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An ode to optimism

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Stef

When I began my postgraduate studies – in 2004 as an Honours in Economics – I had to choose a supervisor for my mini-dissertation. I wanted to work on infrastructure investments, and approached prof Stef Coetzee, then affiliated to the Stellenbosch Business School, because of his expertise in development economics and his proximity to the world of business. He agreed – and I eventually produced a mini-dissertation twice the length of what it should have been.

Prof Coetzee was a wonderful guide for a naive but enthusiastic student. He certainly had the academic expertise to dismiss most of my ideas; he had completed a Masters degree at Stellenbosch University’s Economics department in 1973, the department where I now work, and a PhD at the University of the Free State in 1980. In the above picture, taken on 2 February 2018, Coetzee (on the left) appears with three former Stellenbosch classmates, prof Eon Smit, Hannes le Roux and prof Philip Mohr, men who have all had a profound impact on the South African academic landscape.

Yet prof Coetzee were never dismissive of my attempts to think boldly about the infrastructure that was required to put South Africa on a higher growth trajectory. Perhaps that is because he had experience of leading big teams and organisations, and thinking outside the box. He was a former rector of the University of the Free State, director of the Centre for Policy Analysis at the Development Bank of Southern Africa, and would later be CEO of the Afrikaanse Handelsinstituut.

But I’d like to think that it was also his personality to be open to new ideas, and optimistic about putting them into practice. Because of social media like Facebook, we could reconnect the last few years. Even when things were going badly with the economy, he would be optimistic that things would turn around.

He expressed these views in a chapter he wrote for a book I edited on what students should know when they go to university. Written a decade ago, but still relevant today, here is a short summary:

What do the above challenges and opportunities mean for us as South Africans? Probably the most important is that it leaves the younger generation with a future full of opportunities! The opportunities may be different from in the past, but it will definitely be exciting. The general expectation is that the economic growth of developing economies will in the near future be higher than that of developing economies and will also provide bigger investment opportunities.

Secondly it is also clear that exceptional leadership will be required in order to position South Africa as one of the foremost developing economies. Insight on South Africa within the world and the African context will be necessary to develop the correct policies and strategies.

Thirdly it appears that the opportunities will stretch across a wide spectrum and be multi-dimensional and multi-disciplinary. We are going to need scientists, academics, teachers, business people, farmers, doctors, nurses, and engineers to make South Africa a competitive country, but also one that can handle some the most important problems.

Fourthly new skills will be required in a fast-changing world: better flexibility, the ability to work in multi-cultural contexts, better language skills, excellent technological skills, innovation, creativity and the ability to work in teams on different continents, to name but a few.

Fifthly the future will place bigger demands on young people to achieve breakthroughs on political, economical, social, technological and environmental level. It will simultaneously provide exciting opportunities.

Prof Coetzee passed away on Saturday. Despite attempts to do so last year, we never had the chance to meet up again in person. His last few messages to me were, as always, optimistic, despite his illness and setbacks. He was optimistic about the South African economy, about my career, about the Springboks.

Now that I have my own students to supervise, I have a deeper appreciation of the role that supervisors can play in students’ lives. This, then, is a belated thank you to prof Stef Coetzee, my first supervisor who, unbeknownst to both of us, steered my own academic journey into a more optimistic future.

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Written by Johan Fourie

October 29, 2018 at 08:00

Why are there so many single mothers?

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Family

Here is a statistic to get your head around: Of the 989 318 babies born last year in South Africa, 61.7% have no information about their father included on their birth certificate. We don’t precisely know why the women who register these babies do not record the father’s information, but it is highly likely that it is because the father would not want to be involved in the raising of the child. They are, in fact, single mothers. This conjecture seems to be supported by other evidence: the HSRC estimates that 60% of South African children have an absent father, and that 40% of mothers are single parents.

