GROWTH AND JOBS IN A FINITE WORLD
Tuesday, November 3rd, 2009“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” (Kenneth Boulding – Economist.)
If that statement is true – and I’m certainly inclined to believe it – then our politicians (and many others around the world) have got their hands full trying to deliver on their maniacal promises at the last election.
Not only have they not been able to provide the promised 500,000 jobs by the end of the year, the economy has shed 770,000 jobs because of the recession. That’s an annual decline of 5,6%, which means that employment has fared far worse than the economy itself.
If we are to believe the economists, then the economy has started to turn for the better. Personally, I’m not holding my breath. I think we’ve yet to see the worst. Let’s not forget that we have been surfing on the back of the 2010 world-cup euphoria – there has been significant infrastructural development around the country to cope with the looming rush of soccer-loving visitors, which has created a lot of work and a lot of revenue for a lot of businesses.
But when the last fan flies out of the country, we are going to be left picking up the tab – and from all accounts, the tab is going to be more than we can handle, given all the corruption and backhanders going on. What’s going to be worse is the vacuum that will be left, once this development ceases – and cease it must! And this does not bode well for business, or employment, in South Africa.
So how are the politicians going to deal with this? I hope it won’t be like China! I only say this because China seems to be the flavour of the moment. Not only is it now our biggest trading partner, but I read in yesterday’s newspaper that our government is considering adopting China’s methods of dealing with corrupt officials! In China they jail them. But I rather suspect, from what I’ve read of their methods and intrigues, that the real reason they get jailed is not because of the crimes they committed, but because they were caught! Well, – I guess that’s not too different to us!
China has such a massive unemployment problem that the only way it deals with it is to keep producing goods – irrespective of demand! And this brings me back to the opening statement – we have to concede that in a finite world, exponential growth (which is necessary to create new jobs at the rate we need to) is simply not possible. “Mao Zedong scorned the fact that the scarcity of land was a restraint on population growth. Every mouth, he said, was attached to two arms. People could always produce more than they consumed.” (China shakes the world – James Kynge.)
James Kynge goes on to say:
“In the past, the balance each dynasty strove for was that between food and mouths, but the past twenty-five years of development may have banished this concern forever. The crucial equilibrium now is between people and jobs, and so far it has proven elusive. Even when the economy grows at 9 or 10 percent, it fails by a margin of several million to create the 24 million new jobs required each year. Thus, while China appears to the rest of the world to be enjoying an amazing growth bonanza, the officials working behind the high walls of their leadership compound in Beijing feel trapped in an endless employment crisis.
This creates an unyielding pressure for growth that influences every economic plan and strategy…. Barely a week goes by without some incident of labour or social unrest somewhere in the country, and some of these flare-ups are serious. If the growth rate were to drop dramatically, these convulsions would be almost certain to intensify. As economists in Beijing are so fond of saying, China is like an elephant riding a bicycle. If it slows down, it could fall off and then the earth might quake.
The pressure of population combines with the other features of life in China to create the salient characteristics of corporate China. Chief among these is the tendency among companies to carry on producing, or even expand production, long after any discernable profit margin has vanished. This behaviour is partly down to the mesmerizing attraction of trying ever harder to win a bigger share of the ‘billion consumer’ market, but it is by no means as simple as that. The issue is of critical importance, though, because helps demonstrate why it is that most manufactured products in China are in chronic over-supply – and by extension, why so many of them are extraordinarily cheap.
This is a bit like borrowing money to repay debt! The only difference is that it’s more like me borrowing money to sustain a profligate lifestyle, and leaving the repayment of it to my children. Well, in many ways, I think our politicians act like that right now. The question one could ask though is: how are Chinese businesses able to continue when clearly they must be losing money?
