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The future is an unknown unknown

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Humans know how to adapt. We have populated the planet not because we found an agreeable environment everywhere, but because we were able to adapt to the diverse and often hostile environments we moved into. And so it is today. To survive and thrive, we need to adapt to the global forces of our times, from climate change to automation.

Those with the freedom and ability to adapt to these global forces will benefit most. Take automation. Artificial intelligence and robotics now allow most tasks that manual labourers perform to be done without human intervention. One of the most exciting technologies revealed at the end of 2016, from my perspective at least, is an automated washing and ironing machine. Dirty clothes go in on one side and the fully-ironed clothes, folded by tiny robotic hands inside the machine, come out on the other side. Finally those dreary Sunday afternoon ironing exercises will be a thing of the past! Collectively this technology will save millions of productive human hours, particularly for women who in almost every society are still responsible for most home labour.

And yet, this wonderful new technology won’t be welcomed by everyone. South Africans employ more than 1 million domestic workers (or more than 8% of the work force), most of whom are women from poor households. If the cost of this new machine falls considerably in the next decade (and minimum wages continue to rise), we might soon see a significant decline in demand for ironing services. Because poor South Africans do not have the freedom to adapt to these new technologies, unemployment and inequality will likely increase.

There are many other examples. Tesla and other car companies are working on self-driving cars (no need for taxi drivers) and, which is likely to have an even bigger effect, self-driving buses. Truck driving is America’s sixth most common occupation. Or consider McDonald’s most recent innovation: self-ordering counters. No need to employ more expensive and unreliable staff. How long until everything in a McDonald’s restaurant is automated, from food preparation to servicing and cleaning? Amazon has recently revealed its plan to open 2000 automated grocery stores across the US. And then there are the many disruptive digital technologies, which The Economist editor Ryan Avent writes about in his latest book The Wealth of Humans.

The political consequences of these supersonic changes are unknown. As Avent notes, we are the first generation to live through an industrial revolution. There is little in history that tells us how society will react to such rapid changes. He predicts social unrest, unless government or civil society can reform social welfare programs on a massive scale. We have already seen this in South Africa and elsewhere: the democratic process, for many, is too slow and cumbersome. Service delivery protests, the #MustFall-movement and the global shift towards a more nativist conservatism suggest that the voices of those at the bottom of the income distribution will be heard outside the ballot box.

More creative solutions to support those left behind by the benefits of technological innovation and globalisation must be found. One idea is to institute a basic income grant that would give every person in South Africa a monthly stipend. This is no novel idea – Thomas Paine proposed a similar idea in 1797 – but economists are increasingly willing to put the idea in practice: Utrecht, a beautiful Dutch city south of Amsterdam, will next year give several hundred of its inhabitants an annual monthly stipend of 960 euro.

The concern is that people opt out of productive labour if they receive money for free. The consensus, though, is that this is unlikely: the aspirational drive of humans to move up the income ladder will push them to work hard regardless. What a basic income grant does is to make sure the ladder is solidly grounded.

But even a basic income grant won’t do enough. The rapid change will bring about psychological and sociological consequences that are hard to predict. Which social policies to implement, from early-childhood development to adult retraining programmes, in order to combat the technological disruption will be important research questions in the next few years. Creative use of technology, ironically, might be one solution.

Donald Rumsfeld famously quipped that there are known knows (the things we know we know), unknown knows (the things we know we don’t know), and unknown unknowns (the things we don’t know we don’t know). The future used to be mostly unknown knows. With some degree of likelihood, we could analyse the past and make conjectures, following somewhat linear trends, about what the future might hold. Change was incremental; we had time to adapt.

The period of rapid change we have seen since the dawn of the Internet is only likely to accelerate. As a species, we have never been required to adapt this fast, and not everyone in society will have the freedom and ability to do so. This will lead to social conflict. To minimise the consequences of this social conflict, the greatest challenge of the next decade is to enable as many as possible to adapt to the inevitable unknown unknowns of our rapidly-changing world.

*An edited version of this first appeared in Finweek magazine of 29 December.

**As this is my first post of the year, I would like to wish all readers a productive and memorable 2017. Let’s hope this will be a good one.

