The Possibility of World War III

By Clem Sunter, originally published on News24 on 18 January 2012

At several presentations that I have done on the long-term outlook for the world economy, I have been asked the following question at the end: why do you not include the possibility of a third world war? After all, the last century had two world wars. This leads to an interesting debate as to whether the 20th century was an aberrant one when mankind went temporarily mad and such behaviour will not be repeated. The alternative view is that war is built into our DNA and the air has to be cleared by a monumental fight every so often. Equally, it’s a good excuse for reviving the economy if it is in recession. Conscription lowers unemployment, defence industries boom and if there is a lot of destruction going on, infrastructure has to be replaced.

Before examining the type of scenario that might lead to an all-out global conflict, let’s define what one means by a world war. We have had plenty of wars around the planet since 1945, but none of them qualifies as a world war. Here are my conditions:

1. The war has to involve the great military powers on opposing sides. For me that means America, Britain and Europe (Nato) on one side and Russia and China on the other. Plenty of other countries may also participate as allies on one side or the other and the combination of the great military powers may be different. But the war has to start out as a fairly even contest, though some would argue that no combination can measure up to the awesome military might of America if it was prepared to go all the way with its nuclear arsenal;


2. The war has to be fought on several continents at the same time, as was the case with World War II; and,




3. Each side uses its complete portfolio of weapons including nukes and other weapons of mass destruction. There is no self-restraint. Maximum force to win is the rule of the game.



The Alternative National Democratic Revolution

By Clem Sunter, originally published on News24 on 7^th December 2011

I do believe in a National Democratic Revolution; but not the one that has been peddled by the Left which is the same old, same old ideological stuff around redistribution of wealth. In its latest and more extreme form, it includes nationalisation of industries and land expropriation. The philosophy behind it is that the State must play an ever-increasing role in ordering the affairs of society. In other words, we as citizens walk behind the government into the future.

The word "democracy" means people power and my kind of National Democratic Revolution puts power in the hands of the people - not as a collective but as individuals. The State has an incredibly important role to play in providing the rules and conditions according to which every citizen has the greatest chance of fulfilling his or her potential as a human being. That is the mission statement of the State - that and no more. We all walk together into the future.

Now we have dealt with the generalities, let us get down to the specifics. Before we do so, I would like to quote two observations from government ministries in the wake of the publication of the National Development Plan:

• 90% of the jobs to be created in order to reduce unemployment in South Africa to 6% by 2030 will come from the small business sector;
• the challenge in solving South Africa's problems is not money but management. We have a crisis of implementation.

Obama 1 Osama 0; What next?

By Clem Sunter, originally published on News 24 5^th May 2011

We all know where we were in South Africa during the late afternoon of September 11, 2001. Like the death of John Kennedy and Princess Diana, the destruction of the twin towers at the World Trade Centre in New York represented drama, which you seldom see in your lifetime.

Nearly 10 years later, Osama bin Laden – the architect of the attack – has been killed by American Special Forces. George W Bush, like the marshal in those old Western movies, called for his capture "dead or alive" and Barack Obama delivered on the request. The interesting question is who got the bounty of $25m for fingering the fugitive.

It is also nearly the 10th anniversary of the publication of a book that I co-authored with Chantell Ilbury called The Mind of a Fox. Launched in June 2001, it contained a letter to George Bush listing as his biggest threat a massive terrorist strike on a Western City. We wrongly talked of nuclear terrorism in the letter, but the flags which made us rank it as his primary uncertainty turned out in retrospect to be correct. They were the rise of Fundamental Islam during the 1990s; the re-equipping of terrorist movements in places like Saudi Arabia; and the two attacks on American embassies in East Africa in 1998.

We offered the American president two scenarios in light of such an attack. The first one we called "Friendly Planet" in which nations found common ground to eradicate poverty and disease, to tackle problems of the environment and to root out dangerous criminal and terrorist organisations. The alternative scenario was a "Gilded Cage" in which the West tried to hole itself up; but the cage could be blown to smithereens at any moment by nuclear-armed terrorists or be gradually overwhelmed by millions of illegal immigrants slipping through the bars.

So what is the verdict 10 years on? We have not had another attack in the US since 9/11, which for Americans is the bottom line. Terrorist organisations have had their capability to mount an attack on a grand scale degraded by the wars in Afghanistan and Iraq. Their movements are more carefully monitored by better intelligence sources in the sky and on the ground. Moreover, the unrest in North Africa and the Middle East seems to be producing a new generation of young Arabs who are more concerned with democracy and economic advancement than religious ideology.

Nevertheless, the threat of another event is still there, because the world has not become a friendlier place in the last 10 years. Many advanced economies are now mired in unemployment and debt as they slowly recover from the worst crash since 1929; and emerging economies like China have troubles of their own which include a potential property bubble, food price inflation and destruction of the physical environment. Hard times generally increase bitterness among ordinary people, and increasing bitterness opens the door to future divisions and war of a trade or military kind.

Hence, the 50/50 odds we were giving to the two scenarios 10 years ago have not really changed. The flags we now propose in favour of a safer and better planet are a quicker global economic recovery than anticipated; and greater international co-ordination to prevent nuclear proliferation and further terrorist outrages. The flags for the emergence of a more dangerous planet are a deterioration of the relationship between the West and the East as economic power shifts from the former to the latter; an uncontrollable scramble for the remaining resources in the world as oil, water and metals become scarcer commodities; and a complete loss of faith in the US dollar as a reserve currency that leads to another financial crash. A showdown with Iran over its nuclear programme is also waiting in the wings. Plus the regime change in Egypt, and possibly elsewhere in the Middle East, could have repercussions on Israel.

It will be interesting to see which flags go up over the next 12 months as an indication of where the global game is headed in the longer run. Meanwhile, an important chapter has closed on 9/11.

Walk like an Egyptian, think like a fox

By Clem Sunter, originally published 16 February 2011

If anything has shown the limitations of being a superpower today, it is the events that have unfolded in Egypt. Sure, Mubarak has been replaced by a new Armed Forces Supreme Council and that council is aware of the $873m annual aid package the Egyptian military gets from the US. It would suggest that Obama still has strings to pull in the transition process.

However, as Obama himself has said, the people of Egypt have spoken and will settle for nothing less than genuine democracy. Genuine democracy means genuine elections with genuine choices between different political parties. It certainly means no orchestration by an external power to achieve an election result which is favourable to the interests of the external power. Indeed the more that people perceive any form of orchestration, the more likely they are to vote for parties clearly not aligned to the interfering agent or agents. Imagine how Americans would feel if they discovered that the policies of either major political party were being tailored to the wishes of another nation. They would scream about it and rightly so.


Yet all the planning models taught in the MBA programmes at America's leading business schools still assume a level of control over the future that simply no longer exists. Chantell Ilbury and I call it the hedgehog concept - and indeed so does Jim Collins who actively promotes the idea in his highly influential book Good to Great. Essentially, if you come up with a plausible vision and you focus on it to the exclusion of virtually everything else, you will make it happen.

Our starting point is that much of the future is beyond your control and uncertain enough to be unpredictable. By all means have a vision and support it with objectives, key performance indicators and all the other accessories developed since Peter Drucker wrote his ground-breaking Management by Objectives. But, for heaven's sake, do not bet the shop on the future unfolding in the way you want it to unfold. Play other futures as well, prepare the best options for them and constantly keep an eye out for the flags. Then, like a fox, adapt your strategy for whatever the future throws at you - decisively and quickly and as soon as the flags go up.


Why is Egypt such a good example for contrasting our technique to the orthodoxies offered at American business schools (and European ones)? Because I would defy anyone to come up with a firm prediction of where Egypt is going to be in one year's time, let alone five years. Nobody knows; so you can only play scenarios, identify the flags for each scenario, consider the probabilities based on the disposition of the flags and then decide what you are going to do - proactively and reactively - in a continuous state of adjustment. Optimisation of strategy is incremental.


What America, and for that matter other Western powers, cannot do is construct their own vision for Egypt and in a blinkered way pursue it at all costs. It will not work: just like it has not really worked in Iraq and is currently not working in Afghanistan. You have to be flexible when you no longer have the power to impose your own will. Otherwise, the law of unintended consequences kicks in and you end up with a worse outcome.

