Why is policy and other change often so difficult? Because humans are involved.

Following on my previous post regarding South Africa’s likely rough and rocky path to structural reforms, I ponder why the road to big changes is not always a smooth one. Often, when we view a looming change unemotionally from the outside, for instance a Government policy change, the particular change seems to make perfect sense and it frustrates us no end that the interested parties involved in that changed cannot just embrace it and move on to a better future dispensation. We see the change as good for the country, and perceive the organizations or people resisting the change to possess seriously flawed thinking, put politely.

Not understanding human nature  and its attitude to change properly is what often makes us economists and many others slip up when it comes to our expectations of how a process of change will proceed, and how it will impact on the economy in the interim while change is under way.

In classical economic textbook theory, a change in a market merely shifts supply and demand curves in a certain direction until a new equilibrium is reached. And many people end up almost assuming that it is that simple in real life too…that the adjustment to change happens smoothly and quickly.

Evidence of such simplistic assumptions was arguably reflected in a huge spike in both the BER’s South African Consumer and Business Confidence Indices in the early stages of 2018, shortly after Cyril Ramaphosa won the ANC presidential election, which in turn set him up to replace Jacob Zuma as the country’s president shortly thereafter. The spike was known as “Ramaphoria”.

These spikes were not long lasting, however, confidence slumping back into mediocrity and worse as the country quickly realized that nothing surrounding policy and economic performance was going to change quickly.

The reality is that change is often a long, slow and turbulent process, as the proponents of change are forced into battles with those forces resisting it. South Africa has many historic examples of such hard won policy changes.

Below is a diagram that I obtained on Thwink.Org that portrays a simple view of the broad cycle of acceptance”. Step 1 is a “normal existence”, which I interpret as an existence that has come to be seen as “normal” due to a significant length of time over which it has prevailed. It is a situation where the individual is likely calm and able to think clearly and perhaps “rationally” if there is such a thing. People may well be in what is called a “comfort zone” at this stage of the cycle.

Then comes step 2….”Receipt of Bad News”. Here we can insert “News of Change”……change not necessarily being bad but often seen by some as bad news. And then the “battles” begin as people and organizations start to make their way through the “cycle of acceptance”. First there is the “denial” (step 3) stage….where we try to either convince ourselves that “this is not happening”….or that “it won’t be that bad”. But facts are facts and sooner or later one has to accept that change is taking place. Then comes the anger (step 4), which can sometimes manifest itself in aggression, or deteriorate further into depression (step 5). In these stages there can be fierce resistance to change.

Step 6, bargaining, is where we start to  accept that life must go on, that we must adapt to the change….if we didn’t manage to stop the change from happening….and we start to position ourselves in the best possible way to benefit from the approaching “new normal”. Finally step 7, Acceptance, after which we settle into a new way of doing things in the “new normal”.

The big question is, especially when a big change may be for the better, why would there be sometimes huge resistance to it during the “anger”and “aggression”,and perhaps the “depression”, stages?

Here are some possible “human” reasons:

Change can imply loss of control: Change can imply a loss of control for someone or for an organisation. Having control can hold financial benefits, or it can merely be about power and status for some. Think of the possible reluctance of someone in corporate senior management who is informed that certain entities under their control are set to be moved to another area of that company, or a senior person in Government being informed that certain entities under their control are set to be privatised as Government scales down on what it owns and manages. These “restructurings” may make a lot of sense economically or from a profitability point of view, but not necessarily from the manager’s personal point of view.

Change can imply uncertainty: Change often also implies uncertainty. People are creatures of habit and are often in search of greater certainty. The mere uncertainty of change, even if its a positive change, can cause some people to resist it purely out of fear of the unknown ….preferring a “better the devil you know” stance even if the status quo is sometimes terrible.

Rapid change can be too much too fast for peoples’ minds to cope with: In this regard it is often important to move at a pace not too fast for peoples’ minds to cope. Think of the sudden lockdown-enforced work from home policy for many office workers worldwide in 2020. Prior to Covid-19, many company management teams were slowly but surely moving their work forces to a more flexible work arrangement, waxing lyric about how wonderful it would be, with greater levels of work from home to come. But prior to 2020 it was at a pace that they could mentally cope with and a process that they could feel in control of. Then, enter 2020 lockdowns, and overnight their office buildings emptied out and their entire workforce “vanished”. This was just too much too fast for many senior managers, even for those in favor of more flexible work prior to Covid-19,  and a good dose of panic set in. Now, many are trying hard (not always successfully) to reverse the process significantly and get everyone back to commuting and office attendance.