Written by Johan Fourie

January 5, 2017 at 07:09

We are still on the way up

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I arrived in the USA a day after Donald Trump was announced as president-elect of the United States. I gave talks at Harvard, Mount Holyoke College and MIT, and met with several faculty and students over the four days of my visit. It was eerie. Some students were still in denial, not helped by the fact that they started drinking as soon as the results became evident. Others were in various stages of grief: angry at the nativism of a large chunk of Americans, bargaining in the hope that Hillary might still win, or depressed at how quickly the America of Obama – to whom many at these prestigious institutions look up to as an inspiring intellectual – has given way to the America of Trump – whom they consider to be a coarse, boastful buffoon.

Trump’s victory seems to have been another nail in the coffin of liberty and progress. In America, walls will replace bridges. Despite what Trump has said on the campaign trail, his tax cuts will likely benefit the wealthy elite. And his views on women, on LGBT rights, on climate change, on health care, on trade openness and on immigration is likely to reverse much of the gains in general freedoms the US has made over the last decade.

These trends are not limited to America. Earlier this year the Brexit result revealed the same nativist fear, an anti-open, anti-globalisation vote. Brexit was a vote for a return to the ‘good old times’, however unlikely that is to materialise. It was a vote against intellectualism; liberal London against the conservative hinterland. And in South Africa, the rise of nativist populism on both the extreme right and left reflect a similar frustration with the progressive Rainbow Nation of yesteryear and its liberal (sell-out!) constitution.

Across the globe, it seems, the extraordinary liberty and progress of the 1990s and 2000s are being rejected for a more insular, protectionist conservatism.

We should not be that surprised. Liberty and progress, as a historian at MIT reminded me on my recent visit, is never a foregone conclusion, never an obvious eventuality.  Liberty and Progress is not an Uber ride, taking the shortest, fastest route to a known destination. It is, as the Beatles knew, a long and winding road. Sometimes there are detours, and sometimes we get lost.

Take, for example, Martin Plaut’s latest book, Promise and Despair, the story of the delegation of black leaders that traveled to London in 1909 to fight for representation in the new Union of South Africa. Remember, since 1853, the Cape Colony had had a non-racial franchise, allowing men of all races who had sufficient income or property to vote. When the unification of South Africa began to be discussed following the Anglo-Boer War, many had assumed that the (Liberal) English government would extend the same franchise to all. In fact, this was the promise Lord Salisbury had made in 1899. But politics trumped morals. To secure the support of whites in South Africa in case of war, the English reneged on their promises and turned down the appeal of the delegation. Liberty and progress had to wait.

But to focus on the newsworthy failures of liberty and progress the last few months misses the much bigger story of the last few decades: the incredible improvement in living standards of most of humanity. Johan Norberg, in a new book simply titled Progress, concurs: ‘Despite what we hear on the news and from many authorities, the great story of our era is that we are witnessing the greatest improvement in global living standards ever to take place.’ Life expectancy has risen sharply, poverty and malnutrition have fallen. The risk of death in war or natural disaster is tiny in comparison to our parents or grandparents.

 

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Reasons to be optimistic: Trends for important human welfare measures are all positive in the long run. Source: ourworldindata.org

 

But this does not mean we should be complacent. Says Norberg: ‘There is a real risk of a nativist backlash. When we don’t see the progress we have made, we begin to search for scapegoats for the problems that remain. Sometimes it seems that we are willing to try our luck with any demagogue who tells us that he or she has quick, simple solutions to make our nation great again, whether it be nationalizing the economy, blocking foreign imports or throwing the immigrants out. If we think we don’t have anything to lose in doing so, it’s because we have a bad memory.’

2016 has been a year of setbacks. It reminds us that liberty and progress are never fait accompli, never self-evident. We have to work hard at it, and even then it is not guaranteed. It requires patience and a long-term view. But don’t let 2016 shake your beliefs about humanity’s march forward: we are still on the way up, even if it will take us a little longer to get there.

*An edited version of this first appeared in Finweek magazine of 15 December.