Ultimately, in this new world of social networks empowering people to do their own thing, Egyptians will walk the path that they choose to walk. Every outsider needs to be flexible and adapt like a fox. Maybe even the Ivy League will understand this one day and teach that foxes are as indispensible to good strategic thinking as hedgehogs. Here's hoping! As the democratic revolution spreads across North Africa and the Middle East, Americans will have to learn to let go and prepare themselves for a variety of outcomes like good foxes do. They should resist the urge to be meddling hedgehogs.

Decent work means decent business

By Clem Sunter, originally published 2 February 2011

I fully support calls by the unions for decent work. I have worked for 42 years for the same company and now serve as a non-executive director on one of its boards. Work has been a major part of my life; and I can count myself very lucky that it has always been decent and challenging and I have been decently remunerated. My work has immeasurably improved my quality of life.

If that applies to me, I have to argue that it should apply to everyone else as far as it is reasonably possible. Put another way, if the purpose of our existence is to create the greatest happiness among the greatest number, then decent work should be high on the list of any society's priorities. We all know that life is unequal and harsh at times, but that should not stop all of us striving to create a better life for all – however long it takes. Progress is about taking incremental steps towards an honourable goal.

Now comes the reality check. Decent work depends on three factors:



1. The organisation you work for is financially sustainable. In the case of a business, that means the annual value of the products and services generated by the business exceeds the cost of providing them through all parts of the economic cycle. In the case of an NGO, it means your donations consistently exceed your costs and you have sufficient cash reserves for serious downturns. In the case of a civil servant, it is the knowledge that the government is practising sensible fiscal policies and not indulging in large budget deficits. In short, job security, which is an essential aspect of decent work, rests on working for a soundly managed enterprise with people who know what they are doing.
2. The environment within which you work is conducive to your fulfilling your aspirations as a human being and leading a balanced life. The management style is fair and supportive and you are able to mix work with fun at work. Comradeship binds you and your senior and junior colleagues into an effective team. We all know how hard it is to satisfy this condition when the tasks are arduous and require an exceptional amount of physical exertion, but it can be done. Ask any marine commander.
3. As far as enterprises are concerned where life is risky, decent work is about having the ability to grow your business if you succeed and the ability to try another venture if you fail. It is about being financially rewarded for the risks you have taken and being held up as a role model for young people of a similar disposition to follow. Above all, it is the thrill of being your own boss – free of the hierarchy and bureaucracy that always accompany organisations beyond a certain size.

1. We should change the grand objective of creating five million jobs by 2020 to creating one million new businesses by 2020 that will lead to at least five million jobs if not more. The reason for doing this is to recognise that decent work of any kind flows from the growth in number of enterprises. Even civil servant jobs and public works programmes are financed out of the taxation that comes from increasing the number of transactions (VAT), boosting the number of companies (company tax) and raising the number of employees (income tax) working in the additional businesses.
2. We should optimise the environment in which small business growth can take place, and particularly in which informal sector champions can graduate into the formal business sector and maybe one day into becoming world-class players with an international customer base. This will require a revolutionary approach to tax, micro-lending, angel and venture capital investing, business school entrepreneurial programmes and slashing bureaucratic red tape surrounding business formation so that entrepreneurs have the flexibility to survive the uncertainties of start-up.
3. We should have an Entrepreneurial Economic Empowerment Programme (EEE) where scorecards of large companies, banks and others have a substantial number of points riding on their contribution towards the development of small business and a more participative, democratic economy where economic power is more widely shared.
4. In order to ensure that large companies are decent businesses in the second meaning of offering a decent environment in which to work, we should make it obligatory that they publish in their Annual Report a corporate Gini Coefficient. This would measure the remuneration level of the top salary earners (including all bonuses and gains from share options) versus that of the bottom wage earners. One could then make comparisons across companies and industries, but more importantly judge whether a company is behaving decently in a Hard Times economic scenario by spreading the pain across the entire workforce including the Board of Directors. If the workers are asked to exercise restraint, so should the directors in order that everybody keeps his or her job.

To nationalize or not

By Clem Sunter, originally published 29 October 2010

"To secure for the workers by hand and by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution and exchange, and the best obtainable system of popular administration and control of each industry or service."



Time for a third vision

By Clem Sunter, originally published on 22 September 2010

At the moment the electorate perceives that there are two competing visions for the country: the ANC's vision of state-sponsored redistribution and the DA's vision of protecting the free-market status quo. I know the latter would argue that this does not reflect the true extent of their vision, but that is how they are seen. In Zimbabwe, it is the same duality with Zanu-PF representing redistribution and the MDC perceived to be sponsored by colonial reactionaries. Sadly the black/white division is also part of the party branding among the voters of both countries.

There is now room for a third vision which was originally formulated by the black consciousness movement and which was particularly well articulated by Steve Biko. It rests on a simple assumption about human nature: hand-outs don't improve your self-worth - doing it for yourself does. Liberation in this vision means liberation of the individual human soul to pursue his or her own goals as he or she defines them. It means, for example, that welfare initiatives and public works programmes to reduce unemployment are viewed with mixed feelings. On the one hand, you have to be realistic about reducing human misery; but, on the other hand, these actions do nothing to promote the independence and feelings of self-worth of the recipients.

Translating this third vision into a party manifesto is not difficult. Obviously, the quality of education which gives young people the ability to fulfil their individual goals is paramount. However, what interests me would be the economic recommendations basically to support an affirmative action programme for entrepreneurs where colour is not an issue. I would propose the following:

1. A venture capital fund of R100bn would be established and funded by a one-off turnover tax on big business, the percentage being determined by whatever figure raises that sum. The fund would be spread between the provinces and administered by venture capitalists with proven small business experience. The large companies would each have a shareholding in the fund commensurate with their contribution.
2. The scorecard for banks would be amended to include points for setting up a small loans division and points on the volume of business executed. The same would apply to the JSE in terms of the number of small businesses listed.
3. The scorecard for big business would include percentage targets in their procurement programmes in terms of contracts with businesses below a certain size.
4. The scorecard for accounting firms would be revised to allow for a certain amount of auditing and accounting services for small businesses – albeit at lower charge rates and less stringent standards.
5. The scorecard for business schools would reflect the amount of training and mentorship that they would do for entrepreneurs.
6. Rural communities would be allowed to set up local energy transfer systems whereby local citizens could barter goods and services between one another without having to pay VAT.
7. All small businesses would be exempt from tax (except for VAT) up to an annual profit of R1m. This would immediately legitimise virtually all entrepreneurs as well as provide them with compensation for the risks they take – including the fact that they have to put their own money aside for a pension in old age. The shortfall in tax would be met by introducing a graduated system of company tax similar to the one that operates for income tax.
8. Labour laws would be simplified to allow small business owners to hire and discharge employees with more flexibility. This would not apply to households employing domestic workers.
9. Large agricultural enterprises would be encouraged to transform themselves into networks of small farms which can still achieve the economies of scale and efficiencies of the larger units. Land redistribution implemented in this way would not harm food security.
10. Campaigns to celebrate South Africa's individual pockets of excellence would be undertaken to create a bandwagon effect with the message that if this person can do it, so can you. In this regard, I always invoke the name of Siya Xusa, the young man from Umtata who now has a minor planet named after him by Nasa for the advances he has made in rocketry science.

Who will champion the entrepreneurs?

By Clem Sunter, originally published on 6 May 2010

I was delighted to see the list of people chosen to serve under the chairmanship of Trevor Manuel on the National Planning Commission. They are a representative group who deserve our full support in the critical task to which they have been assigned.

However, one question leapt to my mind: who among these worthy persons will champion the entrepreneurs? I have argued for many years that the only way to turn our exclusive economy into an inclusive economy, in which citizens broadly participate, is to precipitate an entrepreneurial revolution. This means putting a huge focus on our informal sector and creating conditions that will be conducive to allowing the small businesses that inhabit this sector to graduate into the formal sector. There has to be a bridge.

My contention is that if 20 000 entrepreneurs make the successful transition; they could realistically add 25 jobs each to their respective work forces. In total, that would be the extra 500 000 jobs which President Jacob Zuma made his objective in the short term. Moreover, these jobs would be more sustainable than jobs created by public works programmes funded by taxpayers' money.

