Archive for the ‘Food’ Category
Minister of Rural Development and Land Reform Gugile Nkwinti kicked off the Land Tenure Summit yesterday by making several statements about land reform that has left me perplexed. Reported here, the minister said that “privately-owned land is a serious problem”, that “we want to correct a particular South African historical problem”, that “it cannot be that the worker will work forever and at the end of their time on earth, have nothing to show for it. It is not right, it cannot be right” and again promoted the department’s radical plan to give half of each farm to the labourers working on it.
The distribution and productivity of land is the most serious political issue facing South Africa. The alienation of Khoesan lands by European settlers had already started soon after Van Riebeeck arrived in South Africa, but it was really the expropriation of land in the nineteenth century (as British settlers arrived in the Eastern Cape and the Voortrekkers moved into the interior of the country) that has created a legacy of injustice. By 1913 when the Land Act was signed, black South Africans (and those living in neighbouring colonies like Basotholand, Bechuanaland and Southern Rhodesia) had lost large territories of their most fertile land. The Land Act consolidated this expropriation, and even may have prevented further expropriation (see my earlier post on this).
There is no doubt that redress is needed. The question, really, is how to affect this redress. The reason Julius Malema and his Economic Freedom Fighters did so well in the recent elections was because he pushed the land reform agenda to priority number one, and he had a plan. The EFF wants “expropriation of land without compensation for equitable redistribution” and propose a system whereby the “State should, through its legislative capacity transfer all land to the state, which will administer and use land for sustainable-development purposes. This transfer should happen without compensation, and should apply to all South Africans, black and white.” The State will then lease the land for 25 years.
My suspicion is that performance of the EFF in the recent elections has forced the ANC’s hand, and they’ve come up with their own plan for land redistribution. The plan will force commercial farmers to cede 50% of their farms to their workers. This is not the forum to critique these plans in detail, but I can point to others who have done so. Read this, and this. My field of expertise is economic history, not agriculture, and so my only recourse is to look at land expropriation in history. It is not a story to smile about: during the process of collectivisation in the Soviet Union, at least 4 million people died of starvation alone, and the recent land reform in Zimbabwe has resulted in large declines in production, malnourishment and close to 4 million Zimbabweans emigrating to other countries, notably South Africa.
Yet knowing that something has failed in the past – and even knowing that it will fail again – is usually not enough reason for politicians not to attempt it again. In the absence of alternatives, my sense is that black voters will be happy to go along with any plan to redress land, because it will by implication by more fair than the counterfactual, which is to continue the status quo. (This reminds me of why the National Party won the 1948 elections. The ‘racial issue’ had come to dominate the national agenda after the Second World War but the United Party under Jan Smuts had not articulated a clear plan to tackle this issue. Instead, DF Malan proposed a clear plan of separation, of apartheid. Sometimes all you need to win is a plan, even if it is a bad one.)
So what are the alternatives to the Minister’s proposed plan? It depends on your objectives. If the only criterion is to redress past injustice, land expropriation, either fully or, as the Minister suggests, partially, seems like a solution, right? But what are the consequences of such a policy? One can only speculate, but it is likely that commercial farms will see large-scale disinvestment. Farm prices will collapse, forcing other farmers, who have used their land as collateral for loans, to also sell their properties. Movable assets will be sold to provide some capital for a new life in the city. (Other perverse outcomes: expect more golf courses, light industry parks, gated communities and rural retirement villages, and conservation parks and holiday resorts as farmers shift into other industries not affected by the policies.)
Little of this will benefit the new owners. Land is only as useful as the capital investments on it, and without capital (or, at least, new investment in the farm), many of the new owners will find it increasingly difficult to continue the earlier outputs. The state can help, of course, but the state is not a bank who can easily make decisions about which risks to take and which to avoid. (See my earlier post on Tito Mboweni’s plans for a state bank.) Where the new owners are not former workers, an even more serious issue arises: skills and experience. Farming is an increasingly scientific industry. Our agricultural colleges are simply not producing enough graduates nor would they have the experience to take over the immediate operation of large-scale commercial farms producing for the export market. Learning-by-doing is really the only option, which is why this opinion piece by Peter Curle is a useful read. He suggests that the principles of successful BEE transactions could easily be applied to the agricultural sector. This would mean that farmers are able to choose their black shareholders, train them, and be partly responsible for – and benefit from – their success. That is a system that gets incentives right.
