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Archive for March 2016

The layers of history

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Granada1-2

Helanya and I flew to the south of Spain for a short Easter break last Thursday. We spent a day in Granada, another one in Córdoba and then took the train to Valencia where I’m currently attending the European Social Science History Congress.

Spain is an incredibly diverse country, and the South did not disappoint. Influenced by the conquest and settlement of Islamic Moors between 711 (when the Arab and Berber Moors of North Africa crossed the Strait of Gibraltar and conquered Christian Hispania) and 1492 (when the last Muslim stronghold surrendered), the old cities of Andalusia have a distinct architecture that reminds one of the deep layers of history. This is nowhere more apparent than the Mezquita-Catedral in Córdoba where a cathedral is built inside what was once a Grand Mosque. The incredibly impressive structure has 856 marble and granite columns, some of which date back to a Roman temple which had occupied the site previously. Layer upon layer upon layer.

Granada2-2Another highlight was the Easter festivities. The two nights we spent in Granada were filled with processions through the streets, which attracted what must have been almost the entire city of Granada. It’s difficult to say whether participants were in a reflective or festive mood – perhaps a bit of both – but the streets were still busy well into the early hours of the morning. The processions recreated scenes from the crucifixion of Christ, embedded within Catholic symbolism and, I suspect, many other customs that are unique to Andalusia. The layers of history are not only encapsulated in the built environment of southern Spain, but also in the beliefs, symbols and traditions of its people.

Of course, history never ends. Much as they have done for millennia, people continue to move in and out of Spain (the same year that the last Muslim ruler surrendered in Granada, Columbus ‘discovered’ America). Many North African migrants now cross the Mediterranean in the hope of a better life, while Syrian refugees flee their war-torn country. A visit to the south of Spain is therefore a timely reminder that Europe used to be far more integrated into their southern and eastern neighbours. Córdoba’s extraordinary Mezquita-Catedral was, lest we forget, designed by an 8th-century Syrian architect.

Written by Johan Fourie

March 31, 2016 at 13:43

A small-town story of the resource curse

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Kathu

Boom town: This Google Earth image demonstrates the spectacular town growth over the last decade.

A decade or so ago, Kathu in South Africa’s Northern Cape province was little more than a quaint mining town with a fantastic golf course. Supported almost entirely by the nearby Sishen iron ore mine, no one had expected that the town would change remarkably in the coming decade. But a surge in the global price of steel encouraged Anglo American, the majority owner of Kumba Iron Ore, to expand production, rapidly increasing employment. The town boomed. House prices went through the roof, further strengthened by a lump sum bonus to all employees in 2011. (Not all investments were sensible, though: one story goes that upon receiving the bonus, an employee drove to a neighbouring town to purchase a new luxury car, only to crash it on the way back.) The people of Kathu saw their disposable incomes and living standards increase. Two new malls opened in a town with less than 15000 people.

And then it all came tumbling down. A few weeks ago, Anglo announced that, based on weak prospects in China and the low price of steel, it will cut around 4000 jobs at the Sishen mine. House prices are falling and those new developments that rose like mushrooms are going unsold. Stores are likely to close their doors soon, cutting more jobs. The future for the former quaint mining town looks bleak.

Kathu is a microcosm of the problem with development based on natural resources. Oxford University economist Anthony Venables investigates this conundrum in the most recent edition of the Journal of Economic Perspectives, asking ‘Using Natural Resources for Development: Why Has It Proven So Difficult?’. Venables explains that the successful use of natural resources requires multiple stages. First the deposits have to be discovered and extracted. Then the revenues need to be divided between the government, investors and other claimants (like the local community). What is important is how these revenues are split between the different claimants, and what it is used for. Finally, the indirect, negative effects to the rest of the economy must be allayed.

Dividing what can often be large gains can be difficult. Discovery and extraction licenses are typically awarded to encourage the most efficient mining companies to operate, but can result in corrupt practices. To avoid this, auctions provide one mechanism to ensure the government maximise revenue. Auctions do not work everywhere, though: in Botswana, the government instead negotiated with the dominant De Beers to ensure a larger share of the gains from diamonds.

Once gains have been divided, deciding how to spend it can be even more difficult. Often, Venables argues, there is pressure to spend on current expenditure instead of investing in infrastructure, for example. These pressures are magnified by patronage politics, which favours spending on groups or individuals allied to the government. The worst a government can do is to use the revenues to increase its chances of staying in power, for example, by hiring supporters as public sector employees.

