Archive for the ‘South Africa’ Category
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.
When I was an Economics student 12 years ago, the academic literature we read, by South Africa’s leading economic thinkers and social scientists, were lamenting the poor performance of the then South African school system. There was little doubt that what needed to happen was to improve the quality of the schools for the 80% South Africans who were still stuck, despite massive transfers of resources to these schools, in a system that had been crippled by apartheid-era policies.
Fast-forward to today. A generation has now passed through the system, and there has been almost no improvement. Of 100 Grade 1-students that go to school, only 37 can hope to pass matric. With teacher trade unions opposing policies that might improve teacher quality, our Minister of Basic Education seems paralyzed. Corruption often means that budgets are either unspent or spent inefficiently. There is little hope that things will soon improve.
But there is an alternative. Over the last few years, private schools have become an alternative for middle-income families that want a better future for their children. Take Northern Academy in Polokwane, run by the JSE-listed Curro Group. Despite school fees that are around R21000 per year, with a similar amount for boarding, the school has more than 5000 students, 111 classrooms and 66 hostels. In the 2016 matric exams it was the top-performing independent school in the province.
Curro now has schools across all nine provinces. In the last four years, its share price has tripled. Its profit motive means that it must satisfy its client base: if it performs poorly by employing poorly-qualified teachers, its clients will go elsewhere. That is the miracle of the market-system that Adam Smith identified: profits are a way to signal that a firm is doing something right. If profits fall, the firm better improve its products or services or it will go out of business. If profits rise, like in the case of Curro, other firms will notice and enter the market, offering their own product and service which they hope will eat into the profits of the dominant firm.
One fear is that Curro will monopolise the market, charging fees that allow them to earn monopoly profits. This is unlikely in the education sector, though, as there are few barriers-to-entry. Consider the SPARK schools, with tuition also around R21000 per year, that have opened since 2013 in Gauteng and the Western Cape.
A second fear is that a well-run private school system will create further divisions in a country characterized by high levels of inequality; those that are able to afford the high school fees of good education will stand to benefit vis-à-vis kids from poor households forced to attend poor-quality public schools. This is likely to happen if private schools are limited to those that can afford to pay for them. But they need not be.
In Sweden, where equality-of-opportunity is almost a religion, more than 10% of kids are enrolled in private schools. A major education reform in 1992 allowed primary and secondary schools to receive public funding based on the number of students they have enrolled. These schools are not allowed to discriminate or require admissions exams, and they are not allowed to charge parents additional school fees. (They are allowed to accept donations, which are often used to expand school facilities or offer financial support for the poorest students.)
Anyone can start a for-profit school in Sweden. Many offer an alternative curriculum, or provide a service to international, religious or language groups. Others are designated sports or artistic schools. The point is simple: if a public school is not providing the services its community wants, an entrepreneur with the ability to identify a gap in the market will step in to deliver a better service.
This is what we need in South Africa too. The 2017 Budget allocated R243 billion to the Department of Basic Education, which is 16% of our total consolidated spending. With 11.2 million school-going kids in South Africa, that is slightly more than R21000 per kid.
What if every parent in South Africa received a government voucher of R21000 per student which they could deposit at any school they want, public or private? A larger amount could be given to those living in rural areas, and possibly those living in previously disadvantaged areas. This empowers parents to choose the schools which they believe will serve the interests of their kids best.
There are concerns with private education too, of course. One would want to make sure that facilities are of good quality, that teachers and curricula meet certain standards, and that there is some security that students’ interest will be served if a company that provides these services goes into liquidation. But those concerns pale in comparison to the atrocious outcomes of the current school system, where facilities are often non-existent and teachers unqualified.
Imagine the opportunities this will create for entrepreneurs. A community leader in an area with poor public schools can now take the initiative, appoint educators from within the community and use the vouchers to pay their salaries. Imagine Cricket South Africa partnering with an entrepreneur to build a chain of elite cricket schools, with CSA providing the facilities and coaches and the vouchers paying for high-quality education.
