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Five young economists to listen to, and how their ideas might shape our future

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Es liegt an uns, wohin der weg fhrt !

Ideas, and the people that give birth to them, shape our future. The British economist John Maynard Keynes articulated it best: ‘The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.’ So, on this final day of 2018, let us look at five young economists, and their ideas at the frontiers of the field, that will shape our lives, consciously or otherwise, in 2019 and beyond.

One of the most vexing questions social scientists grapple with is how to build a society where everyone has an equal opportunity of reaching the top. Inequality is not in itself unfair: we all know that rare skills, like those possessed by Messi or Musk, should be rewarded more than the rest of us. But what we deem to be unfair is when someone with those skills or abilities cannot, for whatever reason, realise their potential.

In the US, as in South Africa, there are too many children without equal opportunities for success. How to give these children better chances of succeeding is, in short, the research programme of Raj Chetty, professor of Economics at Harvard University and Director of Opportunity Insights, a think tank that aims ‘to develop scalable policy solutions that will empower families throughout the United States to rise out of poverty and achieve better life outcomes’. Somewhat of a child prodigy, receiving his PhD from Harvard in 2003 at the age of only 23, his most recent project, together with several other colleagues, uses ‘big data’ to map the neighbourhoods in America that offer children the best chances of climbing the income ladder. Their freely available interactive mapping tool show how outcomes like poverty and incarceration can be traced back to the neighbourhoods in which children grew up. More importantly, it also helps to develop customised solutions that will improve the outcomes of children in those ‘bad’ neighbourhoods.

One of Chetty’s younger colleagues is Melissa Dell. Graduating with a PhD from MIT in 2012, Dell spent time at Harvard and Stanford before joining Harvard in 2018 as a tenured professor. Dell is fascinated by the factors that underpin long-run development. For her PhD, she investigated the Mita – a system of forced labour several hundred years ago – to assess its persistent effects on levels of Peruvian income today. She has since worked on the persistent differences between north and south Vietnam, the long-run effects of the Mexican revolution and the consequences of the Dutch cultivation system in colonial Java.

What makes Dell’s career even more impressive is that she has a severe visual impairment. And yet, this has not prevented her from, aside from asking fascinating research questions, starting a foundation in Peru or running ultra-long-distance races, including the Comrades!

Dell is one of three women on my list, a comforting sign in a field that is still mostly the domain of men. Claudia Olivetti, Professor of Economics at Boston College (with a PhD in 2001 from the University of Pennsylvania), is one of several scholars who wants to understand which factors prevent women from entering the labour market, and why they move up at the corporate ladder a slower pace. Olivetti’s latest research shows that the best thing the government can do is to spend more on early childhood care and education as this has the largest improvement in women’s employment rates, salaries and even fertility, decreasing the gender pay gap. The benefits of more parental leave and flexible schedules, she finds, are smaller. Why is this? Because access to good early childhood caretakers that makes it easier for young mothers to work allows women to return to the labour market quicker after childbirth, boosting their life-time earnings. In short: the policies that matter most to women are those that help mothers work – not those that help them take breaks from work.

This type of research aims to identify which policies are best in improving the outcomes we hope for. Another area where such policies are desperately needed, in South Africa and elsewhere, is the health sector. Marcella Alsan, who is an Associate Professor of Medicine at the Stanford School of Medicine with a PhD in Economics from Harvard in 2012, plans to do exactly that: use research to identify which health policies improves health outcomes most. One key concern in health, for example, is how to get clients to use their prescribed medicine. Alsan, in a new study, provides one tantalizing clue: pair the patients with doctors that share a similar ethnic background. She and her co-author runs an experiment where several hundred black patients are randomly allocated white and black physicians. They find that those patients that consulted a black physician are more likely to ask for preventative services, particularly if those services are invasive. They argue that this is because of better communication and trust. The implications are profound: they argue that more black doctors could reduce cardiovascular mortality by 16 deaths per 100 000 per year, leading to a 19% reduction in the black-white male gap in cardiovascular mortality.