But even if revenues are divided fairly and invested effectively, resource exports can cause what is known as ‘Dutch disease’: an appreciation of the exchange rate that hurts other exports. (The term ‘Dutch disease’ was coined after the 1959 discovery of gas fields in the Netherlands hurt the Dutch manufacturing industry.) A country that only exports one resource can become dependent on a single but volatile source of income, which can destabilise the economy during bad times. Just ask Angolans or Nigerians. Or the mayor of Kathu.

The future for natural resources dependent economies will not get better soon. Resource prices, notably oil, are unlikely to rise rapidly in the face of continued weak demand combined with the growing popularity of alternative energy sources, from fracking to renewables. That means that resource-rich countries, like many African countries including South Africa, will have to come to terms with the negative shocks on its public finances and balance of payments. The silver lining is that this may stimulate economic activity in other, more sustainable sectors of an economy. But even then, political pressure to protect the status quo may cause additional pain.

Perhaps Kathu will revive the golf course to its former glory, attracting tourists who want to enjoy affordable Kalahari hospitality, and allow the town to develop at a more sustainable rate. But not before many of its inhabitants have suffered the consequences of the natural resource curse.

*This article first appeared in Finweek magazine of 3 March.

Written by Johan Fourie

March 21, 2016 at 09:08

How to decolonise an Economics curriculum

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Mario4

The economics curriculum at South African universities is in crisis, claims Ihsaan Bassier, an honours student at UCT. He writes that UCT’s curriculum is ‘largely abstracted from South Africa’s economic crisis and reinforces an anti-poor understanding of policies’. He explains:

Economics is presented as an amoral subject, only examining mechanistic questions and optimising efficiency. If it is amoral, why is so little attention given to heterodox thought? Capitalism arbitrarily privileges those with money over others in the most violent form possible, through a system of class protection, marginalisation of the poor and gross injustice. Rather than being amoral, undergraduate economics in fact promotes a horrible moral: that “rationality” is defined as profit-maximisation and that the point of departure is our violent system. Students are trained to be apologists for capitalism and alternatives are marginalised.

It is both bad economics and anti-poor for students to be bombarded with arguments that government intervention and minimum wages are “bad”. Social benefits are blamed for unemployment, as if it is preferable to allow people to starve; regulation is demonised, as if unfettered business would solve South Africa’s economic problems. Some attention is eventually given to market failure, but only as a token.

Why do we not learn more seriously about other systems and behaviours, about technical aspects of socialism and redistribution, about power, about how racism interacts with capitalism, the pervasiveness of rent and out-of-equilibrium dynamics, or an endless number of alternatives that my education has not exposed me to?

UCT’s curriculum is quite similar to that of Stellenbosch, where I teach. So let me respond to these rather big accusations, and then make a suggestion.

Capitalism arbitrarily privileges those with money over others in the most violent form possible. Economics equips students with a set of tools that allow them to explain the world around them. One of those tools is statistical analysis, which means we can test a hypothesis – like the above statement – with evidence from the real world. And unfortunately for Ihsaan, the real world evidence is pretty clear on this one: capitalism, a system based on the principle of individual rights, has created remarkable economic freedom for humanity over the last three centuries. Consider this: the real income of the median person in the world doubled in the period between 2003 and 2013, a period that included a financial crisis. In 1981 more than half the people in the world lived in absolute poverty. Today, it is less than 20%. It is simply wrong to declare, without proof, that capitalism arbitrarily privileges those with money. Millions of Indians, and Chinese and, yes, Africans too, have higher living standards than their parents did, and that is highly correlated with more market activity, not less. (In fact, privileging arbitrarily is exactly what communism does, by removing people’s individual freedoms and choices. Just ask the Latvians or any other Eastern Europeans who suffered its consequences.)

Global poverty the last two hundred years

Global poverty the last two hundred years

That is not to say that everything about capitalism is great. Capitalism is not one thing – it morphs into different forms depending on the political and social context. Capitalism in America is certainly more unfettered than capitalism in, say, France. And there is certainly space for more debate about the type of capitalism we need in South Africa.