I point to the top four economies in the world to illustrate the validity of my argument - America, Japan, China and Germany. They have one thing in common: a passion for entrepreneurship. America we all know celebrates individual self-sufficiency and achievement. China has over the last 32 years undergone an entrepreneurial transformation, thanks to Deng unleashing the desire for economic self-improvement that was widely suppressed under Chairman Mao. No other country in modern history has leapt 97 places in the international economic rankings and in such a short time.

Germany and Japan lost the Second World War; but their emphasis on the growth of family-owned businesses in the 1950s and 1960s was the platform for their subsequent economic success. Even now, family enterprise is considered a key driver behind the recovery of both their economies.

Yet in South Africa, small business has always been ignored despite all the talk. It is regarded as something you do if you can't get a decent job in big business or the civil service. It is looked down upon by policy-makers, even frowned upon because of the profit motive. Apart from one or two great initiatives linking big business to small business, most formal sector CEOs don't give any thought to promoting an entrepreneurial class. They are too busy making money for themselves. Banks close their doors. The cost of administering small loans is too much to make them.


Very few schools have entrepreneurial programmes, even though part of their mission statement is to prepare young people for life after school. Given the current state of the labour market, the chances are that most school-leavers are either going to have to start their own business or join small businesses started by someone else.

Business schools and universities in the country relegate entrepreneurial courses to the margin of the product offering. I know they will say otherwise, but visit any business school campus and you will see that executive development programmes (to improve the effectiveness of big business management) as well as the standard MBA courses occupy centre stage. At least, I have to concede, they have made a start.

I remember having breakfast with one of the ministers serving in Nelson Mandela's Cabinet and expressing some of these thoughts. His eyes glazed over as his mind wandered to his agenda for the rest of the day. He simply wasn't interested. Nevertheless, when it comes to regulating small business, everybody wants their pound of flesh. Many entrepreneurs will tell you that the South African environment is basically hostile to their ilk. Nobody is cheering them on and perceiving their sector as the birthplace for the next generation of successful listed companies. Nobody sees them as the future of the country.

I thought that a 42-year-career in Anglo American would prepare me for the small business world. Not a chance. You don't understand the risks that entrepreneurs take until you take them yourself – personally. You market your products; you shell out your own capital in advance; you ring up clients and remind them they haven't yet paid you; you calculate your own VAT. In large organisations, you have no conception of these daily demands because other people do it for you. I now realise you have to compensate entrepreneurs for the enormous risks they take by giving them much bigger tax breaks.

So I come back to my opening question. Who on the National Planning Commission has the personal experience of running a small business, which is a vital pre-condition to champion the cause of the entrepreneurs? I've quoted Steve Biko liberally in recent articles because he was absolutely right. For society to be stable, people have to do it for themselves. That's entrepreneurship. It's not a subsidiary issue. It is the issue.

The Dinokeng Scenarios

Originally published 14 April 2010

The recent hogging of the media headlines by individuals of extreme political persuasion has made a debate on the Dinokeng scenarios absolutely vital. The scenario exercise was funded by Old Mutual, facilitated by Adam Kahane and chaired by Dr Mamphela Ramphele. The team included many notable South Africans.

They came up with three scenarios. "Walk Apart" is a scenario where extremists trump moderates because of political factionalism and weak, unaccountable government at the centre. Society disintegrates to the point where civil war becomes a strong possibility. Corruption abounds and strikes multiply.

"Walk Behind" is a scenario in which the state intervenes strongly in the economy; but the results are mixed due to lack of service delivery and welfare programmes breeding a sense of complacency and dependency among the citizenry. Private initiatives by business and civil society are crowded out.

"Walk Together" presumes a government that encourages an active citizenry which feels empowered to do things for themselves, but sufficiently united not to get in each other's way. It is a scenario of give and take where the moderates trump the extremists. Citizens' groups, business, labour and broader civil society actively engage with the state and form partnerships to improve performance in the public sector. Quality education for all is the key to wean people away from handouts and allow them to live an independent life.

At the moment I would say that the flags which would indicate a rise in probability of the "Walk Apart" scenario are as follows: an increase in unemployment and violent crime statistics; an increase in the Gini coefficient which measures the economic inequality in our society; a further decline in service delivery and the state of our infrastructure; the continuation of our ranking at the bottom of countries in the Premier League in regard to mathematics and science education; a rising popularity of demagogues who aggravate racial divisions within our society; and bribes being the only way of getting things done.

Flags which would indicate a shift towards the "Walk Behind" scenario include the following: nationalisation of land, the mines and the banks; an increase in government expenditure as a percentage of GDP; hikes in individual and corporate taxes which put us way ahead of international norms; growing bureaucracy and an increasingly punitive regulatory environment which particularly hammers entrepreneurs and small business; and the emergence of an all-powerful leader around whom a personality cult develops and against whom no criticism is tolerated.

For the flags which would signal that the "Walk Together" scenario is coming into play, I can do no better than quote the three flags which Steve Biko would have chosen, were he alive today. They are contained in the book I Write What I Like, the first one being a rising of black consciousness and self-worth to a point where the creation of a truly integrated and properly working society in South Africa is a collective endeavour to which everyone contributes. Any other process, he says, "is rather like expecting the slave to work together with the slave-master's son to remove all the conditions leading to the former's enslavement".

The most effective statistics to indicate that this flag is up and fluttering in the breeze are a massive improvement in literacy and numeracy levels among the population as a whole; a serious decline in the Gini coefficient; a consequent broadening of the tax base in the higher income brackets; and a society where the elite - both black and white - do not stick out like a sore thumb.

The second flag is a growing degree of racial harmony in this country in order to improve its competitiveness on the world stage. Without unity of spirit - or an enhanced sense of patriotism if you wish to call it that - our economic prospects are bleak. It means whites must stop being snobs and dismissive of African history; while blacks must stop singing provocative songs about whites and avoid turning themselves from being the oppressed into the oppressors.

As Biko says, "Out of this mutual respect for each other, and complete freedom of self-determination, there will obviously arise a genuine fusion of lifestyles of the various groups. This is true integration."

Elsewhere he states: "A people without a positive history is like a vehicle without an engine." Moreover, "the revolutionary sees his task as liberation not only of the oppressed but also of the oppressor. Happiness can never truly exist in a state of tension." The most tangible sign that the second flag is rising will be for the comments on this website to become a little less angry and a little more forgiving!

The third flag revolves around not so much what Biko wrote but what he did. He launched an organisation called the Zimele Trust Fund; Zimele means "stand on your own feet!" It was to help ex-prisoners from Robben Island to rehabilitate themselves by setting up small co-operatives like brick-making plants. To walk together, we need to start from the bottom up with a plethora of self-help organisations - particularly in rural areas. We need to celebrate and assist both social and commercial entrepreneurship. We need to build a bridge between the formal and informal sectors of our economy so that our entrepreneurs can live the South African dream.

With no positive interventions, I would at present attach significant odds to the "Walk Apart" scenario. "Walk Behind" could be a temporary intermission; but the fractious nature of our society will not allow any single individual to amass the level of personal power required to become a permanent dictator. A sequence of coups and counter-coups is more likely as we return to the more anarchic future of heading in different directions.

Despite political transformation and the current programme of black economic empowerment, the three flags are still at half mast on "Walk Together". Hence, my point at the very beginning of the article that we need to start an open and frank dialogue right now on how we establish the preconditions for walking hand in hand into the future. Biko deserves it and so do the next generation of South Africans. Democracy - or people power - will be the biggest loser if we fail.

The Eish U!

Originally published 19 May 2010

The way the European Union is going, it should change its name from the EU to the Eish U! As I pointed out in an article a couple of months ago, many governments in the world are afflicted by the "Boom, Bloat, Bust" disease.

There is now a rash of candidates in Europe led by Greece. Talk of contagion is rife and the Euro has sunk so far against the US dollar that it is beginning to resemble the Zimbabwean dollar. In a few years time, they will probably knock three noughts off and call it the real Euro. It is a pity that the African continent does not have a common currency, because - if it did - it would be called the Afro and I would be putting my Euros into Afros.

