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Archive for April 2013

Chickenomics

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It should come as no surprise to South Africans that chicken is our most consumed protein. Whereas South Africans may idealise the braai as our traditional dish, chicken is our staple, consumed by rich and poor, urban and rural.

Which should make the request by the South African Poultry Association to increase the cost of chicken in the country by a massive 30-50% a national disaster. Instead, it hardly registers a (chicken) breath.

Over the last few years South African chicken producers have found it increasingly difficult to compete against a rising tide of chicken producers globally. They allege that these producers, notably those in Brazil, are ‘dumping’ chickens (whole or parts there-of) on the South African market, hurting the profit margins of these firms and, ultimately, costing the economy jobs. They therefore request ITAC (the South African commission that decides about trade policy) to impose heavy tariffs on imports from Brazil. Here’s an excerpt from the an article by the Amanda Visser in the Business Day of 19 April:

The association says imports of extremely low-priced frozen chicken meat grew from 97,565 tons in 2008 to 238,582 tons last year. Kevin Lovell, CEO of the poultry association, says the situation is compounded by restrictions on South Africa’s regional exports.

If the application is not successful and the flood of low-priced chicken meat continues it may lead to 20,000 job losses. The industry employs 48,000 people with the five largest producers – Rainbow Farms, Astral Operations, Sovereign Food, Afgri Poultry and Supreme Poultry – employing more than 22,000 people.

Mr Lovell fears a reduction in the food security position of the Southern African Customs Union (SACU) could occur, with lower rates of investment in the industry and a reduction in the contribution of the poultry sector to the gross domestic product (GDP).

According to the association, poultry represents a quarter of the animal product contribution to GDP, which amounted to R25bn in 2011, compared with R19.8bn in 2008. Profit margins at the five major producers had been reduced from double-digit figures in 2006 to margins ranging between 2.4% and 5.9% last year.

“The world’s major poultry producers are targeting developing countries such as South Africa and others in the SACU region to dispose chicken portions for which there is little or no demand in their domestic markets”, Mr Lovell says in his affidavit filed with Itac.

The association is asking for a general increase in the tariffs of carcasses, whole birds, cuts and offal, boneless cuts and bone-in portions. In the case of carcasses, it is asking for an increase of R9.84/kg up to the maximum bound rate of 82% agreed to in terms of the World Trade Agreement – from 27% at present.

In the case of whole birds the South African Poultry Association is asking for an increase of R11.07/kg, subject to a maximum rate of 82% when the currency conversion has been made.

A few minor points first: comparing the rise in chicken imports between 2008 (the midst of the financial crisis) and 2012 is, to put it mildly, problematic. Chicken imports from Brazil increased by 8% between quarter 4 of 2011 and quarter 4 of 2012, less dramatic than the industry claims. Similarly, comparing profit margins of 2006, a boom year, with 2012 is equally distorting. Compare any company profit margin between 2006 and 2012 and you should find the same rapid decline. It’s clear that the years are chosen for effect.

The numbers may also simply be wrong: Below I list the statistics from the International Trade Center’s TradeMap database. According to them, the value of chicken imports from Brazil only increased by 5% per annum between 2007 (before crisis) and 2011. The quantity of chicken imports only increased by 1% annually. Note also that South Africans already pay a 17% tax on these imports, so the domestic industry is already heavily protected against foreign competition. Compare this with the imports from the Netherlands, an EU country which has zero import tariffs, from which imports have grown by a massive 469% annually and now make up 11.5% of our total imports.

ChickenImports

Data source: TradeMap (2013)

But even if Company profits have fallen and even if 20 000 jobs may be lost, the imposition of higher tariffs to prevent further imports from Brazil – I want to emphasise – will be deeply harmful to the South African economy in general, and to the poor in particular. Here’s a post by Colin Phillips early last year:

Say a South African consumer is considering buying two identical products – the Brazilian chicken product costs R20, but the local is lekker equivalent costs R30.  If the consumer chooses the “patriotic” route, then R30 stays in the country, to help create the 7000 jobs the DFPO promises.  But if the consumer chooses the Brazilian equivalent, they have R10 more to spend on something else, which helps stimulate growth in that industry (which, yes, creates jobs).

Again, it is the poorest in South Africa who spend a larger proportion of their income on food. Perhaps the rich can afford to switch their buying patterns from chicken to beef (a boon for the bovine industry?), but the poor do not have that luxury: they will be forced to substitute some other expenditure (perhaps clothing, schooling or health?) to afford the more expensive chicken. Do we really want to force all South Africans (all 52 million of them) to pay 30% more for chicken to “protect” 20 000 jobs, jobs that will be created elsewhere in the economy if all South Africans can buy their chicken cheaper?

