Maverick, Johannesburg, 5 October, 2006

Saving Capitalism

Peter Bruce

AN AMAZING CAPITALIST EXPERIMENT HAS BEGUN IN the rural Transkei area around Kentani, near Butterworth, and in the sprawling Khayelitsha township in Cape Town.

In both places a bubbly woman called Gloria Serobe is trying to change everything we hold dear in our free market. She is trying to make very poor people into interesting customers for rich and sophisticated people. It is alchemy, but if it works it could change the face of our economy.

Serobe’s Wiphold group not so long ago won astake in the Old Mutual empowerment contest. As a result, Wiphold owes OM a bit of money. One way it can reduce the cost of its debt is to bring the OM group (including Nedbank and Mutual & Federal) new business. Shame, OM has probably got a lot more than it bargained for

What Serobe and one of her senior managers, Debra Marsden, have dreamt up is not your average banker’s fantasy. In their experiment, OM, Nedbank and M&F are introduced to people they never would have even considered talking to – the Transkei’s blanketed, pipe-smoking rural poor women and the rapidly swelling Xhosa squatter population in the Cape.

Try to imagine a meeting in a plastic tent in a field outside Kentani. In the seats are hundreds of locals. At the front are insurance salesmen, bankers, and Serobe. “Can you insure my goats?” asks one. Or “Is there insurance against witchcraft?” If the people at the front can figure out how to make products for the folk in the seats (and there are millions of them), Serobe is home free.

If they can’t, then not only Serobe, but the South African market economy, is in some trouble.

Watching Zuma rise upon the shoulders of the socialist trades unions and the communist, er, communists, anyone who thinks capitalism isn’t under severe threat in South Africa is just not paying attention. The possible next president of the country owes his political life to the left and he will have to pay up if he gets the top job.

The problem with the South African way of wealth creation is obvious. Not enough people get to do it. Equally, the problem with wealth distribution (other than theft) is obvious.

Distribution is hard and the new state doesn’t have the expertise to overcome the difficulties.

So if you can imagine a country in which more people get an opportunity to create wealth, you not only begin to shrink your distribution problems, you get to create a new enthusiasm about wealth.

What Jacob Zuma is riding on is a sense of hopelessness among the poor. The Mbeki economy has done little more than change colour during his term. It is still, however, a cradle to the rapacious capitalism the ANC inherited from the whites, and they invented its basics more than a hundred years ago during the reign of Queen Victoria. The rich always get richer.

Serobe’s experiment is the only one I know of in this country to try to reshape the capitalism we inherited from our forebears. It is not in any way a giant leap, but it’s brave just the same.

What’s wrong with us? Very simply, our problem is that poor people don’t have, ever, the wherewithal to stop being poor. It isn’t that they can’t work and it isn’t that they can’t feed themselves. It isn’t that they want your house or your car.

What poor people would like is a chance, just one, to back themselves, to get a shot at living a slightly better life, or creating one for their children.

A salary is quickly spent on the basics and the banks, for all their advertising, can’t lend to people with nothing. So it isn’t money poor people don’t have. It’s collateral. Putting collateral the way of the poor is the magic potion the ANC hasn’t tried (or perhaps even thought of) yet.

In Spain, after the dawn of democracy there in the late seventies, the state put one of the biggest property portfolios in the world in the hands of the trades unions. The immediate result was that the unions had a huge and abiding stake in the success of the Spanish economy.

No such luck here. Instead, the ruling party has done little more than make its traditional elite very rich. It has stuck almost colourfully to the economic conventions of the old West. We might want to call ourselves a social democracy, but measured by the focus of wealth creation, we are the very worst kind of capitalists.

The reason the middle classes worry so much in South Africa is that they instinctively know the economy we have is bad for us. There is no trust, or very low trust, between all of us.

In a low-trust economy, no matter how robust its growth, the whiff of fear is always there. A high-trust economy can withstand almost any burden. How do we make ours a high-trust society?

The answer must surely lie in the kind of dialogue the capitalists and the socialists have with each other. At the moment, distrust is almost universal.

The socialists want to nationalise and business wants total freedom to exploit its talents and opportunities. (Somewhere in there is big business which, I fear, may fall into either or both camps doing, as it does, almost anything to ingratiate itself with power.)

For me, the way out of the ideological impasse that so impoverishes our politics lies in what has come to be called “stakeholder capitalism”. It’s a woolly concept and infinitely adaptable. Essentially it seeks to encourage the maximisation of private profit and, also, to maximise shareholding. It seeks to encourage investors and managers to concentrate on the long term.

The best-known stakeholder work is The State We’re In, by Will Hutton, whom President Thabo Mbeki approvingly quoted in a speech last year. (Unfortunately, Mbeki hasn’t put Hutton on any of his many advisory panels.)

Hutton’s book is basically a critique of the way short-termism in the UK capital markets had skewed the way businesses were having to think and act. By forcing ever more frequent results reporting in the interests of transparency, the markets were also forcing entrepreneurs to abandon long-term strategy for rapid shareholder gratification.

