So Why are you Unemployed?

So why are you Unemployed?

When I left university in Australia  forty years ago with a degree in Economics I had nine job offers within the first week. Fast forward  to Gaborone today while you are definitely more likely to get a job with a degree than without, there are now some 5,000 graduates waiting for internship with the Ministry of Labour. Different country and a vastly different time you say. While most university graduates still eventually get jobs, where I work we have an increasing flow of very bright and intelligent young Batswana university graduates who come to work on internships, often for as long as two years for nothing more than P1,300 per month.

I really began to panic early last year when a young and very enthusiastic Motswana with a degree in mining engineering from Queens University in Canada came to work for us. Queens has one of the best engineering and mining schools in North America. So when someone with a good degree from an excellent university comes home because he wants to serve his country and not stay in Canada but has to take an internship then we have real reason to fear and be concerned with what is happening to the country. Eventually the young man got a good job with BCL and I have no doubt will make an excellent contribution to the nation’s development. But equally I have many bright young UB graduates who I have trained on this program who  after two years have found no job and have had no choice to go back to the cattle post in Shakawe and Bobonong. These are deeply embittered young people who feel that life and  government has failed them.

So what changed ?

Not only the Kalahari and the Indian Ocean, but a whole lifetime stands between my experience of looking for a job in Australia in the 1970’s and that of the current generation of Batswana university graduates. The easy answer to explaining the difference is that, that was Australia and this is Botswana but that answer is just completely wrong because in 1974 as Africa was freeing itself from the shackles of colonialism there were still many good jobs for university graduates. But many if not all those jobs were in government as new ministries opened up, young people who could perform, and many who could not, got jobs for life in the new post-independence public service. There were not enough people to fill these vacancies. What has really changed is not the place but the passage of time- that cruel and insensitive monster that eventually kills us all.  

The post-independence African model of development that emerged in so many countries, including Botswana, was based on extractive industries. Foreign investors would develop mines or agriculture, the government would tax them and the revenues would be used to hire university graduates. Of course this model was limited by how much natural resources you had and  how much your government officials stole from the revenue. Botswana was blessed in that at the beginning it had one of the richest resources in Africa i.e. the diamond mines, a good  share of the revenue from De Beers and a post independence government that did not plunder its people. It is for this reason that the government has until very recently remained one of the most important employers of university graduates. But as government revenues stagnate then this model is failing and we will replicate what happened to the rest of Africa much earlier.

In comes Reagan and Thatcher

When I arrived in Tanzania in 1979 to teach Economics at the University of Dar Es Salaam the strains of the old African development model were starting to show. Following Tanzania’s horrendously expensive invasion of Uganda to oust, the dictator Idi Amin the government of Tanzania began to run out of foreign exchange. The state owned factories that had been established under ‘Ujamaa socialism’ by President Julius Nyerere collapsed and there was nothing in the shops – no sugar, no bread, no maize and painfully, no beer. Tanzania soon collapsed into what we called a ‘hunter- gatherer society’ where everyone spent their time hunting for food and basics and not doing their job.

The same  free market ideology that brought Margret Thatcher and Ronald Reagan to power in the UK and the USA in 1979/80 began to affect Africa directly through the complete domination of the free market, trickle down thinking in the World Bank and the International Monetary Fund at around the same time.   No need for government intervention, the market would solve the problem. Cut government spending, open up markets to international trade get rid of marketing bodies and all would be well. According to this economic philosophy the private sector would step in and do the job that government could not do effectively but it didn’t. This was the so-called ‘Washington consensus’ that dominated what passed for economic thinking for nearly 30 years.  Tanzania  implemented just such a set of reforms in the 1980’s and a whole generation of young graduates that had previously been assured government jobs for life soon  found themselves selling second hand clothes  in the market.

Homo Davos

Fast forward to today and the ‘masters of the universe’ met last week  in Davos, Switzerland as they do every winter to sip champagne and discuss how to get even richer and also, amongst other subjects,  how it is that everywhere you look in the world  income distribution has shifted so much in favour of the rich and against the poor.  Davos has become a magnet for international organisations desperate to attract the attention of the masters of the universe According to Oxfam the top 1% of the world’s population  owned 44%  of the world’s wealth (e.g. houses, shares and other assets) in 2009 to 48% in 2014, while the least well-off 80% currently own just 5.5%. Oxfam suggested that on current trends the richest 1% would own more than 50% of the world’s wealth by 2016.. The International Labour Orgaisation  also published a report showing that global unemployment is now at 200 million and will  continue to rise to 212 million to 2020. The ILO has also predicted that income ( ie. what you earn every year) inequality will also continue to widen and that globally the richest 10% earn 30-40% of total income while the poorest 10% earn around 2% of total income.

