Johan Fourie's blog

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Open or closed borders, that is the question

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Trade bottleneck: The border between Zambia and Zimbabwe in 2008 (Photo: Johan Fourie)

Trade bottleneck: The border between Zambia and Zimbabwe in 2008 (Photo: Johan Fourie)

Most professional economists would agree that open world trade increases economic growth and raises living standards. Trade barriers such as tariffs and non-tariff barriers – which include rules-of-origin clauses or sanitary and phytosanitary conditions – reduce countries’ ability to specialise in those goods and services which they are good at, and force them to produce things that they are not good at.

But despite this important insight that dates back to Adam Smith and David Ricardo, economists also know that free trade is not always good for everyone. Industries that are uncompetitive but employ many thousands of people can suffer when trade barriers protecting those industries fall. Many countries protect certain key industries, arguing that they are industries of national security. The classic examples here are military spending or food security. (This can have ridiculous consequences: Gilette argued that its razors deserve tariff protection during the Second World War, ostensibly because soldiers could not go unshaven.) Other industries are protected because they are young and, it is argued, will become more efficient once they obtain certain economies of scale. This is known as infant industry protection. The problem is: many infants never grow up. The South African clothing and textile industry has received government support since the 1930s, and we still pay exorbitant import tariffs on clothes.

But sometimes it does work. As Concrete Economics, a new book by Stephen Cohen and Brad de Long, explains, the United States became the manufacturing hub of the late nineteenth and early twentieth centuries because it was protecting its local industries from cheap British imports. In Economics jargon, their comparative advantage (the thing they were relatively better at making) switched from agricultural goods to manufacturing goods. And with manufacturing came higher paying jobs and more dynamic technological innovation.

It is this same model that the East Asian Tigers followed, copying the basic and later advanced technological products of the West, building a domestic industry behind high tariffs, and once they’ve built up the necessary technological know-how, exported their way to prosperity. Now they are at the technological frontier designing and building new phones (Samsung, Korean) and computers (Lenovo, Chinese) and robots (Honda, Sony, Fujitsu, Hitachi and Toyota, all Japanese firms, have built human robots).

But this strategy did not work everywhere. The evidence for Latin America is mixed: attempts at import-substitute industrialising failed to propel Argentina, Brazil and many other smaller South American countries to prosperity in the same way it did East Asian countries. And in postcolonial Africa it only managed to impose a heavy burden on poor consumers without stimulating any large-scale industrial activity. Many African countries remain incredibly protected – just ask any importer to Nigeria, for example – and this has contributed little to the rise of African industry.

So are open borders good or bad? A new paper by Pable Fajgelbaum and Amit Khandelwal in the Quarterly Journal of Economics gives the standard economist response: it depends. Some consumers buy more tradable goods and are therefore more affected by relative price changes caused by international trade. They find, using a novel methodology, that those consumers who gain most are often the poor, who buy more tradable goods and services. Open borders, they claim, is a very good thing if you are a poor person.

So policy makers are stuck between a rock and a hard place: close borders in the hope that some industries grow beyond infants, at the cost of cheaper goods and services for poor people. Or open the borders and allow the poorest access to cheap goods and services, but with the caveat that some uncompetitive industries suffer injury.

Take South Africa’s dispute over chicken imports. Chicken is the largest protein for poor South Africans. By denying them access to cheap food we not only hurt them but also their children’s ability to consume nutritious protein so critical for early childhood development. We thus perpetuate the cycle of poverty. And by protecting chicken imports, do we really stimulate local economic development in dynamic industries with agglomeration and spill-over externalities? Probably not.

In contrast, we protect the local automotive industry because it not only creates direct jobs but because vehicles support an entire value-chain, from raw material to assembly. Unlike chicken producers, building a car requires vast numbers of engineers and other skilled artisans that may have large (and unexpected and unplanned) spill-overs in related industries.

What made Japan, the first Asian Tiger, so successful was a capable bureaucratic administration that could, with little political influence, judge which industries required support and which did not. Some that received support failed to deliver, and support was quickly removed. We only recognise the successful ones: Panasonic, Kawasaki, Canon.

