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Cities are the future

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MinasRuines

Photo by Marcia Valle

Brazil is a fascinating country to travel to as a South African. It is vibrant, slightly chaotic and mesmerizing all in one, and, beyond the airports and major tourist areas, quite a challenge for someone with no knowledge of Portuguese. I was invited to a rural university town in the state of Minas Gerais in May to deliver a series of talks. From the airport in Belo Horizonte my driver, hell bent on showing off his Grand Prix skills, took me on a five-hour rollercoaster ride through the hilly countryside. What was formerly a coffee and sugar plantations (and mining) region, were now mostly vacant, most of the land reclaimed by veld and forests. The language barrier prevented me from inquiring in detail what was happening, but from what I could gather, his answer was simple: People are moving to the cities. They want better lives.

Rapid migration to cities is a global phenomenon. People ‘vote with their feet’ for better economic opportunities, and in South Africa, as in Brazil, they vote for the bright lights of the cities. Poverty in South Africa is largely a rural phenomenon. Yes, townships on the periphery of cities house many poor residents, but these residents have better lives than those in the former homelands many of them come from. The search for a better life for them and their children is why they moved in the first place.

Those of us with a romantic view of life in the countryside may think that this flood to the cities can be reversed by, for example, policies that would expand land access or improve rural living standards. But lack of land is not the reason people migrate to cities in large numbers, not in South Africa and also not in Europe, China or Brazil. In several European countries, rural areas have been abandoned, taken over by forests (and returning wildlife). The European policy-makers have done their best to prevent this, by offering expensive agricultural subsidies to its farmers (at the cost of farmers in Latin America, India and Africa), but this has just slowed the inevitable. Farms are now being bought up by rich city-folk that want weekend getaways – cities are what creates wealth, the countryside is for spending it. In China, because of the disastrous policies of Mao, land was equally divided amongst the citizens. Yet with the onset of modern economic growth in China since the 1980s, millions of families have relocated to the cities, first to fill jobs in low-skilled, labour-intensive sectors, but as the economy has grown and wages have increased, to more skill-intensive sectors. Their children will attain much higher living standards than their parents and grandparents could ever dream of. Despite a history of severe inequality, the story is no different in Brazil. Rich and poor move to cities, because that is where their living standards are most likely to improve.

Trying to slow down urbanization is futile; in fact, it is likely to do more harm than good. Cities are where people prosper: they have access to employment opportunities, better schools and clinics, electricity, water and sanitation and access to a greater variety of social institutions and entertainment, like churches and sport clubs. But because cities are so attractive, that also results in higher levels of inequality, as new poor migrants from the countryside continually fill the gaps left by those that were formerly poor but have worked their way up. Inequality in cities should thus be interpreted with caution: it is a consequence, rather than a break, on progress. The poor care less about the Gini coefficient and much more about the possibility of social mobility – the possibility to escape poverty.

Evidence of how migrants’ living standards improve is provided in a new paper by Ivan Turok and Justin Visagie. They track rural migrants to South African cities between 2008 and 2014. Before their move to the city, 80% of these migrants were living below the poverty line. Six years later, they results show, ‘the level of income poverty for these migrants (now living in an urban environment) had more than halved to below 35%. Meanwhile, the poverty level for individuals who remained in the countryside stayed very high at 70%.’

It is for this reason that some economists are proposing a somewhat contentious poverty-alleviating policy: subsidies to help those in rural areas to migrate to cities. A new paper by David Lagakos, Ahmed Mobarak and Michael Waugh use an experimental programme of migration subsidies in Bangladesh to calculate the effect on migrant welfare. They find that for the poorest households, the welfare gains from migration subsidies are higher than unconditional cash transfers or a rural workfare program costing the same total amount. ‘This suggests that conditional migration transfers may be a useful way to raise the welfare of poor rural households in the developing world.’