But those debates need to be based on sound theories and falsifiable evidence. Economic policy arguments – Is a higher minimum wage better for the poorest? Do social benefits lead to unemployment? Does regulation impede growth? – are all empirical questions, one that economists’ statistical toolkits can answer. Yes, we have theories about how the world works, but as Dani Rodrik explains in his excellent new book, Economics Rules, there is not one single (better) theory, but a menu of theories that economists can use to understand their world. Think of a theory (or a model) as a map. There is no single map that explains everything. Sometimes you need a world map just to look at countries. Sometimes you need a street map to take you to your destination. Other times you need a map of the soil quality if you want to sow for the coming season. Economists’ models are the same. We use different models in different contexts, and what makes a really good economist is picking the right model for the right question.

EconomicsRulesHere, Ihsaan’s critique is valid. In first and second year, the emphasis is too much on a single theory (or model) of the world, the standard, neoclassical theory. There are good reasons for this, of course: it is mathematically tractable and provides a solid base for understanding basic human interaction. And that is exactly why it is a good platform for understanding why it does not work in every setting: the assumptions are strong but they are also explicit. Relax some of those assumptions, and the results change. This is exactly how we come to improve our understanding of the world. (In my class, I discuss these assumptions in the South African context and ask the students whether they may or may not hold. That is, I’ve found, how students actually gain a better understanding of the complexities of the problems we have in South Africa, and an appreciation for the tools of economics, of modeling and statistical testing, to solve them.) But a more explicit treatment of the menu of theories economists have at their disposal is necessary.

Ihsaan offers three solutions to solve the curriculum conundrum: 1) admit that we are in a crisis, 2) allocate time to a topic in proportion to its importance in our context, 3) include topics such as poverty, unemployment and inequality from the first year. He fears that too many students leave Economics after only one or two years, without understanding the nuances of the models.

What undergraduate Economics begins to do is equip students with the analytical tools to investigate the important topics of our era. Students need the basic skills of mathematical and statistical analyses to be able to empirically test the questions we are all concerned about. To make it more practical: Debating poverty in South Africa is very difficult if your opponent has no idea how to calculate a ‘poverty line’ or ‘median income’. Or the impact of a higher interest rate with someone who has no idea what the monetary transmission mechanism is. Or the impact of an increase in VAT with someone who has never heard about tax incidence. That is why we need those first three years.

And yes, many students leave after only two years. True, they will have a limited understanding of Economics. But no one expects me to be a psychologist with just Psychology 1, or fluent in French with just French 2. This is why we need to encourage more students to enroll for Economics graduate degrees, and why we need to expose them to more analytical tools, not fewer. We cannot afford to have a society where economic policy is not informed by sound economic analysis undertaken by well-trained, analytical economists. Undergraduate Economics – with the emphasis on rigorous analytical training in microeconomics and macro-economics – needs to stay. This not only gives a solid toolkit for those who want just the ‘essence’ of Economics, but it also allows students to continue with graduate Economics, not only in South Africa but elsewhere. And as I’ve said before, to get into US universities requires a lot of analytical skills.

But I also understand the need for more context, for thinking and discussing the very real material problems that South Africans face. So, I have another solution for Ihsaan, one that betrays my biases: We can look to the past to help us understand today’s problems, and we can look to what the brightest minds have thought about solving these complex problems. In short, we can do more to encourage Economic History and the History of Economic Thought as analytical tools of their own to make sense of today’s development problems.

Ihsaan is fortunate: UCT does have a good undergraduate economic history programme, and a wonderful third-year class in the History of Economic Thought. Global and African economic history provides us with an understanding of the historical roots of poverty, inequality and unemployment; the past does not only explain the present, as one colleague notes, but it is analogous to the present. The History of Economic Thought is concerned with philosophers’ (or theorists’) ideas about solving the economic problem, including philosophers that were very much in favour of socialism. If the neoclassical model is a country-map, the History of Economic Thought is a map of the world, showing how neoclassical thinking evolved and why it became the dominant model.

At Stellenbosch, we have created an entire course in the second year to investigate past and contemporary economic development. One semester of Economics 281 starts with the Neolithic Revolution (circa 8000 BCE) and ends with the Economics of Apartheid. The other semester considers all kinds of current development policies, with a specific focus on South Africa. I see Economics 281 as complementary to the standard Economics courses. You cannot have the one without the other.

You do not decolonise a curriculum by removing content. If you do that, you deny students the opportunity to participate in global debates and the global job market. You decolonise by adding more context and diversity. We advance science by standing on the shoulders of giants. Decolonisation done right can add more shoulders to stand on.