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Archive for May 2014

The rhetoric of economic transformation

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Spot the entrepreneur: Oprah is not fabulously wealthy because of redistribution of wealth, but because she was a more innovative and efficient entrepreneur than her talk-show competitors

Spot the entrepreneur: Oprah is not fabulously wealthy because of the redistribution of wealth, but because she was a more innovative and efficient entrepreneur than her talk-show competitors

This week, Jacob Zuma, appointed for a  second term as president of South Africa, announced his cabinet. He will have 35 ministers and one deputy-president: I’m happy to see Pravin Gordhan move to the Ministry of Co-operative Governance and Traditional Affairs, where he can only improve the inter-governmental workings of provinces and municipalities.  Nhlanhla Neneis is our new Minister of Finance. He has been schooled for this position, but it remains to be seen if he can withstand the pressure to relax the fiscal reigns as Gordhan and Trevor Manuel did before him. Naledi Pandor returns to Science and Technology, a capable minister for an important if peripheral post, and Aaron Motsoaledi can continue the good work he has been doing in healthcare.

But, as expected, Zuma also rewarded his allies with new and important positions, in spite of some having atrocious track records. All and sundry agree that Tina Joemat-Pettersen had a terrible first term as Minister of Agriculture, Forestry and Fisheries (AFF). She has returned, now as Minister of Energy, a vital portfolio given South Africa’s inability to supply enough electricity for its growing demand. A sinister commentator might say that this appointment paves the way for even bigger corruption scandals in a department where massive public investments are urgently needed – think nuclear or fracking. The new minister in agriculture is Senzeni Zonkwana, long-serving head of the National Union of Mineworkers and president of the South African Communist Party. His deputy will be Bheki Cele, who was the National Commissioner of the South African Police Service until October 2011, when he was suspended from duty, due to allegations of corruption.

The appointments in the Agriculture, Forestry and Fisheries portfolio signal a strong emphasis by the president on land reform, which is part of his vision to ‘transform the economy’. Here’s an excerpt from his inaugural address:

Economic transformation will take centre-stage during this new term of government as we put the economy on an inclusive growth path. As the National Development Plan outlines, the structure of the economy will be transformed through industrialisation, broad-based black economic empowerment and through strengthening and expanding the role of the state in the economy.

So let me ask the obvious question: Is this really the best way to transform an economy? Does history suggest that this is indeed a road to economic transformation? Are there not better alternatives available?

But perhaps it’s best to start with a question of definition: what is ‘economic transformation’? I suspect it is not ‘transformation’ in the sense of an ‘industrial revolution’ that our president refers to. Because if you want an industrial revolution – as happened in England in the nineteenth century, and in the US in the early twentieth century, and in several Asian economies at the end of the twentieth century, and is happening in China now – it is not with affirmative action or expanding the role of the state in the economy where you would start. Instead, economic transformation is about encouraging entrepreneurs to imitate or innovate ideas, processes and technologies that will help businesses become more productive. It is the farmer adding another tractor and harvester, a digital irrigation system and genetically-modified seeds. It is the miner using improved drilling equipment, a more efficient air ventilation system, and more affordable railway transport to the ports. It is the retailer building a better distribution network, using cellphones for digital payments, finding markets that are underserviced. It is the software programmer writing a new app that allow millions of users to save time and money.

The rise of inventors like James Hargreaves (Spinning Jenny), Henry Ford (assembly plant), Kiichiro Toyoda (founder of Toyota) or Yang Yuanqing (CEO of Lenovo Computers, the frugal innovator as The Economist notes) did not come about because of broad-based empowerment policies or a bigger state. It was because the incentives of those societies allowed inventors and innovators to prosper from their brilliant ideas, sometimes with state aid, yes, but the entrepreneur, not the politician, was always the most important. The reason England experienced an Industrial Revolution was due to relative factor prices (high wages, cheap energy -> incentives) and the scientific revolution and the ideology of the Enlightenment (generation of useful knowledge, a patent system that protected new innovations and free-trade economic policies -> rhetoric). To transform, entrepreneurs must make use of comparative advantages and be encouraged to do so (or, at least, not be prevented from doing so).

There are, of course, many countries that have tried to follow different routes. Latin American countries are infamous for attempting state-sponsored industrialisation, and failing. Russia, through mass murder and communist policies, transformed their economy from agriculture to industrial at the start of the twentieth century, only to stagnate later. Communist China before the market reforms was a basket case with a few rich state officials (much like North Korea today). Closer to home, Ghana, Nigeria, Kenya and Tanzania are growing rapidly not because of a larger state, but because their entrepreneurs are finding opportunities to exploit.

