Johan Fourie's blog

I'd rather be a comma than a fullstop

A happy 28 September

with 3 comments

Drenched: An unexpected rain storm added to the fun of a memorable day

Drenched: An unexpected rain storm added to the fun of a memorable day

On this day six years ago, Helanya said ‘yes’. It was in Riverside park, New York, on a bench with the inscription ‘…forever…when the wind whispers…’. (A tip for future proposal-hopefuls: I asked her to marry me on that spot because I couldn’t find the place where Kathleen Kelly meets Joe Fox in You’ve Got Mail, although we found it immediately afterwards, of course. It worked out well, though, that place was pretty crowded.) Much of that day is a blur. I remember that as we were walking home to our illegally-rented room-stay apartment on the East Side (those were the days before Airbnb), we got absolutely soaked in an unexpected autumn rain storm. We hid out in a Central Park cabin until the worst had subsided. But I was happy, she seemed happy, and that made me even more happy.

Today is another day for celebration. Tonight, Helanya will become an alumna of Utrecht University. She graduates with a Masters in Economics and Law. I am told she did pretty well. #proudhusband

Now to figure out how this thing called a dishwasher works…

(Also: a shout-out to my brother who got engaged last week! Advice: buy a dishwasher with only one button.)

Written by Johan Fourie

September 28, 2016 at 07:10

How FinTech must disrupt to be effective

leave a comment »

fintech

Although few would dispute that a strong financial industry is necessary for a thriving economy, the growth in finance over the last three decades, as a 2015 paper by Thomas Philippon in the American Economic Review shows, has not contributed to more efficient capital allocation. The cost of financial services – or more technically: the unit cost of financial intermediation – has remained roughly around 2% for the past 130 years in the US. This is not much different for other countries. Financial innovation has not benefited consumers in terms of lower costs as innovations in other industries have done.

Why this happens is not a theoretical puzzle. Innovation in finance is often geared towards rent-seeking and business stealing by incumbents rather than radical disruptions from new entrants. The problem is that such innovation does not improve the overall efficiency of the system; it results in private returns to incumbents but with low or no social returns. Although this is true for most industries, the ease of entry and competition in most industries make this less of a concern.

Finance, though, is characterised by high barriers to entry. The trend, at least since the 1990s, has been to consolidate further. The number of US banks and banking organisations fell, for example, by almost 30% between 1988 and 1997.

The South African banking sector followed roughly the same trajectory, with one exception: Capitec. Using improvements in information technology, Capitec has managed to reduce fees which have reshaped the South African banking landscape. But much of finance still remains expensive. Despite the new entrant, South African banks, like their US counterparts, generate large spreads on deposits. As Philippon argues in a recent NBER working paper, ‘finance could and should be much cheaper. In that respect, the puzzle is not that FinTech is happening now. The puzzle is why it did not happen earlier.’

That is why FinTech, or financial technology, is all the rage. The hope is that financial technology – including cryptocurrencies and the blockchain, new digital advisory and trading systems, artificial intelligence and machine learning, peer-to-peer lending, equity crowdfunding and mobile payment systems, to name a few – will result in innovation where the social returns surpass private returns. In other words, FinTech must disrupt to be effective. This sentiment is echoed in a wonderful new book, Money Changes Everything: How Finance Made Civilization Possible by William Goetzmann: ‘While finance can solve great problems, it also can threaten the status quo. It changes who turns to whom in an emergency. It reallocates wealth; it creates the potential for social mobility and social disruption.’

In July, Ronald Khan of BlackRock investment management firm gave the biennial Thys Visser Memorial Lecture at Stellenbosch University. Over three nights he delved into the details of investment history, theory and its future outlook. He explained how his firm is already using textual analysis and machine learning techniques – Big Data analysis – to improve their returns on global stock markets, and the impact this will have on the active management industry. I was surprised that not once did he mention that these innovations will lead to lower costs for consumers, but that the main purpose was to maintain the high returns (and cost structure) of investment firms.

