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Archive for May 2013

Why and what to study in South Africa

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Career_LetsTalkAboutVarsityIt’s exam time at universities across South Africa, which means most students will suddenly have too much time to ponder the existential questions of life: Why am I here? What am I doing? Why am I doing this? (If you haven’t had these thoughts yet, try studying econometrics.) So I thought I’d provide some answers so that you can get back to thinking about the more pressing matters, like passing Ecos 2.

Why study?

A new research paper by two Stellenbosch economists provides the answer: South Africans (of all races) with a university degree (not a diploma or certificate) enter a labour market with an unemployment rate of 5.9% (in 2012), compared to the 25% unemployment rate for the total population. In other words, a university qualification reduces the odds of you not finding a job from 1 in 4, to 1 in 17. The more surprising thing is that this result holds across all universities and disciplines: a degree – no matter where or what type – makes a significant difference in your likelihood of finding a job.

From the existing data and research there is not much statistical evidence that either the type of degree acquired, or the university attended, leads to a greater likelihood of being unemployed for a graduate (although we still need better data and more research to understand these aspects fully). Unemployment rates are relatively low even amongst black graduates who currently are more likely to enrol for courses in the arts, humanities and social sciences and attend ‘formerly disadvantaged’ universities. While the composition and quality of a degree may play a role in black graduate unemployment being higher than for white graduates, black graduates still experience lower graduate unemployment than in the European Union, for example.

What to study?

So what you study doesn’t seem to matter? No. The above study measures your likelihood to get a job. And even though an art historian is as likely to get a job than a chemical engineer, their remuneration (salary) is likely to be different. Few of us are only concerned about getting a job; most of us care about the financial rewards (and auxiliary benefits) that that job offers.

A recent list by PayScale, a US company, ranks the top-paying degrees in the United States. I think this is a pretty accurate reflection of South Africa too, with one exception (which I’ll get to later). If you want to earn the big bucks, engineering is a good place to start, occupying six of the top seven highest paid degrees. Only Actuarial Mathematics – Actuarial Science in South Africa – can compete. An obvious feature of the top thirty top-paying degrees is that they require a heavy dose of mathematics, and one could argue that, given the poor performance in maths at South African schools, the premiums on these degrees would be even higher. The point is this: if you get an A for Matric maths, your best option is to enrol in an undergraduate degree that further develops your math skills (Engineering, Physics, Actuarial Science, Statistics, Applied Mathematics, Computer Science). Studying mathematics is an excellent core skill to have; it opens up doors (at the graduate level) to many other applied fields, from the medical sciences, to software programming, to game theory, to managing your own business.

But not everyone can or want to (or should) be mathematicians. As the PayScale list shows, there are many other rewarding fields. One underrated field I consider to be increasingly important is supply chain management (or Logistics). Coding and computer programming will become increasingly important. And, as an economist, I must recommend Economics (and History): if you don’t believe me, read Noahpinion on why a PhD in Economics is the best thing since sliced bread. (Michael Jordaan, CEO of First National Bank, recently retweeted Noah’s post…)

And, remember, it is actually really really really important to do something you enjoy doing. You will spend most of your waking hours at work. You don’t want to hate it. (I’m happy that Ben Bernanke, chairperson of the Federal Reserve, shares this view. See point 7.)

Accounting for accounting

At this point, let me say something about the study of Accounting. Advising brilliant students (students that has the ability to study anything), school councillors in South Africa would most often suggest a career in either Actuarial Science and Accounting. To become a Chartered Accountant (following four years of study and two board exams) is seen as a ticket to riches and the logical option for many high-school students. To give one example of the preference for accounting; the School for Accounting at Stellenbosch now constitutes a third of the Faculty of Economic and Management Sciences, which also include Economics, Management, Marketing, Logistics, Actuarial Science, Statistics, Industrial Psychology and the Business School.

This is a peculiar choice, and is unique to South Africa. Accounting is not a career choice for the brightest students in Europe or the United States, as is also clear from the PayScale list (Accounting doesn’t rank in the top 50). There are historical and institutional reasons for Accounting’s dominance at South African universities: the South African Institute of Chartered Accountants sets strict guidelines as to what should be included in undergraduate and graduate training, determines the difficulty of the board exams, and can thus limit the supply of Chartered Accountants (CAs) in the market. A limited supply increases the price, meaning qualified CAs earn well, which makes it even more sought-after. It is also a well-defined career path: get your Honours, write two exams, and you’re set. Make no mistake: these are some of the toughest exams to write, requiring years of hard studying. Only the toughest survive. The pay-off is a qualification with nearly limitless job opportunities (at least until the financial crisis hit) and guarantees high incomes.