The answer as to why this happened lies very much in the world many of these very same people at Davos shaped over the last three decades. When one listens to their debates and discussions on inequality one would think that they were on another planet when all this was happening rather than at the very forefront of the rising inequality.

Part of the reason why the rich get richer is the same reason why I have so many unemployed graduates. The world moved on, we implemented a globalization where trade would occur not in nation states but along global value chains where production was located in the lowest cost locations. The old unionised automobile workers in Canada and the US who in the 1970’s had two cars, a comfortable home for their families as well as a cottage by the lake seems like  a remote memory of a now distant and almost extinct world. Those jobs have moved on to Asia and Latin America, real wages in North America have been pushed downwards and those workers in Asia certainly became better off but those in North America have generally not become much better off and many became much worse off falling into low paid jobs in the service sector ie. KFC. It is these people which are called ‘the middle class’ in America that paid for the uplifting  of Asian workers. The wealth trickled down but mostly it trickled up to  those who owned the factories who became so much richer because of globalization and their ability to make use of much cheaper Asian labour.

But to blame trade liberalization and globalization is not quite right. Of the nine jobs I was offered at least three that I can think of disappeared eventually because of the new information technology. Most disappeared because the jobs went to Asia. The flexible job market combined with the rapid advance of robotics  and advanced computers will in the coming years mean that some 48% of existing professions can be eliminated with the existing state of technology. And that capacity only increases every year Computers now do everything from driving  giant driverless trucks,  at Australian mines, to   drones which will shortly eliminate delivery trucks. And what is the response of the most economists is … get an education, work   hard, train to be an IT and robotics specialist and there will be plenty of jobs. This rings hollow to the otherwise unemployed IT graduates working here on internships We may one day soon have the chance to ask the unemployed truck drivers from Orapa and Jwaneng what they think of this and whether they can retrain as IT specialists?

19^th Century Ideas in the 21^st.

Global inequality between the rich and poor has increased substantially over the last 40 years to the point where even those in power know they have succeeded beyond their wildest expectations in creating Ronald Reagan’s nightmarish Dickensian world where the rich have amassed vast fortunes and little has trickled down to the poor, at least not those in their own countries. What has certainly changed is that globalization and technical change has created a middle class in China, India and the other developing countries. But those who paid for this middle class are the segments of the American and European working classes ie the ones they call the middle class that is increasingly on the endangered species list.

We need to rethink our 19^th century economics for a new world where the power of computers, robotics and information technology are so great that an ever increasing number of people, including university graduates, will not have anything resembling long term meaningful jobs. And while great wealth will be created from this, an unsustainable misery is now emerging  amongst young people all over the world who are bearing the brunt of this 19^th century social experiment. If humanity does not find a better way to give peoples’ lives meaning and share this great wealth that technology and globalization are creating then it will end badly for us, as we now possess the technology of destruction needed to make the 20^th century fascist wars  and communist revolutions look like rather tepid affairs.

 

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he is affiliated.

 

 

Will Putin crash the Global Diamond Market?

Will Putin crash the Global Diamond Market?

In the mid-1990’s when the Russian Federation was being created out of the ashes of the former Soviet Union, Valdimir Putin’s infamous vodka swilling, bottom pinching predecessor  Boris Yeltsin was involved in a process that was to create the Russian oligarchs who made their fortunes accumulating Russian mineral and energy assets at knockdown prices. In gold, aluminium, nickel, oil and gas Yeltsin allowed the oligarchs to accumulate vast fortunes from disposing of the nation’s assets cheaply.

As the Russian economy  collapsed into an crisis of unparalleled  proportions in the 1990’s in the face of the break-up of the Soviet Union and large sections of the Russian population on fixed incomes such as pensioners slid into grinding and previously unimaginable poverty more and more of the nation’s jewels began to leak onto the global market.

