher levels of local and foreign fixed investment needs. A cool, constructive and well-motivated approach to assessing political risk, even when the conclusion may be somewhat negative or qualified, probably does less damage than hot disagreement between opposing camps, hammering each other with blunt weapons.

Having participated in this debate for decades, I have come to feel that many, if not most, of the positions taken overstate their cases and risk oversimplification, and this has included some of my own arguments. With exceptions, obviously, we have served neither the investment decision-makers nor the politicians who have to build confidence in the country particularly well.

The argumentation

Brevity requires that some of the interesting variety in the debate be set aside in order to capture the core positions. This said, the broad pattern of disagreement seems to have emerged as a low intensity intellectual war between “optimists”, “progressives” (or radical critics) and “pessimists”.

The optimists

The “optimists” are a varied group but the position is best exemplified by what I will call the “good news” viewpoint. This has been widely publicised, most prominently in two successive publications, South Africa: the Good News and More Good News, by Brett Bowes and Steuart Pennington, the first of which sold over 10 000 copies. The concern of these authors is that opinion leaders are propagating an “epidemic of negativity… the doom and gloom (has) almost became a self-fulfilling prophecy”. Instead they have set out to create an “epidemic of good news” and their enthusiasm has been infectious, spreading to many business economists and corporate leaders. Contributions to their volumes include some qualified analysis but the overall impact of the keynote prose and statistics is that South Africa since 1994 has been a huge success story. They argue or imply that political risk in South Africa is low, and is far outweighed by socio-economic promise and positive economic and social indicators.

Little that they say is untrue. Their weakness is a restricted context and a tendency to avoid uncomfortable facts. They do not really discuss endemic problems like high rates of violent crime, HIV/Aids, breakdowns in the social fabric and family structures, skill shortages, low savings rates and the like. They cover these issues by presenting the programmes intended to solve the problems but seldom evaluate their effectiveness. For example, in their second volume, chapters on skills development and education are written by the responsible official and minister respectively, who predictably skim over widespread misgivings about the quality of the outcomes.

The optimists seldom stop to consider that certain valid core concerns have halo effects that generate the diffuse pessimism. If a businessman worries about the safety of his family when away on trips, or if he is frustrated at feeling obliged to appoint a less-experienced recruit to satisfy employment equity requirements, or if he has to pay levies for an ineffective training programme, his mood and general attitude will suffer, no matter how patriotic he may be.

The largest weakness in this kind of analysis, however, is that the arguments are too uniformly uncritical to be credible for tough-minded investment decision-makers. The optimists tend to pack all the positive indicators together, with no concessions to the downsides. To be convincing an argument has to confront unpalatable realities. Hence one is never sure whether this kind of approach is analysis or a social movement driven by admirable but rather idealistic sentiment.

The progressives

The progressive/radical grouping is more cohesive and much more analytical. Its adherents’ political sympathies tend to lie with the South African Communist Party or the trade unions, but include some social democrats who find the claimed social democracy of the ANC limited and inconsistent. This “camp” includes some of the toughest and most intelligent critics of the government’s macro-economic and welfare policies. They generally argue for more pliant fiscal and monetary guidelines and an acceptance of the risks of higher inflation in order to achieve demand-led growth and job creation. They have their clearest strategic profile in championing BIG — the Basic Income Grant to support the poor.

Their predictions of the future in the context of current economic policies are doleful, anticipating ever-rising unemployment, deepening poverty and widening inequality. They also tend to pack all their selected indicators together in their critiques of government. Their arguments seldom acknowledge that government faces the pressure of evidence that, on balance, fiscal and monetary discipline has medium and longer-term benefits for the economy that outweigh short-term penalties. They generally avoid discussing the risk of a surge of demand in the economy that is not matched by increasing production for a variety of reasons — including skills constraints, shortages of savings-based capital or investor caution because of fears of inflation or of a populist trend in policy. Hence they are pessimistic about the future because they tend to stereotype and dismiss sound macro economic policy as part of an exploitative neo-liberal “Washington consensus”.

The pessimists

The pessimists or cynics, whose ranks include this author from time to time, often reach the same conclusions about the future as the radicals, but draw on different evidence. Their concerns arise from what they see as burgeoning rent-seeking and crony capitalism in the current black empowerment frenzy, a lack of capacity in the administration of the country aggravated by hasty transformation of the public service, persisting high levels of corruption and crime, skills shortages and a failing educational system. While they endorse the macro-economic policies of government they deplore the lack of follow-through in lifting exchange control, deregulation and micro-economic reform. They are generally opposition supporters and have for some time been labelled as “neo-liberals” and economic right-wingers by government, the progressives and the optimists. As a consequence complete confusion reigns about what liberalism can contribute to development.

One major weakness in the arguments of the pessimists is that they seldom acknowledge the pressures on government to balance contradictory requirements. A government elected by a very poor majority has an extremely difficult task in pursuing measured medium to longer run economic strategies in the face of hunger and deprivation. Some of the very irritating celebratory political symbolism pushed by government is a way of maintaining morale among supporters who feel that they should be getting a better deal. Like the other camps, the pessimists tend to pack all their selected indicators together, and hence have rightly been accused of negativism.

The contrasting positions of the optimists, the pessimists, the radicals and the leading analysts in government may sound like a rich and varied input to the economic debate, but this appearance can be misleading. The arguments are so polarised, and often so over-simple, that they do not interact with and enrich one another. The audience is expected to take its pick and be satisfied with the blunt position of its choice.

This adds up to rather bad “futurology”. Years ago the renowned future scenario expert, Pierre Wack, while working as a strategic planner for Royal Dutch/Shell, pointed out that a sound future scenario will never pack all the positives or negatives together. In order to emulate the real world, a scenario has to deal with contradictions and ironic outcomes, where negative aspects have positive implications and vice-versa.