This type of FinTech will not disrupt the industry, and thus won’t have the large social returns that creative destruction promises. It will most likely only reinforce the position of the incumbent. What is necessary, then, is to encourage start-ups to enter and compete with technologies that can disrupt. Here, according to Philippon, financial regulation can help. He emphasises three challenges that regulation can help address.

First, regulation can help FinTech firms enter a more level playing field. This is complex, however, as some parts of the financial system, like custody and securities settlement, are inherently concentrated. For example, blockchain technology can improve the efficiency of the market, but it could also restrict entry which will see the incumbent firm increase its rents.

Second, regulation must be forward looking. Regulators must identify the basic features or principles of what the FinTech industry must look like within a decade or two, and implement the appropriate regulations when the industry is still small. It will be difficult to regulate once the industry is already established.

Third, FinTech will require additional regulations to protect consumers. One example which Philippon use is the use of robot advisers for portfolio management. The legal challenge here is that no robot will provide fail-safe ‘advice’, but it is highly likely that these robots will be better than their human equivalents.

Just how FinTech will disrupt the South African finance industry is anyone’s guess. But as long as the incumbents develop their own products (or continue to buy young start-ups), don’t expect consumers to benefit soon. If consumers are to benefit, regulators must find a way to make entry and competition a reality in an increasingly complex and technologically advanced industry.

*An edited version of this first appeared in Finweek magazine of 25 August.

Written by Johan Fourie

September 20, 2016 at 06:10

How ‘movers and shakers’ move and shake

leave a comment »

Godfather

We know them well, those people who make things happen. Leaders, entrepreneurs, creators, builders, movers and shakers. Those who see opportunities where others might not, or take risks when others won’t. Some have built – or are building – global empires. Think Elon Musk or Jeff Bezos. Others make things happen at a smaller scale, perhaps in less glamorous industries or with a preference to avoid the limelight. But they are active: building a business, a political movement or fighting for a social cause.

Economists have been slow to understand what makes successful movers and shakers. Our theories generally assume that where profitable opportunities exist, a competitive market will allow entrepreneurs to fill the void. We care little about explaining the characteristics of those entrepreneurs who see the gap in the market first, and then manage to beat the competition. That is, until now.

A forthcoming paper in the Quarterly Journal of Economics attempts to do just that. The authors, Robert Akerlof (son of Federal Reserve Chair Janet Yellen and Nobel Prize winner George Akerlof) and Richard Holden, construct a mathematical model that has two types of agents: managers (or entrepreneurs – the ‘mover and shaker’) and investors. The managers form social connections with investors and then bid to buy control of an investment project. The winning bidder then has to make other investors aware of the project, and these investors then have to decide whether to invest in the project or not.

The model shows that of the many managers that start, there is only one ‘mover and shaker’ that emerges victorious, and that this manager earns a high payoff for doing so. The noteworthy contribution is that the success of this ‘mover and shaker’ depends on their network: “the most connected manager ends controlling the projects”. Other qualities, like a manager’s skill at running the project, their talent in communicating with investors, and the amount of capital they have personally, will also influence the outcome. But, most importantly, a larger network of connections may often compensate for a deficiency in one of these other dimensions.

The authors use William Zeckendorf, a well-known US property developer in the 1950s and 1960s, as a case in point. Zeckendorf was responsible for many ambitious building projects in the US and Canada, and his autobiography attributes his success to his social connections: “the greater the number of … groups … one could interconnect … the greater the profit”.

Akerlof and Holden’s model provide theoretical support for the increasing body of empirical evidence which shows that social networks matter, now and in the past. My PhD student, Christie Swanepoel, have found, for example, that those settler farmers in South Africa’s eighteenth-century Cape Colony that were well-off also had extensive networks of debt and credit.