The influx of migrants are and will continue to be difficult for cities, already suffering backlogs and scarce resources, to manage. But there are ways to support them. National and provincial governments can do more to give cities control over land and infrastructure they own, like Metrorail. Greater private sector involvement can speed the provision of basic services, notably in housing and internet connections. Political competition, like what has happened in Johannesburg, Pretoria and Port Elizabeth, will help to push out bureaucratic incompetence (and corruption) and promote service delivery.

Urbanisation is the key to future prosperity, in South Africa, Brazil and elsewhere. Any policy to keep people in rural areas amounts to a policy to keep them poor. While city governments are battling to tackle existing infrastructure backlogs, they should recognise that they offer the best hope for people to escape poverty.

**An edited version of this article originally appeared in the 7 June edition of finweek.

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Written by Johan Fourie

June 30, 2018 at 06:54

One policy to rule them all

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LotR

The holy grail for development economists is to identify an affordable policy intervention that will help the poorest escape poverty. We know that living a longer and better life is correlated with many things: higher income from having a job, living in a house with clean water and sanitation, and access to better schools and health facilities, to name a few. But the trouble comes when we try to write policy to improve these things: which investment, given limited resources and political constraints, will most benefit children from poor households? And why?

A new paper* published in the American Economic Review last month by a team of economists and psychologists offers an answer. It uses a longitudinal unconditional cash transfer programme – the Great Smoky Mountains Study in North Carolina – to examine how a cash boost for parents affected children’s outcomes. Children from 11 counties were interviewed annually from age 9 until the age of 16. Their parents were interviewed at the same time. One subsection of these children are American Indians. These American Indian families began to receive, five years after the first survey, direct cash transfers from the Eastern Band of Cherokee Indians tribal government as a result of a new casino that came into operation. The cash transfers were provided to all adult citizens of the tribe, regardless of their employment conditions, marital status, or the presence of young children. This is basically equivalent to a universal Basic Income Grant, a policy that is gaining popularity in academic circles.

Because the surveys were initially undertaken for the purpose of collecting information about behavioural and mental health, the authors have a lot of information about the children’s emotional and behavioural well-being at their disposal. Most importantly, the surveys began before the introduction of the unconditional cash transfer, so they can compare the mental health conditions of children in households who receive the transfer to those in households who never received it. This ‘natural experiment’ is the closest thing economists get to a laboratory experiment.

The results are remarkable. They show that the increase in unconditional household income improves child personality traits, emotional well-being and behavioural health. Because of the unique nature of their data, they can demonstrate that these improvements are for the same child using the same measures over time. The formation of positive personality traits, like conscientiousness (individuals who do your duties diligently and thoroughly) and agreeableness (individuals who are kind, sympathetic and cooperative), is ‘crucial in determining long-term socioeconomic standing and may also have strong effects on long-term health, educational attainment, and economic outcomes’. We know from earlier research that mental health conditions, such as attention deficit disorder, are more likely to affect poorer children. The authors concur: ‘We find that the children that start out with the most severe personality or behavioral deficits are the ones who exhibit the greatest improvements.’ A universal cash injection, like a Basic Income Grant, is likely to have the largest impact on children from the poorest households, improving personality traits and health outcomes even during their teenage years.

Such improvements in personality will have large repercussions in adulthood. A large literature now shows that such traits are strong predictors of finding a job, living in a good neighbourhood and living a longer and healthier life.

Most remarkably, because the surveys also included questions about parental health, the authors could discuss potential mechanisms through which additional household income affects child personality traits. They find that the unconditional cash transfers resulted in ‘an improvement in parental mental health, the relationship between parents, and the relationship between the parents and children in the treated households’. A Basic Income Grant may improve long-run child outcomes via the improvement in parental behaviors, stress-reduction, and improvements in decision making in the household.

A Big Income Grant is an expensive policy. A back of the envelope calculation reveals that, with 56 million South Africans, a Basic Income Grant of R758 per month – what is classified as the lower-bound poverty line by StatsSA – will require R509.4 billion annually. This is a lot of money, but not impossible to find. We already spend R193.4 million on social protection, and another R66 million on social security. We pay R180 million on debt servicing, which can be drastically reduced if we sell government-owned assets and repay our debt. A Basic Income Grant will also help reduce the reliance on free government services, such as fee-free schools, and increase VAT income as consumption increases.

