Johan Fourie's blog

I'd rather be a comma than a fullstop

Archive for the ‘Cape Town’ Category

How do we build a prosperous, decolonized South Africa?

with one comment

boys-plowing

I recently attended an academic conference at the University of the Free State on the topic ‘Decolonizing Africa’. Much of the debate was, understandably, about the past: about the lingering effects of the (Atlantic) slave trade, European colonization that included the imposition of largely artificial borders, and the post-colonial failures of independent Africa. But at the final keynote, delivered by Prof Alois Mlambo of the University of Pretoria, the discussion turned to the future. How do we build a prosperous, decolonized South Africa?

One unescapably emotive topic is land reform. The expropriation and dispossession of land in South Africa is the root, many agreed, of the severe levels of inequality that plague the region. But how to correct this past injustice was not so easy; in the audience, too, were several Zimbabwean scholars quite critical of that country’s land reform programme. Over lunch, one Zimbabwean student told me the tragic story of his grandfather, a former farm worker on a white farm turned successful tobacco farmer after land reform, only to lose his land because he was considered ‘too successful’ by the ruling ZANU-PF party. The farm is now dormant.

Getting land reform right is fraught with difficulty. Not everyone that suffered land expropriation wants to return to farming – by far the largest number of recipients of successful land claims in South Africa choose the cash instead of the land. (This is often ignored by politicians and commentators when simply taking the hectares transferred as measure of land reform success.)  And even when recipients choose to return to the land, they often struggle to support themselves because of the small size of land allocated, or a lack of capital investment, or a lack of technical or management skills. There are also political consequences: because land recipients, like those in Zimbabwe, often do not receive title deed to the land they are given, they become ensnared by the political party that gave them the land. Why do people still vote for ZANU-PF despite the state of the economy? Because they worry a vote for the opposition means that they might lose their land. Most worryingly, it is often the original farm workers who lose the most, like the Zimbabwean student’s grandfather.

This is not to say that some form of wealth redistribution is not imperative. But whereas land (and the minerals it contained) was clearly the most productive resource when it was expropriated in the nineteenth century (which is the reason it was expropriated), a valid question is whether it still is the most productive. Of course, people value land not only for its economic uses: there are a myriad of historic, cultural and religious reasons why the land of your ancestors are treasured. But as a redistributive policy aimed at creating a more equitable society, is land reform the best way to create prosperity for those who suffered historical injustice?

Think of the fastest growing companies globally: which of them still rely predominantly on land ownership? AirBnB is a great example: it is the world’s largest accommodation service, without owning any property! For AirBnB and the myriad other unicorns that have created incredible wealth for their founders and shareholders, it is not land or physical property that creates wealth, but science and technology. (Even farmers know this: that is why they are investing in science to improve their crops and in technology to mechanize production.)

In the twenty-first century, land is what you buy with your wealth, and not the reason for your wealth. A quip about Stellenbosch wine farmers summarize this well: How do you make R1 million farming in Stellenbosch? You spend R2 million.

Prof Mlambo remarked that India and China, both with a history of colonisation, is not growing at above 5% because they have redistributed land. They have prospered because they embraced science and technology. Consider this: in the 2015/2016 academic year, 328,547 Chinese students studied in the United States; only 1,813 South African students did. (If you account for population size, 7 times more Chinese than South Africans students study in the US.) Take South Korea, a country with roughly the same population size as South Africa: 61,007 South Koreans traveled to study in the US in 2015/2016, 33 times more than South Africa.

So how would a redistribution policy look that takes science and technology seriously? I don’t have the answers, but here are some suggestions. Most of us would agree that education is key, but the South African education system has not made much progress in the last decade and it is unlikely to do so in the next. Redistribution must start at the first year of life. Publicly funded but privately run nurseries will remove the gap between the rich and poor that has already emerged when kids arrive at school. For primary and secondary education, a voucher system that incentivize private schools for the poor is an option. At tertiary level, we need more and better-funded universities, notably in science and technology. (It would help to send more of our smartest students abroad to study at the frontiers of science – they will return with new ideas and networks to propel our industries forward.) Visas for and recruitment of skilled immigrants can boost research and entrepreneurship. Improve free wifi access and invest in renewable energies. The private sector, because that is where most innovation occur, can be incentivized through appropriate legislation to offer shares to workers – or to those living in communities where they operate. There are a myriad of innovative possibilities.