Seriously, though, this new fund worth one trillion dollars, that has been set up to save Greece and others who face potential default on their loans, is like giving someone an aspirin for a serious illness. It will act as a temporary palliative but it won't cure the problem. In fact, the problem may be chronic so that no cure exists.

Other than Germany, which is still an outstanding world-class economy and - in fields like cars and machine tools - can knock the socks off the competition, Europe has become a high cost, low innovation region. Of course, pockets of excellence exist but they are not enough in number or scale to offset the rise of the East, particularly China. Essentially, European economies are being hollowed out as companies shift their manufacturing plants and service activities to places where labour is cheaper and more productive. The East has even narrowed the gap in the quality of education it gives its children.

Social unrest

Hence this great fund established on the Abba principle "Bailing you, Bailing me" - we'll bail anybody out who gets into trouble - has so far only had one consequence. To foreign investors it has put a Greek element into German bonds and, by doing so, has raised the risk of purchasing the latter.

As I surmised in the previous article, I would not be surprised if the Euro zone broke up with the northern countries parting company with their Club Med neighbours in the south. Most of the commentary has focused on the financial condition of Greece, Portugal and Spain, but I would rate Italy as the biggest potential headache. They have by far the largest national debt (nearly one and a half trillion dollars) of the Club Med group; and the amount exceeds Italy's annual GDP. Moreover, Italians, like Greeks, are not known for their fondness of the tax authorities; and right now, raising more tax revenue and cutting State expenditure are the two critical remedies for bloated debts and deficits.

This raises another issue - social unrest. Those shrieking heads on TV (they never talk) ignore the impact that further austerity measures will have on an already battered public. They blithely side-step the possibility of a revolution against capitalism as it is currently practiced. All I am saying is that social unrest can make nonsense of all the plans carefully crafted by the financial boffins. And then what?

Chantell Ilbury and I have developed a new scenario which we call "Ultraviolet" or "UV" for short. It is a mixture of our "Hard Times" U-shaped recession scenario and our "New Balls Please" V-shaped recovery scenario. Essentially, we move into a two-speed world where some economies recover and others don't. We put America, Brazil, Africa, India and China in the first category and Europe, the UK and Russia in the second category. Japan could go either way. The first lot get a nice, even suntan while the second lot get seriously burnt.

Investments

We now attach the same probability of 40% to this third scenario as to "Hard Times". In a way, we have been in it for the last 10 years. Japan has been in a "U" since 1990; and if you had invested in the UK stock market at the beginning of 2000, you would have lost almost a quarter of your money today (excluding dividends). Meanwhile, you would have tripled your money in the JSE. Even with a higher inflation rate and a depreciating currency, South Africa would have been a better place to invest over the last decade. So much for all those investment advisers who persuaded you to put your money offshore - they were plumb wrong to play the negative scenario, except as a means of making you more geographically diversified in the wealth you possess.

In summary, if you are risk averse, a large chunk of your portfolio should be invested in developing economies. The only safe havens are America and Germany providing it can ring-fence itself. However, let me finish on a humorous note. The Economist in May 2000 had Africa on the front cover with the banner headline "The Hopeless Continent". In every year since then Africa has outperformed the global economy by two per cent per annum (admittedly coming off a low base). How would The Economist describe Europe now? They have to be partisan about the UK.

One thing for sure if you are the largest player in the field. I would rather be South Africa on the tip of the third fastest growing economic region in the world (after China and India) than be Germany bailing out my elderly neighbours!

Climate Change Scenarios

Paper presented by Clem Sunter at Wits Business School, Johannesburg on 16 January 2008

1. Context
   
   The biggest change in the planetary game is the increase in numbers of people inhabiting our tiny ball in space. In 1850, the global population hit one billion for the first time. It is now 6.5 billion, with the national population of two countries - China and India - exceeding the one billion mark. Accompanying the more than six-fold increase in global population has been the spread of the Industrial Revolution with its emphasis on fossil fuel consumption. The results for the atmosphere have been spectacular.
   
   The average emission of carbon dioxide per citizen in the world is now 4 tons per annum which means total global emissions of 26 billion tons. In 1850 the level of atmospheric carbon dioxide was 280 parts per million. It is now 383 ppm. Unchecked, it could reach somewhere between 550 and 600 ppm by 2050 i.e. double the figure of 1850 in just 200 years. Why is this so important?
   
   The 'greenhouse effect' was first predicted in 1827 by French mathematician Joseph Fourier and subsequently explained in much greater detail by Svante Arrhenius, a Swedish scientist, in 1890. It is the theory that, just like the glass in a greenhouse, certain gases in the Earth's atmosphere - including carbon dioxide - trap reflected solar radiation and thereby cause a rise in temperature in the enclosed environment. The increase in mean global temperature is currently estimated at 0.74 degrees centigrade during the last 100 years. Further warming of the atmosphere could not only lead to a hotter world but also to major changes in global and regional climates (hence the term 'climate change'). Other consequences could be crop losses necessitating changes in agricultural patterns (90% of food comes from fewer than 20 species of plants); increased frequency and amplitude of extreme weather events; rising sea levels (endangering low-lying areas like Bangladesh, the Netherlands, London, Venice, half of Florida and many islands); spread of diseases (like malaria) as well as pests; and desertification.
   
    
2. Scope
   
   The playing field in the context of climate change is divided into two halves:
   
   
   1. The curbing of carbon emissions. In this regard one must take into account the entire carbon chain through the lifecycle of the product (including its disposal). For example, it might appear obvious that electric cars are less carbon-emitting than petrol-driven cars; but one must allow for the carbon emitted during the production of the batteries which go inside the electric car as well as the carbon emitted in providing the electricity to charge them. Someone with humour compared walking/cycling to work in London with taking the underground tube train. He argued that with the extra physical exercise involved in the first option one would be hungrier and therefore more likely to consume a hamburger. The latter's carbon content which included the cattle's methane emission during its lifetime, the transport of the meat and the energy consumed in refrigerating and cooking it could end up higher than the tube journey per passenger!
   2. Preserving the photosynthetic uptake of the Earth's forests. The more forests are cut down, the less capacity the Earth has to absorb carbon dioxide. One idea recently mooted is that developing countries with large tropical rainforests should be paid an annual rental for not cutting them down (which is the exact opposite of what is happening at the moment).
   
    
3. Players
   
   There are 4 principal players in the climate change game:
   
   
   1. The Western Countries. America has the highest annual emissions per citizen in the world at 20 tons, which means that its total emissions are 6 billion tons (given its population of 300 million). Europe has an average annual emission of 13 tons per citizen.
   2. The Emerging Emitters which presently comprise China and India. China's annual emissions per citizen are nearly 6 tons, meaning that they have just overtaken America to become the largest emitter in the world. Their rapidly growing economy is ensuring that a growing proportion of their 1.3 billion population are gaining access to an American middle-class lifestyle. One Chinese government official said at a recent climate change conference that if China had not enacted its one-child policy in the late 1970s, China would now have a population of 1.6 billion. They have therefore saved 1.8 billion tons of carbon emissions per annum by having 300 million less people! India meanwhile with its population of 1.1 billion has an average annual emission of one ton per citizen; but that figure is set to rise significantly because of its own industrial revolution. Moreover, with its population expanding by 20 million per annum (i.e. Australia every year), total emissions are projected to increase at an astronomical rate.
   3. The rest including South Africa which, at 8 tons per citizen, makes it the largest emitter on the African continent. Obviously, this group has a vast range of national emission rates seeing that it includes Russia, the Middle East, South America, Indonesia as well as Africa and smaller Asian countries.
   4. The United Nations which is the only international body with the power and authority to impose universal rules to limit emissions and preserve forests.
   