It is not only human health that is the subject of economic research. The health of the planet is under threat, with climate change affecting our sustainable future. Solomon Hsiang, Professor of Public Policy at UC Berkeley and Principal Investigator of the Global Policy Laboratory (with a PhD in Sustainable Development from Columbia University in 2011) is one of the leading thinkers on the topic. In a recent Science letter, he weighed in on the ivory-ban discussion. But it is the interactions between the economy and the ecology that is at the heart of his research. In a 2018 Journal of Economic Perspectives overview paper, Hsiang urges his fellow economists to take the lead on climate change research: All climate change forecasts, he says, rely heavily and directly on economic forecasts for the world. ‘On timescales of a half-century or longer, the largest source of uncertainty in climate science is not physics, but economics.’ The lesson? It is not only us, but our children and grandchildren too, that are the slaves of some defunct economist!

*An edited version of this article originally appeared in the 6 December edition of finweek.

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Books for the (South African) summer (2018 edition)

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It’s that time of year again: sun, sand, sea… and softcovers! Here are the top seven books I read this year, and a list of what I hope to read this summer.

BlackWashington Black, by Esi Edugyan

A beautiful and brilliant book about Wash, an early nineteenth-century Caribbean boy who escapes the brutal life of a slave (by building an air balloon), and then journeys the world from the Arctic to London to Morocco on a (surprising) scientific quest.

Silence of the Grave, by Arnaldur Indriðason

Whenever I visit a new country, I try to read at least one local crime novel. On a 12 day visit to Iceland in August, I read through four of Indriðason’s superb crime novels. Silence of the Grave is his most celebrated, and my favourite.

The Book Smugglers of Timbuktu, by Charlie EnglishFishing

The past and the present of West Africa are interwoven in the stories of twenty-first century book smugglers and eighteenth-century European discoverers.

Fishing: How the Sea Fed Civilization, by Brian Fagan

It was not only the domestication of grains that allowed us to conquer the globe. Fishing fed human settlement, rising social complexity, the development of cities, and ultimately the modern world. To be enjoyed with fish and chips…

MarriageMarriage, a History: How Love Conquered Marriage, by Stephanie Coontz

Already published in 2006, this accessible history of marriage is both remarkable in its breadth and invaluable as a conversation starter. You may have married for love, but it is highly likely that your grandparents (and certainly their grandparents) did not.

Radical Markets: Uprooting Capitalism and Democracy for a Just Society, by Eric Posner and Glen Weyl

An engaging and provocative view on how markets can reshape society. Particularly relevant for South Africa.

The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century, by Walter Scheidel

Inequality is deepening, and people everywhere are demanding policies that purport to reduce it. Don’t be overly optimistic about these attempts, says Scheidel. A sober view on a topic that will be with us for a long time to come.

On my (non-fiction) reading list this summer:

PlaatjeSol Plaatje, by Brian Willan

Europe in Flames: The Crisis of the Thirty Years War, by John Matusiak

Go Tell the Crocodiles: Chasing Prosperity in Mozambique, by Rowan Moore Gerety

Capitalism in America: A History, by Alan Greenspan, Adrian Wooldridge

Nabokov’s Favourite Word Is Mauve: The literary quirks and oddities of our most-loved authors, by Ben Blatt

Identity: Contemporary Identity Politics and the Struggle for Recognition, by Francis Fukuyama

Unai Emery: El Maestro: The Authorised Biography, by Romain Molina

 

Written by Johan Fourie

December 17, 2018 at 08:00

Ramaphosa’s number one challenge: getting rid of patronage politics

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Ramaphosa Investment

President Ramaphosa is on an investment offensive. Because the South African economy is stalling, he is desperate to attract investors who will create jobs and boost incomes. One way to do that, he believes, is by hosting summits; a Jobs Summit in early October and an Investment Summit a few weeks later would just be the thing to invigorate investor appetite for South Africa.