If Zimbabwe has taught us anything, it is that politics may triumph over economic logic. Land reform in Zimbabwe was not an economic strategy in as much as it was a strategy to keep the ruling party in power. It has had severe economic consequences, as anyone visiting Zimbabwe today can attest. The real radical economic transformations of our age – just in my lifetime, the Chinese has managed to reduce the share of people living in absolute poverty from 88% to less than 2% – have not come from redistributing an unproductive twenty-first century resource. It has instead been the result of investments in science and technology. Any attempt to redistribute with the purpose of building a more prosperous society should take this as the point of departure.

*An edited version of this first appeared in Finweek magazine of 29 June 2017.

Advertisements

How to get good politicians

leave a comment »

South African President Jacob Zuma visit Berlin

Politicians can shape the fortunes of countries. Presidents, in particular, set the tone: balancing many stakeholder interests, their job is to create a unifying vision that should guide policy-making. Members of parliament act upon this vision, designing and implementing policies that affect the lives of millions of people. One would imagine, then, that those with the best aptitude for leadership get elected.

That is the theory. But in practice politics is a messy business. For many reasons, it is often not the smartest candidate who gets elected, or the most effective member who gets selected for higher honours. Some economic models even explain why it is not the most capable that move up: Someone without a proper education (but a charismatic personality) has a much higher chance to see greater returns in politics than in the private sector. (In technical terms, lower opportunity costs give the less able a comparative advantage at entering public life.) These selection effects are compounded by the free-rider problem in politics, where work effort is not directly correlated to political outcomes. In other words, according to this model, it is society’s ‘chancers’ that are more likely to end up in politics – and the hard-working, smart ones will tend to end up in the private sector.

Competency in public office is, of course, is not the only goal of a parliamentary system. Representation – having politicians that reflect the demographic and geographic make-up of society-at-large – is also a key concern. But competency and representation, at least theoretically, do not always correlate. Take the following example: a proportional representation system, like we have in South Africa, would require members of all districts to be represented. But what if one region – let’s call it Farmville – has few university-trained citizens, whereas another region – Science City – has many citizens with university degrees? A proportional representation system will necessitate some Farmville politicians also be elected to parliament, even though the Science City politicians will probably be best qualified for the job. In contrast, in a plurality rule system – where the candidate with the most votes gets the job – competency often trumps representation.

A new NBER Working paper – Who Becomes a Politician? – by five Swedish social scientists, casts doubt on this trade-off. Using an extraordinarily rich dataset on the social background and competence levels of Swedish politicians and the general public, they show that an ‘inclusive meritocracy’ is an achievable goal, i.e. a society where competency and representation correlate in public office. They find that Swedish politicians are, on average, significantly smarter and better leaders than the population they represent. This, they find, is not because Swedish politicians are only drawn from the elite of society; in fact, the representation of politicians in Swedish municipalities, as measured by parental income or occupational class, is remarkably even. They conclude that there is at best a weak trade-off between competency and representation, mostly because there is ‘strong positive selection of politicians of low (parental) socioeconomic status.

These results are valid for Sweden, of course, which is a country unlike South Africa. Yet there are lessons that we can learn. First, what seems to matter is a combination of ‘well-paid full-time positions and a strong intrinsic motivation to serve in uncompensated ones’. In other words, a political party in South Africa that rewards hard work for those who serve in uncompensated positions, are likely to see the best leaders rise to the top, where they should be rewarded with market-related salaries. Second, an electoral system which allows parties to ‘represent various segments of society’. Political competition is good. Third, the ‘availability of talent across social classes’. This, they argue, is perhaps unique to Sweden, known for its universal high-quality education.

This reminded me of our State of the Nation red carpet event, where the cameras fixated on the gowns and glamour of South Africa’s political elite. How do the levels of competency in our parliament, I wondered, compare to Sweden and other countries?

Let’s just look at the top of the pyramid. The president of Brazil, Michel Temer, completed a doctorate in public law in 1974. He has published four major books in constitutional law. The Chinese president, Xi Jinping, also has a PhD in Law, although his initial field of study was chemical engineering. Narendra Modi, prime minister of India, has a Master’s degree in Political Science. Former US president Barack Obama graduated with a Doctor of Jurisprudence-degree magna cum laude from Harvard University. Angela Merkel, chancellor of Germany, has a PhD in quantum chemistry. Most of these widely respected leaders gave up a top job in the private sector or academe to pursue a political career.

