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What universities can teach us about job incentives (or how to make South African researchers more productive)

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Freedom

Let there be little doubt: academics have the best jobs. When we teach, we get to fill young, smart minds with ideas we care about and believe in. When we undertake research, we get to explore these ideas further, understanding the world and how it works a little bit better. We work in tranquil settings (most of the time), surrounded by like-minded individuals in search of (the) truth, or, for those of us who shy away from people, books that do the same thing. Sometimes we get to travel to nice places to meet more like-minded people and share our ideas. Sometimes we even take sabbaticals, a time to reflect more deeply about the world and how it works without the need to do anything else. And best of all: even if we do not do most of these things, we have job security for life.

Universities are some of the oldest institutions. Although the role of professor has changed somewhat over the centuries – we used to have to earn our income when students paid to enter our classrooms! – the system of academic tenure, where an appointment is permanent and one cannot be fired except under extraordinary circumstances, has been around for more than a century. It is a decidedly different system than the private sector, where the biggest incentive for working hard is to not get fired.

While South African academics get tenure almost immediately after their appointment (it varies, but there is usually a probation period), ‘getting tenure’ is a big thing in the US. The first five years after appointment is a race to publish in top journals. If your tenure evaluation comes up, and you have not published well enough, you won’t get it, and you will have to move somewhere else, or quit academe. Once you get tenure, though, all the incentives to publish are removed; continued research depends entirely on the goals and objectives you set for yourself.

Here are two very different systems that are perfect for analysis. In the first, the incentives are clear: publish or perish. In the second, there are no external incentive like the overt threat to job security. Which of the two systems produce the best results?

Before answering this question, it is perhaps useful to ask why the system of academic tenure was introduced in the first place. There were mainly two reasons. First, tenure provides academic and intellectual freedom to pursue new avenues of inquiry. Second, it provides a sufficient degree of economic security to make the profession attractive. It is the first of these – the unencumbered pursuit of truth – that is still upheld as the indisputable defense for tenure.

Does this defense stand up to empirical support? Three economists, Jonathan Brogaard, Joseph Engelberg and Edward van Wesep, used their own profession to find out. In a paper published in the Winter 2018 issue of the Journal of Economic Perspectives, they measure the research output of almost a thousand academic economists in the five years before tenure and the ten years after. They not only measure the quantity of output, but also the quality. They create two measures: ‘home runs’ are papers that are highly cited (in the top 10% of papers published in the same year) and ‘bombs’ are poor-performing (papers in the bottom 10% of citations that year).

Their results are emphatic: publication and home run rates rise to tenure, peaking in the year a researcher comes up for tenure and a researcher’s first year as tenured faculty, but then fall off a cliff, with publication and home run rates 15% and 35% lower in years 2 to 10 after tenure. Most surprisingly, bomb rates, publishing papers that get very few citations, increase by 35% after tenure.

The authors consider various reasons that might explain this drop in productivity and success. Perhaps this is just a ‘time since PhD’ effect, in that older people are less productive, but the authors find no evidence to support this. Perhaps it is the rise in service, teaching and other nonacademic obligations post-tenure, but that would not explain, for example, why researchers publish more bomb-papers. Perhaps tenure encourages researchers to take bigger risks and branch out into new, explored areas of research. The authors measure this by looking at where the authors publish, and find no difference in the number or uniqueness of co-authors or journals. Perhaps the averages mask elite researchers’ performances. But even if the authors only limit their analysis to the top US universities, the results hold true. Perhaps it takes time for truly novel research to gain traction. But when the authors limit the sample to papers with 20 year lags, the results stay the same.

What emerges from their analysis is that tenure is bad for research productivity. This is not necessarily to say that the tenure-system is bad: had it not been there, the number and quality of PhD students that aim for academic positions would probably have been lower. The possibility of future economic security is the incentive that really matters in drawing the sharpest minds into the field.

