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What explains the rise of populism?

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Donald Trump

Consider the following thought experiment: Sibusiso and Thulani each own a firm that competes with the other. In each of the following scenarios, Sibusiso’s firm outcompetes Thulani’s. Which of the four do you consider unfair competition?

  • Sibusiso works hard, saves and invests his profits, and invents new techniques and products, while Thulani’s products change little and he loses market share.
  • Sibusiso finds a higher quality input supplier in the US, which makes his products better and he therefore takes market share from Thulani.
  • Sibusiso outsources some of his services to Bangladesh, where workers work 12-hour shifts under hazardous conditions, earning very low wages.
  • Sibusiso brings Bangladeshi workers into South Africa under temporary contracts, and puts them to work at lower than minimum wages.

From an economic perspective, each of these scenarios have a similar result: there are winners as well as losers as they expand the economy. But people generally react very differently to them. Most people are happy with scenario 1 and 2: even if someone loses (Thulani and his employees), this comes through what is perceived as fair competition from Sibusiso. It is scenario 3 and 4 that creates problems: when Sibusiso ‘breaks’ local laws (even though it may be perfectly legal in the foreign country), his competitive advantage, and by implication international trade, is viewed as unfair.

In a provocative new NBER Working Paper, Harvard University economist Dani Rodrik use this example to argue that too-rapid globalisation – the increasing use of scenarios 3 and 4, of outsourcing production to the developing world or of employing immigrants – is the underlying cause for the rise of populism across the developed world. The ‘losers’ from globalisation feel that foreigners – abroad or as immigrants in their own countries – have taken unfair advantage of then, stealing their jobs. They have chosen the politics of populism as a way to ‘punish’ this rapidly globalising world.

Economists know that free trade creates both winners and losers, and that the winners almost always gain more than what the losers lose. If the winners could perfectly compensate the losers, everyone would be better off from a free-trading world.

But Rodrik argues that such compensation is not always easy, and rarely happens. Aside from Europe, where an extensive social safety net was institutionalized to support ‘losers’, most countries failed to find a way to sufficiently compensate those that suffered the consequences of open borders. Make no mistake: open borders resulted in massive global gains, notably for the poor of China and India. But in each country, as trade theory predicts, there were losers. In Rodrik’s words: “People thought they were losing ground not because they had taken an unkind draw from the lottery of market competition, but because the rules were unfair and others – financiers, large corporations, foreigners – were taking advantage of a rigged playing field.”

There are many new studies to back up this claim. In a 2016 paper, David Autor and his co-authors show, for example, that the trade shock of China joining the World Trade Organisation aggravated political polarisation in the United States: districts affected by the shock moved further to the right or left politically, depending which way they were leaning in the first place. Analysing the Brexit vote, Italo Colantone and Piero Stanig show that regions with larger import penetration from China had a higher Leave vote share. They repeat the study for fifteen European countries, showing that China’s entry into the WTO had similar political consequences across Europe. In a 2017 working paper, Luigi Guiso and his co-authors use European survey data to draw even more precise conclusions: the more individuals are exposed to competition from imports and immigrants (the higher their economic insecurity), the more they vote for populist parties.

To summarise: because there were uncompensated losers from global free trade, argues Rodrik, there were political consequences. Rodrik then constructs a model to explain this populist rise on both the left and the right. According to the model, there are three different groups in society: the elite, the majority, and the minority. Says Rodrik: “The elite are separated from the rest of society by their wealth. The minority is separated by particular identity markers (ethnicity, religion, immigrant status). Hence there are two cleavages: an ethno-national/cultural cleavage and an income/social class cleavage. An important implication of this reasoning is that even when the underlying shock is fundamentally economic the political manifestations can be cultural and nativist. What may look like a racist or xenophobic backlash may have its roots in economic anxieties and dislocations.”

Populists who emphasize the identity cleavage target foreigners or minorities, and this produces right-wing populism. Those who emphasize the income cleavage target the wealthy and large corporations, producing left-wing populism. The large numbers of immigrants into Western Europe has resulted in the rise of right-wing populists, for example, while Latin America, because of large disparities between rich and poor, has seen more left-wing populism. The United States, argues Rodrik, falls somewhere in the middle – with Donald Trump on the right and Bernie Sanders on the left.

