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Archive for October 2016

Africa’s $500 billion-a-year treasure fleet

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I usually tell my students that understanding the world is much like understanding the flow of a river. We busy our lives floating on its surface, unaware of the tremendous forces below. Those forces, or currents, have various layers. Just below the surface are the forces still visible to us, the things we might still want to influence. Media, popular culture, sport. Below that is the more established institutions – political, judicial. And below that, I would argue, are the economic forces, pushing us down the river without us ever knowing the true source of the current.

But I often neglect a perhaps even deeper current, a current so slow-moving that in the business of our day-to-day operations, we fail to see its significance. Demographic change.

The world has witnessed massive demographic change over the last two centuries. In the eighteenth century, Reverend Thomas Malthus predicted that because humans increase at a geometric rate but food production only grow at an arithmetic rate, humans will continue to live just above subsistence. What he did not consider was human ingenuity. Since his famed prediction, not only has global population numbers increased by a factor of 7, our average level of prosperity has increased by at least a factor of 8 (and in many countries much more).

But demographic change is more than just an increase in numbers. As medical knowledge and modern medicine expanded, mortality rates, especially those of young children, have fallen to historically low rates. As families recognised that many of their children now survive into adulthood, they have begun to reduce the number of children they have. (When Adam Smith wrote about Scottish Highlands mothers in 1776, he noted that of the 20 children they might bear, only two would survive into adulthood. In 2014, the average Scottish women had 1.56 children.)

The difference between the decline in mortality and the decline in fertility is known as the demographic dividend. A demographic dividend essentially means that there are many more people of working age than there are dependents (very old and very young people); thus, there are more paying taxes than those needing the tax money. Most developed countries experienced their demographic dividend somewhere during the nineteenth or early twentieth century. Most Asian countries experienced theirs during the latter half of the twentieth century; even in Bangladesh, one of the most densely populated countries on earth, the fertility rate is now 2.21, just above replacement level.

Africa has not seen fertility rates fall to the same extent. A new NBER Working Paper by David Bloom, Michael Kuhn and Klaus Prettner argues that this is likely to happen in the next few decades, which means ‘Africa has considerable potential to enjoy a demographic dividend’. This will be a boon to Africa’s economic prospects, but, as the authors argue, only if countries implement good policies.

One place to start is to give women the freedom to choose the number of children that they have. Access to contraceptives and family planning services are among the reasons for the decline in fertility rates elsewhere, and too many women in African countries still lack access to such services. Policies focusing on female education will boost female labour force participation, which not only reduce fertility rates, but also increase investment in their children; more educated, working mothers tend to have fewer, more educated children. The main challenge, as the authors acknowledge, is the capacity of many of the weakest governments to coordinate such policies effectively.

Once fertility rates in African countries start falling – as they already have, down from a high 6 in the 1960s to a still relatively high 4.7 in 2015 (South Africa is an outlier, with a fertility rate of only 2.4) – and the demographic dividend begins to boost government coffers as the number of child dependents fall relative to the working age population, governments will have to make clever, forward-looking decisions about what it is they want to invest in. Education, particularly tertiary education, is an obvious candidate.

Barriers that might prevent African countries from realising these gains include climate change (which affects migration decisions) and, more alarmingly, the wastefulness of government expenditure (corruption, state capture). The authors calculate that a demographic dividend could ‘yield’ as much as $500 billion per year in additional expenditure possibilities. It is easy to see how such a boon could lead to political opportunism in the worst degree.

Because a demographic dividend ‘only’ lasts a couple of decades, after which the working age population grows old and become dependents again, governments must ensure that they invest wisely during the good years. Many developed countries, from Italy to Japan, are today struggling with aging populations, and the fiscal demands of promised pensions.

That is why long-term fiscal planning is essential. In those African countries where fertility rates have already fallen significantly, notably in South Africa, these issues are much more prescient than in others where the demographic dividend is still to be realised. What is clear, though, is that we should be more cognizant of the deep underlying currents that determine the flow of the river, and the direction our boat is likely to go.

*An edited version of this first appeared in Finweek magazine of 22 September.

Written by Johan Fourie

October 27, 2016 at 06:33

It’s the sixth AEHN meetings!

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Stellenbosch PhD student Abel Gwaindepi presenting his research at last year's AEHN meetings

Stellenbosch PhD student Abel Gwaindepi presenting his research at last year’s AEHN meetings

This week the University of Sussex hosts the sixth African Economic History Network meetings. I’ve just arrived in Brighton for what will be a full programme of conferencing on Friday and Saturday, and meetings and discussions in-between. Our hosts, Alex Moradi and Felix Meier zu Selhausen, have done a splendid job of attracting more than 60 high-quality papers from a wide spectrum of economists and historians working on the African past. The full programme is available here.

This is an important moment for the field. Having grown rapidly over the last few years as younger scholars (mostly from Europe) embrace the field of quantitative African economic history, the annual meeting now provides a platform for many of them to showcase their work. Their passion and enterprise have uncovered new data sources, which have challenged long-held beliefs about topics like precolonial inequality, the economic causes underpinning the Scramble for Africa, the effects of missionary education, fiscal regimes, and many more.

But this can only be a beginning. As debates about decolonising curricula within South African universities raise legitimate concerns about challenging a Eurocentric view of African development, the challenge for the Network and for the broader research community is to expand the pool of researchers using these new sources and methods. African economic history, as I’ve written before, is a wonderful tool to contextualise the often ahistorical and acontextual economic theories that are the bedrock of economics courses. And while these formal models are necessary to allow students to evaluate economic policies and communicate their findings to an international audience, their interpretations must be informed by local histories and conditions. That is what a quantitative African economic history can do.