But it does suggest two things. On a practical level, giving tenure too early may be a bad thing. The South African system almost assumes tenure at the time of appointment; I don’t know anyone that has not received a permanent appointment for failure to publish. By extending the timing of tenure to at least five years, and making ‘not getting tenure’ a realistic threat, the South African government can get more research for their proverbial buck. At a more general level, the study clearly shows how important incentives are. A world where permanent employment is guaranteed with no performance appraisals is a world where output falls and innovation dies. Even academic economists sometimes need reminding of that.

**An edited version of this article originally appeared in the 21 June edition of finweek.

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Written by Johan Fourie

July 19, 2018 at 07:30

Join me in New York and Boston!

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On 26 July, the Economics department and LEAP will host a Stellenbosch alumni event in New York. I’ll give a short talk on ‘The Data Revolution in African Economic History’. Four days later, on Monday, 30 July, we’ll host another event in Boston. If you are in the neighbourhood and want to drop in to hear what we’re doing at LEAP, in the department and at Stellenbosch University, please send me a mail. In New York, we’ll meet at the ING offices and in Boston, we’ll be at the Residence Inn hotel in Cambridge.

The reason I’ll be in the US is to participate in the World Economic History Congress, which is hosted by MIT this year. I’m responsible for five papers (yes, I know, this is bad planning), so it will be a busy conference. The programme can be downloaded here. I hope to share some of the results of this research on this blog over the coming three months. (Also, I’m excited about plans for a new look blog. More about that later.)

After the WEHC2018, I’ll take a two-week break before going on a seminar tour in Gauteng, delivering papers at the universities of Pretoria (27 August), Wits (29 August), Johannesburg (30 August) and North-West, Potchefstroom (31 August). I’ll post more detail about those talks closer to the time.

One policy to rule them all

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LotR

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

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

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

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

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

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

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

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

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

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

Written by Johan Fourie

June 19, 2018 at 08:15

The Autshumao and Krotoa International Airport of Cape Town: My letter to ACSA

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AutshumaoKrotoa

Renaming of Cape Town International Airport: A proposal

I would hereby like to submit a nomination for Cape Town International Airport’s new name.

Cape Town is an international, cosmopolitan city, a ‘melting pot of cultures’. Many individuals from Cape Town’s rich history deserve to be celebrated in the renaming of Cape Town International Airport. Yet I often find that little attention is given, in place names, traditions, and heritage symbols, to the indigenous inhabitants of the region before the arrival of European settlers in the mid-seventeenth century.

I therefore feel it is appropriate that Cape Town’s international airport should celebrate the people who had lived in the region for several centuries before European arrival, who had contributed to the economic and social development of the Cape, often in subordinate positions of indentured labour, and whose descendants still reside here, now mixed with more recent immigrants from Europe, Asia and Africa, a city that is, indeed, a ‘melting pot of cultures’.

My proposal is therefore to rename Cape Town International Airport to the Autshumao and Krotoa International Airport of Cape Town.

Autshumao was the first inhabitant of South Africa to travel abroad. In 1630, Autshumao was picked up by a British ship – called ‘King Harry’ on board – and travelled to the East. There he learned Dutch and English, and when he returned to the Cape, he would become postmaster on Robben Island. He would also act as the first translator and trader when the Dutch East India Company settlers established a refreshment station in 1652. Autshumao later fell into disfavour as trading partner, and was banned to Robben Island. Nelson Mandela would later call him the ‘first freedom fighter’.

His niece, Krotoa, was a translator in the household of Jan van Riebeeck, the first VOC commander of the Cape. She would marry a Danish surgeon and her progeny would include several South Africans of note, including Paul Kruger, Jan Smuts and FW de Klerk.

Naming Cape Town International Airport the Autshumao and Krotoa International Airport of Cape Town would signal recognition of the first inhabitants of Cape Town, and the ‘melting pot of cultures’ that Cape Town has become.