Other stakeholder theorists have concentrated on the benefits of inviting, as the German economy did throughout its post-war heyday, the unions and major banks to sit on the supervisory boards that all German companies have. That was imposed on the Germans after the last world war to ensure democracy spread throughout the German economy. It didn’t stop (in fact it helped) German business making enormous strides and creating untold fortunes.

For me, the advantages of stakeholding in South Africa are blindingly obvious, because unless we do something radical here to legitimise, let alone popularise, the maximisation of profit then the free market in capital and goods and services is going to be taken away from us. The recent Cosatu conference was almost benign in its threat to the market. What anger and contempt for business there is out there is quite breathtaking.

It would also be plain dumb not to look at what I am about to suggest because it holds out the promise of a country in agreement with itself and free of the many tensions that plague us.

The way to stop the war between capitalism and socialism tearing us apart is to mediate the two down to a national consensus. That may take an effort on the scale of the talks that gave us our democracy. But it would be seriously worth it.

Here’s what my perfect economic Codesa would look like:

1) The state makes all its property assets (once it has actually succeeded in counting them) over to democratically elected and regularly audited community trusts where poor people live. The Khayelitsha Community Trust becomes the owner, for instance, of the Simon’s Town Naval Base. The Ngqeleni Trust gets the South African High Commission in London. The Winterveld Community Trust gets the Reserve Bank headquarters and the San get the Union Buildings.
Of course, the state gets to lease all of these assets back in perpetuity, but it pays rent for them. Those it wishes no longer to use can be exploited in whatever way to the benefit of the owning community. The trusts are, in turn, required to act as collateral for their members. Audits must be transparent and elections frequent and fair.
2) The three main union federations are invited to take – according to their membership as of tomorrow morning – ownership of all abandoned or illegally maintained or occupied property in South Africa’s inner cities. They are required to repair and improve the properties and may sell them or list them or whatever.
3) The state undertakes to finance the primary school education at any state school of any member of a registered and audited community trust.
4) Companies are required to redesign their boards. Non-executive directors will sit in a supervisory board. Executives will report to this board. Half the nonexecutive directors will be nominated by the workforce of the company concerned.
5) Companies will be given incentives through the tax system to provide a minimum ten percent of their equity to an employee share option scheme (Esop). To soften the effect of the first transfer of shares into an Esop, the revenue service will reward companies with a one-off lifting of their next secondary tax bill.
6) Further, shareholders (worker or private) will face a capital gains tax which decreases in proportion to the time they hold the shares in any one company, the better to encourage shareholder stability and to reduce short-term pressures on managers.
7) The supervisory boards of companies and not the executives will decide by whom the company’s pension fund is to be managed.
8) All companies listed on the JSE donate one percent of their issued shares to a pool. That would immediately raise, by my reckoning, a staggering R44-billion. This would be the largest charitable trust in the southern hemisphere and its income would largely be dividends that accrue to it. Share sales by this fund (an idea initially mooted by Stephen Mulholland) would not attract any taxation and its sole purpose would be to support projects or people put forward by the community trusts mentioned earlier.

One percent is nothing. The JSE moves up or down by more than that every day and no-one cares.

A one percent donation would not require prior shareholder approval; and as their contribution to this “new” economy, the big legal and auditing firms would supply their services for free.

Importantly, the trustees of this fund, which would ideally include union, unemployed and community nominees, would be paid nothing. It would be chaired by the president of the stock exchange. It would in no way engage with the government but, rather, provide a direct and efficient link between capital and the people.

That’s a start. Nothing here even remotely challenges the precepts of the market and nothing here stands in the way of corporate profit maximisation. But if we begin, as government and business, to make serious money for the poor, the siren calls of old socialism will quickly fade away.

The real barrier to a stakeholder economy and a happier country is perception. I have made these arguments many times in Business Day and, before that, as editor of the Financial Mail. Every time – and it will no doubt happen here too – the chorus of contempt from all sides buries the ideas. We South Africans are conservative even when, like the left, we think we are being progressive or radical. We don’t like change. And we particularly don’t like changing our ideas.

So, for the left, these ideas are a ploy to “co-opt” it and rob it of its soul. For business, the thought of making decisions along with workers is appalling.

That’s why Gloria Serobe’s project in Transkei is so important. It is forcing conservative white financial institutions to make spectacular leaps of faith and the early signs are the bankers are rather enjoying getting to understand their country better.

We do not have to live in a crusty old economy designed by dead people a long time ago.

Transformation is making only a small mark upon the landscape because the rules are still the same and they can’t be changed to suit just a skin colour.

We can have an economy that produces more profit for more people. We can have an economy that goes out of its way to include the very poor. We can have a more democratic market and a more social capitalism. We lose nothing and there is everything to gain. We just have to decide it’s worth the effort to try.

Peter Bruce is editor of Business Day and a former editor of Financial Mail. He is the capitalist devil incarnate, a running pig-dog imperialist and a colonial apologist. His detractors call him even worse names.

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