In the early 1990’s De Beers was still king of the global diamond market and almost all countries that discovered new diamond deposits used the De Beers cartel, the Central Selling  organization (CSO) which would  buy up stocks of diamonds that were leaked to shore up the decline in revenues that occurred when the Soviet Union collapsed and became the completely resource dependent exporter that it is today. The leaking of US$1 billion of Russian rough diamonds onto the global market at the time was a serious challenge for De Beers as it had annual sales of USD4.5 billion on average over the period. The evidence is that De Beers seems simply bought up the leaked Russian goods onto the market in order to assure no serious decline in prices.

 In the past De Beers had acted in case of Argyle in Australia and Zaire to punish large companies and countries that tried to operate outside the CSO. De Beers would do this by dumping large quantities of very similar quality diamonds on the market just when the recalcitrants were trying to sell their assets outside the CSO. This depressed prices massively and all though it hurt De Beers, it hurt the chisellers even more because De Beers had deeper pockets and was better able to take the loss. The lesson for everyone in the diamond market, including Botswana, was clear- don’t mess with De Beers because they can seriously undermine any player who acts outside the cartel.

Putin in the Global Economic Crisis

If you fast forward some 15 years you get some indication of just how shrewd Putin could be with the management of diamond resources. In 2008/9 the global diamond market collapsed, prices fell through the floor and there is no more Central Selling Organization as De Beers had dismantled its cartel arrangement in 2000 and moved to a new “Supplier of Choice’ strategy which, while no longer a monopoly, was supposed to maintain its control of the market in other ways.

Without a CSO to buy up excess diamonds the only option was to shut the mines and contract production until the price and demand recovered. That was the De Beers strategy. Mines in Botswana were closed for several months and production decreased in Namibia, South Africa and Canada- countries that are known as the ‘De Beers Zone’. But this was not Putin’s strategy. What he did instead was to in effect guarantee a low but adequate price of diamonds to Alrosa and he instructed Gokhran the Russian Federation’s State Precious Metals and Gems Repository, to buy USD1.2 billion worth of diamonds at the height of the crisis in 2009. In retrospect Putin was astute and two years later Gokhran re-entered the world diamond market selling part of its stockpile that it had reportedly purchased at USD71/carat at approximately USD131/carat. Russia did not lay off its miners and continued producing and its Ministry of Finance made a tidy profit from the transaction.

One can compare this to Botswana where De Beers shut the Jwaneng mine, Botswana  saw its GDP plunge 8% in 2009 and the country went  into significant debt for the first time. Public debt rose from 5.7% of GDP in 2007 to almost 18% in 2013.Botswana borrowed USD1.5 billion in June 2009 from the African Development Bank in order to stabilize the national economy. It is easy enough to conclude that Putin was really clever and the De Beers/Botswana policy was simply short-sighted. But being shrewd requires money and Putin could afford to be clever in 2009 because the Russian Ministry of Finance had revenues from multiple high value minerals and hydrocarbons. Botswana on the other hand only has revenue from diamonds and hence  for Botswana to stockpile diamonds would also have been clever but certainly much riskier because it is far more exposed to the diamond market than the Russian Federation.

The Putin-Modi Diamond Deal

In  early December Putin and Indian PM Modi attended the World Diamond Conference in Dehli, with both leaders keen on ramping up direct exports of diamonds to India. A reported USD 2.1 billion deal was signed with Alrosa for direct exports. India currently exports polished diamonds worth $20 billion and both governments want to see more direct imports. Only about 20% rough diamonds are sold directly from Russia to India and Alrosa  seeking to avoid the potential impact of EU and US sanctions. But Indian diamantaire normally prefer to buy their diamonds through tax-free Dubai or Switzerland where they can transfer price any profits they may have mistakenly declared. Nevertheless, almost immediately after the Russia-India agreement in New Delhi  Indian sightholders at the most recent Gaborone sight of De Beers (DTCB) began giving up their boxes  citing the cheaper goods available from Alrosa than from De Beers and the squeeze on their margins caused by galloping rough prices. It was reported that 25% of the December Gaborone sight remained unsold. In a thoroughly globalized market like diamonds the impact of EU sanctions on Russia is now reverberating through southern Africa.

 Putin in 2015- Boris II?

