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.