An important research literature suggests that mother-tongue education is critical for student success: with a voucher system, if there is a demand for secondary education in Sesotho in a specific community, expect an entrepreneur to spot the gap. Another concern for the near future is the dearth of university-trained teachers: private school chains will have an incentive to fix this, either by training their own teachers on the job, or by investing in teacher training colleges.
We need a new plan for education. I’d hate to see my colleagues 12 years from now write papers still lamenting the poor state of the South African education system. We keep throwing money at a problem that cannot be fixed by money alone. The Basic Education budget grew 7.3% in 2017. If we continue doing this, we are likely to fail a second post-apartheid generation.
*An edited version of this first appeared in Finweek magazine of 23 March.
Late last night, South African president Jacob Zuma fired Pravin Gordhan and Mcebisi Jonas as Minister and Deputy Minister of Finance, and appointed Malusi Gigaba (pictured) and Sifiso Buthelezi in their place. With this move, he has gained the keys to Treasury. Aside from Finance ministry, Zuma appointed 18 new ministers and deputy ministers, including Fikile Mbalula, the former Minister of Sport, as Minister of Police. Bathabile Dlamini, Minister of Social Development, whose incompetence was recently exposed when her actions risked the well-being of 17 million South Africans, remains in her portfolio.
It all sounds so familiar. In December 2015, Zuma fired then Minister of Finance Nhlanhla Nene and replaced him with Desmond van Rooyen. After the rand plummeted more than 5%, Zuma was forced to reverse his decision and appoint Pravin Gordhan in the position three days later.
I wrote a post immediately after the appointment of Van Rooyen. Most of the points I raised there are now valid again. Zuma has captured Treasury – with a Zuma-loyalist in charge, he can now sign off on projects that benefit him and his backers, the Guptas.
The question, again, is what to do. And again I have to say, I don’t know. I see calls on social media for mass action, but I am not too sure Zuma and his cronies would pay much attention. Blog posts, I fear, will also not have much of an impact. What I will do, however, is to encourage Treasury employees, many who are brilliant economists and also good friends, to remain in office, despite the obvious challenges that they will face with a Zuma-loyalist at the helm. How long, though, can one remain honourable and incorruptible in an environment where you might become complicit in whatever shady nuclear or other deals Zuma has up his sleeve?
What this reminds me of is a tweet by veteran Zimbabwean businessman Trevor Ncube:
Many South African friends ask me: “Why did Zimbabweans allow Mugabe to destroy the country? My answer: it was a process not an event.
— Trevor Ncube (@TrevorNcube) December 10, 2015
If something doesn’t happen soon to reverse this process of decline – and this can only happen when Zuma is gone, although that will only be a start – we risk destroying the progress we’ve made since 1994. The irresponsible actions of last night will hurt the economy badly, from a weakening currency (which has already fallen by more than 3%) to almost definite downgrade, which means more money spent on paying loans than building roads, houses and clinics. And if Zuma’s pet projects, like a nuclear deal with Russia, is signed, the cost for South African taxpayers – and the opportunity costs for South Africa’s poor – will be horrific.
Prepare for a bumpy ride.
Politicians can shape the fortunes of countries. Presidents, in particular, set the tone: balancing many stakeholder interests, their job is to create a unifying vision that should guide policy-making. Members of parliament act upon this vision, designing and implementing policies that affect the lives of millions of people. One would imagine, then, that those with the best aptitude for leadership get elected.
That is the theory. But in practice politics is a messy business. For many reasons, it is often not the smartest candidate who gets elected, or the most effective member who gets selected for higher honours. Some economic models even explain why it is not the most capable that move up: Someone without a proper education (but a charismatic personality) has a much higher chance to see greater returns in politics than in the private sector. (In technical terms, lower opportunity costs give the less able a comparative advantage at entering public life.) These selection effects are compounded by the free-rider problem in politics, where work effort is not directly correlated to political outcomes. In other words, according to this model, it is society’s ‘chancers’ that are more likely to end up in politics – and the hard-working, smart ones will tend to end up in the private sector.
