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South Africa’s Great Leap Backward

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Great Leap Forward

Over the next few days, South Africa’s new Minister of Finance, Malusi Gigaba, will meet with representatives of the IMF, the World Bank, international investors, and ratings agencies in the US. His aim is to restore confidence, to steer the South African ship through the troubled waters of junk status.

This was a tough task a week ago, but his appointment of Chris Malikane, associate professor of Economics at Wits University, as adviser, has made this almost impossible. Malikane penned an 8-page manifesto early in April, which will apparently form the basis of his policy advice to Treasury. The document is available here: Chris Malikane – Concerning the Current Situation 2017. (Brace yourself: the phrase ‘white monopoly capital’ appears 58 times. The words ‘science’ or ‘innovation’, not once.)

I read the document just before I had to teach a class on China’s Great Leap Forward yesterday, and the similarities were startling. Malikane calls for the expropriation of ‘banks, insurance companies, mines and other monopoly industries, to industrialise the economy’. He wants to establish a state bank, nationalise the Reserve Bank, and ‘expropriate all land without compensation to the ownership of the state’. Oh, and he also wants ‘free, quality and decolonised education, free and quality healthcare, improved quality housing, community infrastructure, etc., affordable and safe public transport, and affordable and reliable basic services such as water, sanitation and electricity’.

An excellent Business Day editorial summed it up perfectly:

Malikane’s ideas are rooted in Marxist voodoo economics. For a finance minister to be taking advice from one with such outmoded and unorthodox ideas puts SA on the path towards such economic disasters as Zimbabwe and Venezuela. Doing so is an act of grotesque irresponsibility.

Just as we all borrow from banks to pay home loans, so South Africa borrows from international lenders to pay our expenses (which are more than our income, i.e. our budget deficit). If international investors do not believe we will be able to repay, they will make our loans more expensive by raising interest rates. It is not that these international investors want to exploit us – just as banks do not exploit us when we voluntarily go to them for loans – it is just that they want to make sure they get their money back. How an academic macroeconomist at one of South Africa’s top universities do not understand this, I do not know. One has to wonder what he teaches his students at Wits?

I hope the IMF, World Bank, investor and ratings agency representatives ask Gigaba about the economics of his new adviser. I hope they ask him what exactly Malikane will do in his capacity as adviser. I hope they ask him to state his own views about the market economy, about the interplay of fiscal and monetary policy, and, just for fun, about the role of Marxist economic thought in understanding international capital flows. And I hope they ask him whether he’s heard of China’s Great Leap Forward, and its consequences for the Chinese economy.*

*Spoiler alert: 43 million people died.

Four high-growth scenarios for Africa

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africagrowth

Can African countries sustain the relatively high growth rates they attained since 2000? At the start of 2017, putting aside the newsworthy political shifts and the fear of many that the developing world has entered a ‘secular stagnation’, this remains the most vexing question for those of us on the African continent.

It is not a question with an easy answer. The stellar economic performance of several African countries has created an ‘Africa rising’ narrative where further progress – and catch-up to the developed world – seems inevitable. A more pessimistic counternarrative argues that this growth, from a low base, is largely the result of favourable commodity prices and Chinese investment. Both narratives had, unfortunately, made little use of either economic theory or history.

Enter Dani Rodrik, professor of International Political Economy at the John F. Kennedy School of Government at Harvard University, who tackles this question in a new paper in the Journal of African Economies. He first shows that many African economies have indeed improved since 2000, but that many, including Senegal, the DRC, the Ivory Coast and Zambia, remain on levels below those immediately following colonialism (around 1960). The second fact he establishes is that the rapid growth of the last dozen years has not lead to a large structural transformation of the economy. Whereas rapid growth in south-east Asian economies during the late twentieth century resulted in the growth of manufacturing, a more productive activity than subsistence farming, high growth rates in Africa have not had any effect on the relative size of manufacturing. In fact, in many countries, the size of the manufacturing sector has actually declined since 1975.

