Our perceptions about expected inflation have important consequences. It influences how we (or the trade unions we belong to) negotiate wages, our willingness to buy a house, and businesses’ decisions to invest or not.
Inflation determines how many goods and services we can purchase with our current salary. Inflation expectations, however, determine whether future goods and services will be more or less affordable and therefore how we will behave today. If we believe inflation will be 10% next year and our salary increase only 5% (leading to a decline in our purchasing power), we might be less likely to buy that new car.
Measuring inflation expectations and determining what influences peoples’ inflation expectations is therefore important to policy makers, notably, in South Africa’s case, the SA Reserve Bank (SARB).
Controlling inflation expectations is the first step to controlling inflation. If there is a shock to a particular price (such as oil), the macroeconomic consequences will be limited if South Africans believe that Governor Lesetja Kganyago and his Monetary Policy Committee (MPC) will bring inflation under control. If the response of the rest of the economy to the oil shock is muted, the process of inflation won’t get under way.
What do we know about the determinants of inflation expectations? Not much, it turns out. It’s quite difficult to measure inflation expectations. Surveys are often used, but usually of economists in the financial sector; they don’t necessarily gauge the perceptions of the proverbial man-on-the-street.
A new paper published in Economic Modelling by Stellenbosch University economist Monique Reid begins to shed light on the topic. She uses ten years of data from an inflation expectations survey by the Bureau of Economic Research to investigate how quickly the message from the SARB trickles down to the general public. Information is ‘sticky’, Reid finds, and for some groups more than others: financial analysts, for example, adjust their expectations quicker and more accurately than businesses and labour unions. This is because financial analysts have the ability and skill to use and understand other sources of information (like MPC announcements or international economic indicators) than simply the past inflation rate.
A recent paper by two US economists, Ulrike Malmendier and Stefan Nagel, in the The Quarterly Journal of Economics shows that even amongst the general public there is significant variation in inflation expectations. They find that own life experiences determine how individuals form expectations of the future. How would this work?
Say inflation over the last five years has been lower than the average for the last three decades. They show, using 57 years of data of US inflation expectations, that a young person who entered the job market five years ago would be more likely to expect lower inflation than someone who had been employed for longer and had thus experienced both high and low inflation regimes.
If this is true for SA, young South Africans are more likely to expect lower inflation, because the inflation rate in the sixteen years between 1999 (the year SARB started with inflation-targeting) and 2014 averaged 5.2%. South Africans entering the job market during this period would have experienced a low-inflation regime. But those entering the job market in the sixteen years between 1976 and 1991 witnessed an average inflation rate of 14.1%.
This has important implications for policy makers, financial sector managers and their clients. Behavioural economists repeatedly demonstrate that people have biases that they are often unaware of (in this case, a mix of the availability and familiarity heuristics). Younger financial advisors may weigh the recent low-inflation regime more heavily than older advisors would. An obvious way to diffuse such unknown biases is to have teams with advisors of different ages.
Such biases also influence household borrowing and lending behaviour. Younger people may, for example, be more inclined to choose variable-rate investments given that during their lived experience rates never varied dramatically. Older homeowners who remember the trauma of the 1998-rate hike, may prefer fixed-rate investments.
Policy makers in the SARB need to take heed of these findings and include demographic characteristics of consumers into their models of inflation expectations.
*This article first appeared in the Finweek magazine of 29 October.
South Africans are gearing up for a tough summer. While loadshedding (the frequent power shortages that plagued the country since 2008) has eased, a new issue came to the fore this week: watershedding. In areas of Germiston and the East Rand, water shortages have been reported and watershedding between 10am and 3pm is on the cards. While the heatwave and drought across the country are the immediate cause of the shortages, there are far deeper structural problems that is likely to make watershedding a common feature of daily life in South Africa in the near future.
This should not come as a surprise. There has been several warnings in the media about the likelihood of watershedding over the past few years, well before the heatwave and drought made the situation acute. On 25 June, Niki Moore wrote the following in the Daily Maverick:
The reason for any potential water shedding is almost a mirror image of why we have load-shedding. Since 1994, millions of people have been added to the water grid with very little thought being given to increasing the capacity of water storage or water intake plants. Combined with mismanagement of water, non-payment for water, huge water wastage through lack of maintenance and neglect, and poor governance through corruption, we are facing a high noon of water shortages that might start affecting us in as soon as a few months.