The government could, of course, also take another approach. Given that the agricultural sector employs large numbers of unskilled labour (and has the potential to employ more), it could focus on improving the productivity of existing farmers. To do this, the most obvious thing is to identify the currently most unproductive land. That turns out to be communal and state land, not privately-owned land. (And certainly not foreign-owned land, which seems to get all the blame, but is in fact a tiny share of land owned in South Africa.) The power of traditional leaders, however, prevent such communal or traditional lands from being used more productively. In a recent working paper, Daniel de Kadt, PhD-student at MIT, explains why these traditional leaders continue to have such a powerful hold on the ANC:
We argue that traditional leaders, whose power depends on the state, may be incentivized to strategically support political parties who can guarantee their survival and provide them with rents. We study this quid pro quo in the Apartheid-era Bantustans of South Africa. We show that an alignment between the state party and the chiefs maps to increased political support for the party. Further, we provide quantitative evidence consistent with chiefs acting as clientelistic brokers. Our results suggest that chiefs boost African National Congress (ANC) vote-share by 8.2 percentage points in the Bantustans. This translates into roughly 4.5% of the ANC’s total vote-share, and a distortion in the national vote of 2.5 percentage points. This distortion is pivotal in determining whether the ANC is able to alter South Africa’s constitution.
You could also translate it thus: The poorest of the poor South Africans live in Bantustans on communal lands. They, however, are being held ransom by their chiefs who are in cahoots with the ANC, who rely on their support for 2.5 percentage points in each election.
To eradicate the legacy of colonial land expropriation, a thriving agricultural sector is key. The problem is not “privately-owned land”, as the Minister seems to think. Policies that affect commercial farms will only hurt workers and the consumers of cheap food, exactly those people that suffered because of the initial land expropriation. The solution lies in tackling the unproductive, communal lands that is currently held by chiefs or the state. If these areas can prosper, not only will it pull millions of poor South Africans out of poverty, but it will create the necessary skills and capital to allow faster land reform elsewhere. Yet this most important step is unlikely to occur any time soon. That is because poverty alleviation and real redress is not an economic problem, but a political one.
On 30 September South Africa imposed higher tariffs on chicken imports. One important reason for the imposition of tariffs, according to Minister Rob Davies, was that South Africa needs to ensure its own food security. We cannot allow international food producers, the argument goes, to dictate the prices we pay for our food.
I’ve written about the higher chicken tariffs before, and the negative consequences it’s imposition would have for South Africa’s poorest consumers. Other economists agreed. (Economic consultancy Econex contributed this excellent summary. Full disclosure: it was written by my wife.) Nevertheless Mr Davies imposed the tariffs. The government has been so kind as to post a YouTube clip of the full press conference. Three questions: 1) Are we really employing 48 000 workers in the chicken industry? Really? 2) If chicken producers suffered injury because of foreign competition, we would expect to see it in a drop in earnings, right? So what happened to chicken producers’ share prices over the last two years? Any signs of serious injury? Here’s a clue, and 3) Can the journalists at the press conference look like they care any less?
So the predictable has happened. The sugar industry has asked for higher protection, claiming they can’t compete against cheap imports and that South Africa will suffer because of lower food security. And what prevents the dairy or wheat industries from filing their own applications in the near future?
The reason the government gets away with this is because, as I’ve said before, food security is misunderstood by the general public (as reflected in a recent debate on the topic on Afrikaans radio station RSG). Food security is not about producing your own food, but about consuming it at the lowest price. We do not need to produce all of South Africa’s food in South Africa. The richest countries in the world don’t do it, so why should we? Instead, what we should aim for is to provide South Africans with the cheapest food we can find. Perhaps some of it is grown locally, but most of it will come from countries that are really good at growing food, like Brazil (where they can harvest twice a year and where rainfall reduces the need to irrigate). Or it will come from countries that subsidise their farmers which, in other words, mean that their tax payers are willing to pay parts of their salary so that we in South Africa can buy cheap food. This is a pretty sweet deal, except that our government is hell-bent on restricting these benefits.