What Yeltsin faced in 1993 was fundamentally different to the crisis that Putin faced in 2008 and may yet prove to be much more severe than what Putin now faces. Yeltsin faced a complete meltdown of the Russian economy and was desperate for money to stave off economic collapse. This year and next we shall see the stuff from which Putin is made because he will now face a major economic crisis that even he recognizes will last at least two years. Yeltsin pretty well knew that any diamonds that he sold onto the world market behind the back of the De Beers cartel would be bought by the CSO at prices that would not undermine the world diamond market.

But now there is no cartel. In 2013 oil and gas made up 68% of Russian exports and its price has fallen by more than 50% in a year and is trading at less than USD50/barrel. A similar portion of the Russian budget comes from oil and gas revenue. Russia also faces economic sanctions as a result of its annexation of the Crimea and its aggression in Eastern Ukraine. No-one can be certain as to the precise magnitude and duration of the decline of the Russian GDP this year though analysts are predicting a fall of 6% of Russian GDP in 2015. Putin himself believes that the crisis will only last two years. But if the crisis becomes much worse will Putin order an acceleration of production and  export of Russian diamonds to make up for the loss of government revenue? Putin of course knows that there is now no cushion in the diamond market. Since the economic crisis of 2008 De Beers has contracted production in its zone significantly which is one of the main reasons why rough prices have been rising as rapidly as they have during the last five years during the economic crisis.  

But the real long term question is whether Putin is likely to act in the diamond market in the same way as Boris Yeltsin did 20 years ago? In December Russia was reported to have begun selling its gold stockpiles but it is not a significant enough increase to severely effect the gold market. In the diamond market Russia is the world’s largest producer of mined diamonds by volume and unlike gold, any increase in supply would  have profound effects on the global diamond prices. A Russian policy of leaking or dumping diamonds is, at this point,   highly improbable given that there is no longer a CSO and a floor to the diamond price and so Russia is likely to maintain a stable supply situation unless the severity of the economic crisis intensifies to the point where Putin becomes financially desperate and morphs into Boris II? And in such a case the world will have much more to worry about than just the price of diamonds.

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated.

 

 

 

 

 

Knowing the future and Revising the Diamond Projections

Knowing the future and Revising the Diamond Projections

‘De Beers and the Ministry of Minerals Energy and Water Resources should  release, in approximate figures,  the new diamond resource assessment because it will remove uncertainty  about what President Khama meant about Botswana reaming a ‘significant diamond producer’ until 2050 and will help private investors in Botswana make better informed decisions.’

In late 2008, in wake of the financial meltdown,  the worst since the Great Depression of the 1930’s,  Her Majesty Queen Elizabeth, paid a visit to the London School of Economics and posed the incredibly embarrassing question to the assembled economists  ‘how was it that none of you  could see this coming?’She asked. It was a question that could not easily be dismissed because, after all, this was the Queen and she was simply echoing the very question that was on everyone’s lips.  How did the economists get the future so wrong? The number crunchers from the LSE, one of the UK homes of that type of economists who believe they can help mere mortals see the future through their highly sophisticated equations and models looked at their shoes and within a few weeks were spinning all sorts of answers.

Had the Queen gone to Cambridge University she might have come across a few remaining economists who were still literate but not counted amongst the highly numerate charlatans that populate so many universities. Those who were trained by Lord Keynes, the most famous economist of the 20^th century, would certainly have answered what Keynes taught at Cambridge and what every businessman and woman  know-  ‘Mam’, they would almost certainly reply ‘the past is immutable and the future  is unknowable’ This is almost trite but it encapsulates the difficulty that we all face both as people and as businessmen. We make an investment and one it is made that decision cannot be readily changed and we make that investment believing but never really knowing what the future holds cannot be known it offers opportunities. And where we are wrong in our investments and the dice of posterity do not fall in our favour...there is always the bankruptcy court which is market’s way of dealing with fools and uninformed optimists.

In 2008 and 2009 the consensus amongst mainstream economists  was that what was happening to the world was just a financial crisis  stemming from US banks and global investors having mistakenly and with government incentives offered  mortgages to people who did not have the income enough to pay. This is what was called the ‘sub-prime mortgage crisis’. Banks all over the world bought bundles of these American mortgages, often not knowing the laws or even the nature of the asset they were buying, and hence an American financial disaster quickly morphed into a global one.