A Basic Income Grant not only eliminates extreme poverty with the stroke of a pen, but as the Great Smoky Mountains Study show, it can drastically improve the emotional well-being and behavioural health of both children and parents in our poorest communities, with massive implications for their futures and that of South Africa. If we are serious about addressing the stark inequalities in our country, inequalities that ultimately help explain societal challenges like hopelessness, desperation, crime, violence, and even populism, then a Basic Income Grant is a policy we can no longer afford to ignore.

*Akee, Randall, William Copeland, E. Jane Costello, and Emilia Simeonova. 2018. “How Does Household Income Affect Child Personality Traits and Behaviors?” American Economic Review108 (3): 775-827.

**An edited version of this article originally appeared in the 10 May edition of finweek.

Written by Johan Fourie

June 19, 2018 at 08:15

Land expropriation: learning from the Chinese

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GreatLeapForward.jpg

The complexity of the debate about land expropriation without compensation can ultimately be summarized into two questions: Should land be expropriated without compensation? And, if so, who should own the expropriated land? While much media attention has focused on the first, with the focus often on how such a policy will scare off foreign investment, it is the answer to the second, ultimately, that will determine the success of any attempt at redress and wealth creation.

The two proponents of a policy of land expropriation without compensation in South Africa – the ANC and the EFF – stand on very different sides with regards to answering the second question: the ANC has made it clear that ownership should be in private hands, while the EFF has forcefully and repeatedly made the case that the state should be the custodian of all land. Their policy would see the state expropriate all private farm land and lease the land ‘equally’ to the people of South Africa. Dali Mpofu, National Chairperson of the EFF and a respected advocate, has defended this stance by referring to China in a 2017 tweet: ‘Chinese land is owned … by the state and it has registered the highest consistent economic growth in the world!’

Mpofu’s example is an interesting one, and worth exploring. Indeed, Chinese economic growth over the last four decades has been a historically unprecedented 8% per year. But Mpofu would do well to note that this growth was not a consequence of agriculture. Between 1990 and 2016, the share of agriculture in GDP has fallen dramatically from 26.5% to 8.5%. This was associated with massive urbanization; in 2016, 57.4% of the total population lived in urban areas, a dramatic increase from 26% in 1990. Far fewer people now live off the land, and those that have moved to the (often new) cities, are remarkably better off.

This is because land is not the valuable commodity it once was in the nineteenth and twentieth centuries. As a way to empower people, land is probably the least useful asset nowadays, because it requires significant investment in physical and human capital to make it productive. Even then, the most valuable assets today are intangible – skills, intellectual property rights, data. In the twentieth century, agriculture could only thrive with significant state intervention in the form of marketing councils, favourable tariffs and other measures, measures that came at the cost of the South African consumer. In the 21st century economy, living off the land – without significant capital investment – will limit the ability of those that most need access to good education and health services and opportunities for social mobility that are found in cities.

This is even more true if the expropriated land is owned by the state. Let us return to Mpofu’s country of choice: China. Between 1955 and 1957, 96% of China’s 550 million peasants were dispossessed of their private property rights. This was the largest movement from private to communal property rights in history. As Shuo Chen and Xiaohuan Lan show in a 2017 paper published in the American Economic Journal: Applied Economics, the results of this process of land dispossession was devastating for the peasants, and the Chinese economy. The authors use data of 1600 counties that launched the movement in different years, and find that in the year of the dispossession, the number of cattle declined by 12 to 15%. In total, this was a loss of almost 10 million head of cattle. Why? Because people started killing their own animals to keep the meat and hides as soon as they released that they will lose the property rights to the use of those animals, and they did not trust the state to be able to safeguard what used to be theirs. This loss also affected grain output, which fell by 7%. We now know that Mao was not discouraged by this initial production shock. No, he doubled down. This initial process of land dispossession set the stage for the Great Leap Forward movement of 1958, which led to the worst famine in human history that killed an estimated 30 million people.

