Archive for the ‘Development’ Category
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.
Can African countries sustain the relatively high growth rates they attained since 2000? At the start of 2017, putting aside the newsworthy political shifts and the fear of many that the developing world has entered a ‘secular stagnation’, this remains the most vexing question for those of us on the African continent.
It is not a question with an easy answer. The stellar economic performance of several African countries has created an ‘Africa rising’ narrative where further progress – and catch-up to the developed world – seems inevitable. A more pessimistic counternarrative argues that this growth, from a low base, is largely the result of favourable commodity prices and Chinese investment. Both narratives had, unfortunately, made little use of either economic theory or history.
Enter Dani Rodrik, professor of International Political Economy at the John F. Kennedy School of Government at Harvard University, who tackles this question in a new paper in the Journal of African Economies. He first shows that many African economies have indeed improved since 2000, but that many, including Senegal, the DRC, the Ivory Coast and Zambia, remain on levels below those immediately following colonialism (around 1960). The second fact he establishes is that the rapid growth of the last dozen years has not lead to a large structural transformation of the economy. Whereas rapid growth in south-east Asian economies during the late twentieth century resulted in the growth of manufacturing, a more productive activity than subsistence farming, high growth rates in Africa have not had any effect on the relative size of manufacturing. In fact, in many countries, the size of the manufacturing sector has actually declined since 1975.
Rodrik attributes these changes not so much to factors unique to Africa – like a poor business climate or weak institutions or bad geography – but to a global trend of deindustrialisation. Even Vietnam, a country which has recently experienced rapid growth, has not seen much growth in manufacturing. And Latin American countries, which have decidedly better institutions than three decades ago, have also not seen much growth in manufacturing. Technological change – the move to automation, for example – is one likely reason.
So despite high growth rates, African countries have not industrialised – and, in fact, may have even begun to deindustrialise. This is why Rodrik is pessimistic about Africa’s future growth prospects. He nevertheless concludes by considering potential scenarios in which Africa can indeed sustain high growth, and identifies four possibilities: 1) To revive manufacturing and industrialise, 2) To generate agricultural-led growth, 3) To generate service-led growth and 4) To generate natural resource-led growth.
Let’s start with agriculture. Although many African countries have a lot of potential to expand their agricultural sectors, productivity in the agricultural sector remains low. Many farmers are subsistence producers, with low economies of scale. Such a scenario will require a reversal in the current trend away from agriculture. A recent study by Diao, Harttgen and McMillan show clearly how the share of agriculture is falling, particularly as women older than 25 are moving to the cities and into manufacturing and services. This trend seems irreversible, even if changes to technology (like seed varieties or market access opportunities) or institutions (like private property) are made, which means that an agricultural-led high growth scenario seems highly unlikely.
A natural resource-led strategy also seems unlikely for most African countries. Yes, most countries on the continent are well-endowed with resources, but the problems of the Natural Resource Curse and Dutch Disease are well known. It may be an option for some small economies, like Botswana has shown, but one has to question to what extent it can be sustainable beyond a certain level of income.
A third option is to reverse the trend of deindustrialisation. Because a growing manufacturing base seems to be, at least if we consider past examples of industrialisation, the only way to increase labour productivity over a sustained period of time, this is the option preferred by many development agencies. Yet there are many obstacles in the way of a thriving manufacturing sector, including poor infrastructure (transport and power in particular), red tape and corruption, low levels of human capital, and political and legal risk. But as explained earlier, Rodrik believes that even if these (very difficult) barriers can be overcome, it is not clear that manufacturing will return. The Fourth Industrial Revolution may completely alter the nature of manufacturing away from absorbing unskilled labour to capital and knowledge-intensive production. As I’ve said before, it is dangerous to follow a twentieth-century blueprint when production technologies are so different.
That leaves us with one scenario: services-led growth. Services have traditionally not acted as an ‘escalator sector’ as Rodrik explains. The problem is that services typically require high-skilled labourers, one thing that is in short supply in a developing economy. Rodrik does acknowledge, though, that the past will not necessarily look like the future. “Perhaps Africa will be the breeding ground of new technologies that will revolutionise services for broad masses, and do so in a way that creates high-wage jobs for all. Perhaps; but it is too early to be confident about the likelihood of this scenario.”