Well, that was pretty accurate. But watershedding – a shortage of water – is only one concern. The more serious one is the pollution of existing drinking water, which is likely to have serious health consequences. Here is Anthony Turton on the water crisis:
The possibility of major public health crises in the short to medium term is growing and can no longer be discounted. We could soon see a major bloom of toxic cyanobacteria, especially in the light of the increased water temperatures likely to result from the El Nino Southern Oscillation now evident in southern Africa. The growing risk to both companies and individuals needs to be anticipated and understood, so that remedial action can be taken as quickly and effectively as possible.
The reason this is unlikely to happen, he argues, is political:
All available data suggests there is little in South Africa’s water sector to be optimistic about. The level of politicisation has become so high that decision-making is no longer rooted in hydrological realities. Ideology is regarded as paramount, while reality counts only as a secondary factor. The ideological filters in place make it very difficult to carry out any serious technical assessment of water quality or management. In addition, no serious attempt is currently in place to embark on evidence-based policy reforms.
Perhaps the greatest failure of the new order since 1994 has been deteriorating water quality. This has been caused primarily by massive failures in the management of municipal wastewater treatment plants, which have made the State the biggest polluter of water in the country. This looming disaster could have been avoided by more rational and less ideologically-driven policy choices. We need to challenge this approach if we are to re-invigorate our democracy and extricate ourselves from the horns of the dilemma arising from the politicisation of water in a highly water-constrained national economy.
So what can be done about this? The easy but unsatisfactory answer is that local government elections are next year, and South Africans should use this opportunity to demand change. But much of the problem is more systemic and pervasive than local governments can solve on their own; as Turton argues, the “first essential requirement is a new and technically robust national strategic plan for managing, conserving, and augmenting the country’s limited water supplies”. National elections, though, are only in 2018, and it is difficult to envisage dramatic change.
Instead, South Africans will have to find solutions to the water crisis outside the remit of government. This is difficult with a water utility, which is the epitome of a natural monopoly and the reason the state is almost always involved. But just as the case with loadshedding, technology may provide a solution.
Last night, I watched a 2014 documentary about the SlingShot, a device developed by the creator of the Segway, Dean Kamen, to purify water. Much like Elon Musk has created the PowerWall to allow households access to electricity at all times, the SlingShot is a device which would allow anyone able to convert contaminated and filthy water (or even seawater) into drinkable water. The device has been tested in Ghana, South Africa and in several Latin American countries. It has the support of Bill Clinton and the CEO of Coca-Cola.
I’m a technoptimist. I don’t know whether this particular technology will be successful, but as Estian Calitz and I argued in this 2009 paper, technology will allow public goods to be increasingly viewed as private goods, or natural monopolies to be made into competitive industries. Cell phones are a good example, breaking down the need to have large, fixed-line networks that doesn’t make sense to build more than once: i.e. the natural monopoly of Telkom. Elon Musk’s PowerWall, coupled with renewable energy generation, will break the natural monopoly of Eskom. Perhaps Kamen’s SlingShot (or a similar device) will do the same for water.
South Africans have many reasons to be pessimistic about the future. But, as David Landes writes in the Wealth and Poverty of Nations, it pays to be optimistic.
In this world, the optimists have it, not because they are always right, but because they are positive. Even when they are wrong they are positive, and that is the way of achievement, correction, improvement, and success. Educated, eyes-open optimism pays; pessimism can only offer the empty consolation of being right.
Maybe the watershed moment for South Africa is when we realise that the promise of a better life for all lies not in the next elections, but instead in embracing new technologies.
I had the good fortune last week of meeting Leonard Wantchekon, Professor of Economics at Princeton University. His is an incredible story: student protester in Benin, sent to prison, tortured, escaped, fled to Canada, shifted from math to economics, and moved up the ranks to be professor at an Ivy League university.
But apart from these gripping experiences, he noted how important the study of mathematics was in his life, and still is for many students in Benin, a country ranked 167th poorest out of 187 countries in the world. That is why six of the top ten mathematicians in Africa are from Benin (his fact), and why he has opened the African School of Economics in the country.
This got me thinking about a topic I’ve written on before: what do the best and brightest South African high school matriculants choose to study? Of course, their choice is influenced by a multitude of factors. Parents have certain expectations, friends weight in, teachers have their say and there are often financial realities at play. They see adverts for different occupations in newspapers and online, they watch series which portray romanticized images of certain careers, and they dream about working with people, or with animals, or ‘not-in-an-office’. (If I had a Rand for every time a student told me that they just don’t want to work in an office… and these are Commerce students. Buddy, you’ll plead for an office after you’ve spent a few years in a cubicle!)
