Johan Fourie's blog

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We are still on the way up

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I arrived in the USA a day after Donald Trump was announced as president-elect of the United States. I gave talks at Harvard, Mount Holyoke College and MIT, and met with several faculty and students over the four days of my visit. It was eerie. Some students were still in denial, not helped by the fact that they started drinking as soon as the results became evident. Others were in various stages of grief: angry at the nativism of a large chunk of Americans, bargaining in the hope that Hillary might still win, or depressed at how quickly the America of Obama – to whom many at these prestigious institutions look up to as an inspiring intellectual – has given way to the America of Trump – whom they consider to be a coarse, boastful buffoon.

Trump’s victory seems to have been another nail in the coffin of liberty and progress. In America, walls will replace bridges. Despite what Trump has said on the campaign trail, his tax cuts will likely benefit the wealthy elite. And his views on women, on LGBT rights, on climate change, on health care, on trade openness and on immigration is likely to reverse much of the gains in general freedoms the US has made over the last decade.

These trends are not limited to America. Earlier this year the Brexit result revealed the same nativist fear, an anti-open, anti-globalisation vote. Brexit was a vote for a return to the ‘good old times’, however unlikely that is to materialise. It was a vote against intellectualism; liberal London against the conservative hinterland. And in South Africa, the rise of nativist populism on both the extreme right and left reflect a similar frustration with the progressive Rainbow Nation of yesteryear and its liberal (sell-out!) constitution.

Across the globe, it seems, the extraordinary liberty and progress of the 1990s and 2000s are being rejected for a more insular, protectionist conservatism.

We should not be that surprised. Liberty and progress, as a historian at MIT reminded me on my recent visit, is never a foregone conclusion, never an obvious eventuality.  Liberty and Progress is not an Uber ride, taking the shortest, fastest route to a known destination. It is, as the Beatles knew, a long and winding road. Sometimes there are detours, and sometimes we get lost.

Take, for example, Martin Plaut’s latest book, Promise and Despair, the story of the delegation of black leaders that traveled to London in 1909 to fight for representation in the new Union of South Africa. Remember, since 1853, the Cape Colony had had a non-racial franchise, allowing men of all races who had sufficient income or property to vote. When the unification of South Africa began to be discussed following the Anglo-Boer War, many had assumed that the (Liberal) English government would extend the same franchise to all. In fact, this was the promise Lord Salisbury had made in 1899. But politics trumped morals. To secure the support of whites in South Africa in case of war, the English reneged on their promises and turned down the appeal of the delegation. Liberty and progress had to wait.

But to focus on the newsworthy failures of liberty and progress the last few months misses the much bigger story of the last few decades: the incredible improvement in living standards of most of humanity. Johan Norberg, in a new book simply titled Progress, concurs: ‘Despite what we hear on the news and from many authorities, the great story of our era is that we are witnessing the greatest improvement in global living standards ever to take place.’ Life expectancy has risen sharply, poverty and malnutrition have fallen. The risk of death in war or natural disaster is tiny in comparison to our parents or grandparents.

 

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Reasons to be optimistic: Trends for important human welfare measures are all positive in the long run. Source: ourworldindata.org

 

But this does not mean we should be complacent. Says Norberg: ‘There is a real risk of a nativist backlash. When we don’t see the progress we have made, we begin to search for scapegoats for the problems that remain. Sometimes it seems that we are willing to try our luck with any demagogue who tells us that he or she has quick, simple solutions to make our nation great again, whether it be nationalizing the economy, blocking foreign imports or throwing the immigrants out. If we think we don’t have anything to lose in doing so, it’s because we have a bad memory.’

2016 has been a year of setbacks. It reminds us that liberty and progress are never fait accompli, never self-evident. We have to work hard at it, and even then it is not guaranteed. It requires patience and a long-term view. But don’t let 2016 shake your beliefs about humanity’s march forward: we are still on the way up, even if it will take us a little longer to get there.

*An edited version of this first appeared in Finweek magazine of 15 December.