Rodrik attributes these changes not so much to factors unique to Africa – like a poor business climate or weak institutions or bad geography – but to a global trend of deindustrialisation. Even Vietnam, a country which has recently experienced rapid growth, has not seen much growth in manufacturing.  And Latin American countries, which have decidedly better institutions than three decades ago, have also not seen much growth in manufacturing. Technological change – the move to automation, for example – is one likely reason.

So despite high growth rates, African countries have not industrialised – and, in fact, may have even begun to deindustrialise. This is why Rodrik is pessimistic about Africa’s future growth prospects. He nevertheless concludes by considering potential scenarios in which Africa can indeed sustain high growth, and identifies four possibilities: 1) To revive manufacturing and industrialise, 2) To generate agricultural-led growth, 3) To generate service-led growth and 4) To generate natural resource-led growth.

Let’s start with agriculture. Although many African countries have a lot of potential to expand their agricultural sectors, productivity in the agricultural sector remains low. Many farmers are subsistence producers, with low economies of scale. Such a scenario will require a reversal in the current trend away from agriculture. A recent study by Diao, Harttgen and McMillan show clearly how the share of agriculture is falling, particularly as women older than 25 are moving to the cities and into manufacturing and services. This trend seems irreversible, even if changes to technology (like seed varieties or market access opportunities) or institutions (like private property) are made, which means that an agricultural-led high growth scenario seems highly unlikely.

A natural resource-led strategy also seems unlikely for most African countries. Yes, most countries on the continent are well-endowed with resources, but the problems of the Natural Resource Curse and Dutch Disease are well known. It may be an option for some small economies, like Botswana has shown, but one has to question to what extent it can be sustainable beyond a certain level of income.

A third option is to reverse the trend of deindustrialisation. Because a growing manufacturing base seems to be, at least if we consider past examples of industrialisation, the only way to increase labour productivity over a sustained period of time, this is the option preferred by many development agencies. Yet there are many obstacles in the way of a thriving manufacturing sector, including poor infrastructure (transport and power in particular), red tape and corruption, low levels of human capital, and political and legal risk. But as explained earlier, Rodrik believes that even if these (very difficult) barriers can be overcome, it is not clear that manufacturing will return. The Fourth Industrial Revolution may completely alter the nature of manufacturing away from absorbing unskilled labour to capital and knowledge-intensive production. As I’ve said before, it is dangerous to follow a twentieth-century blueprint when production technologies are so different.

That leaves us with one scenario: services-led growth. Services have traditionally not acted as an ‘escalator sector’ as Rodrik explains. The problem is that services typically require high-skilled labourers, one thing that is in short supply in a developing economy. Rodrik does acknowledge, though, that the past will not necessarily look like the future. “Perhaps Africa will be the breeding ground of new technologies that will revolutionise services for broad masses, and do so in a way that creates high-wage jobs for all. Perhaps; but it is too early to be confident about the likelihood of this scenario.”

I don’t see an alternative, though. Yes, some countries, like Mozambique or Tanzania, will be able to expand their agricultural sectors – but higher productivity will probably mean larger farms with fewer workers. A few small countries will be able to benefit from natural resources – from diamonds to rare minerals like tantalum (used in cellphones and laptops); oil-producing countries will struggle, though, as the cost of renewable energies keeps falling. And some coastal countries may even develop their manufacturing sectors, like Ethiopia and South Africa. But for most of Africa, services offer the only reprieve from low productivity, low-wage jobs. From semi-skilled jobs like call-centres and virtual au pairs (apparently the next big thing) to professional services like accountants and designers and programmers, digital technologies must help leapfrog the barriers of poor infrastructure, bad geography and weak institutions. If it cannot, Dani Rodrik’s pessimistic vision of Africa’s future is likely to come true.

*An edited version of this first appeared in Finweek magazine of 26 January.

The world is not a zero-sum game, but it matters if you think it is

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tall-poppy

Question: A farmer in your neighbourhood has had an exceptionally productive 2016. He has managed to double wheat output, and his favourite cow – Daisy – was awarded first prize in the national competition. What is the reason for the farmer’s success? Is it: a) He has worked very hard, b) He was lucky, or c) he put a spell on the rest of the farmers in his village?

