Johan Fourie's blog

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A radical solution to land ownership

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Farmland

What if I could offer you the following three outcomes – 1) an increase in government revenue to the extent that a Basic Income Grant (BIG) can be afforded, 2) a substantial decline in wealth inequality, and 3) a sustainable solution to the land crisis – with just one policy intervention? Fantastic, you’d say, but naïve and, frankly, absurd. There is no policy that we know of that can tackle these immense societal challenges, all in one go.

Wait, I’m not done yet, I’d answer. This policy would make it much easier to build infrastructure, get rid of derelict buildings, would ramp up GDP per capita significantly, and would foster social cohesion.

Seriously? Don’t be ridiculous, you’re dreaming, you’d respond. And to do this, I’d continue, we’d need to do two things that seem almost directly opposed to one another. We need to expand markets. You might nod in agreement, something sensible for the first time. Oh, and we must abolish private property altogether.

This, in short, is the recommendation by two economists, Erik Posner and Glen Weyl, in their new book Radical Markets. Critics seem to agree that this is something worth discussing; Kenneth Rogoff calls this ‘perhaps the most ambitious attempt to rethink democracy and markets since Milton Friedman’.

Although their ideas have huge implications for democracy and immigration too, I will focus here on their first chapter, and probably the one most relevant to South Africa currently: property. They propose a Common Ownership Self-Assessed Tax (COST) on wealth. Property, they argue (like many economists before them), are inevitably monopolistic, and monopolies create inefficiencies in the market. Their COST aims to remove these allocative and investment inefficiencies by introducing a live auction for every asset in society.

So, how does it work? Let’s take Khulekani. His young family has just expanded, and so he wants to buy a new house. He would go to a website – let’s call it UmhlabaWethu.co.za – and open a sort-of Google Maps that will allow him to see every property in South Africa, valued by the owner of the property. He can then decide to buy any property, by just clicking on the property, at the price the owner has listed. The ‘right to exclude’, one of the central tenets of private ownership, is therefore waived in this new system. Every property owned by a company or individual (or government!) must be valued and listed.

So, what prevents owners from just making excessively high valuations, making Khulekani’s attempt at buying a house impossible? Tax. In this system, each owner will pay an annual tax on the self-assessed value of their property, thereby waiving the ‘right to use’, the second central tenet of private ownership. The authors explain: ‘In the popular image of private property, all benefits from use accrue to the owner. Under a COST, on the other hand, a fraction of this use value is revealed and transferred to the public through the tax; the higher the tax, the greater the fraction of use value transferred.’

In other words, all property in South Africa would be on a permanent auction, where the current user of the property determines the price (but pay for that price in tax). It’s almost like Uber, for property.

Imagine a private investor wants to build a high-speed monorail in Cape Town. To do this at present would be almost impossible, as owners of properties on the intended route would hold out for a high price, knowing that they have monopoly bargaining power. A COST would allow an investor to go online and buy up all the properties at the listed price, combine them, and start building the monorail. (Of course, they must also value that property, and pay tax. If another investor believes they can build a more profitable monorail, they might just buy-out the original investor’s right of use.)

Or imagine that the property tax is returned to citizens as a Basic Income Grant. By the authors’ rough calculations, every US citizen from a similar system could receive $20000 annually, which for most would be far less than they would be paying in tax. By their estimates, it would only be the richest 1% property owners that would be paying more than they receive – and often a lot more. This not only reduces inequality (by 4 Gini points, according to their estimates), but it also acts as a subsidy for the poorest.

In South Africa, COST tied to a BIG could do far more to alleviate poverty and address inequality than a policy like expropriation. Unproductive land would be a direct cost to all society: higher property values paying more tax mean that more can be redistributed to everyone. As the authors note, ‘a world in which everyone benefits from the prosperity of others would likely foster higher social trust, a factor essential to the smooth operation of the market economy’.

‘The sharing of wealth would be in accord with many commonsense notions of justice. Wealth is rarely created solely by the actions of the people who are paid for it under capitalism. They normally benefit from the help of friends, colleagues, neighbours, teachers, and many other people who are not fully compensated for their contributions. A COST would better proportion the distribution of wealth o the labour that created it.’

