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Archive for June 2012

Easterly and Levine (2012) and the deathly hallows

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William Easterly and Ross Levine show in a provocative new paper – The European Origins of Economic Development – that the proportion of Europeans during the early stages of colonisation exerts an enduring, positive impact on per capita GDP today. In short, societies where smaller numbers of Europeans settled are poorer today compared to societies where larger numbers of Europeans settled. This correlation is, of course, not surprising: the United States, Australia and New Zealand, some of the richest countries in the world,  were mostly settled by European immigrants, while countries where few Europeans settled, such as equatorial Africa or the Caribbean, are relatively poor. To establish causation rather than correlation, Easterly and Levine use two instruments – the population density in the year 1500, and the mortality rates of the indigenous populations. Both these show, roughly translated, that the greater the likelihood of European settlement, the higher that region’s economic prosperity today.

Elder Wand

Easterly and Levine is fighting a battle that has already been won. For more than a century, intellectuals from across the ideological spectrum have agreed that the arrival of European settlers was critical in boosting growth. There’s Hendrik Verwoerd, the mastermind of Apartheid, saying “We call ourselves European, but actually we represent the white men of Africa. They are the people not only in the Union but through major portions of Africa who brought civilisation here, who made the present developments of black nationalists possible. By bringing them education, by showing them this way of life, by bringing in industrial development, by bringing in the ideals which western civilisation has developed itself.” Or, on the other side of the spectrum, Jomo Kenyatta, father of Kenya, extolling the virtues of the European settlers: “We do not forget the assistance and guidance we have received through the years from people of British stock: administrators, businessmen, farmers, missionaries and many others. Our law, our system of government and many other aspects of our daily lives are founded on British principles and justice”. And then there are the several studies which Easterly and Levine cite that make the same point, although perhaps less explicitly: AJR, Engerman and Sokoloff, and Putterman and Weil. Yes, Easterly and Levine prove causation, but the ramblings of racists and researchers over the last century have also implied causality. In fact, regardless of their motives, no one opposes the view that European settlers matter for economic performance today – and the more, and the earlier they arrive, the better.

Resurrection Stone

But per capita income is not a welfare measure. (To be clear, Easterly and Levine acknowledges this several times in their paper.) In all the regions where large numbers of Europeans settled, large numbers of the indigenous populations died. This is especially true of the United States, Australia and New Zealand, but also in some parts of Latin America and in South Africa. The Cape Colony is a particularly interesting case, because of the existence of several different groups: the European settlers, the Bantu Xhosa and the pastoral and hunter-gatherer Khoesan. Several small pox epidemics – most notably one in 1713 – depleted the local Khoesan population, to the extent that some South African historians believe that close to 90% of Khoesan died, although this high proportion is contested by others. But these epidemics did not affect the Xhosa to the same degree. What was relatively inexpensive settler expansion east from Cape Town during most of the eighteenth century, stopped at the borders of the Fish River when the settlers met a society that had higher population numbers (because of agriculture), more advanced weapons (compared to the Khoesan) and were averse to the effects of disease. Easterly and Levine’s argument has two logical conclusions here: the wipe-out of the Khoesan was good for South African economic development today (as it encouraged greater numbers of European settlers). And the resistance of the Xhosa was bad for economic development today (arguably more settlers would have arrived if the fertile Eastern Cape was uninhabited). Had the Xhosa also perished, South Africa would be a richer, more prosperous society today. (This is of course not the kind of policy advice you’d take to the current ANC conference. And in truth, their paper is not meant as policy advice.)

But it does leave a sense of unease. If we could resurrect the Native Americans that died because of smallpox, or the Cape Khoesan, or the Aboriginal Australians, I’m pretty sure they would be less than thrilled to know that their countries are more prosperous today because they – living just above subsistence levels – perished very early  into the development process. Unfortunately, knowing that more Europeans cause higher level of incomes today – without acknowledging the huge losses (in lives, land and living standards) of the native populations – provides us with little more than support for the widely accepted truism that greater wealth today is as a result of greater wealth yesterday. The Europeans had more capital and higher incomes when they arrived. They killed (intentionally or not) the local, poorer natives. Therefore, these regions are rich today.

This adds little to our understanding of the process of economic development. Regardless of how strong the correlation between European settlers and current income levels is, we simply cannot ignore the immense welfare costs of the dead native populations.