Here is some more evidence to support my claim that that food security is not about producing your own food. The International Food Policy Research Institute has published a new Global Hunger Index, which measures the degree to which people go hungry across the world. I’ve correlated this measure with the share of agriculture in GDP for each of these countries. In short: countries with a high Agriculture/GDP ratio should, if food security is about producers, result in low rates of hunger. Surely a country that produces a larger share of its GDP as food should be able feed its citizens to a greater degree in comparison to countries where agriculture is only a tiny share of GDP? Well, no. In fact, I find a correlation coefficient of 0.6 for 1990, meaning that countries with a higher Agric/GDP ratio also has a much higher likelihood of going hungry. This correlation increases to 0.65 for 2010. (Both sets of data are available online, here and here.) Incidentally, The Economist also shows that South Africa is one of the countries where hunger has increased the most since 1990, meaning that all our ‘food security’ has had little effect for the poorest.
Keeping people well-fed is not only a humanitarian goal; there are also good economic reasons to do so. As Agnes Binagwaho, Minister of Health of Rwanda (and Senior Lecturer at Harvard Medical School) argues, one in three preventable deaths among young children worldwide – up to 2.5 million each year – are the result of inadequate nutrition. Malnutrition limits children’s ability to learn in school, reducing the returns on education and GDP growth. Last year, Minister Binagwaho notes, “the Copenhagen Consensus – an esteemed panel of economists including several Nobel Laureates – ranked child nutrition as the top priority on its list of cost-effective investments that would improve global welfare”.
Min Davies’ higher chicken tariffs impose, I believe, what will be one of South Africa’s most harmful economic policies since the turn of the century, not only for its direct impact on consumers but for the door it opens for other industries to ask for similar protectionist benefits. More shockingly, it’s a policy largely ignored by the media. Of course we can produce our own food. Of course there is a need to make farmers more efficient global competitors. With a rising Africa on our doorstep, with better infrastructure that connects our farmers to this growing market, and farmers’ willingness to invest in new technologies, this will happen.
But if we want to reduce the poorest South Africans’ vulnerability to hunger and malnutrition – if we want food for all – we should eliminate efforts to build walls against imports. Given the government’s recent policy decisions, however, it is highly probable that the hunger pains will further intensify for South Africa’s poorest over the next few years, with incalculably dire consequences for our society and economy.
It should come as no surprise to South Africans that chicken is our most consumed protein. Whereas South Africans may idealise the braai as our traditional dish, chicken is our staple, consumed by rich and poor, urban and rural.
Which should make the request by the South African Poultry Association to increase the cost of chicken in the country by a massive 30-50% a national disaster. Instead, it hardly registers a (chicken) breath.
Over the last few years South African chicken producers have found it increasingly difficult to compete against a rising tide of chicken producers globally. They allege that these producers, notably those in Brazil, are ‘dumping’ chickens (whole or parts there-of) on the South African market, hurting the profit margins of these firms and, ultimately, costing the economy jobs. They therefore request ITAC (the South African commission that decides about trade policy) to impose heavy tariffs on imports from Brazil. Here’s an excerpt from the an article by the Amanda Visser in the Business Day of 19 April:
The association says imports of extremely low-priced frozen chicken meat grew from 97,565 tons in 2008 to 238,582 tons last year. Kevin Lovell, CEO of the poultry association, says the situation is compounded by restrictions on South Africa’s regional exports.
If the application is not successful and the flood of low-priced chicken meat continues it may lead to 20,000 job losses. The industry employs 48,000 people with the five largest producers – Rainbow Farms, Astral Operations, Sovereign Food, Afgri Poultry and Supreme Poultry – employing more than 22,000 people.
Mr Lovell fears a reduction in the food security position of the Southern African Customs Union (SACU) could occur, with lower rates of investment in the industry and a reduction in the contribution of the poultry sector to the gross domestic product (GDP).
According to the association, poultry represents a quarter of the animal product contribution to GDP, which amounted to R25bn in 2011, compared with R19.8bn in 2008. Profit margins at the five major producers had been reduced from double-digit figures in 2006 to margins ranging between 2.4% and 5.9% last year.
“The world’s major poultry producers are targeting developing countries such as South Africa and others in the SACU region to dispose chicken portions for which there is little or no demand in their domestic markets”, Mr Lovell says in his affidavit filed with Itac.
The association is asking for a general increase in the tariffs of carcasses, whole birds, cuts and offal, boneless cuts and bone-in portions. In the case of carcasses, it is asking for an increase of R9.84/kg up to the maximum bound rate of 82% agreed to in terms of the World Trade Agreement – from 27% at present.
