Wednesday, 13 February 2013

What does a 25% probability for a failed state really mean?

What does a 25% probability for a failed state really mean?

(Article from News24)

Clem Sunter

Since writing the column two weeks ago raising the probability of South Africa becoming a Failed State to 25%, many people have asked me what it means and what they should do about it.

Should I make sure my passport is up to date? Should I be going on an LSD (look, see, decide) trip to Australia? Should I be approaching a head hunter for job options in Europe? Should I legitimately be sending more money offshore to mitigate the declining rand? 

Should I be stocking food?

Connecting the dots

These are all valid questions which have been posed to me. Chantell Ilbury and I have always said that part of thinking like a fox is to connect the dots. You cannot just play scenarios – that’s daydreaming. You have to consider your options for each scenario and then decide what you are going to do about it depending on the probability and impact of the scenario. You can either do something now or prepare a contingency plan just in case. Either way, the whole point of the process is to improve the speed and quality of your response in chasing the opportunities and countering the threats offered by the scenarios.

So, let’s get back to the significance of a 25% probability. Pictorially, it covers an “L” or 90 degrees of a circular disc. If you spin the disc, there is a 25% probability that the needle will end up on that 90 degree segment. What is more is that if you spin it again whatever the previous result, the probability is still 25%. Like spinning a coin where you get ten heads in a row, the chances are still 50:50 that the next one will be a head. The difference between these examples and real life is that real life only happens once and therefore probabilities are far more subjective.

Recently, I had a discussion with a group from MIT in the US who tried to convince me that you can mathematically link the raising of the flags on our scenarios to their probabilities. I am not so sure because of the one time aspect of life; and so much of what happens is due to the animal spirits or irrational nature of mankind.

The bottom line is that the 25% probability on a Failed State is instinctive and should be treated as such. In other words, there is nothing scientific about it and if you have a different figure in  mind, you are quite entitled to base your actions on your figure not ours. Suffice it to say, in our mind, the Failed State scenario is no longer a wild card possibility lurking in the shadows: it is now a genuine threat, the consequences of which have to be thought through.

Impact of the scenario on you

This brings us to the second aspect that has to be considered which is the impact of the scenario on you as a business, you as a family or you as a person. If I said to you that the plane you had booked a flight on had a 25% probability of crashing, you almost certainly would not take it unless you were in a war zone and wanted to escape. The reason is a high likelihood of death in the event that the scenario materialises. Equally, if I gave you a 25% probability of being eaten by a shark when swimming off a particular beach, it would be very foolhardy of you to go in the water. One of the reasons you would not take the risk in either case is that the alternative options are usually easy to exercise: use another airline and go to another beach or swimming pool.

The impact of a Failed State scenario is far more difficult to imagine since so many varieties of a failed state exist, ranging from oppressive dictatorships through perpetual anarchy to civil war and at the extreme end genocide. No expert in the field here has adequately described the different forms that a failed state in South Africa could take. We certainly can’t, particularly as regards timing and rate of descent. 

The only thing we can state with confidence is that the rest of the world will collectively turn its back on us, apart from a few outcasts who will welcome us to the club of pariah nations.

Two categories of options

Hence, the evaluation of the overall risk of this worst case scenario i.e. probability times impact is a highly personal thing. And so too is the selection of options available which depends on individual circumstances such as age, level of wealth and education, business experience and skills, as well as the number of children and other family commitments you have in South Africa. In the case of a business, the opportunity to expand the geographical footprint outside South Africa will be linked to its range of products and services, health of its balance sheet and potential partners elsewhere.

However, options can be divided broadly into two categories: adapting your own strategies and tactics as regards your own future in light of the changing odds of the scenario; or rolling up your sleeves and taking action – however big or small it may be – to reduce the odds of the scenario itself. In other words, you become an active citizen in ensuring that South Africa does not fail.

Far be it from Chantell and myself to give you specific advice on which option you should take. 
What our 25% probability means is that you should give the matter some serious thought if you have not done so already. Then decide on appropriate action or have a contingency plan. That is what a fox would do – logically not fearfully, with a sense of purpose not despair.

Russian Economist Fears 'Failed State' in SA

(Article from Business Day Live)

Russian economist fears ‘failed state’ in SA

South Africa IS in danger of "tipping over" and becoming a failed state, according to Yuri Maltsev, a Soviet defector and economic adviser to former Russian president Mikhail Gorbachev.

Dr Maltsev said on Wednesday that South Africa was at a crossroads and there were dangerous signs of instability, such as the farm protests in the Western Cape, which some see as part of a political attempt to undermine the opposition Democratic Alliance.

"The African National Congress (ANC) is a monopoly, and power corrupts," Dr Maltsev said in an interview with Business Day. He was speaking at a forum organised by the Free Market Foundation.
"What worries me is this can be the point of no return … South Africa is at a crossroads and can tip over."

Dr Maltsev was referring to spreading social unrest, mounting corruption and plans by the governing ANC for more intervention of the state in the economy to alleviate poverty and create jobs.

If South Africa could choose the freedom of an open economy with less regulation, lower taxes and more flexible labour laws, it could "explode with economic growth and energy", Dr Maltsev said.

Nomura emerging markets analyst Peter Attard Montalto said labelling South Africa a "failed state" was to look at the issues of the economy in the wrong way.

