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Don’t bet against the historians

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PikettyWEHC

Every three years, economic historians from across the globe gather in one place to discuss the latest research in our field. And so it was again this year that, in early August, more than 1400 of these interdisciplinary scholars convened at MIT in Boston for the latest rendition of the World Economic History Congress (WEHC). It was hot and humid outside, but inside the conference and classrooms, the discussions were no less heated.

Normally a friendly and somewhat reserved crowd, it is as if the political developments of the last three years has forced economic historians out of their slumber. That classic history cartoon – an old man sitting in his rocking chair saying ‘Those who don’t study history are doomed to repeat it. Yet those who do study history are doomed to stand by helplessly while everyone else repeats it’ – seems more apt than ever. As always, there were papers on esoteric topics such as occupational mobility in early-twentieth century Greenland, wine glasses in China during the eighteenth century, or what pollen data can tell us about market integration in Ancient Greece. But it seemed to me, now at my fourth WEHC, that this year the research questions were more aimed at the big questions of the present: How does globalisation lead to populist pushback? Why are inequalities increasing in rich countries, and what can be done about it? How do entrepreneurs use (abuse) networks to become successful? History offers clues (but no quick-fix answers) to all these questions.

Two plenary sessions exemplified this. On the last day of the conference, Jane Humphries and Claudia Goldin debated the missing role of women in economic history. While Humphries, professor of Economic History at Oxford University, discussed the importance of women to the Industrial Revolution, Goldin, a professor of Economics at Harvard, discussed the more recent transition of women into the labour market. She showed, by using extensive data from Harvard Business School graduates, how the gender wage gap can to a large extent be explained by women’s preferences for flexible work. This, she argued, what can be done to close the gap further: women prospered in teams where their skills are substitutable. Instead of operating as a single physician, for example, female doctors were much more likely to stay in the labour market and work more hours if they worked as part of a team of medical experts.

But the big event of the congress was undoubtedly Thomas Piketty’s plenary session. Piketty, who is professor of Economics at the Parish School and known for his best-seller Capital in the 21st Century, has now shifted his inequality work to the political realm. He made a compelling case that the expansion of higher education has altered the traditional alliances in politics. Using three case studies – of France, England and the US – he showed that support from the intellectual elite – those with university degrees – has increasingly shifted to the left in all three countries over the last three centuries. For example, in 1948, less than 20% of all voters with a Masters degree voted for the US democratic candidate; in 2016, it was 70%. Why? Remember that the Democratic Party in the US (or the Labour Party in the UK) is more in favour of redistribution than the Republican Party (or the Conservative Party). For that reason, they tend to get most of their support from the poor (or, at least, those that stand to benefit from redistribution). But the poor is not uneducated anymore. In 1948, slightly more than 20% of voters had a tertiary degree, while in 2016, it was more than 50%. By definition, of course, if 50% of voters have a university degree, they cannot all be in the richest 10%. This means that there has become a disconnect between the educated and the rich. That is why, according to Piketty, new political positions become possible; he identifies four groups of almost equal size that have now emerged in his native France: internationalist-egalitarian (pro-migrant, pro-poor), internationalist-inegalitarian (pro-migrant, pro-rich), nativist-inegalitarian (anti-migrant, pro-rich), and nativist-egalitarian (anti-migrant, pro-poor). The success of Emmanuel Macron was that he could appeal to multiple of these groups.

‘Politics has never been a simple poor vs rich conflict’, says Piketty. ‘One needs to look at the multi-dimensional content of political cleavages.’ We also see this play out in the South African context. The ANC is currently a broad church – from the rural poor to the urban sophisticate. But how long can they maintain this delicate balance, when issues such as globalisation, migration and automation will have decidedly negative effects on one part of their electorate while benefiting another? And these clashes may not be along the fault lines of yesteryear. Capital and labour, poor and rich, educated and uneducated are now in flux. As Piketty says, the US might be returning to the 19th century political alignment, with globalists (high-income, high-education) on one side and nativists (low-income, low-education) on the other. Or it could go the route of the Democratic Party in the US, whose pro-slavery/segregationists introduced poor white policies which also benefited poor blacks. Or we could instead see the re-emergence of a globalist-egalitarian elite like we did in the aftermath of World War II, a system that resulted in the end of colonialism and a global Golden Age of growth.

The high levels of inequality in South Africa would make the continuation of a single, unified ANC seem unlikely in the medium to long run. Rapid globalisation, automation and increasing pressure on immigration are fissures that even a great leader will be unlikely to control. If history (and economic historians) have anything to add, it is that the future is unlikely to be just a continuation of the present.