This is a radical proposal. It might have unintended consequences that we cannot currently imagine. That’s why the authors propose a piecemeal adoption of these policies. That is a sensible approach. Experimentation will be needed, perhaps even within one municipality first.

But the radical economic transformation that COST can accomplish is a lesson in how creative thinking – and perhaps a willingness to put away our ideological differences – can help find solutions to a problem that we had thought to be insurmountable.

*An edited version of this article originally appeared in the 13 September edition of finweek.

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Don’t bet against the historians

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PikettyWEHC

Every three years, economic historians from across the globe gather in one place to discuss the latest research in our field. And so it was again this year that, in early August, more than 1400 of these interdisciplinary scholars convened at MIT in Boston for the latest rendition of the World Economic History Congress (WEHC). It was hot and humid outside, but inside the conference and classrooms, the discussions were no less heated.

Normally a friendly and somewhat reserved crowd, it is as if the political developments of the last three years has forced economic historians out of their slumber. That classic history cartoon – an old man sitting in his rocking chair saying ‘Those who don’t study history are doomed to repeat it. Yet those who do study history are doomed to stand by helplessly while everyone else repeats it’ – seems more apt than ever. As always, there were papers on esoteric topics such as occupational mobility in early-twentieth century Greenland, wine glasses in China during the eighteenth century, or what pollen data can tell us about market integration in Ancient Greece. But it seemed to me, now at my fourth WEHC, that this year the research questions were more aimed at the big questions of the present: How does globalisation lead to populist pushback? Why are inequalities increasing in rich countries, and what can be done about it? How do entrepreneurs use (abuse) networks to become successful? History offers clues (but no quick-fix answers) to all these questions.

Two plenary sessions exemplified this. On the last day of the conference, Jane Humphries and Claudia Goldin debated the missing role of women in economic history. While Humphries, professor of Economic History at Oxford University, discussed the importance of women to the Industrial Revolution, Goldin, a professor of Economics at Harvard, discussed the more recent transition of women into the labour market. She showed, by using extensive data from Harvard Business School graduates, how the gender wage gap can to a large extent be explained by women’s preferences for flexible work. This, she argued, what can be done to close the gap further: women prospered in teams where their skills are substitutable. Instead of operating as a single physician, for example, female doctors were much more likely to stay in the labour market and work more hours if they worked as part of a team of medical experts.

But the big event of the congress was undoubtedly Thomas Piketty’s plenary session. Piketty, who is professor of Economics at the Parish School and known for his best-seller Capital in the 21st Century, has now shifted his inequality work to the political realm. He made a compelling case that the expansion of higher education has altered the traditional alliances in politics. Using three case studies – of France, England and the US – he showed that support from the intellectual elite – those with university degrees – has increasingly shifted to the left in all three countries over the last three centuries. For example, in 1948, less than 20% of all voters with a Masters degree voted for the US democratic candidate; in 2016, it was 70%. Why? Remember that the Democratic Party in the US (or the Labour Party in the UK) is more in favour of redistribution than the Republican Party (or the Conservative Party). For that reason, they tend to get most of their support from the poor (or, at least, those that stand to benefit from redistribution). But the poor is not uneducated anymore. In 1948, slightly more than 20% of voters had a tertiary degree, while in 2016, it was more than 50%. By definition, of course, if 50% of voters have a university degree, they cannot all be in the richest 10%. This means that there has become a disconnect between the educated and the rich. That is why, according to Piketty, new political positions become possible; he identifies four groups of almost equal size that have now emerged in his native France: internationalist-egalitarian (pro-migrant, pro-poor), internationalist-inegalitarian (pro-migrant, pro-rich), nativist-inegalitarian (anti-migrant, pro-rich), and nativist-egalitarian (anti-migrant, pro-poor). The success of Emmanuel Macron was that he could appeal to multiple of these groups.

