Johan Fourie's blog

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Archive for January 2012

What recession?

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Too much has been made of the Great Recession. While global growth has slowed in 2008 and 2009, we are still living in an age where most of the world population’s income is increasing. These increases translate into millions of people being lifted out of extreme poverty every year. This year, 2012, the average person’s income will rise, not fall, which also means that their standards of living will probably increase. In fact, the income of the average person on earth has never been as high as it is today.

How is this possible in the face of what is now generally accepted as the greatest recession since the Great Depression? Why can I be so sure when the European Union is in a severe debt crisis and US politics makes it nearly impossible to boost the fragile economy? With all the noise in the North, most have missed that the rest of the world is, in fact, booming.

The graph, for example, shows the average person’s GDP growth rate across all countries of the world for which data is available. (For all my calculations, I use the 2011 World Development Indicators which can be downloaded online.) This is not the same as the average GDP per capita growth rate, which is weighted by the income of each country (regardless of how many people live in that country) and the most widely used as an indicator of global prosperity. Here, I weight by population of each country. Thus, in the new measure, China and India contribute much more to the growth rate than they would if total income is used as weight. In contrast, the US would weigh only 4.5% (in 2010), even though it represents a much greater share of global income (23% in 2010).

What does the graph tell us? It suggests that the first decade of the new millennium has been the most prosperous for the average person in the world, ever. The 2008/2009 recession certainly had a negative impact, but different to the negative global growth rate reported of 3.4% in 2009, the average person’s income actually increased by 1.5% in 2009. And this dip seemed to be short-lived: in 2010, the average person’s income growth rate rebounded to a high 3.1%, the third highest recorded growth rate for the last 40 years! (I should add that earlier growth rates should be even lower, but because data is not available for many smaller countries early on, they are excluded.)  How is it possible that GDP per capita weighted by income is negative while GDP per capita weighted by population is positive? Well, a disproportionate number of people in rich countries’ incomes fell, while the incomes of most people in poorer countries (that would contribute little to global income) increased. So, while the fall in incomes were larger in absolute terms than the increases (in 2009, that is), a greater number of people’s incomes increased (and considerably so) rather than declined.

Why is this important? The crisis – for the first time – is mostly a developed country phenomenon. So, too, are the pundits and the media that report their daily dosage of pessimism about the future. Even in South Africa, where I live, the woes of European and US markets dominate financial news. We hear about China’s staggering 9.8% growth rate, yes, but don’t know about Uruguay and Ethiopia’s 8% growth rates, nor discuss the 7% growth of Turkey, Turkmenistan and Thailand (all 2010). Sure, some of these rates are from a very low base. That’s not the point. Growth is essential for these countries’ citizens to partake in the global economy. A growing middle-class will buy more goods, creating new markets and perhaps offer the fragile developed world economic salvation (if they can fix their own internal struggles).

The message should be that the world is growing, even if some regions are struggling. The tide is lifting, but not from its usual source. Economic Armageddon is not near. Capitalism is safe. In fact, the future looks quite bright for the average global citizen.

Written by Johan Fourie

January 31, 2012 at 16:40

Lesotho

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Helanya and I spent six days in Lesotho just before Christmas. We had wanted a break from the usual South African holiday experience and booked a four day pony trek through the Mountain Kingdom. Starting at Malealea Lodge, about an hour South of Maseru, we trekked valleys, up mountains and down river gorges, spending three nights in remote villages. It was certainly not a luxurious holiday, but no less enjoyable.

Lesotho is still a predominantly agricultural country. 77% of the land is used for agriculture, ranked ninth in the world (South Africa is fifth with 88%), but only 8% of its GDP is from agricultural, 65th in the world (WDI 2011). This dependence on agricultural is obvious for any visitor; especially in the low-lying areas, maize is the staple crop, and nearly every inch of land that is not lost to erosion is under cultivation. In the higher mountain areas, pastoral goat and sheep farming is the primary economic activity, with mostly younger boys faithfully fulfilling their duty as herders (see picture). While the cultivated areas support larger villages, and perhaps higher standards of living, I was surprised to see that what must surely be surplus production each year does not translate into greater investments in physical and human capital, and resultant productivity increases in these areas. Asking our guide about this, he explains that the surplus is stored for winter and shared with those who might need it. Surely, though, competition would result in the better farmers winning and the weaker farmers losing land? No, not if the land belongs to the king. For the casual observer, land ownership certainly plays a critical role in inhibiting productivity improvements. Land sales in the rural areas are uncommon; even though Lesotho follows the British parliamentary model, the traditional leaders still have power in matters of land distribution. Foreigners are not allowed to own land. (Until recently, women were not allowed to either.) Without institutional changes, the current work of several development agencies in the country can at best only alleviate severe poverty; it cannot propel the country into a high-growth trajectory.

Even given its relative geographic disadvantages and small size, Lesotho is certainly a country that can be optimistic about the future. It has plenty of water, a resource that will only become more valuable. It also has plenty of fertile land. With some investment in infrastructure, the fruits of these two resources can be shipped globally. But to do that, the Basotho will have to allow (foreign) investment, will have to protect property rights and, perhaps, think about closer integration with South Africa. These changes will not be easy, but as the pony trek has taught me, hardship is not an infrequent visitor to the mountain people.