Explaining why these mothers are single is not easy. One argument is historical. Throughout the late nineteenth and twentieth centuries, young men would move to the mines, away from structured family life in the countryside. This migrant labour system, it is said, would explain the large number of single women. While plausible theoretically, this explanation neglects a key empirical reality: that the share of single mothers is on the increase. The migrant labour system, owing to the apartheid-era homeland system, was arguably most intense during the twentieth century. And yet this is also the period where the share of single mothers was much lower. The number of migrant workers fell after the dismantling of apartheid settlement policies and, since the 1990s, the decline of the mining industry. Yet it is exactly then that we see a significant rise in the share of single mothers.

If the migrant labour cannot explain the large numbers of single mothers, what else could? Dorrit Posel and Stephanie Rudwick, in a paper published in 2014 by the African Studies Association, show that the Zulu, in particular, have very low marriage rates, as low as 30%. Perhaps, you might argue, it is just that women prefer to be single – that an unmarried life is better than a married one. Well, the evidence does not support this theory. Using survey data, Posel and Rudwick find that this is not a preference: more than 80% of unmarried Zulu women report that they would like to get married (as do the men, incidentally). The reason they attribute to women remaining unmarried despite their wish to be married is lobola, or bride wealth: ‘Our qualitative data demonstrate that frequently the way ilobolo is practiced, and particularly the amount that is requested relative to men’s opportunities in the South African labour market, can contribute to delayed marriage and nonmarriage.’

Both the migrant labour and lobola systems are unique to southern Africa. But the share of single mothers has been rising almost everywhere. In fact, 62% of all births to non-college educated mothers in the United States in 2014 were to unmarried women, very similar to the South African figure. Something more universal seems to be behind these trends.

One possibility is that men’s poor economic conditions contribute to them delaying or eschewing marriage. This is the argument Posel and Rudwick put forward, but one that is also found for the United States, where non-college educated men’s relative incomes have declined over the last three years. A new paper, soon to be published in the Review of Economics and Statistics, tests whether it is, in fact, men’s poverty that prevents them from marrying. The two authors, Melissa Kearney and Riley Wilson, link the fracking of shale gas in the 2000s to marriage rates. The idea is that, if the hypothesis is true that men do not marry because of poor economic conditions, then a fracking boom, which would create more employment and lead to higher incomes, should result in larger numbers of men being willing and able to marry. Kearney and Wilson use a sophisticated statistical analysis to show that 1) there is no impact on higher incomes of non-college educated men on the likelihood of getting married, 2) there is a boost to fertility rates after their income improves, but this increase is similar for both married and unmarried men. They conclude: ‘We find no evidence from the fracking context to support the proposition that as the economic prospects of less educated men improve, couples are more likely to marry before having children.’ In short: it’s not poverty that prevents marriage.

So what is it then? One possibility is that it might be higher female incomes. Not only have women entered the labour market at historic levels since the 1960s, but social transfers to support children has also increased. Both sources of income would give women more agency (or bargaining power) within the household, and reduce the need to live with an income earning partner. While much evidence shows that giving women more household resources improves the outcomes for children, it may have the unintended consequences of absolving men from their child-rearing responsibilities. Thomas Sowell, a US libertarian economist, notes that in 1960, almost a hundred years after the end of slavery in the US, 22% of African Americans grew up in households with only one parent. ‘Thirty years later, after the liberal welfare state, that number had more than tripled. We can speculate as to how much of that 22% was due to slavery, but we know that that tripling was not due to the legacy of slavery. It was due to the legacy of a whole different set of policies.’

But it is also not that easy. The rise in single mothers, although it has increased in the last two decades, began before the child support grant was introduced in South Africa. Pensions may play a role, but it is unclear to what extent they alone can explain the rise in single motherhood.

Family structure is rapidly changing. More children are now growing up with one rather than two parents. Even if the causes remain fuzzy, one thing is certain: the consequences are likely to be profound.

*An edited version of this article originally appeared in the 26 September edition of finweek.