It was a hard sell. Not only is global economic growth on the wane, but South African internal policies and politics are not creating the stable, low-risk environment that investors crave when the returns are unlikely to be double digits. Whatever the merits of land redistribution, calls for what seems to be an unnecessary constitutional change to allow expropriation create uncertainty. An inability to reduce crime, the one issue that affects all South Africans, makes our country less attractive as an investment destination; The Economist’s recent article on Cape Town’s high murder rate, for example, will undoubtedly hurt tourism. And though Tito Mboweni’s appointment seems to have satisfied markets, it is never a good sign to have a revolving door for the second most important office in government.

All of these ills are rooted in our public sector incompetence – the result of a bureaucracy built on patronage rather than the efficient provision of public services – that makes doing business an expensive and frustrating exercise.

This is the one thing Ramaphosa’s government must begin to address if we are to create the right conditions for growth. As Guo Xu of the Haas School of Business at the University of California, Berkeley notes in an upcoming American Economic Review paper: ‘State capacity is fundamental to development and growth. Bureaucrats are a key element of state capacity: they embody the human capital of the state and are responsible for the delivery of public services and the implementation of policies. Understanding how to promote and incentivize bureaucrats is central to improving organizational performance.’

For much of human history, bureaucrats were appointed through patronage. The way you moved up in society was mostly the result of who you knew rather than what you knew. Even in the United States today, more than 8000 federal positions are still allocated ‘at the pleasure of the president’ (if, of course, he is competent enough to do so). It is also not only in government that you find patronage; we often see family ties and personal connections play an important role in new board appointments.

Theoretically at least, patronage can be a good thing. Loyalty to the superior may incentivise subordinates to not shirk on their work. But patronage can also be bad for organisational performance, as favouritism may disincentivise subordinates to work at all because they have the protection of their superior.

For long, though, it was difficult to prove which of these two outcomes are most likely to occur. Xu, however, has found a novel approach to do just that. He transcribed thousands of personnel and public finance records of the British Colonial Office during the late nineteenth and early twentieth centuries. He then measured how closely governors in the colonies are connected to the Secretary of State, the official in England who appointed them. He shows that governors connected to the Secretary – as family members, members of the same party, or even as school buddies – enjoy higher salaries through the promotion to higher paid and larger colonies. However, this is only true for the period before the Warren Fisher Reform, a policy that changed the appointment process from patronage to meritocratic.

It is not only that these appointments (before the Reform) earn higher salaries. They also perform worse. Xu finds that a colony’s public revenue performance declines in years when a governor with close ties to the Secretary of State rules. ‘This is consistent’, says Xu, ‘with the interpretation that patronage exerts a negative effect on the performance of socially connected governors. Consistent with the previous result, the fiscal performance gap disappears after the removal of patronage.’ The lesson? Patronage is bad for performance.

A new NBER study sheds some light about why this might be. The three economists use very detailed information, including firm-level balance sheet data, social security data, patent data and detailed data on local elections in Italy (between 1993 and 2014), to show that firms that are more connected to politicians are likely to be less productive. They identify a leadership paradox: ‘When compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity’. It seems to work like this: when a firm has strong political connections, they use these connections, legally or illegally, to get preferential contracts, tariffs or other regulations that allows them to beat the competition. When a firm has few or no political connections, they are forced to innovate to be better than the competition. It is ultimately the more innovative firms that are more productive and dynamic.

Patronage, the evidence shows, is a terrible system. It has also become endemic in the South African state. Without attempts at addressing a patronage system that pervades all levels of government, no Investment Summit will push South Africa’s economic growth to where it needs to be.

*An edited version of this article originally appeared in the 8 November edition of finweek.

Written by Johan Fourie

December 10, 2018 at 08:00

The good, bad and ugly of state failure

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parliament

Even Adam Smith, the father of economics, believed that a strong state is a necessary if not sufficient precondition for a growing economy. As Smith wrote, the state must ‘administer justice, enforce private property rights, and defend the nation against aggression’. But many stop reading Smith there, believing him to be a proponent of limited government. This is not entirely fair. As Jacob Viner already pointed out in 1927, the Wealth of Nations also include references to the state’s obligation to regulate financial markets, educate youth, to protect temporary monopolies on patents, and ‘erecting and maintaining certain public works and public institutions intended to facilitate commerce’. It is therefore just not true, concludes Viner, that Smith was a doctrinaire advocate of laissez-faire.