‘Politics has never been a simple poor vs rich conflict’, says Piketty. ‘One needs to look at the multi-dimensional content of political cleavages.’ We also see this play out in the South African context. The ANC is currently a broad church – from the rural poor to the urban sophisticate. But how long can they maintain this delicate balance, when issues such as globalisation, migration and automation will have decidedly negative effects on one part of their electorate while benefiting another? And these clashes may not be along the fault lines of yesteryear. Capital and labour, poor and rich, educated and uneducated are now in flux. As Piketty says, the US might be returning to the 19th century political alignment, with globalists (high-income, high-education) on one side and nativists (low-income, low-education) on the other. Or it could go the route of the Democratic Party in the US, whose pro-slavery/segregationists introduced poor white policies which also benefited poor blacks. Or we could instead see the re-emergence of a globalist-egalitarian elite like we did in the aftermath of World War II, a system that resulted in the end of colonialism and a global Golden Age of growth.

The high levels of inequality in South Africa would make the continuation of a single, unified ANC seem unlikely in the medium to long run. Rapid globalisation, automation and increasing pressure on immigration are fissures that even a great leader will be unlikely to control. If history (and economic historians) have anything to add, it is that the future is unlikely to be just a continuation of the present.

**An edited version of this article originally appeared in the 30 August edition of finweek.

Written by Johan Fourie

October 8, 2018 at 08:00

The cost of crime

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South Africa Gang Violence

It is almost something that defines South Africans: having lived through the traumatic experience of a violent crime or, at the very least, know someone that have. 19016 murders were committed in the country in 2016/2017, according to the South African Police Service, or 34.1 murders for every 100 000 people. (Contrast Afghanistan at less than 7 murders per 100 000 people, Argentina at less than 6, Kenya at less than 5, India at less than 4, Iran at less than 3, and Ghana at less than 2.) Almost the same number of attempted murders as murders were reported to the police. On average, 109 men and women were raped each day. In 2016/17, there were 22,343 incidents of house robbery recorded, or 61.2 each day.

These statistics are nothing less than shocking. They explain why most South Africans list crime as their number one concern, far above access to land or inequality, and why those that decide to emigrate list ‘improved safety and security’ as the top reason for leaving. Given the widespread concern, one would expect that safety and security would be a top research priority at South African universities. It is not. A 2017 World Bank study by leading social scientists reports: ‘There is a dearth of research on crime in South Africa, which is particularly problematic in this country given the extraordinary high crime rates reported here.’ The study begins to fill the gap, but the results show why understanding the causes of criminal behaviour is so difficult.

Surely poverty is the most obvious explanation for crime? Well, consider that the province with the second highest murder rate in the country is the Western Cape (with 51 murders per 100 000 people), and the province with the lowest murder rate is Limpopo (with 14 murders per 100 000 people). The Western Cape is, of course, much more affluent than Limpopo. This suggests that poverty is not the main reason for crime. Perhaps, then, inequality is what matters. The authors of the World Bank study answer this emphatically. Using a sophisticated regression analysis, they conclude that ‘we did not detect any relationship between inequality and violent crime, nor between unemployment and any crime type.’ If it is not poverty and inequality, then what?

We know, for example, that the victims of most violent crime often know the perpetrator. The 2016 Demographic and Health Survey reveals that 17% of women aged 18 to 24 had experienced violence from a partner in the 12 months before the survey. Economists in the US have developed sophisticated household bargaining models to explain this form of violence, but more could be done to test these models in the South African context.

If there is a dearth of research on the causes of crime, there is even less known about the consequences. The costs of a traumatic experience can be multifaceted for the victim, from the direct medical costs to the life-long psychological and emotional pain. And the effects on family and friends, their relationships and interactions, their productivity and future plans, are enormously difficult to quantify.

A new NBER working paper attempts to measure one, often forgotten, cost of domestic violence: the effect on children in utero. Because crime statistics is difficult to get past university ethics committees, it is difficult to track the victims of crime over time in order to measure the effect of the traumatic experience on later-life outcomes. The three authors of this study, Janet Currie, Michael Mueller-Smith and Maya Rossin-Slater, use a unique source of linked administrative data from New York City. They combine birth records with information on maternal residential addresses with the exact locations and dates of reported crimes to compare the outcomes of women who have a reported assault in their home in months 0 through 9 postconception to those who experience an assault 1 to 10 months after the estimated due date.

