Wealth Matters

Adapting to a confusing, fast changing world

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The world has entered a period of profound, fundamental and multi-faceted change, posing serious challenges to economic growth and stability in many countries, including South Africa.

Unexpected catastrophes in the political, economic and financial world around the globe are occurring at such a high speed that anyone can be forgiven for searching for possible conspiracies with a head that’s spinning. But it is a time for cool heads.   

Countries that make the wrong choices in terms of economic and developmental models and fail to adapt in time are heading for serious trouble on both the economic and social fronts. Above all, basing policies on over-simplistic analyses of what is happening is the biggest danger. 

A good example of such over-simplification is commentators who use conspiracy theories to describe last week’s credit downgrade as a politically inspired, or US-government induced, move by American rating agencies. 

The argument goes that Russia’s national debt at 11% of its GDP is almost ten times lower than the US’s 105% of GDP. Whose debt is really more, or less, sustainable? 

The flaw in this argument is that it does not take into account the different ways in which, and the instruments with which, the two countries have responded to challenges such as so-called ‘peak oil’ and the explosion in the information technology. 

The Russian economy remained largely based on resource exports, cashing in on soaring fossil fuel prices in particular. Its system of political patronage also prevented the following:

·       the development of a strong middle class (the driver of a domestic consumer market);

·       strong private capital formation (driver of internationally competitive companies);

·       and the rewarding of innovation.

While Russia is now caught in a recession, the economy of the US is well back on a growth path based on a strong consumer market, the export of value-adding technological innovation and services. The US, via companies fuelled by private capital, responded to the OPEC oil threat of the late 20th century with new resource extracting and replacement technology.

According to some analysts, due to these developments in the US and elsewhere, a large percentage of today’s know fossil fuel reserves will remain un-extracted – a development with huge implications for large parts of the African continent.

Probably one of the most dramatic examples of what is happening on this front just came from India’s Tata Motors. It is about to release a car propelled by compressed air.

Examples for South Africa

Unfortunately South Africa, with its largely natural resources-based economy is not well positioned to meet the challenges of this fast-changing world.

The country, in some ways, displays disturbing similarities to Russia. For one, after 1994, as it – like Russia – was integrating/re-integrating with the global economy, it effectively swapped one patronage system (based on race) for another (based on party-political affiliation).

One of the results is that the country’s middle class is not nearly growing at a desired rate. Other fundamental structural problems, like the sad state of its education system and the uneven distribution of wealth, can be added.

But there is another example in the group of emerging economies (the BRICS-grouping) South Africa belongs to from which some lessons can be learned: China.

China, like Russia, faced with the process of the collapse of communist socialism, integrated into the global economy via the formation of highly competitive companies – companies manned by well-educated and skilled workers.

It started exporting products with technological value added, embarked on an urbanisation process efficiently managed via one of its five-year plans and built a broad-based strong middle class.

Let me acknowledge that this analysis also suffers from simplification for the sake of brevity. Factors like income inequality, stress on the global financial system, a ‘youth bulge’ in some parts of the world and ageing populations elsewhere impacting on migration patterns, climate change and much more make for an extremely complicated global environment.

Fact remains, conspiracy theories and political sloganeering are dangerous tools for trying to deal with the realities of our fast-changing world.

Private investors

For the private investor and those who want to protect their existing wealth, probably  the three most important rules of thumb are: Keep an eye on private companies at the forefront of innovation in diversified sectors; diversify investments to beyond just domestic opportunities; and avoid kneejerk reactions to the news headlines of the day.

Another strategy may be to find a quiet place, pour yourself a stiff scotch and read or re-read Naseem Taleb's two bestsellers, Black Swan and Fooled by Randomness. You may be forgiven if you continue with his other books. Taleb may just pull his laptop closer to write something about the speed at which these events are happening and the profound effect it will have on mankind.

                                                                                                                                         by Heinrich Kruger

 (Heinrich Kruger is the founder and CEO of Kruger International Asset Management. He writes this column in his private capacity.) [email protected]

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