Wherever protection has failed, it has done so because supported firms gain political influence to protect their support. Bureaucrats are people too – often poorly paid – and find it difficult to challenge entrenched interests of the firms they initially supported. The government bureaucrats that steered Japan’s miracle were not only well remunerated (making them less corruptible) but were also the top graduates from Japan’s best universities. They had the foresight to invest in industries of the future.

In general, then, open borders are likely to be more beneficial than closed ones, especially to those people who are worst off in society. But this is not to say that there is no role for industrial policy. If political influence can be thwarted – and that’s a big ‘if’, especially given the recent revelations of state capture in South Africa – support for strategic industries that have large spill-overs can play an important role in building a thriving economy. The hard questions remain, though: Who picks the winners? And what happens when they fail?

*An edited version of this first appeared in Finweek magazine of 21 April.

Is our financial sector too big?

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Roads to prosperity? Sandton is the hub of South Africa's financial industry

Roads to prosperity? Sandton is the hub of South Africa’s financial industry

Most economists would agree that a growing economy requires a well-functioning financial system that is able to move capital between its owners and those who need it. The larger the financial sector, the argument goes, the more likely it is that capital will be efficiently allocated, and the better for the economy. Of course, the same is true for other intermediate services, from law and consulting to auditing and marketing, which performs intermediate services that helps firms to specialise, and flourish.

But a new working paper by economists Stephen Cecchitti and Enisse Kharroubi at the Bank for International Settlements questions this logic. They argue instead that a too-large intermediate sector (they specifically refer to finance) can actually hurt growth. Neoclassical theory argues that mergers and acquisitions (M&As) create value through the takeover of undervalued products, as typically recognized through stock market valuations. The larger the financial sector, the more resources are available for these transactions to take place.

There are two caveats to this. First, instead of focusing on the long term value of a firm, executives often embark on M&As to further their own short term gain, e.g. prestige and increased compensation of managing a large firm. Second, and independent of M&A activity, the larger the financial sector, often the more complex it becomes and the more resources must be spent to analyse and understand it. And sometimes, despite these resources, it still spins out of control, as in 2008.

Cecchitti and Kharroubi finds that there is a threshold beyond which growth of the finance industry actually reduces total factor productivity growth. All developed economies are already beyond this threshold, they find, and provide evidence of a clear negative correlation between financial sector growth and R&D-intensive industries. One mechanism through which this happens is that finance consumes resources that could have been utilised more productively in other sectors. A complex financial system needs highly-qualified engineers, for example, clever people that could have been employed in research industries that would have had a bigger impact on society.

This is worrying for a country like South Africa where financial and other intermediate services are, like the US, a large part of the economy. The more finance and other intermediate service firms employ our smartest students (a precious resource), the fewer there are of them to start their own businesses producing stuff that we can export, or doing research that can invent new things. I’ve seen this myself: the largest consulting firms pilfer our best graduates (promising the incomes and status that come with these jobs – and the luxurious Sandton offices) at the expense of far less appealing jobs in industries that our economy desperately need. Who wants to work in a factory anyway?

In their book Concrete Economics, Brad Delong and Stephen Cohen explain why the finance industry grew so rapidly, from roughly 3% in 1950 to almost 9% of US GDP today. It happened as a result of the deregulation that already began in the 1970s but intensified in the 1990s. Some of this was good, like the innovation of low-cost brokerages and low-cost investment funds, just like the deregulators had hoped. Unfortunately, these were the exceptions rather than the rule. Financial intermediaries soon realised that it is much easier to promise clients that ‘they could beat the market and become rich’ than provide value to their clients by ‘soberly matching risks to risk-bearing capacity’. And so, instead of charging lower fees which would benefit investors, a freer market made financial intermediaries move into fancy office blocks, recruiting the smartest minds, and charging higher fees as a signal that their portfolios are the ones with the best returns.