Politics is messy, but given the right conditions, it can still attract high-quality leaders. For that to happen, though, aspiring politicians must put in the hard yards, even if initially uncompensated, supported by a competitive political party system and broad access to quality education. South Africa, unfortunately, is still a long way from meeting these criteria.

*An edited version of this first appeared in Finweek magazine of 9 March.

Written by Johan Fourie

March 24, 2017 at 07:35

How Uber makes the world a better place

leave a comment »

uber-logo

The first thing students are taught in any introductory microeconomics course is that the price of something, let’s say chauffeur services, and the quantity of it that consumers want is depicted by a negative-sloping demand curve. The difference between what consumers are willing to pay for a chauffeur ride (the demand curve) and what the chauffeur asks (the market price), is what is known as the consumer surplus. The bigger the consumer surplus, the better for society.

But even though the idea of consumer surplus is used in many applications, measuring it has always been problematic. That is because, in the real world, demand and supply move together, and it is therefore difficult to establish the exact shape of a demand curve.

That was, until Uber. A team of economists (including Steven Levitt of Freakonomics fame) recently published an NBER Working Paper that uses almost 50 million UberX ‘consumer sessions’ to identify a demand curve for taxi services, and then calculate the consumer surplus that these services generate. A ‘consumer session’ is basically when someone logs onto the UberX app and requests the price for a proposed trip. The consumer either accepts the price and wait for an Uber driver to pick them up, or they don’t, and find alternative transport.

What makes Uber unique is that its prices vary according to demand (for its services) and supply (the availability of drivers). This unfortunately also means that it is not possible to simply calculate a demand curve when the price increases by 10%, because the increase might be the result not of greater demand by consumers for Uber trips, but of lower supply (having fewer drivers on the route). The research team use a clever trick to get around this. Say the algorithm predicts that the price must increase by 1.249. This is then rounded down to 1.2 for the consumer. Other times the algorithm suggests the price must increase by 1.251, but the app then rounds this up to 1.3. It is this discrete difference when the price is essentially the same which the authors exploit using regression discontinuity analysis.

uber_advertIf this sounds very geeky, the results are worth the wait. First, the authors find that demand is quite inelastic (around 0.5). This means that if prices increase by 10%, demand will only fall by 5%. Second, they compute the dollar value of consumer surplus in Chicago, Los Angeles, New York and San Francisco to be roughly $2.8 billion annually. This is more than six times Uber’s revenue in those cities. Put another way, for each $1 spent on an UberX ride at the lowest price, the authors estimate that the consumer ‘receives’ $1.57 in extra surplus. In short, Uber generates massive benefits for society-at-large.

Why does Uber generate so much consumer surplus compared to normal taxi operators? Another NBER Working Paper, written by Judd Cramer and Alan Krueger, suggests that it is because of the higher capacity utilisation rate of Uber drivers: “UberX drivers spend a significantly higher fraction of their time, and drive a substantially higher share of miles, with a passenger in their car than do taxi drivers.” There are four reasons for this. First, Uber’s better matching technology (an app that anyone can download on their phones). Second, the larger scale of Uber’s usage in comparison to taxi companies. Third, highly inefficient taxi regulations which limit the number of routes or time periods taxi drivers can operate. Fourth, Uber’s flexible labour supply model and pricing model which match supply with demand.

South African regulators have had varied responses to Uber’s entrance in the local market. There has been opposition from the taxi industry, sometimes violent. Proponents of Uber, on the other hand, often highlight the entrepreneurial and job-creating opportunities the service creates.

What this research shows, though, is that Uber’s main benefit is the massive surplus it generates for consumers. According to the Levitt research team, one day’s worth of consumer surplus in the four US cities they analyse is worth about $18 million. “If Uber were to unexpectedly disappear for a day, that is how much consumers would lose in surplus.”

Aside from this consumer surplus, Uber services create many positive externalities, from lower congestion and pollution levels to semi-skilled employment to, perhaps more tenuously, greater social interaction and cohesion – I’ve had some fascinating conversations with Uber drivers, and know of one driver that was offered a scholarship by a client. But, most importantly, when regulators and policy-makers debate the pros and cons of Uber and other such services that will almost certainly appear in the next few years, it is worth remembering one of the basic principles of introductory economics: the immense benefits society derives from the additional consumer surplus.

