South African Mining Sector In Serious Trouble, Country’s Economy Downsized – Says Zambian Mining Executive

By Paolo von Schirach

February 24, 2013

LUSAKA, Zambia – As Africa is moving forward, South Africa, the Continent’s historic economic power house, seems to be falling behind, having lost its ability to modernize. The huge South African mining industry, the country’s main economic driver, is in trouble. Plenty of  recent stories about violent labor unrest, in a few instances punctuated by violence and excessive use of force by the police. Many striking miners have been killed in these demonstrations that evoked the atmosphere of the worst days of apartheid. 

South Africa is in trouble

Here is how a competitor sees South Africa. This is what Adam Little, an executive with First Quantum Minerals, FQM, a mining conglomerate operating in Zambia, a smaller country north of South Africa, said in an interview published in the January/February 2013 issue of Zambian Traveller:

 

Q. What do you say about the labour related problems facing the mining sector in South Africa?

A. We believe that the South African mining industry is in a different position to the Zambian mining industry, and we sincerely believe that there is no need for the type of tragic confrontation that we have recently seen in South Africa.

South Africa has completely missed the last two mining booms, due largely to the problems associated with labour force relations and also to the uncertainty of ownership raised by talks of nationalization.

The effect of this on the entire South African economy has been catastrophic, which has seen the country decline from a position where it contributed 40% of Africa’s total GDP to less than 20% in just 18 years. [bold added]

As a result all South Africans are now poorer than they were a decade ago. In the meantime other African countries, Zambia included, with more balanced [business-labour] relationships have enjoyed the boom times with a material rise in living standards across most of the continent.”

 Bad policies, no growth

Of course, a mining company operating in a different African country may have a vested interest in exaggerating South Africa’s precarious conditions. But it is true that labor issues are a big problem, while it is also true that there has been open speculation about nationalizations concerning the South African mining and banking sectors. And it is also a fact that the South African economy is not growing much, this way making it impossible for the  ANC government led by president Jacob Zuma to raise the revenue necessary to finance its very ambitious social agenda.

Bottom line: bad economic policies and troubled labor relations yield little or no new wealth. As a result, few if any new schools and hospitals built.




America’s Problem: Half The Country No Longer Believes In The Virtues Of Free Market Capitalism

WASHINGTON – America’s biggest problem –as the recent presidential elections have demonstrated– is that a bit more than half the country no longer believes in unfettered free enterprise as the main engine of both personal and national growth.

Government is better

Obama’s re-election (with 51% of the votes) as the defender of entitlement programs as they are, of state intervention and as proponent of income redistribution through taxation shows that a majority of American voters today believe that the benign hand of government helping them is a better and safer bet than the Republican promise to lower taxes and public spending, so that the spirit of can-do enterprise can be once more liberated and put to work. At least 51% of American voters are not so sure about free enterprise.

Capitalism as a model lost the battle of ideas

Let’s face it. The 2008 recession destroyed capitalism’s credibility and mystique. The system failed. And it failed big time. Most of the almost theological assumptions about the sanctity of markets were proven wrong by the Financial Catastrophe.

Nothing illustrates this failure more than Alan Greenspan’s contrite admission that he –The Flawless Maestro– had made a huge mistake. All his life he believed that financial markets would self-regulate in a fashion that would allow them to price risk appropriately and thus avoid excesses. Well, it wasn’t so. No self-regulation. On the contrary, even the most elementary rules dictating restraint were broken.

And it turned out that our Wall Street Captains were not just unwise, they were in fact complicit in a sinister orgy of speculation and greed in which they all succumbed to the zany idea that financial manipulation would make them super rich. In so doing, they almost sank America.

Romney successfully portrayed as the enemy of the common people

Right or wrong, this is the prevailing narrative. And this is what those who voted for Obama believe in. Poor Mitt Romney came along saying that he had the super manager credentials to really fix this mess.

The premise for his challenge was that Obama had done a poor job as economy’s steward during his first term. “Well –said a confident Romney– let the amateurs go back home and let me, the real pro, handle the economy. I know this stuff. I have done it all my life”.

Well, this impeccable resume became Romney’s main political liability. Precisely because of his close identification with venture capital, Romney was conveniently depicted by the Democrats as the arch-enemy, as the fox in disguise who wanted to run the chicken coop. Thanks to the clever character assassination dished out by the Obama campaign, Romney was doomed.

