This is Not the End of the Book

This is not the end of the book (Harvill Secker, 2011) is a conversation between Umberto Eco and Jean-Claude Carrière about the past and future of books. For us bibliophiles, this is like listening to the pope debate the Archbishop of Canterbury around a campfire. The discussion ranges from their collections of incunabulum (books printed before 31 December 1500) to the definition of stupidity, how to filter information and what will happen to book collections when you die – and then some more.

Some topics are less arbitrary than others: the conversation begins with a discussion of the rise of e-books and the possible “end of the book” to which the title refers. They argue that paper is the medium that have survived all other media and will continue to do so, even if books are now available in many other formats. (As an economic historian, I must concur: data collated on microfilm in the 1980s is now more difficult to access than archival records of the 18th century). There are several delightful ideas and anecdotes. Jean-Claude argues, for example, that there are two kinds of books: “The book the author writes, and the one the reader owns.” I like that. A book changes meaning as the reader (and the context within which it is being read) changes. Animal Farm read in 1980s South Africa has a different meaning than it has today. Great books manage to maintain their relevance, even as the readership and the world changes around them. Great Gatsby remains a classic, but will Harry Potter be read by future generations? Can’t we only really discern good from great books a century after they’ve been published?

This is not a book to be read in one sitting. Rather, it is like good wine; allow it to linger on your taste buds while swishing it around the entirety of your mouth. Read a section, mull over its contents, read a bit further, drink more wine. And like meeting an old friend, hope the conversation never ends.

How Far Will You Get If You Are Sitting In Your Corner

The 2012 Budget Speech by Pravin Gordhan delivered few surprises. Aside from his request for members of parliament to stop whistling at the high proposed capital gains taxes, or his attempts at reading Zulu proverbs (Uzothola kanjani uhleli ekhoneni, or How far will you get if you are sitting in your corner), the budget did what it was supposed to do: begin the slow process of roping in anti-cyclical fiscal policy (i.e. a lower budget surplus and debt) now that the economy is growing again. Minister Gordhan, as per usual, increased sin taxes (R36 on tax for a bottle of brandy!) and announced tax reductions (which are mostly the result of bracket creep). Surprisingly, the increases in the social grants are all below inflation rates, marking what I believe is a significant step in rewarding productive activity rather than hand-outs. All in all, I think, he did pretty well.

What made his task difficult, of course, was the emphasis on infrastructure investment, as outlined in Zuma’s State of the Nation address. Minister Gordhan took some time to explain the various sources of infrastructure finance: while government (through the budget) will continue to finance social infrastructure like schools, clinics and courts, investment in economic infrastructure is (mostly) outsourced to the parastatals. Eskom and Transnet will receive little government transfers to finance their massive investment programmes, while telecommunications infrastructure will also be financed by the private operators.

The devil is in the detail, though. Sentech will receive R800 million “for the dual illumination of analogue and digital television, and for digital broadcasting infrastructure”. While there was no mention of South African Airways’ request for R5.6 billion, there was also no mention that SAA will privatise, except to say “our airlines industry has several private sector players”. R5.8 billion will be spent on the Gauteng Freeway Improvement Programme, which effectively mean that the rest of South Africa (which is responsible for 60% of our GDP, and thus tax revenue) will pay for congestion in one province. As Roelof Botha argues convincingly, toll roads are the best way to ensure that the users of the service pays. (He also notes that the top quintile of income earners will carry the heaviest burden, meaning that toll roads are fairer than relying on the general budget.)

But perhaps the main infrastructure-related item was not all the hype about expenditure, but the mention of an increase in 20c on the fuel levy (plus an additional 8c for the Road Accident Fund). Fuel remains an important input into South African production, especially in the two sectors which the Minister singled out as key sectors of the future: agriculture and manufacturing. Of course, increasing the fuel price will create the incentive to shift away from its use, but there really are no viable short-run solutions yet. If the plan is to move from road transportation to rail, then we should not be expanding highways and building new roads where cars require fuel (at least for the next five years) to operate. I suspect the increase in the fuel levy is an easy way to earn revenue – a cash cow – but it creates all sorts of price distortions (inflation!) which eliminate most of the benefits of the greater revenue. Moreover, because the poor spend more on transport as a share of their budget, they will bear more of the burden, exacerbating inequality.