China’s process of collectivization should be the example that Mpofu and the EFF leadership study. If they want more evidence of how collectivization collapses an economy, they need look no further than Tanzania’s Ujamaa and Operation Vijiji, a much understudied but enlightening experience. Or ask our Zimbabwean neighbours about their land reform programme. As Tawanda Chingozha, a PhD student in the Department of Economics at Stellenbosch University, shows using sophisticated satellite imaging technology, Zimbabwe’s land reform programme caused a significant reduction in both the quantity and quality of crops harvested, and not only on formerly white commercial farms. The empirical evidence against state-owned land ownership is unequivocal.

Land is an emotive issue because the memories of dispossession, forced removals, and apartheid segregation remain vivid for many. Others are simply unhappy with the slow process of economic progress in the last decade, and see in land a source of safety and security.

But if land is expropriated and private property removed, the hope of economic progress will be nothing more than a mirage. We have smart people in South Africa. Surely we can find a way of redress that actually empowers people – and won’t replicate our disastrous past policies that subjugated the poorest to a life of poverty on the periphery of progress?

*An edited version of this article originally appeared in the 26 April edition of finweek.

The stories we do not tell

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Abel2018b

One of my favourite scenes in Love, Actually is right at the beginning of the movie. The setting is an airport arrivals terminal. As travelers arrive through the gates, they are welcomed by family and friends, smiling, laughing, hugging and kissing. Whenever I have to pick someone up at the international terminal, I do my best to arrive early, and to witness the joy of family and friend reunions.

I would contest that there is another setting where you’re guaranteed to be uplifted. Graduation ceremonies. I was fortunate to attend one of these at the end of March where hundreds of students received their degrees, with thousands of friends and family watching on. Each applause and ululation tells a story, stories often coupled with hardship, sacrifice and perseverance but also with hope, faith and, ultimately, success. There are few things better to see than a father or mother, proud and captivated as their son or daughter walks across the stage, holding back the tears.

Several of my own Economics students graduated too, each with their own stories. Thokozire Gausi graduated with an Honours degree. She is from Malawi and part of a network of students that self-finance their studies in South Africa, often with very little institutional support. Masters-degree graduate Omphile Ramela, who grew up in Soweto, wrote his dissertation while playing professional cricket for the Cape Cobras and, now, the Highveld Lions, and while balancing the demands of a young family. Abel Gwaindepi received his PhD in Economics. He grew up in Zimbabwe, where his father worked in the sugarcane plantations of Anglo-American. Abel has 16 siblings, many of whom he had to support with his meagre scholarships through an undergrad at Fort Hare, a postgraduate at Rhodes and, ultimately, a PhD at Stellenbosch. It is difficult to imagine what that moment of graduation must have felt like for Abel and the Gwaindepi family.

At the same ceremony, both Patrice Motsepe and Jannie Mouton received honorary doctorates, and had the chance to say a few short words. Motsepe noted South Africa’s amazing people, and our duty to ensure that each has the opportunity to live a life of dignity and prosperity. We underestimate our own abilities, Motsepe said, to make a success of South Africa. Mouton highlighted the wealth of opportunities in the country. Focus, he said, on the opportunities instead of being an expert on the problems. ‘Build a business, employ people, pay taxes – contribute.’

Negativity pervades our society, and can be incredibly debilitating. A few minutes on Twitter and you’re bound to find discussions that turn into slurs and slanders which will only end in ignorance and intolerance. But – and this I repeat to myself and my students frequently – Twitter is not the real world. Despite all the negativity that surrounds us, there is one undeniable truth: there has never been a better time to be human than in 2018.

The story we do not tell often enough – and one that still surprises each new cohort of students I teach – is that life is getting better. Yes, we have tremendous challenges in South Africa, in Africa and globally, but we are making good progress to tackling these head-on. Six of the ten fastest growing economies in 2018 will be in Africa. But it is not only incomes that are improving. Steven Pinker, in the first few chapters of his new book, Enlightenment Now, provides a wonderful summary of the trends in health, happiness, and living standards, as well as inequality, the environment, safety and democracy. In each case, the evidence suggests that we live in a much better world than our parents and grandparents.

