Johan Fourie's blog

I'd rather be a comma than a fullstop

It’s the sixth AEHN meetings!

leave a comment »

Stellenbosch PhD student Abel Gwaindepi presenting his research at last year's AEHN meetings

Stellenbosch PhD student Abel Gwaindepi presenting his research at last year’s AEHN meetings

This week the University of Sussex hosts the sixth African Economic History Network meetings. I’ve just arrived in Brighton for what will be a full programme of conferencing on Friday and Saturday, and meetings and discussions in-between. Our hosts, Alex Moradi and Felix Meier zu Selhausen, have done a splendid job of attracting more than 60 high-quality papers from a wide spectrum of economists and historians working on the African past. The full programme is available here.

This is an important moment for the field. Having grown rapidly over the last few years as younger scholars (mostly from Europe) embrace the field of quantitative African economic history, the annual meeting now provides a platform for many of them to showcase their work. Their passion and enterprise have uncovered new data sources, which have challenged long-held beliefs about topics like precolonial inequality, the economic causes underpinning the Scramble for Africa, the effects of missionary education, fiscal regimes, and many more.

But this can only be a beginning. As debates about decolonising curricula within South African universities raise legitimate concerns about challenging a Eurocentric view of African development, the challenge for the Network and for the broader research community is to expand the pool of researchers using these new sources and methods. African economic history, as I’ve written before, is a wonderful tool to contextualise the often ahistorical and acontextual economic theories that are the bedrock of economics courses. And while these formal models are necessary to allow students to evaluate economic policies and communicate their findings to an international audience, their interpretations must be informed by local histories and conditions. That is what a quantitative African economic history can do.

To dismiss the immense contribution the new breed of African economic historians that will congregate in Sussex has made is senseless. These scholars have spent many years reading and researching the African past, digitising precious historical sources, analysing trends and interpreting the African past based on new empirical results. These efforts have often also been associated with significant financial resources, which have allowed many sources to remain in the public domain. They have also written textbooks that are downloadable for free to African students.

My hope is that more African scholars can become participants in and contributors to these debates. Funding remains an issue, but so too a demand from African students. It would be wonderful, for example, to see more Masters dissertations at South African universities on African economic history questions. This is not always the students’ fault. As one of my own students recently reminded me, it is the responsibility of academic staff to instil in students an interest in the important and often difficult (and contentious) research questions of our time. What were the causes and consequences of slavery and colonialism in its many dimensions? Of colonial infrastructure and education? Of the IMF structural adjustment programmes and the debt cancellation and development aid? Of immigration and emigration? Of natural resources and sovereign wealth funds? Of genetically modified crops and robotics?

Hopefully the AEHN meetings at Sussex this week will pose some of these important and difficult questions. And when the seventh African Economic History Network meetings come around next year (in Stellenbosch), we will have a large pool of African students contributing answers – and new questions.

Africa should invest in itself

leave a comment »


Imagine you receive the news tomorrow that an unknown, distant family member has passed on and left you a bequest of a million dollars. What to do? Spend it immediately on luxury consumption – a round-the-world trip, perhaps – or invest it offshore and live off the returns, thereby smoothing your consumption and protecting the wealth for your own and your children’s futures? There is another option, though: immediate investment in yourself, say by enrolling at Harvard for an MBA. This way you not only boost your personal future income, but more educated parents tend to have more educated (and healthier and connected) children, thus boosting the prospects of future generations.

This third option, in a nutshell, is what three new papers in the Journal of African Economies suggest for developing countries that have jumped on the Sovereign Wealth Fund-bandwagon. Sovereign wealth funds (or SWFs) are state-owned investment funds designed to preserve the high returns from non-renewable resources, like oil, for future generations. A quarter of the world’s economies still depend on non-renewable resources, and more than half of them now have some type of SWF, including many recently established funds in Africa: consider, for example, Ghana (2011), Angola (2012), Nigeria (2012) and Senegal (2012). Others, like Kenya, Tanzania and Mozambique, are finalising SWF policies. And these funds matter: Sovereign Wealth Funds are a quarter of Algeria’s GDP, 40% of Botswana’s GDP and over 100% of Libya’s GDP.

There is good reason for the turn to this type of investment fund. SWF have many good properties, as the experience of Norway since 1990 have shown. It converts temporary resource revenue into a permanent investment income. Best to keep it offshore, too, so as to avoid domestic inflation, real exchange rate appreciation and the contraction of other traded sectors (also known as Dutch disease). And why invest locally when all profitable investment opportunities would presumably have been financed already at the world interest rate if the capital account is open? For these theoretical reasons, and because of the practical successes of SWF across the world – Norway, Chile, Saudi Arabia – many African countries followed suit.

But the authors of the three Journal of African Economies papers question this logic. They argue that many African countries do not have open capital accounts, meaning that there are still many profitable opportunities to invest within Africa. Why then send precious investment funds abroad when the highest returns can be reaped locally? To return to our earlier metaphor, why invest your long-lost family member’s bequest in stocks on the JSE, when you don’t even have a high school education yet. Invest in yourself first!

In Africa, the focus should be on infrastructure. One set of authors, Rabah Arezki and Amadou Sy, argue for three stages of financing infrastructure with the help of SWFs: First, involve development banks, who are often more informed about viable investment projects, in the first phase of large projects that are often the riskiest. Second, offload more mature projects to arms-length institutional investors like SWFs. Third, develop an African bond market to facilitate this offloading.

The maintenance of infrastructure in Africa is of particular concern, and SWFs can play a role here. Arezki and Sy calculate that at least one-third of Africa’s investment needs are in maintenance, and suggest bundling construction and maintenance services in private-public partnerships as one way to overcome this (by making sure builders have an incentive to minimise maintenance costs).

South Africa does not have a SWF, although the idea of a supertax on mining profits has been mooted before. If we did decide to go this route, as many of our neighbours seem to do, the question becomes: who gets to choose how the funds are spent? Anthony Venables and Samuel Wills, another set of authors, argue that it should be done through the usual budgetary process; in South Africa’s case, that will be through Treasury. Another author, Joe Amoako-Tuffour, argues instead for a more independent SWF that take direct positions in investments. Whatever strategy is followed, it is important to remember an additional reason for Sovereign Wealth Funds: to minimise the misuse of resource rents by politicians.

There is no better example of this than the second smallest nation in the world: the Pacific island of Nauru with a population of 10000. In their paper, Samuel Wills, Lemma Senbet and Witness Simbanegavi note how the island, made almost entirely of phosphate, was the richest country in the world in the 1960s. Two-thirds of the phosphate revenues were invested in a Trust, which peaked at $100 000 per person. In 2004, after some questionable investment decisions that included a cruise ship that never left port and a Lamborghini for the police chief (to drive on an island of 21km2), the fund had only $3000 per person left.

The lesson is that we do not live in a world of benevolent dictators. Politicians make bad decisions often, and state-owned investment fund should be structured to avoid their misuse. But going to the extreme and parking all resource returns offshore is also not the answer for many African countries. Investing in local infrastructure and its maintenance may provide far higher returns for future generations – if the possibility of misuse can be curtailed.

*An edited version of this first appeared in Finweek magazine of 8 September.

Written by Johan Fourie

October 4, 2016 at 10:20

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 »


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 »


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


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 »


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