Cloak of Invisibility

Easterly and Levine emphasise that though they prove a causal link from European settlers to income today, they don’t identify the specific mechanism which may explain this causality. While they do test for several possible explanations (for example, they do suggest that education may explain an important part of the story: ‘the results are more consistent with the … argument that Europeans brought human capital and human capital creating institutions’ that explains ‘the divergence of economies in the long-run’), they acknowledge that these results are ‘hardly definitive’ and the true mechanisms remain invisible. Over the last decade, economists and economic historians have grappled with identifying the true causes of long-run prosperity, and colonial settings have often provided a fertile field for investigation. AJR argues for political institutions, but education (broadly defined) seems to carry most weight: this is confirmed in several studies that goes to much greater lengths in identifying human capital as the causal mechanism, something which Easterly and Levine does not do. These include papers by Jutta Bolt and Dirk Bezemer, showing that precolonial African education explains economic performance today better than institutions. Or Nathan Nunn on missionary societies in Africa, showing that the impact of missionaries in Africa was to influence education, which still has a positive impact on African societies today. Or my and Dieter von Fintel’s work on Huguenot migrants to South Africa, showing that those Huguenots with wine-making skills were much more productive than their counterparts from non-wine making regions in France.

The message is clear: the benefits of education persist, often long into the future. (So, too, the costs of bad education. Consider the current South African education system.) Europeans happened to have better education when they arrived in the new territories. Where more of them settled (and more natives died), they could use their human capital to create better institutions, to build more productive societies, generating higher incomes. It’s called development. Moreover, Easterly and Levine also show that earlier settlers matter more than later settlers. Of course that’s true: the earlier settlers had more time to create better institutions, build more productive societies and generate higher incomes. The proportion of Europeans that settled early is simply a proxy for all the things we believe is important for development.

Easterly and Levine has played a clever trick on us: they’ve made us believe that what they say is novel and important. It’s neither. European settlers are not the answer to development. It’s the qualities these settlers possess that matters. Expert wizards like Easterly and Levine should know that.

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Written by Johan Fourie

June 28, 2012 at 16:23

Evolution, not revolution

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Sometimes I find something that is so unbelievably jaw-dropping that it challenges my perceptions about how far we’ve come as a country. A leading Johannesburg investor recently retweeted the thoughts of Bafedile Mafologele, a trained Chartered Accountant who is now Chief Operating Officer for an investment company “whose core business is the provision of Investment Consulting, Asset Management, Private Wealth and Hedge Fund solutions”. This CV is important: these are not the pseudo-intellectual ramblings of a leftist scholar that has just awakened from a twenty-year slumber. No, this is indeed a UCT-educated, qualified Chartered Accountant that now manages other people’s assets.

So what is so unbelievably jaw-dropping? In a post, titled “Black South Africans – I have a feeling one day your children are going to piss on your graves and call you stupid whilst the Zimbabwean children will be worshipping their parents as gods!!!”, Mr Mafologele proclaims the virtues of Robert Mugabe’s economic liberation campaign:

Dare I say Zimbabweans are richer now than they were during their times of prosperity. … Someday, if not today, the Zimbabwean people will realise that their suffering was worthwhile and that their days of prosperity are fast approaching.  As Zimbabweans reap the rewards of their suffering and enjoy what is rightfully theirs on their land, our children as black South Africans will ask us a very simple question: “why did we not think of similar radical policies?”  The policies did not have to be as extreme and bring about dire poverty however, they needed to ensure that the goal of freedom is realised not only in a political sense but also in an economical sense.

I remain South African but, it is at times like this that I wish I was Zimbabwean so I could enjoy the fruits of my “forefathers’” suffering.  President Robert Mugabe is villainised and seen by many as a dictator but what he has managed to do is give Zimbabweans political freedom and economic freedom.  It can be said that Mugabe’s dictatorship has worked in favour of Zimbabweans and he will die a happy man.  It is said he has left a trail of deaths, that remains an uncertainty as he is yet to be convicted in a court of law, however I believe he has liberated the people from economic slavery.  History will judge him and I wonder if people will say at that point that it was for the greater good.  The people of Zimbabwe will see economic freedom in their lifetime.