It was only later, starting in 2010 that some economists began to ask if the 2008 crisis was simply just  a banking crisis then why did it begin amongst the poor and lower income groups in America and why in 2008?  It was then people started to put various bits of the crisis together. The process of analysing what happened in 2008 is by no means complete and hundred of doctoral these are yet to be written. What is known is that there has been a massive shift in the distribution of income in the USA over the last thirty years in favour of the rich and away from those low income workers, ie those who were supposed to pay these sub-prime mortgages. Along with the massive rise in oil and food prices that occurred in 2006/7just  before the 2008 financial meltdown provided the conditions for the economic crisis. No-one saw it coming because no-one was looking at what had happened to the structure of the America economy and those charlatans whose models did not predict what happened were largely looking forward based on one or other variant of what had happened in the past. Driving down the highway looking in the rear vision mirror is never very clever.

Economists Make Mistakes … sometimes big ones!

Late last year I was asked by the Ministry of Minerals to make a presentation on the future of base metal prices. I just giggled. For years I had seen absolutely wrong projections from the IMF, the World Bank and Economist Group on the future of commodity prices. If the economists in any of these  agencies or firms could reasonably predict copper and nickel prices with any accuracy then they would be  very, very rich people and would not be sitting at their work stations  making predictions of the future for a few thousand dollars a month .

We have a similar case with oil prices which should be a lot easier to predict but oil prices have in the last few months slipped from over $110/barrel to under $50 in the last few days. Can anyone find an economist or so called ‘commodity specialist’ who was predicting that the price of oil would halve in 2014? To the best of my knowledge, not a one!  But unlike the far more complex situation with money markets this decline should have been fairly predictable. Between the massive increase in the supply of gas and other hydrocarbons as a result of ‘fracking’ in the US , the collapse of substitute hydro-carbon and fossil fuels eg coal and the weakening global economy there should have been warning bells. But this did not occur.

Is Economics useless?

If your idea of economics is based on believing scurrilous  number crunchers, ie those predicting the future then on the basis of past performance  a saguma will give you results that are probably no worse than most economic forecaster. The famous economist John Kenneth Galbraith once quipped that the only function of ‘economic forecasting was to make astrology look respectable’.  But if your vision of economics is a little humbler, that as a  discipline it exists to help people to understand  what forces shape the world we live in then it is far from useless.

Diamond projections

But there are errors in economics that stem from really bad data and information. Last year I undertook a study for the government about the future of the Botswana economy after diamonds ran out. That of course was based on the assumption that the diamonds would soon run out. I did not try to predict the future but to analyse why the country had not diversified and what would happen when, based on the governments’ own estimates the diamonds would run out by 2027. But those predictions on future diamond production were wrong and superseded in August 2014. All the analysis the government had done which showed that diamond revenue would seriously decline after 2027 were completely wrong. The new resource projections were made by the diamond industry and on  this basis HE President Khama could safely say in the state of the nation address  in 2014 that Botswana will remain a ‘significant  diamond producer’ until the end of the 2050. But President Khama did not elaborate on what  it meant in practice to be a ‘significant producer’- does that mean 5 Mcts o5 25 Mcts per annum as both numbers are significant.

Clearly the earlier diamond projections upon which Botswana’s 10^th National Development Plan were based were completely wrong and they were wrong not because De Beers suddenly discovered a massive new mine but because there is no financial interest in informing the diamond  market that there are far more diamonds in Botswana as it will only serve to depress world prices. But there are  bigger  development issues for Botswana. The new  resource assessment is almost certainly very good news for Botswana as it means there will be no imminent decline in diamond revenues after 2027. For the sake of Botswana I am happy to report that my earlier assessment was completely wrong. But equally the new resource assessment mean for an entire generation the heat is now off the policy makers and as a result no-one will ever think seriously about undertaking the sort of economic reform measures that are needed to drive economic diversification.

 But because the resource assessment is not public the good news about the future of the country is also not public and hence it is vital that the government release the future diamond production projections to 2050 because all private investment in Botswana ultimately rests on this number. De Beers and the Ministry of Minerals Energy and Water Resources should  release, in approximate figures,  this new diamond resource assessment because it will remove uncertainty  about what President Khama actually meant about ‘significant diamond producer’ and will help private investors make better informed decisions about investment. The future, as Keynes said, is unknowable but there is no reason to make the job of business more difficult by not publicising this most important of Botswana’s statistics.  

These are the views of the author and not necessarily those of any institution with which he may be affiliated.