Of course, the 2007/2008 impact of quotas on Chinese imports of clothing and textiles also suggests another result of the chicken tariffs: import shifting. Instead of buying (expensive) local clothing, retailers simply switched their imports from China to cheap clothing manufacturers in other countries, like Bangladesh, Vietnam, India and even Zimbabwe. A tariff on Brazilian chickens will simply force South African food retailers to switch imports from Brazil to other countries (with which we have fixed free trade agreements), like the Netherlands, the United Kingdom, Denmark and Ireland. The Dutch are licking their fingers, so to speak.

Other countries are also affected by South Africa’s decision. ITAC speaks not only for South Africa, but also Botswana, Namibia, Lesotho and Swaziland. To the extent that these countries do not have a domestic chicken industry – and I would expect, apart from Namibia, most do not – consumers in these countries will be taxed on chickens with no benefit to their domestic industry (read: the poor will suffer).

Higher chicken prices will also not, as Mr Lovell suggests, increase food security. Producing chickens locally is not food security; but providing the citizens of South Africa access to affordable food is (for a definition of food security, here’s an earlier post). Tell me, should we also produce all our own rice or coffee?

More fundamentally, though, this affair suggests a complete lack of understanding of the benefits of international trade. Think of trade as a new technology that a famous South African scientist develops, a machine where you input something – like iron ore – and out comes chickens. Would we use this machine? Of course! We will dig up iron ore, feed it into the machine, and out would pop chickens. Marvellous. But this is exactly what international trade is: South Africa currently exports iron ore to Brazil ($124 million* of it; or if you don’t like the sound of our natural resources leaving the country unbeneficiated, let’s go far car engines, of which we currently export $72 million* to Brazil) and in return we buy chickens from them. We are better at making iron ore than Brazil is, and Brazil is better at making chickens. South African producers of iron ore win, South African consumers of chicken win, and so does Brazilian consumers of iron ore. Trade is win-win, that great insight from Adam Smith.

In the end, Mr Lovell and the South African Poultry Association has a job to do. Like any producer union, they have the interests of their producers at heart, which is to protect profits. To do this, they have to lobby government for protection against more efficient producers (which happens to be located in other countries). Credit must be given to Minister Rob Davies, who in December turned down a first proposal to increase tariffs. Cynics argue that this was only to keep the peace with Brazil in expectation of the BRICS summit in Durban a month ago. Perhaps, but at least it shows a government able to reject harmful lobby requests. Let’s see how he stands up to repeated requests.

ITAC, the media, and all South Africans should remember that Mr Lovell’s story is a partial one, one that neglects to consider the welfare of all South Africans. Higher taxes on chicken imports from Brazil will have large, negative consequences for the South African consumer, especially those at the bottom of the income distribution. To argue the opposite is not only wrong, it is irresponsible.

* These are all 2011 figures. See TradeMap.

Written by Johan Fourie

April 30, 2013 at 07:25

An Economic Freedom Day

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FreedomDayDoodleToday is Freedom Day in South Africa, the day we celebrate South Africa’s first general elections in 1994. It is a day that many South Africans remember vividly: long lines of patient people awaiting their chance to vote, many for the first time. A day of optimism and hope. For change. For a prosperous future.

But history doesn’t stand still. It’s nineteen years since that memorable day. And now, one generation later, it’s a day that South Africans will begin to reflect on the changes in our society since 27 April 1994. Were the aspirations and hopes of millions of South Africans met? Was it reasonable to expect that it could be? Have we, since achieving political freedom, also achieved economic freedom?

The consensus, both on the far left and the far right (if that distinction can be made in South Africa), seems to suggest that we haven’t. Populist politicians tend to point to the stark inequalities that permeate South African society. We are still an extremely unequal nation, yes, but the type of inequality has changed since 1994. As surveys suggest, between-group (black-white) inequality has fallen remarkably, which means that inequality within racial groups have increased. Here’s a startling fact that few people know: if all whites are removed from South Africa’s income distribution, the Gini-coefficient would be exactly the same. This is not to say that the average white South African is not more affluent than the average black South African: they certainly are. But we should remember that they continue to be a tiny minority, less than 10% of the population and declining as a proportion.  Inequality – globally and throughout history – is a symptom rather than the disease itself, and the best way to ‘cure’ it would be address the underlying cause: differences in the productive capacity of people. If we are to address inequality in South Africa, the large differences within the black population should be our greatest concern.

