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Archive for December 2014

A good year

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Helanya and I, with Willem and Zorada, in Berlin

Reichstag selfie: Helanya and I, with Willem and Zorada, in Berlin

I’m officially on leave from today. It’s been a good year; a busy first six months of teaching followed by a productive second half of research. I presented in Barcelona in September and at the LSE and Sussex in October, but these were mostly opportunities to meet old and new friends (economic history is like that). It’s fantastic to see African economic history take off, and it is thanks to a dedicated group of great people. The 2014 South African Economic History Annual will be online soon, but a sneak peak can be found here. There are many exciting things awaiting in 2015 too. More research, more workshops and conferences in places I haven’t been before, and more good times with good friends.

But first it’s time for a holiday. I’m off on a golf tour for four days. I don’t play golf, so it promises to be memorable and hilarious for all the wrong reasons. Robin Williams summarized the rationality of golf best, I think. Then it’s Christmas, which in the southern hemisphere is associated with sun tan lotion and ice cream and hours spent in front of the TV watching the Proteas play cricket. It also means time to reflect on the year that’s been, and appreciate those around you. There are many people who have made this year special. Our parents and parents-in-law enable us to travel to and spent time in some of South Africa’s most exotic locations, like the southern Cape coast or the Kruger National Park. We spent a wonderful time with Willem and Zorada in Berlin and then Barcelona. Alfonso Herranz-Loncan was very kind to host us in this wonderful city. Pim de Zwart invited me to Amsterdam, Leigh Gardner invited me to London, and Alex Moradi and Felix Meier zu Selhausen welcomed me in Sussex. This year, for the first time I think, I’ve learned more from my students than they from me. My colleagues and co-authors have been kind and encouraging in their advice, and many have become role models that I hope to emulate in some way or another. Special mention must go to Ina Kruger who organizes my jumbled admin, Hanlie and Carine at the university library for fielding urgent requests, and Di Kilpert for her hard work in fixing my sometimes dodgy English. I still don’t get English grammar, and play it all by ear.

Many close friends became married: Willem and Zorada, Anne and Rohan and, this coming Saturday, Dieter and Marisa. Others found new jobs, or graduated (well done Wynand – now can I finally see some returns on my investment, please?), moved to a new city or into a new place, or welcomed new members to the family.  There was sad news too, and this year was the first time I had to preside over the funeral of a close family member. None of the ups and downs, though, would have been possible without the support of my wonderful wife, Helanya. She puts up with being woken (very) early and runs our little household like a “well-oiled machine”, while also having a full-time job with far more demands than mine. Thank you for the good memories.

On 2014, and the possibilities of 2015!

Written by Johan Fourie

December 16, 2014 at 09:09

South Africans need higher EQON

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The much maligned measure of intelligence – IQ – has an equivalent that measures emotional intelligence – EQ. I vaguely remember studying this in industrial psychology, but, as with most things I’ve studied, I had to go to Wikipedia to get the exact definition: “EQ is the ability to monitor one’s own and other people’s emotions, to discriminate between different emotions and label them appropriately, and to use emotional information to guide thinking and behavior.”

But this is not a post about South Africans’ emotional intelligence. Instead, I want to propose another measure: Economic intelligence, or EQON (pronounced with a click to sound hipster). What is economic intelligence? I’ve borrowed from the other EQ: It is the ability to monitor one’s own and other people’s economic behaviour, to discriminate between different economic actions and label them appropriately, and to use economic information to guide thinking and behaviour.

Reading the press, and especially the comments on a news site like News24, is a nightmare for anyone with a basic understanding of economics. See, economists disagree a lot. If you ask ten economists what will happen to the economy, you will get eleven different answers. (Forecasting is a game only the brave or ignorant play, and it is actually a very small part of what economists do.) But even though economists debate many things, this is not to say that they don’t also agree on many things. We all study the same laws and theories that guide our thinking. We know that if demand increase, prices will tend to increase too. Of course there are assumptions, and we can debate those assumptions. But the theories hold, most of the time.