    
4. Rules of the Game
   
   Whatever the outcome of the climate change game, these rules apply:
   
   
   1. The science is virtually certain. In other words, the world is warming up and it is due to man-made emissions. 'Virtually certain' according to the experts means in excess of 95 per cent probability, just short of the figure to convict a person of a criminal act in a court of law. However, there is still a minority out there who dispute the science. One would hesitate to put them in the same category as HIV/AIDS dissidents or Holocaust denialists. Instead, one should invoke the 'cautionary principle' which is set out in the next rule.
   2. We have one Earth with one atmosphere. If life becomes unlivable because we descend into a microwave, there is no other planet for mankind to find refuge in - other than a few lucky astronauts. So the stakes can be no higher; and one must be extremely cautious about dismissing the science (like one famous author who insists that climate experts are only in the game to feather their own nests by inspiring fear). Even if you feel the chance is only one in six that the greenhouse lobby are right, it is foolish to play Russian roulette on such a cosmic scale. You may make your name in the public domain, but future generations won't thank you for it in the event that you are wrong. Being responsible for your own oblivion is one thing, assisting everybody else's is another!
   3. Fossil fuels will continue to be a significant source of energy in all scenarios, there being well over 100 years of oil reserves and over 300 years of coal reserves remaining in the ground. Fuel security may also be a consideration for countries like China which have abundant coal resources but not much else. Even in the most optimistic scenario for the next 50 years, alternative energy sources such as solar, tidal, wind-driven and geothermal devices will probably satisfy no more than 20% of total global demand. Hydroelectric schemes are restricted to localities with major rivers and uranium has problems of its own (not least the disposal of spent material and threat of nuclear proliferation). Nuclear fusion is still a twinkle in the eye; but if it ever comes to pass on a commercial scale, everything will change. Of course, ethanol (or close equivalents) extracted from maize and other crops is being touted as the new frontier. Biofuels may help security of supply but they do not assist in bringing down carbon emissions. They may actually trigger a permanent increase in food prices as agricultural production is re-directed to the energy market.
   4. Despite the previous rule, the technology exists to make huge inroads into reducing carbon emissions. On the supply side, power plants are getting more efficient and carbon sequestration by liquefying the emissions and pumping them into underground sites is technically feasible though terribly expensive. Several pilot projects to prove the viability of constructing a zero-emission power plant where coal, oil or gas is the raw material feed are in the works. Nevertheless, a cardinal principle for this rule to make a difference world-wide is that technological breakthroughs are shared between the developed and developing world on a generous basis.
      
      On the demand side, the potential for energy savings which reduce an individual consumer's carbon footprint is even more promising. For example, with no advances in technology at all, people could be induced to switch to smaller, lighter, more fuel-efficient cars. The way to make this happen is through a tax surcharge which makes the carbon chain a significant factor in the purchase price of the car. If you want the adrenalin rush of going from nought to 100 in 5 seconds or the comfort of a luxury SUV, you have to pay upfront for its impact on the atmosphere. Such a principle can be applied to all consumer goods, but it presumes a huge change in government mindset everywhere as well as an effective way of calculating a product's lifetime carbon chain.
   5. The previous point about changing government mindset is a precursor to probably the most important rule of the game - the Three Musketeers rule - 'all for one and one for all'. Given that no government is going to diminish its nation's competitiveness unilaterally, rules governing climate change should be universally applied. The Kyoto Agreement breaks this rule as many important nations are conspicuously absent from it. America, as the leading per capita carbon emitter, has to take the lead but the UN has to be the principal intermediary through which the rules are agreed. It will need greater international co-operation than ever before, fostered through an incremental trust-building process among the participants.
   6. Finally, there is the supertanker effect. Whatever is done now will only impact the environment very slowly, just like trying to change the course of a supertanker mid-ocean. This is frustrating for the average person who likes to see consequences flow immediately from any action taken. The importance of this rule can be gauged from the belief of some prominent environmentalists that should the carbon dioxide content in the atmosphere surpass 450 ppm and temperatures rise by more than 2 degrees centigrade, certain irreversible changes will take place in the environment on account of feedback mechanisms kicking in e.g. the permafrost in Siberia will melt and release further significant quantities of carbon dioxide into the atmosphere. Their argument is simple: only by acting right now at 383 ppm can this disastrous scenario be averted.
   
    
5. Key Uncertainties
   
   The following uncertainties could exercise a critical influence over the outcome of the game:
   
   
   1. The political will to tackle the issue is shaky. As a species, we are not good at handling gradual threats. Shock events like international terrorism or an earthquake evoke a fight-or-flight response but the gradual stuff tends to be put on the back burner. For instance, even after Al Gore's call to arms in 'An Inconvenient Truth', the environment does not register sufficiently in the public consciousness for any of the candidates to make a big play out of it in the run-up to the forthcoming US Presidential Election. The possibility of an economic recession and withdrawal of troops from Iraq rank far higher as issues. As one environmentalist put it: "The only thing which will give climate change the boost it deserves is seven Katrinas in a row. That would do it." In that sense, the future pattern of extreme climatic events is a key uncertainly which could play an important role in determining how the game unfolds.
   2. The degree of international co-operation necessary to obtain agreement on policies and action is questionable at the moment. Ask yourself, is there a sufficient level of goodwill between the US, Europe, China, India, the Middle East and Russia to handle the problem collectively? A point consistently made by Indian and Chinese Authorities is that the West, particularly America, is the cause of the problem in the first place and has shown no sign of being prepared to make genuine sacrifices to rectify the situation. Unless the West with its much higher carbon footprint per citizen is willing to take the pain to make the gains, why should the emerging emitters? Certainly in the event of the geopolitical climate worsening because of acts of terrorism, a recession, renewed protectionism or regional wars, an international consensus on climate change will become virtually impossible.
   3. Related to the previous uncertainty, the choice of the next US President and the determination he or she shows in handling the issue will heavily influence the progress to be made in the short run. Bearing in mind the decision made at the recent UN climate change conference in Bali to defer any substantial agreement on policies and goals to the next meeting in 2009, we will know soon enough whether a sea-change in American attitude at the highest level has taken place.
   4. The specific consequences of global warming remain a key uncertainty because the climate change models are immensely complex and sensitive to changes in input. The rate of warming (we could even have a hiatus of cooler years), the rate of sea level rise and the regional/local impacts of climate change cannot be predicted with great accuracy. There will be winners and losers (Russia and Canada may be better off with milder weather, the US grain belt worse off with more droughts), but it is dangerous to play specific scenarios like the Gulf Stream disappearing and Britain having another Ice Age by such-and-such a date. Unfortunately, for policy-makers this haziness over consequences makes it even more difficult to get people to accept some sacrifices in their lives. Nevertheless, it is preferable to the (falsely) precise omens offered by some of the gloom-and-doom merchants, which are rightly dismissed by most ordinary folk.
   5. The cost of mitigation (i.e. doing something now to pre-empt the severity of climate change) versus the cost of adaptation (i.e. taking action later as and when the changes occur) is still a relative unknown. Recent studies suggest that mitigation is much cheaper than adaptation, but it all depends on the discount rate applied to future costs. Of course, this cost comparison becomes trivial if the result is an uninhabitable planet to which nobody can adapt in the long run. Mitigation then is the only strategy - whatever the costs. Understandably, justifying mitigation (which is about stopping something happening) is always more difficult than justifying an initiative to make something happen. How do you prove you were successful? Politicians will have to find a way around this conundrum (like they do with the threat of terrorism).
   6. Technological advances could change the whole picture. For example, if carbon sequestration is turned into a relatively cheap and effective process, such a development would make a huge difference to the electricity generation industry. If nuclear fusion becomes a reality, it turns the game upside down. A super-light, super fuel-efficient car would make an enormous difference.
   7. The future trajectory of energy prices could modify behaviour regarding energy consumption. While stratospheric oil price scenarios exist because some experts believe we are past or are about to pass the peak of oil production, no such scenarios exist for thermal coal on account of its abundance.
   
    
6. Scenario Gameboard
   
   The two variables selected to be the axes for the climate change scenario gameboard are the level of political will and the presence or absence of international co-operation. Combining these variables gives four possible scenarios which were formulated by a group of policy experts recently in London. They outline possible futures after the Kyoto Agreement comes to an end in 2012.
   