Others focus, instead, on poverty. The quip ‘ the rich are growing richer, and the poor, poorer’ is often employed  for dramatic purposes and is rhetorically appealing. It is also hogwash. Yes, the rich have grown richer, sometimes faster than the poor. But the South African poor is most definitely better off than they were on 27 April 1994. This we know from a variety of surveys and censuses, but its easier to just point to one invention that has remarkably changed the lives of the poorest of the poor: cellular phones. On 27 April 1994 no one in South Africa had ever seen a cell phone, today there are more cell phones than people in the country. To make a phone call in 1994 was a luxury for a lucky few, today it’s a basic human right. (And, oh yes, we have something called the internet today. And Google. In seven South African languages. Note: unregulated, unenforced.)

Others blame government policy: Solidarity, a predominantly white trade union, recently released a report in which they claim that “almost all South Africans, including black people, are poorer thanks to BEE” (page 5). The report, which was widely cited in the media, provides no evidence to support this claim. That is probably because it doesn’t exist. Firstly, all South Africans are not poorer. On average, South Africans are wealthier, much wealthier, than they were in 1994. In fact, our incomes are today approximately double what they were in 1994, which means we can buy double the amount of food, clothes and other luxuries than then. And this doesn’t account for the vast improvement in the quality of these goods, like cell phones and the internet. But I don’t think this is exactly what Solidarity implied. They claim that black economic empowerment makes black South Africans poorer compared to a counterfactual world of no BEE. I’ve voiced my concerns, too, with BEE, especially in the way it distorts incentives for black entrepreneurs, but even in the counterfactual no-BEE world there is no guarantee that South Africans would have been poorer. BEE is an attempt to address the inequalities of the past. Who is to say alternative attempts at redistribution would not have had a far worse impact on South Africans’ incomes?

We have not achieved economic freedom to the extent that all South Africans have an equal opportunity to prosper. But we have also not moved backwards, become poorer, or failed as The Economist would have us believe. Today, we suffer the anxieties of those that expected a radical transformation but found only a gradual improvement.

Written by Johan Fourie

April 27, 2013 at 09:42

The future of news

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CNN

I’m sure I was not the only one to follow the tragic but thrilling Boston shooting story yesterday. In short, police were first alerted to a robbery and a car-jacking, where a police officer and one of suspects of the Boston bombings were killed, before a massive manhunt began for the second suspect. After several hours they discovered him in a boat in someone’s backyard and made an arrest.

What made this event more intriguing is that I did not need access to the traditional news sources – CNN, BBC – for my updates. In fact, had I done that, I would have completely missed the story, because CNN had followed a wrong lead, reporting on an arrest of ‘The Naked Man’, a man thought to be the suspect, forced to undress, but then released. Instead I followed Reddit, an online site where anyone can report news and post content. On Friday morning while at work I could follow a minute-by-minute update of the events in Boston, courtesy of JpDeathBlade, who live posted the news from police scanners. More extraordinary, I could log on to the police scanners myself, and half a world away, follow the search over my computer speakers – as it happened – for suspect 2.

Reddit

It is, or should be, no surprise that the internet changes the way we consume news. The fate of newspapers to report ‘breaking news’ has long been proclaimed; gone were the days where newspapers could wait till morning to break a news story to an unsuspecting audience. But, in my opinion, the Boston events showed just how obsolete, and disappointing, TV news is.

Does that mean the end of newspapers and TV news channels? Certainly not. But it does suggest that a different type of journalism is required, a focus on more investigative journalism: instead of asking what happens, authoritative news agencies will have to investigate why it happens. When a newsworthy event happens in our area, Reddit and other such sources allow all of us to become reporters on the ground. The Oscar Pistorius saga is a case in point; most of South Africa stood still while his bail conditions were read, even though we followed tweets from those within the courtroom. To know what happens, we can rely on the law of large numbers.

But the law of large numbers falls apart as soon as we begin to question the why. (Again, the Oscar Pistorius case is a brilliant example. Here’s a warning: don’t read the comments section on any Oscar news article.) JpDeathBlade may bring me live coverage of the events as it happen in Boston, but I’m not sure I care much for his opinion about why it happened. That requires an thorough investigation; interviews with family members and friends of the suspects, sifting through tons of documentation, picking up clues, following hunches. And it requires high-quality writing. All of these require the skills of a trained professional.

For newspapers and TV news stations to prosper in future, answering the why is more important than reporting on the what. The internet can supply the latter much more accurately (and cheaply); the former is a product worth selling.