In South Africa, I would venture that this also happened in other intermediate sectors, like auditing and consulting. Between 1981 and 2006, our service sector increased by 42%. Finance may have benefited from deregulation, but the tightening of accounting standards and other types of well-intentioned regulation to safeguard businesses from fraudulent practices meant that these highly concentrated industries had a captured market for their services.  High prices – and Sandton office towers – followed.

But, as DeLong and Cohen aptly summarise, ‘nobody eats the advice of M&A strategists’ (or the audits of accountants, or the powerpoints of consultants). Our large intermediate services sector means that we have fewer innovative firms that can produce products and services to sell to a global audience. Our best minds should be developing new genetically-modified crops or mobile apps, not more complex financial instruments.

How we fix this is a more difficult question. It is unlikely that change will come from within these firms; in fact, expect lobbying for more rules and higher standards which require bigger teams of experts selling better advice. Why kill the goose that lays the golden eggs? A concerted effort by government is instead necessary to reduce the demand for and market power of these intermediate services firms. Reducing excessive bureaucratic red tape can help with the former. Competition policy can help with the latter.

Perhaps the emphasis should instead be on growing other sectors, specifically manufacturing. But what regulators should realise is that, unlike fancy office towers, bigger is not always better when it comes to finance and other intermediate service industries.

*An edited version of this first appeared in Finweek magazine of 5 May.

Written by Johan Fourie

May 26, 2016 at 07:22

On mystical discoveries

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The Trinity College Library Long Room is a must-see.

The Trinity College Library Long Room is a must-see in Dublin. Photo: Johan Fourie.

Our stay in Utrecht is quickly coming to an end. We’ve been here eights months, and it has been a wonderful time to be productive and also, sometimes, less productive. We traveled often, mostly to conferences and seminars, but occasionally just to explore new places. To Spain, France, Germany, Sweden, Belgium and, the past weekend, to Ireland, one of the few places in Europe South Africans can enter without a Schengen visa. We rented a car and stayed in a wonderfully nondescript farm cottage with thick walls, a fireplace and a few dozen cows browsing outside our window.

Rural Ireland is a mystical place, exuding a sense of wonder. North of Dublin is Brú na Bóinne, an ancient neolithic site that was built before Stonehenge or Egypt’s pyramids, around 3000BC. Evidence of long-distance trade suggests a sophisticated society, and entering the sacred tombs – where a beam of light only enters once a year during winter solstice – confirms an advanced knowledge of their environment and complex social rituals. This mystical aura lingers across Ireland, in the evergreen forests and tiny towns and black stone walls that dot the landscape, interspersed with more cows and sheep. We also visited the Cliffs of Moher on the west coast of the island, a breathtaking sight I won’t recommend to anyone with a fear of heights. (At least, the fear of watching others take selfies precariously close to a 120m slippery ridge.) And then it was back to Dublin, for some whiskey and music and, of course, a visit to the world famous Trinity College Library with its splendid Long Room (pictured).

Although our time in Europe is sadly coming to an end, the prospect of returning home – good wine, food and friends (and sun!) – is certainly exciting. But first, I will be taking a technology hiatus in the next month as I travel to northern Spain to hike part of the Camino de Santiago, starting in Oviedo. It will be a physical challenge but certainly also a psychological one: I cannot remember a time when I did not have access to email for more than a few days. Away from the busyness of modern life, perhaps it will be good to rediscover something of that mystical world the ancients inhabited.


Written by Johan Fourie

April 22, 2016 at 09:15

Three hundred years of firm myopia

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Three centuries ago, on 24 June 1716, a very important letter arrived from Amsterdam in Cape Town; a letter that, according to John X Merriman two centuries later, would change the future of what would become South Africa. Written by the Board of the Dutch East India Company (the VOC), the letter requested the Council of Policy in Cape Town to reflect on the economic needs of the still small and fragile colonial settlement. In particular, the Board wanted to know whether the Council of Policy would recommend more European immigration to the Cape or whether an increase in slave arrivals would be preferred.

A year later, seven members of the Council responded. Six members recommended that slavery was the better choice. The reason was simple: slaves could supply cheaper labour than European wage labourers. And because all agricultural output had to be sold to the Company stores in Cape Town, cheap labour meant that the Company could pay farmers less for their produce, allowing the Company to make a very decent return when reselling the produce to passing ships.