But what happens when the state does not fulfill its duty? What happens when – despite the intention to do all of these things – the capacity of the state to deliver these services is weak or non-existent?

To some extent, this is exactly what has happened in South Africa. Our education system is a mess. Hundreds-of-thousands of South African kids attend a school each day where the teachers are unskilled, demotivated and often absent, where the facilities are dilapidated and textbooks missing, where school principles battle a limited budget, poor information management, almost no parental support and work in unsafe conditions.

Our public health system, as one June report coined it, ‘teeters on the verge of collapse’. It is estimated that there are 37 000 vacant positions, despite the fact that medical professionals struggle to find employment.

Crime is a major issue our police force cannot seem to bring under control. Prison cells are often filled beyond capacity. We have become used to power outages the last decade, and increasingly we find our taps dry. A lack of government service delivery is one of the major reasons for protests across the country.

What to do? One option is to sit back and wait that the government fixes itself. True, the democratic process allows each of us to vote every five years for a party we hope will represent our interests better. If the incumbent party does not deliver the services we expect to see, we should choose new leadership. But it is a slow and fuzzy process. Humans are not, in contrast to what economists believed for a long time, perfectly rational beings, making decisions that optimise their own self-interest. We are emotional. We trust charismatic politicians, especially the ones that lie often. We are waiting for Godot if we rely only on the political process.

An alternative is to vote with our feet and move to greener pastures. This has happened internally in South Africa already, as thousands of migrants move from the former homelands to the metropoles of Johannesburg, Pretoria and Cape Town. Urbanisation is a phenomenon that will only speed up as the disparity between the urban opportunities and rural doldrum grows.

It’s not only local migration anymore. More and more South Africans, as The Economist alluded to last month, are emigrating. But for most of us without a second passport or a thick wallet, that option is not even on the table.

So, what are our options? One alternative is the market, flaws and all. We see this happening already. Private firms like Curro are quickly filling the void left by the failing school system to service middle and higher income clients. Those who can afford it use excellent private medical facilities offered by the likes of Medi-Clinic, a private firm which has successfully copied its model to countries as diverse as Switzerland and the United Arab Emirates. Many of South Africa’s prisons are privately run. The number of active private security officers in South Africa is nearly double the size of the South African Police Service and South African National Defense Force combined, a R45 billion industry.

The good news is that improved technologies will see more of this happen. For long, the state could be the only provider of most types of infrastructure. This is because such infrastructure (also known as public goods) have two properties that make its private provision difficult: it is non-rival and non-excludable. But better technology makes older forms of infrastructure redundant. Natural monopolies – like electricity generation – has also given way to competition from alternative sources of energy. Now we can each use solar panels on our private homes instead of having to rely on a national source of electricity generation. This allows the private sector to compete in industries that was formerly only the domain of the state.

That is great. It creates opportunities for bright-eyed entrepreneurs to service clients unsatisfied by government services. But it does not, as many fans of the free market would argue, mean that government should simply get out of the way. No, because the market – especially in industries which are prone to the formation of oligopolies and monopolies (in other words, low levels of competition) – can also fail. Here, failure would mean higher prices and poor quality in the name of efficiency. Think of prisons: they are not just places where sentenced individuals’ liberties are removed. They are places where remediation can (should!) occur – but such practices are costly, and unlikely to be encouraged in a private prison that wants to maximise profit.

A thriving economy requires a creative and competitive private sector, one where new technologies can help entrepreneurs to enter industries where the state used to play a dominant role. But government must come to the party too, ensuring, through regulation, a competitive and fair business environment to prevent market failure.