Written by Johan Fourie

April 20, 2013 at 08:46

2020 vision

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One of man’s eternal quests is to predict the future. We all want to know what will happen tomorrow, next year, or twenty years from now, not only because we are curious beings but because it has a real effect on how we behave today: I have one year left to live? Well, perhaps I should go on that expensive vacation. The economy will boom within the next five years? Well, perhaps I need to buy that property today.

Modeling the future is therefore one of the activities economists and other scientists tend to do and, if they are relatively successful (i.e. accurate), are rewarded for richly. Take New York University economist Nouriel Roubini who famously predicted the collapse of the US housing market and the consequent recession. Here’s his entry on Wikipedia: “As Roubini’s descriptions of the current economic crisis have proven to be accurate, he is today a major figure in the US and international debate about the economy, and spends much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Although he is ranked only 512th in terms of lifetime academic citations, he was #4 on Foreign Policy magazine’s list of the top 100 global thinkers.” They neglect to say he makes a ton of money. (Roubini continues his bearish stance on the economy which provides a clear lesson for future economists: pessimism sells.)

But it is not only economists who attempt to forecast the future. Historians such as Niall Ferguson (Civilization) and Ian Morris (Why the West Rules – for Now) use the past to map the future. Morris’s contribution builds on Jared Diamond’s Guns, Germs and Steel to argue that the reason the West ruled was mostly due to geography and, importantly, how societies adapt to the changing climate and environment. Ferguson argues that Europe developed six ‘killer apps’ that ensured that they ruled the world after 1411. Both authors paint pessimistic pictures for future Western domination. Economists often get heavily criticised for projecting or forecasting trends two, three years or even a decade into the future. Much of the criticism is true; the world is complex and by projecting what will happen even a few months down the line, economists risk looking like fools. And ask any investor. Despite (or perhaps because of) no quantitative evidence, these historians have found a gap in the market: Using mega-histories to explain the rise and fall of societies, they claim to be able to see far into the future.

Cliodynamics

Enter the mathematicians. As an article in Nature (and a new one in Wired) suggest, a group of mathematicians have taken up the forecasting crusade by using newly digitised historical data and undertaking cliodynamics. They claim to find cycles of upheaval in society: as the graph illustrates, every 50 years (1870, 1920 and 1970) have seen major social disruptions. They predict that 2020 will see a new flood of protests, riots and/or terrorism.

There is much to disagree with: Is this only true for the US, or a global phenomenon? Were the US really a peace-loving society between 1780-1840? Are three data points enough to statistically predict future trends? But the problem is more fundamental: the US (and world) economy today is very different from those of earlier periods. What would be the justification that similar patterns would emerge today when, in economics jargon, the data generating process is fundamentally different?

Finding historical cycles is an old fantasy (Isaac Asimov’s Foundation spells out the science of Psychohistory). But it is little more than fantasy. Historical statistics can tell us a lot about history (or help us reinterpret history, i.e. cliometrics), but, like the long-run predictions of historians, it has little scientific merit for making (accurate) predictions about the future.

Written by Johan Fourie

April 12, 2013 at 16:04

Why I travel

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A recent column in the Mail & Guardian suggested a number of reasons why Afrikaners should travel more. These included, and mostly with reference to Europe, 1) to appreciate our (presumably good quality and inexpensive) meat, 2) to learn to be on time, 3) to rediscover our cultural roots, 4) to understand how language can bind people together, 5) to realise that one can have more than one cultural identity. Although I’m sure the column was well-intended (and was perhaps filled with some nostalgia after a few weeks away from home), there are simply too many generalisations to take it seriously: “Europe is essentially individualistic and the downfall of one individual or family rarely affects the rest of a community. Ask someone what the surname of their neighbour is and they would not be able to tell you.” Here’s my confession: I’ve lived in South Africa all my life and I cannot name one of my many neighbours’ surnames.

McGregor, South Africa

McGregor, South Africa

But the piece did get me thinking about why I travel. I am fortunate to travel relatively frequently, mostly to attend some economic history congress somewhere in Europe. I usually manage to take a day or two after a conference to see the sights. So, apart from attending conferences, why do I do it? I guess we all have our own reasons for travelling (and, I should add, ways of travelling), but I think it boils down to this:

