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Archive for April 2018

A moment to remake South Africa

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Cyril

At the dawn of independence, it fell on the first generation of African leaders to choose a new economic paradigm to deliver economic freedom to their people. In the Cold War between capitalism and communism, these African leaders almost unilaterally preferred a third option – ‘African socialism’ – a potpourri of policies built on the ethic of egalitarianism grounded in African history and culture.

At the second annual LEAP Lecture at Stellenbosch University in October 2017, Emmanuel Akyeampong, professor of African history at Harvard University, returned to the topic of ‘African socialism’ following independence, and its consequences for the continent. In countries as diverse as Ghana, Tanzania, Senegal and Guinea, he notes, the new policies were, ultimately, attempts to industrialise, to break away from the agriculture-based systems of the colonial economies.

In Kwame Nkrumah’s Ghana, for example, plans were drawn up for massive infrastructure investments. Sadly, many of these projects never got off the ground, or were only finished much later. In one project, for example, Nkrumah convinced the Russians to build a railway from Kumasi to Ouagadougou, the capital of Burkino Faso, but the railway was never completed.

The most extreme version of ‘African socialism’ was Julius Nyerere’s umajaa (villagization) campaign in Tanzania in 1967. This essentially meant the collectivization of all forms of productive capacity, notably in agriculture; Tanzanians, Nyerere believed, must learn to free themselves from dependence on European powers by becoming self-reliant.

Nyerere’s bold vision, and those of his contemporaries, failed miserably. Says Akyeampong: “The 1980s put paid to the concept and the vision, as steep economic decline resulted in what has been called Africa’s ‘lost decade’; the most notable architect of African socialism, Nyerere, conceded that his attempt at ujamaa had failed and stepped down from power in 1985; and the collapse of the Soviet Union in 1989 marked the triumph and ascendancy of capitalism.”

But Akyeampong is less interested in the reasons for their failures than in the boldness of their visions.  “It is the vision of bold and broad transformative change that I find admirable and worthy of emulation, and the desire to lift entire populations out of poverty and give them a decent life.” This optimism and boldness was not limited to the African leaders themselves; even the World Bank, soon after independence, remarked: ‘For most of Africa, the economic future before the end of the century can be bright’.

As I listened to Cyril Ramaphosa deliver his first State of the Nation address, I was reminded of that special moment in time when monumental change seemed possible. The general mood seems to have lifted after Jacob Zuma’s departure. Is this another moment when the trajectory of history seems to shift gear?

We should, of course, learn from history. Utopian visions of the future can easily become a justification for social engineering. While a powerful state can quickly transform society, it can do so at the cost of freedom. This is not the route I have in mind. Instead, this opportune moment can be used to redefine the social contract, to implement a nuanced set of social democratic policies with two explicit aims: economic security and economic freedom. In short, we want to live in a just and prosperous society.

How do we achieve that? Security requires that people have a basic standard of living. One policy proposal that has attracted a lot of interest is the basic income grant, a small monthly grant (of say R752, the lower-bound poverty line) to every South Africa, regardless of income. This would replace the child support grant. Every person with an ID document will be required to open a bank account (perhaps with a new state deposit bank), which will be linked to their SARS account. To partially fund this, VAT will increase. A tax on consumption means we incentivise savings and investment, the heart of creating economic prosperity.

There are many such policy options. State ownership of some assets, like aeroplanes and television stations, make little sense. These can be sold to pay off national debt and lower personal income taxes. Government can also save by reducing the number and size of departments and keeping the increases in the public wage bill to less than inflation.

As South African cities have some of the longest transit times in the world, infrastructure investment in urban areas – notably in public transport and housing – needs urgent attention. Water and electricity can benefit from innovations like desalination and solar panels. Broadband access can be expanded through incentive programmes.

A prosperous society requires an educated populace and work for them. Investing in early childhood development is key to eradicate large discrepancies that already exist when kids arrive at school. Incorporating the private sector in secondary and tertiary education, perhaps through a voucher system, is one way to not only improve the quantity of seats in class, but also provide opportunities for entrepreneurs at the local level. We should also welcome immigrants with skills with open arms; they not only bring much-needed expertise, but they often build new businesses that create jobs and improve living standards.