The policies proposed by president Zuma are, ironically, exactly the opposite of what is written in the NDP. The South Africa of 2014, it seems, believes that we can grow prosperity through a large state and the transfer of wealth. We won’t: not because we are somehow incapable of making it happen, but simply because it has never worked before. This is harsh, but true. Yet – I understand the reason for this sentiment. Our massive inequality and the populist appeal of ‘economic revolutionaries’ will make a large state that can ‘redress’ the past appealing. The truth is that our woeful education system and rigid labour laws make it difficult for the poorest to take advantage of market opportunities, which leaves them with little alternative but to absorb the populist sentiments. If you were poorly-educated, living in poverty and hopelessness, would the illusions of prosperity that the populists promise not seem very real too?

There are no easy answers. If we stay the course of a market approach, there is little doubt that inequality will remain, simply because of the massive inequalities in education. If we choose to encourage entrepreneurship, for example, many of those entrepreneurs may be white South Africans (people like Koos Bekker) who will become extraordinarily rich (Naspers is now the largest internet company outside China and the US). Even though this will boost economic growth and reduce poverty (which is the reason the US is rich), it won’t affect the distribution of income (which is the reason America is also massively unequal).

Instead, we have decided on a different type of economic transformation: redistribute existing wealth. In some sectors this will be relatively successful: Naspers has, for example, made thousands of black South Africans prosperous by offering them shares at discounted rates several years ago. This is black economic empowerment at its best. But the economic transformation the president envisages is, most likely, not limited to such slow adjustments of our income distribution, especially if change needs to happen within the political deadline of five years. So instead of encouraging imitation and innovation of our entrepreneurs, we could expect to see policies that attempt to transform ownership. Expect agriculture to see the first of these radical transformations.

Thomas Piketty argues that inequality exists because capital grows faster than the economy. This implies that the rewards to the owners of capital (rent from land, buildings, equipment) grow faster than the returns to workers (wages). While this may be true, it is a very static way to explain the exponential growth the world has seen over the last two centuries. Here’s Deirdre McCloskey’s view neatly summarised by Evan Davis:

McCloskey has long argued that economists are far too preoccupied by capital and saving. She doesn’t even like the word capitalism, on the grounds that capital is not what got us where we are today. ‘If Scotland is trying to become Holland, then capital accumulation is how to do it. That will double your income, maybe triple it.’ But for her, that sort of accumulation is a scratch-card-sized prize — and the lottery jackpot beckons. She enthuses about the Great Enrichment of the 19th century. ‘What happened, understand, is not 100 per cent growth, but anywhere from 2,900 per cent growth to 9,900 per cent growth. A factor of either 30 or 100.’

That jump in incomes came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists.

Professor McCloskey has a point, of course. Think of the Bill Gates and Steve Jobs, big wealth accumulators in recent times. It wasn’t the magic of compound interest on capital that made them rich; it was intellectual property. They created billions of dollars of business from virtually nothing at all. If you measure the profits as a return on the small amount of initial capital invested, then it looks huge; but capital was no more important an ingredient of the original Apple or Microsoft than cookies or cucumbers.

And to me, this is one big distinction at the heart of the wealth equality debate: whether capital — past accumulation of savings — gets to devour the future, or whether the future is created afresh by each generation. This argument is a struggle between those who think riches are created from riches, and those who think riches are created from rags. Are big profits best viewed as a generous return on capital, in the way that worries Piketty? Or as coming from innovation that ultimately benefits us all?

Capital and saving will not make South Africa prosperous, regardless of whether it is in rich or poor, black or white hands. If we want our children’s children to be better off, we need to design policies that encourage our farmers, miners, retailers and software programmers (and talk-show hosts!) to invest in innovation. And we need our leaders, especially the president, to change the discourse on economic transformation away from the redistribution of wealth towards the empowerment of entrepreneurs.

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On the economic histories of developing regions

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EHDRFrom the start of 2014, Leigh Gardner and I are editors of Economic History of Developing Regions, a journal dedicated to publish scholarly papers about the economic histories of developing countries. For our first issue as editors, we have put together a short note, now an LSE working paper, on an issue we believe requires attention: the lack of publication outputs in the top economic history journals about developing country topics, and from developing country authors. Here’s the abstract:

The internationalization of economic history is everywhere except in the publication outputs. Using a new dataset of publications in the top four economic history journals, we investigate this puzzle and attempt to explain why relatively few papers on and from developing countries are published in top journals despite the growing internationalization of economic history more broadly. We find little evidence to suggest that this is due to a bias against papers on developing country topics and by developing country authors. Developing country papers and authors also do not perform worse in citation analyses. Authors from developing countries, it seems, are less productive, or discouraged from submitting their papers to top quality journals, choosing instead local journals.

