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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

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