Kind regards,

Johan Fourie

The stories we do not tell

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Abel2018b

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

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

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

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

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

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

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

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

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

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

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

The unintended consequences of good intentions

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party

We all hope to live long, healthy lives. And we want that for other people too. So when we have medical breakthroughs that allow us to alleviate the suffering of others, almost all of us would agree that it should be rolled out to those needing it most.

Opioid abuse kills 42000 Americans annually. Opioids are a class of drugs usually prescribed to treat pain, but many patients develop addictions that result in the illegal use of prescription drugs or even cheaper alternatives, like herion. Opioid abuse has increased steadily over the last decade to now constitute more than two-thirds of all drug overdose deaths. How to stop and reverse this rising trend has been the subject of debate amongst public health officials and policymakers for some time.

One option, preferred by most US health experts, is Naloxone. Naloxone is a drug that can reverse the effects of an opioid overdose if administered quickly. In short: it can save many lives if it is easily accessible. With this knowledge, many US states began to pass laws that facilitated the widespread distribution and use of Naloxone. Surely this policy would save thousands of American lives?

Unfortunately and surprisingly, it had the opposite effect. This is the astounding conclusions of a new study by Jennifer Doleac of the University of Virginia and Anita Mukherjee of the University of Wisconsin-Madison. The two economists find that broadening Naloxone access had ‘no reduction in opioid-related mortality’.  Why? Because the availability of Naloxone encouraged riskier behaviour; access to Naloxone increased the use and abuse of opioids. Doleac and Mukherjee show, for example, that where Naloxone became available, it was followed by a clear increase in opioid-related emergency room visits and more opioid-related theft. In some places, like the Midwest, there was even an increase in opioid-related deaths, as abuse increased because people were comforted by the knowledge that there is a way out. A policy with fundamentally good intentions had perverse outcomes.

This is a classic example of the dilemma that policymakers face on a daily basis. Good intentions do not equate to good policy. Differently put, the road to hell is paved with good intentions. What is needed is an understanding that humans react to incentives, and that if the incentives change, so will their behaviour.

Sport is a great example of how policies can have undesired consequences. Increase the points awarded for a try to encourage more running rugby? Maybe it works, but it is more likely that it will encourage foul play because a penalty is now a relatively less expensive mistake. Design cricket helmets to make batsmen safe from bouncers? Possibly, but it is equally likely that fewer batsmen now learn to play the bouncer well, and are thus hit on the head more often (obviously with less severe consequences). Give three log points for a win in a soccer championship instead of two to encourage more attacking play? Expect more defensive home games and draws as teams want to avoid ‘losing three points at home’. These examples may be somewhat facetious, but they show just how difficult it is to regulate human behaviour.

One policy that is likely to have serious ramifications for South Africans is the proposed Liquor Amendment Bill, which will increase the minimum drinking age from 18 to 21 years. The goal, ostensibly, is to reduce the number of alcohol-related deaths of teenagers, both from overconsumption and from the associated violence and car accidents. There is no doubt of the good intentions here. Alcohol abuse can have deadly consequences. Limiting the drinking age to 21 seems like a rational way to reduce consumption amongst a group of young people that is most at risk. What could go wrong?

The answer is: we don’t really know. Would young adults be happy teetotallers for three years, or would they find alternative means of enjoying the products of Bacchus? Are the alternatives – hiding consumption from adult supervision, or consuming unregulated drinks bought on the black market – not potentially worse?

Perhaps we can find examples elsewhere. Empirical evidence in the US seems to suggest that increasing the minimum drinking age reduced car accidents by around five percent. That would be great, of course, although those results rely on strict enforcement capabilities and supporting institutions. Would violence, particularly against woman, cease? Perhaps it would, but the new bill might also shift drinking away from bars and public places and into the home, with even worse outcomes.