Written by Johan Fourie

December 30, 2016 at 13:21

Books to make you think this summer

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It’s – finally! – summer again. After three winters in a row, Helanya and I are looking forward to some sun, sea and sand (and watermelon, and ice-cold beer, and cricket on the tele, and litchis, and did I mention sun?). And what better way to enjoy summer than with excellent local and international books, fiction and non-fiction to make you think. Here’s what I’m recommending for those long, lazy days on the beach:

2016book1Nomavenda Mathiane’s excellent Eyes in the Night tells the true story of the life and times of the author’s grandmother, Gogo Makhoba. Apart from the title (I don’t quite understand the relevance), the book is an eye-opener on a neglected part of South African history: the tale of a young girl’s adventures during and after the Anglo-Zulu war of the late nineteenth century. It is an incredible story of resilience in the face of almost unthinkable atrocities. And yet, with the author resisting the urge for melodrama, grandmother okaMakhoba and her experiences of running from the English Redcoats, working in the household of the horrible Oubaas, and then running away to Zulu missionaries who convert her to Christianity, complicates our often oversimplified version of history. Who stole land, and at what cost? How did Christianity affect Zulu traditions? What are the differences between township and traditional Zulu culture? It is good to be reminded that history is never black and white. Through her grandmother’s extraordinary life, Mathiane gives South Africans a vibrant picture of our own interconnectedness and, for lack of a better word, complicatedness. Eyes in the Night is a book I enjoyed thoroughly and is my book of the summer.

2016book2Deon Meyer is a household name, and not only in South Africa. Yet his stories are as South African as they come. He has produced another gem with Koors (as far as I can see, still only available in Afrikaans). What happens when 95% of humanity is wiped out by a deadly virus? How do we rebuild civilization? How do societies develop? Yes, this is the fictional story of a young South African boy and his dad trying to survive the aftermath of a deadly virus, but it is more than that: it is a philosophical reflection on the roots of development. What role for specialisation, for trade, for politics, for religion in the creation of societies, and how do these interact as these societies become more complex over time? (Sidenote: political economists familiar with the literature on stationary and roving bandits would particularly enjoy this. If I have to be critical, I would have liked to see more economics – for example, the birth of currency in this post-apocalyptic world, or the emergence of debt and credit, although I guess these are less sexier topics.) Combine this fascinating setting with a murder plot and you’ve got a book that is much like all his others: unputdownable. And I promise: you won’t be able to predict the twist at the end…

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I’ve just started Richard Baldwin’s The Great Convergence, but have seen enough to recommend it. Globalization is not popular, yet it continues to lift many out of poverty. Baldwin’s clear analysis of an increasingly complicated phenomenon helps us understand how the the cost of moving goods, ideas and people has shaped, and will continue to shape our economies – and politics. Richard Evans is a historian I greatly admire, and he seems to have produced a wonderful new account of the nineteenth-century in Europe: The Pursuit of Power. (Sidenote: I also love the cover.) The Information Nexus presents an intruiging new thesis that explains the rise of capitalism not so much as an accumulation of capital but instead as an improvement in our ability to record and process information.

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Johan Norberg (great name) shows why we should be a little less despondent about the events of 2016: the world is still a much better one than the one of we inhabited a decade or five decades earlier. One way to summarise the book: ‘200 000 people were lifted out of poverty yesterday’ is a newspaper headline that could have appeared every single day the last decade. Donker Stroom is an award-winning true story of an Afrikaner writer and poet and his adventures in England during the Anglo-Boer War. Still unread, but it comes highly recommended.

I will post a couple of my Finweek columns over the next few weeks, but this will be the last personalised blog post for the year. Thanks again for continuing to read, and share my posts: I appreciate all the feedback and support (and criticisms) I receive.

2016 has been a tough year in many respects. Let’s hope 2017 will be filled with happy surprises.

Written by Johan Fourie

November 29, 2016 at 14:06

Sapiens and Naledi

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Naledi

I finally read Sapiens: A Brief History of Humankind by Yuval Noah Harari. It is a provocative book, one that challenges many of our long-held beliefs. Religion, for example, is one topic that will upset many – one of the ‘myths’ or ‘fictions’ humans have, says Harari, like money or empire. But it is the discussion of how we have domesticated plants and animals and its implications for today – ‘We did not domesticate food. It domesticated us.’ – that is revealing, if sometimes leaning towards the sensationalist – ‘modern industrial agriculture might well be the greatest crime in history’.