But a new paper by Biniam Bedasso of ERSA suggests that there are other factors, too, which shape our behaviour. Your science teacher is one. The most significant determinant of choosing a major at the University of Cape Town, according to Bedasso, is the number of science courses an applicant took in high school. The more science courses you take, the more likely you are to choose high-earning degrees like Engineering. Not all schools, however, are equally endowed with good science teachers, which means that inequalities at school translate into inequalities at university: black students who are more likely to go to schools with no science teachers are more likely to end up choosing degrees in the Arts and Humanities, for example.
Peer pressure is another factor that influences degree choice. Using enrollment at UCT between 2010 and 2013, Bedasso finds that if your friends choose a Humanities degree, you are 10% more likely than someone with your exact same characteristics that live elsewhere to also choose a Humanities degree. In his words:
Neighbourhood effects shape the choice of individuals through the influence of near-peer role models. Correcting for possible clustering of unobserved preferences along postcodes, a one standard deviation increase in the ratio of near-peers who were admitted to a certain faculty during the last three years is shown to increase the probability of choosing the same faculty by around 10 percent.
He also finds, interestingly, that politics matter. Black South African matriculants are more likely to choose Commerce or Arts degrees, instead of Engineering or Science, if they live in a neighbourhood that is governed by the ANC. It’s difficult to think why this would be: perhaps this confirms the old adage that it is not what you know but who you know. In economics-speak: social capital trumps human capital.
As we would expect, the quality of high school attended also matters. Says Bedasso: “High-achieving applicants who come from less competitive high schools tend to choose high-return majors than similar students from more competitive high schools.” So, if you’re from a poor school but do very well, you are more likely to study Math and Science than if you do equally well in a good school.
Surprisingly, whites weigh expected earnings more heavily in their choice of degree: “White applicants are more responsive to differentials in aptitude-adjusted expected earnings than black applicants.” In other words, whites are more likely to switch to a degree where they can earn a higher salary.
Bedasso thinks these results have profound implications for South Africa:
The gravitation of the children of the political elites towards less technical majors may deprive the political class of sufficient interest in productive activities. This, in turn, is likely to leave the elites with little incentives to respect property rights in the future. Hence, policy measures that will improve the availability of science education at high school level or account for the effect of near-peer role models in college admissions may go a long way in terms of shaping the path of economic development.
I think this is stretching the results, and would be more optimistic. Successful businesses require more than just breakthrough innovations; many of our top accountants and business students end up running technology companies because they know that running a business is not an algorithm to be programmed for success. As a new wave of young, successful black South African entrepreneurs strut their stuff in the business world and the barriers to entrepreneurial and managerial success appear less daunting, the attractiveness of a political career (and academic) will seem less appealing. This young generation, I would argue, is unlikely to cede property rights.
That being said, the need to promote math and science at schools remains imperative. We need more scientists, mathematicians, engineers, and computer programmers to remain competitive in the knowledge economy. We should start by appointing more and better math and science teachers, as Bedasso’s evidence suggests. It would also help if parents support their children to choose these (tougher) subjects. And if friends encourage each other.
I don’t know how to incentivize this change in behaviour. What I do know is that math and science can open doors that, if they remain locked, bar entry to a better life. Just ask a former prisoner from Benin.
A few months ago, I had one of the most gratifying experiences of my academic career, as a member of an appointment committee at Stellenbosch University. We had two candidates for a tenure-track position in economic history within the Department of Economics. Both were Masters students within our department, but the quality of the interviews would have suggested otherwise: the candidates were clearly passionate, eloquent and thoughtful in their answers. I remember thinking afterwards of the story of Paul Samuelson’s dissertation defense at Harvard, when one member of the committee, the great Joseph Schumpeter turned to another member, Nobel Laureate Wassily Leontief, and asked, ‘Well, Wassily, do you think we have passed?’. And it’s true: the questions both candidates asked of us were often more grueling than what we asked them.
The point is, if we had the resources, there was no reason not to appoint both. In fact, that was the recommendation of several members of the appointment committee.
But we couldn’t. Because of something called the Budget Constraint.
This week, on campuses across South Africa, students will continue their protest against higher tuition fees. Classes at Wits University were called off for several days last week as students demanded that a fee increase of 10.5% for next year be rescinded. Similar protests are happening as I write his at UCT and Rhodes and Stellenbosch in the face of similar increases.