Competency in public office is, of course, is not the only goal of a parliamentary system. Representation – having politicians that reflect the demographic and geographic make-up of society-at-large – is also a key concern. But competency and representation, at least theoretically, do not always correlate. Take the following example: a proportional representation system, like we have in South Africa, would require members of all districts to be represented. But what if one region – let’s call it Farmville – has few university-trained citizens, whereas another region – Science City – has many citizens with university degrees? A proportional representation system will necessitate some Farmville politicians also be elected to parliament, even though the Science City politicians will probably be best qualified for the job. In contrast, in a plurality rule system – where the candidate with the most votes gets the job – competency often trumps representation.
A new NBER Working paper – Who Becomes a Politician? – by five Swedish social scientists, casts doubt on this trade-off. Using an extraordinarily rich dataset on the social background and competence levels of Swedish politicians and the general public, they show that an ‘inclusive meritocracy’ is an achievable goal, i.e. a society where competency and representation correlate in public office. They find that Swedish politicians are, on average, significantly smarter and better leaders than the population they represent. This, they find, is not because Swedish politicians are only drawn from the elite of society; in fact, the representation of politicians in Swedish municipalities, as measured by parental income or occupational class, is remarkably even. They conclude that there is at best a weak trade-off between competency and representation, mostly because there is ‘strong positive selection of politicians of low (parental) socioeconomic status.
These results are valid for Sweden, of course, which is a country unlike South Africa. Yet there are lessons that we can learn. First, what seems to matter is a combination of ‘well-paid full-time positions and a strong intrinsic motivation to serve in uncompensated ones’. In other words, a political party in South Africa that rewards hard work for those who serve in uncompensated positions, are likely to see the best leaders rise to the top, where they should be rewarded with market-related salaries. Second, an electoral system which allows parties to ‘represent various segments of society’. Political competition is good. Third, the ‘availability of talent across social classes’. This, they argue, is perhaps unique to Sweden, known for its universal high-quality education.
This reminded me of our State of the Nation red carpet event, where the cameras fixated on the gowns and glamour of South Africa’s political elite. How do the levels of competency in our parliament, I wondered, compare to Sweden and other countries?
Let’s just look at the top of the pyramid. The president of Brazil, Michel Temer, completed a doctorate in public law in 1974. He has published four major books in constitutional law. The Chinese president, Xi Jinping, also has a PhD in Law, although his initial field of study was chemical engineering. Narendra Modi, prime minister of India, has a Master’s degree in Political Science. Former US president Barack Obama graduated with a Doctor of Jurisprudence-degree magna cum laude from Harvard University. Angela Merkel, chancellor of Germany, has a PhD in quantum chemistry. Most of these widely respected leaders gave up a top job in the private sector or academe to pursue a political career.
Politics is messy, but given the right conditions, it can still attract high-quality leaders. For that to happen, though, aspiring politicians must put in the hard yards, even if initially uncompensated, supported by a competitive political party system and broad access to quality education. South Africa, unfortunately, is still a long way from meeting these criteria.
*An edited version of this first appeared in Finweek magazine of 9 March.
Story-telling is as old as civilization. Around the fire, in religious texts, and in children’s books, stories give us identity, teach us right from wrong, and inculcate us with the norms and values that help us make sense of the world around us.
Economists are beginning to understand that stories also shape our behaviour, and therefore our economic outcomes. In a new NBER paper, financial economist Robert Shiller, the 2013 Nobel-prize winner, calls for the study of what he calls ‘economic narratives’. He argues that the way we talk about certain events, the stories that were told during the Great Depression (of the 1930s) or the Great Recession (of 2007) or even the stories we tell of Trump’s economic policies today, affected (or will affect) the outcomes of these events. Business cycles, he explains, cannot only be explained by the rationality of numbers. The stories we tell, and how these stories spread, matter too.