At any policy level, therefore, the success of implementation can often depend on the pace at which changes are implemented.

Bad communication can mean that change is misunderstood: The reasons for change are sometimes badly communicated, contributing to suspicion and resistance to it. Good communication and an understanding of the benefits of it can thus be a crucial ingredient of successful change.

Change can create fears around one’s own competence: People can fear change due to fears regarding their own competence. Think of a company implementing a new system of some sort. Staff can often fear that they may not be able to operate this new system, and may thus attempt to delay implementation as they prefer to stick to the old way that they know so well.

Change can create fears around others’ competence: Then there is sometimes the fear regarding other peoples’ competence, causing a resistance to change. A familiar scenario comes to mind in companies where an individual gets a promotion, but can’t mentally “leave” his former job, constantly looking over his succesor’s shoulder and not willingly relinquishing control of his former responsibilities and decision-making powers to his successor.

Accepting change can be perceived by some as an admission of being wrong: To some, pride gets in the way, with acceptance of a new and different way of doing things being perceived by themselves as an admission that their previous modus operandi was wrong. Many people are not prepared to admit to their flaws. In politics we often see political leaders having to change course due to the voters beginning to tell them that, if they don’t, their time in Government may be up. Those that can move with the times and change can often see their careers go from strength to strength, but those who can’t take such steps risk being cast aside at the next election.

Change can imply more work/effort: Sometimes, change is resisted because it implies more work. Whether it is a person’s need to take on additional responsibilities, or being required to learn new skills to keep pace with the change, more work is very often a reality that comes with change. Some will see the potential future benefits of the change and embrace the need to increase their efforts, but others will not understand those benefits, and perhaps then resist the change.

And yes, change often means that some stand to lose…often quite significantly: Finally, the reality is that some people will gain more than others from change , while others may stand to be marginalized and “lose out”. Corporate restructurings often mean retrenchment. In some cases, where the economy is weak and not creating many jobs , some affected staff may fear that alternative employment may not be forthcoming. This fear gets worse when they know that they lack appropriate skills for a changing labour market. 

It gets even worse in the case of South Africa’s state owned enterprises, where changes aimed at rooting out corruption and criminal activity in these entities could not only see some people losing their jobs, but in some instances also facing jail time. In such instances one should expect strong resistance to change.

In short, the process of change can be a long and bumpy road, sometimes highly disruptive to the economy and society around it. This process often does not receive strong enough attention from analysts, policy makers, the public and business planners. Therefore, society is often ill-equipped for change and taken by surprise when it happens, and taken even more by surprise when certain changes that appear positive are met with fierce resistance, take a long time, and cause a great degree of volatility at times.

Change is the only certainty in the world. Being in a change “mindset” that involves expecting change, embracing positive change, and better understanding the nature of the process of change, would serve many of us well.

We often look forward to positive change, but are we ever prepared for what often awaits us during the change process?

I’ve been pondering the process of change quite a bit lately, especially with regard to structural reforms in South Africa, parastatal reform being quite a hot topic at present.

I know that many people in South Africa currently hope for good news regarding structural economic reforms, notably with regard to improving the performance of many areas of broader government. Widespread mismanagement and corruption is widely reported, and this large part of the economy has become the key “drag” on growth performance.

But recent revelations at emerging from South Africa’s power utility Eskom (and certain other key parastatals) around investigations and progress relating to widespread corruption and mismanagement can be both encouraging and demoralising at the same time.

That the investigating authorities are on a “drive”, and appear to be making progress in uncovering malpractices, with action already being taken, is encouraging. But as the scale of the decades of mismanagement becomes evident, one can be forgiven for wondering if it is at all fixable, and this can be rather demoralising.

Often, as better information around the extent of a crisis emerges, and big battles between the proponents of change vs those who are anti-change heat up, progress towards a sustainably better situation can often feel more like we are going backwards. This is perhaps due to a lack of understanding of the realities of the process of change.

 

One thing that we must understand is that the time frames for fixing this crisis are likely long ones at best, no matter how good the new Eskom board and management may be. Not only is this due to the sheer magnitude of the malpractices, which have built up over decades, but also due to the likelihood that people who benefit from these practices won’t go without a fight.