What is clear, though, is that it is not necessarily the number of connections that matter, but the quality of those connections. In a recent summary of the literature on social networks, Matthew Jackson, Brian Rodgers and Yves Zenou argue that the network structure of a society can have large implications for how innovation and new ideas spread through it. “Not only does the average number of relationships per capita in a society matter, but also higher variance in connectivity matters since highly connected individuals can serve as hubs that facilitate diffusion and contagion.”

Understanding the network structure of a society is, therefore, essential for businesses and policy-makers. At the most basic level, marketers may find that a customer’s decision to buy is heavily influenced not only by the price or quality of the product, but who their customers are shopping with. (My grocery basket looks remarkably different when I do the groceries with or without my wife.)  At a more macro level, policy-makers should realise that networks can have a significant impact on the success of policies ranging from education, public health, segregation, finance, and even policing. Let’s take the latter as an example. Movers and shakers operate, of course, not only within the bounds of the legal economy. The mafia is a classic example of the success of an interlinked network. Using Swedish criminal records, two researchers at Stockholm University have shown that if the police target ‘key players’ – i.e. the mafia bosses – in the criminal network, they can reduce crime much more than if they had just focused on tracking the most active criminals or, worse, just tracked any criminal without considering their position in the network. Using network analysis in their crime fighting strategy, they suggest, the police can reduce crime by 37%.

From criminal networks to political networks to business networks, identifying movers and shakers, and the reasons for their success, can be a very useful strategy in fighting crime, securing votes or boosting profits. But networks vary across many dimensions, and so too its applications; size, clearly, isn’t everything. Understanding network structures in a diversity of social settings will be a fruitful avenue for future interdisciplinary research, fertile ground for the next academic ‘mover and shaker’.

*An edited version of this first appeared in Finweek magazine of 11 August.

Written by Johan Fourie

September 3, 2016 at 05:34

I, Krotoa

with one comment

Krotoa

Last Friday at around noon, I ended a class on European settlement at the Cape and the demise of the Khoesan by lamenting the lack of public acknowledgement for some of the Cape’s most famous Khoe inhabitants. Autshumao was one of the first translators and interlopers between the trading Dutch and local Khoesan clans. Gonnema was a proud leader of the Cochoqua, who fought the Dutch in three Khoe-Dutch Wars. And then there was Krotoa, Autshumao’s niece, who was brought up by the Van Riebeecks. Here is her short Wikipedia bio:

On 3 May 1662 Krotoa was baptised by a visiting parson, minister Petrus Sibelius, in the church inside the Fort de Goede Hoop. The witnesses were Roelof de Man and Pieter van der Stael. On 26 April 1664 she married a Danish surgeon by the name of Peter Havgard, whom the Dutch called Pieter van Meerhof. She was thereafter known as Eva van Meerhof. She was the first Khoikoi to marry according to Christian customs. There was a little party in the house of Zacharias Wagenaer. In May 1665, they left the Cape and went to Robben Island, where van Meerhof was appointed superintendent. The family briefly returned to the mainland in 1666 after the birth of Krotoa’s third child, in order to baptize the baby. Van Meerhoff was murdered on Madagascar on 27 February 1668 on an expedition.

Krotoa returned to the mainland on 30 September 1668 with her children. Suffering from alcoholism, she left the Castle in the settlement to be with her family in the kraals. In February 1669 she was imprisoned at the Castle and then banished to Robben Island. She returned to the mainland on many occasions just to find herself once more banished to Robben Island. In May 1673 she was allowed to baptise a child on the mainland. Three of her children survived infancy. She died on 29 July 1674 in the Cape and was buried on 30 September 1674 in the church in the Fort,

Pieternella and Salamon, Krotoa’s two youngest children from her marriage to van Meerhof, were taken to Mauritius in 1677. Pieternella, who was known as Pieternella Meerhof or Pieternella van die Kaap, later married Daniel Zaaijman, a VOC vegetable farmer from Vlissingen. They had four sons and four daughters, one of whom was named Eva, and the family moved back to the Cape in 1706.