A small but highly competent government is the ideal. South Africa, at the moment, has exactly the opposite.

*An edited version of this article originally appeared in the 28 October edition of finweek.

Written by Johan Fourie

November 27, 2018 at 09:00

An ode to optimism

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Stef

When I began my postgraduate studies – in 2004 as an Honours in Economics – I had to choose a supervisor for my mini-dissertation. I wanted to work on infrastructure investments, and approached prof Stef Coetzee, then affiliated to the Stellenbosch Business School, because of his expertise in development economics and his proximity to the world of business. He agreed – and I eventually produced a mini-dissertation twice the length of what it should have been.

Prof Coetzee was a wonderful guide for a naive but enthusiastic student. He certainly had the academic expertise to dismiss most of my ideas; he had completed a Masters degree at Stellenbosch University’s Economics department in 1973, the department where I now work, and a PhD at the University of the Free State in 1980. In the above picture, taken on 2 February 2018, Coetzee (on the left) appears with three former Stellenbosch classmates, prof Eon Smit, Hannes le Roux and prof Philip Mohr, men who have all had a profound impact on the South African academic landscape.

Yet prof Coetzee were never dismissive of my attempts to think boldly about the infrastructure that was required to put South Africa on a higher growth trajectory. Perhaps that is because he had experience of leading big teams and organisations, and thinking outside the box. He was a former rector of the University of the Free State, director of the Centre for Policy Analysis at the Development Bank of Southern Africa, and would later be CEO of the Afrikaanse Handelsinstituut.

But I’d like to think that it was also his personality to be open to new ideas, and optimistic about putting them into practice. Because of social media like Facebook, we could reconnect the last few years. Even when things were going badly with the economy, he would be optimistic that things would turn around.

He expressed these views in a chapter he wrote for a book I edited on what students should know when they go to university. Written a decade ago, but still relevant today, here is a short summary:

What do the above challenges and opportunities mean for us as South Africans? Probably the most important is that it leaves the younger generation with a future full of opportunities! The opportunities may be different from in the past, but it will definitely be exciting. The general expectation is that the economic growth of developing economies will in the near future be higher than that of developing economies and will also provide bigger investment opportunities.

Secondly it is also clear that exceptional leadership will be required in order to position South Africa as one of the foremost developing economies. Insight on South Africa within the world and the African context will be necessary to develop the correct policies and strategies.

Thirdly it appears that the opportunities will stretch across a wide spectrum and be multi-dimensional and multi-disciplinary. We are going to need scientists, academics, teachers, business people, farmers, doctors, nurses, and engineers to make South Africa a competitive country, but also one that can handle some the most important problems.

Fourthly new skills will be required in a fast-changing world: better flexibility, the ability to work in multi-cultural contexts, better language skills, excellent technological skills, innovation, creativity and the ability to work in teams on different continents, to name but a few.

Fifthly the future will place bigger demands on young people to achieve breakthroughs on political, economical, social, technological and environmental level. It will simultaneously provide exciting opportunities.

Prof Coetzee passed away on Saturday. Despite attempts to do so last year, we never had the chance to meet up again in person. His last few messages to me were, as always, optimistic, despite his illness and setbacks. He was optimistic about the South African economy, about my career, about the Springboks.

Now that I have my own students to supervise, I have a deeper appreciation of the role that supervisors can play in students’ lives. This, then, is a belated thank you to prof Stef Coetzee, my first supervisor who, unbeknownst to both of us, steered my own academic journey into a more optimistic future.

Written by Johan Fourie

October 29, 2018 at 08:00

Why are there so many single mothers?

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Family

Here is a statistic to get your head around: Of the 989 318 babies born last year in South Africa, 61.7% have no information about their father included on their birth certificate. We don’t precisely know why the women who register these babies do not record the father’s information, but it is highly likely that it is because the father would not want to be involved in the raising of the child. They are, in fact, single mothers. This conjecture seems to be supported by other evidence: the HSRC estimates that 60% of South African children have an absent father, and that 40% of mothers are single parents.