Written by Johan Fourie

October 26, 2018 at 08:00

A radical solution to land ownership

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Farmland

What if I could offer you the following three outcomes – 1) an increase in government revenue to the extent that a Basic Income Grant (BIG) can be afforded, 2) a substantial decline in wealth inequality, and 3) a sustainable solution to the land crisis – with just one policy intervention? Fantastic, you’d say, but naïve and, frankly, absurd. There is no policy that we know of that can tackle these immense societal challenges, all in one go.

Wait, I’m not done yet, I’d answer. This policy would make it much easier to build infrastructure, get rid of derelict buildings, would ramp up GDP per capita significantly, and would foster social cohesion.

Seriously? Don’t be ridiculous, you’re dreaming, you’d respond. And to do this, I’d continue, we’d need to do two things that seem almost directly opposed to one another. We need to expand markets. You might nod in agreement, something sensible for the first time. Oh, and we must abolish private property altogether.

This, in short, is the recommendation by two economists, Erik Posner and Glen Weyl, in their new book Radical Markets. Critics seem to agree that this is something worth discussing; Kenneth Rogoff calls this ‘perhaps the most ambitious attempt to rethink democracy and markets since Milton Friedman’.

Although their ideas have huge implications for democracy and immigration too, I will focus here on their first chapter, and probably the one most relevant to South Africa currently: property. They propose a Common Ownership Self-Assessed Tax (COST) on wealth. Property, they argue (like many economists before them), are inevitably monopolistic, and monopolies create inefficiencies in the market. Their COST aims to remove these allocative and investment inefficiencies by introducing a live auction for every asset in society.

So, how does it work? Let’s take Khulekani. His young family has just expanded, and so he wants to buy a new house. He would go to a website – let’s call it UmhlabaWethu.co.za – and open a sort-of Google Maps that will allow him to see every property in South Africa, valued by the owner of the property. He can then decide to buy any property, by just clicking on the property, at the price the owner has listed. The ‘right to exclude’, one of the central tenets of private ownership, is therefore waived in this new system. Every property owned by a company or individual (or government!) must be valued and listed.

So, what prevents owners from just making excessively high valuations, making Khulekani’s attempt at buying a house impossible? Tax. In this system, each owner will pay an annual tax on the self-assessed value of their property, thereby waiving the ‘right to use’, the second central tenet of private ownership. The authors explain: ‘In the popular image of private property, all benefits from use accrue to the owner. Under a COST, on the other hand, a fraction of this use value is revealed and transferred to the public through the tax; the higher the tax, the greater the fraction of use value transferred.’

In other words, all property in South Africa would be on a permanent auction, where the current user of the property determines the price (but pay for that price in tax). It’s almost like Uber, for property.

Imagine a private investor wants to build a high-speed monorail in Cape Town. To do this at present would be almost impossible, as owners of properties on the intended route would hold out for a high price, knowing that they have monopoly bargaining power. A COST would allow an investor to go online and buy up all the properties at the listed price, combine them, and start building the monorail. (Of course, they must also value that property, and pay tax. If another investor believes they can build a more profitable monorail, they might just buy-out the original investor’s right of use.)

Or imagine that the property tax is returned to citizens as a Basic Income Grant. By the authors’ rough calculations, every US citizen from a similar system could receive $20000 annually, which for most would be far less than they would be paying in tax. By their estimates, it would only be the richest 1% property owners that would be paying more than they receive – and often a lot more. This not only reduces inequality (by 4 Gini points, according to their estimates), but it also acts as a subsidy for the poorest.

In South Africa, COST tied to a BIG could do far more to alleviate poverty and address inequality than a policy like expropriation. Unproductive land would be a direct cost to all society: higher property values paying more tax mean that more can be redistributed to everyone. As the authors note, ‘a world in which everyone benefits from the prosperity of others would likely foster higher social trust, a factor essential to the smooth operation of the market economy’.