I don’t see an alternative, though. Yes, some countries, like Mozambique or Tanzania, will be able to expand their agricultural sectors – but higher productivity will probably mean larger farms with fewer workers. A few small countries will be able to benefit from natural resources – from diamonds to rare minerals like tantalum (used in cellphones and laptops); oil-producing countries will struggle, though, as the cost of renewable energies keeps falling. And some coastal countries may even develop their manufacturing sectors, like Ethiopia and South Africa. But for most of Africa, services offer the only reprieve from low productivity, low-wage jobs. From semi-skilled jobs like call-centres and virtual au pairs (apparently the next big thing) to professional services like accountants and designers and programmers, digital technologies must help leapfrog the barriers of poor infrastructure, bad geography and weak institutions. If it cannot, Dani Rodrik’s pessimistic vision of Africa’s future is likely to come true.
*An edited version of this first appeared in Finweek magazine of 26 January.
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.
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.
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.
One of the biggest barriers to deeper economic integration in Africa is the excessive trade costs that prevent regional trade. Import tariffs have traditionally been an important source of revenue for poorer countries, and it has taken several spaghetti-like agreements to reduce these. Although an agreement has been signed to create a Free Trade Area from the Cape to Cairo, none of the 26 countries have ratified it. Import duties remain between most African countries.
But tariffs are only of the costs of trade. It takes time to move a container from Johannesburg to Kinshasa, and the journey by land is often filled with tales of unscheduled delays and red tape. I remember traveling through the Victoria Falls border post between Zimbabwe and Zambia a few years ago and asking the truck drivers how long they had to wait to cross into Zambia. Their response: ‘A couple of days, if we are lucky’. This is no way to encourage regional trade.
Poor infrastructure is another significant barrier. The massive distances between major economic centres means that the unit cost of transport is high. A new paper in the Review of Economic Studies by Tufts University economist Adam Storeygard confirms this. Storeygard measures the impact of the oil price increases between 2002 and 2008 on the incomes of African cities. He compares two types of cities: those with a port on the coastline, and those of similar type but 500 kilometers inland. Using satellite imagery over the period, he finds that the oil price shocks increased the size of port cities by 7% more than in cities in the hinterland. The take-away: high transport costs retard growth. And because many African cities are located far from the coast, the high transport costs of poor transport infrastructure explains why African manufacturers find it difficult to compete with manufacturers in Asia and Europe. Just think of the difficulty manufacturers in landlocked countries like Malawi or Zambia face.
But even where better physical infrastructure reduces transport costs, other, ‘softer’ trade barriers often remain. Corruption, for example. Traveling into Malawi on my trip of a few years ago, we were pulled off the road a few kilometres after the border post by an armed man, and then required to return to the border post because we needed ‘additional insurance’. That was a $50 payment that went straight into the friend of the armed man’s pocket.
The effects of these ‘invisible’ trade barriers on trade and consequently economic performance have been hard to quantify, though, until now. In a new American Economic Review paper – ‘Corruption, Trade Costs, and Gains from Tariff Liberalization: Evidence from Southern Africa’ – Sandra Sequeira of the London School of Economics and Political Science finds that a reduction in tariffs between South Africa and Mozambique in 2006 had a very limited effect on trade. This is surprising: one would expect that lower tariffs would lead to higher levels of trade. And yet, the sharp decrease in tariffs had basically no effect (in technical terms, the elasticity of imports to tariff changes was very low).
What explains this surprising result? Sequeira uses a novel dataset of exporters’ bribe payments between South Africa and Mozambique to show that the decline in tariff rates at the border resulted in a 30% decline in the probability of bribe payments and a 20% decline in the average bribe amount paid. In other words, the lower tariffs did not actually reduce firms’ trade costs, it just shifted paying corrupt border officials to actually paying the tariffs as required by law, boosting government revenue. That is also why the elasticity of imports was so low: because costs did not fall in practice, there was no concomitant increase in trade.
Sequeira’s innovative study shows that high tariffs explain why corruption thrives. Remove the tariffs and the ability to solicit bribes vanishes. But don’t think that trade will suddenly blossom. Bribes keep trade costs lower than what they would be if tariffs were fully paid; lowering tariffs only lower the amount corrupt officials receive.
This has important implications for policy-makers: first, lower tariffs may actually result in an increase in tariff revenue as traders switch from paying bribes to paying the now more reasonable official tariffs. Free trade agreements (with zero tariffs) may not result in a significant fall in revenue either, because much of the revenue goes into the pockets of corrupt officials in any case, and will likely lead to greater transparency; Sequeira finds, for example, that trade statistics also improve when corruption practices decline.