The audience does no longer believes the old story about capitalism

But Romney was doomed also because a bit more than half of the audience no longer believes the old American narrative of “self-help and individual effort”. People are tired and disoriented. Capitalism failed. Corporate leaders behaved like gangsters.

Therefore, now a liberal Government that promises help looks like a better bet.

And so it was. Obama won the political battle.

That said, the Obama policy medicine is a disaster. He may want to help out with more of this and that –and the people cheer. But he of all people should know that the cupboard is bare. There is no money, while public spending is still trending up.

America does not grow

Obama’s ideological blinders prevent him from understanding that the country needs first and foremost higher growth. From a post war average of about 3%, we are down to 2%. This trend will get us closer to stagnating Europe and all its problems. In order to get to higher growth, it is essential to have a new Grand Bargain that would place entitlement programs on a sustainable course, while reforming our incomprehensible tax system in order to provide a strong encouragement to business creation.

Public assistance for ever?

Of course we need to extend a helping hand to those in need. But only if this is a way to make people self-sufficient sooner rather than later. Unfortunately, the message now is that there are some perpetually weak constituencies that will need assistance in perpetuity.

If you are on the receiving end of these public goodies, this may sound great. Easy for the moment to ignore the combined consequences of low growth, high spending (that goes mostly to assistance and income support, as opposed to investments), and more debt. If we looked at where sorry-looking Southern Europe is today, after having followed exactly this course of action for a few decades, the end game should be obvious. But nobody within this new majority will point this out.

Who will make capitalism believable?

Until and unless somebody will come up with a credible message that will reignite enthusiasm for free market capitalism and sober governance, along with policies aimed at opening up real opportunity to all, America will continue to slowly slide into higher debt, mediocrity and eventually national decline.




Monti Has No Chance To Become Italy’s Elected Prime Minister

 

WASHINGTON – With his (typically Italian) hints and hesitations as to whether he will or will not be a candidate to lead a centrist/reformist group aspiring to form Italy’s next government, Mario Monti (the outgoing, unelected Prime Minster) proved that he is not a national leader. And this is fine. In fact it would a major surprise if he demonstrated both the willingness and the ability to move into a terrain that was never his to begin with.

No reformist party in Italy

His semi-surrender to Italy’s political reality, even though not proclaimed (in true Italian fashion) in clear terms, is also Monti’s admission that Italy cannot and will not be governed by what it would really need: a solid, pro-market political force (led by him) that would have the popular support necessary to dismantle layers and layers of statism, crony capitalism, excessive union power and corruption –all of it nicely intertwined with organized crime.

Monti can interpret the existing political landscape. He sees that the painful fiscal reforms concocted by his government –a technocratic, unelected government “imposed” on the country by President Giorgio Napolitano– were accepted only because of the semi-emergency fiscal predicament confronting Italy at the end of 2011.

Monti called upon to fix an emergency

Then Prime Minister Silvio Berlusconi was weak and discredited, his coalition in disarray. The left opposition was in no better shape. Credit markets were demanding premium interests to but Italian bonds.

And so Mario Monti, a distinguished economist and University President who never held elective office, was called upon by Giorgio Napolitano, Italy’s President, to form a new government of experts that would do the dirty job of raising taxes and cutting spending, with the proviso that, once it performed this difficult but limited task, Monti and his crew of technocrats would graciously leave the scene.

Run for office?

But now some are having second thoughts. There are some well-meaning (but delusional) Italians who would like Monti to stay on, participate in the elections, win the popular vote and prove that Italy can become a modern industrial democracy. Yes, they want to show the world that Italy deep down is a Western country with good rules and a credible eco-system that will make it possible for jobs creating, competitive enterprises to grow and prosper.

Monti may have liked the flattery. But he can understand the dominant statist (and in fact anti-capitalistic) political culture. And he can read the polls. The centrist, reformist coalition that would like to have him as an elected Prime Minister is way too small. Not a chance that it would win the upcoming elections.

Italians vote for those who promise the impossible

The likely winner is the Democratic Party, mostly retreaded former Communists who for sure abandoned their beloved Bolshevik dreams but who are still attached to the equally stupid dream of a state capable of engineering economic growth.

In the same vein, the Italians (most of whom have understood nothing about the causes of the debt crisis) are still attached to the impossible dream of publicly funded jobs for life and/or a private sector jobs that are theirs for ever. Yes, friends, nobody gets fired, no downsizing in Wonderland.

