Clem Sunter

Keeping the red flags down

2012-03-28 12:21

Clem Sunter

There are two reasons why Chantell Ilbury and I provide red flags for downside scenarios. The first is to allow people time to take action on their own behalf to ameliorate the impact of such scenarios on their organizations or personal lives. The second is to give them the chance, collectively with other people, to keep the red flags down in order to minimize the probability of Armageddon-type scenarios becoming reality.

Such is the case with our most negative scenario for South Africa which we call “Failed State”.

It is where we join the likes of Somalia, Afghanistan and Syria because the level of violence and unpredictability surrounding our future rises to a point where foreigners are too afraid to come here, let alone invest in any new business here. Yet again we are isolated from the rest of the world, but this time not as a result of sanctions but through being perceived as too high a risk.

We have four red flags and one tendency associated with the “Failed State” scenario. A tendency is like Japan being located in a seismically active zone of the earth’s crust, so it has a higher probability of earthquakes. At the moment, we attach low odds to the “Failed State” scenario. But if any of the four flags rise or the tendency turns into reality, watch out – the odds are increasing and it is time to seek protection.

Actions of the first kind in the first paragraph are to keep your passport up to date; possibly look for a job overseas; take as much of your wealth offshore as you are legally allowed to do; and if you own a business expand the geographical footprint elsewhere in Africa and overseas. In a “Failed State” scenario, the rand could fall to 100 against the US dollar (after all it has devalued by a factor of 10 since 1980).

Nevertheless, being patriotic, it is actions of the second kind which hold more interest for Chantell and myself. Let me therefore list the flags and tendency and provide the countermeasures to keep them down and out of play.

The first red flag is nationalisation as many of our trading partners would regard it as a retrogressive step of the worst possible kind. The policy has failed miserably in most of the countries where it has been implemented and anyway the question universally asked is: How on earth would the government afford to pay fair value for the mines and the banks? It would push our national debt to GDP ratio from its current modest level to something approaching that of Greece. Not paying fair value on the other hand is tantamount to confiscation which would be a total turn-off for foreign investors.

The ANC appears to have arrived at a similar conclusion so this flag is down at present. But the best way to keep it there is for the mining companies and banks to initiate major employee share ownership programmes. The capital of this country would not be shared with government but with the workers. It would no longer be perceived as monopoly capital.

The second red flag is a clumsy implementation of national health insurance which leads to a decline in the quality of private medical care. This could cause another mass exodus of skills, since young talented people in particular put a high premium on access to decent health care for themselves and their families. The way to keep this flag down is for the major private sector health care players to offer to go into partnership with the government in regard to the management of the big state hospitals. Thus, a stampede towards the private hospitals can be avoided when the public have freedom of choice on where to go for medical care.

The third red flag is a media tribunal with punitive powers. This flag has partially risen with the passing of the secrecy bill. Muzzling the media is as bad as undermining the independence of the judiciary. It can precipitate a quantum leap in corruption as there is no longer the fear of exposure. The way to keep this flag down is to campaign for a very narrow definition of a secret, preferably only military ones.

The fourth red flag is potentially the most toxic and lethal – land grabs. The latter could even be the trigger for a civil war in South Africa. Already the fear of this flag rising has caused the number of commercial farmers to diminish and constrained new investment. This flag will only be kept down by bringing all the major players in agriculture together in an Agridesa (i.e. an agricultural equivalent of a Codesa) to negotiate a land reform programme with a reasonable chance of success.

The tendency arises from the three characteristics shared by all the Arab countries that have gone through the Arab Spring: abnormally high youth unemployment; a growing alienation from society by those unemployed young people; and active social networks. South Africa has all three factors which means our own version of the Arab Spring could be only one random event away. Measures to stop this tendency turning into reality may include tax incentives for companies to take on young recruits out of school and train them; an easing of labour laws for small business to give them the flexibility to employ extra staff; teaching pupils entrepreneurial skills as part of the curriculum; and some form of national community service.

By articulating the “Failed State” scenario as a low probability, high impact event – what Nassim Taleb refers to as a Black Swan – Chantell and I hope that we have provided an adequate motivation for everybody to take action to keep the red flags down.


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