In some of the comments I’ve read, the increases are seen as a sinister way to exclude poor students, almost all black, from South Africa’s elite universities. (This is happening at other universities too: Fort Hare has proposed an increase in registration fees of 42% and an increase in tuition fees of 15%. As I write here, there are other serious issues at Fort Hare too.) But this sinister explanation is simply not true: universities are desperate to attract the best talent and ensure their success. What students often don’t know is that a university forgoes its government subsidy when a student fails, which covers about two-thirds of the total cost. Failure is expensive, both for the student and the university.
But it is also true that a 10.5% hike is close to double inflation. And attending university is already incredibly expensive. By my estimates, at least 95% of South Africans cannot afford to spend R100 000 a year to send their kids to varsity (which would include tuition fees, accommodation, textbooks, and spending money). To give some context, only 4% of South African households earn R500 000 per year or more. Most students need a loan, as I did and almost all of my friends. But we were the lucky ones. Many students’ parents simply don’t have the collateral to get loans. Some parents saved throughout their adult lives, forgoing many things to give their kids the opportunity of a better life. Here’s a story of one of our students:
My dad always reminiscences on the poverty of the 70s in KZN, when my grandfather couldn’t get a job in Johannesburg. My grandfather would sell one of his cows, so that all the children would at least have a pencil to write with and a book to write in. This meant that there was never any money left over for shoes. Dad always talks about the frost bites in winter and how he couldn’t feel his toes on his way to school. But, all he knew was that he had to get to school .
From those harsh experiences, my parents have instilled in us a deep sense of love, respect and appreciation for education. At some point my sister and I were both at Wits and UCT respectively and my parents definitely felt the financial burden to get us through school. It wasn’t easy, but all they knew was that they had to get us through varsity. We thank God that they could. I know that a 10.5% increase in fees would have compromised their ability to get us through school. Some of my friends were not so fortunate. I’ve seen many friends and colleagues being financially excluded in the middle of their degrees.
The #witsfeesmustfall campaign is legitimate. For some a degree is just a paper, yet for another that degree is a ticket out of poverty.
So how should universities balance fee increases with the need to grow their talent pools, specifically of black staff? There are only three other alternatives: 1) cut budget items elsewhere, 2) raise income from third party sources, or 3) greater transfers from national government.
The first is dangerous. The first item on any budget – for a university, but also for a country or a household – that is usually slashed in the face of pressure is new infrastructure and maintenance of existing infrastructure. Consider this: when your monthly salary suddenly falls, what will you cut first? Probably the new tires for your car. You can always do that next year, right? Governments do the same: we can always build that power plant next year, or skip the maintenance on those roads for when we have a bigger budget. Many campuses across South Africa already struggle with dilapidated facilities. Infrastructure construction has not kept pace with student enrollment, meaning that students often have to sit on the floor in lectures. The point is: there is very little scope in university budgets for further fiscal restraint.
Raising third-stream incomes is a better alternative. But this type of income is often a consequence rather than a cause of excellence. Only the top universities will be able to attract third-stream incomes, either from donors or in collaboration with the private sector. Donor money is also incredibly contingent: donors want to add their names to new buildings, or see their donations spent on sport teams, or pay for bursaries. Few want to donate money to pay salaries. Third-stream incomes through collaborations with the private sector can provide additional capacity in some industries – like engineering – but even here the effect on the total budget is limited.
The only alternative is to increase government funding, which in South Africa lags behind what other countries spend on tertiary education. Here is Belinda Bozzoli earlier this year in the Financial Mail:
The fundamental problem is that the anchor of it all, the government subsidy, is low in absolute terms, by world standards. SA university funding languishes at levels below those of dozens of emerging economies. At a mere 0,6% of GDP it is dwarfed by the levels in Saudi Arabia (2,3%), Russia (1,8%), Argentina (1,4%) and India (1,3%). Furthermore, SA’s expenditure on higher education is a mere 12% of expenditure on education as a whole, whereas for the rest of Africa it is 20%, for OECD countries it is a massive 23,4%, and for the rest of the world it is 19,8%.
To make it worse, the core subsidy for universities has consistently fallen in real terms in relation to student numbers, which have, in turn, risen dramatically. This has skewed the entire model. The fall began under apartheid, when many free-thinking universities were regarded with suspicion, and continued apace under the ANC, which continues to choose to place nearly all of its education funding into schools.
Given the difficult environment Minister Nhlanhla Nene will face this week in his Medium Term Budget Policy Statement, with growth slowing, tax income falling, and few prospects of a reversal, a sudden increase in higher education funding is unlikely.