In the case of whole birds the South African Poultry Association is asking for an increase of R11.07/kg, subject to a maximum rate of 82% when the currency conversion has been made.
A few minor points first: comparing the rise in chicken imports between 2008 (the midst of the financial crisis) and 2012 is, to put it mildly, problematic. Chicken imports from Brazil increased by 8% between quarter 4 of 2011 and quarter 4 of 2012, less dramatic than the industry claims. Similarly, comparing profit margins of 2006, a boom year, with 2012 is equally distorting. Compare any company profit margin between 2006 and 2012 and you should find the same rapid decline. It’s clear that the years are chosen for effect.
The numbers may also simply be wrong: Below I list the statistics from the International Trade Center’s TradeMap database. According to them, the value of chicken imports from Brazil only increased by 5% per annum between 2007 (before crisis) and 2011. The quantity of chicken imports only increased by 1% annually. Note also that South Africans already pay a 17% tax on these imports, so the domestic industry is already heavily protected against foreign competition. Compare this with the imports from the Netherlands, an EU country which has zero import tariffs, from which imports have grown by a massive 469% annually and now make up 11.5% of our total imports.
But even if Company profits have fallen and even if 20 000 jobs may be lost, the imposition of higher tariffs to prevent further imports from Brazil – I want to emphasise – will be deeply harmful to the South African economy in general, and to the poor in particular. Here’s a post by Colin Phillips early last year:
Say a South African consumer is considering buying two identical products – the Brazilian chicken product costs R20, but the local is lekker equivalent costs R30. If the consumer chooses the “patriotic” route, then R30 stays in the country, to help create the 7000 jobs the DFPO promises. But if the consumer chooses the Brazilian equivalent, they have R10 more to spend on something else, which helps stimulate growth in that industry (which, yes, creates jobs).
Again, it is the poorest in South Africa who spend a larger proportion of their income on food. Perhaps the rich can afford to switch their buying patterns from chicken to beef (a boon for the bovine industry?), but the poor do not have that luxury: they will be forced to substitute some other expenditure (perhaps clothing, schooling or health?) to afford the more expensive chicken. Do we really want to force all South Africans (all 52 million of them) to pay 30% more for chicken to “protect” 20 000 jobs, jobs that will be created elsewhere in the economy if all South Africans can buy their chicken cheaper?
Of course, the 2007/2008 impact of quotas on Chinese imports of clothing and textiles also suggests another result of the chicken tariffs: import shifting. Instead of buying (expensive) local clothing, retailers simply switched their imports from China to cheap clothing manufacturers in other countries, like Bangladesh, Vietnam, India and even Zimbabwe. A tariff on Brazilian chickens will simply force South African food retailers to switch imports from Brazil to other countries (with which we have fixed free trade agreements), like the Netherlands, the United Kingdom, Denmark and Ireland. The Dutch are licking their fingers, so to speak.
Other countries are also affected by South Africa’s decision. ITAC speaks not only for South Africa, but also Botswana, Namibia, Lesotho and Swaziland. To the extent that these countries do not have a domestic chicken industry – and I would expect, apart from Namibia, most do not – consumers in these countries will be taxed on chickens with no benefit to their domestic industry (read: the poor will suffer).
Higher chicken prices will also not, as Mr Lovell suggests, increase food security. Producing chickens locally is not food security; but providing the citizens of South Africa access to affordable food is (for a definition of food security, here’s an earlier post). Tell me, should we also produce all our own rice or coffee?
More fundamentally, though, this affair suggests a complete lack of understanding of the benefits of international trade. Think of trade as a new technology that a famous South African scientist develops, a machine where you input something – like iron ore – and out comes chickens. Would we use this machine? Of course! We will dig up iron ore, feed it into the machine, and out would pop chickens. Marvellous. But this is exactly what international trade is: South Africa currently exports iron ore to Brazil ($124 million* of it; or if you don’t like the sound of our natural resources leaving the country unbeneficiated, let’s go far car engines, of which we currently export $72 million* to Brazil) and in return we buy chickens from them. We are better at making iron ore than Brazil is, and Brazil is better at making chickens. South African producers of iron ore win, South African consumers of chicken win, and so does Brazilian consumers of iron ore. Trade is win-win, that great insight from Adam Smith.
