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Archive for April 2012

Job revolution

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The best essay I’ve read for a while is certainly The Economist’s Leader on “The Third Industrial Revolution”, a timely and fascinating take on the digitisation of manufacturing, and the implications that will have on the geography of jobs. While the first industrial revolution brought us mechanisation in the eighteenth and nineteenth centuries, the second industrial revolution of the twentieth century brought mass production (think Henry Ford’s quip ‘Any colour as long as it’s black’), the third industrial revolution of the twenty-first century will bring us mass customisation. We’ve been moving in this direction for a while (high-end fashion is one example), but, The Economist argues, the converging of several technologies, including clever software, novel materials, more dexterous robots, new processes (such as 3D printing) and web services, now allows the consumer to also be her own producer.

The manual labour of the future?

Gone are the need for cheap Chinese (or Vietnamese, Bangladeshi or Malawian) imports. Need a new pair of shoes? Why not just order a pair of Reebok’s printed by a local shoe-maker to your exact specification (size, material, colour)? Inviting guests over for the evening? Why not print them personalised cutlery on your home 3D printer, which will soon be as  ubiquitous in our homes as the fridge? To be profitable, large manufacturers will have to shift from producing products to producing services; the example of Rolls-Royce that no longer sells jet engines but rather the hours that each engine is actually thrusting an aeroplane through the sky is pertinent. Of course, not everything can be printed (see The Economists’ April fools-joke about printing pets). But there is no denying that the most recent technological revolution will (again) be creatively destructive, benefiting most at the cost of some.

The consumer should be the biggest benefactor. (Ask any wearer of size 15 shoes.) But large manufacturers of standardised, cheap products will struggle. Governments, too, will find it hard. As The Economist notes, “their instinct is to protect industries and companies that already exist, not the upstarts that would destroy them. They shower old factories with subsidies and bully bosses who want to move production abroad. They spend billions backing the new technologies which they, in their wisdom, think will prevail. And they cling to a romantic belief that manufacturing is superior to services, let alone finance”. The internet is perhaps the best way to see this process of creative destruction with little to no government involvement: Instagram, after just a year with a dozen employees, was worth $1 billion to Facebook. No bureaucrat could have foreseen this a year ago.

South African minister of Trade and Industry, Rob Davies, at the recent Africa Dialogue conference called for African governments to promote policies that encourage industrialisation. His argument is that all the rich nations have industrialised by promoting large, manufacturing industries, and that African countries should follow that blueprint. Unfortunately, Minister Davies still lives in the twentieth century; he needs to realise that the most recent technological revolution won’t allow African countries to replace Factory China. In fact, Factory China is disappearing faster than you can say “African renaissance”. Services are the future. South Africa already has a unique comparative advantage in three important service industries: travel, communications and finance. Others, such as insurance, construction and business services may follow. In the next decade, these are the industries where thousands of (well-paying) jobs will be created, not in mass production, regardless of whatever government support is provided.

The problem is that governments don’t know how to support or encourage these services industries. It’s easy to give subsidies, or tax rebates, or build infrastructure, that cater to the manufacturing industry.  It’s also easy to win votes when politicians can state that they’ve protected 50,000 jobs in the clothing industry (but at what cost?!). But to support the services industries requires far tougher policies; reduced red tape (across national boundaries), free and fast web access, in short, make it easier for entrepreneurs to start and grow a business. Entrepreneurs also require something else: education. It’s this last hurdle that is South Africa’s  Achilles Heel: the most essential way to improve a country’s industrial capacity – be it in manufacturing, but especially in services – is to ensure that kids get a quality education, that they learn to think critically, do math, and have access to tertiary education (either at universities but more importantly at vocational colleges). It’s a cliché that we should prepare students for jobs that don’t yet exist, but it’s also frighteningly true. Some of my best-paid friends are writing web applications for tablets and smart phones on the African continent, neither of which existed a decade ago when we studied together. Minister Davies’ best sangoma bones could not have foreseen this.

Those fortunate enough to gain a quality education could lead Africa’s industrial revolution (and benefit from the large consumer gains it has to offer).Those left behind will have to resort to manual labour, labour that’s increasingly outsourced not to cheap China, but to rapidly improving robots in the rich world.