This good story did not just happen for no reason. It is humankind’s ability to use the resources of nature and transform them into food, clothing and shelter, through ever-increasing understanding of science, our complex technologies and sophisticated institutions, that have allowed us to build a more prosperous world. I really like the way Pinker explains this:

Poverty needs no explanation. In a world governed by entropy and evolution, it is the default state of humankind. Matter does not arrange itself into shelter or clothing, and living things do everything they can to avoid becoming our food. As Adam Smith pointed out, what needs to be explained is wealth. Yet even today, when few people believe that accidents or diseases have perpetrators, discussions of poverty consist mostly of arguments about whom to blame for it.

That our world is getting better should not mean that we can get complacent. As we’ve seen in several countries around the world, places like Syria, Venezuela and Zimbabwe, when things fall apart, living standards quickly revert back to poverty and chaos. As long as we understand that investment in better knowledge about how the world works lies at the heart of our story – in other words, investing in innovation, science and technology – such an outcome is unlikely for South Africa. The worrying thing about our recent budget is that the allocation towards this category will grow at less than the inflation rate. Our politicians seem to not understand that our wealth is dependent not on connections, mineral resources or land. Instead, it is the result of innovation-led improvements in productivity that explains the huge progress of the last two centuries.

Motsepe and Mouton are both correct: we have amazing people and amazing opportunities. But we will only be able to tell a good story if we invest in those amazing people – like Thoko, Omphile and Abel – to use their knowledge and skills to take advantage of those opportunities.

*An edited version of this article originally appeared in the 12 April edition of finweek.

A moment to remake South Africa

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Cyril

At the dawn of independence, it fell on the first generation of African leaders to choose a new economic paradigm to deliver economic freedom to their people. In the Cold War between capitalism and communism, these African leaders almost unilaterally preferred a third option – ‘African socialism’ – a potpourri of policies built on the ethic of egalitarianism grounded in African history and culture.

At the second annual LEAP Lecture at Stellenbosch University in October 2017, Emmanuel Akyeampong, professor of African history at Harvard University, returned to the topic of ‘African socialism’ following independence, and its consequences for the continent. In countries as diverse as Ghana, Tanzania, Senegal and Guinea, he notes, the new policies were, ultimately, attempts to industrialise, to break away from the agriculture-based systems of the colonial economies.

In Kwame Nkrumah’s Ghana, for example, plans were drawn up for massive infrastructure investments. Sadly, many of these projects never got off the ground, or were only finished much later. In one project, for example, Nkrumah convinced the Russians to build a railway from Kumasi to Ouagadougou, the capital of Burkino Faso, but the railway was never completed.

The most extreme version of ‘African socialism’ was Julius Nyerere’s umajaa (villagization) campaign in Tanzania in 1967. This essentially meant the collectivization of all forms of productive capacity, notably in agriculture; Tanzanians, Nyerere believed, must learn to free themselves from dependence on European powers by becoming self-reliant.

Nyerere’s bold vision, and those of his contemporaries, failed miserably. Says Akyeampong: “The 1980s put paid to the concept and the vision, as steep economic decline resulted in what has been called Africa’s ‘lost decade’; the most notable architect of African socialism, Nyerere, conceded that his attempt at ujamaa had failed and stepped down from power in 1985; and the collapse of the Soviet Union in 1989 marked the triumph and ascendancy of capitalism.”

But Akyeampong is less interested in the reasons for their failures than in the boldness of their visions.  “It is the vision of bold and broad transformative change that I find admirable and worthy of emulation, and the desire to lift entire populations out of poverty and give them a decent life.” This optimism and boldness was not limited to the African leaders themselves; even the World Bank, soon after independence, remarked: ‘For most of Africa, the economic future before the end of the century can be bright’.

As I listened to Cyril Ramaphosa deliver his first State of the Nation address, I was reminded of that special moment in time when monumental change seemed possible. The general mood seems to have lifted after Jacob Zuma’s departure. Is this another moment when the trajectory of history seems to shift gear?