**An edited version of this article originally appeared in the 30 August edition of finweek.

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Written by Johan Fourie

October 8, 2018 at 08:00

Why vegetarians are from Knysna and meat-eaters from the Karoo

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Boerewors2

Talking about factor endowments sounds like one of the most boring dinner conversation topics ever. The land/labour ratio of India, Europe or Africa does little to whet the appetite, and might actually be a polite way to signal that the evening is coming to an end. And yet, factor endowments explain far more about ourselves – from what we produce and trade, to how we marry and what we eat – than we would care to admit.

The ratio between a country’s endowment of land and labour – the land/labour ratio – is common to economic theory. One of the central theories of international trade, for example – the Heckscher Ohlin theory – uses factor endowments to explain what countries produce and trade. In its most succinct form, it says that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively. Basically, if South Africa has a lot of land relative to Bangladesh, then we should produce things that use land intensively (like cattle), and export this to Bangladesh, while Bangladesh should produce things that uses its most abundant factor – in this case labour – most intensively (like clothes), and export this to South Africa. Both countries would win from the trade. This is standard Econ 101 stuff.

But increasingly the land/labour ratio is used to not only explain a country’s comparative advantage in production, but also explain the social and cultural differences between places. How we marry is one example. Take the lobola, the bride price that is traditional to most marriages in southern and eastern Africa. Why do Africans have a lobola, while Indians have a dowry? One answer: factor endowments. See, Sub-Saharan Africa traditionally had a lot of land relative to people. A high land-to-labour ratio meant that people were immensely valued for their ability to perform labour. Women, given their reproductive ability, was therefore of great value, and powerful men would claim multiple wives to ensure not only a long lineage but also a large workforce. That is also why polygamy is still popular amongst many African societies across the continent, and why indigenous slavery (raids on neighbouring tribes to poach their people rather than their land) was a feature of precolonial Africa.

By contrast, labour is abundant in India relative to land. There the institution of bride price never emerged; instead, it would be a dowry system, where the bride or bride’s family would pay (in property or money) for the right to marry the husband. This was to consolidate the most important asset – land, not labour – to ensure a successful lineage. Europeans, incidentally, had the same low land-to-labour ratio, which is why it is typically the wife’s family who pays for the wedding in European custom.

Factor endowments, surprisingly, can also say much about what we eat. In a series of tweets on 12 June, Sarah Taber, agricultural scientist and host of the Farm to Taber podcast, explained just how our eating habits are the result of the environment and endowments (the land/water ratio) around us. She starts by mentioning that many cultures have traditionally had low or no-meat diets. Think of the Ganges valley, the Nile valley, or the Amazon. What do these places have in common? It rains a lot. This matters because in such environments, plants that humans can consume tend to grow, like those with tender stems, leaves and fruit, or those with enlarged seeds or energy storing roots. The rest of the plant is basically useless to us.

On the other hand, many societies, like the Mongols, the Bedouin, the Inuit or the Masai, have evolved to consume almost only meat. This is because they live in places that are dry or very cold, where plants are either very sparse or very tough, and made entirely of things that humans cannot digest. These plants are almost entirely cellulose, having tough stalks, fibrous leaves, and so on. But cows, sheep, goats, horses and camels can consume these scrubs with 3- to 4-chambered stomachs that turn the cellulose into sugars.

Taber goes on to say that we neglect to factor in these differences when we debate vegetarianism, for example: ‘Failure to recognize the role of local environment in diet is a major oversight in the vegetarian community at large. Traditional vegetarian societies are trotted out to showcase that low/no-meat diets are possible. But it’s done without recognition as to why those particular societies did it, and others did not.’ The key, she says, is that we fail to recognize that for dry regions, the bottleneck in productivity is not land. It is water.

She then explains that a farm in a dry area, if used for cultivating vegetables, might produce enough food to feed 10x the number of people than it would if it was to produce meat. But, she shows, it would require a 1000x more water to produce those vegetables. ‘In places where there’s limited land and a surplus of water, it makes a lot of sense to optimize for land. So there, grow and eat crops. And in places where there’s a lot of land and limited water, it makes sense to optimize for water. So there, grow and eat ruminants (meat).’

‘It’s really interesting to me that the conversation around vegetarianism and the environment is so strongly centred on an assumption that every place in the world is on the limited land/surplus plan. You know what region that describes really well? Northwestern Europe. In many ways, viewing low/no-meat diets as the One True Sustainable Way is very much a vestige of colonialism. It found a way of farming that works really well in NW Europe, assumed it must be universal, and tries to apply it to places where it absolutely does not pencil out.’