I was amazed to find that there was hardly an increase over the last decade in the number of papers on developing countries. My sense is that, at least since 2000, there is a much greater appetite and enthusiasm for developing country topics. As we mention in the paper, some of the most prominent papers in the field have been on developing country topics – think AJR (2001), Nunn (2008), Dell (2010). Networks in African, Latin American, Asian and Eastern European economic history have either been established or have seen an increase in its activities and membership.  The World Economic History Congress, held in Stellenbosch in 2012, contributed to the renaissance of African economic history and focused attention on the economic histories of developing countries in general. A survey by Baten and Muschallik (2012) shows that there are large numbers of economic historians based in the developing world.

Yet, despite all these improvements, the share of papers dealing with developing countries have hardly changed over the last 15 years. Even more worryingly, the share of papers written by scholars outside Western universities (including Japan), is tiny; only 2.2% who published papers in the top four economic history journals were affiliated to universities in the developing world.

There are several reasons for this. Leigh and I note that the priorities of scholars in developing countries are often biased towards teaching and consulting work, rather than research.  Where research do receive priority, it prefers quantity (local) over quality (international) output. Language and a preference to speak to a local rather than international audience, especially in Asia and Latin America, is also an issue. While these factors apply to all fields of research, economic history may have additional constraints. Economic history is a luxury good; the digitisation and transcription of historical sources are expensive exercises, which limits its appeal in underfunded universities. Also, economic history is, sadly, not always at the front of the queue for policy-relevant analysis; when appointments are made or funding granted, research on education, poverty or trade may seem to yield more immediate returns than investigations into the economic past.

Sparked by the rapid economic growth of nearly all developing regions, though, I suspect that, over the next decade, we will see a flourishing of interest in the economic histories of developing countries. That is why Leigh and I are excited to be part of EHDR (and why we want you to submit your paper). Most of this interest, however, will come from scholars based at European or US universities. It is here that the techniques and networks are developed that is so important in the academic publication business. (In a recent NBER working paper, Peter Temin gives a succinct overview of the development of these techniques.) But, if Economic History hopes to increase its influence, it should make more effort in nurturing links with scholars in the developing world. The immediate gains may be less visible, but the long-term benefits, for developing countries and for the discipline, may be far more rewarding.

Written by Johan Fourie

May 20, 2014 at 06:33

More knights in shining armour, please: Why we need YOU! to do a PhD in Economics

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This morning, Jonathan Jansen, vice-chancellor of Free State University, posted the following message on Facebook: ‘Dear students, your education will be incomplete unless you all read Pikkety’s new book Capital in the 21st century. What he discovers about inequality over time, and how to remedy it, might just save our country from social and economic doom. Required reading!’

Thomas Piketty, and his thesis, has certainly taken the world by storm. Paul Krugman called it ‘an extremely important book on all fronts’, Mervyn King called it a ‘serious, thought-provoking book’, and Tyler Cowen argues that the book aims to ‘answer a basic but profoundly important question’. This is true. Capital in the Twenty-First Century makes an important contribution to our understanding of inequality. But it is also voluminous and, to be honest, translated from the French edition, not wonderfully eloquent. It is a publishing sensation (it reached number one on Amazon!), but I doubt that many will actually finish it, especially given that the main thesis is better explained in the excellent reviews cited above. It will certainly not appeal to the average undergraduate student, given that many struggle to read a 5-page chapter in a textbook. As someone on Twitter noted, ‘Now the Thomas Piketty book has hit the mainstream I’d like to make it clear I knew about it and didn’t read it before you didn’t read it’.

Yet the book addresses one of the most fundamental challenges of our time – inequality. While inequality has reached the global policy agenda only recently (owing to the rapid increases in inequality within countries, even though inequality between countries is on the decline), it is an economic and social problem that South Africa has had to deal with for a long time. Professor Jansen is correct in asserting that we – students of the social sciences – need to spend more time thinking about the economic causes and consequences of inequality, even if it is not entirely to ‘save our country from social and economic doom’. (Mental picture: Knights in shining armour (Servaas, Murray, Haroon?) fighting the dragons of Nkandla.) But here is an alternative suggestion, prof Jansen: Why not recommend your students to study Economics? If we believe that poverty, unemployment and inequality are serious economic issues, why do we not encourage more students to understand (and transform!) the nature of the beast? Why recommend a book written by a French economist when it should be our best and brightest who, given our own long road to (economic) freedom, tell the world about the pitfalls and paradoxes of economic inequality?

unclesamSouth Africa desperately needs more economists – not more people who have read a book about inequality. Economists are trained to not only construct plausible hypotheses but to also test these hypotheses using empirical data and statistical techniques, and to contextualise these results. It is a field that accommodates many interests: development economists think about policies to alleviate poverty, trade economists identify constraints that allow South African businesses to find export markets, macroeconomics attempt to understand the business cycle and prescribes policies to reduce fluctuations around it, and economic historians, like myself, believe, much like Piketty, that the past has useful knowledge that will allow us to make better policies in the present.