We should, of course, learn from history. Utopian visions of the future can easily become a justification for social engineering. While a powerful state can quickly transform society, it can do so at the cost of freedom. This is not the route I have in mind. Instead, this opportune moment can be used to redefine the social contract, to implement a nuanced set of social democratic policies with two explicit aims: economic security and economic freedom. In short, we want to live in a just and prosperous society.

How do we achieve that? Security requires that people have a basic standard of living. One policy proposal that has attracted a lot of interest is the basic income grant, a small monthly grant (of say R752, the lower-bound poverty line) to every South Africa, regardless of income. This would replace the child support grant. Every person with an ID document will be required to open a bank account (perhaps with a new state deposit bank), which will be linked to their SARS account. To partially fund this, VAT will increase. A tax on consumption means we incentivise savings and investment, the heart of creating economic prosperity.

There are many such policy options. State ownership of some assets, like aeroplanes and television stations, make little sense. These can be sold to pay off national debt and lower personal income taxes. Government can also save by reducing the number and size of departments and keeping the increases in the public wage bill to less than inflation.

As South African cities have some of the longest transit times in the world, infrastructure investment in urban areas – notably in public transport and housing – needs urgent attention. Water and electricity can benefit from innovations like desalination and solar panels. Broadband access can be expanded through incentive programmes.

A prosperous society requires an educated populace and work for them. Investing in early childhood development is key to eradicate large discrepancies that already exist when kids arrive at school. Incorporating the private sector in secondary and tertiary education, perhaps through a voucher system, is one way to not only improve the quantity of seats in class, but also provide opportunities for entrepreneurs at the local level. We should also welcome immigrants with skills with open arms; they not only bring much-needed expertise, but they often build new businesses that create jobs and improve living standards.

Cyril Ramaphosa has a window of opportunity in the first few months of his tenure. He can dare to be bold, and should do so. Says Akyeampong: “We need the bold and transformative vision of the likes of Nyerere and Nkrumah to ensure that come 2050 we do not find ourselves in the same predicament as on the eve of independence, when our new leaders, coming out of decades of repressive colonial economic policies, were faced with what appeared to be insurmountable challenges.” What will economic historians, fifty years from now, say about Ramaphosa’s moment to remake South Africa?

*An edited version of this article originally first appeared in the 15 March edition of finweek

Patience is not only a virtue

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CologneCathedral

Cologne Cathedral. Painting by Josef Langl

Patience is not only a virtue. It might also be the root of economic prosperity.

On 15 August 1248, the Archbishop of Cologne laid the foundation stone of a cathedral that would take 632 years to complete. One of the remarkable things about the cathedral, apart from the mesmerizing Gothic architecture of its twin spires that stand 157m tall, is that it was largely funded by civil society. How is it possible, one wonders, that a community can fund the construction of a building that they, nor their children, nor even their children’s children, would never see completed?

Patience is a virtue, says a fifth-century poem, but economists are increasingly confident that is a key building block of economic prosperity too. Two concepts are of relevance. The first is to what degree do you consider the future in your decision-making – your time preference. The second concept is the period of time that is relevant for you current decision-making – your time horizon. Patient people tend to have a high time preference and a long time horizon. And as more and more experimental evidence now show, so do successful people.

The study of patience was made famous by the Stanford marshmallow experiment. In the late 1960s, Walter Mischel offered children, in a controlled experimental environment, a choice between a small reward like a marshmallow immediately or a larger award (two marshmallows) if they waited 15 minutes. Some children immediately grabbed the marshmallow and swallowed it down. Others waited a while, and then had a bite. But several waited diligently until the fifteen minutes had passed for their second marshmallow. To their surprise, the researchers found in follow-up studies that children who were able to wait for the higher pay-off were also more likely to have better school outcomes, BMI and other life measures.