Their results are startling. Women who suffer from domestic violence during pregnancy, especially during the third trimester, have as much as 50% higher rates of births that are very low birth weight (less than 1,500 grams) and are very pre-term (less than 34 weeks gestation). The likelihood of induced labour also increases for these women.

The authors then do a back-of-the-envelope calculation of the costs of US domestic violence. ‘We calculate an average social cost of $41,771 per assault during pregnancy. Assuming that 2.6 percent of pregnant women experience an assault—the national victimization rate estimated from survey data—this figure translates into a total annual social cost in excess of $4.25 billion.’

Many might groan at trying to put a number on these tragic experiences, but quantifying the social costs – in other words, the costs for society – of domestic violence is one way to help governments prioritise preventative and remedial expenditures. The high rates of domestic violence and abuse in South Africa, particularly of women during their most fertile years, suggests that the costs of domestic violence would be significantly higher here compared to the US. And because domestic violence is more likely to be suffered by women from poor households, this may suggest, according to the authors, ‘an important and previously understudied mechanism by which early-life health disparities perpetuate persistent economic inequality across generations’.

Violence, in all its manifestations, is costly for society, which is why we should invest more resources into understanding its causes and consequences. Domestic abuse, in particular, seems to carry not only a cost for the current generation, but is likely to affect the next generation through its intergenerational effect on children in utero. Understanding and preventing it may be one of the key ways to fight deepening inequality and poverty persistence.

**An edited version of this article originally appeared in the 16 August edition of finweek.

Written by Johan Fourie

September 19, 2018 at 08:00

The big misconception about the free market

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South-African-Airways

There are many who view the free market with skepticism. Some are downright hostile towards it, proclaiming – erroneously so, given the empirical evidence of history – that capitalism hurts labour, the environment, or the poor, and is largely to blame for the evils of this world. Others grudgingly accept that capitalism is a better system than the alternatives, but look down, much like the nobility viewed merchants in Medieval times, on those in the business world as scammers and frauds. After the Steinhoff collapse, many commentators, often those schooled in the humanities, pointed to unethical behaviour of the ‘markets’ or the ‘business community’ or the ‘corporate sector’. In its crudest form, they blamed it all on ‘free market capitalism’ or, that insult of insults, ‘neoliberalism’.

But that interpretation is predicated on a fundamental misunderstanding of what ‘the free market’ actually is. A student pointed me recently to a ten-part television series by one of the leading economists of the twentieth century, Milton Friedman. Recorded in the 1980s but as relevant today as then, Free to Choose spells out Friedman’s belief that the ‘free market’ is preferable to the alternative of government intervention. The series is now freely available on YouTube.

After each episode, Friedman debates with invited guests, many who don’t share his views, about the pros and cons of the market. The moderator at some stage points out that both Friedman’s opponents, one from big business and the other from government, tends to agree that government intervention – say, to increase tariffs – is a good idea. How would he explain this? Friedman responds that it is perfectly rational that the two agree, even if for opposite reasons. ‘The two greatest enemies of free enterprise and freedom in the world, have been on the one hand the industrialists and on the other hand most of my academic colleagues who end up in government, and for opposite reasons.’ His academic colleagues, Friedman argues, want freedom for themselves. ‘They want free speech, they want freedom to write, they want freedom to publish, to do research. But they don’t want freedom for any of those awful businessmen.’

‘The businessmen are very different’, says Friedman. ‘Every businessman wants freedom for somebody else. But he wants special privileges for himself. He wants a tariff from congress.’

Entrepreneurs are in the business of making money. One way to do that is to produce a good or service that is better than the competition through efficiencies or strategy or innovation. So far, so good. Another way to do this is to eliminate the competition altogether. This can be done by getting government to impose a tariff on imports, or to get government to issue special licenses, or to convince government to issue regulation that protect your business from superior competition.

South Africa, of course, has a long history of this type of government intervention. The VOC that set up a refreshment station at the Cape was a company founded on monopoly trading rights. Paul Kruger’s ZAR government was built on a complex network of monopoly licenses with industrialists, and so, too, was the apartheid state. The scale of collusion between government and big business in more recent years ultimately coined a new term: state capture.