In the end, Mr Lovell and the South African Poultry Association has a job to do. Like any producer union, they have the interests of their producers at heart, which is to protect profits. To do this, they have to lobby government for protection against more efficient producers (which happens to be located in other countries). Credit must be given to Minister Rob Davies, who in December turned down a first proposal to increase tariffs. Cynics argue that this was only to keep the peace with Brazil in expectation of the BRICS summit in Durban a month ago. Perhaps, but at least it shows a government able to reject harmful lobby requests. Let’s see how he stands up to repeated requests.
ITAC, the media, and all South Africans should remember that Mr Lovell’s story is a partial one, one that neglects to consider the welfare of all South Africans. Higher taxes on chicken imports from Brazil will have large, negative consequences for the South African consumer, especially those at the bottom of the income distribution. To argue the opposite is not only wrong, it is irresponsible.
* These are all 2011 figures. See TradeMap.
The recently released Eat Out Restaurant Award nominees show how Stellenbosch has become the gastronomy capital of South Africa: 7 of the 19 South African nominees for the title of top South African restaurant are based in or just outside Stellenbosch. A further 3 are located in Franschhoek, or on the road between Stellenbosch and Franschhoek (a town about 30 kilometres from Stellenbosch). A further 6 are based in Cape Town, which means that of the top 19 restaurants in South Africa, 16 are based in a radius of about 60km in the Western Cape, and only 2 are based in Gauteng. (The final nominee is located in the Kwazulu-Natal midlands.)
How would an economist explain this? It’s clear that it’s not only demand driving this: Gauteng, the wealthiest province of South Africa, has only 2 nominees (one in Johannesburg, one in Pretoria and zero in Sandton). Tastes may play a role – Capetonians may prefer more exquisite dishes while patrons in Gauteng prefer something else – but I think it would take a brave man to argue (and prove) this. In fact, I don’t think it has anything to do with local demand, except that there must be a minimum level of ability-to-pay, which both exist in the Cape and Gauteng. Tourism is perhaps a better explanation: Cape Town is South Africa’s favourite tourist destination and the surrounding Winelands is in the top 5 most popular South African destinations. But why so many in Stellenbosch, and why doesn’t Soweto, or the Garden Route, or the Kruger Park, also top ten destinations, have any nominees?
It is supply, rather than demand, that is key: the Cape performs better because it is better at supplying the inputs that is required to produce a quality restaurant establishment. As I am no food connoisseur and should tread carefully in discussing food inputs, but perhaps the Western Cape may have a climate conducive to producing the vegetables and other greeneries that are required for exquisite dishes (although, you’ll find the best meat in Gauteng, where there’s a much larger market). But Cape restaurants are close to the (very fertile) Atlantic Ocean, which provides ready access to a large source of fish and shellfish. And they often have a great setting: 6 of the 7 Stellenbosch restaurants are located on wine estates (although, scrolling through the criteria for selection for the Eat Out Awards, it doesn’t seem as though setting counts for anything.) They also have direct links with Europe and elsewhere – I’ve heard a rumour that a certain Cape Town restaurant imports fresh bread from France – but so does Johannesburg, of course.
My suspicion is that they have two things which Gauteng don’t. Chefs and competition. The Cape hosts a number of internationally accredited hotel and culinary schools that produce talented young recruits for the restaurant industry. These young chefs know that if they want to be successful, the Cape is the place to be: it’s here that they’ll have access to the best tutors, and the most up-to-date fashions, styles and trends. It’s here where a new idea or concept or taste will be noticed faster by the rest of the gastronomy community (such as food blogs). Firms (restaurants) benefit because they have a wider pool of possible recruits. Labour (chefs) benefit because the pool of possible job opportunities is larger, and the opportunities to do something new and exciting and brilliant greater.
It’s these same reason that industries agglomerate in certain areas. Demand is important, yes, but demand simply means cheap access to international markets (tourism in the case of Cape restaurants, or fast, reliable and affordable port services in the case of manufacturing). The Cape gastronomy industry is a good example of how, with little government involvement, the market creates agglomeration economies that lowers the costs for each individual firm. More importantly, no policy-maker or consultant would have spotted this trend a decade ago. My own (bad) advice would have been to focus on the fashionable districts of Sandton, where local demand is largest.
All that that shows is that our “predictive ability” about future trends is extraordinarily bad. Any policy-maker with a taste for involvement in the market economy (read: “industrialisation” or “beneficiation”) should carefully heed the lessons of the South African gastronomy industry.
PS: This post is now also available on Finweek.com.