‘The sharing of wealth would be in accord with many commonsense notions of justice. Wealth is rarely created solely by the actions of the people who are paid for it under capitalism. They normally benefit from the help of friends, colleagues, neighbours, teachers, and many other people who are not fully compensated for their contributions. A COST would better proportion the distribution of wealth o the labour that created it.’

This is a radical proposal. It might have unintended consequences that we cannot currently imagine. That’s why the authors propose a piecemeal adoption of these policies. That is a sensible approach. Experimentation will be needed, perhaps even within one municipality first.

But the radical economic transformation that COST can accomplish is a lesson in how creative thinking – and perhaps a willingness to put away our ideological differences – can help find solutions to a problem that we had thought to be insurmountable.

*An edited version of this article originally appeared in the 13 September edition of finweek.

Don’t bet against the historians

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PikettyWEHC

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

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

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

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

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

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

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

Written by Johan Fourie

October 8, 2018 at 08:00

The cost of crime

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South Africa Gang Violence

It is almost something that defines South Africans: having lived through the traumatic experience of a violent crime or, at the very least, know someone that have. 19016 murders were committed in the country in 2016/2017, according to the South African Police Service, or 34.1 murders for every 100 000 people. (Contrast Afghanistan at less than 7 murders per 100 000 people, Argentina at less than 6, Kenya at less than 5, India at less than 4, Iran at less than 3, and Ghana at less than 2.) Almost the same number of attempted murders as murders were reported to the police. On average, 109 men and women were raped each day. In 2016/17, there were 22,343 incidents of house robbery recorded, or 61.2 each day.

These statistics are nothing less than shocking. They explain why most South Africans list crime as their number one concern, far above access to land or inequality, and why those that decide to emigrate list ‘improved safety and security’ as the top reason for leaving. Given the widespread concern, one would expect that safety and security would be a top research priority at South African universities. It is not. A 2017 World Bank study by leading social scientists reports: ‘There is a dearth of research on crime in South Africa, which is particularly problematic in this country given the extraordinary high crime rates reported here.’ The study begins to fill the gap, but the results show why understanding the causes of criminal behaviour is so difficult.

Surely poverty is the most obvious explanation for crime? Well, consider that the province with the second highest murder rate in the country is the Western Cape (with 51 murders per 100 000 people), and the province with the lowest murder rate is Limpopo (with 14 murders per 100 000 people). The Western Cape is, of course, much more affluent than Limpopo. This suggests that poverty is not the main reason for crime. Perhaps, then, inequality is what matters. The authors of the World Bank study answer this emphatically. Using a sophisticated regression analysis, they conclude that ‘we did not detect any relationship between inequality and violent crime, nor between unemployment and any crime type.’ If it is not poverty and inequality, then what?

We know, for example, that the victims of most violent crime often know the perpetrator. The 2016 Demographic and Health Survey reveals that 17% of women aged 18 to 24 had experienced violence from a partner in the 12 months before the survey. Economists in the US have developed sophisticated household bargaining models to explain this form of violence, but more could be done to test these models in the South African context.

If there is a dearth of research on the causes of crime, there is even less known about the consequences. The costs of a traumatic experience can be multifaceted for the victim, from the direct medical costs to the life-long psychological and emotional pain. And the effects on family and friends, their relationships and interactions, their productivity and future plans, are enormously difficult to quantify.

A new NBER working paper attempts to measure one, often forgotten, cost of domestic violence: the effect on children in utero. Because crime statistics is difficult to get past university ethics committees, it is difficult to track the victims of crime over time in order to measure the effect of the traumatic experience on later-life outcomes. The three authors of this study, Janet Currie, Michael Mueller-Smith and Maya Rossin-Slater, use a unique source of linked administrative data from New York City. They combine birth records with information on maternal residential addresses with the exact locations and dates of reported crimes to compare the outcomes of women who have a reported assault in their home in months 0 through 9 postconception to those who experience an assault 1 to 10 months after the estimated due date.

