The Other Side Of Job Creation

It astonishes me to see how everyone buys the ‘job creation’ story the state and media sells them, without considering the bigger picture. What I believe most people fail to ask is how many jobs were not created elsewhere, where there is a greater need or bigger demand. In order for new businesses to flourish, it will require reallocation of capital and people and their skills to higher yielding industries and businesses. This process is very important to the agility and livelihood of a healthy economy, where unproductive businesses close down to make way for new ones that can use the resources (capital and people) better, because they can better provide things people really want at prices they’re willing to pay. When government (and the labor unions) intervenes in this process, they waste capital by not directing resources to the most desirable industries and businesses, and applying it to their political agenda.

Consider this about private businesses: If they fail to produce in the cheapest and best possible way those things which people most need, they suffer losses and are eliminated from the economy. Other businesses who know better how to deliver the right things, at the right price, replace them. This is how inefficient businesses get eliminated from the economy, a kind of survival of the fittest. If you take the wrong decisions in business, you get punished very quickly. Do it long enough and you’re out.

Now consider this – government’s ‘capital’ comes from tax or debt. Debt is just borrowing against a government’s future income, that in turn comes from tax. Therefore, ultimately, all government’s income comes from tax. But in government’s case there is absolutely no incentive or threat to use it efficiently. Because government doesn’t get eliminated from the economy when it makes the wrong decisions about how and what to use resources for, it continues to do so at a much greater cost to the economy.

With every new ‘job creation’ project government funds, that same amount of money was previously taken away from productive businesses. Because of government’s inefficiency and misallocation, it is very likely that a lot more could have been done with the resources elsewhere, including hiring people. Also, based on what criteria does government direct resources? Yes, a lot of it is probably for the “greater good” and altruistic in nature, but an enormous part of the criteria is determined by political, emotional, subjective and selfish factors.

Another thing I find quite amusing to read is how the competition commission hunted down and punished the latest business cartel that is hurting the man on the street by manipulating prices. What is a cartel other than a type of monopoly? And we all know how much our beloved socialist government loves their state controlled monopolies: Eskom, Transnet, Telkom, PetroSA and Infraco. And what they don’t already control under these state enterprises and government departments, I’m sure they are planning to take over soon. By the sounds of it, mining and banking is next on the cards. So on the one hand government continuously seeks to end anti-competitive behavior, but on the other it’s recommended as the best solution to the nation’s problems. If there’s one thing the South African economy needs is more competition, but not only in the form of a reactive central watchdog that runs around trying to police the 3 or 5 big players in each industry. Instead we need to focus on growing the size, quality and number of entrepreneurial businesses in each industry.

At this stage government and the labour unions, are blocking the free readjustment and reallocation of resources to new businesses that can use it to better produce that what is required more. Government sucks more resources out of the economy, in the form of tax for their ‘job creation’, and labor unions force artificial labor costs on businesses. Instead of addressing the true underlying problems of our economy, government chooses to prop up ailing industries and expand the public sector. In the long run this will do very little to solve the dysfunctional structure of our economy:

1. There is poor separation of concerns between the labor unions, Cosatu, and the government. Cosatu helps the ANC government stay in power. Let’s not forget they were the big reason Zuma was elected as president, and election after election tell their members to vote for the ANC. This makes government unlikely to make the necessary labor and economic reforms, needed to pursue a true growth strategy.

2. Labour unions and the ANC government must accept, that it’s impossible to keep all current jobs, with increasing salaries, and have meaningful success in creating new businesses. Rather focus on creating new businesses, making current ones more competitive and allowing labour to adjust to the industry’s natural cost and employment structure. This means there will be jobs lost, before new ones can be created.

3. The ANC government must also realize that the free market economy is better at determining how to use resources. Resources are still wasted in a free market economy, but not for long. Expanding the public sector payroll, increasing grants, and so forth, requires more tax money, which in the end defeats their original purpose of improving living conditions.

Government Covers Up Underlying Problems by Increasing Public Sector Employment

By April 2010 the private sector (excluding agriculture) lost some 377,000 jobs from a peak in October 2008. Since then the private sector has only been able to add a 94,470 jobs, and the public sector added 106,503 or 53% of 201,000. In July 2011, private sector employment has grown 0.5% since a year before, and the public sector 3.3%. I’m just wondering what all these new government employees are doing? What are they creating that other people need? What new industries, technologies,and specialized skills are they mastering?

National departments’ wages also increased by 11.3% for the year to July 2011, and increased by more than 10% for the past 2 years. Private sector wages only increased by 7,4%. So clearly the place to work in South Africa is at government departments. This has to mean that these people are making the most important contributions to our economy, or does it? The figures seem to suggest they own specialized skills that are in high demand, because not only is the country hiring more of these people, but we’re also paying them more.

To get a picture of the SA government’s debt, I quote a sentence from the SA Reserve Bank’s Quarterly Bulletin for December 2011: “As a ratio of gross domestic product, national government’s total gross loan debt increased from 35,4 per cent to 37,3 per cent during the period under review.” So quite an innocent figure really, especially considering that America’s debt to GDP is 100% and Greece’s is 150%. But as in all things finance, it’s the trends that reveal the truth. In 2007 this figure was 27.4%, and except for 2008, has grown every year since then. Makes one wonder if South Africa isn’t maybe Africa’s version of a Greece in the making?



The Show Must Go On

What a hectic fortnight! With the left-wing in the ANC finally taking control of the organization with Mbeki’s resignation as South Africa’s president, under pressure from Zuma’s left-wing buddies, I believe the Rand and JSE will remain under pressure over the next 18 months. The good news this week was that the PPI increased by a modest 0.2% in August 2008. The bad news is that it’s standing at a whopping 19.1%. Ouch! But with the comrades’ red flag waving high in government, I don’t believe we are in for any interest rate increases by Tito Mboweni for at least 6 months, even if inflation jumps with another full percent.