What follows is a very brief synoptic illustration of a political risk assessment that might meet the criteria that Pierre Wack had in mind.

Another view: low political risk, moderate economic growth and constrained democracy

The ANC government is likely to continue to enjoy large majority support, largely due to historical solidarities and a low-level welfare state.

While between 35 per cent and 40 per cent of the population will continue to live in dire poverty, already some nine million people or more receive either old age pensions, disability grants or child support grants of various kinds that boost average household incomes among many of the very poor above sheer starvation levels. The government has prioritised improved efficiency in grant administration with the establishment of a special agency. Most of the poor have never known better times and they are so dependent on state support as to be grateful for local service and educational subsidies and the welfare grants. If discontent rises, the government has the fiscal resources to yield to pressure and introduce a very small Basic Income Grant. Hence although dire poverty is often seen as a potential source of instability, it also creates dependency and gratitude for small mercies.

The government, furthermore, is improving its techniques to reassure its mass supporters that it is on their side. Aside from imbizos and the regular rhetoric about a better life, the semi-state media are effectively controlled by government sympathisers and give generous and repetitive publicity to events that symbolise a caring government.

The real empowerment of the poor through meaningful job creation lags badly but the critics of government, both within the ANC alliance and among the opposition, struggle to get the attention of the masses. The government controls its alliance partners very skilfully and therefore the alliance is a guarantee that no effective mobilisation of the poor against the government will take place.

In any event so few of the poor under the age of 30 have had jobs that unemployment has become an accepted lifestyle. Increasingly, fulltime formal sector work in South Africa will be limited to higher-level school leavers, and the majority of young people will become latter day “Gypsies” (with apologies to the Romany people), holding no threat to the stability of the state. They have neither the confidence nor the organisation of independent peasants or unionised workers to constitute any threat to stability. Unionised workers are protected by elaborate labour regulations and despite bursts of intense labour action, see little benefit in opposing the ANC.

In the foreseeable future, therefore, there is very little that could put the ANC under pressure to become more “populist” than it already is. The current balance of economic policies is likely to hold.

The current empowerment and transformation targets imposed on the private sector through industry charters look frightening from afar but for large corporations and multi-nationals these are impositions that can be tolerated, mainly because the costs can be diffused and imperceptibly passed on to shareholders, consumers and banking clients.

As government begins to experience the poaching of scarce skilled government personnel as a consequence of the charters, it will realize that pressure on the private sector has to be eased at least for a while. Increasing skills capacity constraints in public administration will make government increasingly grateful for the fact that the private sector can be used as a vehicle not only for empowerment but also for outsourcing and sub-contracting to the state. Any fears that the government will raise taxes or other penalties on large private business are probably misplaced. The corporate sector is emerging as a very useful, even compliant, partner to government in its pursuit of its transformation agenda. Big business, at bearable cost, is cushioned by these trade-offs and by its effective co-optation by government in pursuit of transformation. This also means that investors may not have to fear that empowerment demands will be ratcheted ever upwards.

The government has become increasingly aware of the costs of crime and corruption and will continue to use the mechanism of special agencies, like the Scorpions, to combat these ills. Although crime statistics are unconvincing, many crimes that the public and business fear most are at least being contained, albeit at too high a level. In any event, part of the costs of crime seem to be fairly willingly carried by the middle classes through their increasing use of private security agencies and technology.

Small and medium sized business finds it more difficult to meet the employment equity and empowerment requirements, imposed in particular through state tendering regulations or by large corporations through the outsourcing criteria built into the charters. The Small and Medium Enterprises (SMME) also have thinner resources to cope with an over-regulated labour market and the consequently high costs of labour. Because SMMEs account for a high proportion of new growth and job creation in other global economies, this will depress growth in South Africa. It is largely for this reason, as well as the effect of skills shortages, that no more than moderate economic growth can be forecast, well below the average for other middle level emerging markets.

The greatest dissatisfactions will continue to exist among the “formerly advantaged” middle classes outside of the co-opted corporate sector. These middle classes include minority ethnic groups like the Afrikaners who have lost a great deal in the transformation of the public service and in imposed language medium changes in schools. Afrikaners are in the process of losing a public language. Nevertheless, there is little prospect of active dissent from this quarter. Middle classes are too visible, and hence too vulnerable, to risk aggressive mobilisation. Their relatively advanced skills also ensure a comfortable lifestyle for the majority, even if in backroom positions. Furthermore, there is the safety valve of emigration. Soon Canada and the United Kingdom will have more dedicated Afrikaans-language television than South Africa, and Afrikaans newsletter circulation suggests that a massive diaspora is emerging abroad, helping to protect the South African political system from any theoretical instability.

The real threat in the scenario sketched is to responsive democracy and political pluralism. Not only does the government’s own political mission favour hegemony, but its ambitious programmes of transformation and severe problems in the fabric of society, like crime, corruption and Aids, impel it towards increasing centralisation and orchestration of public life. The electoral system — the proportional list system — also gives the ruling party executive complete control over the composition of the governing party caucus in the central and provincial parliaments. This is bad for democracy but lowers pressure on government for populist policies.

But investors rushing into China demonstrate that plural democracy is not an issue for investors if predictability and stability in the operating environment can be secured by other means. Although operating costs in South Africa are driven up by skills shortages and government intervention, as long as larger companies in less competitive market positions can pass on the costs, our market can offer investors certain things that they value very highly — consistent if moderate growth, muscular consumer demand from the growing middle classes, predictability and low risk of instability.

In the longer run we will pay a severe price for below-average growth rates and a weakened democracy. But investors seldom worry about the distant future. For them there is an analysis that promises low political risk in the medium term, and, for the foreseeable future this will strengthen economic confidence.