Economic stories or narratives are simplified ways to help us understand the world. They can take many forms: from newspaper articles and books, to memes, anecdotes, and even jokes. They often appeal to us not because they account for all facts, but because they explain the world in a way that strengthens our existing biases and beliefs. And their success is unpredictable: consider how difficult it is to identify the next ‘hit’ on YouTube or cultural trend to go ‘viral’.
Shiller uses, well, a story to explain the impact of stories. One evening in 1974, at the Two Continents in Washington DC, economist Arthur Laffer had dinner with White House influentials Dick Cheney and Donald Rumsfield. They discussed tax policy, and Laffer took a napkin and drew an inverted-u graph. On the left side, tax rates were 0%, which means tax income was also zero. On the right side, tax rates were 100%, which meant that no-one would work and tax income would also be zero. The point of the curve was to show that there is an optimal tax rate where tax income cannot increase further, whether you increase or decrease tax rates.
This meeting in 1974 would not have been remembered, was it not for the story-telling powers of Jude Wanniski, who wrote a colourful article in National Affairs about the dinner four years later. The story went viral (see image), and had a massive impact on Ronald Reagan’s election as US president in 1980 and his commitment to cutting taxes. (He argued that cutting taxes could increase tax revenue because America was on the wrong side of the Laffer curve). This story was so powerful that a napkin with a Laffer curve is today displayed in the National Museum of American History.
Shiller is, of course, not the first to argue that stories matter. A few years ago, Barry Eichengreen, professor of Economics at UC Berkeley, explained in his presidential speech to the Economic History Association that, while scientists use deductive or inductive reasoning in their research, policy-makers often rely on analogical reasoning. He knows this from experience: when the severity of the Great Recession became known in 2007, policy-makers realised they had to act fast. Had they followed a deductive approach, they would have had to agree on the theoretical reasons for the crisis. Eichengreen argues that this was almost impossible given the deep divides in the field of macroeconomics. Had they followed an inductive approach, they would have had to rely on statistical evidence, much of which was not available immediately.
So instead they turned to an event that they had studied: the Great Depression of the 1930s. Ben Bernanke, who was a student of the Great Depression, used analogical reasoning to ensure that the same mistakes were not repeated. Expansionary monetary and fiscal policy followed. The analogy with the Great Depression also made it easier to communicate their policy response to the broader public. Instead of trying to explain theory or statistics, they could construct a narrative that helped people understand why quantitative easing or fiscal stimulus was necessary.
If stories matter in shaping our response to economic events or in persuading us of the validity of some economic policies, what should economists do about it? Shiller suggests that we should incorporate textual analysis into our research: “There should be more serious efforts at collecting further time series data on narratives, going beyond the passive collection of others’ words, towards experiments that reveal meaning and psychological significance.” But this is difficult: “The meanings of words depend on context and change through time. The real meaning of a story, which accounts for its virality, may also change through time and is hard to track in the long run.” New techniques in data science may help.
Eichengreen proposes more emphasis on the study of history. Consider the case of a bank failure in South Africa today. What will we use as policy response: theory, statistics, or earlier bank failures, like Saambou and African Bank? Probably the latter. The problem, Eichengreen warns, is that there is not a single version of history. We all have our ideological glasses through which we look at the past. This is especially true when the facts of what had happened during these past failures are not widely known. The recent Bankorp saga comes to mind.
Because ‘historical narratives are contested’, Eichengreen suggests, we should see ‘more explicit attention to the question of how such narratives are formed’. In other words, if we want to improve our understanding of the world and our ability to predict the future, it’s time economists learn how people tell stories, and how these stories persuade us to behave differently.
*An edited version of this first appeared in Finweek magazine of 23 February.
In his 1936 book that would give theoretical support to Franklin D. Roosevelt’s New Deal, the British economist John Maynard Keynes wrote the following: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.”