Kynge explains it in this way:
“In a normal market economy companies cannot go on selling at below cost for years. Banks start to worry about their ability to repay the debts and eventually call in their loans. But China is not a normal market economy. It does not have a functioning bankruptcy law, so the liquidation of insolvent companies is difficult. In addition, banks are awash with liquidity; Chinese people save an average of around 40 per cent of their income and the supply of money is well over double the annual gross domestic product. This means that banks often have more deposits than they can find borrowers to lend to, and are therefore less than vigilant about calling in suspect loans. A senior provincial banker with the Industrial and Commercial Bank of China, the country’s largest bank told me that precipitating a bankruptcy by calling loans from an insolvent company was inimical to the interests of the bank. The knock-on effect would be palpable as that company’s suppliers were also pushed under, he said. Unemployment would rise, potentially causing a slump in consumer spending and endangering social stability. ‘It is much better to wait for the next upturn in the market than cause a slump across the board‘ the banker said. The ubiquity of this attitude is revealed by an extremely low level of Chinese corporate bankruptcies by international standards.
This peculiarity leads to another, one that is shaped partly by the ever-present lure of selling to the mythical ‘billion’ Under market economy conditions, when a company encounters over-supply of the product it makes, it generally pulls in its horns. But in China this happens only rarely. A more common response is to continue producing at the same rate while looking around for another sector to diversify into.”
It is not uncommon then for one to find manufacturers of motor cars, also producing porcelain tea sets; and denim jeans, the design of which has been shamelessly copied from Levi or any one of the top international brands.
Not that I think the Chinese model would work here! First of all, our people cannot produce at the level the Chinese do; and secondly, our labour laws would never allow South African companies to treat their workers like Chinese companies do.
In today’s (2nd November) edition of Business Day, the editor stated,
“We’re still waiting to see third-quarter economic growth figures but in the first half of this year the economy contracted by only 2% compared with the first half of last year. And signs are that it is already starting to turn around.
But in the job market, clearly, things have got worse – and could deteriorate further. Standard Bank ’s economists think the unemployment rate, which has already jumped from around 23% to 24,5%, could go as high as 27% this year.
So why the lag in the time it’s taken the labour market to respond to the recession? And why is the response now so severe?
Ironically, SA’s labour market regulations may have something to do with both. In the US, for example, where workers have very little protection against being fired or retrenched, the job market responded almost immediately to the economic crisis. People were put out of work overnight as firms felt the crunch last year and early this year. Now, things are starting to look a bit better.
In SA, by contrast, workers are protected from simply being thrown out on the streets arbitrarily or overnight. So employers must follow complex and lengthy retrenchment procedures. And that may be why it’s taken a while for job losses to bite. So the latest quarterly survey figures seem to suggest that it’s not that our labour laws necessarily help workers hold on to their jobs in a recession – they seem simply to delay the evil day.
Worse, one theory holds that SA’s restrictive labour laws may in fact add to the chances that jobs will be lost in a recession. Because it is so difficult to get rid of workers (even for good reason) in good times, so the theory goes, some employers will take advantage of the economic downturn to do even more retrenching than they strictly need to. And that means, of course, that those lost jobs are unlikely to come back, even once the economy recovers.
As it is, the recovery is expected to be slow and bumpy, and not very job-creating. That’s a bad story for any country but particularly for SA, with one of the world’s highest unemployment rates.
And if the unemployment ratio doesn’t look that great, look at it as an employment ratio and it’s even worse. The third-quarter figures show that only about two out of every five adult South Africans have jobs of any sort. And we know that the unemployment problem hits young adults hardest, so that almost half of young Africans have never worked at all – making it unlikely that they ever will be able to break into the labour force.
So creating jobs just has to be a priority. This is surely not the time to quibble too much about how “decent” those jobs are. Nor is banning labour brokers going to do the trick. The government keeps saying that job creation is one of its five priorities. It has agreed to measures such as the Training Layoff Scheme, designed to try to save some jobs in the recession. It has improved unemployment benefits and boosted the public works programme.
But none of these are solutions to SA’s unemployment problem. Rather, as last week’s medium-term budget speech emphasised, SA needs an alternative, more labour- absorbing growth path. The challenge is to devise ways to achieve that. (emphasis – mine!)
So, what does mean for South African business right now? What does it mean for our businesses in a year; or five year’s time? The outlook is not great, but there are some things we can do to give us an edge, when the proverbial does hit the fan – as I think it will in about two year’s time. And it certainly doesn’t include the Chinese ‘Lemming’ approach!
In my next newsletter, I’m going to set out some basics that I believe you need to do well, if you want survive the next crunch, and have a strong business left at the end of it to take advantage of any upswing.