Written by Johan Fourie

December 30, 2016 at 13:21

The invisible barriers of international trade

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One of the biggest barriers to deeper economic integration in Africa is the excessive trade costs that prevent regional trade. Import tariffs have traditionally been an important source of revenue for poorer countries, and it has taken several spaghetti-like agreements to reduce these. Although an agreement has been signed to create a Free Trade Area from the Cape to Cairo, none of the 26 countries have ratified it. Import duties remain between most African countries.

But tariffs are only of the costs of trade. It takes time to move a container from Johannesburg to Kinshasa, and the journey by land is often filled with tales of unscheduled delays and red tape. I remember traveling through the Victoria Falls border post between Zimbabwe and Zambia a few years ago and asking the truck drivers how long they had to wait to cross into Zambia. Their response: ‘A couple of days, if we are lucky’. This is no way to encourage regional trade.

Poor infrastructure is another significant barrier. The massive distances between major economic centres means that the unit cost of transport is high. A new paper in the Review of Economic Studies by Tufts University economist Adam Storeygard confirms this. Storeygard measures the impact of the oil price increases between 2002 and 2008 on the incomes of African cities. He compares two types of cities: those with a port on the coastline, and those of similar type but 500 kilometers inland. Using satellite imagery over the period, he finds that the oil price shocks increased the size of port cities by 7% more than in cities in the hinterland. The take-away: high transport costs retard growth. And because many African cities are located far from the coast, the high transport costs of poor transport infrastructure explains why African manufacturers find it difficult to compete with manufacturers in Asia and Europe. Just think of the difficulty manufacturers in landlocked countries like Malawi or Zambia face.

But even where better physical infrastructure reduces transport costs, other, ‘softer’ trade barriers often remain. Corruption, for example. Traveling into Malawi on my trip of a few years ago, we were pulled off the road a few kilometres after the border post by an armed man, and then required to return to the border post because we needed ‘additional insurance’. That was a $50 payment that went straight into the friend of the armed man’s pocket.

The effects of these ‘invisible’ trade barriers on trade and consequently economic performance have been hard to quantify, though, until now. In a new American Economic Review paper – ‘Corruption, Trade Costs, and Gains from Tariff Liberalization: Evidence from Southern Africa’ – Sandra Sequeira of the London School of Economics and Political Science finds that a reduction in tariffs between South Africa and Mozambique in 2006 had a very limited effect on trade. This is surprising: one would expect that lower tariffs would lead to higher levels of trade. And yet, the sharp decrease in tariffs had basically no effect (in technical terms, the elasticity of imports to tariff changes was very low).

mozambique-and-malawi-border-postWhat explains this surprising result? Sequeira uses a novel dataset of exporters’ bribe payments between South Africa and Mozambique to show that the decline in tariff rates at the border resulted in a 30% decline in the probability of bribe payments and a 20% decline in the average bribe amount paid. In other words, the lower tariffs did not actually reduce firms’ trade costs, it just shifted paying corrupt border officials to actually paying the tariffs as required by law, boosting government revenue. That is also why the elasticity of imports was so low: because costs did not fall in practice, there was no concomitant increase in trade.

Sequeira’s innovative study shows that high tariffs explain why corruption thrives. Remove the tariffs and the ability to solicit bribes vanishes. But don’t think that trade will suddenly blossom. Bribes keep trade costs lower than what they would be if tariffs were fully paid; lowering tariffs only lower the amount corrupt officials receive.

This has important implications for policy-makers: first, lower tariffs may actually result in an increase in tariff revenue as traders switch from paying bribes to paying the now more reasonable official tariffs. Free trade agreements  (with zero tariffs) may not result in a significant fall in revenue either, because much of the revenue goes into the pockets of corrupt officials in any case, and will likely lead to greater transparency; Sequeira finds, for example, that trade statistics also improve when corruption practices decline.

But don’t expect free trade agreements like the one being discussed at the moment to result in a large increase in regional trade. As long as other barriers, like delays, severe red tape and poor infrastructure, remain, regional trade in Africa is likely to remain too weak to foster the economic development it promises to deliver.

