Sunday, 30 December 2007

South Africa Faces Education Crisis

South Africa is facing an in education crisis. Following the matric results that failed to impress, one Sunday paper termed this a teacher crisis. The poor results came primarily from the public sector schools. While tertiary education remains in good shape, the school system is facing huge challenges.

It is not education funding that is at fault. The huge budget dedicated to education should be enough. It is the funding that actually reaches the schools that constitutes the main problem.

Government funded primary and high school education is split between schools that can raise money through school fees set by the school’s governing body, and those that cannot. Government funding for schools is limited to paying for only a core number of teachers. Additional but essential teachers are employed directly by the governing body from fees collected. Not all schools can afford this. Many have a majority of parents that cannot or will not pay. Maintenance of school facilities is not covered by departmental funds. Librarians, sports coaches, computer teachers are regarded as extras.

With education funding at about R50 billion per annum, why is there this crisis in providing resources for schools?

Government departments have become a source of gravy. Directors are appointed with salaries to match and thousands of administrative jobs are created. A huge bureaucracy has emerged to run the educational system. Teachers have been burdened with huge volumes of administrative tasks to do. The department has to employ vast numbers of people to manage the output of these administrative tasks!

My guess is that less than half of the funds allocated to school education actually reach the schools. The bulk is used to fund the oversized education department. This is an issue which probably affects many other government departments.

Government departments should use 80% of their resources to provide services “on the ground”. In the case of education, that 80% should be at the schools. Teachers should not be burdened with cumbersome administrative tasks and reporting processes. The school itself should provide the necessary checks and balances to ensure quality education.

The current situation is that teachers are leaving the profession in droves because of poor pay and even worse working conditions. Schools with facilities such as libraries and swimming pools are unable to afford a librarian or a swimming teacher.

Part of the solution is to provide the schools with sufficient funds to function properly. Remove the admin burden from the teachers. Educators should be left to educate. The bureaucracy is there to facilitate the efficient running of the education system. It should be lean and efficient, not a burden to the educators.

Earn Extra Money in Your Spare Time!

You've identified a need to earn some extra money in your spare time. This is a great idea. Even the smallest extra income contributes towards your overall level of financial security. When things get tough then the small extra income is a potential life-saver. If you are a student then you may want to keep the source of extra income even when you begin to work. For a home executive the extra income is yours to spend as you please.

"But what can I do?" Start by looking at your skills. What can you do well? If you write then it's time to start writing for Helium! Helium is a great Web site that allows you to publish your own articles and earn some money at the same time. The address is - or click on the link on the right of this page.

Making money from writing is not easy. Even on Helium. Helium provides an opening. There is not likely to be too much money at first - but as you build up a large portfolio of articles then a regular monthly income becomes a real possibility. To increase your earnings, enter as many contests as as you can and write articles for the Marketplace. Both are featured on Helium. Even if you don't win you will be building up on the number of articles that will contribute towards your income.

While you are working to build-up your Helium earnings, a more interactive approach may be required. Bars and restaurants are always looking for extra help in the form of waiters and waitresses. Did someone say waitrons!? Upmarket restaurants are the best places to earn good tips. Tourist area may offer the most. Cape Town is excellent.

Waiting also provides a SECRET bonus - a source of new material for your creative writing on Helium and your Blog!

My Blog? Who said anything about a Blog?

Everyone has to have a blog. It tells the world who you are. It is fun. It is also an additional source of income. To set-up your blog, there are a number of excellent free blogging sites. Google's Blogger is really great. You don't need technical knowledge to get started. The address is Once you have st up your blog, add Google Adsense and start earning!

Have a look at these two examples. is a site to provide exposure for an artist. It was really easy to set up and can be shown anywhere. The other site is this one - my own personal blog - providing articles, comment and some great videos. Click on the adverts. Google ads are usually relevant to your site, and the links provided often useful. Whenever someone clicks on a Google advert it earns good money for the blogger. Better than Helium.

The next step is to get some traffic to your site. Tell all your friends and family. Advertise on Facebook and MySpace. You may even want to advertise yourself!

While setting-up and maintaining your blog you will learn a whole bunch of new skills. You can of course teach these for money! The possibilities are endless. On-line or face-to-face.

So that is one plan for earning extra money. Once the money begins to roll in, take the first ten percent and donate it to your favorite charity. A very worthwhile investment that will pay off handsomely in the future. The next ten percent is for you to pay yourself. This is for investments. Investments in equities are usually a good idea, but it does involve learning about the markets and the companies where you place your money. To do this you need knowledge, money and access to either a good on-line system or tool or a good broker. You may want to diversify into property as well.