These findings have important implications for South Africa too. South Africa joined the WTO in 1995 and liberalised our complicated tariff schedule, opening our borders to foreign competition. There were many winners from cheaper imports, notably consumers, but some firms and industries struggled, leading to job losses, often concentrated in certain regions. And although South Africa rolled out an impressively comprehensive social safety net for a middle-income country, they could not compensate all the losers, especially as the global financial crisis hit in 2007 and unemployment began to worsen. It is not entirely coincidental that the first large-scale xenophobic attacks on foreigners happened in 2008 (what Rodrik would call right-wing populism) and that the ANC shifted left with the election of Jacob Zuma as South African president in 2009.

Even if globalisation creates more winners than losers, the losers, like Thulani and his employees, may feel that the system is rigged, and retaliate by voting for more populist parties. As South Africa stumbles into another recession, this may have profound consequences for the ANC’s December elective conference – and the national election in 2019.

*An edited version of this first appeared in Finweek magazine of 10 August 2017.

Written by Johan Fourie

August 14, 2017 at 16:47

How do we build a prosperous, decolonized South Africa?

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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.

How social status drives our consumption – and inequality

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louis-vuitton

A couple of years ago I attended a focus group for Finweek. The magazine was rebranding and it had invited a diversity of people to comment on the content it should offer. The conversation turned to investment options for young professionals: should young people invest their monthly savings in a new property, or stocks, or something else? The facilitator asked the thoughts of a young woman that had been quiet for most of the meeting. Her answer, and its consequences for many young South Africans like her, stunned me: I invest in expensive clothes, because I have to signal to a potential husband that I am wealthy. In other words: I buy brand names, because I want to improve my social status.

Economists have known since Adam Smith already that people buy luxury goods not only for the value they derive from consuming it, but because these goods offer something else: social status. Conspicuous consumption, as economist Thorstein Veblen coined our affinity for status goods, has helped explain economic phenomenon like our excessive expenditure on weddings or the difference between black and white incomes in America.

However, so far economists have struggled to differentiate between our affinity for nice things (in economics jargon: our unobserved consumption utility) and our affinity for the status that those nice things signal. In other words, I might buy a Ferrari not only because I really like fast and furious cars (consumption utility), but also because I want to signal to the everyone else that I am rich (status).

A team of five economists, in a new NBER Working Paper, has now found a way to test the importance of social status. They worked with a large Indonesian bank that distribute credit cards to clients. (Indonesia is a great place for a test like this, because it is in developing economies, as Veblen theorized, where you are most likely to see conspicuous consumption. Also, Indonesia has 74 million middle-class consumers, expected to double by 2020.) They used platinum credit cards, which come with a number of benefits like a higher credit limit and discounts on luxury purchases and is typically sold to high-income individuals, in their experiment.

How do they show that social status matter? They randomly offered a fancy-looking platinum and standard-looking credit card to their customers at the same price and with the same benefits. If customers only cared about the utility of the new card (like the benefits on offer), there should be no difference in the take-up of the fancy-looking or standard-looking card. And yet, there is a 7 percentage point difference: 21% purchased the fancier card versus only 14% for the standard card. The mere fact that the fancy-looking card was associated with a higher status meant that people purchased it.

Perhaps it is not that surprising that people purchase something because it conveys an additional status element, but what is surprising about the experiment is that poorer individuals bought more of the fancy-looking card. The rich, in contrast, showed no difference in demand for the fancy or standard card. The authors ascribe this finding to the fact that “richer individuals already have ways to signal their income, while the platinum credit cards are a more powerful signaling tool for those with comparatively lower incomes”. This also explains the behaviour of the young woman in our focus group; she was more limited in her ability to show social status and thus had to resort to clothing.

In a second experiment, the authors then look at how the customers use their cards. Consistent with their theory, they find that the customers that bought the fancy-looking card (remember: it had the same privileges as the standard-looking card) used the card more often in social settings, such as spending in restaurants, bars and clubs, where the card is more visible to others. Here, too, there is somewhat of a surprise: the use of this card comes at a cost, because in 48% of the cases the customers have another card that would have given them discounts on those purchases. In other words, they chose to ignore the discount just so that they can use the fancy-looking card that gives them social status! If this is true for credit cards where there is a limited audience (only your buddies who joined you for dinner can see you paying with a fancy-looking card), imagine what people are willing to forego for luxury products with a larger audience, like clothes and cars.