 

There is an apparent attempt by Government at a massive change in how Eskom (and other key parastatals it seems) operates, and any change will see some groups sidelined from the “benefits” in the process. Worse, some may end up being convicted for their crimes and face jail time, while many ordinary workers may lose their jobs. This almost inevitably brings about strong resistance to change. 

In the early-1980s, Margaret Thatcher’s reforms in the UK brought about huge and almost inevitable battles….trade unions being one of her big adversaries. When she moved to privatize mines, a national mining strike of more than a year followed. She dared not blink first. Winning these battles despite significant disruption to the economy was crucial to making progress in the longer run.

 

As it was in Mrs Thatcher’s case, it is important in the Eskom case that the authorities moving for positive change win these reform battles in order to ultimately take the economy forward on a more sustainable basis.

 

Economics 101 text books teach us how a policy change instantly shifts the supply and demand curves to a new equilibrium and life goes smoothly on. But in the real world of human nature and vested interests, the change adjustment process is a far slower and rockier path.

 

Mrs Thatcher’s 1980s battles give us some insights into the rough process of structural reform that may await us…..where positive change can first require a very rough, uncertain and turbulent period as big battles play out. It is this sometimes very rough path to positive change that, I believe, many members of the public and commercial sector are not prepared for and are often surprised and horrified by….and may incorrectly interpret it as a sign of going backwards instead of forwards.

 

But Thatcher’s era in the UK also showed that if it is the “right” structural reform, that rocky period can be followed by a future period of improved and more sustainable economic performance….if the often tough reform battles can be won.

Domestically, it was a similar story in the dying days of Apartheid rule. The end of minority rule was effectively announced on the 2 February 1990. This was likely the most positive policy reform that could have been made at that time. But 4 extremely volatile and uncertain years followed in the run up to the 1994 democratic elections. For those 4 years of recession, violence and unrest, it often felt more like we were going backwards rather than forwards at times. Only thereafter to economic performance meaningfully improve, and a relative economic boom period ultimately arrived…a period that is unlikely to have happened without those early-1990s reforms.

 

It is a case of short term pain in the hope of long term gain, and historic examples of major structural reform suggest that it would be unrealistic to expect quick and smooth results. It is important to understand what the process of change can imply.

Maybe Central Bank Focus Should Have Been On What They Can Influence In The First Place - Debt

Below, I link to a nice article on discussions, concerns and opinions from the recent annual gathering of central bankers at Jackson Hole in the USA. Inflation was understandably top of mind.

With globalisation taking something of a step back...first Covid-19 supply chain disruptions...then an escalation of Cold War 2...including the Ukraine invasion and a whole host of retaliatory measures against Russia....these events and others make it look like an increasingly fractured and perhaps "less globalised" economy supply chain, which could potentially imply higher inflation over a long period of time. This in turn may require higher interest rates over a lengthy period of time.

But while recent global issues driving inflation are largely outside of the area of central bank control, what seems far less spoken about is the area very much within central bank influence....i.e. levels of indebtedness within economies. Central banks have been expected to focus largely on inflation, while also on short term economic growth each time some growth pressure arises.

The expectation on central banks to boost growth, especially during a crisis, by fuelling borrowing throughout economies, and with no regard for the levels of household, corporate or government indebtedness levels in an economy, is where the monetary policy brief given to central banks has gone wrong I believe.

I believe that many role players in the economy have borrowed and lent based on some implicit assumption that interest rates would remain at very low levels, and that we could rely on central banks to alleviate any pressure by lowering rates in times of economic or financial pressure.

Now....enter a dramatic change in the inflation environment, and a central bank need to combat this inflation. But even an interest rate hiking cycle of moderate proportions, compared to hiking cycles of a few decades ago, could quickly cause severe financial pain due to the mountains of debt piled up now. Will such pain be palatable? I doubt it. I suspect it may be a case in many countries of..."if you can't make the target then adjust the target"....higher inflation targets perhaps coming.