This is not free market capitalism. Put differently, it is not the type of capitalism that creates prosperity. Friedman made the same point in the 1980s: ‘It’s not proper to put the issue as industrialists versus government. On the contrary, one of the reasons why I’m in favour of less government, is because if you have more government, industrialists take it over. The two together form a coalition against the ordinary worker and the ordinary consumer. I think business is a wonderful institution, provided it must face competition in the marketplace, and it can’t get away with something except by producing a better product at a lower cost.’

Think of South Africa’s most concentrated sectors – telecommunications, electricity, healthcare, air travel. In each case, the government is either a significant player themselves, or they impose tight regulation. Much of this regulation is founded on good intentions, of course. Licenses often require a minimum safety standard; one wouldn’t want just anyone opening a hospital or flying an airplane. But most often, it is these well-intentioned regulations that strangle competition, creating oligopolistic sectors that favour a few big businesses.

South Africa’s Competition Commission is tasked with investigating and mitigating collusive business practices and other ways firms may abuse their market position. When a large firm acquires another, they need to file an application to the commission for approval. This prevents that one firm dominates a market, pushing up prices and hurting consumers.

But the Competition Commission can only do so much. In many cases brought before it, the South African government is an active player in the market – think SAA – or regulates the industry through other bodies – like the telecom spectrum ICASA controls. We cannot just rely on the Commission to ensure free competition: it requires a widespread acceptance in government that any regulation that impedes competition hurts both workers and consumers. The Minister of Energy signing the power purchase agreements for 27 mostly solar and wind projects – and thus encouraging competition in the market for energy generation – is an excellent step in the right direction. Our failing education or health systems are not so lucky; both suffer as a result of too little competition.

The big misconception about the free market is that ‘the market’ is often equated with ‘big business’. As Friedman notes, they are not the same thing. There is good reason for oligopolistic firms to cozy up to government: it is a great way to get rid of competitors. But over the last decade, South Africans have learnt the painful consequences of what happens when that system becomes entrenched. In contrast, a society that prioritises market competition is most likely to benefit the ordinary worker and the ordinary consumer. This is because competition fosters innovation. And innovation improves productivity, growth and living standards. That is, ultimately, the long road to economic freedom.

**An edited version of this article originally appeared in the 2 August edition of finweek.

Written by Johan Fourie

September 10, 2018 at 08:00

Making South Africans more productive

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Drone

Economic growth is defined, in its most basic form, as doing more with less. Economists often overcomplicate things. We talk about ‘an increase in gross domestic product (GDP) per capita of 2%’ when in fact we could simply say ‘the average South African produced 2% more than last year’. More production translates into greater incomes. Take India and China. At an average growth rate of 7%, these countries will double their production/output/income in 10 years. In contrast, if South Africa continues to grow at 2% it will take 36 years to double our income. That is why South Africans are so upset: we see millions of Indians and Chinese growing wealthier, transforming their countries from subsistence breadbaskets to industrial and ICT powerhouses, while we are frustrated by the meagre increases in our living standards.

The Indians and Chinese also show that it is only economic growth that will allow us to escape poverty. We cannot redistribute ourselves rich. Even if incomes were equalised in South Africa, we would still be poorer than those Americans who live below the poverty line. The unescapable truth is that if we want to prosper, we need to make South Africans, all of us, more productive; we need to get South Africans to produce more than they do at the moment.

With an unemployment rate upwards of 30%, this would not seem to be too difficult a task. A lot of people are able and willing to work – to produce stuff – but they currently cannot find employment at the price they are willing to work for. How we address this mismatch is a question that should occupy the minds of the smartest people in our society. Perhaps we need more students to study growth theory, industrial organisation, labour economics and economic history – compared to India and China, for example, too few South Africans take up graduate studies in Economics. But perhaps we also need more scientists, entrepreneurs, tinkerers, coders, designers, educators and experimenters with the vision and ability to make their fellow citizens more productive. In short: we need more people like Norman Borlaug.