   
   
   
   
   1. Dirty Dancing. In this scenario, no new agreement of substance replaces Kyoto. Everybody goes their own way, doing nothing to curb carbon emissions. It's all about the economy, stupid! Energy security, resource nationalism and protectionism rear their heads; and climate change dissidents wage a successful war with the scientific community to sow confusion in the public mind.
   2. Different Dances. In this scenario, some countries (like those in Scandinavia) and some states in America (like California where Arnold Schwarzenegger is now dubbed the 'Greenerator') come to the party with carbon emission reduction programmes (including successful carbon trading schemes). There is no co-ordination between these programmes so they have limited impact, except to provide a role model for other countries to follow. Nevertheless, it's better than nothing.
   3. Dances with Wolves. This scenario unveils a formal agreement with much fanfare but no teeth. Immediately after it is signed, countries - called 'the wolves' - start cheating on the agreement. There is no retribution for their misbehavior because the agreement is vaguely worded and full of loopholes.
   4. Strictly Ballroom. This is the virtuous scenario where countries sign up to an agreement containing clear objectives and targets and keep to it. They waltz together in a co-ordinated programme of action, sharing best practice and new technologies. The US leads the way with China and India in hot pursuit. A global carbon trading market is established.
   
    
7. Conclusion
   
   At this point in time, the world resides in the Different Dances scenario involving outstanding individual contributions but no concerted effort. Some countries who shall remain nameless continue their Dirty Dancing routines. All eyes will be on the meeting in 2009 to signal a new dawn. The final pronouncement from Bali went as follows: "The Conference culminated in the adoption of the Bali roadmap which charts the course for a new negotiating process to be concluded by 2009 that will ultimately lead to a post-2012 international agreement on climate change." Will it be Dances with Wolves or Strictly Ballroom? The judges will adjudicate and the public will cast their vote. Meanwhile, the environment awaits their verdict.

Showdown Scenario

This was first posted on this site in August 2006. It seems like it could be playing out...

September 1st 2006 is the day the showdown starts. It is the day after the UN deadline passes whereby Iran has to categorically state that it is giving up its nuclear ambitions and will furthermore allow the decision to be independently verified. Iran refuses. After much negotiation and consultation, the UN decides to impose a watered-down set of sanctions on Iran. Iran meanwhile declares that it is accelerating its nuclear programme.

Intelligence sources inform the American and British governments that Iran is much closer to creating the enriched material needed for a nuclear weapon than previously thought. It is decided that military force has to be used to stop the programme, particularly in light of the Heathrow terror plot, the war in Lebanon and the Iranian leader's repeated statements that Israel has to be destroyed. An attack is launched on Iran's nuclear facilities wherever they are known to exist. In retaliation, Iran blocks the Strait of Hormuz and the price of oil rockets to 150 US Dollars a barrel.

The world economy comes to a shuddering halt because finally oil has reached a price that cannot be handled. America moves into a sharp recession, followed by China and the rest of the world. The price of gold hits 1 000 US Dollars an ounce, whilst the oil price continues to oscillate around 150 US Dollars until the Iranian issue is settled one way or another. Stock markets together with commodity prices other than oil and gold plunge.

If you give decent odds to this scenario, it's better to be in gold, bonds and cash and not in the stock market.

The Nuclear Gameboard

In a book published in 1992 with the title The New Century, one of us wrote the following: "The growth of fundamentalist Islam poses a serious threat to Western lifestyles and values. This in itself is not a geopolitical problem. It only becomes one if attempts are made by zealots to impose Islam on countries wishing to pursue other paths of development. The attractions to the 'poor young billions' of a religion based on the strict code of the Koran are obvious. It anchors their existence in spiritual certainties when all is flux around them; it gives a clear sense of purpose in a world that for many has no meaning whatsoever; and it abhors materialism, a quality the poor do not possess anyway through force of circumstance. The Middle East, Pakistan, the southern republics of the former Soviet Union and northern Africa are all falling under the spell of fundamentalist Islam. That is a formidable area of influence. How much further it will spread and at what rate is unknown. Equally unknown is whether the spreading of an idea will degenerate into a war of beliefs. A nuclear jihad is not out of the question. Fundamentalist Islam is a wild card with the ability to alter the balance of power in important parts of the world."

This uncertainty, particularly as it relates to Iran developing its own nuclear capabilities, is now uppermost in the minds of Western leaders. As they ponder their options, we'd like to draw their attention to the Nuclear Gameboard we included in Games Foxes Play. The relevant excerpt follows:

It would be true to say that although HIV/AIDS dominates the scene in South Africa and many other developing countries, the developed world has other worries on its plate. Given the tempestuous nature of man, and his propensity for fighting, our world has been, and always will be, pockmarked with skirmishes, battles and wars that dictate the course of history. But there is one threat that is of global significance. It is well known that the current nuclear weapon stockpiles of the few nations who have them are enough to destroy all life on this planet many times over. The future of our existence hangs in the balance, because access to these weapons could dramatically increase over the next fifty years.

We have therefore constructed a gameboard which has peace and war as the horizontal axis and nukes and no nukes on the vertical axis. This leads to four possible scenarios upon which we have plotted past events (solid circles) and possible future events (dotted circles).

When Obama met Nash

Originally published on 14 October 2009

Many people feel it was premature for Barack Obama to win the Nobel Peace Prize for calling for a world free of nuclear weapons. But he was following in the footsteps of another Nobel Prize winner, mathematician John Nash. You may remember Russell Crowe played him in a movie called A Beautiful Mind in 2001.

We first connected Nash to the nuclear game in April 2005 in our book Games Foxes Play. In a section called "The Ultimate Gameboard", we laid out three scenarios. The one which we are in at the moment we named "The Madhouse" in that what deters any nation from launching a strike on another nation is a counterstrike. The principle that keeps the peace is mutually assured destruction (MAD).

We went on to say: "Obviously, the advent of stateless terrorism has knocked this principle on the head since terrorists who plant nukes need have no fear of reprisals in a specific spot. They could be anywhere. Meanwhile, in this scenario, new nations build up secret silos to have at their disposal if attacked."

The second scenario we called "Boom!" where the world in the next 50 years experiences another Hiroshima or Nagasaki. If you want to witness how devastating such an event would be, go to YouTube and click into Hiroshima atomic bomb re-enactment. Then reflect that modern nuclear weapons can be three thousand times more powerful that the bomb dropped on Hiroshima. It's like comparing one metre to three kilometres.

The third scenario we offered was "All Together Now" where the world is at peace with no nukes. This is what we had to say: "What is really needed is a new non-proliferation agreement that tackles the issue in a completely neutral manner. Hence the name of the scenario. For how can America or any country that currently has nukes take the moral high ground by arguing that other countries shouldn't have them? For any agreement to be sustainable in the long run and have teeth, the 'haves' will have to come to the party and disgorge some of their nukes.

"John Nash would approve of the scenario. In the movie, he is in the bar with friends when a blonde and several brunettes walk in. He advises that, instead of competing for the blonde (first prize for each of them), they should ask the brunettes out on the basis that this is the best outcome for the team. Otherwise, all but one of them are going to lose out, as the brunettes, realising they are second choice, will walk off in a huff.

"In real life, Nash won the Nobel Prize for his idea that games played in a co-operative fashion can lead to a higher level of equilibrium than pure rivalry. Nuclear games are no different, particularly as the West no longer has the supremacy to impose its own solution but equally has the most to lose."

Clearly, Barack Obama echoes our sentiments about what constitutes the desired scenario. Now he must turn his words into action and persuade everyone else to do the same. All together now!

Hedgehogs and Foxes

Originally published on 28 October 2009

The Greek poet, Archilochus, said it first circa 650 BC: "The fox knows many things, but the hedgehog knows one big thing." The British philosopher, Isaiah Berlin, expanded on the concept in 1953 in a celebrated essay. He nominated Aristotle as a fox and Plato as a hedgehog. Then in 2001, we published The Mind of a Fox in June and a little later in October Jim Collins came out with Good to Great.

We took contrary positions. We said that because so many factors are uncertain and beyond the control of an individual business, it was better to have the flexibility, adaptability and speed of response of a fox. Jim, on the other hand, asserted: "Those who built the good-to-great companies were, to one degree or another, hedgehogs. They used their hedgehog nature to drive toward what we came to call a Hedgehog Concept for their companies." He dismissed foxes as "scattered, diffused and inconsistent".

Enter Philip Tetlock, a professor at the Haas Business School which is attached to Berkeley in California. He published a book in 2005 called Expert Political Judgement: How Good Is It? How Can We Know? Over 25 years, he studied 82 000 forecasts made by experts against real world outcomes. He concluded that expert predictions barely beat random guesses, but "if you want good, stable long-term performance, you're better off with a fox. If you're up for a real roller-coaster ride, which might make you fabulously wealthy or leave you broke, go hedgehog. Hedgehogs are sometimes way, way out front. But they can also be way, way off".