So what to do? As Dan de Kadt, a PhD student in Political Science at MIT remarked on Facebook this week, universities face a new impossible trinity: appoint more black scholars, reduce student fees, or cut costs through outsourcing and maintenance on facilities. An impossible trinity means that you can only have two of the three: so, which two will it be? That is why university management is such a difficult task: there has been protests on campuses against all three issues this year, and I’ve seen a poster on Twitter this morning demanding all three. This is like asking for healthy food, a lot of food and cheap food, all at the same time. It is an impossible trinity. You can always only have two of the three. (I know which two I chose as a student.)
The Budget Constraint is a reality that we cannot wish away. We can label it elitist, racist, capitalist, colonialist, and neoliberal, but it won’t disappear, not for a university, not for a country (as Minister Nene will try and convince parliament this week) and also not at the household level. The Budget Constraint is the reason poor families struggle to afford sending their kids to university. We have to find solutions within the Budget Constraint.
So what is the solution? I don’t think we can afford to relax spending on maintenance while running university facilities into the ground. (If we do, we also lose the ability to collect third-stream incomes, which further exacerbate the problems.) There is a trade-off between hiring more black academics (i.e. transforming faster) and lowering student fees. My preference is for the first, because I think we can think more creatively about the second.
I would argue for better targeted support for poorer students, instead of a blanket reduction in student fees. Here is my colleague, Eldridge Moses, on the topic:
Would bursaries and other forms of economic alleviation instruments not be more targeted interventions than the blunt instrument of blanket fee reductions or freezes? I would strongly suggest more progressive thinking on inequality reduction. A blanket freeze on fees benefits the rich way more than it does the poor due to access issues.
Eldridge is correct. Reducing student fees will benefit the wealthy more than poorer students because tertiary education is more accessible to the rich. So I would take a different approach and increase student fees by 25%. Yes, you read that right: 25%! Then I would use the additional 15% income from these fee increases to provide bursaries for students that come from poor backgrounds. A multi-tier or sliding scale system – where, for example, those with parents earning above R500 000 per annum pay R150 000, and those earning less than R50 000 pay R15 000 – is a far more equitable option than scrapping fee increases for all. And there will be additional funds to appoint black staff.
The sad reality is that the pressure to have a blanket fee reduction for all students will not only benefit wealthy students more than poor students, but it will inhibit universities’ ability to appoint excellent, young black scholars. In the job interview I took part in a few months ago, both candidates were female, black South Africans. Due to the Budget Constraint, however, we could appoint only one. The other candidate, equally brilliant, had a grandfather who struggled to get a job in Johannesburg and therefore had to sell his most prized possession to give his children, and grandchildren, the education they deserve.
I say: Let’s get a better fee system, and appoint his granddaughter.
Imagine you’re a young entrepreneur and have built up a profitable IT business. You can expand either by going at it alone, or partnering with a more established, perhaps international firm. Which should you choose?
Sign up with the multinational.
That’s the advice of a new NBER Working Paper ‘Does Foreign Entry Spur Innovation?’ by three US trade economists, Yuriy Gorodnichenko, Jan Svejnar and Katherine Terrell. They find, using a large firm-level dataset of eighteen countries, that foreign direct investment (FDI) have a significantly positive impact on product and technology innovation of domestic firms in emerging markets. In other words, those domestic firms that receive FDI become more innovative over time than other domestic firms.
This isn’t surprising. Trade economists have long argued that increased trade and investment boosts domestic firms’ productivity. Foreign firms tend to bring new innovative ideas, technology and management practices that replace potentially inefficient practices of domestic firms. When SA opened up to the world after the isolation of the apartheid years, the argument goes, local firms’ productivity increased significantly because they suddenly had to compete against more competitive producers.
This was difficult to prove empirically: industry-wide statistics are often too vague to give reliable evidence that FDI has a positive impact, and some firms may close due to tougher competition. But this study uses firm-level data, measuring the size of spillover effects from the international partner to the domestic firm, and documents the impact on innovation instead of noisy productivity estimates.
The authors found that the benefits of FDI don’t accrue to other firms in the industry, but is localised to the domestic firms immediately connected to the foreign firms. They conclude: Simply being in an industry populated by foreign firms generally has a weak, if any, effect on innovation. In fact, if our entrepreneur doesn’t get a foreign partner but his competitors do, he may find himself out of business.
This study is important for policy makers too. Firstly, encouraging FDI is critical to growing an economy. Public (and political) sentiment is often against foreign competition; consider the long (and expensive) deliberations preceding the Walmart-Massmart merger. Let me be unequivocal about this: this study shows that foreign competition drives innovation in domestic firms, making them more competitive and longer-lasting. We need more, not less, of it.