One member of the Council of Policy, however, disagreed. Dominique Marius Pasques de Chavonnes instead made a case for encouraging European immigrants. Though slavery would be more profitable in the short run, he argued that the settlement of free people would be better for the economy, and thus for the Company, in the long run.  Free men have an incentive to invent while slaves do not, he said, pre-empting what Adam Smith would write in his Wealth of Nations half a century later. And invention is the root of productivity and prosperity.

It’s no surprise that the shareholders in Amsterdam chose the advice of the six men that appealed to their immediate interests. After 1717, European immigration slowed considerably, and slave arrivals from modern-day Malaysia, Indonesia, India, Madagascar and Mozambique increased. The Cape became a slave economy, with high levels of inequality, an inequality that has still not abated. In 1776, Adam Smith would write in his Wealth of Nations that ‘of all the expedients that can well be contrived to stunt the natural growth of a new colony, that of an exclusive company is undoubtedly the most effectual’. DM Pasques de Chavonnes and Adam Smith had recognized the myopia of firms.

Although it has a long history, such short-termism is rising. The trend towards financialisation (higher levels of stock liquidity), diversification and hostile takeovers of the 1980s increased the separation between firm ownership and control. Managers’ incentives to maximise their own utility were no longer aligned with maximising the utility of the firm. To realign these incentives, managers were increasingly compensated with stock options. The result has been a sole focus on higher share prices to the detriment of the long-term sustainability and growth of the firm, for example, by investing less in research and development.

There is now evidence that clearly shows the negative impact of financialisation on innovation. A 2014 paper in the Journal of Finance use exogenous variation in liquidity generated from financial regulation and finds that an increase in liquidity causes a reduction in future innovation. The authors propose two possible reasons: a higher likelihood of hostile takeovers and more institutional investors, like pension funds, who rely on less information and monitoring. The consequences are that short-term boosts in shareholder value come at the expense of the long-term profitability of the firm.

So what can be done to prevent managers from succumbing to these short-term pressures? One solution is to offer managers contractual protection like severance pay agreements. This seems to have a positive impact on innovation; Xia Chen and co-authors of a 2015 paper in The Accounting Review, find that firms with CEO contractual protection are less likely to cut R&D expenditure to avoid earnings decreases. They are also less likely to engage in real earnings management. More detailed analysis reveals that the larger the duration and monetary strength of the agreement, the less likely the CEO is likely to cut R&D expenditure. The effect is also larger for firms in more homogeneous industries, and for firms with higher transient institutional ownership.

Hedge funds and their supporters are eager to point out that not all short-termism is bad and that the evidence on various firm outcomes is mixed. That may be true, but what the recent evidence begins to suggest is that at least one factor that we associate with sustainable firms – innovation – seems to suffer when managers’ priorities shift from the future to the present. Managers that focus too much on short-term gains may, much like the VOC shareholders three-hundred years ago, shift a firm down a path from which it is unlikely to return.

*An edited version of this first appeared in Finweek magazine of 17 March.

The layers of history

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Helanya and I flew to the south of Spain for a short Easter break last Thursday. We spent a day in Granada, another one in Córdoba and then took the train to Valencia where I’m currently attending the European Social Science History Congress.

Spain is an incredibly diverse country, and the South did not disappoint. Influenced by the conquest and settlement of Islamic Moors between 711 (when the Arab and Berber Moors of North Africa crossed the Strait of Gibraltar and conquered Christian Hispania) and 1492 (when the last Muslim stronghold surrendered), the old cities of Andalusia have a distinct architecture that reminds one of the deep layers of history. This is nowhere more apparent than the Mezquita-Catedral in Córdoba where a cathedral is built inside what was once a Grand Mosque. The incredibly impressive structure has 856 marble and granite columns, some of which date back to a Roman temple which had occupied the site previously. Layer upon layer upon layer.