The book sets out to explain the three most important revolutions in human history, the Cognitive Revolution (around 70 000 BCE), the Neolithic Revolution (around 10 000 BCE) and the Scientific Revolution (around 1500 CE). It is much better at the first and second than at the third. In fact, as with one of my favourite books, Jared Diamond’s Guns, Germs and Steel, Harari unsuccessfully attempts to make the post-1500 and particularly the post-1800 period fit into the simple framework of the two earlier epochs. (For example: he attributes the Industrial Revolution to only two things – imperialism and science. If this was true, then China should have had an Industrial Revolution in the 15th century, when they were the most advanced scientifically and were discovering the world with their giant fleets. But they didn’t.) Read the book for the first half, not for the last.

The topic of humans and their evolution is a fascinating, and also fast-changing one. The October 2015 edition of National Geographic tells the tale of Lee Berger’s discoveries of Homo Naledi in a cave near Johannesburg. Homo Naledi fits somewhere between the apelike australopithecines like Lucy, a skeleton discovered in Ehtiopia in 1974, and Homo Habilis, the ‘first’ known human ancestor of us, Homo Sapiens, which was classified in Kenya in the 1970s. This evolution occurred maybe two to three million years ago. Homo Habilis (or the myriad of other forms of proto-humans that existed but are still undiscovered) evolved into Homo Erectus, and then Homo Sapiens. These sapiens left Africa in two waves. Almost all human DNA derive from the second ‘Out-of-Africa migration’ around 75 000 BCE. (The Neanderthals derive from the first out-migration, and new evidence suggests may have left a tiny DNA footprint in some modern Europeans.) The Cognitive Revolution, when we begin to see evidence of art and burials and other cultural traits, begin around 70 000. Homo sapiens – modern humans in all respects similar to us today – reached South Asia around 50 000 years ago, Australia around 46 000 years ago, 43 000 years ago, North America around 15 000 years ago, the Pacific islands around 1300 BCE and New Zealand only around 1280, about the same time as University College in Oxford was founded.

The cave Berger and his large team of archaeologists uncovered was a remarkable find, a possible link between our apelike ancestors and modern humans. It has also shifted attention back to South Africa and our rich archaeological history. This is one area of science where we clearly have a comparative advantage, and more can be done to promote this field of research.

But why care about the evolution of humans, you may ask. In Sapiens we find the answer: according to Harari, we are about to be replaced by a superior human. After the Scientific Revolution came the Information Revolution of the twentieth century. And now we are at the cusp of the Biotechnological Revolution. Soon we will be able to engineer humans to become amortal (not immortal, because we would still be able to die in car crashes and terrorist attacks). And these humans might be smarter, quicker, better than us. And once artificial intelligence reaches the singularity, who knows what they will do to humans, to us.

I am less pessimistic that we will soon be replaced by Homo Mechanica. Biotechnology, instead of replicating human brains, might allow us to fully exploit our extraordinary creativity. Much like love, it might help us to become better versions of ourselves, a new and improved Homo Sapiens.

How to decolonise an Economics curriculum

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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.

 

Piketty in South Africa

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After missing his flight and his much-anticipated Cape Town lecture, Thomas Piketty, the French economist who published the widely-acclaimed and best-selling Capital in the Twenty-First Century last year, arrived in South Africa to deliver a lecture at Wits University yesterday. And he did not disappoint, calling for higher minimum wages, land redistribution and, echoing his call in Capital, a wealth tax. But his most stinging critique he reserved, it seems, for economists: “No such science as economics”, one conference attendee tweeted Piketty, “everyone can have an opinion. Applause from room full of social scientists & historians”.

I can understand the frustration with economists. They write in a language few other social scientists understand. They tend to support a system of wealth creation that is not very hipster. And Piketty is right: For a while in the previous century economists may have believed that economics is a science on par with physics, and that the economy can be manipulated much like a giant computer. But for the most part, economists have now realised (and incorporated into our models) the knowledge that people are not always rational agents, and that they make decisions within social settings where context and institutions matter as much as incentives. Witness the rise of behavioural economics and the renaissance of economic history.

Yet bashing economics is a favourite past-time of social scientists in South Africa. At the recent South Africa Historical Society conference in Stellenbosch, a historian and one of the organisers of yesterday’s Piketty event suggested to a room full of his colleagues and students that instead of studying economics, historians should just read more. I agree that we all should read more, but why deride economics in the process?