And they will vote mostly for parties that keep promising what over time is unsustainable and thus cannot be delivered: safe jobs for all, long paid vacations, lots of benefits, light duties, steady pay, free health care, guaranteed retirement.

The left will win

The Monti government has been a short and totally out of character parenthesis of sanity imposed by extreme circumstances in an Italian environment that in general resists reality.

Now that they have a chance to express their true wishes, most likely the Italians will elect a left wing government led by the Democratic Party. And the Democrats will make the same mistakes the French Socialists have already made: their union allies will scare investors and cause capital flight, while the government will create fake, subsidized jobs.

And then we wonder why Southern Europe is such a disaster area?




A Horrible Fire In A Bangladesh Garment Factory Places The Spotlight On Labor Standards In Emerging Markets – The Western Brands Imposed Stringent Rules On Their Suppliers – But What About Compliance?

[the-subtitle ]

By Paolo von Schirach

November 27, 2012

WASHINGTON – Just a few days ago, a horrible fire in a garment factory in Dhaka, Bangladesh caused the death of more than 100 women workers. This tragedy could have been avoided or at least mitigated had their been fire escapes. But there were none and so the poor women could not leave the building on fire. They were trapped inside and died. Walmart immediately issued a statement indicating that it no longer used this factory as a supplier.

The supply chain

This tragedy and the Walmart damage limitation effort placed the spotlight once again on the rather difficult and opaque issue of the supply chains that provide the garments that eventually are bought by Western customers in inexpensive department stores such as Walmart.

Indeed the poor women workers in Bangladesh in a sense are the key factor that allows Walmart to charge very low prices for its jeans and T shirts. Yes, it all starts with cheap labor provided by illiterate workers who are paid almost nothing for their efforts. Like it or not, this is the sad face of globalization. It is relatively easy and inexpensive to source labor intensive goods in low wage countries like Bangladesh.

Let’s make it clear that Walmart, Polo, Benetton or Calvin Klein usually do not own any garment factories in Bangladesh, Vietnam, Cambodia or Nicaragua. They source from these factories and/or from intermediaries who in turn place orders with the factories. Therefore, technically speaking, the Western brands and/or major retailers bear no direct responsibility for the (usually inadequate, sometimes appalling) working conditions in these modern sweat shops.

Moral responsibility

But they do bear moral responsibility. Because of media campaigns fed by NGOs, Western consumers are becoming aware of the long supply chains that originate in poor countries. People are beginning to realize that what they buy in Chicago or Frankfurt has been made by poor, underpaid and usually exploited women in Bangladesh or India. And, yes, at last some Western consumers do care about lack of living wages, unpaid over time and bad workplace conditions in far away countries.

Labor standards

For these reasons the big Western brands and major retailers decided a few years ago that it was in their business interest to be seen as proactive on labor conditions in the countries where they source their garments. And so they started pushing their suppliers to improve work place conditions and wages for their workers.

Whether they really meant it or not, it is good PR to be seen on the side of the struggling workers as opposed to be viewed as complicit with the exploitative sweat shops owners.

Over time, because of media attention fueled by a variety of NGOs that forced the brands to act there have been improvements regarding work place conditions in factories located in emerging markets that supply the Western brands.

In many cases, the factory owners have to abide by certain work place and labor standards in order to qualify and retain their qualification as suppliers. The brands conduct routine inspections to verify compliance. Sometimes specialized NGOs participate in the monitoring process, in order to verify real compliance.

Improved conditions?

The end result should be improved working conditions for those low wage emerging markets workers (mostly women) who make it possible for us Western shoppers to buy really inexpensive socks or underwear.

But obviously the system is not really working as it should. The fire in the Dhaka factory is evidence of non compliance with elementary safety rules. And we can rest assured that, beyond glaring issues such as lack of fire escapes, most of these factories have inadequate ventilation or sanitation facilities. We can bet that women workers are routinely intimidated, threatened, fired or worse just for asking bathroom breaks. We can bet that many of them have to survive on ridiculously low wages, while they are not fully paid for their overtime.

Hidden cost of low prices

There is no doubt that the efforts promoted by NGOs and other activists helped a lot. If nothing else the Western brands felt compelled to demand compliance with new, decent standards and to issue yearly reports on working conditions in the factories operated by their main suppliers. That said, this Bangladesh avoidable tragedy shows that we are still far from a world in which all workers are treated fairly. Sadly, this is the hidden cost of your low priced jeans.