Granada2-2Another highlight was the Easter festivities. The two nights we spent in Granada were filled with processions through the streets, which attracted what must have been almost the entire city of Granada. It’s difficult to say whether participants were in a reflective or festive mood – perhaps a bit of both – but the streets were still busy well into the early hours of the morning. The processions recreated scenes from the crucifixion of Christ, embedded within Catholic symbolism and, I suspect, many other customs that are unique to Andalusia. The layers of history are not only encapsulated in the built environment of southern Spain, but also in the beliefs, symbols and traditions of its people.

Of course, history never ends. Much as they have done for millennia, people continue to move in and out of Spain (the same year that the last Muslim ruler surrendered in Granada, Columbus ‘discovered’ America). Many North African migrants now cross the Mediterranean in the hope of a better life, while Syrian refugees flee their war-torn country. A visit to the south of Spain is therefore a timely reminder that Europe used to be far more integrated into their southern and eastern neighbours. Córdoba’s extraordinary Mezquita-Catedral was, lest we forget, designed by an 8th-century Syrian architect.

Written by Johan Fourie

March 31, 2016 at 13:43

A small-town story of the resource curse

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Boom town: This Google Earth image demonstrates the spectacular town growth over the last decade.

A decade or so ago, Kathu in South Africa’s Northern Cape province was little more than a quaint mining town with a fantastic golf course. Supported almost entirely by the nearby Sishen iron ore mine, no one had expected that the town would change remarkably in the coming decade. But a surge in the global price of steel encouraged Anglo American, the majority owner of Kumba Iron Ore, to expand production, rapidly increasing employment. The town boomed. House prices went through the roof, further strengthened by a lump sum bonus to all employees in 2011. (Not all investments were sensible, though: one story goes that upon receiving the bonus, an employee drove to a neighbouring town to purchase a new luxury car, only to crash it on the way back.) The people of Kathu saw their disposable incomes and living standards increase. Two new malls opened in a town with less than 15000 people.

And then it all came tumbling down. A few weeks ago, Anglo announced that, based on weak prospects in China and the low price of steel, it will cut around 4000 jobs at the Sishen mine. House prices are falling and those new developments that rose like mushrooms are going unsold. Stores are likely to close their doors soon, cutting more jobs. The future for the former quaint mining town looks bleak.

Kathu is a microcosm of the problem with development based on natural resources. Oxford University economist Anthony Venables investigates this conundrum in the most recent edition of the Journal of Economic Perspectives, asking ‘Using Natural Resources for Development: Why Has It Proven So Difficult?’. Venables explains that the successful use of natural resources requires multiple stages. First the deposits have to be discovered and extracted. Then the revenues need to be divided between the government, investors and other claimants (like the local community). What is important is how these revenues are split between the different claimants, and what it is used for. Finally, the indirect, negative effects to the rest of the economy must be allayed.

Dividing what can often be large gains can be difficult. Discovery and extraction licenses are typically awarded to encourage the most efficient mining companies to operate, but can result in corrupt practices. To avoid this, auctions provide one mechanism to ensure the government maximise revenue. Auctions do not work everywhere, though: in Botswana, the government instead negotiated with the dominant De Beers to ensure a larger share of the gains from diamonds.

Once gains have been divided, deciding how to spend it can be even more difficult. Often, Venables argues, there is pressure to spend on current expenditure instead of investing in infrastructure, for example. These pressures are magnified by patronage politics, which favours spending on groups or individuals allied to the government. The worst a government can do is to use the revenues to increase its chances of staying in power, for example, by hiring supporters as public sector employees.

But even if revenues are divided fairly and invested effectively, resource exports can cause what is known as ‘Dutch disease’: an appreciation of the exchange rate that hurts other exports. (The term ‘Dutch disease’ was coined after the 1959 discovery of gas fields in the Netherlands hurt the Dutch manufacturing industry.) A country that only exports one resource can become dependent on a single but volatile source of income, which can destabilise the economy during bad times. Just ask Angolans or Nigerians. Or the mayor of Kathu.