Those last two sentences really sum it up. Successful hedgehogs can leave an everlasting footprint on humanity providing they're right with their big ideas - Albert Einstein with his theory of relativity, Henry Ford with his idea of a cheap, mass-produced car for the masses and Charles Darwin with his principle of natural selection.

But, ironically, it's Darwin who inspired us to argue the case of the fox. For he stated that the survival of the species rests on its ability to adapt to the changes in nature taking place around it. If you think about it, most species last millions of years because nature changes relatively slowly. Yet how many businesses last 100 years? The business environment changes much more dramatically and quickly than nature. Hence our insistence that alongside a vision, a mission statement and hedgehogs seeking an alignment to both, there have to be foxes who constantly question the relevance and solvency of the business in light of the changing context.

In other words, it's about a balance between the two species: neither can do without the other (which is more than a hedgehog would grant). The problem we have is when a vision is elevated to the position of a religious dogma which no one in an organisation is permitted to challenge. Hedgehogs have a tendency to move in this direction, so they have to be checked by foxes requesting an open debate on alternative futures that could compel a revision of strategy. The big idea may well survive but in a modified form.

The tumultuous times we are currently experiencing are giving traction to our argument on behalf of the foxes. If you Google "hedgehogs and foxes" in South Africa, you will see that our website ranks fourth; but more importantly four places ahead of the hedgehog concept. The age of the fox is dawning.

The Icarus Scenario

Originally published on 20 January 2010

One of the best scenario planning exercises ever to be undertaken happened in the early 1990s, at a conference centre called Mont Fleur near Stellenbosch. Under the guidance of Pieter le Roux of the University of the Western Cape and using the expertise of Adam Kahane as facilitator, a group of prominent South Africans - which included Trevor Manuel and Tito Mboweni - put together a suite of economic scenarios that could play out in the new South Africa.

The one most relevant today, not so much for South Africa but for America and Britain, was called "Icarus". It involved populist economics leading to a short-term boom but a long-term economic bust. Icarus, if you recall classic Greek mythology, was the young man who flew too close to the sun, thus melting the wax which his father had used to glue each of his wings. He plunged to his death in the Aegean Sea.

Not for one moment am I criticising the measures taken by the American and British governments to bail out the banks. They had to do so in order to avoid an even greater catastrophe, namely most citizens in both countries losing their entire bank deposits.

However, it is the aftermath that is cause for concern. You have a situation where interest rates for depositors are virtually zero, which means that many pensioners who saved up for their old age are earning a pittance. They have to either live off their capital or invest in more risky income - earning assets just when the markets could be heading for another fall.

Meanwhile, the central banks are indulging in the dubious practice of printing money that is euphemistically named quantitative easing or QE for short. This can have inflationary consequences down the line as demonstrated historically in Germany, Brazil and Zimbabwe.

Then there is the question of both governments racking up enormous debts by running huge budget deficits. We all know that the only solution is to raise taxes or cut government expenditure or both. None of these measures will win you the votes to be re-elected if you are President Obama in America or Prime Minister Brown in Britain. Imagine what would happen to the discipline in a school if the principal were elected every five years by the pupils! Democracy seldom produces tough leaders, the net result being the passing of the problem to future administrations. They in turn are saddled with the increased interest burden of the extra debt they have inherited as well as the challenge of rolling it over and paying it off.

The last step in economic populism is to protect your own economy by slapping tariffs and quotas on imports. Thank heavens neither government has been tempted to indulge in these tactics on a wide scale or it would spell disaster. Tit-for-tat trade wars precipitated the depression of the 1930s.

The Icarus scenario has already occurred once this century on account of the easy monetary policies in place after the dotcom bubble burst at the beginning of it. The plunge into the ocean took place in March last year as a direct result of these policies which also featured the granting of subprime mortgages to people who could not possibly repay them when interest rates were hiked. The practice was encouraged on the grounds that extending home ownership to everybody was a perfectly honourable objective. It is, but the way it was implemented was financially unsound.

Normally humanity only repeats mistakes once every generation because the next one does not have the collective memory and experience of the previous one. This time an Icarus-like fall could repeat itself - within 10 years. The irony is that South Africa has not fallen into the trap of America and Britain. We were one of the first countries in the world to introduce a National Credit Act. None of our banks had to be bailed out. Perhaps it has something to do with the fact that two of the leading players in our financial universe, for most of the period since 1994, actually foresaw the consequences of an Icarus scenario. After all, they helped formulate it.

So take a bow - all you who were involved in the Mont Fleur initiative. You may have changed our history at a critical juncture in the fortunes of the world. As the Australians would say, good on you.

Darwinomics

Originally published on 27 January 2010

Darwin's principle of natural selection has two elements to it:

• nature is constantly changing and if a species does not adapt to the changes, it becomes extinct;
• within a particular habitat, there is intense competition and only the fittest (those who have adapted successfully) survive.

• the market is constantly changing and if a company does not adapt to the changes, it goes out of business;
• within a particular niche, only the most competitive companies are selected by the market to survive.

The illusion of Chindia

Originally published on 30^th September 2009

The conflation of the words "China" and "India" into "Chindia" is supposed to imply that the two emerging giants have plenty in common. Nothing could be further from the truth.

I visited both countries in 2006. I went to China to formulate future scenarios on the country. I interviewed a range of political and economic observers in Shanghai and Beijing as well as going to Inner Mongolia and Xian. The cherry on the top was a visit to the Central Party School, a few kilometres outside Beijing.

China struck me as a huge corporate enterprise where the board of directors is the politicians, the management is the party and the employees are the people. This model has worked phenomenally well since 1978 when Deng succeeded Mao and introduced the "open door" policy. No other country in modern economic history has ascended the charts so quickly.

Of course the Chinese will tell you that they were the No 1 economy in the world for 1 000 years - from 400AD to 1400AD. The West then took over, but after a brief interval of 600 years the Chinese are about to assume their rightful position again. The date by which they are currently anticipating to overtake America is 2040. Certainly, Chinese culture has remained unchanged for about 5 000 years and never been influenced to any degree by Western culture.

They get very annoyed with Western leaders who criticise them for the absence of democracy and human rights. Their response is that they were the first civilised nation on Earth and they don't go round telling everyone else how to run their lives.

India, by contrast, is a democracy with all the advantages and flaws that go with a democratic society. It takes a long time for policies to be implemented because of the interminable debate on every issue at all levels of government. The development of infrastructure in India is noticeably behind that of China for the same reason.

India is also a lot more Western than China, having absorbed British culture - particularly a love of bureaucracy and cricket. India is more individualistic than China. Whereas China is incredibly competent at replicating Western ideas and technology, and especially projects involving collective effort, India has world-class centres of innovation in fields such as computer software. And then there's Bollywood, India's own version of Hollywood, which makes more movies and produces more stars than any other group of studios in the world.

When I was in India, I had to facilitate a workshop in New Delhi on global warming. It brought together European policy advisers with Indian utility and coal industry chiefs. My job rapidly turned to mediation, because the Indian participants became angry about what they saw as a set of preconceived formulas put on the table by the Europeans. They wanted to make their own inputs and have them considered too.

In that sense, I think the major challenge for the West is how they are going to handle these two new kids on the block who are so different to one another.  The West is so accustomed to having its own way that there is bound to be friction as well as moments of harmony. And then the two new kids have to get along with one another as well. All very interesting.

Portrait of a winning nation

Originally published on 17 February 2010

There I was sitting in my office in December 1989 when the phone rang. "Hello, this is Sergeant Marais of the South African Police." "Yes, Sergeant Marais, what can I do for you?" "There's a prisoner who would like to talk to you." "I don't know any prisoners." "You know this one." "Really?" "Nelson Mandela." "You're kidding." "No I'm not." "When would he like to see me?" "Anytime."

So off I went to Victor Verster in early January 1990. After entering the prison grounds, I was led to a cottage and, there on the doorstep, was the great man with a big smile on his face. He was much slimmer than I imagined from an old boxing photograph. He ushered me in and we spent the morning talking about the global economy and the prospects for South Africa.