Their results are startling. Women who suffer from domestic violence during pregnancy, especially during the third trimester, have as much as 50% higher rates of births that are very low birth weight (less than 1,500 grams) and are very pre-term (less than 34 weeks gestation). The likelihood of induced labour also increases for these women.

The authors then do a back-of-the-envelope calculation of the costs of US domestic violence. ‘We calculate an average social cost of $41,771 per assault during pregnancy. Assuming that 2.6 percent of pregnant women experience an assault—the national victimization rate estimated from survey data—this figure translates into a total annual social cost in excess of $4.25 billion.’

Many might groan at trying to put a number on these tragic experiences, but quantifying the social costs – in other words, the costs for society – of domestic violence is one way to help governments prioritise preventative and remedial expenditures. The high rates of domestic violence and abuse in South Africa, particularly of women during their most fertile years, suggests that the costs of domestic violence would be significantly higher here compared to the US. And because domestic violence is more likely to be suffered by women from poor households, this may suggest, according to the authors, ‘an important and previously understudied mechanism by which early-life health disparities perpetuate persistent economic inequality across generations’.

Violence, in all its manifestations, is costly for society, which is why we should invest more resources into understanding its causes and consequences. Domestic abuse, in particular, seems to carry not only a cost for the current generation, but is likely to affect the next generation through its intergenerational effect on children in utero. Understanding and preventing it may be one of the key ways to fight deepening inequality and poverty persistence.

**An edited version of this article originally appeared in the 16 August edition of finweek.

Written by Johan Fourie

September 19, 2018 at 08:00

The big misconception about the free market

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South-African-Airways

There are many who view the free market with skepticism. Some are downright hostile towards it, proclaiming – erroneously so, given the empirical evidence of history – that capitalism hurts labour, the environment, or the poor, and is largely to blame for the evils of this world. Others grudgingly accept that capitalism is a better system than the alternatives, but look down, much like the nobility viewed merchants in Medieval times, on those in the business world as scammers and frauds. After the Steinhoff collapse, many commentators, often those schooled in the humanities, pointed to unethical behaviour of the ‘markets’ or the ‘business community’ or the ‘corporate sector’. In its crudest form, they blamed it all on ‘free market capitalism’ or, that insult of insults, ‘neoliberalism’.

But that interpretation is predicated on a fundamental misunderstanding of what ‘the free market’ actually is. A student pointed me recently to a ten-part television series by one of the leading economists of the twentieth century, Milton Friedman. Recorded in the 1980s but as relevant today as then, Free to Choose spells out Friedman’s belief that the ‘free market’ is preferable to the alternative of government intervention. The series is now freely available on YouTube.

After each episode, Friedman debates with invited guests, many who don’t share his views, about the pros and cons of the market. The moderator at some stage points out that both Friedman’s opponents, one from big business and the other from government, tends to agree that government intervention – say, to increase tariffs – is a good idea. How would he explain this? Friedman responds that it is perfectly rational that the two agree, even if for opposite reasons. ‘The two greatest enemies of free enterprise and freedom in the world, have been on the one hand the industrialists and on the other hand most of my academic colleagues who end up in government, and for opposite reasons.’ His academic colleagues, Friedman argues, want freedom for themselves. ‘They want free speech, they want freedom to write, they want freedom to publish, to do research. But they don’t want freedom for any of those awful businessmen.’

‘The businessmen are very different’, says Friedman. ‘Every businessman wants freedom for somebody else. But he wants special privileges for himself. He wants a tariff from congress.’

Entrepreneurs are in the business of making money. One way to do that is to produce a good or service that is better than the competition through efficiencies or strategy or innovation. So far, so good. Another way to do this is to eliminate the competition altogether. This can be done by getting government to impose a tariff on imports, or to get government to issue special licenses, or to convince government to issue regulation that protect your business from superior competition.