I ended my class by suggesting the students consider these local figures when they think about renaming campus buildings, as had happened last year during the #FeesMustFall movement. What I had not known, was that at that exact moment, Krotoa’s spirit was returned to the Castle of Good Hope where her remains had been removed from a century ago. Here’s the news report:

Gathered around a tree at the Groote Kerk, they [traditional and religious leaders] burned an incense plant and beckoned for her soul to rise from the unmarked grave where her bones had been held.

Her remains had been removed from the grounds of the Castle of Good Hope, nearly a century after she was buried there.

On Friday, some of her descendants returned with her spirit to the castle.

A few months ago, after uncovering an old computer file that contained my genealogy, I discovered that the wife of my paternal great-grandfather – Wynand Breytenbach Fourie – was one Johanna Beatrix Fourie. Her maiden name: Zaaiman.

Many other South Africans also descend from Krotoa. It is in the math – here’s Stephen Fry on the topic. Almost all white South Africans today must have some non-European heritage, given the women of Khoe or slave (especially) origin who married Dutch or German or French (or, in Krotoa’s case, Danish) men at an early stage in the country’s history.

Although several novels have appeared that feature her – most famously Dan Sleigh’s Eilande and Dalene Matthee’s Pieternella van die Kaap – Krotoa, and the tumultuous times she lived in, has been largely neglected from popular discourse. Fortunately, that is changing. In the ceremony on Friday, she was variously described as a child labourer, a feminist, and a language fighter who helped create Afrikaans, even a martyr. An Afrikaans/Nama movie that feature her life is now in post-production stage. Armand Aucamp plays Jan van Riebeeck and Crystal Donna Roberts an older Krotoa.

But more should certainly be done. Monuments and renamed buildings and public places can play a role, but because Krotoa’s story is claimed by so many (as Heritage Consulatant Tracy Randle explains in this interview), these memorials will remain contested. Some activitists protested outside the Castle on Friday, for example. Last year, a bench which had Krotoa’s face engraved in mosaic art, and which was located at Krotoa Place, the small square at the intersection of Castle Street and St George’s Mall, was destroyed.

Much like 350 years ago, Krotoa embodies the tragedy and disillusionment but also the hopes and aspirations of our fractured society. Unshackled to anyone or any group, hers is our story.

Or, as Lara Kirsten observes in her poem Vir Krotoa (For Krotoa):

in haar skyn die hoop
wat nog by ons mense spook

(in her shines the hope that still frightens our people)

Written by Johan Fourie

August 25, 2016 at 08:46

What you need to know about South African exporters

leave a comment »

Ngqura-South-Africa

One of the most profound (and often most difficult to teach) insights in economics is the idea that trade is not a zero-sum game. Just as my salary allow me to purchase all the things I cannot (or don’t want to) produce on my own, so do our exports (of the things we are good at) allow us to buy imports (of the things we are not good at). We do not work simply to accumulate a salary; we work because it allows us to buy nice things.

In other words, we are not mercantilists. A mercantilist hopes to export as much as possible and restrict imports. A large, positive trade balance, they believe, will ‘make a nation rich’. Not so. Mercantilism is not why England experienced an Industrial Revolution, and it is not why Africa will grow rich. Having more exports than imports over the long-run simply means that a country’s citizens are not reaping the fruits of their labour. To return to the earlier metaphor: it’s like earning a salary but not being allowed to purchase anything with it.

It’s easy to sell mercantilist ideas, though. Here is Mr Wilmot in the Legislative Council of the Cape Colony in August 1891: ‘Let us be wise in time, and really patriotic, grow our food, encourage our own industries…’. Or Mr Merriman in the same debate: ‘The best form of Protection was for everybody to set to and buy as much as they could in the Colony. (Hear, hear.)’ Or Mr Van den Heever: ‘The question was to keep, through fostering Colonial industries, the money in the Colony’.