*An edited version of this first appeared in Finweek magazine of 20 October.

Written by Johan Fourie

November 23, 2016 at 08:56

How long-distance flights are good for business

leave a comment »

ba-a380-over-cpt

When, a few weeks ago, Tim Harris, CEO of the Western Cape’s investment and trade promotion agency Wesgro, claimed that Cape Town’s business community is likely to benefit from five new routes and four expansions at Cape Town International Airport, I was doubtful. Sure, the four new routes – which include British Airways flying three times a week to Gatwick, Lufthansa to Frankfurt three times a week, Kenya Airways to Nairobi and Livingston, as well as an Airlink route to Maun in Botswana – is great for tourism. But it was unlikely, I imagined, to stimulate sustainable investment in the city.

That is, until I read a new study investigating the impact of international long-distance flights on local economic development. The authors, Filipe Campante of Harvard’s Kennedy School and David Yanagizawa-Drott of the University of Zurich, use a fantastically innovative approach to identify a causal link between long-distance flights to a city and that city’s economic growth. They go one step further by identifying the reason for this growth impact: more flights result in a higher frequency of business links that generate investment.

So how do they do this? Campante and Yanagizawa-Drott exploit the fact that cities that are just under 6000 miles apart are distinctly more likely to have direct air links, as compared to cities slightly above that threshold. This is because of regulations that make flights longer than 12 hours much more expensive. Consider, for example, flights between Milan and Shanghai (5650 miles) and Madrid and Shanghai (6350). The first route between Milan and Shanghai opened in 2003; the route between Madrid and Shanghai only opened this year. The authors show that, globally, city pairs with more likely connections (below 6000 miles) do indeed have more connections than pairs just above 6000 miles.

But does this matter for economic growth, and if so, how? First, using satellite-measured night lights, the authors show that areas close to airports with connections just below the 6000-mile threshold grew faster between 1992 and 2010 than those with connections above the threshold. They also show that this is not just displacement of economic activity from elsewhere in the city. Second, long-distance connections increase a city’s desirability for other connections, increasing the amount of medium-distance connections and the overall quality of air links. Third, long-distance connections are good for business. The authors geolocate over half-a-million foreign-owned companies all over the world, as well as their owners. They show that in cities with direct connections, there are likely to be far stronger business links: for instance, they find over three times as many ownership links between Milan and Shanghai as between Madrid and Shanghai.

These effects are sizable. Campante and Yanagizawa-Drott estimate that a given increase in connections generates about a similar proportional increase in ownership links. “The evidence suggests that most of this increase constitutes capital flowing from relatively richer to relatively poorer countries: three-quarters of the increase in business connections could be attributed to companies in high-income countries owning companies in in middle-income ones, and a quarter in the opposite direction.” The lesson is that the movement of people leads to the movement of capital. Expect more investment in Cape Town from entrepreneurs in London and Frankfurt.

Such research also raises uncomfortable questions. Even if a route is unprofitable for a carrier, the benefit of having that route to a city’s business community and society-at-large, especially in the long run, may justify government support. Is there perhaps justification for a national carrier like South African Airways to fly to long-haul destinations like Rio de Janeiro, Beijing or Atlanta, even if these routes are unprofitable, with support from taxpayers? I would hesitate to go this far, but it does suggest that cities should do everything they can to attract long-distance flights. This can include anything from offering hospitality services to tired crew members to expanding the capacity of the airport (or even commissioning the construction of a new one).

Over the last century, the cost of human travel has fallen significantly. This has connected the world, allowing the movement of people and capital to destinations where they are likely to have the largest impact. Cities that have been disconnected have lost out; those with more frequent long-distance flights have benefited most. The good news for South Africa is that the barriers of the 6000 mile limit and air regulations have less impact now than it did in the past; the bad news is that, because these things matter less, competition from other long-distance destinations will increase. Let’s hope policy-makers in our big cities – people like CEO Tim Harris – are up for the challenge.

*An edited version of this first appeared in Finweek magazine of 6 October.