We have excellent departments of economics in this country who deliver a steady supply of well-trained economists (who, incidentally, find work with relative ease). But we are not exempt of blame. We often talk to ourselves, mostly in economist-speak, and avoid forums where public opinion takes shape. (For example, how many South African economists can you name? But I’m sure many have heard the names of Paul Krugman, Joseph Stiglitz or Tim Harford.) I am also convinced that we do not do enough to encourage our best students to consider a PhD in Europe or, preferably, the US. On my brief visit to the US last year, I was surprised by the high number of PhD students in Economics from countries much poorer than South Africa. Close to 70% of all economics PhDs awarded at American universities are to foreign-born students. Very few of them, I fear, were South African.

We cannot improve as a discipline if we only train ourselves. (Piketty, even though he is French, studied at the London School of Economics and worked for two years at MIT.) My advice to any (bright) student who wants to tackle South Africa’s greatest challenges is to do a Masters-degree in Economics at a South African institution (preferably with a strong dose of mathematics and econometrics), and then enrol for a PhD at a US university. (Note: this need not be a PhD at an Ivy League university. Even the 50th best US university is likely to deliver a better, or at least different, product than South African universities.)  But these programmes are not for everyone; there is a strong bias towards mathematics. (Piketty warns of its overuse, but in South Africa we are still on the wrong side of this distribution.) And this is not to say that South African PhDs are not worth pursuing: they can be equally valuable (and much more affordable) if they offer students exposure to international networks, workshops and conferences. So, does this PhD-thing sound tempting? There’s some good advice online. Start here, then go here, here and here.

Lindiwe Mazibuko’s decision to do a Masters-degree at Harvard is an excellent example of someone who realises the many positives of a foreign education. She will be an example to many of our brightest students. Let’s hope, to save our country from social and economic doom, some of them return with PhDs in Economics.

Written by Johan Fourie

May 13, 2014 at 07:39

The remarkableness of an unremarkable day

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Early morning voting in Stellenbosch

Early morning voting in Stellenbosch. Photo by Johan Fourie.

Yesterday millions of South Africans voted in the country’s fifth democratic elections. I took an early-morning stroll to the Stellenbosch City Hall in anticipation that I would miss the crowds. Not so. Dozens of students, some having spent the night in the clubs across the street and some still in pyjamas, were already in line, waiting to cast what for most of them would have been their first vote. The atmosphere was solemn. Maybe some needed sleep, but there was a sense of expectation, of collective responsibility for a greater good.

Voting is not really a rational decision. The time it takes to vote – even if just half-an-hour – is more valuable (in monetary terms) than the benefit you receive by casting your vote, especially in a country with 25.3 million registered voters. To put it in perspective, your vote counts as much as the odds on a lotto ticket. And yet, many millions do it. Some even go to great lengths to vote: standing in line for hours, or driving to another province to cast their vote. Perhaps there are social costs to not voting: those with no blackened left thumb feel excluded from the office talk the morning after. But my sense is that, even if the result is a foregone conclusion, South Africans of all backgrounds have a strong sense of civic duty. Early results suggest that more than 72% of those registered to vote did, an impressive turn-out, even if it is lower than before.

This will not always be the case. Only a third of 18- and 19-year old’s are registered to vote. The ‘born frees’ – which is perhaps a misnomer as those born into poverty in 1995 are little better off than those born in 1993 – are seemingly disinterested in voting. As we move into the third decade of democracy, the euphoria of the memories of 1994 will fade. It probably means that loyalty to the liberation movements of the past will give way to more critical reflection on who to vote for, that we are become a ‘normal’ democracy. This can only be a good thing.

Yet I also hope we do not lose our sense of uniqueness, our belief that South Africa, the rainbow nation, is somehow special. I hope we can instil and cultivate a moral obligation in younger generations to take up the baton, to share in the pride of voters who had fought so long for the right to do so. Ours is an unusual democracy, a democracy of paradoxes. We live in the most unequal country on earth, yet each of us, rich or poor, gets one vote. Crime continues to plague our people, yet no election since 1994 has been marred by violence; the worst report of violence I could find was of a guy shouting at officials for not being able to use his passport. Lest we forget, this is a remarkable achievement for a country that, only twenty years ago, was on the brink of civil war.

Today, around the country, people will be glued to their TV and computer screens. The results are updated every fifteen minutes on the IEC website. A more useful tool might be Adrian Frith’s blog, where he will create a 2014 map at the voting district level*, similar to the one he created recently for the 2009 elections. But when the buzz of the results are over and everything returns to normal, let’s take a moment to reflect on the remarkableness of what can best be described as an unremarkable day.

*11 May update: The map is now available here.

Written by Johan Fourie

May 8, 2014 at 07:54