South Africa, of course, has a long history of this type of government intervention. The VOC that set up a refreshment station at the Cape was a company founded on monopoly trading rights. Paul Kruger’s ZAR government was built on a complex network of monopoly licenses with industrialists, and so, too, was the apartheid state. The scale of collusion between government and big business in more recent years ultimately coined a new term: state capture.

This is not free market capitalism. Put differently, it is not the type of capitalism that creates prosperity. Friedman made the same point in the 1980s: ‘It’s not proper to put the issue as industrialists versus government. On the contrary, one of the reasons why I’m in favour of less government, is because if you have more government, industrialists take it over. The two together form a coalition against the ordinary worker and the ordinary consumer. I think business is a wonderful institution, provided it must face competition in the marketplace, and it can’t get away with something except by producing a better product at a lower cost.’

Think of South Africa’s most concentrated sectors – telecommunications, electricity, healthcare, air travel. In each case, the government is either a significant player themselves, or they impose tight regulation. Much of this regulation is founded on good intentions, of course. Licenses often require a minimum safety standard; one wouldn’t want just anyone opening a hospital or flying an airplane. But most often, it is these well-intentioned regulations that strangle competition, creating oligopolistic sectors that favour a few big businesses.

South Africa’s Competition Commission is tasked with investigating and mitigating collusive business practices and other ways firms may abuse their market position. When a large firm acquires another, they need to file an application to the commission for approval. This prevents that one firm dominates a market, pushing up prices and hurting consumers.

But the Competition Commission can only do so much. In many cases brought before it, the South African government is an active player in the market – think SAA – or regulates the industry through other bodies – like the telecom spectrum ICASA controls. We cannot just rely on the Commission to ensure free competition: it requires a widespread acceptance in government that any regulation that impedes competition hurts both workers and consumers. The Minister of Energy signing the power purchase agreements for 27 mostly solar and wind projects – and thus encouraging competition in the market for energy generation – is an excellent step in the right direction. Our failing education or health systems are not so lucky; both suffer as a result of too little competition.

The big misconception about the free market is that ‘the market’ is often equated with ‘big business’. As Friedman notes, they are not the same thing. There is good reason for oligopolistic firms to cozy up to government: it is a great way to get rid of competitors. But over the last decade, South Africans have learnt the painful consequences of what happens when that system becomes entrenched. In contrast, a society that prioritises market competition is most likely to benefit the ordinary worker and the ordinary consumer. This is because competition fosters innovation. And innovation improves productivity, growth and living standards. That is, ultimately, the long road to economic freedom.

**An edited version of this article originally appeared in the 2 August edition of finweek.

Written by Johan Fourie

September 10, 2018 at 08:00

Making South Africans more productive

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Drone

Economic growth is defined, in its most basic form, as doing more with less. Economists often overcomplicate things. We talk about ‘an increase in gross domestic product (GDP) per capita of 2%’ when in fact we could simply say ‘the average South African produced 2% more than last year’. More production translates into greater incomes. Take India and China. At an average growth rate of 7%, these countries will double their production/output/income in 10 years. In contrast, if South Africa continues to grow at 2% it will take 36 years to double our income. That is why South Africans are so upset: we see millions of Indians and Chinese growing wealthier, transforming their countries from subsistence breadbaskets to industrial and ICT powerhouses, while we are frustrated by the meagre increases in our living standards.

The Indians and Chinese also show that it is only economic growth that will allow us to escape poverty. We cannot redistribute ourselves rich. Even if incomes were equalised in South Africa, we would still be poorer than those Americans who live below the poverty line. The unescapable truth is that if we want to prosper, we need to make South Africans, all of us, more productive; we need to get South Africans to produce more than they do at the moment.