Perhaps your investments could lead to eventual financial independence! And all from some spare time earnings.

Does the new ANC have a high tolerance for corruption?

Judging from its response to charges leveled against Jacob Zuma, it would appear that the new ANC leadership believes that the party leader should be above the law. It further seems to follow that corruption is not really a crime and should not be prosecuted.

The view that corruption and fraud don’t matter is supported by the results of the leadership elections at the ANC conference in Polokwane this December. The fact that candidates with recent criminal records for fraud and corruption were elected to leadership posts serves to support this view. So too do the protests surrounding the charging of Jacob Zuma.

The ANC is doing itself a great disservice. One that could lead to long term problems within the party. Accusing the State President of a political conspiracy does not help their cause. It does little to build party unity. It does less to maintain the widely held respect that has hitherto been the ANC’s due.

The roots of this issue stem from earlier events. The corruption allegations associated with controversial arms deal have never been properly investigated or dealt with. The Travelgate scammers have all retained their parliamentary seats. All indications suggest that there has been a massive cover-up of any corruption that may have taken place in as part of the arms deal. The indications also suggest that many people were involved. No wonder Zuma’s supporters feel that he is being singled out.

Would it not be appropriate to call for a judicial inquiry into the whole arms deal corruption affair?


Saturday, 29 December 2007

Zuma Charged - the ANC's Reaction and the Future

Jacob Zuma was elected president of the ANC with a cloud over his head - the spectre of fresh corruption charges being levelled against him. These charges - on various counts of racketeering, money laundering, corruption, fraud and tax evasion - have now become a reality.

These are serious charges. They should come as no surprise. Shabir Shaik was convicted and is already serving time for corruption involving Jacob Zuma. Zuma's lawyers have managed to delay this process by contesting the admissibility of various documents submitted as evidence.

Once again Zuma's supporters are claiming that the charges are ‘groundless’ and that the prosecution is politically orchestrated. Zuma’s right hand man went as far as accusing President Thabo Mbeki himself of orchestrating this campaign.

The fact that the ANC went ahead with its conference and the election of Zuma under these circumstances casts a shadow over the organisation. The response of the ANC to the charges intensifies the shadow. The ANC’s NEC (National Executive Council) has stated that it will seek to have the charges dropped. The current members of the NEC were all elected as part of the Zuma ‘ticket’.

The political claims and accusations against Mbeki go against Zuma’s speech at the end of the conference in which he called for unity within the party. Attempts to block the prosecution would constitute political interference in the judicial process.

The fact that Zuma was elected so overwhelmingly by the ANC came as a surprise considering the fact that prosecution was imminent. It illustrates the fact that he has managed to convince a sizable body of supporters not only of his innocence, but also of a political conspiracy against him. It also illustrates the fact that many party members were dissatisfied with the status quo.

The main hope for South Africa lies in allowing due process to take its course. Zuma must face these charges in a court of law. Any other course of action would lead to disaster. The ANC must accept this process.


Tuesday, 25 December 2007

The cost of money in the South African economy revisited

I am not an economist and make no claims to be one. I have an understanding of some elements of economic theory. I also believe that the policy of inflation targeting is generally correct.

In an earlier blog I suggested that high interest rates can in themselves be inflationary. Perhaps there is a point at which raising interest rates becomes counter productive.

I do understand that imported inflation fuels local inflation. Pressure is placed on suppliers to pass on the costs. Reducing aggregate demand by raising interest rates will reduce the inflationary pressure. The laws of supply and demand apply. The recent property boom was slowed dramatically by increasing rates. House prices have stabilised and perhaps even fallen as a result.

Higher interest rates also serve to make the local currency more attractive to foreign investors. This helps to strengthen the currency thereby reducing the extent and impact of imported inflation.

Under a previous governor of the Reserve Bank many years ago, interest rates soared to about 26% in a futile effort to calm inflation. It didn’t work. Is there a point at which high interest rates actually become inflationary? When the rate of interest becomes a significant cost factor can it contribute towards cost-push type inflation?

Another observation is that when we see interest rate changes in the US, these are usually in steps of 25 basis points. Our interest rate adjustments have all been at 50 basis points. Perhaps we should adapt a more cautious approach?


Monday, 24 December 2007

The Cost of Money in the South African Economy

Governments, the World Bank, The World Monetary Fund are all prone to fads in determining their economic policies.

Keynesian Economics

During the 60’s Keynesian economics was king. The theory worked! Western economies were boosted by increased government spending. They came close to achieving full employment. Government’s had found the solution to control the cyclical nature of capitalist economies.