The authors conduct several other experiments, all of which support the authors’ theory that social status matter in explaining our consumption behaviour. We do not only buy luxury goods because they provide us with utility; we buy them because they signal something about our social status. And because poorer individuals tend to have fewer ways of signaling social status than richer ones, they are the most eager to grasp at opportunities for showcasing their status. (That is why direct marketing is never aimed at the wealthiest individuals!)

Such findings have implications for the distribution of wealth. The choice for a young person between investing your meager savings in stocks or a new car may not only depend on the financial returns they can get, but also the psychological returns they might get from purchasing a luxury good. If poorer individuals tend to buy more luxury goods to earn social status, like the young woman in the Finweek focus group, while the rich invest in assets that yield positive financial returns (because they already have assets that give them social status), the only logical conclusion is a widening wealth gap. There is little any policy, like a purported wealth tax, can do to prevent that instinctive human yearning for status.

*An edited version of this first appeared in Finweek magazine of 15 June 2017.

Written by Johan Fourie

July 12, 2017 at 11:02

How our emotional intelligence makes us productive

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Emotional-Intelligence-1

Economists spend a lot of time investigating the factors that make people more productive. This is because more productive people – producing more, with less – is the reason we can today afford a much higher standard of living than our ancestors – in Africa, India or Europe – two centuries ago.

Many things improve our productivity. Technological improvements like a computer can allow us to use the power of machines to substitute manual labour. Education allow us to build faster and stronger computers. Both technology and education are key if we are to continue building and sharing a prosperous future.

But it is not only technology and education that improve our living standards. There are formal and informal institutions – things like the criminal-justice system, property right regimes and the political system – that create the incentives for us to invest in technology and education. And there are the even less tangible things, like the way we make decisions (often referred to as ‘culture’), or our personalities. Economists are only now beginning to explore the roots of these ‘soft’ determinants.

Psychologists have known for long that our personality affect the way we make decisions. One example: Whether we apply for that senior position may depend on whether we exhibit the leadership qualities that is required to lead a large team. But what determines whether we have those leadership abilities? Is it nature or nurture?

One option is to look at siblings. If genetic traits (nature) were the only source of leadership qualities, then almost all the variation we find in society would be between families. In other words, there should be little variation between brothers, for example, as they have a lot of genetic overlap.

This is not the case, however, at least according to a recent NBER Working Paper written by three economists, Sandra Black, Björn Öckert and Erik Gröngqvist. Almost a third of total variation in personality traits, they note, are within the family. So, if it is not only nature that determine much of your personality, where do these within-family differences come from?

One possibility, they argue, is birth-order. Using a very rich Swedish dataset, the authors find that first-born children are ‘advantaged’ when measured on their ‘emotional stability, persistence, social outgoingness, willingness to assume responsibility and ability to take initiative’. Note: these are non-cognitive abilities, i.e. there is little difference in terms of a first-born and a third-born’s innate ability to do math, for example. It is on the softer abilities, instead, that first-borns clearly outperform their lower-ranked siblings: third-born children, for example, have non-cognitive abilities that are 0.2 standard deviations below first-born children.

These non-cognitive abilities matter. Controlling for many things, they show that first-born children are almost 30% more likely to be Top Managers compared to third-borns. This is because managerial positions, they argue, tend to require all Big Five domains of personality: openness to experience, conscientiousness, extraversion, agreeableness, and emotional stability.

But why does birth-order matter? The authors argue for largely three possible reasons. First, biology. Successive children may have less of the stereotypical male behavioural traits due to the mother’s immunization to the H-Y antigen. But this seems unlikely to explain most of the variation, as the authors also find that birth order patterns vary depending on the sex composition of the older children: third-born sons perform worse on non-cognitive tests when their older siblings are male compared to when they are female.

This suggests that it has something to do with how parents allocate their time and resources, especially in the early years. ‘First-born children have the full attention of parents, but as families grow the family environment is diluted and parental resources become scarcer’, the authors argue. Parents may also have incentives for more strict parenting practices towards the first born to ensure a reputation for “toughness” necessary to induce effort among later born children.