Explaining why these mothers are single is not easy. One argument is historical. Throughout the late nineteenth and twentieth centuries, young men would move to the mines, away from structured family life in the countryside. This migrant labour system, it is said, would explain the large number of single women. While plausible theoretically, this explanation neglects a key empirical reality: that the share of single mothers is on the increase. The migrant labour system, owing to the apartheid-era homeland system, was arguably most intense during the twentieth century. And yet this is also the period where the share of single mothers was much lower. The number of migrant workers fell after the dismantling of apartheid settlement policies and, since the 1990s, the decline of the mining industry. Yet it is exactly then that we see a significant rise in the share of single mothers.

If the migrant labour cannot explain the large numbers of single mothers, what else could? Dorrit Posel and Stephanie Rudwick, in a paper published in 2014 by the African Studies Association, show that the Zulu, in particular, have very low marriage rates, as low as 30%. Perhaps, you might argue, it is just that women prefer to be single – that an unmarried life is better than a married one. Well, the evidence does not support this theory. Using survey data, Posel and Rudwick find that this is not a preference: more than 80% of unmarried Zulu women report that they would like to get married (as do the men, incidentally). The reason they attribute to women remaining unmarried despite their wish to be married is lobola, or bride wealth: ‘Our qualitative data demonstrate that frequently the way ilobolo is practiced, and particularly the amount that is requested relative to men’s opportunities in the South African labour market, can contribute to delayed marriage and nonmarriage.’

Both the migrant labour and lobola systems are unique to southern Africa. But the share of single mothers has been rising almost everywhere. In fact, 62% of all births to non-college educated mothers in the United States in 2014 were to unmarried women, very similar to the South African figure. Something more universal seems to be behind these trends.

One possibility is that men’s poor economic conditions contribute to them delaying or eschewing marriage. This is the argument Posel and Rudwick put forward, but one that is also found for the United States, where non-college educated men’s relative incomes have declined over the last three years. A new paper, soon to be published in the Review of Economics and Statistics, tests whether it is, in fact, men’s poverty that prevents them from marrying. The two authors, Melissa Kearney and Riley Wilson, link the fracking of shale gas in the 2000s to marriage rates. The idea is that, if the hypothesis is true that men do not marry because of poor economic conditions, then a fracking boom, which would create more employment and lead to higher incomes, should result in larger numbers of men being willing and able to marry. Kearney and Wilson use a sophisticated statistical analysis to show that 1) there is no impact on higher incomes of non-college educated men on the likelihood of getting married, 2) there is a boost to fertility rates after their income improves, but this increase is similar for both married and unmarried men. They conclude: ‘We find no evidence from the fracking context to support the proposition that as the economic prospects of less educated men improve, couples are more likely to marry before having children.’ In short: it’s not poverty that prevents marriage.

So what is it then? One possibility is that it might be higher female incomes. Not only have women entered the labour market at historic levels since the 1960s, but social transfers to support children has also increased. Both sources of income would give women more agency (or bargaining power) within the household, and reduce the need to live with an income earning partner. While much evidence shows that giving women more household resources improves the outcomes for children, it may have the unintended consequences of absolving men from their child-rearing responsibilities. Thomas Sowell, a US libertarian economist, notes that in 1960, almost a hundred years after the end of slavery in the US, 22% of African Americans grew up in households with only one parent. ‘Thirty years later, after the liberal welfare state, that number had more than tripled. We can speculate as to how much of that 22% was due to slavery, but we know that that tripling was not due to the legacy of slavery. It was due to the legacy of a whole different set of policies.’

But it is also not that easy. The rise in single mothers, although it has increased in the last two decades, began before the child support grant was introduced in South Africa. Pensions may play a role, but it is unclear to what extent they alone can explain the rise in single motherhood.

Family structure is rapidly changing. More children are now growing up with one rather than two parents. Even if the causes remain fuzzy, one thing is certain: the consequences are likely to be profound.

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

Written by Johan Fourie

October 26, 2018 at 08:00