Some National Media Obfuscate The Real Issue At the Center Of the Chicago Teachers Strike: Mayor Emanuels’ Push To Introduce Serious Evaluation Criteria, So That Bad Teachers Can Be Fired -Teachers Resist Accountability, While Children Learn Little Or Nothing At All

[the-subtitle ]

By Paolo von Schirach

September 11, 2012

WASHINGTON – Amazing to observe to what lenghts some media can go when determined to obfuscate rather than clarify a critical issue, the dire state of American public education in this case. There is now a major, almost historic teachers’ strike underway in Chicago, one of America’s largest public schools systems. While there are many issues on the table, including pay, at the core of the confrontation is Mayor Rahm Emanuel’s effort to introduce serious accountability for Chicago’s educators. The teachers’ unions, mostly concerned about themselves as opposed to their education mission, resist change. The reform would measure teachers’ performance on the basis of the results of their teaching. If the children learn, it means that they have good teachers. If they do not, then those teachers need to find another line of work.

Accountability

And why is this an issue? It is an issue, in fact a huge issue, because in Chicago and nationwide America’s children are held back by far too many mediocre or bad teachers who stay in their jobs not on account of their performance, but because they are protected by their membership in powerful teachers unions, like the National Education Association, (NEA), and The American Federation of Teachers, (AFT). The American education crisis is deep. Nationwide, test scores show poor results; meaning that children do not learn much, or nothing at all. International comparative analyses of students abilities clearly indicate that American children do either so-so or poorly against their peers from China, Korea, Finland and many other countries.

All this is now well known and well documented. Mayor Emanuel’s efforts aimed at introducing accountability among Chicago’s teachers should be saluted by the media as a valiant effort aimed at turning things around, an effort aimed at weeding bad teachers out so that America’s young people, especially the poor and the disadvantaged, can get a real education. It is quite clear that in today’s super competitive world a bad education is a ticket to nowhere.

Coverage failed to mention critical issues at the center of the dispute

But absolutely none of this came out of an in depthsegment in the course of a radio program normally regarded as serious journalism. Absolutely nothing. The program anchor started by wandering what this strike might be all about. No context, no background about the US education crisis. Nothing about the new and more stringent teachers evaluation criteria put forward by Mayor Emanuel. And the expert interviewed proceeded to raise a lot of dust by talking about ancillary issues that supposedly are instead at the center of Chicago teachers’ grievances. They complain, we are told, about class sizes, about lack of air conditioning in some buildings and about rehiring the good teachers who have been laid off when a failed school is closed. (Again, no explanation as to why in Chicago some schools are so bad that they need to be closed down).

In the end, the causal listeners got from this rather lengthy segment that Chicago teachers are up in arms about work place and pay raise issues, or something like that. Nothing whatsoever about the national fight (of which Chicago is now a major battleground) to reform the entire system of teachers’ tenure, so that there will be accountability, and so that it will be finally possible to get rid of incompetent educators who teach nothing.

Failure to inform

A mediocre to bad public education system is one of America’s major weaknesses. This is bad for young people getting into the world with little knowledge and no training to think. It is bad for the economy, as uneducated workers under perform; and it is ultimately very bad for America, because any country will thrive only if its citizens are creative and capable. It is to the credit of leaders like Chicago Mayor Emanuel that they are trying to remedy this disaster; but major media that supposedly are there to provide in depth coverage dance around the issue, failing to inform the public as to what is really at stake here. A major disservice.




Italian Prime Minister Monti Cannot Do Magic – Bond Yields Are Up Again, The Economy Is In Recession, And Unpopular Reforms Are Stuck

[the-subtitle ]

By Paolo von Schirach

June 14, 2012

WASHINGTON – The Wall Street Journal seems to be somewhat surprised that Prime Minister Mario Monti has hit a political sandbar and is now stuck, (Italy’s Reform Stall, June 14, 2012). Its editorial laments the fact that Monti is raising taxes too much while he is unable to reform the “Statuto dei Lavoratori“, the “Workers Charter”, one of the most insane pieces of labor legislation in the modern world.

Protecting workers right

In case you do not know this, in Italy it is practically impossible to fire anybody, given the armor plated protection given to employees by this law. And you can figure out that an extremely rigid labor market is bad for business. Labor flexibility would provide incentives to new enterprise. In fairness to Monti, he tried, as he tried other things. But Italy, while not crazy as Greece, is a close relative. Serious reforms run against ultra established special interests that will never give up.