Trade makes society prosperous. But trade is only viable when transport is cheap. A large fuel levy will discourage transport and trade, except if there are alternatives available. At the moment, there are few. Mr Gordhan would do well to consider his own Zulu proverb: How far will you get if you are sitting in your corner (without cheap transportation to get you to work or make your business grow)?

Breakfast

Enough has been written about the poor state of education in South Africa. (If you need reminding, The Economist is a good start.) Truisms abound: Quality education remains the bedrock of a productive labour force. Our high unemployment rate is to a large extent the result of bad past and current education outcomes. Apartheid education, especially the low quality of mathematics and science, has resulted in several generations of South Africans missing out on the opportunities of tertiary education, and a more fulfilled life.

But less has been written about solutions for the challenges of the education sector, not because no-one has thought to do so, but because answers remain elusive. High inputs do not translate into high outputs; economists have been unable to pin down the exact sources of failure or, even more importantly, devise novel strategies to improve outcomes. Teacher quality is bad, yes, but so are absenteeism rates, management practices, the curriculum, infrastructure, criminality, or, as many would say “the culture of education”. Where to begin?

Breakfast. At least, that is the argument by two American economists, Imberman and Kugler, investigating an in-class breakfast program in US schools. They show, using an innovative difference-in-difference approach, that in-class breakfast increases both math and reading achievement by about one-tenth of a standard deviation relative to providing breakfast in the cafeteria. They find that these effects are most pronounced for low performing, free-lunch eligible, Hispanic, and low body mass index students, i.e. the poorest of the poor.

School feeding programmes, of course, are nothing new and have been used across the world as ways to incentivise students to, firstly, attend school, and secondly, perform better. But these are usually concerned with providing a (free) lunch. Instead, there are clearly many medical benefits to eating breakfast, especially for kids. According to WebMD, “when kids skip breakfast, they can end up going for as long as eighteen hours without food, and this period of semistarvation can create a lot of physical, intellectual, and behavioral problems for them”. Math scores, especially, seem to suffer. Perhaps, then, in search of education fixes, we need to remember another truism: Breakfast really is the most important meal of the day.

Food Security

Two quite unrelated news items caught my attention today. The International Trade Administration Commission (ITAC) of South Africa yesterday announced that it will impose provisional anti-dumping duties for the following 26 weeks against Brazilian imports of frozen whole chickens and boneless chicken cuts. The magnitude of the duties is between 6 and 63 percent. (Read the tralac report here.) A few hours ago, the DA released a media statement “Mr Mulder needs a history lesson”, in which they attack Freedom Front Plus leader Pieter Mulder’s claims of land redistribution. Mmusi Maimane, the DA National Spokesperson, makes a fair point about land redistribution, but he then makes the following claim: “The first freedom is the freedom to eat. We need working farms that ensure the food security of our people and create employment opportunities in rural areas.”

Unfortunately, Mr Maimane and ITAC (and, for that matter, the Freedom Front Plus) is guilty of the same incorrect rhetoric. Food security is not about production. Food security is not about producing enough food for your citizens. If it was, then Hong Kong and Singapore would be the most food insecure regions in the world, which it isn’t. Food security, as Wikipedia will tell you, refers “to the availability of food and one’s access to it”. Food insecurity is the inability of citizens to consume, not produce, food. Food insecurity can occur in a country that is nearly entirely agricultural, such as Somalia and Ethiopia, two countries that only recently experienced food shortages and starvation.

Why should South Africa produce all its own food, when only 13% of our land is suitable for crop production? Why not import our food from other breadbaskets, like India, or (subsidy-rich) Europe, or Brazil? Nineteenth century England realised this and removed the Corn Laws that protected local farmers. Instead, they focused on what we today call the Industrial Revolution, and imported their (growing) food requirements from the American Corn Belt. The South African Poultry Association alleged that frozen chickens were being dumped on the South African market, at prices below what South African chicken farms can rival. ITAC perceived this as a threat to food security, and instituted duties that will almost certainly increase food prices. This will have the exact opposite effect on food security: higher prices would allow fewer (poor) South Africans to buy chicken, reducing food security for those that are most at risk.

Food security is not about South Africa producing all its own food. Food security means we should provide all our citizens with food at as low a cost as possible. That’s the lesson from the Industrial Revolution. It seems that both Messrs Maimane and Mulder need history lessons.