Indeed, in this article some of the economists quoted have started rumbling about possible upward adjustments in inflation targets, and perhaps we will have to live with higher global inflation for a while. Is it all bad? Not necessarily, it may be the way to inflation the global debt-to-GDP ratio to a lower levels in the coming years. I'm not sure how else we reduce global indebtedness.

https://www.afr.com/policy/economy/global-economy-faces-greatest-challenge-in-decades-officials-warn-20220829-p5bdg5

MOODY’S IMPROVES SOUTH AFRICA OUTLOOK – A MILD POSITIVE, BUT TOO EARLY TO CALL THE TURN FOR THE BETTER IN CREDIT RATINGS

 Ratings agency Moody’s came up with some mildly positive news for South Africa over the weekend. It kept South Africa’s foreign and local currency credit ratings at Ba2, but changed its outlook from negative to stable. A period of strong commodity prices has boosted South Africa’s Government tax revenue, and Moodys points to some success regarding Government’s fiscal consolidation measures and an expectation that the Government debt-to-GDP ratio will stabilise around 80% in the medium term.

 Any such positive news from a ratings agency is welcome, for a country languishing in territory below investment grade, and it does serve to remind us that we must not merely expect a trend to continue for ever in one direction downwards (or upwards for that matter). Life generally goes in cycles. But could this be the turning point for South Africa’s credit ratings? It is far too early to tell.

 Firstly, Moodys makes mention of external factors contributing positively to Government revenues recently, notably strong commodity prices that boosted mining company profitability. But there is also a myriad of uncertainties regarding Government expenditure commitments. 

 Social welfare spending pressures are enormous, and not the type of pressure that can easily be ignored should they produce nasty “upside surprises” for Treasury, especially not in an environment where the unemployment rate has just gone above the 35% mark and rising. Social unrest and potential of resultant economic volatility is never far away in an environment which is highly unequal and high on poverty.

 There is also the issue of ageing infrastructure in South Africa, with economic infrastructure investment by government weakening sharply as a percentage of GDP as far back as the late 1970s, and never having recovered significantly since. High on current expenditure, “fiscal consolidation” continues to translate into a budget very low in capital expenditure. Infrastructure spending surprises become more likely as infrastructure ages and sometimes crumbles.

 And then there is the myriad of state-owned enterprises, many in disarray, some of them crucial, such as the electricity and transport utilities to name but two. Unexpected fiscal support also remains a key risk to Government finance in such times.

 The bottom line is that I would be wary of getting too optimistic until we have seen meaningful improvement in microeconomic management in certain key industries, notably Electricity and Transport, but not only those. Large parts of the Education and Health Care Sectors are also in need of improvement, and for as long as such crucial sectors of the economy are battling with their management capacity, unpleasant fiscal surprises are always a real possibility.

 The reality is that Government is overstretched, committed to too many areas of the economy, with resources too thinly spread, and weak micro-economic performance ultimately adds up to weak macroeconomic performance. Some would say that a skills shortage is at the heart of the problem, and I would concur that good skilled labour is in short supply should South Africa want to harbour ambitions of being a far bigger economy than what it is today.

 But I do believe that it is possible to do far better with what we have, should the set of incentives in certain sectors of the economy be changed meaningfully. The broad approach in my view should be for a “regulatory vs delivery split” between Government and the Private Sector, Government focusing on being a good regulator, and the Private Sector delivering the goods and services in a well-regulated competitive environment. In the highly competitive and professional industries of professional sports, this is more-or-less the split that we see. FIFA or the IRB (or others) are relatively small organisations as far as numbers of staff go. They focus on trying to regulate the sport well. It isn’t a free market. Far from it, free markets can be a “free-for-all” that often end up being monopolistic and not so free. The games are highly regulated, including on-field and off-field rules and referees, disciplinary codes and anti-doping measures. A lot of attention goes into structuring the competition to get the best out of people, teams and individuals of similar standards being grouped together in segregated competitions, the idea to protect and develop new talent (entrants) and those of lesser ability of experience without “crushing” them.

 In South Africa, operating within the same labour laws that many criticise as being too onerous, the Financial Sector is often rated in competitiveness reports as one of the better ones in the world. How is this possible? I believe the recipe is well-regulated competition. In markets with significant competition, Retail being another big example, the standards of service at the southern end of Africa have often shown to be impressive. This is the broad approach that I believe should be rolled out to other key sectors, and can achieve significant improvement in economic performance…. “well-regulated competition”, with the regulator and competitors at healthy arms’ length from each other, Government focusing on designing and implementing the most appropriate competitive structure and regulatory environment for each industry, with the Private Sector being the competitors and “playing the game” within these regulatory frameworks. Government would likely be significantly smaller in size, and able to better focus its resources, while private investment would be allowed, and likely forthcoming, into a larger part of the economy.