I, Krotoa

with one comment

Krotoa

Last Friday at around noon, I ended a class on European settlement at the Cape and the demise of the Khoesan by lamenting the lack of public acknowledgement for some of the Cape’s most famous Khoe inhabitants. Autshumao was one of the first translators and interlopers between the trading Dutch and local Khoesan clans. Gonnema was a proud leader of the Cochoqua, who fought the Dutch in three Khoe-Dutch Wars. And then there was Krotoa, Autshumao’s niece, who was brought up by the Van Riebeecks. Here is her short Wikipedia bio:

On 3 May 1662 Krotoa was baptised by a visiting parson, minister Petrus Sibelius, in the church inside the Fort de Goede Hoop. The witnesses were Roelof de Man and Pieter van der Stael. On 26 April 1664 she married a Danish surgeon by the name of Peter Havgard, whom the Dutch called Pieter van Meerhof. She was thereafter known as Eva van Meerhof. She was the first Khoikoi to marry according to Christian customs. There was a little party in the house of Zacharias Wagenaer. In May 1665, they left the Cape and went to Robben Island, where van Meerhof was appointed superintendent. The family briefly returned to the mainland in 1666 after the birth of Krotoa’s third child, in order to baptize the baby. Van Meerhoff was murdered on Madagascar on 27 February 1668 on an expedition.

Krotoa returned to the mainland on 30 September 1668 with her children. Suffering from alcoholism, she left the Castle in the settlement to be with her family in the kraals. In February 1669 she was imprisoned at the Castle and then banished to Robben Island. She returned to the mainland on many occasions just to find herself once more banished to Robben Island. In May 1673 she was allowed to baptise a child on the mainland. Three of her children survived infancy. She died on 29 July 1674 in the Cape and was buried on 30 September 1674 in the church in the Fort,

Pieternella and Salamon, Krotoa’s two youngest children from her marriage to van Meerhof, were taken to Mauritius in 1677. Pieternella, who was known as Pieternella Meerhof or Pieternella van die Kaap, later married Daniel Zaaijman, a VOC vegetable farmer from Vlissingen. They had four sons and four daughters, one of whom was named Eva, and the family moved back to the Cape in 1706.

I ended my class by suggesting the students consider these local figures when they think about renaming campus buildings, as had happened last year during the #FeesMustFall movement. What I had not known, was that at that exact moment, Krotoa’s spirit was returned to the Castle of Good Hope where her remains had been removed from a century ago. Here’s the news report:

Gathered around a tree at the Groote Kerk, they [traditional and religious leaders] burned an incense plant and beckoned for her soul to rise from the unmarked grave where her bones had been held.

Her remains had been removed from the grounds of the Castle of Good Hope, nearly a century after she was buried there.

On Friday, some of her descendants returned with her spirit to the castle.

A few months ago, after uncovering an old computer file that contained my genealogy, I discovered that the wife of my paternal great-grandfather – Wynand Breytenbach Fourie – was one Johanna Beatrix Fourie. Her maiden name: Zaaiman.

Many other South Africans also descend from Krotoa. It is in the math – here’s Stephen Fry on the topic. Almost all white South Africans today must have some non-European heritage, given the women of Khoe or slave (especially) origin who married Dutch or German or French (or, in Krotoa’s case, Danish) men at an early stage in the country’s history.

Although several novels have appeared that feature her – most famously Dan Sleigh’s Eilande and Dalene Matthee’s Pieternella van die Kaap – Krotoa, and the tumultuous times she lived in, has been largely neglected from popular discourse. Fortunately, that is changing. In the ceremony on Friday, she was variously described as a child labourer, a feminist, and a language fighter who helped create Afrikaans, even a martyr. An Afrikaans/Nama movie that feature her life is now in post-production stage. Armand Aucamp plays Jan van Riebeeck and Crystal Donna Roberts an older Krotoa.

But more should certainly be done. Monuments and renamed buildings and public places can play a role, but because Krotoa’s story is claimed by so many (as Heritage Consulatant Tracy Randle explains in this interview), these memorials will remain contested. Some activitists protested outside the Castle on Friday, for example. Last year, a bench which had Krotoa’s face engraved in mosaic art, and which was located at Krotoa Place, the small square at the intersection of Castle Street and St George’s Mall, was destroyed.

