Johan Fourie's blog

I'd rather be a comma than a fullstop

Archive for September 2018

The cost of crime

with one comment

South Africa Gang Violence

It is almost something that defines South Africans: having lived through the traumatic experience of a violent crime or, at the very least, know someone that have. 19016 murders were committed in the country in 2016/2017, according to the South African Police Service, or 34.1 murders for every 100 000 people. (Contrast Afghanistan at less than 7 murders per 100 000 people, Argentina at less than 6, Kenya at less than 5, India at less than 4, Iran at less than 3, and Ghana at less than 2.) Almost the same number of attempted murders as murders were reported to the police. On average, 109 men and women were raped each day. In 2016/17, there were 22,343 incidents of house robbery recorded, or 61.2 each day.

These statistics are nothing less than shocking. They explain why most South Africans list crime as their number one concern, far above access to land or inequality, and why those that decide to emigrate list ‘improved safety and security’ as the top reason for leaving. Given the widespread concern, one would expect that safety and security would be a top research priority at South African universities. It is not. A 2017 World Bank study by leading social scientists reports: ‘There is a dearth of research on crime in South Africa, which is particularly problematic in this country given the extraordinary high crime rates reported here.’ The study begins to fill the gap, but the results show why understanding the causes of criminal behaviour is so difficult.

Surely poverty is the most obvious explanation for crime? Well, consider that the province with the second highest murder rate in the country is the Western Cape (with 51 murders per 100 000 people), and the province with the lowest murder rate is Limpopo (with 14 murders per 100 000 people). The Western Cape is, of course, much more affluent than Limpopo. This suggests that poverty is not the main reason for crime. Perhaps, then, inequality is what matters. The authors of the World Bank study answer this emphatically. Using a sophisticated regression analysis, they conclude that ‘we did not detect any relationship between inequality and violent crime, nor between unemployment and any crime type.’ If it is not poverty and inequality, then what?

We know, for example, that the victims of most violent crime often know the perpetrator. The 2016 Demographic and Health Survey reveals that 17% of women aged 18 to 24 had experienced violence from a partner in the 12 months before the survey. Economists in the US have developed sophisticated household bargaining models to explain this form of violence, but more could be done to test these models in the South African context.

If there is a dearth of research on the causes of crime, there is even less known about the consequences. The costs of a traumatic experience can be multifaceted for the victim, from the direct medical costs to the life-long psychological and emotional pain. And the effects on family and friends, their relationships and interactions, their productivity and future plans, are enormously difficult to quantify.

A new NBER working paper attempts to measure one, often forgotten, cost of domestic violence: the effect on children in utero. Because crime statistics is difficult to get past university ethics committees, it is difficult to track the victims of crime over time in order to measure the effect of the traumatic experience on later-life outcomes. The three authors of this study, Janet Currie, Michael Mueller-Smith and Maya Rossin-Slater, use a unique source of linked administrative data from New York City. They combine birth records with information on maternal residential addresses with the exact locations and dates of reported crimes to compare the outcomes of women who have a reported assault in their home in months 0 through 9 postconception to those who experience an assault 1 to 10 months after the estimated due date.

Their results are startling. Women who suffer from domestic violence during pregnancy, especially during the third trimester, have as much as 50% higher rates of births that are very low birth weight (less than 1,500 grams) and are very pre-term (less than 34 weeks gestation). The likelihood of induced labour also increases for these women.

The authors then do a back-of-the-envelope calculation of the costs of US domestic violence. ‘We calculate an average social cost of $41,771 per assault during pregnancy. Assuming that 2.6 percent of pregnant women experience an assault—the national victimization rate estimated from survey data—this figure translates into a total annual social cost in excess of $4.25 billion.’

Many might groan at trying to put a number on these tragic experiences, but quantifying the social costs – in other words, the costs for society – of domestic violence is one way to help governments prioritise preventative and remedial expenditures. The high rates of domestic violence and abuse in South Africa, particularly of women during their most fertile years, suggests that the costs of domestic violence would be significantly higher here compared to the US. And because domestic violence is more likely to be suffered by women from poor households, this may suggest, according to the authors, ‘an important and previously understudied mechanism by which early-life health disparities perpetuate persistent economic inequality across generations’.

Violence, in all its manifestations, is costly for society, which is why we should invest more resources into understanding its causes and consequences. Domestic abuse, in particular, seems to carry not only a cost for the current generation, but is likely to affect the next generation through its intergenerational effect on children in utero. Understanding and preventing it may be one of the key ways to fight deepening inequality and poverty persistence.

