When the British voted marginally in favour of leaving the European Union (Brexit as it was popularly known as); many, including me and even Brexit supporters were surprised. Even more surprising was Donald Trump’s stunning victory in the US presidential elections. We were all led to believe by the mainstream media, as well as most pollsters, that Hillary Clinton would win the election. In the recent local government elections in South Africa, we witnessed similar changes in voting behavior. Most of the major metropolitans are now run by parties in opposition to the ANC.
If you include in the mix the #FeesMustFall movement, the public service delivery demonstrations and other similar protests; it is becoming evident that there is a growing level of discontent with the current status quo in South Africa as well as in many other countries.
As citizens as well as investors, we try to understand what is happening and how this may affect us.
What is happening?
I would like to posit a theory that suggests that these changes in voting and the protests that are taking place reflect a deepening dissatisfaction by the majority of citizens on the current status quo:
- Unemployment – unemployment levels are high, traditional long-term employment is being replaced by short-term contract type assignments. In South Africa, unemployment levels stand officially at 26.6% but does not take into account many who are in the informal sector who barely make ends meet.
- Increasing levels of Inequality – a study by Anna Orthofer from Stellenbosch University, finds that 95% of the wealth in the country is owned by only 10% of the population. Interestingly, Orthofer also finds that there is a growing Black middle class which makes up approximately 40% of the population and that there is less disparity in incomes between top earners and the middle class. This Black middle class however, has very little assets (only 5% to 10% of the total wealth).
- Poor policy choices – policy choices made those in power have not had the expected impact on unemployment and / or inequality. One can argue that these policies have exacerbated these issues. Low interest rates by central bankers have increased asset prices (stocks, bonds, property, etc.) widening the inequality gap. Where businesses have invested, these have been typically in capital intensive, labour saving machinery instead.
- Disconnected elite – Elites (i.e. those in government, business and professionals) are disconnected and thus unable to understand and / or respond appropriately to the growing angst and dissatisfaction of the majority of the population.
The result is Brexit, Trump, Vuyani, #FeesMustFall, #RhodesMustFall, etc. Citizens are rejecting the status quo and are looking for alternatives. You may not agree with any or all of these movements, but they are capturing voters by understanding their fears and voicing these. Some of the words and actions may be racist or violent in nature, but this does not deter people from supporting them.
My view is that the underlying causes of the issues are not well understood and hence we find ourselves in this situation.
Some of the Underlying reasons for the issues
Several underlying issues are playing out causing the current dissatisfaction. I highlight two of these:
- Technological Change – Technology innovations are increasingly decimating jobs. Most modern factories are highly automated. Similarly clerical or white collar jobs are also rapidly been replaced by automation. Recent developments in artificial intelligence are also beginning to impact on knowledge based professions (automated trading; robot advisors, medical diagnosis, legal research, language translation, etc.). Imagine the impact that driverless vehicles will have by thinking about how many earn their living by driving.
- Globalisation – Globalisation also plays a significant role in the destruction of jobs. Offshoring, cheap manufacturing countries, low tax jurisdictions, all vie for more capital and / or jobs to move to their countries. The movement of people from countries with potentially lower economic prospects to countries with higher economic prospects (e.g. Mexico to USA; Zimbabwe to South Africa; Eastern Europeans to United Kingdom) also plays a role in employment changes.
But the world has gone through technological as well as globalisation changes before and by-and-large mankind has benefited from this. What is wrong this time?
Benefits not equally shared
Take a look at the graph below:
Source: Lawrence Mishel, The Wedges Between Productivity and Median Compensation Growth, Economic Policy Institute. http://www.epi.org/publication/ib330-productivity-vs-compensation/
What this graph shows is that the economic benefits of productivity gains has by-and-large only gone to others (shareholders, maybe tax authorities) and not to the workforce. This is perhaps the most telling picture of why we have the level to inequality that we have right now.
Jobs have been displaced from blue and white collar workers to technologists and from high cost countries to low cost countries. New jobs created have been insufficient in addressing the tide of unemployment or real wage growth. Further, the benefits of productivity improvements from 1975 onwards has not gone towards compensation (salaries and wages). Hence this growing inequality and unrest on the status quo.
South African specifics
In South Africa, with the challenges that we face in our education sector, we are not creating near enough new economy jobs or onshoring jobs to take advantage of these trends. Many of our school leavers and even university graduates are ill-equipped to cope with the demands of the new economy. We score poorly in Mathematics and Science when we benchmark our students against global peers. Many of our brightest minds are been lured to work overseas taking with them their skills and the opportunity to create jobs in South Africa.
Because our economy is not growing, those that are in employment, protect their jobs at every cost. Whether it is through subtle racism in the corporate world or by killing rival political candidates in government elections. All these actions reflect a fear of losing one’s income.