*An edited version of this first appeared in Finweek magazine of 17 November.

Written by Johan Fourie

December 8, 2016 at 21:17

High-skilled migrants matter – and we’re not winning

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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.

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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.

Books to make you think this summer

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It’s – finally! – summer again. After three winters in a row, Helanya and I are looking forward to some sun, sea and sand (and watermelon, and ice-cold beer, and cricket on the tele, and litchis, and did I mention sun?). And what better way to enjoy summer than with excellent local and international books, fiction and non-fiction to make you think. Here’s what I’m recommending for those long, lazy days on the beach:

2016book1Nomavenda Mathiane’s excellent Eyes in the Night tells the true story of the life and times of the author’s grandmother, Gogo Makhoba. Apart from the title (I don’t quite understand the relevance), the book is an eye-opener on a neglected part of South African history: the tale of a young girl’s adventures during and after the Anglo-Zulu war of the late nineteenth century. It is an incredible story of resilience in the face of almost unthinkable atrocities. And yet, with the author resisting the urge for melodrama, grandmother okaMakhoba and her experiences of running from the English Redcoats, working in the household of the horrible Oubaas, and then running away to Zulu missionaries who convert her to Christianity, complicates our often oversimplified version of history. Who stole land, and at what cost? How did Christianity affect Zulu traditions? What are the differences between township and traditional Zulu culture? It is good to be reminded that history is never black and white. Through her grandmother’s extraordinary life, Mathiane gives South Africans a vibrant picture of our own interconnectedness and, for lack of a better word, complicatedness. Eyes in the Night is a book I enjoyed thoroughly and is my book of the summer.

2016book2Deon Meyer is a household name, and not only in South Africa. Yet his stories are as South African as they come. He has produced another gem with Koors (as far as I can see, still only available in Afrikaans). What happens when 95% of humanity is wiped out by a deadly virus? How do we rebuild civilization? How do societies develop? Yes, this is the fictional story of a young South African boy and his dad trying to survive the aftermath of a deadly virus, but it is more than that: it is a philosophical reflection on the roots of development. What role for specialisation, for trade, for politics, for religion in the creation of societies, and how do these interact as these societies become more complex over time? (Sidenote: political economists familiar with the literature on stationary and roving bandits would particularly enjoy this. If I have to be critical, I would have liked to see more economics – for example, the birth of currency in this post-apocalyptic world, or the emergence of debt and credit, although I guess these are less sexier topics.) Combine this fascinating setting with a murder plot and you’ve got a book that is much like all his others: unputdownable. And I promise: you won’t be able to predict the twist at the end…

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I’ve just started Richard Baldwin’s The Great Convergence, but have seen enough to recommend it. Globalization is not popular, yet it continues to lift many out of poverty. Baldwin’s clear analysis of an increasingly complicated phenomenon helps us understand how the the cost of moving goods, ideas and people has shaped, and will continue to shape our economies – and politics. Richard Evans is a historian I greatly admire, and he seems to have produced a wonderful new account of the nineteenth-century in Europe: The Pursuit of Power. (Sidenote: I also love the cover.) The Information Nexus presents an intruiging new thesis that explains the rise of capitalism not so much as an accumulation of capital but instead as an improvement in our ability to record and process information.

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Johan Norberg (great name) shows why we should be a little less despondent about the events of 2016: the world is still a much better one than the one of we inhabited a decade or five decades earlier. One way to summarise the book: ‘200 000 people were lifted out of poverty yesterday’ is a newspaper headline that could have appeared every single day the last decade. Donker Stroom is an award-winning true story of an Afrikaner writer and poet and his adventures in England during the Anglo-Boer War. Still unread, but it comes highly recommended.

I will post a couple of my Finweek columns over the next few weeks, but this will be the last personalised blog post for the year. Thanks again for continuing to read, and share my posts: I appreciate all the feedback and support (and criticisms) I receive.