Thirdly, children may also act strategically in competing for parental resources. Siblings compete for possession of property and access to the mother. Older siblings, research shows, tend to take a more dominant role in conflict and have more elaborate conflict strategies. To minimise conflict, parents tend to invest more in the dominant, older sibling.

Using a novel approach, the authors can identify which of these effects is largest. They find that biological factors only explain a small part, and may actually benefit later-born children. It is however in the behaviour of parents that there are distinct differences between first- and later-born children: they find that later-born children spend substantially less time on homework and more time watching TV. Parents are also less likely to discuss school work with later-born children, suggesting that it is the parents that lower their investment which explains the large gap in non-cognitive skills.

What the authors do not do is to link their results with the general improvement in living standards over the last two centuries. We are becoming ‘better angels of our nature’ because we grow up in smaller families with more parental attention and resources, improving our non-cognitive abilities.

It is not only the vast improvement in technology and education that has made us more productive, but also because we have become more conscientious, agreeable, responsible and willing to take the initiative. We are rich, in part, because we are more emotionally intelligent.

*An edited version of this first appeared in Finweek magazine of 1 June 2017.

Written by Johan Fourie

June 23, 2017 at 07:49

South Africa’s Great Leap Backward

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Great Leap Forward

Over the next few days, South Africa’s new Minister of Finance, Malusi Gigaba, will meet with representatives of the IMF, the World Bank, international investors, and ratings agencies in the US. His aim is to restore confidence, to steer the South African ship through the troubled waters of junk status.

This was a tough task a week ago, but his appointment of Chris Malikane, associate professor of Economics at Wits University, as adviser, has made this almost impossible. Malikane penned an 8-page manifesto early in April, which will apparently form the basis of his policy advice to Treasury. The document is available here: Chris Malikane – Concerning the Current Situation 2017. (Brace yourself: the phrase ‘white monopoly capital’ appears 58 times. The words ‘science’ or ‘innovation’, not once.)

I read the document just before I had to teach a class on China’s Great Leap Forward yesterday, and the similarities were startling. Malikane calls for the expropriation of ‘banks, insurance companies, mines and other monopoly industries, to industrialise the economy’. He wants to establish a state bank, nationalise the Reserve Bank, and ‘expropriate all land without compensation to the ownership of the state’. Oh, and he also wants ‘free, quality and decolonised education, free and quality healthcare, improved quality housing, community infrastructure, etc., affordable and safe public transport, and affordable and reliable basic services such as water, sanitation and electricity’.

An excellent Business Day editorial summed it up perfectly:

Malikane’s ideas are rooted in Marxist voodoo economics. For a finance minister to be taking advice from one with such outmoded and unorthodox ideas puts SA on the path towards such economic disasters as Zimbabwe and Venezuela. Doing so is an act of grotesque irresponsibility.

Just as we all borrow from banks to pay home loans, so South Africa borrows from international lenders to pay our expenses (which are more than our income, i.e. our budget deficit). If international investors do not believe we will be able to repay, they will make our loans more expensive by raising interest rates. It is not that these international investors want to exploit us – just as banks do not exploit us when we voluntarily go to them for loans – it is just that they want to make sure they get their money back. How an academic macroeconomist at one of South Africa’s top universities do not understand this, I do not know. One has to wonder what he teaches his students at Wits?

I hope the IMF, World Bank, investor and ratings agency representatives ask Gigaba about the economics of his new adviser. I hope they ask him what exactly Malikane will do in his capacity as adviser. I hope they ask him to state his own views about the market economy, about the interplay of fiscal and monetary policy, and, just for fun, about the role of Marxist economic thought in understanding international capital flows. And I hope they ask him whether he’s heard of China’s Great Leap Forward, and its consequences for the Chinese economy.*

*Spoiler alert: 43 million people died.

Can private schools save South Africa?

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NorthernAcademy

When I was an Economics student 12 years ago, the academic literature we read, by South Africa’s leading economic thinkers and social scientists, were lamenting the poor performance of the then South African school system. There was little doubt that what needed to happen was to improve the quality of the schools for the 80% South Africans who were still stuck, despite massive transfers of resources to these schools, in a system that had been crippled by apartheid-era policies.