What they forgot was that John Maynard Keynes’ theory was intended to be a short term solution. As he said, "In the long run, we are all dead."

As the Western World moved into the 70’s the phenomenon of rampant inflation caused havoc. Governments sought measures to control inflation.

Moneterist Policies

Milton Friedman coined the term “stagflation”. Soaring demand for goods and services – largely fuelled by credit - pushed prices higher as industry did not have the capacity to increase supply. Printing money referred to the increase in the supply of money in the economy without a corresponding increase in the real value produced in an economy. It meant that more money was chasing the same bucket of goods and services.

The solution lay in the carefully controlled use of interest rates to control inflation. We can control the money supply and therefore inflation through the use of interest rates.

Monetarist, neo-classical or ‘supply-side’ economic policy became the order of the day. In at least some cases with considerable success.

The South African Economy

The South African economy has adapted this model in its inflation targeting strategy, and the strategy has worked to a large extent.

But should this strategy be used to counter inflation in the economic climate of late 2007? The current spate of inflationary pressures is largely a result of rapidly increasing global oil and food prices. How will increased interest rates help to stem this inflationary pressure?

Can Higher Interest Rates be Inflationary?!

Many businesses use credit to finance capital expenditure and to manage their cash flows. The cost associated with this credit is interest. What happens when that cost of borrowing increases by 30% over the course of one to two years? That cost must be recovered. It can only be recovered by higher prices. Rapidly increasing interest rates can therefore be counter-productive in the fight against inflation. Higher interest rates in themselves are inflationary!

The effect on Growth

High interest rates carry a second side-effect. One that is very significant in the South African context. It slows growth. To finance investment at 8% is very different to financing that investment at 14%. At an 8% cost, a 14% return produces a 6% profit. The same return at the current cost merely serves to break even.

Under South Africa’s current circumstances, is there actually anything to be gained by raising interest rates, or does it merely serve to slow growth and cause additional hardship to the population? Perhaps it is time for another paradigm shift.

BM 23 December 2007

Thursday, 20 December 2007

How Life Insurance Works

Sean Jameson is the marketing manager of a large toy manufacturer. He is a family man of 40. His wife Cindy is a part-time assistant at a local supermarket. Their children Cheryl (14), Adrienne (12) and Bart (6) are enrolled at a private school.

The Jamesons own two cars, a modern home and have some savings. The house is mortgaged to the bank and the cars have been financed through the bank's Motor Finance division.

Sean was already running late for the regular Monday morning management meeting when he received a call from the bank's broker. He hastily agreed to a meeting with the broker.

The meeting took place at the Jameson's home in the early evening. Sean and Cindy were brought face to face with the bare facts. If anything happened to Sean, the family would be all but destitute. Their savings would last a year at most and Cindy would probably lose the house and cars. The private school would have to go.

This huge risk could be covered by a life insurance policy. The needs analysis' revealed that a capital sum of at least $1 million will be required as an investment to ensure that the family could maintain their lifestyle in the event of his death. The broker's plan will provide the required capital. A part investment, part life cover mix. In just 25 years the premium of $1000 per month will have turned into an illustrated $1 million and the family will be protected. The premium will increase by 5% each year. In addition, the policy would include disability cover at no charge! The broker completes the form, Sean signs and undergoes the required medical tests.

The policy is known as a 'universal life' policy. At the beginning, a significant portion of the premium is used to cover life insurance, and the remainder (after expenses) is invested. As the investment portion grows, the requirement for life cover diminishes.

The life insurance company uses mortality tables to calculate the risk of Sean dying within the next year. These tables show the proportion of people that die at each age. Between the ages of 40 and 41, roughly 0.2% or 2 out of every 1000 people of that age die. The statistics vary from country to country, by gender and by race. For a white male the risk is 0.25% or 2.5 per 1000. Females have a much lower chance of dying! As the age increases, so does the risk.

Being healthy, Sean's risk of dying is actually less than that of the general population.

The risk of death for the first year is 0.25% or 1 in 400. The cost of $1m life cover for the year is $2,500 or $208.33 per month. The insurance company need to do more than simply break even. So the odds are changed to favour the insurance company. Life cover is charged at 0.4% - $4000 for the first year. Broker's commission is paid at 85% of the first year's premium - $10,200. Expenses are calculated at an additional $134 per month. So the first year's costs amount to $15,808 (Risk Cover $4,000 + Commission $10,200 + expenses $1,608) from the $12,000 premium. At the end of year 1, the policy shows a shortfall of $3808. In the second year some funds will become available for investment. Commission, expenses and the margin on life insurance may vary according to the company and the country, but the principle is the same.