Where to begin? History will remember Mr Mugabe as a revolutionary leader who freed his people politically, and then misused his power to repress them economically, dashing the hopes and dreams of black and white citizens of what was once one of Africa’s most thriving economies. Zimbabweans are not better off than they were 20 years ago. In 1992, life expectancy was 58 years. Today it is 50. Gross national income in 1992 was 690 US$, today it is 460 US$. (All this from the World Development Indicators.) Thousands of Zimbabweans have died because of conflict, hunger and disease. Following Mr Mafologele’s argument, all this suffering was “worth it” because it was the only way black Zimbabweans could prosper. Rubbish. This is like arguing that the Black Death was a great economic boon to Western Europe during the fourteenth century, as it killed off nearly half of the population and resulted in high wages for those that remained. While it did increase wages – and living standards – for those that survived, I’m pretty sure no-one would propose the Black Death as a policy mechanism to increase economic prosperity.

Moreover, Mr Mafologele claims that, even though Zimbabweans are poorer, at least now they own whatever is left. I’m not so sure that this is true either. How sure is he that ownership is widely spread, and not captured by the supporters of Mr Mugabe? Moreover, do the people who now live on the formerly white-owned farms have legal tenure of their newly acquired farms? What if a new dispensation after next year’s election again decides to redistribute farms to their own group of supporters? If it happened once, there is no reason why this won’t happen again.

The real scary part is where Mr Mafologele pleads for similar policies in South Africa: “South Africa perhaps needs a bit of dictatorship and people with radical minds to ensure that all citizens share in its wealth.” There is only one quick way to reduce inequality, which inspires the thinking of populist ideas such as those Mr Mafologele propose, and that is to take away from the rich (which includes himself) so that everyone is equally poor. This is what happened in Zimbabwe. The rich – black and white – have left Zimbabwe because their prospects of prosperity was dashed and they could find better opportunities elsewhere. The revolutionary speed at which such change can occur makes this an appealing proposal, but it only results in sustained poverty and hardship (as is evidenced by the statistics). Redistributing from the rich is not a solution if one really cares about creating prosperity for all.

No, the only way is the hard way – it takes time to build up the necessary physical capital (savings, which is still extremely low in South Africa) and human capital (which is why the Apartheid education policies were particularly bad), time to build the necessary trust that makes markets work, and time to build networks that allows capital to find its most efficient use. (Let’s also not forget that South Africa, through the hard work of politicians on both sides of the spectrum, was fortunate to adopt a political system, legislative framework, system of property rights and media freedom that creates and protects the right institutions for this “construction project” to happen. For some countries, such as the United States, this process of democratic required several conflicts over several centuries.) There is no quick-and-easy solution to quality education, descent health care and high incomes for all. Chartered Accountants like Mr Mafologele should know this from personal experience.

In truth, I am surprised because I expected such sentiments from populist politicians, not asset managers. I understand the frustrations of Mr Mafologele – seeing how, 18 years after 1994, the number of poor remains large  – but calling for revolutionary approaches will only harm the marginalised even more. Instead, what is necessary is that Mr Mafologele encourages his 823 followers to engage in constructive ideas about how South African society can evolve into a nation where everyone has an equal opportunity to prosper. If Mr Mafologele wants to be remembered as a god (and avoid being pissed on), he would do well to think about economic evolution, rather than revolution.

Lessons from colonial Mars

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I often get asked what the practical use is of my research. Given that I predominantly study the seventeenth and eighteenth century Cape Colony, there is not an immediate connection between life in the uninhabited Cape 360 years ago and life on earth today. (Although, I could make a case that understanding the incentives and institutions that drive human behaviour inform our theories of development that could, potentially, allow for better policy-design today, but that, usually, draws only a frown and a change of topic.)

But this morning all my months of counting probate inventories finally seem worth it. Because, you see, the Dutch are colonising again. Not a beautiful, fertile valley nestled between two oceans and a mountain as flat as a table. No, they’re colonising Mars.

There are interesting parallels: it is a private company that is attempting to send humans to permanently inhabit Mars, much like the eighteenth Dutch East India Company (VOC) was privately financed and operated. (Will we see that governments offer companies “charters” to certain parts of our planetary system, like the The Mars West Company or the The Mars East Company?) This is also not a settlement with the purpose of extracting resources: at the Cape, the idea was to provide a refreshment station for ships passing the Cape on their way to the East. The idea of the Mars Colony is to make it a massive media-event: billions of people will tune in to watch the colonists arriving and to see how they live. (Thought Prince William’s wedding was big? Think about the viewership when the first Mars baby arrives.) Given the popularity of Big Brother and reality TV, it actually seems like something that could be feasible.