 There are some limited signs of a shift in this direction, the sale of a share of airline SAA, and Transnet Freight Rail opening to third party operators. One hopes that it isn’t too late, given the crumbling state of rail infrastructure, but bigger Private Sector involvement seems the only plausible way to improve the stage of Government finance more sustainably and convincingly.

 A small improvement in a Moodys Outlook does remind us that life does work in cycles of varying length, not in never ending straight lines up or down, and that there is a glimmer of hope for a turn for the better. But too much still rests on good fortune, such as commodity price cycles going the right way for us, and we know that such markets are highly cyclical.

 More meaningful economic structural reform for a more resilient and better performing economy over the long term is required before we can be optimistic about a sustainable turn for the better.

Towards a More Well-Being Focused Economic Future

THE “GROWTH MODEL” IS NO LONGER SERVING US WELL 

As an economist in South Africa, I’ve “grown up” in an environment where economic growth seems to have largely been the end goal of economic policy and economic thinking. As a former macroeconomist, and a forecasting one at that, that well-known measure of economy-wide production, namely GDP (Gross Domestic Product), was undoubtedly the most important forecasted economic variable. In fact it probably still is in this part of the world at least for the time being.

And other macro variables that receive much attention, for instance interest rates or exchange rates, are often merely of key interest due to their impact on the economy and on the “holy grail” that is GDP growth.

There is of course a common reasoning behind driving GDP growth hard with the “appropriate” economic policy. GDP growth will drive employment and income growth, which in turn can be instrumental in lifting more people out of poverty and supposedly providing a better life for a greater part of society, so the reasoning more-or-less goes, and that surely is a noble ideal.

There is obviously a distributional requirement to this, i.e. that if income distribution were to deteriorate while economic and total income growth was taking place, GDP growth may not necessarily lift more people out of poverty. And so, economists and policy-makers involved in policy debates and setting have spent significant time not only debating how to achieve growth, but also how it should be distributed or redistributed.

Nevertheless, whether one tended towards “unfettered growth and trickle down economics” or towards greater redistribution, the biggest obsession in my lifetime as an economist has been largely around income and wealth as a way of increasing society’s happiness and well-being….with many of us having believed that growth was key to all of this.

A key problem with the GDP growth focus is that it often doesn’t consider the all the costs of achieving that GDP growth. Achieving economic growth requires financial, human and natural resources, and those costs are often not well considered by economists as they enthuse over a “good” quarterly or annual economic growth number. What was the cost in natural resources and in terms of environmental destruction? How much additional debt needed to pile up in order to achieve that growth? In recent years, many countries have been raising various forms of borrowing and indebtedness sharply to keep short term economic growth going the “easy way”, which when taken into account doesn’t make their current economic growth that impressive. And we are often not too concerned with what gets produced to feed this economic growth. 

I use the example of urban commuting to illustrate this. The massive amount of fuel production and vehicle production that is required for the wasteful daily urban commute to and from places of work gets added to GDP, and is thus often implicitly seen as a “positive” by macroeconomists as they admire the GDP number. Insufficient emphasis has been placed on the amount of daily emissions pollution caused, and the health costs to people not only from that pollution but also due to congestion and the stress related to it. Why would it? Simplistically viewed, Healthcare services and products to help mentally and physically unhealthy people adds to GDP too. For some, if it adds to GDP then all is good, even if a product does so only because of negative factors that could have been proactively avoided, and even if human health and well-being does suffer in the longer term.

So, even if GDP does remain the most important economic targeted variable, the composition of that GDP desperately needs attention.

We may conceivably be better off as a society with less GDP and income, should we be able to structure production better so as to lessen the “wasteful  costs” of urban commuting, pollution and congestion for example, which include not only the financial and time costs of transport, but possibly significant health care costs too. Past generations of office workers were seemingly less concerned with these costs, perhaps because urban congestion wasn’t as bad as today, and of course the lack of information and communication technology decades ago gave them little option out of the “rat race”. At the same time, the looming climate crisis awareness was far less, so air pollution was not yet seen as such an immediate threat to human survival and well-being.