Written by Johan Fourie

April 28, 2012 at 14:31

Fertility explained

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My first empirical paper, written for Murray Leibbrandt’s UCT Stata course, investigated the changes in South African fertility using 2001 census data. I vividly remember struggling to match the textbook definition of fertility with the data that was available in the census and then, while washing the car (and, Helanya, there is no causality here), experienced a Eureka moment and rushed to the computer, soaking wet, to type in the precious code that would give me a semi-decent essay mark.

But fertility is on my radar again. Demographic variables are important because it is correlated with so many development indicators – education, health, and income, of course. Economic historians have also noted its relevance; in fact, when considering a country’s early development performance, demographic variables are often the only reliable quantitative estimates available (see Wrigley 1997). That’s why I found it surprising that there is a total lack of demographic South African history, except for a 1975 paper by Robert Ross using a sample of 300 settler households. Fortunately, a new data set which includes more than 380,000 individuals (compiled from genealogical records by Jeanne Cilliers, a Masters student at Stellenbosch) will begin to provide new answers to questions about early Cape Colony levels of fertility, marriage patterns and household size. More on this soon.

Measuring is only the beginning, though. Understanding the decline in fertility levels worldwide is a topic that have interested economic historians and demographers alike, and is probably one of the ‘big questions’ that are still left without a satisfactory answer. In a new Working Paper by Laura Rossouw, Ronelle Burger and Rulof Burger, this question is again brought to the fore in the context of the South African fertility decline since the 1960s. They use the National Income Dynamics Study data to construct a retrospective panel which allows them to decompose fertility by its causes. They find that a large share of the observed fertility decline across birth cohorts is a result of improving education levels and the lower prevalence of marriage. An important result. However, they also find that a “considerable segment of the transition is ascribed to the unobservables”, i.e. causes we cannot identify. They posit that these include HIV/Aids, the increased use of contraceptives and the social role of women. Yet given that a large part of this decline is in the 1960s and 1970s, it is unclear how important the impact of contraceptives were during this period and how HIV/Aids could have had any role to play.

I’d like to propose another theory, based on the work of Neil Cummins, now at Queens College, City University of New York. In his PhD dissertation on the nineteenth century fertility decline in England and France, Neil posits that:

parents are motivated by relative status concerns and the fertility transition is a response to changes in the environment for social mobility, where upward social mobility becomes obtainable through family limitation. This hypothesis is tested with the new micro data. In both England and France, fertility decline is strongly associated with decreased levels of inequality and increased levels of social mobility. The analysis finds strong support for the role of changes in inequality and the environment for social mobility as central factors in our understanding of Europe’s fertility transition.

Could it be that black South Africans in the 1960s, but especially during the 1970s (when most of Rossouw et al’s fertility decline is unexplained), realised that social and political change is a reality in South Africa, and that those perceptions of social mobility influenced their decision to have children or not? When upward social mobility seemed impossible, more children were always better than fewer because of the greater likelihood of at least one child surviving into adulthood. However, when social mobility became a reality (or perhaps only a perceived reality), fertility decisions changed, as investments in fewer children might allow them to move up the social (and income) ladder. Similarly, white fertility would have been high, given the low risk of downward social mobility during Apartheid. However, once downward social mobility became an option, whites limited their number of children to ensure that their offspring maintain at least the same social status that they enjoyed.

In the wise words of Rafiki: “We can either run from our past, or learn from it.” Time to learn.

PS: Rulof noted below that I misinterpreted their results. The 1960s and 1970s refer to birth cohorts, which means that the largest decline in “unexplained” fertility occurs during the 1980s and 1990s, when these women reach child-bearing age. Their claims about HIV/Aids and contraceptive use therefore make perfect sense. Increased social transfers, also. But Neil’s theory about social mobility, too, has greater relevance, given the political changes South Africa witnessed from 1989 to 1994. The question remains: how to measure “perceived social mobility”?

Written by Johan Fourie

April 24, 2012 at 21:59

From Portugal, with love

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(c) Johan FourieThe Portuguese have a saying: “Há Mouro na costa…“, there’s a Moor on the coast. The Moors were the Muslim people from North Africa who lived in the Iberian Peninsula between roughly 800 and 1200 CE. Reconquered by the catholics, the Moors remained a “threat”. The expression, though, refers not to war but to love. You say this when there’s a person threatening to invade someone’s heart.