Travelling is a conversation with yourself. It is a way to take stock, to reflect, to reassess, to change course. To adopt what is good and to discard the bad. Destinations become beacons – Uganda 2003, Utrecht 2010 – the value of which only become apparent much later in life. Travelling is a conversation with friends. About shared dreams and desires. About shared hopes and disappointments. About plans for the future. About the good old times. It is laughing together, fighting together, being-late-for-the-train together. It is about writing new stories – together (New York 2010). Travelling is also a conversation with strangers. Stef Bos, the Dutch-Afrikaans word maestro, sings: ‘Ek wil praat met ‘n vreemde om myself te verstaan’ (I want to chat with a stranger to understand myself.) Travel allows us to define who we are (Afrikaans? South African? African?). It is a way to define what we believe (in), and what we do not. Travelling forces us to confront our own prejudices and stereotypes. It is also about changing perceptions. (Nearly every South African travelling abroad will have a story about stranger’s ignorance about Africa. Mine was on a train with a Belgian student. She asked me where I was from. I said South Africa. She responded that her brother had been to North Africa. I said ‘South Africa’ is a country, not a region. And it’s about as far away from North Africa as Brussels is from Vladivostok on the east coast of Russia. The remainder of the three hour journey was awkwardly quiet.)

Positano, Italy

Positano, Italy

Travelling is an education. Much like in Night at the Museum, it brings history alive: I would have known very little of the Moorish invasion of Spain had I not been to the Alhambra (Granada, Spain), or little of the devastating impact of communism had I not walked through the streets of Riga (Latvia). The slave trade and its many atrocities only fully manifests on a visit to Goreé, an island off the coast of Dakar (Senegal), and the plight of the early Christians is evident in the catacombs of Rome (Italy). Travelling is also about geography, of course: Where is is the origin of the Nile? (Answer: Jinja, Uganda. But don’t swim in those waters – I did, only to discover crocodiles on the opposite bank.) What is the highest mountain in Western Europe? (Answer: Mont Blanc, France. But don’t forget your gloves. Ever.) And it teaches ethics (should I pay the bribe?), arithmetic (try the 14 (English Pound), 25 (Hungarian Forint) or 55 (West African Franc) multiplication table to get to Rand), negotiation (‘Welcome to Istanbul. This is my lowest price.’ The best response: ‘Okay, let’s begin at half of that.’), and music (Who knew the Germans are stuck in the 80s?).

Brown bear, Finland

Brown bear, Finland

Travelling activates the senses. The smells of port in the Porto (Portugal) caves, of home-brewed beer in Talinn (Estonia), of meat on the braais in the Kgalagadi (South Africa), of gluhwein at the Christmas markets of Budapest (Hungary). The tastes of deep-dish pizzas in Chicago, of pastries in Holland, of chocolate cake in New York, of a brie and fig steak in a guest house next to Augrabies Falls (South Africa). The sounds of Mozart in Vienna (Austria), of the US national anthem (sung by the Chicago Gay Choir) before a baseball game at Wrigley Field (Chicago), ‘vergeet om niet uit te checken’ announcements on the Utrecht (Netherlands) buses, and of a vuvuzela at the 2010 FIFA World Cup (South Africa). And then there are the sights: The colours of Istanbul (Turkey), Maputo (Mozambique), of Sintra (Portugal) or Durban (South Africa). The breathtaking awe of cathedrals (Cathédrale Saint Jean-Baptiste, Lyon), and mosques (Sultan Ahmed Mosque, Istanbul), and temples (Pantheon, Rome) or the tiny chapel in which I got married (McGregor, South Africa, pictured). The majestic beauty of elephants on the plains of the South Luangwa National Park (Zambia), or of a rhino in the Kruger Park (South Africa), or of polar and brown bears in Finland (pictured). And the epic landscapes of the Drakensberg mountains in Lesotho, or of Positano (Italy, pictured), or the Alps, or Lake Victoria just before landing at Entebbe (Uganda).

But, ultimately, travelling gives ‘home’ new meaning. It forces us to consider the possibility that our own (people, places – policitians?) are not unique, not different, not special. That we share all the vices and virtues with all of humanity: I’ve encountered sloth, pride (racism, sexism), and greed everywhere I’ve been. But I’ve also experienced the greatest patience, humility and charity. We all share a common ancestry, a common history, a common humanity and – the sooner we realise this the better – a common future.

Stef Bos also writes: ‘Ek wil reis rond die wêreld om huis toe te gaan’ (I want to journey around the world to go home). Not only should Afrikaners travel more. We should all travel more. Even if it is simply to meet our neighbours (next door or on another continent).

PS: At the start of this year, my wife and I started a travel blog in Afrikaans to document our journeys. We called it Grensloos (borderless). There are also numerous other sites, but if you want to be inspired to travel (and perhaps laugh and cry at the same time), watch this.

Written by Johan Fourie

April 7, 2013 at 10:42