A Profession At Sea

In Time Magazine of January 30, Robert Johnson, executive director of the Institute for New Economic Thinking, called economics “a discipline in disrepute”. The financial crisis, he argues, was partially the result of “false visions of financial-market behaviour” pushed by economic models “constructed with building blocks that assume [unrealistic] stable and anchored expectations”. In short, the recession has broken the ship “from its stable mooring and unexpectedly slammed it into the rocks”.

Johnson proposes two remedies. Firstly, economists should be more humble about what they actually know. This is a fair point and probably true of most science. Secondly, Johnson criticizes the over-reliance on high-powered mathematical models. He argues, instead, for the reintroduction of context. “More research on economic history and evidence-based studies are needed to understand the economy and overcome the mechanistic bare-bones models”. Also, political economy: “We must acknowledge the intimate, inseparable relationship between politics and economics”.

Economics teaching now involves large quantities of math and statistics. This is by no means a bad thing. Math allows for the derivation of complex theories. Statistics allows tests of these theories that are replicable and falisfiable in the Popperian spirit. But the criticism is not in the use of math and stats, but in its absolute use. Graduate students are often graded only on their ability to name the constraints of the OLS model, rather than their ability to explain the economic causes of the Industrial Revolution or, closer to home, Apartheid or the first democratic elections in 1994.  (In fact, students of economics often have little need for knowing about anything that happened before 1960, when national accounts data become available on a global scale.) Economists look disparagingly at political science, or sociology, or ethics for their lack of rigorous statistical techniques, but understand little about the political processes that shape economic outcomes. As Johnson notes: “We are living in an era of money politics and large powerful interests that influence the laws and regulations and their enforcement”. Why has the South African Journal of Economics not published a paper on Malema’s call for economic freedom?

We need to train students in math, statistics and context. We need, as Deirdre McCloskey eloquently argues at the end of her most recent book (Bourgeois Dignity), ‘a more idea-oriented economics… For such a humanistic science of economics … the methods of the human sciences would become as scientifically relevant as the methods of mathematics and statistics now properly are. Such a widened economic science would scrutinize literary texts and simulate on computers, analyse stories and model maxima, clarify with philosophy and measure with statistics, inquire into the meaning of the sacred and lay out the accounting of the profane. The practitioners of the humanities and the social sciences would stop sneering at each other, and would start reading each other’s books and sitting in each other’s courses.” In short, we need to navigate the high seas armed with advanced digital satellite equipment and, when an electric thunderstorm erupts, the working knowledge of past experience and alternative methods to stay clear of the rocky cove and steer the ship back to safety.

Travel companion

On our recent visit to Lesotho (described below), we were accompanied by Tony Belgrave, a Brit who travels the world deactivating landmines. He also happens to be a really good photographer and has now published some of his Lesotho and South Africa travel photos. The picture above shows us traversing through ‘Surreal’, an enclosed valley high up in the mountains, on day 2 of our 4-day trek. Be sure to check out Tony’s website for wonderful photos of his somewhat alternative travel destinations. The picture is © Tony Belgrave (2012).

Infrastructure

The main highlight of President Zuma’s State of the Nation Address was his announcement of several new infrastructure projects. This seemed to go down well with the popular media, who called it an “ambitious” speech, and the general impression seems to be that infrastructure spending is difficult to fault given the crumbling condition of many rural roads, the frequent warnings of electricity shortages and the high costs, and slow speed, of internet access.

But what is often missing in the public discourse is that infrastructure spending decisions are implicitly decisions about industrial policy, which implicitly influences a country’s comparative advantage. Because infrastructure are expensive, it is simply impossible to simultaneously provide all infrastructure service requirements at once: fix all roads, reduce all port charges, provide low cost internet coverage across the country. Choosing one project means not choosing another. This means favouring certain industries against others: a new railway linking a iron-ore mining town to a port, for example, would entail few benefits for those sectors outside mining.

So what were the projects Zuma announced: firstly, a “plan to develop and integrate rail, road and water infrastructure, centred around two main areas in Limpopo: the Waterberg in the Western part of the province and Steelpoort in the eastern part”. Zuma is clear on its intentions: this investment is intended to “unlock the enormous mineral belt of coal, platinum, palladium, chrome and other minerals, in order to facilitate increased mining as well as stepped-up beneficiation of minerals”. There should be no doubt about the sector that profits from this investment.