It is difficult to not attribute such ridicule from social scientists and historians to a fear of numbers. Because what economists – and certainly most South African economists – do, is measure. We measure the increase in prices in order to determine the most appropriate level for the interest rate. We measure the quality of schools to ascertain why kids drop out too early, or why many of our high-school graduates struggle to find jobs. We measure the international trade of goods and services to understand competitiveness and adjust tariffs. And yes, we measure income levels to say something about inequality and its historical evolution. Still, there is much we don’t yet measure, which is why we need more (historical) statistics, not less, much like Piketty called for yesterday: “We need data to have a better conversation about inequality in South Africa.”

More data allow us to test our hypotheses about how the world works. Because we believe, much like other (social) scientists do, that theories help us to explain and understand the world better than simply ‘having an opinion’. Astrologers have an opinion. Homeopaths have an opinion. But I don’t rely on them to tell me why I am ill. Social scientists (yes, all of them, even historians) construct theories about how the world works, and then use evidence (quantitative or qualitative) to test the relevance of these theories.

Which is why I find it surprising that very few of the commentators at yesterday’s Piketty lecture actually engaged with Piketty’s theory at all. I assume everyone actually read the book – or at least the first chapter that summarises the thesis quite nicely. But did any take the trouble to read at least some of the critiques? This paper is a good start, written by an economist and political scientist. It actually uses South Africa as a case study (in comparison to Sweden) to show why Piketty’s measurement of inequality misrepresents what actually happened in both countries during the twentieth century. Or there is this (rather long) response from Deirdre McCloskey, certainly no proponent of the mathematical direction economics took in the 80s but also not averse to fighting with numbers.

And why did no one – not even Piketty himself – make an effort to gather historical data on wealth inequality in South Africa? With little effort and using Reserve Bank data, a PhD student at Stellenbosch could calculate wealth and income rates for South Africa going back to 1975. Instead of finding the same U-shaped rebound in private accumulated wealth as Piketty did for rich countries, she found that in South Africa the wealth-to-income ratio has been relatively low and stable at about 250% for the past 40 years.

This is important not only because it shows that social context and institutions matter, but because it could have very real policy implications. The Davis Tax Committee’s recent recommendation on estate duties is partly motivated by extensive references to Piketty’s book. Acccording to the Financial Mail, the committee suggests that the rules should change so that tax revenue from estate duties increases by about 10 times. Here’s Stan du Plessis, dean of Economic and Management Sciences at Stellenbosch and PhD supervisor of the student, on the topic: “The Davis Tax Committee and everyone else in SA assumed that since inequality is so high in SA, what Piketty was saying must also hold true for SA. It does not.” That is what economists do.

Land expropriation is another policy of choice to reduce inequality. Piketty argues that because land redistribution have reduced inequality in Brazil, for example, it should work in South Africa too. Not quite: I don’t know much about farming, but I do know that most land in South Africa is not as fertile as in tropical Brazil. Here a farmer needs a lot of capital equipment to be productive, which in turn requires large scale farming to be profitable. It also requires management and technical expertise. Those things, in contrast to land, are difficult to expropriate and transfer. Why not, instead, give poor, black South Africans a choice: I am quite confident that not all would prefer to become farmers. Offer them shares (at massively discounted rates, perhaps subsidised with the income from the wealth tax) in companies listed on the Johannesburg Stock Exchange. To begin with, the SA government owns shares in several listed companies too: if these are transferred to poor South Africans, they have liquid capital which they can – if they so choose – either sell and buy land or hold on to earn dividends. This is what BEE is all about, and in the few cases where it was implemented correctly, like in Naspers selling discounted shares to black South Africans, it has created immense wealth. Giving someone land without the necessary scale, capital and skills to work it (especially someone living in a city, like most South Africans now do), dooms them to a live of subsistence farming.

Piketty’s other proposal of a higher minimum wage also fails to acknowledge the excellent work of South African economists over the last few years. Yes, a higher minimum wage in the United States might not increase unemployment (because it is off a low base and much lower than the median income level), but to recommend such a policy in a country with an unemployment rate above 30% is not only irresponsible but disastrous. New research by labour economists in my Department at Stellenbosch shows a stark rise in unemployment, 4.8% in the Western Cape of mostly temporary workers, following the increase in the Western Cape minimum wage on farms two years ago.