To dismiss the immense contribution the new breed of African economic historians that will congregate in Sussex has made is senseless. These scholars have spent many years reading and researching the African past, digitising precious historical sources, analysing trends and interpreting the African past based on new empirical results. These efforts have often also been associated with significant financial resources, which have allowed many sources to remain in the public domain. They have also written textbooks that are downloadable for free to African students.

My hope is that more African scholars can become participants in and contributors to these debates. Funding remains an issue, but so too a demand from African students. It would be wonderful, for example, to see more Masters dissertations at South African universities on African economic history questions. This is not always the students’ fault. As one of my own students recently reminded me, it is the responsibility of academic staff to instil in students an interest in the important and often difficult (and contentious) research questions of our time. What were the causes and consequences of slavery and colonialism in its many dimensions? Of colonial infrastructure and education? Of the IMF structural adjustment programmes and the debt cancellation and development aid? Of immigration and emigration? Of natural resources and sovereign wealth funds? Of genetically modified crops and robotics?

Hopefully the AEHN meetings at Sussex this week will pose some of these important and difficult questions. And when the seventh African Economic History Network meetings come around next year (in Stellenbosch), we will have a large pool of African students contributing answers – and new questions.

Africa should invest in itself

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Imagine you receive the news tomorrow that an unknown, distant family member has passed on and left you a bequest of a million dollars. What to do? Spend it immediately on luxury consumption – a round-the-world trip, perhaps – or invest it offshore and live off the returns, thereby smoothing your consumption and protecting the wealth for your own and your children’s futures? There is another option, though: immediate investment in yourself, say by enrolling at Harvard for an MBA. This way you not only boost your personal future income, but more educated parents tend to have more educated (and healthier and connected) children, thus boosting the prospects of future generations.

This third option, in a nutshell, is what three new papers in the Journal of African Economies suggest for developing countries that have jumped on the Sovereign Wealth Fund-bandwagon. Sovereign wealth funds (or SWFs) are state-owned investment funds designed to preserve the high returns from non-renewable resources, like oil, for future generations. A quarter of the world’s economies still depend on non-renewable resources, and more than half of them now have some type of SWF, including many recently established funds in Africa: consider, for example, Ghana (2011), Angola (2012), Nigeria (2012) and Senegal (2012). Others, like Kenya, Tanzania and Mozambique, are finalising SWF policies. And these funds matter: Sovereign Wealth Funds are a quarter of Algeria’s GDP, 40% of Botswana’s GDP and over 100% of Libya’s GDP.

There is good reason for the turn to this type of investment fund. SWF have many good properties, as the experience of Norway since 1990 have shown. It converts temporary resource revenue into a permanent investment income. Best to keep it offshore, too, so as to avoid domestic inflation, real exchange rate appreciation and the contraction of other traded sectors (also known as Dutch disease). And why invest locally when all profitable investment opportunities would presumably have been financed already at the world interest rate if the capital account is open? For these theoretical reasons, and because of the practical successes of SWF across the world – Norway, Chile, Saudi Arabia – many African countries followed suit.

But the authors of the three Journal of African Economies papers question this logic. They argue that many African countries do not have open capital accounts, meaning that there are still many profitable opportunities to invest within Africa. Why then send precious investment funds abroad when the highest returns can be reaped locally? To return to our earlier metaphor, why invest your long-lost family member’s bequest in stocks on the JSE, when you don’t even have a high school education yet. Invest in yourself first!

In Africa, the focus should be on infrastructure. One set of authors, Rabah Arezki and Amadou Sy, argue for three stages of financing infrastructure with the help of SWFs: First, involve development banks, who are often more informed about viable investment projects, in the first phase of large projects that are often the riskiest. Second, offload more mature projects to arms-length institutional investors like SWFs. Third, develop an African bond market to facilitate this offloading.

The maintenance of infrastructure in Africa is of particular concern, and SWFs can play a role here. Arezki and Sy calculate that at least one-third of Africa’s investment needs are in maintenance, and suggest bundling construction and maintenance services in private-public partnerships as one way to overcome this (by making sure builders have an incentive to minimise maintenance costs).

South Africa does not have a SWF, although the idea of a supertax on mining profits has been mooted before. If we did decide to go this route, as many of our neighbours seem to do, the question becomes: who gets to choose how the funds are spent? Anthony Venables and Samuel Wills, another set of authors, argue that it should be done through the usual budgetary process; in South Africa’s case, that will be through Treasury. Another author, Joe Amoako-Tuffour, argues instead for a more independent SWF that take direct positions in investments. Whatever strategy is followed, it is important to remember an additional reason for Sovereign Wealth Funds: to minimise the misuse of resource rents by politicians.

There is no better example of this than the second smallest nation in the world: the Pacific island of Nauru with a population of 10000. In their paper, Samuel Wills, Lemma Senbet and Witness Simbanegavi note how the island, made almost entirely of phosphate, was the richest country in the world in the 1960s. Two-thirds of the phosphate revenues were invested in a Trust, which peaked at $100 000 per person. In 2004, after some questionable investment decisions that included a cruise ship that never left port and a Lamborghini for the police chief (to drive on an island of 21km2), the fund had only $3000 per person left.

The lesson is that we do not live in a world of benevolent dictators. Politicians make bad decisions often, and state-owned investment fund should be structured to avoid their misuse. But going to the extreme and parking all resource returns offshore is also not the answer for many African countries. Investing in local infrastructure and its maintenance may provide far higher returns for future generations – if the possibility of misuse can be curtailed.

*An edited version of this first appeared in Finweek magazine of 8 September.

Written by Johan Fourie

October 4, 2016 at 10:20