The authors also found, in short, that FDI from rich countries is better. Again, this makes intuitive sense. Firms in the rich world already operate at the technological frontier. Now, for the first time, it has found empirical support. One wonders about SA’s attempts to cosy up to our BRICS partners instead of encouraging investment from our traditional (and still largest) trade partners. If we believe the results of this study FDI from China is less beneficial for SA than from the US or Germany.
Another, perhaps more controversial, finding: because the benefits of FDI only accrue to firms within the supply chain of the acquired domestic firm, it might mean that policies which require foreign firms to have significant local content (for example, a rule which states 20% of a firms’ inputs must be locally made) may be justified. Minister Rob Davies will be happy to hear this.
But he’ll first need to get foreign firms excited about SA. In late July, he introduced the Promotion and Protection of Investment Bill in parliament as an attempt to do just that. The bill aims to protect and promote investment, but, sadly, falls short. As Webber Wentzel’s Peter Leon argues, it contains few of the protections one would typically find in a bilateral investment treaty. ‘Fair and equitable’ treatment for investors, such as market value compensation in the event of expropriation, are missing.
The rapid growth of emerging markets over the last two decades seems to be tapering off. SA cannot rely on foreign firms entering the country seeking investment opportunities as had happened during the good times. We have to up our game and become more attractive. That means improving all sorts of things, like skills and infrastructure, but the low-hanging fruit of investment bills and secure property rights should be top priority.
*This column first appeared in the 1 October edition of Finweek.
After missing his flight and his much-anticipated Cape Town lecture, Thomas Piketty, the French economist who published the widely-acclaimed and best-selling Capital in the Twenty-First Century last year, arrived in South Africa to deliver a lecture at Wits University yesterday. And he did not disappoint, calling for higher minimum wages, land redistribution and, echoing his call in Capital, a wealth tax. But his most stinging critique he reserved, it seems, for economists: “No such science as economics”, one conference attendee tweeted Piketty, “everyone can have an opinion. Applause from room full of social scientists & historians”.
I can understand the frustration with economists. They write in a language few other social scientists understand. They tend to support a system of wealth creation that is not very hipster. And Piketty is right: For a while in the previous century economists may have believed that economics is a science on par with physics, and that the economy can be manipulated much like a giant computer. But for the most part, economists have now realised (and incorporated into our models) the knowledge that people are not always rational agents, and that they make decisions within social settings where context and institutions matter as much as incentives. Witness the rise of behavioural economics and the renaissance of economic history.
Yet bashing economics is a favourite past-time of social scientists in South Africa. At the recent South Africa Historical Society conference in Stellenbosch, a historian and one of the organisers of yesterday’s Piketty event suggested to a room full of his colleagues and students that instead of studying economics, historians should just read more. I agree that we all should read more, but why deride economics in the process?
It is difficult to not attribute such ridicule from social scientists and historians to a fear of numbers. Because what economists – and certainly most South African economists – do, is measure. We measure the increase in prices in order to determine the most appropriate level for the interest rate. We measure the quality of schools to ascertain why kids drop out too early, or why many of our high-school graduates struggle to find jobs. We measure the international trade of goods and services to understand competitiveness and adjust tariffs. And yes, we measure income levels to say something about inequality and its historical evolution. Still, there is much we don’t yet measure, which is why we need more (historical) statistics, not less, much like Piketty called for yesterday: “We need data to have a better conversation about inequality in South Africa.”
More data allow us to test our hypotheses about how the world works. Because we believe, much like other (social) scientists do, that theories help us to explain and understand the world better than simply ‘having an opinion’. Astrologers have an opinion. Homeopaths have an opinion. But I don’t rely on them to tell me why I am ill. Social scientists (yes, all of them, even historians) construct theories about how the world works, and then use evidence (quantitative or qualitative) to test the relevance of these theories.
Which is why I find it surprising that very few of the commentators at yesterday’s Piketty lecture actually engaged with Piketty’s theory at all. I assume everyone actually read the book – or at least the first chapter that summarises the thesis quite nicely. But did any take the trouble to read at least some of the critiques? This paper is a good start, written by an economist and political scientist. It actually uses South Africa as a case study (in comparison to Sweden) to show why Piketty’s measurement of inequality misrepresents what actually happened in both countries during the twentieth century. Or there is this (rather long) response from Deirdre McCloskey, certainly no proponent of the mathematical direction economics took in the 80s but also not averse to fighting with numbers.