What are the lessons from the first episode of Dutch colonisation that could be useful for the Mars colonists? The system of government is important. As Adam Smith noted, a private company is the worst form of any government. Krige Siebrits, Ada Jansen and I currently investigate the fiscal system of the eighteenth-century Cape, showing that while taxes and expenditure were not all that different from other governments at the time, the Company did implement considerably more rules about buying and selling. Will Mars have a free market, or will it be strictly regulated by the Mars One Company? Who will be the first settlers? Will they be selected based on criteria that will appeal to an international audience (their looks, personality), or with skills to improve and expand the settlement (PhDs in engineering, science and agriculture)? What system of law will be used? Will kids go to school? Who will provide medical services? (More bizarrely, what happens when we discover alien life? Are we allowed to enslave ‘it’? Lessons from the past suggest that this is not a good idea.)

Perhaps economic historians 360 years from now will investigate how the Dutch colonised Mars and ask what “lessons we can learn from that episode for development of our solar system?”. And I’m pretty sure someone will think: What a completely irrelevant question!

Written by Johan Fourie

June 19, 2012 at 09:14

African drums

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(c) Cobus PotgieterOne of my secret passions is playing the drums. No, let me rephrase that. It’s thinking that I can play the drums. Because, see, I’ve never actually played drums. (The closest I came was to buy drumsticks…) But I’m sure I would like it. And I’m also pretty confident (and naive) that I’d be good at it.

So when I discovered Cobus Potgieter a couple of years ago on YouTube, he kind of made up for me not making the effort of actually finding a drum set, sitting down and start hitting. Cobus is probably South Africa’s most famous musician (although relatively uncelebrated in his own country). Self-taught, his videos have become YouTube sensations – notably Kelly Clarkson’s My Life Would Suck Without You – and he now counts more than 100 million views. (My favourite still is 30 Seconds to Mars’s Vox Populi.) He has collaborated with various artists, and now spends most of his time at the Drum Channel in the US.

Enter his next project: to create an album from scratch by inviting musicians from all over the world to collaborate. He’ll fly them to Los Angeles, put them together in a room for a few weeks, and produce an album. I guess this is the Cobus version of The World’s Got Talent.

But even if you’re not a musician – like me – you can contribute. He’s opened a Kickstarter project that will allow you to contribute anything from $1 to $10000 to make this album happen. (He’s already received more than the $35000 minimum.) I donated $30 and will receive a signed album due in October, an album that still has no songs, no vocalists, and only one drummer. But it’s Cobus. And that’s good enough for me.

Written by Johan Fourie

June 13, 2012 at 08:51

Universities for Africa

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Carnegie in Rwanda: The next wave of investment in Africa? (Original photo by oledoe – http://www.flickr.com/photos/oledoe/)

Universities are often the catalysts for creative destruction. Cities and towns that host quality universities are more resilient to change, and are often at the forefront of new innovations that drive new products, services and industries. Think of the close relationship between Stanford University and the rise of the scientifically and technologically trendsetting Silicon Valley. Closer to home, Stellenbosch would not be growing as fast if it was not for its recession-proof university.

Yet only four of the top 500 universities are in Africa, according to the Times Higher Education 2011/2012 rankings: the University of Cape Town, Stellenbosch University, Wits University (all of them in South Africa) and the Alexandria University in Egypt. The reasons for Africa’s dismal performance in this respect is probably similar to the reasons for its low income levels: low savings,  low investment (in physical and human resources, which causes brain drain), weak institutions, low state revenue, low state spending, low income, low savings, etc. So are universities endogenous to growth, or can they actually – if somehow exogenously created – cause long-run growth? That is an experiment that may pretty soon become a reality, as Rwanda – one of the smallest and poorest countries in Africa – is about to open Africa’s first campus operated by a top US university. The Carnegie Mellon University of Rwanda will “operate a master’s degree-granting program in Rwanda because of CMU’s strong culture of research and innovation”. According to CMU’s website,

the reputation of CMU and the quality of education that will be delivered at CMU-R will be unique in the region and should attract the best students from the world to come to study in Rwanda. We expect major information technology (IT) companies to partner with CMU-R and provide job opportunities for its students to collaborate with their best employees. With this critical mass of expert skills, Rwanda is on its way to becoming a leader in developing the breakthrough ICT solutions needed for the future of Africa.