Which is why it is often excruciating to read comments on news or business sites which report about issues that impact the economy. Take the recent ban on chicken imports from Europe. Because of bird flu, South Africa has closed imports from several European countries to ensure that bird flu doesn’t spread into our borders. How will this policy impact us? It is indeed necessary to protect consumers of chicken to the harmful effects of chicken, but there should be no doubt that consumers will lose because a ban on imports will inevitably push prices higher. This is indeed what has happened after the tariffs on chicken imports increased. But there are winners too: South African producers – mostly oligopolists like Rainbow Chicken and County Fair – will benefit through higher prices and a larger market share. One commentator saw this as a positive step: “Thank God”, he said. “Let’s grow our own industry.”

It would indeed be great to grow our own industry, but at what cost? Should all South Africans pay double for their largest source of protein so that we can create a couple of hundred additional jobs? Do the math: if 50 million South Africans pay only R1 more per month for chicken, we would ‘lose’ R600 million a year. Are producers really going to create 6000 new jobs at R100 000 a job? No, they’re not. The bird flu epidemic is bad, not only for European producers but also for the South African economy too, and especially the poorest South African consumers, who now will be forced to either switch to more expensive proteins are to go without it. That’s why nearly all economists would agree that trade is beneficial for a country, because it allows consumers to improve their living standard much higher than if they had to only bought locally produced goods.

Another thing that most economists would agree on, is that immigration is a good thing. Last month News24 reported that close to 200 000 Zimbabweans are applying for a special extension of their visas. The comments all reflected the following sentiment: “Send the f#ckers back. That’s why there’s no jobs for our guys (sic).” But economists know that immigration is not a zero-sum game. When 10 people immigrate to South Africa, the don’t steal the 10 jobs of South Africans. Many immigrants become entrepreneurs, employing locals. Many work very productively in existing firms, allowing those firms to expand and employ more people. Immigration, especially of well-qualified individuals like the ones moving to South Africa, is a boon not a bane to the economy. We should welcome them with open arms, give them citizenship and let them contribute to the economy to the benefit of everyone else.

Let me give a third example. Economics 101 teaches us that a price floor such as a minimum wage creates a disconnect between the amount of labour supplied and the amount of labour demanded. We call this unemployment. If the minimum wage increases, this disconnect will become larger still, meaning unemployment will increase further. There are exceptions, of course. Sometimes the markets are not competitive, or there are information asymmetries, or there are counterveiling shocks in the rest of the economy that mitigates against the rise in minimum wages. But, in general, a higher minimum wage leads to higher unemployment.

Which is exactly what I predicted two years ago when, after the labour unrest in November 2012 on Western Cape wine farms, the government implemented a higher minimum wage for farm workers. What has happened since? Well, according to Carmen Louw of Women on Farms, “more than 73,000 jobs were lost in the Western Cape farm sector after the statutory minimum wage was raised by more than half in the wake of the violent farm worker strikes of 2012.” Seventy-three thousand! That is nothing less than tragic.

Of course, even in the face of such glaringly obvious evidence that higher minimum wages hurt poor farm workers, some are still not willing to accept that it’s the most basic economic law that explains the higher unemployment. As Dave Marrs points out in yesterday‘s Business Day, Women on Farms and Cosatu believe it is “a matter of racist and misogynist white farmers taking revenge for the strike by victimising black women, rather than simple economics”. Not a lot of EQON there.

Fortunately, in contrast to IQ and EQ, there is actually hope for those with a low EQON. It helps to remove the ideological blinkers, and focus on the evidence. (This is true for economists too. Again, not all economists agree on everything, and much of the disagreement is an unwillingness to accept the evidence of the opposite school of thought.) But people struggle to understand what evidence is. Is one anecdotal account of a woman losing her job because her chicken farm is struggling to compete against cheap Brazilian imports enough evidence to tell us that chicken imports are bad? No, it is not. Because what of the millions of other stories of consumers, unknowingly, buying more chicken products because of cheap prices. Unfortunately the story of the woman – usually accompanied with a photo of her family – appeals to our emotions much more than the story of cheap food.

Economists can also help to remove the blinkers by doing better research: if we can convincingly show with numbers how immigration improves an economy, or that higher chicken prices hurt consumers, or that higher minimum wages cause people to lose their jobs, and if we can convincingly communicate our results to a public often unwilling or unable to see both sides of a story, then it will be easier to convince people of the merits of our case.