Secondly, government “will improve the movement of goods and economic integration through a Durban-Free State-Gauteng logistics and industrial corridor”. R200 billion will be allocated to rail improvements and R100 billion on port projects to “connect the major economic centres of Gauteng and Durban/Pinetown, and at the same time, connect these centres with improved export capacity through our sea-ports”. As South Africa’s main industrial hub, Gauteng needs a rapid, reliable and low-cost connection to the global market, and this certainly is an attempt to reduce these transport costs. Manufacturing seems to be the main beneficiary of this investment, although Zuma does mention that “amongst the list of planned projects, is the expansion of the Iron Ore Export channel from 60 million tons per annum to 82 million tons per annum”, as is a “new 16 million tons per annum manganese export channel through the Port of Ngqura in Nelson Mandela Bay”. Mining, again, seems to benefit.

A third project envisages the agricultural development and improvement of export capacity in the Eastern Cape region. Less detail is available in the President’s speech, but this lower logistics costs seems to be the main focus. A new dam will also provide water to farmers in the former Transkei. Agriculture, thus, and perhaps the existing motor vehicle manufacturing industry are the most likely beneficiaries of these plans.

Fourthly, in the North West, government “will expand the roll-out of water, roads, rail and electricity infrastructure. Ten priority roads will be upgraded.” The main economic activity in North West remains agriculture and mining, and they will arguably be the main beneficiaries of this investment.

Fifthly, Zuma sees “enormous potential along the west coast of the country and [we] need to improve infrastructure to unlock this potential. Our plans include the expansion of the iron-ore rail line between Sishen in Northern Cape and Saldanha Bay in the Western Cape, which will create large numbers of jobs in both provinces. The iron-ore capacity on the transport-side will increase capacity to 100 million tons per annum.” Mining.

Of the five key infrastructure projects South Africa chooses to invest in, two is entirely dedicated to mining, while another two will, in addition to agriculture and manufacturing, also benefit mining. Considering that the Industrial Policy Action Plan (IPAP2) released by Minister of Trade and Industry Rob Davies in 2010 focus on “metals fabrication, capital and transport equipment, green and energy saving industries and agro-processing” as strategic sectors, as well as sectors which were identified in the first Industrial Policy Action Plan, namely “automotives and components, medium and heavy vehicles, plastics, pharmaceuticals and chemicals, clothing, textiles, footwear and leather, bio-fuels, forestry, paper, pulp and furniture, cultural industries and tourism and business process services (or call centers), nuclear, advanced materials and aerospace” the infrastructure spending plans of government seems to weight too heavily on one specific sector.

There is no mention in the infrastructure plan, for example, of investments in information and telecommunication networks. The only investment of note in the service industry, is the Square Kilometre Array radio telescope which South Africa is bidding to host. No extra funds, though, is promised. Rather, “we urge you to support the country’s bid”.

Infrastructure investment offers a rare chance to shape a country’s industrial future. There is no doubt our existing comparative advantage is in mineral resources. But is that the future we collectively envisage? Will we, for example, be satisfied if we reduce our high unemployment rate by providing jobs in the static, low-paying mining sector, jobs that can easily shift to lower-paying jobs in other resource rich countries? Will our dwindling mineral resources be able to compete with the mineral wealth of the rest of Africa? In addition, mining companies often provide their own infrastructure; by substituting private infrastructure with public infrastructure, the government is in fact boosting mining profits, exactly the opposite intention of the nationalisation/mining tax debate that is currently in the public sphere.

This is the most opportune time in our history to shift our comparative advantage to a dynamic, entrepreneurial and, incidentally, the fastest growing sector globally: services. Our kids should dream of designing mobile applications rather than working in an iron-ore mine. They should dream of becoming accountants, designers, bankers, scientists, musicians, football stars to a global audience, rather than forced to work menial jobs. Infrastructure investment is the catalyst to such a future. Rather than focus on the mining industry, this country should ensure that every urban kid has access to a fast and cheap internet connection, has a computer in her school, has access to quality health, education and, as she grows older, financial services. Reliable rail services, quality roads and reliable electricity are important, as are lower port fees, but so are clean water and sanitation services. Cities are the incubators of economic growth, which means we should direct infrastructure spending to these areas.

Our country has a scarred history. If we want to live in a nation where the past has less of a footprint, and where the chance to prosper is not restricted to a fortunate few, we need to put much greater emphasis on the services sector, and less on mining. While infrastructure investment may alleviate the acute unemployment problem that defines the state of our nation, the type of infrastructure we choose reflects, perhaps unwittingly, the state of our future.