Much like 350 years ago, Krotoa embodies the tragedy and disillusionment but also the hopes and aspirations of our fractured society. Unshackled to anyone or any group, hers is our story.

Or, as Lara Kirsten observes in her poem Vir Krotoa (For Krotoa):

in haar skyn die hoop
wat nog by ons mense spook

(in her shines the hope that still frightens our people)

Written by Johan Fourie

August 25, 2016 at 08:46

Three hundred years of firm myopia

with one comment

voc-rede-van-texel_w1190_h734_1

Three centuries ago, on 24 June 1716, a very important letter arrived from Amsterdam in Cape Town; a letter that, according to John X Merriman two centuries later, would change the future of what would become South Africa. Written by the Board of the Dutch East India Company (the VOC), the letter requested the Council of Policy in Cape Town to reflect on the economic needs of the still small and fragile colonial settlement. In particular, the Board wanted to know whether the Council of Policy would recommend more European immigration to the Cape or whether an increase in slave arrivals would be preferred.

A year later, seven members of the Council responded. Six members recommended that slavery was the better choice. The reason was simple: slaves could supply cheaper labour than European wage labourers. And because all agricultural output had to be sold to the Company stores in Cape Town, cheap labour meant that the Company could pay farmers less for their produce, allowing the Company to make a very decent return when reselling the produce to passing ships.

One member of the Council of Policy, however, disagreed. Dominique Marius Pasques de Chavonnes instead made a case for encouraging European immigrants. Though slavery would be more profitable in the short run, he argued that the settlement of free people would be better for the economy, and thus for the Company, in the long run.  Free men have an incentive to invent while slaves do not, he said, pre-empting what Adam Smith would write in his Wealth of Nations half a century later. And invention is the root of productivity and prosperity.

It’s no surprise that the shareholders in Amsterdam chose the advice of the six men that appealed to their immediate interests. After 1717, European immigration slowed considerably, and slave arrivals from modern-day Malaysia, Indonesia, India, Madagascar and Mozambique increased. The Cape became a slave economy, with high levels of inequality, an inequality that has still not abated. In 1776, Adam Smith would write in his Wealth of Nations that ‘of all the expedients that can well be contrived to stunt the natural growth of a new colony, that of an exclusive company is undoubtedly the most effectual’. DM Pasques de Chavonnes and Adam Smith had recognized the myopia of firms.

Although it has a long history, such short-termism is rising. The trend towards financialisation (higher levels of stock liquidity), diversification and hostile takeovers of the 1980s increased the separation between firm ownership and control. Managers’ incentives to maximise their own utility were no longer aligned with maximising the utility of the firm. To realign these incentives, managers were increasingly compensated with stock options. The result has been a sole focus on higher share prices to the detriment of the long-term sustainability and growth of the firm, for example, by investing less in research and development.

There is now evidence that clearly shows the negative impact of financialisation on innovation. A 2014 paper in the Journal of Finance use exogenous variation in liquidity generated from financial regulation and finds that an increase in liquidity causes a reduction in future innovation. The authors propose two possible reasons: a higher likelihood of hostile takeovers and more institutional investors, like pension funds, who rely on less information and monitoring. The consequences are that short-term boosts in shareholder value come at the expense of the long-term profitability of the firm.

So what can be done to prevent managers from succumbing to these short-term pressures? One solution is to offer managers contractual protection like severance pay agreements. This seems to have a positive impact on innovation; Xia Chen and co-authors of a 2015 paper in The Accounting Review, find that firms with CEO contractual protection are less likely to cut R&D expenditure to avoid earnings decreases. They are also less likely to engage in real earnings management. More detailed analysis reveals that the larger the duration and monetary strength of the agreement, the less likely the CEO is likely to cut R&D expenditure. The effect is also larger for firms in more homogeneous industries, and for firms with higher transient institutional ownership.

Hedge funds and their supporters are eager to point out that not all short-termism is bad and that the evidence on various firm outcomes is mixed. That may be true, but what the recent evidence begins to suggest is that at least one factor that we associate with sustainable firms – innovation – seems to suffer when managers’ priorities shift from the future to the present. Managers that focus too much on short-term gains may, much like the VOC shareholders three-hundred years ago, shift a firm down a path from which it is unlikely to return.

*An edited version of this first appeared in Finweek magazine of 17 March.

How to decolonise an Economics curriculum

with 15 comments

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.