And why did no one – not even Piketty himself – make an effort to gather historical data on wealth inequality in South Africa? With little effort and using Reserve Bank data, a PhD student at Stellenbosch could calculate wealth and income rates for South Africa going back to 1975. Instead of finding the same U-shaped rebound in private accumulated wealth as Piketty did for rich countries, she found that in South Africa the wealth-to-income ratio has been relatively low and stable at about 250% for the past 40 years.
This is important not only because it shows that social context and institutions matter, but because it could have very real policy implications. The Davis Tax Committee’s recent recommendation on estate duties is partly motivated by extensive references to Piketty’s book. Acccording to the Financial Mail, the committee suggests that the rules should change so that tax revenue from estate duties increases by about 10 times. Here’s Stan du Plessis, dean of Economic and Management Sciences at Stellenbosch and PhD supervisor of the student, on the topic: “The Davis Tax Committee and everyone else in SA assumed that since inequality is so high in SA, what Piketty was saying must also hold true for SA. It does not.” That is what economists do.
Land expropriation is another policy of choice to reduce inequality. Piketty argues that because land redistribution have reduced inequality in Brazil, for example, it should work in South Africa too. Not quite: I don’t know much about farming, but I do know that most land in South Africa is not as fertile as in tropical Brazil. Here a farmer needs a lot of capital equipment to be productive, which in turn requires large scale farming to be profitable. It also requires management and technical expertise. Those things, in contrast to land, are difficult to expropriate and transfer. Why not, instead, give poor, black South Africans a choice: I am quite confident that not all would prefer to become farmers. Offer them shares (at massively discounted rates, perhaps subsidised with the income from the wealth tax) in companies listed on the Johannesburg Stock Exchange. To begin with, the SA government owns shares in several listed companies too: if these are transferred to poor South Africans, they have liquid capital which they can – if they so choose – either sell and buy land or hold on to earn dividends. This is what BEE is all about, and in the few cases where it was implemented correctly, like in Naspers selling discounted shares to black South Africans, it has created immense wealth. Giving someone land without the necessary scale, capital and skills to work it (especially someone living in a city, like most South Africans now do), dooms them to a live of subsistence farming.
Piketty’s other proposal of a higher minimum wage also fails to acknowledge the excellent work of South African economists over the last few years. Yes, a higher minimum wage in the United States might not increase unemployment (because it is off a low base and much lower than the median income level), but to recommend such a policy in a country with an unemployment rate above 30% is not only irresponsible but disastrous. New research by labour economists in my Department at Stellenbosch shows a stark rise in unemployment, 4.8% in the Western Cape of mostly temporary workers, following the increase in the Western Cape minimum wage on farms two years ago.
Because data allow us to test and improve our models, certain theories become generally accepted. One of them is the likely impact of a wealth tax. I am not necessarily against a limited wealth tax (for political economy reasons), but what Piketty and his commentators failed to do was spell out the likely effects of such a tax. So let me attempt to do so. A wealth tax favours the young and punishes the old. Young people, like me, have many debts. If the wealth tax is instituted on net wealth (which I think is what Piketty argues for), then it will have a limited impact on me but will tax my parents heavily, who have paid their debts during their lifetime. So here are my options: either I live frugally now, saving carefully and repaying my debts, only to be taxed by government when I’ve done so, or I stop saving and buy a fancy new car, because that’s better than giving it to government. Rather than growing my savings, I would instead find ways to consume all my earnings. (This is why Bill Gates suggests a progressive consumption tax instead. Piketty warns that consumption is difficult to measure, which is true. But it actually encourages saving, investment and accumulation, something a wealth tax does not do.)
Except, of course, one type of investment which cannot be (directly) taxed: education. So expect to see parents, because they cannot leave their children a large physical inheritance, spend even more on educating them. Surprisingly, this will likely increase inequality in South Africa even further. As economists know very well and as Kuben Naidoo, Deputy Governor of the South African Reserve Bank, so eloquently put it yesterday, “the major increase in inequality in South Africa is as a result of rising skills and not wealth accumulation”. Even if all the gains from the wealth tax is spent by government on education (unlikely to be the case), we will continue to have a schooling system that is horribly unfair. A lot of tax money so far has failed to fix the problem; South African economists that have measured these things clearly show that more school resources (like higher teacher salaries or buying more books) help little to improve education outcomes. Why is that likely to change if we add even more money to the mix?