Let the quest for a higher national EQON begin!

Written by Johan Fourie

December 12, 2014 at 09:19

The dangerous appeal of the benevolent dictator

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General Park Chung-hee, South Korean president from 1962-1979

General Park Chung-hee, South Korean president from 1962-1979

Two weeks ago, Alan Knott-Craig Jnr, South African entrepreneur and IT whiz, tweeted the following to his more than 12000 followers:

Young countries are like startups. They need to move fast to find a viable economic model. That’s why dictators are best for young countries.

Dictatorships are appealing. They can transform a country more rapidly than any other mode of government. Consider the widely cited example of South Korea’s General Park Chung-hee. He took over the ineffectual South Korean government in 1962 and imposed a military regime that included giving the president sweeping (almost dictatorial) powers and permitted him to run for an unlimited number of six-year terms. He suppressed the media and instituted morality laws with mandatory curfews and regulations on attire and music. Yet during his 17 years in charge until his assassination in 1979, he oversaw a massive expansion of the South Korean economy, known as the Miracle on the Han River. Relying on cheap wages, South Korea industrialized in the manufacturing of cheap manufactured goods. It invested heavily in new technology and education. Within two decades, the economy had transformed from an impoverished backwater to the host of a very successful 1988 Seoul Olympic Games. Today, Seoul is one of the most technologically advanced cities in the world.

Knott-Craig Jnr is correct that dictators can be best for young countries, as the South Korean example shows. But are they, on average? A new paper by Papaiounnou and Van Zanden shows they are not. The authors build a large database, measuring the length of tenure of each of the heads of states of all countries since 1960. They then regress the length of tenure on the economic performance of a country. Their findings? The longer a president is in office, the worse that country’s economy is doing. They explain:

In all specifications, we find a strong negative coefficient linking years in office to economic growth and the quality of institutions, and a positive coefficient relating years in office and the rate of inflation. In particular, there is enough evidence to suggest that the young states of Africa and the Near East are the ones more severely affected by the ‘dictator effect’. The average country in this region saw its GDP per capita double between 1960 and 2009, implying an average growth rate of almost 1,5% per year; had there been no ‘dictator-effect’ as estimated here, average growth would have at least been 2,38% per year, and GDP per capita in 2009 75% higher than its current level.

A dictatorship is not the way to grow your economy. Sure there are a few exceptions, but they are exactly that: statistical outliers. A country where the president stays in power longer than two terms will, on average, perform worse than had a new president been elected. Perhaps the main issue is that a dictator, even a benevolent one, may do well in his (it is always men) initial few years. His power to affect change becomes an all-consuming drug that can only be appeased by more power. Consider South Africa’s neighbour, Robert Mugabe. Leading the revolution against white rule, Mugabe emerged not only as the hero of the people but also the one to put Zimbabwe’s economy on the path to prosperity. During the early 1990s, the Zimbabwean economy was often growing at more than 5% per annum. Mugabe was praised in his own country and also abroad; he received honorary doctorates from the universities of Edinburgh, Massachusetts Amherst and Michigan State (all since revoked). But Mugabe, like all dictators before him, could not retire and admire their achievements. Instead, he changed the constitution (which is possible if you are widely admired) and remained in power. Zimbabwe’s economy and people have suffered as a result.

The wise Adam Smith, in his lesser-known Theory of Moral Sentiments, writes about this ‘terrible drug’ as Russ Roberts calls it in his new book How Adam Smith Can Change Your Life:

To those who have been accustomed to the possession, or even to the hope of public admiration, all other pleasures sicken and decay. Of all the discarded statesmen who for their own ease have studied to get the better of ambition, and to despise those honours which they could no longer arrive, how few have been able to succeed?

There is no way of knowing what would have happened to South Korea had General Park Chung-hee not been assassinated. My guess is he would have hung onto power, and pulled the South Korean economy down with him. Robert Mugabe stayed on too long, and Zimbabwe are the poorer for it. The lessons are clear: dictators are bad not because they immediately do bad things, but because they become addicted to power. And to hold on to that power, they distort the institutions – an independent judicial system, a free media, regular elections – that are essential for sustainable and shared growth.