Fast-forward to today.  A generation has now passed through the system, and there has been almost no improvement. Of 100 Grade 1-students that go to school, only 37 can hope to pass matric. With teacher trade unions opposing policies that might improve teacher quality, our Minister of Basic Education seems paralyzed. Corruption often means that budgets are either unspent or spent inefficiently. There is little hope that things will soon improve.

But there is an alternative. Over the last few years, private schools have become an alternative for middle-income families that want a better future for their children. Take Northern Academy in Polokwane, run by the JSE-listed Curro Group. Despite school fees that are around R21000 per year, with a similar amount for boarding, the school has more than 5000 students, 111 classrooms and 66 hostels. In the 2016 matric exams it was the top-performing independent school in the province.

Curro now has schools across all nine provinces. In the last four years, its share price has tripled. Its profit motive means that it must satisfy its client base: if it performs poorly by employing poorly-qualified teachers, its clients will go elsewhere. That is the miracle of the market-system that Adam Smith identified: profits are a way to signal that a firm is doing something right. If profits fall, the firm better improve its products or services or it will go out of business. If profits rise, like in the case of Curro, other firms will notice and enter the market, offering their own product and service which they hope will eat into the profits of the dominant firm.

One fear is that Curro will monopolise the market, charging fees that allow them to earn monopoly profits. This is unlikely in the education sector, though, as there are few barriers-to-entry. Consider the SPARK schools, with tuition also around R21000 per year, that have opened since 2013 in Gauteng and the Western Cape.

A second fear is that a well-run private school system will create further divisions in a country characterized by high levels of inequality; those that are able to afford the high school fees of good education will stand to benefit vis-à-vis kids from poor households forced to attend poor-quality public schools. This is likely to happen if private schools are limited to those that can afford to pay for them. But they need not be.

In Sweden, where equality-of-opportunity is almost a religion, more than 10% of kids are enrolled in private schools. A major education reform in 1992 allowed primary and secondary schools to receive public funding based on the number of students they have enrolled. These schools are not allowed to discriminate or require admissions exams, and they are not allowed to charge parents additional school fees. (They are allowed to accept donations, which are often used to expand school facilities or offer financial support for the poorest students.)

Anyone can start a for-profit school in Sweden. Many offer an alternative curriculum, or provide a service to international, religious or language groups. Others are designated sports or artistic schools. The point is simple: if a public school is not providing the services its community wants, an entrepreneur with the ability to identify a gap in the market will step in to deliver a better service.

This is what we need in South Africa too. The 2017 Budget allocated R243 billion to the Department of Basic Education, which is 16% of our total consolidated spending. With 11.2 million school-going kids in South Africa, that is slightly more than R21000 per kid.

What if every parent in South Africa received a government voucher of R21000 per student which they could deposit at any school they want, public or private? A larger amount could be given to those living in rural areas, and possibly those living in previously disadvantaged areas. This empowers parents to choose the schools which they believe will serve the interests of their kids best.

There are concerns with private education too, of course. One would want to make sure that facilities are of good quality, that teachers and curricula meet certain standards, and that there is some security that students’ interest will be served if a company that provides these services goes into liquidation. But those concerns pale in comparison to the atrocious outcomes of the current school system, where facilities are often non-existent and teachers unqualified.

Imagine the opportunities this will create for entrepreneurs. A community leader in an area with poor public schools can now take the initiative, appoint educators from within the community and use the vouchers to pay their salaries. Imagine Cricket South Africa partnering with an entrepreneur to build a chain of elite cricket schools, with CSA providing the facilities and coaches and the vouchers paying for high-quality education.

An important research literature suggests that mother-tongue education is critical for student success: with a voucher system, if there is a demand for secondary education in Sesotho in a specific community, expect an entrepreneur to spot the gap. Another concern for the near future is the dearth of university-trained teachers: private school chains will have an incentive to fix this, either by training their own teachers on the job, or by investing in teacher training colleges.

We need a new plan for education. I’d hate to see my colleagues 12 years from now write papers still lamenting the poor state of the South African education system. We keep throwing money at a problem that cannot be fixed by money alone. The Basic Education budget grew 7.3% in 2017. If we continue doing this, we are likely to fail a second post-apartheid generation.

*An edited version of this first appeared in Finweek magazine of 23 March.

How to get good politicians

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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