The next time you run out of dinner conversation, a discussion about factor endowments may not be such a bad option after all.

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

Written by Johan Fourie

August 18, 2018 at 09:03

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.

Written by Johan Fourie

June 30, 2018 at 06:54

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.

What explains the rise of populism?

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Donald Trump

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

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

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

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

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

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

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

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

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

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

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

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

Written by Johan Fourie

August 14, 2017 at 16:47

High-skilled migrants matter – and we’re not winning

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elon-musk-is-making-history

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.

emigration-rate

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.

Africa’s $500 billion-a-year treasure fleet

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zambezi

I usually tell my students that understanding the world is much like understanding the flow of a river. We busy our lives floating on its surface, unaware of the tremendous forces below. Those forces, or currents, have various layers. Just below the surface are the forces still visible to us, the things we might still want to influence. Media, popular culture, sport. Below that is the more established institutions – political, judicial. And below that, I would argue, are the economic forces, pushing us down the river without us ever knowing the true source of the current.

But I often neglect a perhaps even deeper current, a current so slow-moving that in the business of our day-to-day operations, we fail to see its significance. Demographic change.

The world has witnessed massive demographic change over the last two centuries. In the eighteenth century, Reverend Thomas Malthus predicted that because humans increase at a geometric rate but food production only grow at an arithmetic rate, humans will continue to live just above subsistence. What he did not consider was human ingenuity. Since his famed prediction, not only has global population numbers increased by a factor of 7, our average level of prosperity has increased by at least a factor of 8 (and in many countries much more).

But demographic change is more than just an increase in numbers. As medical knowledge and modern medicine expanded, mortality rates, especially those of young children, have fallen to historically low rates. As families recognised that many of their children now survive into adulthood, they have begun to reduce the number of children they have. (When Adam Smith wrote about Scottish Highlands mothers in 1776, he noted that of the 20 children they might bear, only two would survive into adulthood. In 2014, the average Scottish women had 1.56 children.)

The difference between the decline in mortality and the decline in fertility is known as the demographic dividend. A demographic dividend essentially means that there are many more people of working age than there are dependents (very old and very young people); thus, there are more paying taxes than those needing the tax money. Most developed countries experienced their demographic dividend somewhere during the nineteenth or early twentieth century. Most Asian countries experienced theirs during the latter half of the twentieth century; even in Bangladesh, one of the most densely populated countries on earth, the fertility rate is now 2.21, just above replacement level.

Africa has not seen fertility rates fall to the same extent. A new NBER Working Paper by David Bloom, Michael Kuhn and Klaus Prettner argues that this is likely to happen in the next few decades, which means ‘Africa has considerable potential to enjoy a demographic dividend’. This will be a boon to Africa’s economic prospects, but, as the authors argue, only if countries implement good policies.

One place to start is to give women the freedom to choose the number of children that they have. Access to contraceptives and family planning services are among the reasons for the decline in fertility rates elsewhere, and too many women in African countries still lack access to such services. Policies focusing on female education will boost female labour force participation, which not only reduce fertility rates, but also increase investment in their children; more educated, working mothers tend to have fewer, more educated children. The main challenge, as the authors acknowledge, is the capacity of many of the weakest governments to coordinate such policies effectively.

Once fertility rates in African countries start falling – as they already have, down from a high 6 in the 1960s to a still relatively high 4.7 in 2015 (South Africa is an outlier, with a fertility rate of only 2.4) – and the demographic dividend begins to boost government coffers as the number of child dependents fall relative to the working age population, governments will have to make clever, forward-looking decisions about what it is they want to invest in. Education, particularly tertiary education, is an obvious candidate.

Barriers that might prevent African countries from realising these gains include climate change (which affects migration decisions) and, more alarmingly, the wastefulness of government expenditure (corruption, state capture). The authors calculate that a demographic dividend could ‘yield’ as much as $500 billion per year in additional expenditure possibilities. It is easy to see how such a boon could lead to political opportunism in the worst degree.

Because a demographic dividend ‘only’ lasts a couple of decades, after which the working age population grows old and become dependents again, governments must ensure that they invest wisely during the good years. Many developed countries, from Italy to Japan, are today struggling with aging populations, and the fiscal demands of promised pensions.

That is why long-term fiscal planning is essential. In those African countries where fertility rates have already fallen significantly, notably in South Africa, these issues are much more prescient than in others where the demographic dividend is still to be realised. What is clear, though, is that we should be more cognizant of the deep underlying currents that determine the flow of the river, and the direction our boat is likely to go.

*An edited version of this first appeared in Finweek magazine of 22 September.

Written by Johan Fourie

October 27, 2016 at 06:33