The future for natural resources dependent economies will not get better soon. Resource prices, notably oil, are unlikely to rise rapidly in the face of continued weak demand combined with the growing popularity of alternative energy sources, from fracking to renewables. That means that resource-rich countries, like many African countries including South Africa, will have to come to terms with the negative shocks on its public finances and balance of payments. The silver lining is that this may stimulate economic activity in other, more sustainable sectors of an economy. But even then, political pressure to protect the status quo may cause additional pain.

Perhaps Kathu will revive the golf course to its former glory, attracting tourists who want to enjoy affordable Kalahari hospitality, and allow the town to develop at a more sustainable rate. But not before many of its inhabitants have suffered the consequences of the natural resource curse.

*This article first appeared in Finweek magazine of 3 March.

Written by Johan Fourie

March 21, 2016 at 09:08

How to decolonise an Economics curriculum

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The economics curriculum at South African universities is in crisis, claims Ihsaan Bassier, an honours student at UCT. He writes that UCT’s curriculum is ‘largely abstracted from South Africa’s economic crisis and reinforces an anti-poor understanding of policies’. He explains:

Economics is presented as an amoral subject, only examining mechanistic questions and optimising efficiency. If it is amoral, why is so little attention given to heterodox thought? Capitalism arbitrarily privileges those with money over others in the most violent form possible, through a system of class protection, marginalisation of the poor and gross injustice. Rather than being amoral, undergraduate economics in fact promotes a horrible moral: that “rationality” is defined as profit-maximisation and that the point of departure is our violent system. Students are trained to be apologists for capitalism and alternatives are marginalised.

It is both bad economics and anti-poor for students to be bombarded with arguments that government intervention and minimum wages are “bad”. Social benefits are blamed for unemployment, as if it is preferable to allow people to starve; regulation is demonised, as if unfettered business would solve South Africa’s economic problems. Some attention is eventually given to market failure, but only as a token.

Why do we not learn more seriously about other systems and behaviours, about technical aspects of socialism and redistribution, about power, about how racism interacts with capitalism, the pervasiveness of rent and out-of-equilibrium dynamics, or an endless number of alternatives that my education has not exposed me to?

UCT’s curriculum is quite similar to that of Stellenbosch, where I teach. So let me respond to these rather big accusations, and then make a suggestion.

Capitalism arbitrarily privileges those with money over others in the most violent form possible. Economics equips students with a set of tools that allow them to explain the world around them. One of those tools is statistical analysis, which means we can test a hypothesis – like the above statement – with evidence from the real world. And unfortunately for Ihsaan, the real world evidence is pretty clear on this one: capitalism, a system based on the principle of individual rights, has created remarkable economic freedom for humanity over the last three centuries. Consider this: the real income of the median person in the world doubled in the period between 2003 and 2013, a period that included a financial crisis. In 1981 more than half the people in the world lived in absolute poverty. Today, it is less than 20%. It is simply wrong to declare, without proof, that capitalism arbitrarily privileges those with money. Millions of Indians, and Chinese and, yes, Africans too, have higher living standards than their parents did, and that is highly correlated with more market activity, not less. (In fact, privileging arbitrarily is exactly what communism does, by removing people’s individual freedoms and choices. Just ask the Latvians or any other Eastern Europeans who suffered its consequences.)

Global poverty the last two hundred years

Global poverty the last two hundred years

That is not to say that everything about capitalism is great. Capitalism is not one thing – it morphs into different forms depending on the political and social context. Capitalism in America is certainly more unfettered than capitalism in, say, France. And there is certainly space for more debate about the type of capitalism we need in South Africa.

But those debates need to be based on sound theories and falsifiable evidence. Economic policy arguments – Is a higher minimum wage better for the poorest? Do social benefits lead to unemployment? Does regulation impede growth? – are all empirical questions, one that economists’ statistical toolkits can answer. Yes, we have theories about how the world works, but as Dani Rodrik explains in his excellent new book, Economics Rules, there is not one single (better) theory, but a menu of theories that economists can use to understand their world. Think of a theory (or a model) as a map. There is no single map that explains everything. Sometimes you need a world map just to look at countries. Sometimes you need a street map to take you to your destination. Other times you need a map of the soil quality if you want to sow for the coming season. Economists’ models are the same. We use different models in different contexts, and what makes a really good economist is picking the right model for the right question.