But don’t expect free trade agreements like the one being discussed at the moment to result in a large increase in regional trade. As long as other barriers, like delays, severe red tape and poor infrastructure, remain, regional trade in Africa is likely to remain too weak to foster the economic development it promises to deliver.
*An edited version of this first appeared in Finweek magazine of 17 November.
One of the baffling things in explaining the Industrial Revolution is that education, that pillar most economists believe to be critical for economic growth, seems to have played a relatively minor role. Universal public education was a consequence rather than a cause of the Industrial Revolution. Eighteenth-century England did not first have a skilled population before they had an economic transformation; the uncomfortable truth is that it was the other way round.
This uncomfortable truth does not suggest that formal education was completely unimportant. It suggests, instead, that much of what caused the Industrial Revolution was the scientific knowledge obtained by an elite group of highly skilled artisans, inventors and entrepreneurs. It was not the average level of education of every Brit that mattered. Most of the breakthrough technologies of the era – the Spinning Jenny, the steam engine – came instead from upper-tail tinkerers who had hoped to make a profit from their innovations.
A wonderful new research paper by economists Mara Squicciarini and Nico Voigtländer in the Quarterly Journal of Economics confirm this. They use the subscriber list to the mid-eighteenth century French magazine Encyclopédie to show that knowledge elites mattered in explaining the first Industrial Revolution: in those French towns and cities where subscriber density to the magazine was high, cities grew much faster in the following century, even when controlling for a variety of other things, like wealth and general levels of literacy. Their explanation? Knowledge elites (engineers, scientists, inventors) raise the productivity at the local level through their piecemeal innovations, with large positive spill-overs for everyone around them.
Fast-forward to the twenty-first century. High-skilled workers are the stars of today’s knowledge economy. Their innovations and scientific discoveries spur productivity gains and economic growth. Think, for example, of the immense contributions of Sergey Brin’s Google, or Elon Musk’s Tesla, or even Jan Koum’s WhatsApp. It is for this reason that the mobility of such highly talented individuals has become such an important topic – consider that all three individuals mentioned above are immigrants to the United States. There is little doubt that the most prosperous economies of the future will be the ones to attract the most skilled talent.
Which is why understanding the push-and-pull factors of current global talent flows are so important, and the subject of an important new article in the Journal of Economic Perspectives. The four authors begin with the facts. High-skilled elites are more mobile: between 1990 and 2010, the number of migrants with a tertiary degree increased by 130%; those with only primary education increased by only 40%. More of these high-skilled migrants depart from a broader range of countries and head to a narrower range. While OECD countries constitute less than a fifth of the world’s population, they host two-thirds of high-skilled migrants. 70% of these are located in only four countries: the United States, the United Kingdom, Canada and Australia.
The United States, unsurprisingly, dominates all rankings. Since the 1980s, of all the Nobel Prizes awarded for Physics, Chemistry, Medicine and Economics, academics associated with American institutions have won over 65%, yet only 46% of this group was born in the United States.
One fascinating and underappreciated fact of global migrant flows is the role of highly educated women. Between 1990 and 2010, high-skilled women immigrants to OECD countries increased from 5.7 to 14.4 million; in fact, by 2010, the stock of highly skilled women migrants exceeded male migrants! As the authors note, ‘Africa and Asia experienced the largest growth of high-skilled female emigration, indicating the potential role of gender inequalities and labour market challenges in origin countries as push factors.’
And what about South Africa? The authors calculate the emigration rates of high-skilled individuals by country for 2010, and plot these on a graph. South Africa is a clear outlier: emigration of high-skilled individuals is the sixth highest of the countries included, and by far the highest for countries with more than 10 million people. This is worrisome. True, some of this emigration is made up by high-skilled immigrants from our African neighbours, like Zambia and Zimbabwe, who also have high emigration rates. But the fact remains: our economic outlook will remain precarious if we continue to shed high-skilled individuals at these exorbitant rates.
Is there something to do? The authors mention various push and pull factors that affect the decision to migrate, from gatekeepers that pull the best talent by giving citizenship based on a points system to repressive political systems that suppress freedom of speech and scientific discovery and push the best and brightest to emigrate. If South Africa is to prosper, high-skilled individuals should be recruited and retained – not pushed to find opportunities elsewhere. Protests at universities do not help; providing residency to graduates, as the South African government has proposed, will.
In the knowledge economy, knowledge elites are the bedrock of success. If we are to learn from history, cultivating them should be our number one priority.
*An edited version of this first appeared in Finweek magazine of 3 November.