With an unemployment rate upwards of 30%, this would not seem to be too difficult a task. A lot of people are able and willing to work – to produce stuff – but they currently cannot find employment at the price they are willing to work for. How we address this mismatch is a question that should occupy the minds of the smartest people in our society. Perhaps we need more students to study growth theory, industrial organisation, labour economics and economic history – compared to India and China, for example, too few South Africans take up graduate studies in Economics. But perhaps we also need more scientists, entrepreneurs, tinkerers, coders, designers, educators and experimenters with the vision and ability to make their fellow citizens more productive. In short: we need more people like Norman Borlaug.

An agronomist who completed his PhD in plant pathology, Borlaug became fascinated as a student with the productivity of crop farming. In the 1940s, he moved to a research unit in Mexico where he began developing high-yield, disease-resistant wheat varieties. His wheat varieties, combined with modern agricultural production techniques, soon improved Mexican farmers’ incomes, and then spread to other countries. By 1963, Mexico became a net exporter of wheat. Between 1965 and 1970, wheat yields nearly doubled in Pakistan and India. In 1970, Borlaug was awarded the Nobel Peace Prize for leading the ‘Green Revolution’, a massive transformation of agricultural productivity in mostly Latin America and Asia.

A new NBER Working Paper by three economists spell out just how consequential this revolution was. They use variation in geography combined with the exogenous timing of agricultural research successes in high-yielding crops to measure the effect of the high-yielding crops on output. The results are startling: they find that a 10-percentage point increase in the share of area under high-yielding varieties in 2000 is associated with a massive 10-15 percentage point increase in per capita GDP. To put that differently, if a country moves from having no high-yielding crops to having half its crops of the high-yielding type, then income will almost double. That is why Borlaug is considered to have saved almost a billion people from starvation.

Higher agricultural output, in a Malthusian world, usually results in fertility increases as food becomes more abundant. But the authors also show that this was not the case with the Green Revolution. Higher agricultural yields actually reduced population size, as parents chose quality over quantity.

The paper also shows that the new high-yielding crop varieties, in contrast to what many environmentalists believe, actually benefited the environment. Increases in the area under high-yielding varieties has, the authors find, tended to reduce the amount of land devoted to agriculture – ‘improvements in the productivity of food crops actually lead to intensification of agriculture on a smaller land area, preventing expansion on the extensive margin’.

Their results suggest at least three lessons. First, there is huge potential for improving living standards in developing countries through new crop varieties remains. This is especially true in many African countries, where adoption is far from universal, and agriculture is still an important sector. Second, new biological technologies are available to increase productivity of some crops, both by increasing yields and by reducing costs – for example, disease-resistant varieties that minimise the need for spraying with costly pesticides. Third, ‘technology continues to have a huge potential for improving incomes in the poorest places on our planet’. Indeed, the authors’ results suggest that the investments in the development of high-yielding crops have been ‘the most successful form of foreign aid to developing countries in the past half century’.

By itself, land reform in South Africa will not be enough to improve living standards, as the rest of the continent’s poor agricultural productivity attest to. What is needed is large investments in developing new technologies – universities, research institutes and the research capacity of state-owned enterprises, with the help of foreign donors like the Bill and Melinda Gates Foundation – to improve the productivity of our farms and factories and fibre-optic networks.

‘Whoever makes two blades of grass to grow upon a spot of ground where only one grew before,’ writes Jonathan Swift in Gulliver’s Travels, ‘would deserve better of mankind, and do more essential service to his country, than the whole race of politicians put together.’

Technology and scientific advancement is often last in line when the menu of economic policies are discussed in South Africa and on the rest of the continent. But technology that can ‘make two blades of grass to grow upon a spot of ground where only one grew before’ – or, in a more general sense, can make South Africans produce more with less – is the only way we can escape the stasis of the last decade, regardless of what South African politicians repeatedly promise.

**An edited version of this article originally appeared in the 19 July edition of finweek.

Written by Johan Fourie

August 27, 2018 at 08:00