EconomicsRulesHere, Ihsaan’s critique is valid. In first and second year, the emphasis is too much on a single theory (or model) of the world, the standard, neoclassical theory. There are good reasons for this, of course: it is mathematically tractable and provides a solid base for understanding basic human interaction. And that is exactly why it is a good platform for understanding why it does not work in every setting: the assumptions are strong but they are also explicit. Relax some of those assumptions, and the results change. This is exactly how we come to improve our understanding of the world. (In my class, I discuss these assumptions in the South African context and ask the students whether they may or may not hold. That is, I’ve found, how students actually gain a better understanding of the complexities of the problems we have in South Africa, and an appreciation for the tools of economics, of modeling and statistical testing, to solve them.) But a more explicit treatment of the menu of theories economists have at their disposal is necessary.

Ihsaan offers three solutions to solve the curriculum conundrum: 1) admit that we are in a crisis, 2) allocate time to a topic in proportion to its importance in our context, 3) include topics such as poverty, unemployment and inequality from the first year. He fears that too many students leave Economics after only one or two years, without understanding the nuances of the models.

What undergraduate Economics begins to do is equip students with the analytical tools to investigate the important topics of our era. Students need the basic skills of mathematical and statistical analyses to be able to empirically test the questions we are all concerned about. To make it more practical: Debating poverty in South Africa is very difficult if your opponent has no idea how to calculate a ‘poverty line’ or ‘median income’. Or the impact of a higher interest rate with someone who has no idea what the monetary transmission mechanism is. Or the impact of an increase in VAT with someone who has never heard about tax incidence. That is why we need those first three years.

And yes, many students leave after only two years. True, they will have a limited understanding of Economics. But no one expects me to be a psychologist with just Psychology 1, or fluent in French with just French 2. This is why we need to encourage more students to enroll for Economics graduate degrees, and why we need to expose them to more analytical tools, not fewer. We cannot afford to have a society where economic policy is not informed by sound economic analysis undertaken by well-trained, analytical economists. Undergraduate Economics – with the emphasis on rigorous analytical training in microeconomics and macro-economics – needs to stay. This not only gives a solid toolkit for those who want just the ‘essence’ of Economics, but it also allows students to continue with graduate Economics, not only in South Africa but elsewhere. And as I’ve said before, to get into US universities requires a lot of analytical skills.

But I also understand the need for more context, for thinking and discussing the very real material problems that South Africans face. So, I have another solution for Ihsaan, one that betrays my biases: We can look to the past to help us understand today’s problems, and we can look to what the brightest minds have thought about solving these complex problems. In short, we can do more to encourage Economic History and the History of Economic Thought as analytical tools of their own to make sense of today’s development problems.

Ihsaan is fortunate: UCT does have a good undergraduate economic history programme, and a wonderful third-year class in the History of Economic Thought. Global and African economic history provides us with an understanding of the historical roots of poverty, inequality and unemployment; the past does not only explain the present, as one colleague notes, but it is analogous to the present. The History of Economic Thought is concerned with philosophers’ (or theorists’) ideas about solving the economic problem, including philosophers that were very much in favour of socialism. If the neoclassical model is a country-map, the History of Economic Thought is a map of the world, showing how neoclassical thinking evolved and why it became the dominant model.

At Stellenbosch, we have created an entire course in the second year to investigate past and contemporary economic development. One semester of Economics 281 starts with the Neolithic Revolution (circa 8000 BCE) and ends with the Economics of Apartheid. The other semester considers all kinds of current development policies, with a specific focus on South Africa. I see Economics 281 as complementary to the standard Economics courses. You cannot have the one without the other.

You do not decolonise a curriculum by removing content. If you do that, you deny students the opportunity to participate in global debates and the global job market. You decolonise by adding more context and diversity. We advance science by standing on the shoulders of giants. Decolonisation done right can add more shoulders to stand on.



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