And so economists and planners focused large amounts of their time on that simple GDP growth measure and how to get it to grow faster, along with employment and income and the distribution of that, implicitly assuming that if we could get the amount and the distribution of income and financial wealth right we would create a happier society, or greater societal well-being.

And when trade and industrialization policies were discussed, with the aim of boosting export growth in order to boost GDP and income growth, the discussion centered largely industrial incentives of a tax, tariff or subsidy nature, or perhaps on easing the “red tape” or legislation/policies associated with doing business. It may also periodically focus on human capital development, but then normally in the narrow sense of acquiring the skilled labour relevant for the production process.

TIME FOR CHANGE - THE RISE OF THE WELL-BEING FOCUS

But attitudes in our world have seemingly been changing, in many ways for the better I believe, and I expect that the change will continue. What change am I referring to? In short, a change to where that simple GDP measure gets “demoted” to a position of lesser importance, becoming a means to an end as opposed to the end goal, and where the composition of GDP becomes far more sustainable. 

Firstly, it appears very clear that the climate crisis is becoming a very serious matter, rapidly increasing in profile and importance in the media and in politics. Sustainability is the buzz word. It makes no sense to drive short term GDP growth if there is not going to be a habitable planet in the longer run. So that is the first major change in thinking taking place. Policy change is not all being driven by policy and law makers. Much of it is driven more from the Household Sector upwards, with society becoming ever more concerned about environmental destruction and its negative impacts to it, forcing policy and law makers to change their thinking should they wish to continue to remain in power, and corporates too should they wish to continue to sell their product.

This is a process of change already under way, especially in certain developed economies, albeit seemingly not far enough yet to see a significant reversal on environmental damage.

Environmental destruction, and concerns surrounding that, implicitly perhaps have a lot to do with thinking around current or future “physical”health of people. 

But the concern around  mental health and well-being seems to be a relatively newer concern.

Mental health has become a major issue, having been seemingly more neglected in bygone years. Certainly in my economist schooling it received almost no attention at all. We thought about what skills were necessary to enhance labour output and productivity, with far less attention to mental health and motivation levels. Efficiency was king in the production process, which often meant increasing specialization or automation of labour, making many jobs increasingly mundane. As production processes become longer and more complicated, and employees increasingly specialized and reliant on machines, many must surely battle to see what value they add, or how meaningful their impact is to the complex process. This may well have been a negative to human happiness and well-being in many cases, as working life has become highly repetitive and mundane for many. But for many economists and business leaders alike, greater efficiency has often been the main consideration, great for output but perhaps to the detriment of the mental health and well-being of the work force.

However, efficiency considerations have been traditionally more limited to within the workplace, and not always to what happens outside of that. So while a workplace may have be “highly efficient”, the commuter time cost in getting to and from that place was anything but efficient,  receiving far less attention in many cases. I love using the example of urban commuting as a wasteful and inefficient exercise.

But the times they are a changin’.

Admittedly a lot of work has been done over many decades in many cities of the world on urban design and transport systems in order to address congestion and quality of life issues. So this is nothing new, although much work is still needed in many cities of the world. But rapid information and communication technology advances are likely to force city governments’ into speeding up the redesign of their cities into greater “lifestyle” cities. I expect this, because technology is making a sizeable portion of companies and the labour force increasingly mobile with regard to where they are located. 

Certain activities such as mining, for instance, are bound to a specific location due to the availability of a natural resource. But in a country such as South Africa, where two-thirds of the economy is services, a large portion of business can service its client base from a variety of locations. So how do business leaders and owners choose their locations? As mobility and location flexibility increases, lifestyle appears to play a more prominent role. How do higher skilled employees decide where to live? Increasingly, lifestyle appears to play a role. And where do affluent retirees take their purchasing power and locate to? Lifestyle often plays a key role.

In South Africa, we have seen a major outcome of this increased mobility and location flexibility in the form of a major “semi-gration” of employees, retirees and even businesses in the direction of the country’s Western Cape Province. Various studies have provided evidence of this. While South Africa has a major emigration issue, or “brain drain”, due to its national policies and performance, it also has significant migration of skilled labour within its borders between regions. The Western Cape has been the province that, over the past 2 decades or more, has been able to attract and retain affluent and skilled people better than any other of the 9 provinces. The reason appears to be that region’s combination of being perceived as a region with a relatively good lifestyle, a major economic opportunity having a major city of Cape Town within its borders, and being relatively well-run at provincial and local government levels according to a lot of evidence.