Uninspiring fiscal and economic picture

In Italy the short term fiscal picture is not so bad. But the rebalancing of public accounts came at a huge price. Tax rates are confiscatory. And a new increase in the VAT tax is in the works.

Meanwhile, looking at the long term fiscal picture, with public debt still at 120% of GDP, investors are penalizing Italy. Bond yields are up. The 10 year is once again above 6%. And the economy is in recession, while youth unemployment is now at a stunning 36%. The young Italians who have a chance emigrate to Brazil, or wherever there seem to be prospects.

Monti is a well meaning technocrat. But the notion that he had some kind of magic formula to fix public spending and the economy, all by himself and painlessly, was and is ludicrous. Today, as the Italians realized that most disappointingly he cannot do magic, his favorable rating in opinion polls plummeted to 34%.

Lessons for America

As I said, Italy is not Greece; but we are getting there. As for America, it would be nice if someone started reflecting. This is what out of control public spending, generous entitlements and slow growth gets you: national decline. This is still America, mind you. But, as we postpone critical debates on fiscal and tax reform, while not promoting pro-growth policies, America is becoming more and more like Europe.




Will Greece Finally Exit The Euro? – Economy Is Too Weak – Current Austerity Focused On Higher Taxes, While Keeping A Huge Public Sector Makes Things Worse – Expect No Growth

[the-subtitle ]

By Paolo von Schirach

May 24, 2012

WASHINGTON – The unmentionable is now openly talked about. Greece may have to leave the euro after all. Until recently this was considered a complete impossibility. Even talking about it was akin to blasphemy. The common currency agreements, we were told, do not contemplate an exit. Once in, you are in, for ever. But now there is at least talk.

Monetary union among unequal members was a bad idea

I am not sure of how a Greek exit, now often referred to as “Grexit”, a term coined by Citigroup analysts, could be arranged with manageable levels of pain and not too much market confusion. But I am sure that the whole concept of a monetary union linking together vastly unequal members was and is a bad idea.

Weak economies, bloated public sectors

The problem is that in Southern Europe the economies are not productive: there is hardly any innovation and no dynamic investment environment, while labor and other costs are too high.

At the same time, the political systems favor notoriously inefficient and bloated public sectors because public sector jobs are a way to soak unemployment while rewarding political friends. So we have the unhappy combination of weak economies and large public sectors that are both too expensive and totally unproductive.

After joining the euro, Greece and the others did not think even for a moment that they would need to reform in order to catch up with the more energetic Northern European countries so that they could actually stay and prosper in the common currency. No, absolutely not. They kept doing exactly the same, only borrowing a bit more to finance larger public deficits.

Wrong way to fix the problem

Now we are at the point in which the systemic weaknesses cannot be kept hidden any more. But the crazy answer is to rebalance the books through austerity that hits society and not by shrinking the bloated governments. A pro-growth austerity program, as David Malpass points in a WSJ op-ed piece, favors enterprise and the creation of new business activities, while shrinking the state via cuts in public employment and asset sales.

Well, in Greece they have done exactly the opposite. The state not only did not shrink, it actually grew a bit more, while it tries to get new revenue through impossible levels of taxation that are suffocating whatever economic vitality was left. And so the unproductive state with all its coteries of politically supported friends prospers, while society and the private economy, already in terrible shape, suffers even more.

This is a recipe for economic suicide. The idea that one can engineer economic recovery by taxing companies and people to death, (the same complaints can be heard in Italy and Spain), is ludicrous.

Southern Europe could adopt the Northern model

In theory it would be quite possible for the Southern European members of the eurozone to adopt the Northern models. There is nothing mysterious about recipes aimed at reforming public administration and taxation, while creating a new investor friendly environment. The Republic of Georgia did this. Some African countries have made significant progress towards this.

A matter of values and psychology

But I doubt that Greece and the others are willing to adopt Northern ways. The problem in the South of Europe rests in values and psychology. For most people a public sector job for life is much more appealing than taking a chance in the private sector. Nobody really considers the aggregate consequences of this collective predilection. A large and inefficient public sector consumes resources rather than producing them. High labor costs and rigid labor rules discourage investments.

With this approach, no solution

Unless something gives, the result is exactly what you see. Out of control debt that cannot be repaid because the economy is too weak. But instead of reversing course by cutting the public sector while encouraging new enterprise, they make the problem worse by adding to taxation while keeping the state just as large and unproductive as it was.

If this is the approach, I cannot see how these countries, starting with Greece, can share the same monetary union with more enlightened countries. Time to plan for Grexit.