Written by Johan Fourie

January 29, 2012 at 20:05

Grand Pursuit

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Sylvia Nasar’s Grand Pursuit: The Story of Economic Genius brings to life most of the leading economic thinkers of the nineteenth and twentieth century. The Industrial Revolution, for example, inspired Charles Dickens, in contrast to Carlyle and Mill who were pessimistic about the progress of the new industrial society, to write that “we have risen slowly, painfully, and with many a hard struggle out of all this social degradation and ignorance”. This was the shocking realisation of the mid-nineteenth century: that you could improve your own material condition, and so could your children, and their children. Improvement. Progress. Prosperity. Alfred Marshall offered an explanation for this continued improvement: productivity growth. But economic growth was not enough; poverty was the main concern. Beatrice Webb (nee Potter), a surprising but no less interesting inclusion, argued for government to intervene through social programmes. Keynes, Fisher, Hayek, Galbraith, Robinson and Schumpeter all feature prominently, their ideas influenced by the extraordinary events of the first half of the twentieth century. Paul Samuelson and Amartya Sen are the most recent economists included, although their stories are distinctly less detailed, less passionately written, and less integrated into the global economic changes. A case could be made for including more of the recent economic thinkers like Milton Friedman, or Paul Krugman, or even Joseph Stiglitz. But perhaps that is an entirely different book. As it is, this is an entertaining story about individuals who’ve shaped the world we live in, and continue to do so, even long after they are gone. They all share at least one common characteristic: their experiences of the world compelled them to, first, understand it, and second, do something about it. That should be an inspiration to all of us.

On Agency

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Jan Luiten van Zanden recently published what I think is an important contribution to the discussion about the future direction of economic history research. His main point is that too much of recent research has focused on those factors that have had a causal, long-run impact on development outcomes today. Think, for example, of Nathan Nunn’s work on slavery, showing convincingly that the slave trades had the largest detrimental impact in those areas where most slaves originate from (Nunn 2008). Or, for an even more long-term causal link, Ashraf and Galor (2011) show that “in the course of the exodus of Homo sapiens out of Africa, variation in migratory distance from the cradle of humankind to various settlements across the globe affected genetic diversity and has had a long-lasting effect on the pattern of comparative economic development that is not captured by geographical, institutional, and cultural factors”. In short: our level of income today is determined to some extent by how far our Kenyan ancestors walked. Seriously?

That deep historical changes matter today is clear, but Jan Luiten’s point is simply whether that is the right question to ask. Should we all be “prisoners of the history we inherited”? Should economic historians not focus on those factors that allow us to escape the historical legacies? In his words: “even if history can explain 60% or 80% of the outcomes, it would make sense to be most interested in the remaining 40% or even 20% that allows us to change things in the future”.

Understanding the impact of past effects on development outcomes today is important, as it allows us to avoid similar mistakes. It also informs and expands economic theory. But how policy-relevant is slavery, or the Out-of-Africa hypothesis, for African leaders today? Are the more critical questions for policy not those that investigate the determinants of societal change, the factors that give people agency? In other words, how do we overcome the disadvantages of slavery, or the large genetic diversity in African societies that might limit our productivity?

Jan Luiten asks: “Can we try to free our profession from an overemphasis on historic determinism?” Economic historians will have no choice if we hope to contribute to a better understood, and ultimately more prosperous, world.

Read the paper here.

Written by Johan Fourie

January 25, 2012 at 12:08

Jackers

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I spent five days during December in Lesotho on horseback, which also meant that, for the first time, I missed following the Boxing Day cricket test match . Except, I did not miss my cricket fix. I had purchased Robin Jackman’s biography – Jackers, a life in cricket – just before entering Lesotho and spent the five days reading about the life and career of one of cricket’s most beloved and talented commentators. The book is written by Colin Brydon, but it is easy to hear Jackman’s voice in the text. It’s filled with honest anecdotes about his time in England, on tour with the English cricket team, but especially interesting his time at Western Province, Zimbabwe and now on tour as commentator. For my generation, Jackman’s emphasis on player experience (he made his own debut for England at 35)  may sound old-fashioned, but it is a message that the success of Vernon Philander has recently echoed. While his earlier chapters may sound nostalgic, the late night endeavours throughout his career, though, colourfully portrayed in the later chapters, is sure to add to his fun and rebel-like image.  It’s his knowledge of the game, and especially of the people in the game, that makes this book worth reading. Especially when you’re missing his voice because, like me, you’re on horseback in Lesotho or, which is similar, watching cricket on SABC.

Written by Johan Fourie

January 22, 2012 at 18:00

Global Economic History

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Global Economic History: A Very Short Introduction, by Robert Allen provides an excellent overview of global economic change over the last 500 years. Allen is an expert on the Industrial Revolution, but this tiny book also showcases his authority on other, less popular histories, including the economic changes of Russia, Japan and the Americas. Allen excels at fusing economic theory and long data series into a narrative that would be understandable to any high-school student. Perhaps he should consider expanding this into a textbook for undergraduate students (as I’ve suggested to him, although he looked less than thrilled). I am more critical of his contribution on African economic history, as I’ve said before. But this should not keep anyone from buying this as a Christmas gift for someone vaguely interested in economics, world history or those simply interested in understanding why some regions of the world prospered while others remained poor.

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January 22, 2012 at 17:19

Grape

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Grape, by Jeanne Viall, Wilmot James and Jakes Gerwel, offers an interesting perspective on the South African wine and table grape industry. The book is divided into eleven diverse chapters, including the origins of the wine industry, the demand for labour and its social consequences, South African wine consumption, the impact of climate change and land redistribution and transformation issues. A good blend. It is not an academic work, although it is firmly ingrained in the (historical and scientific) literature, except for a few minor errors (like spelling my name incorrectly). And although the narrative is sometimes coloured by a bias towards the disposessed and disadvantaged, it nevertheless is thought-provoking if not outright challenging. Next time you need to buy a gift for a visiting academic, buy her this rather than another Stellenbosch coffee-table book. Footnote: I’ve reviewed the book in Afrikaans soon to be published on Litnet.

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January 22, 2012 at 17:15