Helanya and I recently traveled to Portugal for a short but memorable vacation. We spent one night in Lisbon, before traveling to Porto, Coimbra and back to Sintra. Although Portugal’s economy is struggling, it remains a rich country; rich in history, tradition, culture, colour and taste. Portugal gave Europe the Age of Discovery, it gave the Cape its name, it gave Holland it’s Tulips, it gave Brazil its football and the world Christiano Ronaldo. But there is an immense sense of sadness, of melancholy, of a golden age that will never be again, best embodied by Coimbra’s forlorn Fado music. Perhaps, also, this is its appeal.

The Portuguese are probably the friendliest and most hospitable people you will meet, especially in the less touristy areas. Tourism is a large share of the country’s GDP (about 5%) and a huge employer. Although tiny in terms of land area, there is enough diversity to justify returning again and again (this was my third trip). Porto, especially, is a romantic city. The city rises from the banks of the Douro River, with tiny houses and factories and cathedrals clamoring for space on the steep hills. On the opposite bank are the “caves”, which invite you to explore the flavours and sensations of port wine. I’d recommend Croft. And if you need a place to stay, try the 6Only hotel.

Visiting Portugal is a bit like going back into the past. The Portuguese have another saying: “Àguas passadas não movem moínhos“, past waters don’t power past mills, meaning you shouldn’t worry about past things. Perhaps so, but the past might just be its saving grace, if it manages to make more visitors, like me, fall in love.

Written by Johan Fourie

April 21, 2012 at 12:58

Explaining African tourism

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(C) Isabel Lundin

Elephants in Zambia: That's me snapping some photos in the South Luangwa National Park, one of the best (if not the best) game reserve I've visited. Photo by Isabel Lundin.

I was fortunate to share a platform last week with Deputy Minister of Tourism, Thokozana Xasa, and SAA CEO, Siza Mzimela on the topic of tourism in Africa at the Africa Dialogue conference. Moderator Thebe Ikalafeng (Chairman of Brand Africa) fired off the discussion by asking Ms. Mzimela why it is that SAA (again) requested R6 billion from the Treasury. Her response – that SAA would like to expand its activities in Africa which will require large capital investment, capital which will be sourced from the capital markets with the R6 billion used as collateral – was to the point and clear, a sign that SAA may be turning the tide.

I was asked several questions about some (provocative) statements in my research papers (i.e. that African tourists are similar to foreign tourists visiting Africa). With limited time to explain the context and methodology, I focused rather on what my results could add to the discussion. I had prepared a short introduction, though, and thought it good to repeat it here (with links to the appropriate papers).

Tourism research in South Africa is a relatively new field, although there are some strong schools (such as those at North-West University Potchefstroom campus) that is doing invaluable micro-economic research. I come from a trade background, and first became interested in tourism when I calculated South Africa’s revealed comparative advantage in various goods and service sectors. Travel service exports (mode 2 is tourism) was the only service sector that revealed a strong comparative advantage. I investigate the reasons for this persistent advantage over time in a paper published last year.

I also calculated tourism RCAs for other African countries. I found that a number of African countries for which 2006 data is available reveal comparative advantages in tourism. Four interesting trends are observed: first, the island economies of Mauritius, Reunion, Seychelles, Cape Verde, etc all have, as expected, large RCAs. The three northern African countries of Egypt, Tunisia and Morocco also attract a lot of tourists relative to trade in other trade sectors, probably because of their proximity to Europe. Most interestingly, a band of countries running from South Africa to Ethiopia on the East coast of Africa all achieve relatively strong comparative advantages. (Zimbabwe should also be included here, but its political problems have eliminated its advantage – and data.) Finally, a group of countries in West Africa – especially those landlocked – also reveal (weak) comparative advantages in tourism.