An agronomist who completed his PhD in plant pathology, Borlaug became fascinated as a student with the productivity of crop farming. In the 1940s, he moved to a research unit in Mexico where he began developing high-yield, disease-resistant wheat varieties. His wheat varieties, combined with modern agricultural production techniques, soon improved Mexican farmers’ incomes, and then spread to other countries. By 1963, Mexico became a net exporter of wheat. Between 1965 and 1970, wheat yields nearly doubled in Pakistan and India. In 1970, Borlaug was awarded the Nobel Peace Prize for leading the ‘Green Revolution’, a massive transformation of agricultural productivity in mostly Latin America and Asia.

A new NBER Working Paper by three economists spell out just how consequential this revolution was. They use variation in geography combined with the exogenous timing of agricultural research successes in high-yielding crops to measure the effect of the high-yielding crops on output. The results are startling: they find that a 10-percentage point increase in the share of area under high-yielding varieties in 2000 is associated with a massive 10-15 percentage point increase in per capita GDP. To put that differently, if a country moves from having no high-yielding crops to having half its crops of the high-yielding type, then income will almost double. That is why Borlaug is considered to have saved almost a billion people from starvation.

Higher agricultural output, in a Malthusian world, usually results in fertility increases as food becomes more abundant. But the authors also show that this was not the case with the Green Revolution. Higher agricultural yields actually reduced population size, as parents chose quality over quantity.

The paper also shows that the new high-yielding crop varieties, in contrast to what many environmentalists believe, actually benefited the environment. Increases in the area under high-yielding varieties has, the authors find, tended to reduce the amount of land devoted to agriculture – ‘improvements in the productivity of food crops actually lead to intensification of agriculture on a smaller land area, preventing expansion on the extensive margin’.

Their results suggest at least three lessons. First, there is huge potential for improving living standards in developing countries through new crop varieties remains. This is especially true in many African countries, where adoption is far from universal, and agriculture is still an important sector. Second, new biological technologies are available to increase productivity of some crops, both by increasing yields and by reducing costs – for example, disease-resistant varieties that minimise the need for spraying with costly pesticides. Third, ‘technology continues to have a huge potential for improving incomes in the poorest places on our planet’. Indeed, the authors’ results suggest that the investments in the development of high-yielding crops have been ‘the most successful form of foreign aid to developing countries in the past half century’.

By itself, land reform in South Africa will not be enough to improve living standards, as the rest of the continent’s poor agricultural productivity attest to. What is needed is large investments in developing new technologies – universities, research institutes and the research capacity of state-owned enterprises, with the help of foreign donors like the Bill and Melinda Gates Foundation – to improve the productivity of our farms and factories and fibre-optic networks.

‘Whoever makes two blades of grass to grow upon a spot of ground where only one grew before,’ writes Jonathan Swift in Gulliver’s Travels, ‘would deserve better of mankind, and do more essential service to his country, than the whole race of politicians put together.’

Technology and scientific advancement is often last in line when the menu of economic policies are discussed in South Africa and on the rest of the continent. But technology that can ‘make two blades of grass to grow upon a spot of ground where only one grew before’ – or, in a more general sense, can make South Africans produce more with less – is the only way we can escape the stasis of the last decade, regardless of what South African politicians repeatedly promise.

**An edited version of this article originally appeared in the 19 July edition of finweek.

Written by Johan Fourie

August 27, 2018 at 08:00

Why vegetarians are from Knysna and meat-eaters from the Karoo

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Boerewors2

Talking about factor endowments sounds like one of the most boring dinner conversation topics ever. The land/labour ratio of India, Europe or Africa does little to whet the appetite, and might actually be a polite way to signal that the evening is coming to an end. And yet, factor endowments explain far more about ourselves – from what we produce and trade, to how we marry and what we eat – than we would care to admit.

The ratio between a country’s endowment of land and labour – the land/labour ratio – is common to economic theory. One of the central theories of international trade, for example – the Heckscher Ohlin theory – uses factor endowments to explain what countries produce and trade. In its most succinct form, it says that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively. Basically, if South Africa has a lot of land relative to Bangladesh, then we should produce things that use land intensively (like cattle), and export this to Bangladesh, while Bangladesh should produce things that uses its most abundant factor – in this case labour – most intensively (like clothes), and export this to South Africa. Both countries would win from the trade. This is standard Econ 101 stuff.