"The whole point is that there hasn’t been enough of a dramatic shock to the system yet to push the government, ANC and associated interests into meaningfully doing something about the economy’s problems and providing the leadership required," he said.

"Hence we deal with ongoing underperformance without any ‘blow-up’ situation. Even the situation in the mining labour market does not seem to have been enough."

There are concerns that plans by Anglo American Platinum to cut as many as 14,000 jobs after mothballing four mining shafts will lead to a repeat of the wildcat strikes that hit the sector last year, leading to the loss of almost 50 lives.

Dr Maltsev said the election of business tycoon Cyril Ramaphosa as ANC deputy president was probably a good thing, although he did not approve of the way Mr Ramaphosa had acquired his wealth. Turning to broader issues, he said he was not worried by the growing Chinese presence in Africa as China seemed to be avoiding political influence. Africans could not afford to "pick and choose" who is investing in their economies, he said.

Dr Maltsev praised the formation of the Brics bloc, which groups Brazil, Russia, India, China and South Africa. "It’s a good idea because all the countries are on the same level of economic development," he said.

Before defecting to the US in 1989, Dr Maltsev was a member of a senior Soviet economics team that worked on Mr Gorbachev’s reforms package of perestroika.
He is now a professor of economics at Carthage College in the US state of Wisconsin.

Sunday, 3 February 2013

Revolt, Torture, Tyranny face an Unreformed SA

(Article from TimesLive)

Revolt, torture, tyranny face an unreformed SA

Inequality is dragging South Africa closer to its "tipping point" and becoming a failed state, says Clem Sunter.

Sunter is probably best known for the high-road/low-road scenarios he posited for South Africa in the mid-1980s and for predicting a "major attack on a Western city" in Mind of a Fox, a book he wrote with Chantell Ilbury in 2001.
A year ago, the former chairman and CEO of Anglo American's gold and uranium division, and until recently chairman of the Anglo American Chairman's Fund, believed that there was a "0%" chance that this country would become a failed state. He has since increased the odds to 25%.
"Once people get seriously upset, it takes only one event to cause the country to erupt," said Sunter, and "Marikana could have been it".
"There is a level of anarchy creeping into protests - both labour and service delivery - that hasn't been seen before, and that we've now seen in Sasolburg and Parys."
Six people were killed during the violent protests by residents opposing their area's incorporation into the Ngwathe municipality.
Zamdela township residents razed property, stoned cars and looted shops.
Police reacted with tear-gas, rubber bullets and live ammunition to disperse crowds.
Sunter believes that increasingly violent protests could become normal.
During the Arab Spring, Sunter talked to analysts researching the motives for the upheavals in the Middle East and North Africa.
"There were three factors that contributed hugely - very high youth unemployment, highly active social networks and growing alienation from the state," he said.
"We have all three."
He believes the consequences of this country not getting its act together economically, socially and politically could be dire.
"After Marikana and Sasolburg, we might be close to an Arab Spring."
Sunter has predicted three scenarios for the future of South Africa.
The first is that it stays in what he terms the "Premier League" and keeps its place as one of the world's top 53 economies. It is currently in 50th spot. Sunter believes we should be in 32nd place because we have the 32nd-biggest economy but the many problems that remain unresolved continue to create uncertainty.
Whereas a year ago Sunter gave the country a 70% chance of staying in this league, he now gives it only a 50% chance.
The second scenario is that South Africa slides peacefully into what he calls the "Second Division". These are countries that Sunter describes as poor but peaceful.
He gives South Africa a 25% chance of becoming one of these nations, with Nigeria taking over as the most influential country in Africa.
The third scenario is that South Africa becomes a failed state, a place of anarchy, warfare, hunger and disorder - like Syria or Afghanistan.
Such a state generally has high unemployment, gross income inequality and appalling human rights abuses, including routine use of torture by the police and security forces.
The country is governed either by a dictator - living in a palace among the ruins of a country in which revolt is kept in check by intimidation - or by a shifting alliance of warlords, each with a private army or militia.
Sunter said there is a 25% chance - a "real threat" - of South Africa becoming such a country.
There are two ingredients that Sunter said we need to stay in the Premier League.
The first is an inclusive leader, such as former president Nelson Mandela.
"I'm afraid [Mandela's] successors [Thabo Mbeki and Jacob Zuma] have not been inclusive leaders, and I hope that Cyril Ramaphosa might be the someone who could bring the nation together.
"I see the move to bring Cyril back as very positive.
"It looks like our leaders are getting the message that something has to be done."
Sunter believes that, if Ramaphosa had followed Mandela into politics in the 1990s, the value of Ramaphosa's leadership might have been lost.
"We didn't know all our weaknesses then," he said.
The other way in which South Africa can improve its chances of being a functioning democracy, he said, is by "using our pockets of excellence such as the good schools".
"We should try to replicate these pockets of excellence.
"The reason we have inequality is that we don't have jobs.
"For each worker in the formal sector there are three people who don't have a job ," he said.
"People don't have jobs because the education system hasn't delivered the skills to create jobs."
Sunter has been calling for an "economic Codesa" for this reason.
"We need a cooperative model [to deal with inequality].
"There is no way the ANC can do it by itself, and business and the unions can't do it by themselves either," he said.
"This is the tipping point."
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