Wealth taxes are most likely to reduce investment and social mobility, exactly the opposite of what is necessary to fix South Africa’s economy. Yes, we may get the richest billionaires to cough up some more of their wealth to government. But will it really matter to the kid from Soweto or Soshanguve whether Nicky Oppenheimer or Johann Rupert or Patrice Motsepe has R8 billion or R4 billion in wealth? Not a lot.
What will matter to that kid is whether he will get a fair chance in life. That is unlikely to happen if we don’t fix our education system first and make it easier for people to do business and create jobs. A wealth tax that discourages investment and raises the cost of education is not going to help, and might even have a perverse impact.
I agree that we need to address South Africa’s massive inequality. To correct this wrong is the reason many economists choose to study economics in the first place. And I also understand Piketty’s appeal: he proposes three policies that are relatively easy to implement and requires little more than political will. But, unfortunately, these policies are disconnected from the real world, the world which South African economists study. In a best case scenario these policies will reduce inequality marginally in the short run; a worst case scenario is that they inhibit investment and put further limits on social mobility by raising the returns to quality education.
I realise that I cannot convince everyone about the need to study economics. As an economic historian I’ve had my own gripes with the mathematisation of the discipline. But to ignore the theories of human behaviour that economists construct, theories that have been empirically shown to be worth keeping, is wrong. Opinions without facts are not worth listening to, as Hans Rosling perfectly explained. Let’s encourage our students to engage with Piketty’s theories, test them against the evidence, and keep them and use them if they apply to South Africa. Or improve them if they don’t.
Imagine a university that trained most of the leaders of the largest political party of a country. A university which educated many past and existing leaders of several other countries. A university which trained thousands of doctors, lawyers and other civil servants. A university which educated a Nobel Peace Prize winner.
This university would be the flagship of any country’s education system, yet in South Africa it is not. Fort Hare, despite its illustrious history, is not ranked in the top 10 universities in South Africa. It barely makes it into the top 100 in Africa.
And, unfortunately, UFH seems poised to remain there. The university has a R100-million deficit. It has reportedly used National Student Financial Aid Scheme (NSFAS) money – intended to subsidise students from poor backgrounds – to pay staff salaries. And only last Friday it emerged that the university’s registrar, Prof Mike Somniso‚ was recorded saying to a colleague that he will unleash the ANC’s uMkhonto weSizwe military veterans on DASO, the Democratic Alliance’s Student Organisations that, surprisingly, won the Student Representative Council elections last year. Let’s think carefully about that: a university registrar calling for violence against students.
Here is Max du Preez on Facebook about the recording:
So how come this is not a scandal in South Africa? A senior administrator at a university planning violent attacks on student leaders to make it impossible for groups other than the ANC to operate on campus? Where is the reaction of the minister of Higher Education – this was revealed on Friday morning already. Have we written off Fort Hare as an academic institution? Isn’t it perhaps time to launch an #OpenFortHare campaign?
It is difficult not to become cynical about the attempts on other South African campuses to reform higher education when Fort Hare, a beacon of hope for many black scholars in South Africa and elsewhere in Africa during apartheid’s darkest days, is withering away. Just imagine, some would say, what the response would have been had a UCT or Stellenbosch or Wits registrar called for violence against students!
Instead, we find a deafening silence. No resignation. No national twitter campaign ostracizing the individual or institution. No call to appear before Parliament’s Higher Education Portfolio Committee. (To be sure, UFH was due to appear on the 23rd of September to explain the charges of fraud, but the meeting was postponed indefinitely.)
Those of us who care deeply about the state of higher education in South Africa are left bewildered. What will it take to transform Fort Hare (and many of the other formerly black universities) into a national asset that can deliver minds that can contribute to a more prosperous South Africa? Funding? Management? Student activism? I don’t know, but the many brilliant minds that go there – I know, one of my own PhD students is a former graduate – deserve better.
I don’t want to belittle the legitimate demands for transformation at South Africa’s top universities. But the number of classrooms and lecturers at these universities are simply too few to provide a quality education to all who want it. If we want to improve South Africa, we – the government, yes, but also civil society like the campus movements pushing for change – need to shine a light on all places that can provide quality education for thousands of students who won’t find places at (or cannot afford) the top universities. That includes Fort Hare.
This is currently not happening, which means that the financial mismanagement and the utterances of a registrar is not delivering on Fort Hare’s vision of In lumine tuo videbimus lumen (In Thy Light We See Light), a vision that had inspired the likes of Oliver Tambo, Nelson Mandela, Govan Mbeki, Robert Sobukwe and Mangosuthu Buthelezi.
We need to #LightUpFortHare. Their future students (and the legends of the past) deserve nothing less.