But increasingly the land/labour ratio is used to not only explain a country’s comparative advantage in production, but also explain the social and cultural differences between places. How we marry is one example. Take the lobola, the bride price that is traditional to most marriages in southern and eastern Africa. Why do Africans have a lobola, while Indians have a dowry? One answer: factor endowments. See, Sub-Saharan Africa traditionally had a lot of land relative to people. A high land-to-labour ratio meant that people were immensely valued for their ability to perform labour. Women, given their reproductive ability, was therefore of great value, and powerful men would claim multiple wives to ensure not only a long lineage but also a large workforce. That is also why polygamy is still popular amongst many African societies across the continent, and why indigenous slavery (raids on neighbouring tribes to poach their people rather than their land) was a feature of precolonial Africa.

By contrast, labour is abundant in India relative to land. There the institution of bride price never emerged; instead, it would be a dowry system, where the bride or bride’s family would pay (in property or money) for the right to marry the husband. This was to consolidate the most important asset – land, not labour – to ensure a successful lineage. Europeans, incidentally, had the same low land-to-labour ratio, which is why it is typically the wife’s family who pays for the wedding in European custom.

Factor endowments, surprisingly, can also say much about what we eat. In a series of tweets on 12 June, Sarah Taber, agricultural scientist and host of the Farm to Taber podcast, explained just how our eating habits are the result of the environment and endowments (the land/water ratio) around us. She starts by mentioning that many cultures have traditionally had low or no-meat diets. Think of the Ganges valley, the Nile valley, or the Amazon. What do these places have in common? It rains a lot. This matters because in such environments, plants that humans can consume tend to grow, like those with tender stems, leaves and fruit, or those with enlarged seeds or energy storing roots. The rest of the plant is basically useless to us.

On the other hand, many societies, like the Mongols, the Bedouin, the Inuit or the Masai, have evolved to consume almost only meat. This is because they live in places that are dry or very cold, where plants are either very sparse or very tough, and made entirely of things that humans cannot digest. These plants are almost entirely cellulose, having tough stalks, fibrous leaves, and so on. But cows, sheep, goats, horses and camels can consume these scrubs with 3- to 4-chambered stomachs that turn the cellulose into sugars.

Taber goes on to say that we neglect to factor in these differences when we debate vegetarianism, for example: ‘Failure to recognize the role of local environment in diet is a major oversight in the vegetarian community at large. Traditional vegetarian societies are trotted out to showcase that low/no-meat diets are possible. But it’s done without recognition as to why those particular societies did it, and others did not.’ The key, she says, is that we fail to recognize that for dry regions, the bottleneck in productivity is not land. It is water.

She then explains that a farm in a dry area, if used for cultivating vegetables, might produce enough food to feed 10x the number of people than it would if it was to produce meat. But, she shows, it would require a 1000x more water to produce those vegetables. ‘In places where there’s limited land and a surplus of water, it makes a lot of sense to optimize for land. So there, grow and eat crops. And in places where there’s a lot of land and limited water, it makes sense to optimize for water. So there, grow and eat ruminants (meat).’

‘It’s really interesting to me that the conversation around vegetarianism and the environment is so strongly centred on an assumption that every place in the world is on the limited land/surplus plan. You know what region that describes really well? Northwestern Europe. In many ways, viewing low/no-meat diets as the One True Sustainable Way is very much a vestige of colonialism. It found a way of farming that works really well in NW Europe, assumed it must be universal, and tries to apply it to places where it absolutely does not pencil out.’

The next time you run out of dinner conversation, a discussion about factor endowments may not be such a bad option after all.

**An edited version of this article originally appeared in the 7 July edition of finweek.

Written by Johan Fourie

August 18, 2018 at 09:03

What universities can teach us about job incentives (or how to make South African researchers more productive)

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Freedom

Let there be little doubt: academics have the best jobs. When we teach, we get to fill young, smart minds with ideas we care about and believe in. When we undertake research, we get to explore these ideas further, understanding the world and how it works a little bit better. We work in tranquil settings (most of the time), surrounded by like-minded individuals in search of (the) truth, or, for those of us who shy away from people, books that do the same thing. Sometimes we get to travel to nice places to meet more like-minded people and share our ideas. Sometimes we even take sabbaticals, a time to reflect more deeply about the world and how it works without the need to do anything else. And best of all: even if we do not do most of these things, we have job security for life.