5 years later Cindy has a shock visit from the police. Sean has been killed in a terrible motor accident. The family are devastated. The life company are informed and a claim initiated. But the family are in for another shock. Under huge stress at work, Sean had taken to smoking a few months earlier. He did not think of telling the insurance company. The insurance company discovered this and refuted the claim on the basis of non-disclosure. Sean had been covered as a non-smoker.

Non-disclosure refers to anything that could materially affect the risk but is not disclosed to the insurer. Smoking is one of these risks. Others would be undisclosed health history. Had Sean told the life company, the family would have been paid the $1m. Had Sean lived, the investment portion would have grown.

Life insurance can be seen as a wager. The premium is the bet. The risk-cover the prize. As long as the premium is paid, the cover will remain. The client wins if he dies as long as he has disclosed everything.

Tuesday, 18 December 2007

South Africa: The ANC Leadership Elections

18th of December 2007. Tonight Jacob Zuma has been swept to leadership as president of the African National Congress (ANC), South Africa's ruling party. The election was a two-horse race. The Zuma camp took all leadership positions of the party convincingly.

Jacob Zuma has huge popularity. The first ANC leader to emerge from “the People”. Former leaders were drawn from the "elite". From the middle class, from royal families, from the families of traditional leaders (tribal chiefs) and from the intelligentsia. Zuma, by contrast, has little formal education. He educated himself while imprisoned at Robin Island.

All leadership positions of the party were taken convincingly by the Zuma camp. The Zuma “ticket” has taken all of the party’s top spots.

Thabo Mbeki represents the intellectual middle-class branch of the ANC. He is currently in his second and final term as South Africa's State President. His failings – perceived or actual - include crime, HIV AIDS, poverty, poor service delivery and the “quiet diplomacy” policy to Zimbabwe.

In the lead-up to these elections, Jacob Zuma spoke out against the way that these issues were being handled. The government’s failure to deal effectively with crime. The high levels of crime in the country were an infringement of our human rights, an infringement on our freedom. Similarly with the innefective HIV AIDS policy.

While there have been many successes, Mbeki’s government has failed to deliver on several fronts:

• Crime – particularly violent crime – remains a national curse. People live in fear behind high walls and electric fences
• Anti-retroviral drugs for AIDS sufferers. Mbeki’s infatuation with the AIDS dissidents (or denialists) some years ago was not well received.
• Poverty remains a huge issue. While there are a growing number of wealthy and middle-class black people, the majority remain in poverty.
• Poor service delivery is another issue causing great dissatisfaction
• The quiet diplomacy policy towards Zimbabwe has had no perceivable effect.

The vote for Zuma within the ANC was primarily a vote for change. The perceived failings of the Mbeki’s government provided enough fuel for ZUMA to gain support.

Jacob Zuma has faced and was acquitted of a rape charge. Shabir Shaik is in prison for his role in conducting a generally corrupt relationship with Jacob Zuma. Jacob Zuma will probably be facing charges of corruption within the next few months. There is a possibility that he will be found guilty.

Zuma supporters believe that his rape charge and the corruption allegations were politically inspired. What seems certain is that Jacob Zuma was not alone in benefiting from arms deal corruption if indeed he was involved. Jacob Zuma has strong leadership skills. In the early 1990’s he played a huge role in bringing the armed conflict in Kwa-Zulu to rest. He achieved unity in the province. He is seen as a man of the people.

The next national elections are due in 2009. Until then, Mbeki is likely to remain as State President. What happens next is anyone’s guess.

Saturday, 15 December 2007

Interest Rates and Inflation

While interest rates around the world are falling, in South Africa we are faced with rising interest rates. The reason? Inflation.
The inflation is driven by oil and food prices. An international phenomenon. Not by demand.

Higher interest rates cool down the economy and leads to a slow down in demand. That will in theory lead to lower inflation. At least if the inflation is of the demand-push type.

In a nutshell, demand push inflation works like this. Demand for goods and services exceeds the supply or the capacity of the economy so prices go up.

For some time I have been wondering about the inflationary effects of interest. With low rates the effect can be negligable. But what happens when the prime lending rate reaches 14.5% or beyond? Many business rely on large amounts of credit to fund their operations. The interest on this credit represents a major cost to the business. What happens to that additional cost? The only thing that a business can do is to pass the cost onto the customer in the form of higher prices.

So while interest rates may be effective in curbing inflation under some circumstances and within an interest rate range - say 2 to 6 % - when the rate of interest becomes a significant cost, the effect is to fuel inflation more.