Because data allow us to test and improve our models, certain theories become generally accepted. One of them is the likely impact of a wealth tax. I am not necessarily against a limited wealth tax (for political economy reasons), but what Piketty and his commentators failed to do was spell out the likely effects of such a tax. So let me attempt to do so. A wealth tax favours the young and punishes the old. Young people, like me, have many debts. If the wealth tax is instituted on net wealth (which I think is what Piketty argues for), then it will have a limited impact on me but will tax my parents heavily, who have paid their debts during their lifetime. So here are my options: either I live frugally now, saving carefully and repaying my debts, only to be taxed by government when I’ve done so, or I stop saving and buy a fancy new car, because that’s better than giving it to government. Rather than growing my savings, I would instead find ways to consume all my earnings. (This is why Bill Gates suggests a progressive consumption tax instead. Piketty warns that consumption is difficult to measure, which is true. But it actually encourages saving, investment and accumulation, something a wealth tax does not do.)

Except, of course, one type of investment which cannot be (directly) taxed: education. So expect to see parents, because they cannot leave their children a large physical inheritance, spend even more on educating them. Surprisingly, this will likely increase inequality in South Africa even further. As economists know very well and as Kuben Naidoo, Deputy Governor of the South African Reserve Bank, so eloquently put it yesterday, “the major increase in inequality in South Africa is as a result of rising skills and not wealth accumulation”. Even if all the gains from the wealth tax is spent by government on education (unlikely to be the case), we will continue to have a schooling system that is horribly unfair. A lot of tax money so far has failed to fix the problem; South African economists that have measured these things clearly show that more school resources (like higher teacher salaries or buying more books) help little to improve education outcomes. Why is that likely to change if we add even more money to the mix?

Wealth taxes are most likely to reduce investment and social mobility, exactly the opposite of what is necessary to fix South Africa’s economy. Yes, we may get the richest billionaires to cough up some more of their wealth to government. But will it really matter to the kid from Soweto or Soshanguve whether Nicky Oppenheimer or Johann Rupert or Patrice Motsepe has R8 billion or R4 billion in wealth? Not a lot.

What will matter to that kid is whether he will get a fair chance in life. That is unlikely to happen if we don’t fix our education system first and make it easier for people to do business and create jobs. A wealth tax that discourages investment and raises the cost of education is not going to help, and might even have a perverse impact.

I agree that we need to address South Africa’s massive inequality. To correct this wrong is the reason many economists choose to study economics in the first place. And I also understand Piketty’s appeal: he proposes three policies that are relatively easy to implement and requires little more than political will. But, unfortunately, these policies are disconnected from the real world, the world which South African economists study. In a best case scenario these policies will reduce inequality marginally in the short run; a worst case scenario is that they inhibit investment and put further limits on social mobility by raising the returns to quality education.

I realise that I cannot convince everyone about the need to study economics. As an economic historian I’ve had my own gripes with the mathematisation of the discipline. But to ignore the theories of human behaviour that economists construct, theories that have been empirically shown to be worth keeping, is wrong. Opinions without facts are not worth listening to, as Hans Rosling perfectly explained. Let’s encourage our students to engage with Piketty’s theories, test them against the evidence, and keep them and use them if they apply to South Africa. Or improve them if they don’t.

South African xenophobia: We are all immigrants

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Zapiro

Consequence of the 1885 Berlin Conference? Source: Zapiro

South Africa is a country of immigrants. 2000 years ago, when Romans were conquering Europe, Chinese invented paper making, and Jesus was born in the Middle-East, only the San lived in South Africa. Visit Aliwal North, or Lesotho, or Fish Hoek, or Kwazulu-Natal, and you will find evidence of their existence. Around 300 CE, groups of blacks crossed the Limpopo, settling within the boundaries of modern-day South Africa. Roughly three hundred years later, these groups reached the Eastern Cape. This slow process of gradual migration – known as one of the largest migrations in world history – created the cultural differentiation within black society that we still observe today: the clicks of the Xhosa, for example, is the result of assimilating the Khoesan language. The reason they supplanted the ‘indigenous’ San was iron-working and crop cultivation: two key ingredients to support larger populations. Recent evidence shows that another group – the Khoe – moved into South Africa roughly between 900 and 1300 CE. A pastoral people, they came from Botswana, crossed the Gariep, and settled in the Western and Eastern Cape. (They were roughly 10 cm taller than the San, who still relied mostly on hunting and gathering, although with the arrival of the Khoe, the San often lived in a servant-relationship with the Khoe.)