Well-trained accountants have certainly contributed to the quality financial institutions South Africa is known for.  But – and this is a question I have no answer for – at what cost for the individuals and for society? I have not met many accountants who enjoy their job; they enjoy the benefits, yes, but not necessarily the auditing. These are driven individuals (you have to be to pass those exams) and they often rise quickly in an organisation, but is it because of the knowledge they gained studying Accounting or is it because they are inherently intelligent, motivated individuals? Would they not have climbed the corporate ladder in any event – perhaps even faster – with some other degree? More importantly for society, what if the most brilliant of South African high-school students, instead of learning auditing rules and tax principles and accounting standards, were grappling with the Hodge conjecture (in mathematics), the Gettier problem (in epistemology), the Golgi apparatus (in cell theory), the Equity Premium puzzle (in financial economics), or supermassive black holes (in astrophysics)? Or instead decided to create something brilliant: as authors, as artists, as entrepreneurs?

If Einstein was born in South Africa, he would probably have studied accounting. I’m not sure that he – or South Africa and the world at large – would have benefited much from such an arrangement.

I’m still at school and don’t know what I want to study

The good news is that it doesn’t really matter what you study, as long as you study something and make sure you get your degree. That degree – regardless of what you know – is already a sign to potential employers that you can work hard. But there are a few things you can do to improve your salary and job satisfaction:

  • Learn a computer language at school. Coding will open many job opportunities that probably don’t even exist yet.
  • In a world of information overload, writing succinctly is a skill that will be prized in all professions. To write well, read. Why not learn another language while you’re at it? (I would recommend Portuguese (for the fast-growing markets of Brazil, Mozambique and Angola), Swahili (East Africa), Mandarin (China), Spanish (the Americas) or French (West Africa, and to impress girls).
  • Of course, the richest people under 30 in the world are not the ones who studied. They are the entrepreneurs that had a great idea and put in a lot of effort to make those ideas a reality. Entrepreneurs are the life-blood of society. I can think of nothing more rewarding than building your company from a small garage workshop into something that has a profound impact on society, employing dozens or even hundreds or thousands of people. The sooner you start, the better.
  • If you need more information of university life, please read this book. It’s available (for free) on Google Books. If you’d like a hard copy, I still have thousands in my garage. (I started too late.)

Written by Johan Fourie

May 25, 2013 at 10:19

How to make a bad financial decision

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I have a confession to make: I made a really bad financial decision in 2003, my first year of earning a (lump sum, non-permanent) income. I guess what surprised me this week when I made this discovery was not the fact that I made a bad decision – that I already knew – but, after seeing the share price of Naspers hit new records, I realised, for the first time, the extent of my financial folly.

I earned roughly R20 000 (roughly $3000 at the time) through a holiday job that year, a job that paid really well. My decision was about what to do with this extra cash; I remember thinking about my options, but then more urgent things (student life!) got in the way, and the money eventually ended up in some money market account, the easiest and quickest solution for a disorganised student. I actually remember considering buying Naspers (a South African media company listed on the Johannesburg Stock Exchange), as I had always had an affinity for the media, was part of the editorial staff of the student newspaper (which meant we were invited to a fish-and-chips-in-newspaper dinner with CEO Koos Bekker every year) and, in truth, I knew little about the other companies on the JSE. In my counterfactual world, instead of a money market account, I would have purchased R20 000 worth of Naspers equity.

NaspersSo here’s what has happened to the Naspers share price since: an increase of 3100%. That’s R620 000 (roughly $70 000) if I had cashed out on Friday, meaning I could have owned my own Stellenbosch student flat today, or an FJ Cruiser paid for in cash, or enjoyed a year-long holiday touring the world. Instead, that money market account was closed somewhere over the years, the money probably used for some black hole debt. Of course I realise that hindsight is always perfect; that Naspers may have gone the route of most media companies, with declining market shares and dwindling profits. But it didn’t, and in my counterfactual world I’ve done a bad deal.