The trade in education services is not new. A few years ago Emile du Plessis and I investigated the large and growing market of foreign students studying in Stellenbosch (mode 2 exports) – now totaling more than 2500 students annually, a potentially lucrative market for the university, property owners in Stellenbosch and local tourism operators. Importing education services was usually restricted to African students studying abroad (mode 2 imports). But this was limited to the fortunate few: universities in Europe and the US are expensive, is culturally dissimilar and students, having integrated into the foreign culture and with good job prospects, were less willing to return.

With a growing African middle class, however, now estimated to be somewhere in the region of 300 million consumers, and with governments unwilling or unable to provide the quality education kids demand, expect to see more foreign firms (schools, colleges and universities) bringing quality education to Africa (mode 3 imports). There will be tensions: this might lead to within-country brain drains as the best students leave public universities to study at private universities. Where African states are weak, who will be responsible for quality control, although, presumably, students will be able to vote with their feet. Overall, though, this should be a huge positive for African countries and hopefully governments will welcome such investment (as the Rwandan government has clearly done). Perhaps the South African government – having now decided to build two new universities – could consider this model: imagine Oxford and Harvard opening campuses in Kimberley and Nelspruit. The ivory towers of existing South African universities will shudder. Talk about a catalyst for creative destruction.

Written by Johan Fourie

June 8, 2012 at 15:00

Education persists

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It is self-evident, or should be, that the Bantu Education Act of 1953 had, and still has, a large, systemic and persistent detrimental effect on the South African economy. While the reasons for its imposition are still being debated – historian Hermann Giliomee, in a 2009 SAJE article that I recently reread, argues that it had more to do with the demands of an industrialising economy than with “racist obsessions” – the Apartheid government’s reluctance to teach black kids science and mathematics are still pervasive in South African society. Consider that, even today, for every 10000 black children that enter first grade, only one graduates with an A in mathematics.

Before the Bantu Education Act, most coloured and black education were undertaken by missionaries. In a new paper, Robert Ross, Russel Viljoen and I investigate the determinants of success at these schools (pictured) in the 1849 census of Cape missionary station residents. We find several causes: age, the length of residence at the station and the type of missionary society that ran the station matter in explaining literacy. The latter is interesting because traditionally Protestant missionaries were seen as producing more educated followers, compared to Roman Catholic stations. (More recent work by Nathan Nunn, however, shows that the effect of Protestant missionaries are predominantly on female followers, while Roman Catholics tend to educate men.) Our contribution is to show that there is large variety even within Protestant missionary societies: while the residents of stations run by the Free Church of Scotland like Lovedale in the Eastern Cape, for example, achieved high literacy rates, the residents at other stations, like those run by the South African Missionary Society were not so fortunate. The school at Lovedale would produce some of South Africa’s most famous black leaders, including ZK Mathews and Govan Mbeki, father of Thabo and Moeletsi, who, incidentally, was named in honour of Edward Govan, the Scottish missionary who founded Lovedale.

(c) Johan FourieSo what? Well, what Nunn and others find is that these early missionary activities (they consider twentieth century missionary activities in Africa) still have persistent effects on education today. Is it possible, then, that South African missionary activities more than a century ago still matter for today? Perhaps. Early results show what seems to be a persistent link between the variation in literacy in 1849 and education outcomes in  the 1996 census. While these results are still tentative, they suggest that the education inequalities of today are not only a consequence of twentieth century Apartheid policies.

But a history of racially segregated education not only had a long-run effect on South Africa’s education system: as one would expect, it also had severe negative impact on the labour market. A recent working paper by Rulof Burger, Servaas van der Berg and Dieter von Fintel show that the large increase in the unemployment rate after the democratic elections are not only due to demographic pressures and a static labour market (as previously thought), but also due to a change in education policy. Realising that a large number of schoolchildren were actually over-age (older than 18 and still in school) and that these young adults were diverting resources from younger learners, the Department of Education decided to impose an age-limit of 20 years. This forced many kids – who chose to stay in school rather than enter the labour market with no qualification – into an already tight labour market, increasing unemployment. The increase in the unemployment rate after 1994 was thus simply a statistical correction: these kids were already unemployable but biding their time in the Apartheid schooling system.

Unemployment was traditionally seen as a post-1994 problem. It is not. Not only is bad education persistent, but so too the unemployment it creates.