Universities are some of the oldest institutions. Although the role of professor has changed somewhat over the centuries – we used to have to earn our income when students paid to enter our classrooms! – the system of academic tenure, where an appointment is permanent and one cannot be fired except under extraordinary circumstances, has been around for more than a century. It is a decidedly different system than the private sector, where the biggest incentive for working hard is to not get fired.

While South African academics get tenure almost immediately after their appointment (it varies, but there is usually a probation period), ‘getting tenure’ is a big thing in the US. The first five years after appointment is a race to publish in top journals. If your tenure evaluation comes up, and you have not published well enough, you won’t get it, and you will have to move somewhere else, or quit academe. Once you get tenure, though, all the incentives to publish are removed; continued research depends entirely on the goals and objectives you set for yourself.

Here are two very different systems that are perfect for analysis. In the first, the incentives are clear: publish or perish. In the second, there are no external incentive like the overt threat to job security. Which of the two systems produce the best results?

Before answering this question, it is perhaps useful to ask why the system of academic tenure was introduced in the first place. There were mainly two reasons. First, tenure provides academic and intellectual freedom to pursue new avenues of inquiry. Second, it provides a sufficient degree of economic security to make the profession attractive. It is the first of these – the unencumbered pursuit of truth – that is still upheld as the indisputable defense for tenure.

Does this defense stand up to empirical support? Three economists, Jonathan Brogaard, Joseph Engelberg and Edward van Wesep, used their own profession to find out. In a paper published in the Winter 2018 issue of the Journal of Economic Perspectives, they measure the research output of almost a thousand academic economists in the five years before tenure and the ten years after. They not only measure the quantity of output, but also the quality. They create two measures: ‘home runs’ are papers that are highly cited (in the top 10% of papers published in the same year) and ‘bombs’ are poor-performing (papers in the bottom 10% of citations that year).

Their results are emphatic: publication and home run rates rise to tenure, peaking in the year a researcher comes up for tenure and a researcher’s first year as tenured faculty, but then fall off a cliff, with publication and home run rates 15% and 35% lower in years 2 to 10 after tenure. Most surprisingly, bomb rates, publishing papers that get very few citations, increase by 35% after tenure.

The authors consider various reasons that might explain this drop in productivity and success. Perhaps this is just a ‘time since PhD’ effect, in that older people are less productive, but the authors find no evidence to support this. Perhaps it is the rise in service, teaching and other nonacademic obligations post-tenure, but that would not explain, for example, why researchers publish more bomb-papers. Perhaps tenure encourages researchers to take bigger risks and branch out into new, explored areas of research. The authors measure this by looking at where the authors publish, and find no difference in the number or uniqueness of co-authors or journals. Perhaps the averages mask elite researchers’ performances. But even if the authors only limit their analysis to the top US universities, the results hold true. Perhaps it takes time for truly novel research to gain traction. But when the authors limit the sample to papers with 20 year lags, the results stay the same.

What emerges from their analysis is that tenure is bad for research productivity. This is not necessarily to say that the tenure-system is bad: had it not been there, the number and quality of PhD students that aim for academic positions would probably have been lower. The possibility of future economic security is the incentive that really matters in drawing the sharpest minds into the field.

But it does suggest two things. On a practical level, giving tenure too early may be a bad thing. The South African system almost assumes tenure at the time of appointment; I don’t know anyone that has not received a permanent appointment for failure to publish. By extending the timing of tenure to at least five years, and making ‘not getting tenure’ a realistic threat, the South African government can get more research for their proverbial buck. At a more general level, the study clearly shows how important incentives are. A world where permanent employment is guaranteed with no performance appraisals is a world where output falls and innovation dies. Even academic economists sometimes need reminding of that.

**An edited version of this article originally appeared in the 21 June edition of finweek.

Written by Johan Fourie

July 19, 2018 at 07:30