2016 has been a tough year in many respects. Let’s hope 2017 will be filled with happy surprises.

Written by Johan Fourie

November 29, 2016 at 14:06

How Uber makes the world a better place

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uber-logo

The first thing students are taught in any introductory microeconomics course is that the price of something, let’s say chauffeur services, and the quantity of it that consumers want is depicted by a negative-sloping demand curve. The difference between what consumers are willing to pay for a chauffeur ride (the demand curve) and what the chauffeur asks (the market price), is what is known as the consumer surplus. The bigger the consumer surplus, the better for society.

But even though the idea of consumer surplus is used in many applications, measuring it has always been problematic. That is because, in the real world, demand and supply move together, and it is therefore difficult to establish the exact shape of a demand curve.

That was, until Uber. A team of economists (including Steven Levitt of Freakonomics fame) recently published an NBER Working Paper that uses almost 50 million UberX ‘consumer sessions’ to identify a demand curve for taxi services, and then calculate the consumer surplus that these services generate. A ‘consumer session’ is basically when someone logs onto the UberX app and requests the price for a proposed trip. The consumer either accepts the price and wait for an Uber driver to pick them up, or they don’t, and find alternative transport.

What makes Uber unique is that its prices vary according to demand (for its services) and supply (the availability of drivers). This unfortunately also means that it is not possible to simply calculate a demand curve when the price increases by 10%, because the increase might be the result not of greater demand by consumers for Uber trips, but of lower supply (having fewer drivers on the route). The research team use a clever trick to get around this. Say the algorithm predicts that the price must increase by 1.249. This is then rounded down to 1.2 for the consumer. Other times the algorithm suggests the price must increase by 1.251, but the app then rounds this up to 1.3. It is this discrete difference when the price is essentially the same which the authors exploit using regression discontinuity analysis.

uber_advertIf this sounds very geeky, the results are worth the wait. First, the authors find that demand is quite inelastic (around 0.5). This means that if prices increase by 10%, demand will only fall by 5%. Second, they compute the dollar value of consumer surplus in Chicago, Los Angeles, New York and San Francisco to be roughly $2.8 billion annually. This is more than six times Uber’s revenue in those cities. Put another way, for each $1 spent on an UberX ride at the lowest price, the authors estimate that the consumer ‘receives’ $1.57 in extra surplus. In short, Uber generates massive benefits for society-at-large.

Why does Uber generate so much consumer surplus compared to normal taxi operators? Another NBER Working Paper, written by Judd Cramer and Alan Krueger, suggests that it is because of the higher capacity utilisation rate of Uber drivers: “UberX drivers spend a significantly higher fraction of their time, and drive a substantially higher share of miles, with a passenger in their car than do taxi drivers.” There are four reasons for this. First, Uber’s better matching technology (an app that anyone can download on their phones). Second, the larger scale of Uber’s usage in comparison to taxi companies. Third, highly inefficient taxi regulations which limit the number of routes or time periods taxi drivers can operate. Fourth, Uber’s flexible labour supply model and pricing model which match supply with demand.

South African regulators have had varied responses to Uber’s entrance in the local market. There has been opposition from the taxi industry, sometimes violent. Proponents of Uber, on the other hand, often highlight the entrepreneurial and job-creating opportunities the service creates.

What this research shows, though, is that Uber’s main benefit is the massive surplus it generates for consumers. According to the Levitt research team, one day’s worth of consumer surplus in the four US cities they analyse is worth about $18 million. “If Uber were to unexpectedly disappear for a day, that is how much consumers would lose in surplus.”

Aside from this consumer surplus, Uber services create many positive externalities, from lower congestion and pollution levels to semi-skilled employment to, perhaps more tenuously, greater social interaction and cohesion – I’ve had some fascinating conversations with Uber drivers, and know of one driver that was offered a scholarship by a client. But, most importantly, when regulators and policy-makers debate the pros and cons of Uber and other such services that will almost certainly appear in the next few years, it is worth remembering one of the basic principles of introductory economics: the immense benefits society derives from the additional consumer surplus.