There is little doubt that the ideas of economists – their models or theories or ideologies – have had a profound influence on our daily lives. To give just one example: when South Africa’s Monetary Policy Committee decides whether to lower or raise the interest rate, they do so based on a model that predicts the likely effects of the policy change.
But there is not one universal model. Macroeconomists, depending on their school of thought, have different beliefs about how the real world works. Some, like those that propound Real Business Cycle (RBC) theory, argue that business cycle fluctuations are the result of exogenous changes to an economy, and because wages and prices are flexible, there is little that governments can do through fiscal and monetary policy in a downswing. Others, like New Keynesians, see a greater role for government intervention because of things like sticky wages and prices.
Though these ideological disagreements in macroeconomics are nothing new, one would expect that the competition between these ideas would ultimately lead to a better way to explain what is happening in the world. This is, however, not the case, and one of the main reasons the World Bank’s new chief economist, Paul Romer, formerly professor at Stanford and New York University, recently wrote a stinging critique of macroeconomics. “I have observed more than three decades of intellectual regress”, he begins, explaining that macroeconomics has gone down a wrong path and have now reached a dead-end.
The basic premise is this: macroeconomists’ increasingly sophisticated models have ignored real-world evidence. Simon Wren-Lewis of Oxford University explains: “If we look at the rise of Real Business Cycle (RBC) research a few decades ago, that was only made possible because economists chose to ignore evidence about the nature of unemployment in recessions.”
Why would scholars willingly choose to ignore real-world evidence? “The obvious explanation is ideological” says Wren-Lewis. “I cannot prove it was ideological, but it is difficult to understand why – in an area which … suffers from a lack of data – you would choose to develop theories that ignore some of the evidence you have.” Ironically, this shift came at a time when the rest of the profession, fields like labour economics, development economics and international trade, shifted the other way: from theory to empirics.
To be fair, RBC models have become less popular, replaced by ‘New Keynesian’ models. These ones make more realistic assumptions of the real world, like adding sticky wages, but still share many of the same concerns. Because these new generation models, known as Dynamic Stochastic General Equilibrium models, are ‘built from the ground up’ (in other words, built on microeconomic foundations) they are far more appealing theoretically (and technically more difficult to construct) than the structural models of the previous generation, models which only considered the interlinkages of different macroeconomic variables. But in practice they turned out to be less than satisfactory: DSGE models require the modeller to make many assumptions about how individual agents behave, and it turns out that this behaviour is difficult to measure, making the assumptions rather subjective. The result is that, though theoretically plausible, the outcome is often far removed from the real-world evidence. And, most importantly, forecasts – that thing that most people think is an economist’s only job – are often far less accurate with DSGE models than with multiple-equation structural models. That is why most reserve banks, including our own, still mostly rely on structural models to help predict the future outcomes of their policy decisions.
So why continue with DSGE models? This is a consequence of the way scholarship works. In a blog post in response to Romer, Narayana Kocherlakota of the University of Rochester writes: “We tend to view research as being the process of posing a question and delivering a pretty precise answer to that question. In this process, machines that can be used by many scholars to generate answers to wide ranges of questions are highly prized. The King-Plosser-Rebelo real business cycle model was one such machine. The New Keynesian three-equation model is another. And people who have the mathematical and computational skills to make machines even more powerful, so that they can answer even more questions, are naturally highly valued.”
Yet if these ‘answers’ increasingly abstract away from reality, we are not much better off than before. Keynes, who developed a new theory when the existing paradigm could not explain the real world anymore, knew this all too well: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
For academic macroeconomics to regain its influence, it needs to be, as Kocherlakota writes, “a lot more flexible in our thinking about models and theory, so that they can be firmly grounded in an improved empirical understanding”. This won’t be easy. As Locherlakota says, it will be “hugely messy work”. Will this generation’s John Maynard Keynes please stand up?
*An edited version of this first appeared in Finweek magazine of 9 February.