This is an example of the type of survey questions a team of Harvard economists have been asking to subsistence farmers in the Democratic Republic of the Congo on several visits over the last few years. In contrast to what one might think, the answer to this question is almost always the same: C. Witchcraft and supernatural beliefs are widespread in Africa and throughout the developing world. One aim of the research group is to identify how these cultural traits affect economic decision-making. Clearly, if my answer to this question was that the farmer’s success was due to hard work, I would conclude that the way to excel is to work harder. But if my understanding is that this farmer somehow cheated – that his success was due to a spell he put on the rest of the community, and that his gain was our loss – then my takeaway is that I need to spend more of my surplus not on investing in my farm, but on bribing the local spiritual leader for favours.

The belief that the world is a zero-sum game is widespread. Like these Congolese farmers, many of us believe that the success of one member of our communities must be to the detriment of others. In some cases, this is, of course, true: when one bowler takes 7 wickets in an innings, it leaves only 3 scalps between the remaining bowlers. But, generally, the world is not zero-sum. China’s success is not a consequence of America’s decline, despite what the Trump propaganda machine says. Trade, as economists have known since David Ricardo, can be mutually beneficial, even if it means that the benefits and costs of growth are not shared by everyone equally. My neighbour’s financial success after she designed and marketed a new app is not the result of her ‘stealing’ my success.

But beliefs of a zero-sum world are widespread, and results in what has become known as the Tall Poppy Syndrome. I’ve seen this in action: students that excel sometimes draw the envy of their poorer-performing peers. And it has consequences: the envious ones believe that the good student must have achieved the high marks because of external factors, such as being the teachers’ favourite. They avoid taking responsibility for their own mediocre efforts. The star student, depending on the sanction of the envious ones, also reacts, either by withdrawing from social interaction or, worse, by putting in less effort in the next test to avoid standing out.

The Tall Poppy Syndrome is prevalent in all societies, but its density and effects are likely to vary. If TPS is more concentrated in poorer communities, for example, it will hamper social mobility, reinforcing both the poverty and the cultural beliefs itself. Development economists are therefore hoping to not only identify the causes of these beliefs but also how to change them.

This will not be easy: beliefs are difficult to measure accurately, and their origins may be deep in history. Nathan Nunn and Leonard Wantchekon’s work several years ago showed how the Atlantic slave trade still affects trust in African societies: people that today live in areas where most slaves were captured are more likely to distrust their neighbours and the government. In a new paper, Oded Galor and Ömer Özak show that people’s belief about time preference – whether you have a long-term horizon or not – were affected by what type of crops their ancestors grew. Both trust and time preferences are necessary ingredients for development. As Adam Smith already pointed out in the eighteenth century, trust is necessary for specialisation and exchange. A long-term horizon allows one to forego future income, invest in the present and earn the higher future returns. It affects our propensity to save, to adopt new technologies, and, as Galor and Özak show, even our likelihood to smoke.

If these cultural beliefs are so deeply rooted and have such a pervasive influence over our behaviour, what can be done to change them? This is difficult to answer and requires the interdisciplinary efforts of psychologists, economists, anthropologists and neuroscientists. The answers they provide may not only contribute to sustainable development and social mobility, but may have applications elsewhere. Marketers may have to design products that appeal to those with a zero-sum worldview, or managers may have to lead teams of people where some ascribe to this view. The incentives that motivate people who have Tall Poppy Syndrome, for example, are likely to be different to those who are less envious of their successful colleagues.

Our beliefs about the world shape our economic decision-making. We are only now beginning to understand how it does, and what to do to change it.

*An edited version of this first appeared in Finweek magazine of 1 December.