*An edited version of this first appeared in Finweek magazine of 20 October.

Written by Johan Fourie

November 23, 2016 at 08:56

How long-distance flights are good for business

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When, a few weeks ago, Tim Harris, CEO of the Western Cape’s investment and trade promotion agency Wesgro, claimed that Cape Town’s business community is likely to benefit from five new routes and four expansions at Cape Town International Airport, I was doubtful. Sure, the four new routes – which include British Airways flying three times a week to Gatwick, Lufthansa to Frankfurt three times a week, Kenya Airways to Nairobi and Livingston, as well as an Airlink route to Maun in Botswana – is great for tourism. But it was unlikely, I imagined, to stimulate sustainable investment in the city.

That is, until I read a new study investigating the impact of international long-distance flights on local economic development. The authors, Filipe Campante of Harvard’s Kennedy School and David Yanagizawa-Drott of the University of Zurich, use a fantastically innovative approach to identify a causal link between long-distance flights to a city and that city’s economic growth. They go one step further by identifying the reason for this growth impact: more flights result in a higher frequency of business links that generate investment.

So how do they do this? Campante and Yanagizawa-Drott exploit the fact that cities that are just under 6000 miles apart are distinctly more likely to have direct air links, as compared to cities slightly above that threshold. This is because of regulations that make flights longer than 12 hours much more expensive. Consider, for example, flights between Milan and Shanghai (5650 miles) and Madrid and Shanghai (6350). The first route between Milan and Shanghai opened in 2003; the route between Madrid and Shanghai only opened this year. The authors show that, globally, city pairs with more likely connections (below 6000 miles) do indeed have more connections than pairs just above 6000 miles.

But does this matter for economic growth, and if so, how? First, using satellite-measured night lights, the authors show that areas close to airports with connections just below the 6000-mile threshold grew faster between 1992 and 2010 than those with connections above the threshold. They also show that this is not just displacement of economic activity from elsewhere in the city. Second, long-distance connections increase a city’s desirability for other connections, increasing the amount of medium-distance connections and the overall quality of air links. Third, long-distance connections are good for business. The authors geolocate over half-a-million foreign-owned companies all over the world, as well as their owners. They show that in cities with direct connections, there are likely to be far stronger business links: for instance, they find over three times as many ownership links between Milan and Shanghai as between Madrid and Shanghai.

These effects are sizable. Campante and Yanagizawa-Drott estimate that a given increase in connections generates about a similar proportional increase in ownership links. “The evidence suggests that most of this increase constitutes capital flowing from relatively richer to relatively poorer countries: three-quarters of the increase in business connections could be attributed to companies in high-income countries owning companies in in middle-income ones, and a quarter in the opposite direction.” The lesson is that the movement of people leads to the movement of capital. Expect more investment in Cape Town from entrepreneurs in London and Frankfurt.

Such research also raises uncomfortable questions. Even if a route is unprofitable for a carrier, the benefit of having that route to a city’s business community and society-at-large, especially in the long run, may justify government support. Is there perhaps justification for a national carrier like South African Airways to fly to long-haul destinations like Rio de Janeiro, Beijing or Atlanta, even if these routes are unprofitable, with support from taxpayers? I would hesitate to go this far, but it does suggest that cities should do everything they can to attract long-distance flights. This can include anything from offering hospitality services to tired crew members to expanding the capacity of the airport (or even commissioning the construction of a new one).

Over the last century, the cost of human travel has fallen significantly. This has connected the world, allowing the movement of people and capital to destinations where they are likely to have the largest impact. Cities that have been disconnected have lost out; those with more frequent long-distance flights have benefited most. The good news for South Africa is that the barriers of the 6000 mile limit and air regulations have less impact now than it did in the past; the bad news is that, because these things matter less, competition from other long-distance destinations will increase. Let’s hope policy-makers in our big cities – people like CEO Tim Harris – are up for the challenge.

*An edited version of this first appeared in Finweek magazine of 6 October.

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