What are the lessons I’ve learned? 1. Don’t think that a small amount is not worth investing. (Of course, I probably could’ve invested more, if I had bet all my savings at that stage on Naspers, but that would’ve been too many eggs in one basket and is therefore not a realistic counterfactual.) 2. Prioritize financial decisions and don’t be lazy. Savings in a money market account is not a good financial decision, except perhaps if you’re close to retirement, but it was the easy thing to do. No one ever made money by doing the easy thing. 3. Invest in brilliant people and the projects they pursue. Anyone who met Koos Bekker in 2003 could’ve seen there’s something exceptional about him; his vision to acquire sizeable shares of Tencent and Mail-ru (Naspers’ Chinese and Russian holdings, now contributing a sizeable share of its profits) was eccentric and ingenious. And 4. Have some luck. When I could have made my oh-so-important investment in Naspers, Facebook didn’t yet exist, and social media was an expression used for celebrity TV-shows. Not me, not Bekker and not anyone else could have predicted the rapid growth of social media, or of China, or of social media in China.

Which of course raises the all-important question of what to do with today’s savings? Is Naspers still a good bet? Given their earnings per share ration, perhaps not. The record prices of the JSE in recent weeks also suggest that we’re closer to the peak than the trough. But who knows? I’m certainly not the one to give sound financial advice.

Written by Johan Fourie

May 20, 2013 at 06:34

Africa’s investment opportunities

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Daniel Altman, Harvard-trained economist and journalist, has created what he calls a Baseline Profitability Index. In short, the index aims to rank markets for foreign investment based on asset growth, preservation of value, and repatriation of capital to help investors decide where to “really put their hard-earned cash”. Altman’s BPI seems to be an index of indices: he’s used the World Bank’s Worldwide Governance Indicators, Transparency International’s Corruption Perceptions Index, the Property Rights Alliance and Americans for Tax Reform’s International Property Right Index, Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer’s index of investor protection, and Menzie Chinn and Hiro Ito’s index of financial openness. All thrown in the same pot, the magic potion is stirred (according to Altman the alchemist’s algorithm) and out pops the BPI.

The full ranking (published in Foreign Policy) includes 102 countries, 17 of which are African (14 are sub-Saharan African). The top 50, listed below, include 12 African countries, with three of the top ten being the African countries of Botswana (second), Rwanda (fifth) and Ghana (tenth). South Africa ranks 41st, scoring high on the Preservation of Value-category but performing worse than all other African countries (except Nigeria) on the Repatriation of Capital. I’m not sure what the reason for such a low ranking is (and, to be honest, it is surprisingly low), but it could possibly be due to South Africa’s still-existing capital controls or the threat of expropriation (in mining, for example) over the last few years (although the threat has considerably weakened since the ANC’s policy conference in December 2012.) Interestingly, two African countries that have received a lot of press coverage over the last few years – Kenya and Nigeria – are amongst the worst performers on the list: Kenya comes in at 67th, while Nigeria can only reach 95th. Altman’s index has a clear warning for investors with dollars in their eyes: don’t only consider potential growth of these markets, but the preservation of value and repatriation of capital too.

There are a few surprises, too. Germany, one of the few European countries to witness positive growth over the last few years, doesn’t feature in the top 50 (it’s 53rd). In fact, Eastern Europe seems to be a lucrative destination: Estonia, Lithuania, Poland, Bulgaria, Latvia and Slovakia all feature in the top 30. Only two of the so-called BRICS are in the top 50: China (21st) and South Africa (41st). Surprisingly, Brazil (91st) and Russia (98th) languish at the bottom. Is Burkina Faso really a better investment opportunity than Brazil?


Fifty highest-ranked countries on Daniel Altman’s BPI. African countries in bold. Source: Foreign Policy 2013

As with any list, there are weaknesses. Why are other African gems (like Tanzania, or Malawi, or Namibia, or … yes, Zimbabwe) not included on the list? Presumably it’s data constraints, but this should be corrected in a future BPI. Also, could a 2000 ranking not be calculated from the same data sources? Tracking the change over time, especially for African countries, could be interesting and, perhaps, suggest some policy implications.

Altman’s list provides more evidence of the profitability of African markets. But it also shows that investors should not be be blinded by the bling of big bucks. A careful assessment of risk and return remains the cornerstone of a sound investment.

Written by Johan Fourie

May 10, 2013 at 09:29

A roadmap to prosperity

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Image by Erik Johansson.

Image by Erik Johansson.