After that, he kindly asked me to stay to lunch and I was on my way in the early afternoon. He gave me no indication that he was going to be released in the following month. Nevertheless, what really interested me was that he wanted to talk about the future and not in any way about the past. Specifically, how could South Africa become a winning nation in a global game that was becoming increasingly competitive? He even quoted Deng to me: "I don't care if a cat is black or white as long as it catches mice."

I was reminded of the visit when I recently saw the movie Invictus about his release and subsequent support for the Springbok rugby team, culminating in their famous victory in the World Cup. While some of the rugby scenes were fairly rudimentary, Clint Eastwood who directed the movie hit the nail on the head with his theme of reconciliation. You don't win critical rugby matches without a positive team dynamic and you don't move up the Premier League of nations without social harmony among the citizens of the country.

Winning nations and winning rugby teams share a lot in common. Besides the patriotism and camaraderie, the individuals making up the team must be chosen for the skills set that is appropriate for each position in the side. Education and training are critical for victory as well as hard work. Knowledge of the strengths and weaknesses, and the strategy, of your competitors is a prime requirement too. Moreover, the stadium and other infrastructure need to be in excellent condition. Above all, the leadership must understand that if any action undermines the competitiveness of the team, then the fortunes of the entire team are put at a disadvantage as well.

Spelt out in simple terms, a better life for all in South Africa presupposes that we improve our national economic ranking in the world at large. The bickering and finger-pointing have to stop and we must focus on raising the overall quality of our game. We have plenty of pockets of excellence in all sectors of South African society to provide inspirational examples. The last thing we should do is dumb them down. Celebrate excellence. Don't tolerate mediocrity. That is if you want to catch a lot of mice.

Crouching Tiger, stripy fox

Originally published 24^th February 2010

When Chantell Ilbury and I wrote The Mind of a Fox, we decided to make Tiger Woods our icon of how foxes think. We published the book in June 2001, just after he had won four grand slam events in a row (but not in the same year).

The choice was not based on how accurately he could drive the ball down the fairway. Rather it was his powers of recovery after hitting a bad shot - the way he adapted his strategy to achieve the same result which was either a birdie or a par. Equally, his impeccable compliance with the rules of the game of golf, including etiquette, caught our eye.So he fitted in with one of the principal messages of our book, namely there are always rules of the game and uncertainties beyond your control in business. You have to comply with the one and adapt to the other. That is how you win business games in the manner of a fox.

So he fitted in with one of the principal messages of our book, namely there are always rules of the game and uncertainties beyond your control in business. You have to comply with the one and adapt to the other. That is how you win business games in the manner of a fox.

Hence, like many others, we were saddened by the tumultuous events at the end of last year when his infidelities to his wife Elin were exposed. At the press conference he gave a few days ago, he admitted that fame and fortune had led him down the slippery slope of believing that no rules applied in his private life. That is exactly what hedgehogs believe - their cause and their success are so strong that they can make the rules. They are in total control of their own universe.

I remember Chantell and I were regularly asked whether there was any factor that could turn a fox into a hedgehog. We said arrogance ensuing from success. As frequently, we were asked the contrary question of whether there was any factor that could turn a hedgehog into a fox. We said humility derived from failure. I guess if we had given the answers in Ancient Greek, we would have mentioned hubris in the first instance and nemesis in the second instance. For as we all know from the proverb, after hubris comes nemesis.

A good sign that this is at work in Tiger's case - in other words he is on his way back to being a humble fox again - is the fact that he did not, like many expected, announce a scheduled comeback date. People in the golf media had speculated that it might be in the tournament prior to The Masters. By contrast, he said he did not know when he would be in the right frame of mind again. He is obviously still very concerned about the future of his family and saving his marriage.

There are now essentially three scenarios. The first is that he never comes back because the experience has caused too many emotional scars. I think this is unlikely. He has a lot of golf left in him and providing he shows - as I think he has done - genuine remorse for his foolishness, his fans and the public will forgive him.

The second scenario is that he makes a return, but he simply does not get back to his winning ways. Given the mental toughness and focus required to be the world's number one golfer, this is not an unreasonable scenario. When you are standing on the tee knowing what people around you are thinking and that any weakness in your game will be voraciously analysed by the media, that adds to the pressure. I also would not be surprised if one or two ribald comments are made by members of the gallery as he tees his ball up. That will hurt him badly.

The third scenario is a triumphant return where he goes on to eclipse Jack Nicklaus' record of 18 grand slam event wins. I give this scenario fair odds of materialising, but one must not underestimate the monumental challenges involved.

Should he do so, he will confirm my and Chantell's opinion that he is the fox of all foxes at adaptation, but in a way we would never have anticipated when we wrote the book. The future is indeed unknowable. Look at Bill Clinton's renaissance.

Boom, bloat, bust

Originally published 10^th March 2010

In an article entitled 'The Global Flags' that I wrote in May 2009, I said that "one flag to indicate the approach of a 'Perfect Storm' scenario is a national bankruptcy of note. We have already had Iceland, but if a European Union member goes down, the event would severely disrupt the international monetary system".

Well, it hasn't happened yet but there is plenty of talk about it. Greece has to repay or roll over debt of 20bn Euros by the end of May. The Greek government has announced a whole raft of austerity measures which have prompted rioting on the streets in Athens. Government debt as a percentage of GDP is around 125% when the recommended ceiling for any EU member is 60%. The budget deficit as a percentage of GDP is 12.5% when the recommended ceiling is 3%.

In other words, the public finances of Greece are in a terrible mess but they are not alone. Portugal, Spain, Italy and Ireland are close behind. Britain is mentioned as being in danger of getting into the same state, and the US budget deficit for the current year is estimated at $1.8 trillion. Dividing that by the US GDP figure of $14 trillion gives a percentage of 12.9%.

So it's no exaggeration to say that much of the world is now suffering from Bloated Government Syndrome (BGS). The financial meltdown in the banks has masked the onset of BGS but both maladies arise from a similar cause.

In the case of the banks, the boom conditions created the flawed belief that property prices would go up forever. It didn't matter if you lent money to the dodgy borrowers because in the event that they could not repay their loans, you would just repossess their house, sell it at a higher price, extinguish the mortgage and pocket the difference. Of course, house prices fell leading to trillions of dollars of losses for the banks.

In the case of governments, it was the flawed belief that economies would grow forever. Remember Gordon Brown asserting that there would be no more boom and bust? Hence, you could increase the number of civil servants, markedly improve their salaries and pensions, introduce extra welfare programmes for the public at large and reduce tax rates - all at the same time. Why? Simple, said Brown. Growing economies provide a wider tax base, so even if tax rates are reduced, tax revenues would ascend into heaven.

Bailing you, bailing me

That bubble of reasoning has also burst and could precipitate an even bigger catastrophe than the banks. It is one thing for governments to go to taxpayers and argue that their hard-earned cash should be used to bail out the banks, otherwise they will lose their bank deposits. It is quite another thing for governments to start bailing each other out. Do you think that the German Chancellor, Angela Merkel, can tell German taxpayers with a straight face that she is going to use their money to rescue the Greeks? Not a chance! And she has already indicated her extreme reluctance to do so.

BGS means that governments will be forced to do the unthinkable which is to cut back on expenditure and raise taxes in a depressed market - the very opposite of what they are doing now and the very opposite of what John Maynard Keynes, the greatest economist of modern times, would have recommended. However, he probably had never figured on the level of public debt that BGS would create in the first place.

I am sure that some people reading this column will comment that I am being alarmist, as the next boom will automatically correct the situation without emergency measures being needed. My counter-argument is that the current mess may precipitate short-term actions which nip the recovery in the bud.

We'll see. Meanwhile, Chantell Ilbury and I still give a 40% probability to a 'Perfect Storm' or double-dip scenario, despite the recent optimism exhibited by stock markets worldwide. Maybe, one should even consider the possibility of the Euro being disbanded as a result of the stress between the individual nations making up the EU. In fact, this is the first real test of what the union means. Is it all for one and one for all? Will a European Monetary fund get off the ground and prop up the Euro?

For the record, the projected budget deficit of our own government in South Africa is 7.5% of GDP this fiscal year. That's high, but not in the same league as the others. Nevertheless, wherever you are in the world, the only cure for BGS is smarter government - in other words, more for less!