Written by Johan Fourie

January 16, 2017 at 08:16

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

I, Krotoa

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Krotoa

Last Friday at around noon, I ended a class on European settlement at the Cape and the demise of the Khoesan by lamenting the lack of public acknowledgement for some of the Cape’s most famous Khoe inhabitants. Autshumao was one of the first translators and interlopers between the trading Dutch and local Khoesan clans. Gonnema was a proud leader of the Cochoqua, who fought the Dutch in three Khoe-Dutch Wars. And then there was Krotoa, Autshumao’s niece, who was brought up by the Van Riebeecks. Here is her short Wikipedia bio:

On 3 May 1662 Krotoa was baptised by a visiting parson, minister Petrus Sibelius, in the church inside the Fort de Goede Hoop. The witnesses were Roelof de Man and Pieter van der Stael. On 26 April 1664 she married a Danish surgeon by the name of Peter Havgard, whom the Dutch called Pieter van Meerhof. She was thereafter known as Eva van Meerhof. She was the first Khoikoi to marry according to Christian customs. There was a little party in the house of Zacharias Wagenaer. In May 1665, they left the Cape and went to Robben Island, where van Meerhof was appointed superintendent. The family briefly returned to the mainland in 1666 after the birth of Krotoa’s third child, in order to baptize the baby. Van Meerhoff was murdered on Madagascar on 27 February 1668 on an expedition.

Krotoa returned to the mainland on 30 September 1668 with her children. Suffering from alcoholism, she left the Castle in the settlement to be with her family in the kraals. In February 1669 she was imprisoned at the Castle and then banished to Robben Island. She returned to the mainland on many occasions just to find herself once more banished to Robben Island. In May 1673 she was allowed to baptise a child on the mainland. Three of her children survived infancy. She died on 29 July 1674 in the Cape and was buried on 30 September 1674 in the church in the Fort,

Pieternella and Salamon, Krotoa’s two youngest children from her marriage to van Meerhof, were taken to Mauritius in 1677. Pieternella, who was known as Pieternella Meerhof or Pieternella van die Kaap, later married Daniel Zaaijman, a VOC vegetable farmer from Vlissingen. They had four sons and four daughters, one of whom was named Eva, and the family moved back to the Cape in 1706.

I ended my class by suggesting the students consider these local figures when they think about renaming campus buildings, as had happened last year during the #FeesMustFall movement. What I had not known, was that at that exact moment, Krotoa’s spirit was returned to the Castle of Good Hope where her remains had been removed from a century ago. Here’s the news report:

Gathered around a tree at the Groote Kerk, they [traditional and religious leaders] burned an incense plant and beckoned for her soul to rise from the unmarked grave where her bones had been held.

Her remains had been removed from the grounds of the Castle of Good Hope, nearly a century after she was buried there.

On Friday, some of her descendants returned with her spirit to the castle.

A few months ago, after uncovering an old computer file that contained my genealogy, I discovered that the wife of my paternal great-grandfather – Wynand Breytenbach Fourie – was one Johanna Beatrix Fourie. Her maiden name: Zaaiman.

Many other South Africans also descend from Krotoa. It is in the math – here’s Stephen Fry on the topic. Almost all white South Africans today must have some non-European heritage, given the women of Khoe or slave (especially) origin who married Dutch or German or French (or, in Krotoa’s case, Danish) men at an early stage in the country’s history.

Although several novels have appeared that feature her – most famously Dan Sleigh’s Eilande and Dalene Matthee’s Pieternella van die Kaap – Krotoa, and the tumultuous times she lived in, has been largely neglected from popular discourse. Fortunately, that is changing. In the ceremony on Friday, she was variously described as a child labourer, a feminist, and a language fighter who helped create Afrikaans, even a martyr. An Afrikaans/Nama movie that feature her life is now in post-production stage. Armand Aucamp plays Jan van Riebeeck and Crystal Donna Roberts an older Krotoa.

But more should certainly be done. Monuments and renamed buildings and public places can play a role, but because Krotoa’s story is claimed by so many (as Heritage Consulatant Tracy Randle explains in this interview), these memorials will remain contested. Some activitists protested outside the Castle on Friday, for example. Last year, a bench which had Krotoa’s face engraved in mosaic art, and which was located at Krotoa Place, the small square at the intersection of Castle Street and St George’s Mall, was destroyed.

Much like 350 years ago, Krotoa embodies the tragedy and disillusionment but also the hopes and aspirations of our fractured society. Unshackled to anyone or any group, hers is our story.