**An edited version of this article originally appeared in the 16 August edition of finweek.

Advertisements

Written by Johan Fourie

September 19, 2018 at 08:00

The big misconception about the free market

with one comment

South-African-Airways

There are many who view the free market with skepticism. Some are downright hostile towards it, proclaiming – erroneously so, given the empirical evidence of history – that capitalism hurts labour, the environment, or the poor, and is largely to blame for the evils of this world. Others grudgingly accept that capitalism is a better system than the alternatives, but look down, much like the nobility viewed merchants in Medieval times, on those in the business world as scammers and frauds. After the Steinhoff collapse, many commentators, often those schooled in the humanities, pointed to unethical behaviour of the ‘markets’ or the ‘business community’ or the ‘corporate sector’. In its crudest form, they blamed it all on ‘free market capitalism’ or, that insult of insults, ‘neoliberalism’.

But that interpretation is predicated on a fundamental misunderstanding of what ‘the free market’ actually is. A student pointed me recently to a ten-part television series by one of the leading economists of the twentieth century, Milton Friedman. Recorded in the 1980s but as relevant today as then, Free to Choose spells out Friedman’s belief that the ‘free market’ is preferable to the alternative of government intervention. The series is now freely available on YouTube.

After each episode, Friedman debates with invited guests, many who don’t share his views, about the pros and cons of the market. The moderator at some stage points out that both Friedman’s opponents, one from big business and the other from government, tends to agree that government intervention – say, to increase tariffs – is a good idea. How would he explain this? Friedman responds that it is perfectly rational that the two agree, even if for opposite reasons. ‘The two greatest enemies of free enterprise and freedom in the world, have been on the one hand the industrialists and on the other hand most of my academic colleagues who end up in government, and for opposite reasons.’ His academic colleagues, Friedman argues, want freedom for themselves. ‘They want free speech, they want freedom to write, they want freedom to publish, to do research. But they don’t want freedom for any of those awful businessmen.’

‘The businessmen are very different’, says Friedman. ‘Every businessman wants freedom for somebody else. But he wants special privileges for himself. He wants a tariff from congress.’

Entrepreneurs are in the business of making money. One way to do that is to produce a good or service that is better than the competition through efficiencies or strategy or innovation. So far, so good. Another way to do this is to eliminate the competition altogether. This can be done by getting government to impose a tariff on imports, or to get government to issue special licenses, or to convince government to issue regulation that protect your business from superior competition.

South Africa, of course, has a long history of this type of government intervention. The VOC that set up a refreshment station at the Cape was a company founded on monopoly trading rights. Paul Kruger’s ZAR government was built on a complex network of monopoly licenses with industrialists, and so, too, was the apartheid state. The scale of collusion between government and big business in more recent years ultimately coined a new term: state capture.

This is not free market capitalism. Put differently, it is not the type of capitalism that creates prosperity. Friedman made the same point in the 1980s: ‘It’s not proper to put the issue as industrialists versus government. On the contrary, one of the reasons why I’m in favour of less government, is because if you have more government, industrialists take it over. The two together form a coalition against the ordinary worker and the ordinary consumer. I think business is a wonderful institution, provided it must face competition in the marketplace, and it can’t get away with something except by producing a better product at a lower cost.’

Think of South Africa’s most concentrated sectors – telecommunications, electricity, healthcare, air travel. In each case, the government is either a significant player themselves, or they impose tight regulation. Much of this regulation is founded on good intentions, of course. Licenses often require a minimum safety standard; one wouldn’t want just anyone opening a hospital or flying an airplane. But most often, it is these well-intentioned regulations that strangle competition, creating oligopolistic sectors that favour a few big businesses.

South Africa’s Competition Commission is tasked with investigating and mitigating collusive business practices and other ways firms may abuse their market position. When a large firm acquires another, they need to file an application to the commission for approval. This prevents that one firm dominates a market, pushing up prices and hurting consumers.

But the Competition Commission can only do so much. In many cases brought before it, the South African government is an active player in the market – think SAA – or regulates the industry through other bodies – like the telecom spectrum ICASA controls. We cannot just rely on the Commission to ensure free competition: it requires a widespread acceptance in government that any regulation that impedes competition hurts both workers and consumers. The Minister of Energy signing the power purchase agreements for 27 mostly solar and wind projects – and thus encouraging competition in the market for energy generation – is an excellent step in the right direction. Our failing education or health systems are not so lucky; both suffer as a result of too little competition.

The big misconception about the free market is that ‘the market’ is often equated with ‘big business’. As Friedman notes, they are not the same thing. There is good reason for oligopolistic firms to cozy up to government: it is a great way to get rid of competitors. But over the last decade, South Africans have learnt the painful consequences of what happens when that system becomes entrenched. In contrast, a society that prioritises market competition is most likely to benefit the ordinary worker and the ordinary consumer. This is because competition fosters innovation. And innovation improves productivity, growth and living standards. That is, ultimately, the long road to economic freedom.

**An edited version of this article originally appeared in the 2 August edition of finweek.

Written by Johan Fourie

September 10, 2018 at 08:00