The question, of course, is whether patience is the result of genetic inheritance or environmental influence. In a 2007 Journal of Public Economics paper, Eric Bettinger and Robert Slonim found that parent’s patience are uncorrelated with their children’s patience, questioning the belief that it’s only nature at work. They also found, however, that mathematics scores and whether a child has attended a private school was also uncorrelated, suggesting that nurture’s influence is also limited.

The one result that most studies find is that girls tend to be more patient than boys. This has important implications for motiving children. Girls are more likely, for example, to respond to student performance incentives. A study that paid Israeli students conditional on their performance on university exams had a greater effect on girls. Knowing what determines patience can go a long way in helping kids perform better at school, and achieve better life outcomes.

While most research focus on individual-level outcomes, the question is whether patience also matters at the societal level? Global surveys now ask questions that allow us to deduce some measure of time preference or time horizon. The results suggest that while these generally correlate positively with GDP per capita, it is not always the case. Citizens of Botswana and Kenya, for example, are more patient, on average, than those of Japan and France. (South Africa, by the way, is very close to the world average.)

Patience does not only vary across space, but also across time. At a conference at Stellenbosch University during November last year, Jan Luiten van Zanden and Gerarda Westerhuis of Utrecht University presented a paper on how time preference has changed across the last few centuries. They argue that, during the Middle Ages in Europe, the ‘future’ became more important, in other words, people’s time preference increased. The consequence was that saving and investment increase, and that people started to accumulate capital with long time horizons. The construction of the Cologne Cathedral is one example of this. Why that is remains somewhat of a mystery, but there are clues in the changing (religious) beliefs and institutions of the time. Consider, for example, the emergence of corporations, initially religious institutions and guilds but later companies, notably the limited liability company, which would transcend the life of shareholders. The rise of big business would follow in the late nineteenth and early twentieth century, where salaried managers now focused on long-term value creation.

Van Zanden and Westerhuis argue, however, that this trend has reversed in the last few decades. Since the 1970s, ‘short-terminism’ is on the increase, reflected in the focus of short-term value for shareholders (and performance-related pay for managers). One of the factors that might explain this is the shift from modernism to post-modernism. Modernists believed that the future could be changed, for example, through strategic planning in a business environment or (in the case of the Soviet Union) even an economy. The rise of post-modernist beliefs – the belief that reality cannot be known and the future cannot be predicted or changed – has shifted our long-term gaze to the present. Instant gratification, exacerbated by social media, is now the order of the day.

There are valid reasons to question these preliminary findings. Companies like Alphabet (Google’s parent company), Apple and Facebook seem to be able to invest in new technologies where the pay-offs are only likely to be in the medium- to long-run. But it is difficult to imagine that we invest in something that we won’t see the end of: perhaps that is why tackling climate change is so difficult!

Time preference and time horizon remains vastly understudied topics. We know that time preference (roughly proxied for by people’s patience) matters at the individual level; more patient people are more ‘successful’ later in life. What we don’t know is why they are patient, and how to improve our impatient natures.

Similarly, we know that some societies, at certain times in history, had a longer time horizon. Those societies were then able to invest and accumulate, improving the prosperity of the generations to follow.

Consider this: children born in 2018 are likely to live to the year 2100. Are our political and business leaders factoring the year 2100 into their long-term strategies? Unlikely. Perhaps we need a bit more of the long-term horizon the inhabitants of Cologne had when they decided to build a cathedral 632 years before it was completed.

>>> An edited version of this article originally appeared in the 14 December 2017 edition of finweek.

How religion shapes an economy

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Harare billboard

Source: Her Zimbabwe

Drive around Harare and you will notice something very peculiar. Billboards across the city do not advertise the latest car model or data bundle or washing powder. In Harare, by contrast, almost every billboard advertises church services. They all follow a precise formula: next to the photo of the charismatic spiritual leader is the date of the event and a promise, best summarised in this example: ‘Freedom from poverty/freedom from disease/freedom from barrenness.’ The implication: join us to improve your material welfare.