State capitalism

The Mail & Guardian on Friday proclaimed that South African economic policy will now follow a Chinese blueprint.  The article attempts to explain what this means: apparently, the “the private sector has failed to invest in infrastructure to stimulate economic growth and the state needs to play a more activist role in the economy. Lack of investment in infrastructure over the past years is believed to have stunted South Africa’s growth.” Now, the authors argue, the South African government will follow “the Chinese model of building infrastructure”. Indeed, some policy makers have even visited China to study how China uses “state capitalism”, the new buzzword promulgated by The Economist, to keep its economy growing at nearly double-digit rates.

This should be an interesting debate, but it is diluted by bad economics. Firstly, it has and never will be the private sector’s responsibility to provide infrastructure. This was already known by Adam Smith, when he wrote: “The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain” (V.1.69). All governments invest in infrastructure – it is their duty – and lack of such investment, and the consequent stunted growth, is not the fault of capitalism but the fault of the state. If I read The Economist correctly, state capitalism (or China’s economic blueprint) implies even greater government involvement in all “key” areas of the economy. If our own government acknowledges that there has been a failure to invest in infrastructure, and it is our government’s responsibility to invest in South African infrastructure, surely then we should not give more responsibility to that same actor whose record shows an incapacity to deliver?

But what is this Chinese blueprint? The plan is that government would purchase shares in South African companies like MTN or Anglo and would “support” these companies strategically to promote the interests of  “the country”. It is not clear who “the country” is, though. Is it the people? Is the purpose therefore to promote employment or force down prices, with profits of secondary consideration (and at the cost of tax revenue)? Or is “the country” politicians and their cronies who can now influence how and where these companies conduct their business, from whom they buy their inputs, and to whom they sell and at what cost? Government involvement in the private sector leaves too many questions unanswered. What will happen when MTN, for example, makes a bad investment abroad, and must be bailed out? And what of Vodacom, who won’t have government “support”? Remember, China is not a democracy. There are no political parties requiring funds to help in election campaigns. If government “owns” MTN, or a share of it, who is to say that the incumbent political party does not misuse MTN’s vast communication infrastructure to influence voters? Similar examples abound.

This is not to say that government should not play a role. The Economist’s examples of successful Chinese, Russian and Brazilian state-sponsored companies are certainly valid. Sasol is a good example of a state-sponsored South African company that is now successfully operating in various markets, delivering profits to its shareholders and taxes to government. South African Airways, on the other hand, is a good example of how a parastatal drains government’s (and thus citizens’) resources. Why was Sasol successful and SAA not? One lesson, perhaps, is that state-owned companies are often not bought, but rather created for a specific purpose. Sasol was created to provide oil to an increasingly isolated country. Perhaps a state-sponsored company that targets the delivery of 5GW of green electricity within five years will be a more successful investment than acquiring shares in an already profitable firm. But, of course, there is no guarantee that the same issues that affect current parastatals will not also affect the upstarts.

If the South African government decides to follow the Chinese blueprint, given the current record of state-sponsored entities, a can of worms will be opened that will be difficult to reverse. What is quite clear, though, is that government’s (and, dare I say, economic illiterate journalists’) enthusiasm for a “new” model of capitalism is diverting attention from the real issue of how to ensure reliable services in those areas – such as infrastructure – where it is the government’s duty to operate.

When things fell apart

This is by far the best analysis of the post-independence African tragedy that I’ve read. And the shortest. In When Things Fell Apart, Robert Bates distills decades of research into a compact but powerful book that will take you an afternoon to read, but will keep you contemplating much longer. How is it possible that African states, inheriting growing economies at independence, could radically deteriorate into constant conflict and, in a few cases, genocide? Bates has the answer: political order rests on three variables, namely, the level of public revenues, the rewards from predation, and the specialist’s rate of discount. The interplay of these three factors determines whether a state protects or preys upon its citizens. Bates shows how the decline in public revenues, from internal and external forces, the capture of state revenues by elites (often in the name of nationalisation), and the natural resource wealth most African countries are endowed with, all combined to explain the decline of state order, and the rise of disorder (or failed states), often with devastating consequences. The analysis draws on several examples, showing how each case corresponds with the theoretical model. And given the success of the model to explain past failures, it also points to important trends that might help predict, or avoid, such disasters in the future. This is a book that is worth reading to anyone, but perhaps Cambridge University Press can send a complementary copy to each of the 54 heads of African states and their members of parliament. Understanding the past – in this case, the causes of state failure – remains the best way to navigate the future successfully.