Or, as Lara Kirsten observes in her poem Vir Krotoa (For Krotoa):

in haar skyn die hoop
wat nog by ons mense spook

(in her shines the hope that still frightens our people)

Written by Johan Fourie

August 25, 2016 at 08:46

What you need to know about South African exporters

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Ngqura-South-Africa

One of the most profound (and often most difficult to teach) insights in economics is the idea that trade is not a zero-sum game. Just as my salary allow me to purchase all the things I cannot (or don’t want to) produce on my own, so do our exports (of the things we are good at) allow us to buy imports (of the things we are not good at). We do not work simply to accumulate a salary; we work because it allows us to buy nice things.

In other words, we are not mercantilists. A mercantilist hopes to export as much as possible and restrict imports. A large, positive trade balance, they believe, will ‘make a nation rich’. Not so. Mercantilism is not why England experienced an Industrial Revolution, and it is not why Africa will grow rich. Having more exports than imports over the long-run simply means that a country’s citizens are not reaping the fruits of their labour. To return to the earlier metaphor: it’s like earning a salary but not being allowed to purchase anything with it.

It’s easy to sell mercantilist ideas, though. Here is Mr Wilmot in the Legislative Council of the Cape Colony in August 1891: ‘Let us be wise in time, and really patriotic, grow our food, encourage our own industries…’. Or Mr Merriman in the same debate: ‘The best form of Protection was for everybody to set to and buy as much as they could in the Colony. (Hear, hear.)’ Or Mr Van den Heever: ‘The question was to keep, through fostering Colonial industries, the money in the Colony’.

You don’t need to go too far to find similar sentiments in contemporary debates. The clothing and textile industry recently held an Imbizo to discuss ways to grow the industry. Some of the comments on news websites reporting this story summarise the sentiment I often find in my classes too: ‘Chinese imports killed the textile industry in South Africa’, ‘You forget the greedy retailers preferring the cheapest suppliers’, ‘All we need is a 90% buy local campaign’, ‘With a bit of good will and assistance in the form of import restrictions we would all benefit. Jobs, better quality and some pride in the achievement would do all of us some good!’.

Again, not true. Aside from the small detail that the industry has received support since the 1930s, long before China was a competitive force, we should rather export what we are good at, and import the cheap goods which we aren’t relatively good at. (Also, Chinese clothes are becoming increasingly expensive as Chinese wages increase. We are increasingly importing clothes from other parts of Asia, and Africa.)

But how do we do this? Two recent UNU-Wider working papers by South Africa’s foremost trade economists help to answer exactly this question. The first, by a team of economists from North-West University and Stellenbosch University, use a new firm-level dataset of South African manufacturers to understand exporting firms better. They report five key findings: 1) Export participation is rare – only 19% of South African firms export. 2) Exporters are systematically different to non-exporting firms – they are larger, more labour productive, pay higher wages, and are more capital and intermediate-input intensive than non-exports. I will lump all these things together and just say they are ‘better’. 3) Firms that export to multiple destinations and across multiple product lines are ‘better’ across all the dimensions listed above. 4) Exporters to countries outside Africa are ‘better’ across the same dimensions than exporters to countries within Africa. 5) Firms that already export are most likely to grow the total value of exports than new entrants.

The second paper, by researchers at the University of Cape Town and the University of Bari in Italy, use similar data to show that the most productive South African firms are the ones that both import and export. Importing from advanced economies especially makes local firms more productive, and more likely to export at greater scale, scope and value. The authors argue that access for domestic firms to a variety of intermediate inputs from abroad can be crucial to raising local employment and gaining access to new technologies.

The takeaway: South Africa’s exporters need imports to be competitive. We can only grow our local exporting firms by giving them access to the cheapest inputs and the best technologies, and these are often found outside South Africa. Much like our 19th-century ancestors, our zest to expand exports will only inflict harm if we adhere to the mercantilist sentiment by restricting imports.

*An edited version of this first appeared in Finweek magazine of 14 July.

Written by Johan Fourie

August 11, 2016 at 09:13