The result is that the Western Cape has seemingly outperformed most others when it comes to long term economic performance, because South Africa’s services-dominated economy is increasingly a modern skills-dependent economy. And then there is a large group of affluent retirees who bring their considerable purchasing power to the Western Cape. 

This internal migration within South Africa is insightful, because it begins to show us what is required to achieve a competitive advantage trade and business-wise. There is not a different currency or any exchange rate competitiveness issue for the Western Cape relative to other South African region. And there is not a meaningful difference in trade policies and regulations between the country’s regions. The Western Cape is gaining a competitive advantage over others, and thus a superior economic performance to most, significantly due to its ability to attract and retain skilled labour and affluent purchasing power.

Future trade policy and strategy discussions in countries’ corridors of power and planning may in future not be confined to the set of industrial financial incentives, therefore. A lifestyle discussion may be a big part of those deliberations. Increasingly, as skilled labour becomes more mobile, and is able to operate more remotely from their official place of employment in certain industries, so major centres’ competitive advantage will be determined by their ability to attract and retain skills and purchasing power….skills and purchasing power that are increasingly able to leave for “greener pastures”.

But this is an old trend. What is new?

What’s New is seemingly the discovery by an increasing part of society as to what drives their well-being. And it isn’t all about income and financial wealth, as earlier generations were seemingly taught. Let’s not downplay money. It has an important place. But it is one of a few factors key to well-being. For very low income people, money is often extremely important, and the “marginal utility” from each Dollar gained can be very high. But as a person’s income rises, so that marginal utility from each dollar gained often declines, and some studies even point towards an average income being reached in a society above which no further increase in happiness is observed. 

What do higher income/skilled people then start to do? Many move up Maslow’s hierarchy of needs to look for fulfillment in self-actualisation or self-transcendence. Purpose and Meaning are 2 words often heard from modern day positive psychologists. Many people are searching for purpose and meaning in their lives, and want jobs with that. Engagement is another driver of well being according to positive psychologist Martin Seligman, while Accomplishment is another. And while you may argue that a sense of achievement can be attained from one’s corporate job, for many it cannot because of the difficulty in measuring what one’s contribution to the company’s results are. And so there are theories that many senior corporate execs are taking to endurance sport to find a sense of achievement, because measurement of performance in such activities is far more precise and transparent.

All of this change in focus away from solely money towards a more balanced view of well-being drivers, raises the possibility that the employee paycheck and bonus can no longer serve as such a strong motivating factor as what may have been believed in the past.

COVID-19 lockdowns have seemingly magnified this apparent change in thinking. Some surveys, emanating from the lockdown period, from developed countries point to a significant portion of employees being prepared to work for a lower salary in return for being able to work from home. Others point to strong resistance by employees towards being forced back into the long commute to the office. And then in the USA there has been talk of the so-called “Great Resignation” in 2021, with record numbers of people quitting their jobs, and many experts pointing to this being in part a result of many employees rethinking their lives and moving for something which may satisfy their passion or give them more meaning and satisfaction.

What happens next? 

It is a slow process, but increased focus and understanding by individuals of what drives their well-being, and a realization that there are multiple factors of which income is only one, ultimately forces change upward. Companies who want to attract and retain top skills will be the ones to move first to attempt to accommodate these people’s needs. The rest will have to follow in order to compete.

And in the economic policy debate, Governments will be increasingly pressured into focusing economic policy on well being, with economic growth relegated from the pole position. That is not to say economic growth of the right (environmentally sustainable) type won’t be important. But it will become a means to an end, as opposed to the end, the end increasingly becoming the well-being of society. 

Expect an increasing number of nations’ Governments to label themselves as well-being focused al la New Zealand, and to increasingly focus on, and be evaluated according to, new metrics measuring happiness, well-being and sustainability. Former UK Prime Minister David Cameron was possibly ahead of his time when he aimed to be evaluated more on the happiness of the UK’s citizens than on mere growth. And the measurements of happiness and well-being have some way to go, The annual World Happiness Report probably just the start. But this, I believe, is where the world is steadily headed, and it is long overdue.

As the world piles up mountains of debt and decimates the environment al in the name of growth, it is time for change. It is time for the economy to serve the people, and not for the people to serve the economy. The “Simple Growth Model” is no longer serving us well.