Cyril Ramaphosa has a window of opportunity in the first few months of his tenure. He can dare to be bold, and should do so. Says Akyeampong: “We need the bold and transformative vision of the likes of Nyerere and Nkrumah to ensure that come 2050 we do not find ourselves in the same predicament as on the eve of independence, when our new leaders, coming out of decades of repressive colonial economic policies, were faced with what appeared to be insurmountable challenges.” What will economic historians, fifty years from now, say about Ramaphosa’s moment to remake South Africa?

*An edited version of this article originally first appeared in the 15 March edition of finweek

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Do management consultants really add value?

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management-consulting

That good managers matter for corporate success, should be a surprise to no-one. Early economists like Alfred Marshall, back in the nineteenth century, already noted the importance of good management practices to drive productivity. But because managers and the way they behave is such a difficult thing to quantify, economists have struggled to measure how important good management practices are in explaining firm success.

In 2008, five leading economists from Stanford University and the World Bank, tackled this difficult question. They wanted to know whether investing in good management practices improve productivity and profits, and so, between 2008 and 2010, they conducted a large field experiment in India. They approached large, multi-plant Indian textile firms and divided them in two groups. For one group – the treatment group – they gave five months of extensive management consulting through a large international consulting firm. This included a month of diagnosis, where the consulting firm would find opportunities for improvement, and four months of intensive support for the implementation of these strategies. In contrast, the other group – the control group – received only one month of diagnostic consulting, but no intensive follow-up.

At the end of the study, in 2011, they tested the performance of the firms in the two groups. The results, published in the Quarterly Journal of Economics in 2013, were quite remarkable. Even with just four months of follow-up, those in the treatment group saw an increase of 11% in productivity, and an increase in annual profitability of about $230 000. Interestingly, firms also spread these management improvements from their treatment plants to other plants they owned, creating positive spillovers that resulted in returns that far outstripped the initial investment.

What made the difference? The authors suggest two reasons for the improvements: First, owners delegated greater decision making power over hiring, investment and pay to their plant managers. “This happened in large part because the improved collection and dissemination of information that was part of the change process enables owners to monitor their plant managers better.” Second, the extensive data collection necessary for quality control, for example, led to a rapid increase in computer use. Better information management resulted in better performance.

The concern with the study, though, was that it failed to measure the persistence in performance. Did the differences between the treatment and the control group wither away as soon as the management consultants left, or did they persist for a month, a year, or even longer? To answer this question, almost the same team of authors returned to India in 2017 to measure the performance of the firms eight years after the initial intervention. Their results appeared in an NBER Working Paper last month.

It seems that management practices do persist. Despite the fact that several firms (in both the treatment and control group) dropped some of the management practices that were initially proposed by the consultants, the difference between the two groups were still large – worker productivity is 35% higher in the treatment group compared to the control group. The spillover effects, in particular, were still there: in fact, in most cases, the plants that did not receive treatment but were part of the same firm, were indistinguishable from the plants that did receive management consulting services. As the authors note: While “few management practices had demonstrably spread across the firms in the study, many had spread within firms, from the experimental plants to the non-experimental plants, suggesting limited spillovers between firms but large spillovers within firms”.

The authors were also able to collect information on the reasons certain management practices were dropped over the period of 8 years. Three reasons were frequently mentioned: the new management practices faded when the plant manager left the firm, when the directors, notably the CEO and CFO, were too busy, and when the practice was not commonly used in many other firms. “The first two reasons highlight the importance of key employees within the firm for driving management practices, while the latter emphasizes the importance of beliefs.”

There were other surprising consequences of intervention too. Not only was worker productivity higher in the treatment group, but treated firms continued to use consulting services in the years following the initial intervention, not only improving their operational management practices, but also their marketing practices.

Management consultants often get a bad rep, but random control trials like these – experiments that are costly and time-consuming – clearly demonstrate the advantages, in profits and productivity, of investing in good management practices. Successful firms thrive because of good managers. The key is to hang on to them, empower them with the ability to make decisions, and free up their time.

*This article originally appeared in the 1 March edition of finweek.

Written by Johan Fourie

April 6, 2018 at 15:21