Of course, the next step is to identify the causes of this advantage. The full results will soon be published in a co-authored article with Leon du Toit, but a Working Paper is available. I think there are four interesting findings. First, natural and cultural resources seem to matter a lot in explaining the advantage. We test this with a number of variables – the UNESCO World Heritage sites, size of protected area and length of coastline, to name a few. The coefficients are large and significant, suggesting that African countries should put greater value on their environmental and cultural resources. Second, some variables that we think might be important does not come out statistically significant. Crime is the most obvious example here; most reports on tourism emphasise the adverse affects of (perceived) crime on a country’s tourism industry. We interpret the insignificance in the following way: while crime will have an adverse effect on tourism, it probably also has adverse effects on other trade sectors. Thus, tourism is not disproportionately more affected by high crime than other sectors. Third, we show that something like a neighbourhood effect exists; countries, on average, have a higher RCA if their neighbours also have a high RCA. Political tension in a neighbouring country might thus affect a tourism industry in the stable country worse than other trade sectors. This also give rise to some policy suggestions: why not reduce the costs of moving between countries for tourists, like a UNIVISA for SADC countries as has been proposed before (and at the Africa Dialogue conference)? Finally, we find that relative transport costs (air over sea) matter. While air transport to African countries is expensive relative to Asia, it is less expensive than sea transport to Africa vis-a-vis Asia. Landlocked countries in Africa – as can be seen from the map – would do well to focus on the tourism industry, especially smaller countries like Lesotho and Swaziland. Rwanda and Uganda already have a strong comparative advantage. This final result also suggest at least two policy interventions: reduce the costs of air travel further (why not open air travel to chartered flights from Europe?), and relax policies that may hinder tourism developed, especially in the poorest landlocked countries. Having traveled to Lesotho (see below), I have seen the limited availability of good tourism infrastructure in that country. This is probably as a result of institutional constraints: the system of property rights, the difficulty of land acquisition for foreigners, and similar issues restrain the development of what might be a highly successful tourism industry, especially given its location within the borders of a country where tourism is already well-developed.

These are just some of the ideas of my first work in tourism. I have also compared within-African tourism with inbound-African tourism (see below and here), have investigated the impact of the World Cup on tourist arrivals (with Maria Santana-Gallego, see here and here), and estimated the impact of international students studying at Stellenbosch University (with Emile du Plessis, see here). Most recently, I’m busy with an exciting project that investigates the impact of historical migration on tourism. But more on this later.

Tourism is an exciting research area. It is also an important economic sector in the South African economy, accounting for a larger share of GDP than agriculture, for example. We thus need to expand our understanding of its causes and consequences, and hopefully arrive at policy suggestions that will allow the tourism industry, especially in small, landlocked African countries, to take off.

Beginner’s luck

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REUTERS/Action ImagesSport has many applications to real life. We learn that life is sometimes unfair, that even our best is sometimes not good enough, or the commentator’s favourite cliché that determination is as important as preparation, athletic ability or creativity. But, at a broader level, sport can also inform our understanding of how humans behave, which has application to activities outside of the sporting world. Think of goal keepers’ decisions to choose which way to dive in a penalty (game theory), or the tests for racial discrimination in English football or the NBA.

A 2010 IMF working paper investigates one other aspect of sport – and life – that is too often neglected by economists: luck. The paper asks a simple question: is an international cricket player’s career adversely affected if his first series is played in a country outside of his home country. The authors argue that the bad luck of being first selected in an away-series, on average, leads to a less successful career than those cricketers who were selected for their countries and then played their first series at home.

This has important implications for labour markets in general, the authors aruge. Economists often find it tough to dissect the effect of luck in the job market, as it is often correlated with ability; people who work hard create their own luck, as Gary Player would have said. What this study shows is that luck (playing in either a home or away series, which has nothing to do with player ability) does not only impact a players performance during the first series, but also has an impact on his chances of being reselected (negatively, if he played his first series away from home) and on his career performance (measured as his batting average). Vernon Philander (pictured) is perhaps the best recent South African example. Many thought his initial success was down to beginner’s luck and that he would struggle on different pitches. Yet, he has reached 50 test wickets faster than any other South African bowler. These findings also suggest why it is better to keep Mark Boucher for the England series; the lesson here is don’t send your best new youngster to debut away from home in difficult and unfamiliar conditions.

Of course, the study is open to criticism. The data used is for all test cricketers between 1950 and 1985 (excluding South Africans because of isolation). That is before the professional era. Top cricketers are now readily exposed to different pitches and environments; just think about the emergence of the IPL where most of the best players play annually, and of the hectic international tour schedule. The best cricketers also play little domestic cricket, and international pitches have also improved to meet certain standards. Even so, captains and commentators often emphasise home ground advantage.

The best cricketers are arguably those who adapt best to new conditions. But allowing them to play their first series at home can improve their chances of success. Perhaps a large share of Vernon’s success is simply down to, well, the beginner’s luck of playing his first series in South Africa.

Written by Johan Fourie

April 13, 2012 at 20:58