Any policy, regardless of its intentions, has consequences. Some are obvious to see, but often our good intentions have undesired or even perverse outcomes that nullify or even contradict the initial aims. We can avoid the worst of these by carefully considering the alternatives, through modelling behaviour and empirical testing (of similar policy experiments). But often the bad news is that, despite our best intentions, humans are best left to their own devices.

*An edited version of this article originally first appeared in the 29 March edition of finweek

Written by Johan Fourie

May 7, 2018 at 10:00

Do management consultants really add value?

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management-consulting

That good managers matter for corporate success, should be a surprise to no-one. Early economists like Alfred Marshall, back in the nineteenth century, already noted the importance of good management practices to drive productivity. But because managers and the way they behave is such a difficult thing to quantify, economists have struggled to measure how important good management practices are in explaining firm success.

In 2008, five leading economists from Stanford University and the World Bank, tackled this difficult question. They wanted to know whether investing in good management practices improve productivity and profits, and so, between 2008 and 2010, they conducted a large field experiment in India. They approached large, multi-plant Indian textile firms and divided them in two groups. For one group – the treatment group – they gave five months of extensive management consulting through a large international consulting firm. This included a month of diagnosis, where the consulting firm would find opportunities for improvement, and four months of intensive support for the implementation of these strategies. In contrast, the other group – the control group – received only one month of diagnostic consulting, but no intensive follow-up.

At the end of the study, in 2011, they tested the performance of the firms in the two groups. The results, published in the Quarterly Journal of Economics in 2013, were quite remarkable. Even with just four months of follow-up, those in the treatment group saw an increase of 11% in productivity, and an increase in annual profitability of about $230 000. Interestingly, firms also spread these management improvements from their treatment plants to other plants they owned, creating positive spillovers that resulted in returns that far outstripped the initial investment.

What made the difference? The authors suggest two reasons for the improvements: First, owners delegated greater decision making power over hiring, investment and pay to their plant managers. “This happened in large part because the improved collection and dissemination of information that was part of the change process enables owners to monitor their plant managers better.” Second, the extensive data collection necessary for quality control, for example, led to a rapid increase in computer use. Better information management resulted in better performance.

The concern with the study, though, was that it failed to measure the persistence in performance. Did the differences between the treatment and the control group wither away as soon as the management consultants left, or did they persist for a month, a year, or even longer? To answer this question, almost the same team of authors returned to India in 2017 to measure the performance of the firms eight years after the initial intervention. Their results appeared in an NBER Working Paper last month.

It seems that management practices do persist. Despite the fact that several firms (in both the treatment and control group) dropped some of the management practices that were initially proposed by the consultants, the difference between the two groups were still large – worker productivity is 35% higher in the treatment group compared to the control group. The spillover effects, in particular, were still there: in fact, in most cases, the plants that did not receive treatment but were part of the same firm, were indistinguishable from the plants that did receive management consulting services. As the authors note: While “few management practices had demonstrably spread across the firms in the study, many had spread within firms, from the experimental plants to the non-experimental plants, suggesting limited spillovers between firms but large spillovers within firms”.

The authors were also able to collect information on the reasons certain management practices were dropped over the period of 8 years. Three reasons were frequently mentioned: the new management practices faded when the plant manager left the firm, when the directors, notably the CEO and CFO, were too busy, and when the practice was not commonly used in many other firms. “The first two reasons highlight the importance of key employees within the firm for driving management practices, while the latter emphasizes the importance of beliefs.”

There were other surprising consequences of intervention too. Not only was worker productivity higher in the treatment group, but treated firms continued to use consulting services in the years following the initial intervention, not only improving their operational management practices, but also their marketing practices.

Management consultants often get a bad rep, but random control trials like these – experiments that are costly and time-consuming – clearly demonstrate the advantages, in profits and productivity, of investing in good management practices. Successful firms thrive because of good managers. The key is to hang on to them, empower them with the ability to make decisions, and free up their time.

*This article originally appeared in the 1 March edition of finweek.

Written by Johan Fourie

April 6, 2018 at 15:21