It was the Khoe the Portuguese first met on their visit to Africa’s southernmost trip in the fifteenth century. And it was the Khoe who lost their land when the Dutch settled the Cape in the seventeenth century. And after 1652, that dreaded date in South African history, came more Europeans: Germans, English, French, Scandinavians. And with the Europeans came slaves from the East: mostly from modern-day Malaysia, Indonesia, India, Sri Lanka, Madagascar and Mozambique, but also China, Iran, and the coast of West Africa (even as far as the Canary Islands).

During the nineteenth century came more Europeans, British mostly, moving to sunny South Africa to escape the working-class squalor of the early Industrial Revolution. And when diamonds and gold was discovered, more came, this time from all across Europe, and America, and Australia. But the diamond mines required labour, and so millions of Africans came from across southern Africa: Tswanas from Botswana, Shonas and Ndebele from Zimbabwe, Makua and Tsonga from Mozambique, Chewa and Lomwe from Malawi. At the beginning of the twentieth century, more than 60 000 Chinese were brought to work on the mines, although the experiment proved disastrous and most were sent back. In Kwazulu-Natal, however, the settlement of more than 150 000 Indians on sugar plantations proved more enduring.

Immigration never stopped, not even during apartheid, comprising many nationalities, religions and ethnicities: Jewish, Portuguese, Greek, to name a few. The world wars brought thousands of Western and Eastern Europeans to South Africa. And mines continued to bring foreign workers to the country, in their tens-of-thousands. And it continued after 1994: Between 1995 and 2010, more than a million Basotho (from Lesotho) and Swazi (from Swaziland) traveled to South Africa every year. The New South Africa brought Chinese and Pakistani and Cuban and Bangladeshi and Nigerian and Somali and Congolese and Vietnamese and Senegalese immigrants to our shores. Many of the Italian and German and Irish and American tourists who fall in love with the country and its people, stay behind. More than a million Zimbabweans now call South Africa home.

South Africa is a country of immigrants. And yet, we treat our new arrivals like shit. This week, xenophobic attacks in Soweto relived the awful attacks of 2008. Poor communities are disgruntled because immigrants ‘steal the jobs of locals’. And while the attacks on foreigners are limited to townships, the vitriolic sentiment is pervasive, even into upper middle-class households. “Send them back to their own countries” is the standard response on news sites.

It is certainly sad that many of the foreigners’ origin countries are struggling economically, notably Zimbabwe. But South Africa should be thankful to these immigrants, welcoming them, offering them work visas (and, after a few years, citizenship) and allowing them to build our economy. They are not a drain on our resources, but a boon. The literature on the economics of immigration suggest that immigrants stimulate the domestic economy, creating jobs (and not stealing them). That is because immigrants are often better-educated, more resourceful and more driven; they have to make a success because their support structures (family and ethnic networks) are limited. Especially in South Africa where skills are in short supply, foreign skills are critical if our economy is to thrive.

South Africa, the rainbow nation, should be the one place where we celebrate diversity, where we live Thabo Mbeki’s vision of the African Renaissance. It is deeply ironic that we consider our African neighbours ‘foreigners’ only because they live in countries created by European colonial officials randomly drawing lines on a map.

Instead, we despise these ‘foreigners’. We attack them. We loot their shops. We don’t give them work visas, which means they can’t find work as nurses, or electricians, or university professors. They find it difficult to open a bank account, register a car, or buy a house. In short, we make their lives a living hell. (Read Jonny Steinberg’s latest novel – A Man of Good Hope – to get a sense of the hope and determination of these immigrants, but also of the sad reality of their unwelcoming arrival here. The Economist reviews the book here.)

I am sure we can all do better. For the future of South Africa, we need to do better. That a country which has survived apartheid can be so hostile to outsiders is perhaps the greatest indictment against our generation. Especially considering that we are all, essentially, immigrants.

#JeSuisÉtranger

Written by Johan Fourie

January 25, 2015 at 10:34