I’m only at chapter 14 of Deirdre McCloskey’s Bourgeois Dignity (there are 46), but it’s already been worth the read. I wish I could prescribe it to all our Economics students, not only because it’s clever and brilliantly written but also because it’s entertaining, at least as entertaining as discussing the causes of the Industrial Revolution can be. While most of the book is about the Industrial Revolution of 200 years ago, the first few chapters deal with growth today: why some countries prosper, and why other’s take longer to do so. (In the end, we’ll all be rich. My quip, not hers.)

There are many memorably passages, but Chapter 13 mentions South Africa, and I’d thought I’ll follow her advice and “borrow” her ideas. Here’s selected paragraphs from pages 121-124:

England in the eighteenth century could not possibly have experienced the present-day Chinese growth rate of real incomes per head of 10 percent per year, even in its greatest booms. The doubling of income per head in a mere seven years that the Chinese rate implies could not happen before very recent times, with gigantic piles of already-invented ideas such as the power loom or the light bulb or the printer circuit waiting to be borrowed, if one will but let people use them for the profit due a person with a newly borrowed idea, and cease from sneering at and stealing from and executing those who earn the profits. The historian of technology David Edgerton speaks of “the shock of the old,” in which people – even very poor people in the favelas of Brazil – keep finding new uses for old technologies, such as sheets of corrugated iron.

China and India, in other words, can take off the shelf the inventions laboriously developed by the Watts and the Edisons of the past three centuries – and by the Chinese and Indian inventors of earlier centuries, together with the Incan potato breeders and the brass casters of Benin, all of whose inventions had been taken up eagerly by the curious Westerners. Indians invented fine cotton cloth, which then became the staple of Manchester, but latterly in its fully mechanized form became again the staple of Mumbai. The Chinese invented mass-produced pig iron, which then became the staple of Swedish Uppland and English Cleveland and American Gary, but latterly with some additional chemical engineering the staple of the Kamaishi Works in Japan and now the Anshan works in China. And so Sweden in the late nineteenth century and then Japan in the early and middle twentieth century and China in the early twenty-first century caught up astonishingly quickly.

Richard Easterlin would agree with the speed implied by the metaphor of “taking technology off the shelf”. He wrote in 2003 that “since the early 1950s, the material living level of the average person in today’s less-developed countries…, which collectively account for four-fifths of the world’s population, has multiplied by threefold”, much faster than presently rich countries grew in the nineteenth century. It has led to Paul Collier’s Top Four to Six Billions. Similarly rapid has been the rise in life expectancy and the fall in fertility and the rise of literacy: on all counts, notes Easterlin, it is “a much more rapid rate of advance … than took place in the developed countries in the past”.

Good policies are boringly similar: rule of law, property rights, and above all dignity and liberty for the bourgeoisie. The happy countries end up looking similar, because each has automobiles, computers, higher education. Good policy allows taking technology off the shelf, and achieving a pretty good life for ordinary folk in two or three generations. It has happened repeatedly, as when the United States adopted British manufacturing, or Germany the same. Consider such recent miracles of leaping over putatively inevitable stages as Taiwan or Hong Kong or Singapore. Perhaps we should stop being gob-smacked every time it happens. Give people liberty to work and to invent and to invest, and treat them with dignity, and you get fast catching up.

In other words, what does not need much scientific inquiry is how the Indians and the Chinese, having been denied innovation for decades by imperial edict and warlord pillaging and socialist central plan and lack of widespread education, can get rich quickly by gaining peaceful access to well-stocked shelves of inventions, from the steam engine to the forward contract to the business meeting. Routine economics predicts that, after decades of disastrous economic luck, the misallocations and spurned opportunities will be so great that considerable fortunes can be made pretty easily, and the average income of poor people can be raised pretty easily, too. If Brazil and South Africa can be persuaded to adopt the liberal economic principles that are presently enriching China and India (and that had enriched Britain and Italy more slowly and therefore less obviously), there is no reason why in forty years the grandchildren of presently poor Brazilians and South African cannot enjoy something pretty close to Western European standards of living. That’s not ideological prejudice, some neocon fantasy in support of American imperial power. It’s a soberly obvious historico-experimental fact, which has already curbed American power. On the other hand, if Brazil and South Africa persist in unhelpful economic policies (such as South Africa’s labor laws based on German models), they can retain a gigantic, unemployed underclass and an inferior position relative to the United States, just as long as they find that attractive.

If it’s so infallibly simple, why are we so unfailingly ignorant?

Written by Johan Fourie

May 5, 2013 at 17:46