You don’t need to go too far to find similar sentiments in contemporary debates. The clothing and textile industry recently held an Imbizo to discuss ways to grow the industry. Some of the comments on news websites reporting this story summarise the sentiment I often find in my classes too: ‘Chinese imports killed the textile industry in South Africa’, ‘You forget the greedy retailers preferring the cheapest suppliers’, ‘All we need is a 90% buy local campaign’, ‘With a bit of good will and assistance in the form of import restrictions we would all benefit. Jobs, better quality and some pride in the achievement would do all of us some good!’.

Again, not true. Aside from the small detail that the industry has received support since the 1930s, long before China was a competitive force, we should rather export what we are good at, and import the cheap goods which we aren’t relatively good at. (Also, Chinese clothes are becoming increasingly expensive as Chinese wages increase. We are increasingly importing clothes from other parts of Asia, and Africa.)

But how do we do this? Two recent UNU-Wider working papers by South Africa’s foremost trade economists help to answer exactly this question. The first, by a team of economists from North-West University and Stellenbosch University, use a new firm-level dataset of South African manufacturers to understand exporting firms better. They report five key findings: 1) Export participation is rare – only 19% of South African firms export. 2) Exporters are systematically different to non-exporting firms – they are larger, more labour productive, pay higher wages, and are more capital and intermediate-input intensive than non-exports. I will lump all these things together and just say they are ‘better’. 3) Firms that export to multiple destinations and across multiple product lines are ‘better’ across all the dimensions listed above. 4) Exporters to countries outside Africa are ‘better’ across the same dimensions than exporters to countries within Africa. 5) Firms that already export are most likely to grow the total value of exports than new entrants.

The second paper, by researchers at the University of Cape Town and the University of Bari in Italy, use similar data to show that the most productive South African firms are the ones that both import and export. Importing from advanced economies especially makes local firms more productive, and more likely to export at greater scale, scope and value. The authors argue that access for domestic firms to a variety of intermediate inputs from abroad can be crucial to raising local employment and gaining access to new technologies.

The takeaway: South Africa’s exporters need imports to be competitive. We can only grow our local exporting firms by giving them access to the cheapest inputs and the best technologies, and these are often found outside South Africa. Much like our 19th-century ancestors, our zest to expand exports will only inflict harm if we adhere to the mercantilist sentiment by restricting imports.

*An edited version of this first appeared in Finweek magazine of 14 July.

Written by Johan Fourie

August 11, 2016 at 09:13

Voice Day

with one comment

Voting opens at Stellenbosch Town Hall on 3 Aug 2016 in the local municipal elections.

Voting opened at 7h00 at Stellenbosch Town Hall in the local municipal elections.

In Afrikaans, the same word is used for ‘vote’ and ‘voice’ – stem. Today South Africans vote in the local government elections. But it is more than that: it is a day that they will voice their hopes, frustrations, and visions for a better South Africa.

Because, 22 years into democracy, there is now more than ever a need to signal to the ruling alliance that they cannot take their tenure for granted. There is no doubt that those in power have become too emboldened by their own success; weak political competition has provided fertile ground for corruption and mismanagement. As always, the squandering of public funds has hurt the poorest the most.

Although this won’t be an election about macro policy, the failure of the ANC (since Zuma) to stimulate growth (and its incompetence to root out corruption) will deliver more votes for the two opposition parties, the DA and the EFF. The two central questions are: which opposition party will voters prefer, and how many will make the switch? The two parties are run by young men with very different visions of a future South Africa.

In this election, the question should be which of the two can provide the services that constituents deserve. But a careful consideration of this question, unfortunately, is probably not how most of us make decisions. This is not unique to South Africa, of course. As this John Oliver excerpt shows, feelings, nowadays, trump facts. Also: see Brexit.

Today’s municipal elections will be especially heavily contested in three metropolitan areas: Nelson Mandela Bay, Tshwane and Johannesburg. If an opposition party (or a coalition of opposition parties) secures a win in these major cities, especially in Tshwane and Johannesburg, it will signal a fundamental shift in politics in South Africa. But don’t underestimate the resolve of the ruling ANC: the liberation movement continue to be a powerful brand for most South Africans, despite the actions of the man in charge.