On my visit last year, I spoke to several university students who attend these services. One told the incredible story of a pastor who arrived one Sunday morning at his church with a truck full of bricks. These were ‘blessed bricks’, he proclaimed; one of them built into your house would, according to the good pastor, alleviate you from material want. According to the student, he sold each of the 10 000 bricks on the truck for $10. The last few ones even fetched as high as $50. Do the math. It would seem that at least one person’s material welfare did improve significantly.

This and similar stories by the students reminded me of something that had happened five centuries ago. By the 16th century, the abuse of indulgences – a payment to reduce the punishment for sins – had become a serious problem that the Catholic Church in Europe recognized but was unable to restrain effectively. A young German professor of theology, Martin Luther, rejected the belief that freedom from God’s punishment for sin could be purchased with money, and penned his Ninety-Five Theses to the door of All Saints’ Church in Wittenberg on 31 October 1517, a date now considered the start of the Protestant Reformation.

Luther’s movement, and the ones it would kindle elsewhere, heralded an era of prosperity across Northern Europe. The Catholic city-states of Southern Europe – think Venice – were some of the wealthiest in 14th and 15th century Europe. But by the 17th and 18th centuries, these had been supplanted by cities in the Protestant North, notably in Holland and then England.

Many scholars have linked the Protestant Reformation – at least indirectly – to this reversal of fortunes. German sociologist Max Weber, for example, argued that the Reformation encouraged the ethics of hard work, thrift and efficiency, and that this resulted in a change in savings behaviour by the followers of the new religion, with consequences for investment and growth. Others highlighted the impact the new religion had on literacy and education, as it emphasized adherent’s ability to read and write, and that this channel of causation was what propelled the North forward. But proving these theories empirically was difficult.

A new NBER Working Paper by Davide Cantoni, Jeremiah Dittmar and Noam Yuchtman posit another channel and finds empirical support for it. The authors assemble a new, highly disaggregated dataset on the degrees received by German university graduates for more than 2000 German towns in the period following the Reformation. They then split the sample in two: those students that qualify with religious degrees, and those with secular degrees. The authors are also able to identify the occupations of these German graduates, and split the occupational sample in two: those who find work as monks and priests, and those who find work in administration and the private sector.

The results are remarkable. In those areas that experienced the Reformation, two things happen. First, the Protestant university students increasingly studied secular subjects, especially degrees that prepared students for public sector jobs, rather than church sector-specific theology. Graduates of Protestant universities, in contrast to universities that remained Catholic, also increasingly took secular, especially administrative, occupations.

Second, the Reformation affected the sectoral composition of fixed investment. In Protestant regions, new construction shifted from religious toward secular purposes, especially the building of palaces and administrative buildings, which reflected the increased wealth and power of secular lords.

In short, the Protestant Reformation changed the preference for physical and human capital investment from unproductive to more productive activities. Importantly, this reallocation was not caused by preexisting economic or cultural differences. The interpretation is therefore that it was the Reformation, and not some other underlying factor, that resulted in this shift to the secularization of graduate degrees and the workforce.

This had profound long-run consequences. With more students studying secular subjects and more of them finding jobs in the public or private sector (instead of the religious sector), a process of cultural and intellectual change was set in motion that culminated, ultimately, in the enlightenment, the scientific revolution and modern economic growth.

Which brings us back to the pastors of Zimbabwe. In a country devoid of private sector opportunities, religious entrepreneurship is a popular calling for charismatic individuals. But if the brightest young minds choose professions in the religious sector – and the little surplus capital that there is, are used to fund mega-church buildings (as you will find when you drive around Harare) – then Zimbabwe is experiencing exactly the opposite of the Protestant Reformation. Selling ‘blessed bricks’ is the modern equivalent of the sixteenth-century indulgences sold for salvation.

The result? Productive investments in human and physical capital becomes investments in unproductive activities. The circle of poverty is strengthened, exploited by religious entrepreneurs who themselves profit from others’ hardship. Are we returning to the Middle Ages, or will our generation’s Martin Luther rise up?

*An edited version of this first appeared in Finweek magazine on 16 November 2017.

Written by Johan Fourie

January 4, 2018 at 10:57