Everybody was shocked at how fast Mbeki was kicked out of government, and at the timing of it – amid a global financial crises. This was followed by the resignation of several ministers loyal to him. Some who’s political careers are nearing the end anyways, like Alec Erwin. I guess it’s better to go out with some fireworks, and controversy, than facing the embarrassment of not getting a post in the new government after next year’s elections. Some we weren’t going to miss at all, such as the aforementioned, which brought us legendary hits like “Darkcity”, or better known as “Mzansi Without Power”. Some, like Trevor Maneul and Tito Mboweni (yes, I know I’m most likely standing in my own little corner adding him to the my-favorites list – but I have my reasons), we feared that should they leave, large parts of government will collapse into a state of total anarchy, and any hope of a seamless continuation of policy lost forever.

At least the fact that we would’ve had 3 new presidents in 6 months, should reassure the international community that South Africa won’t have a dictator anytime soon. It should also silence the skeptics that South Africa is the next Zimbabwe. Yeah right! The competition in the ANC for the post of president is way too intense for a Mugabe-like figure to rule for a second longer than his allotted 8 years. Hey, come to think of it, South Africa has not had one president that completed his second 4 year term. Now that’s what I call democracy! The only aspect that smells of a Zimbabwe land-grab  stink, is the notorious Expropriation Bill. This ugly anti-capitalist piece of legislation has been shelved for the time being, while the ANC is gearing up for the 2009 elections. But it’s still lurking as the precious ring of Mordor in the dark basements of government, that will bestow it with the ultimate power to confiscate and hand out any property, without having to answer to a court of law. What any corrupt politician won’t give to wield such a  wonderful tool to hand out property at free will to his confidants.

Kgalema Motlanthe was appointed interim president. Although he is a left leaning comrade, coming from the trade union side, he looks like a humble (well, probably as humble as a big shot politician can be), and diplomatic person. Exactly the kind of leader we need to massage the current government pain points, until Zuma takes over. Or might he attempt to win the hearts and minds of his party and people by next year’s election? I’ve already read in The Sunday Times that in some quarters he is more popular than Zuma. It will be interesting to see how this suspense drama plays out: I can already see a new wave of infighting as Motlanthe maneuvers to compete with Zuma for president.

With the local and international scene churning out one new catastrophe after the other, I definitely urge those of you who haven’t invested in gold to do so urgently. And I’m definitely more in favor of actual gold, rather than gold stocks. I’m not saying sell all your stocks and buy only gold coins to hide under the mattress, but I definitely recommend allocating about 10% of your portfolio in the ultra cool, ultra liquid, New Gold ETF, listed on the JSE. The wonderfully Rand denominated gold ETF, will insure you against negative movements in the dollar, and Rand. Wow! Two for the price of one. What a bargain.

As I’ve mentioned, South African stocks will remain under pressure amid all the uncertainty, especially as far as capital growth is concerned. I believe it’s definitely the time of more defensive, good dividend paying stocks.

Hey, talking of good dividends; definitely take a look at preference shares. Most stocks bought an sold are “ordinary shares”. These stocks have have no maturity (expiry) date. Meaning they exist in perpetuity, or well, at least until the company goes bankrupt. Ordinary shareholders have a proportional claim to the income and assets of the company after the company’s met all its obligations to creditors and preference shareholders. So you’re last in line should a company go bankrupt, and its assets sold off to pay its outstanding debt. New ordinary shares can’t be issued, unless you’re offered the first “right” to take up more shares in the same proportion as your current ownership. You also have the right to vote on various resolutions at company annual general meetings. Although for small investors, such as myself, this really doesn’t matter since we usually own so few shares that it’s not going to make any difference whether we vote or not.

This brings us to preference shares, or preferred stocks. This type of share is a combination of equity and debt, issued with a “guaranteed” percentage dividend. You buy and sell these stocks just like normal shares, but you don’t get any voting rights. However you are first in the shareholder line when it comes to dividends, and claims. This means that should a company declare a dividend, preferred shareholders must get a dividend, before ordinary shareholders get their share of the dividend.

They also have other benefits, such as that the dividends are tax free, unlike dividends on ordinary shares, and the dividend amount is based on a ratio of the prime interest rate. The net effect of this is that they actually pay larger dividends as the prime interest rate increases, yet the actual share price comes down, just like normal shares do in a higher interest rate environment. But watch out, you do not nearly get the same price appreciation with preferred stocks, that you get with ordinary shares. Preferred stocks are also less liquid than ordinary shares.

The different types of preferred stock

Cumulative preference shares:
In the event of a company being unable to pay preference share dividends in a particular financial year, the amount of these “unpaid” dividends will be paid in subsequent years when results allow. These types of preference shares are my favorites. On the JSE it’s mostly the non-banks’ preference shares that are cumulative. Although there are exceptions, such as ABIL’s preference share which is in fact cumulative.

Non-cumulative preference shares:
In the event of a company being unable to pay preference share dividends in a particular year, the holder of a non-cumulative preference share forfeits the right to this dividend. The majority of the banks on the JSE have this kind of preference share.

Redeemable preference shares:
A redeemable preference share is issued with the provision that the company will be able to redeem this share at some future date. This means the company will be able to “buy” these shares back and remove them from circulation.

Convertible preference shares:
These shares can be converted to ordinary shares, at a specified or unspecified time in the future. The Sasol Inzalo shares will be converted to ordinary Sasol shares, after 10 years.

Participating preference shares:
These shares get both the preferred dividend, and the ordinary dividend.

In future posts I’ll cover the characteristics of individual preferred stocks on the JSE. But that’s it for now. Have a wonderful week!