Today is stemdag in South Africa. It is a day to vote, yes, but, most importantly, it is a day to make our voices heard.

Written by Johan Fourie

August 3, 2016 at 08:14

How a pair of glasses – and a cup of tea – can change the world

leave a comment »

Cup of tea 4

I got my first set of eyeglasses at the age of 16. I vividly remember sitting at the back of the physics class and squinting to read the formula on the board, and the embarrassment of having to move to the front. I also vividly remember the joy of facing my friend in the nets when, wearing new contact lenses, I could finally ‘read’ his spinners.

Invented in Italy in the 13th century, eyeglasses were initially used by scribes to allow them to remain productive long after their natural eyesight had deteriorated. But the technology improved over time, and has allowed me and many generations of young and old, male and female, doctors, soldiers, clerks, truck drivers, computer scientists and athletes with hyperopia (farsightedness) to remain productive members of society.

But many millions are not so lucky. The World Health Organization estimates that at least 20 million Africans are visually impaired, and hopes to reduce this figure by 25% by 2020. Many of these are children in schools, struggling to read the board or their prescribed books. This is an example, it seems, where developmental efforts should be focused: an inexpensive solution with long-term benefits for the recipients.

A new study published in the Journal of Development Economics attempts to measure the gains from just such a programme. Paul Glewwe, Albert Park and Meng Zhao report the results from a randomized control trial in Western China that offered free eyeglasses to rural primary school students. Almost 10% of primary school students in these areas have poor vision, but very few of them wear glasses. The authors find that wearing eyeglasses for one academic year increased the average test scores of students with poor vision by an amount equivalent to 0.3 to 0.5 years of additional education.

That is a massive economic return to a small investment, which should raise the question: Why don’t parents make this investment themselves? For poorer families, it seems that eyeglasses are still too expensive. But other factors matter too: parents often lack awareness of their children’s vision problems, and it seems like girls are more likely to refuse wearing glasses. Maybe it’s time to introduce more glasses-wearing female characters in children’s programmes. (Apart from 78-year old Carl in Up, I can think of few Pixar/Disney movies with a lead character with glasses.)

This type of research allows policy-makers to identify the low-hanging fruit of development. Whereas more textbooks, or higher teacher salaries, or even deworming programmes (all policies that have been tested in schools) can be expensive, free eyeglasses will, with a small initial investment, yield large returns for the (often marginalised) individual and society.

Initiatives to improve health can have many other benefits too. Randomized control trials have been done on the impact of everything from washing hands and better toilets, to home-visitation programmes for teenage mothers and promotion programmes aimed at reducing open defecation. (Eliminating open defecation in rural villages, it is found, can increase child height significantly.)

South African researchers are making progress in identifying the low-hanging fruit for local communities. Ronelle Burger and Laura Rossouw, two researchers at Stellenbosch University, are investigating the impact of the Thula Baba Box, a box filled with baby products, clothes, information brochures, basic medicines, toys and other items, and given to young mothers. If the results show a large, positive impact on maternal and child health, there is no reason why the Thula Baba Box cannot be provided, free of charge, to all mothers in the country. Not only is it morally just, but it is a clever investment strategy too.

Sometimes, though, the low-hanging fruit can be as basic as a cup of tea. A new study by Francisca Antman of the University of Colorado-Boulder investigates the custom of tea drinking in 18th century England. One of the unintended consequences of tea drinking, which happened even among the lower classes, was an increase in the consumption of boiled water. She finds that regions in England with lower initial water quality had larger declines in mortality after tea drinking became widespread. This ‘accidental improvement’ in public health, she argues, happened at the same time as people were moving into cities, thus providing a healthy pool of labour needed for industrialization.

The next time you sit down with a cup of tea and a good book (remember those glasses!), remember the profound effect those simple ‘technologies’ have had, and, with the help of researchers and government funding, are still likely to have in much of the developing world.

*An edited version of this first appeared in Finweek magazine of 30 June.