Johan Fourie's blog

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Posts Tagged ‘capitalism

Piketty in South Africa

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After missing his flight and his much-anticipated Cape Town lecture, Thomas Piketty, the French economist who published the widely-acclaimed and best-selling Capital in the Twenty-First Century last year, arrived in South Africa to deliver a lecture at Wits University yesterday. And he did not disappoint, calling for higher minimum wages, land redistribution and, echoing his call in Capital, a wealth tax. But his most stinging critique he reserved, it seems, for economists: “No such science as economics”, one conference attendee tweeted Piketty, “everyone can have an opinion. Applause from room full of social scientists & historians”.

I can understand the frustration with economists. They write in a language few other social scientists understand. They tend to support a system of wealth creation that is not very hipster. And Piketty is right: For a while in the previous century economists may have believed that economics is a science on par with physics, and that the economy can be manipulated much like a giant computer. But for the most part, economists have now realised (and incorporated into our models) the knowledge that people are not always rational agents, and that they make decisions within social settings where context and institutions matter as much as incentives. Witness the rise of behavioural economics and the renaissance of economic history.

Yet bashing economics is a favourite past-time of social scientists in South Africa. At the recent South Africa Historical Society conference in Stellenbosch, a historian and one of the organisers of yesterday’s Piketty event suggested to a room full of his colleagues and students that instead of studying economics, historians should just read more. I agree that we all should read more, but why deride economics in the process?

It is difficult to not attribute such ridicule from social scientists and historians to a fear of numbers. Because what economists – and certainly most South African economists – do, is measure. We measure the increase in prices in order to determine the most appropriate level for the interest rate. We measure the quality of schools to ascertain why kids drop out too early, or why many of our high-school graduates struggle to find jobs. We measure the international trade of goods and services to understand competitiveness and adjust tariffs. And yes, we measure income levels to say something about inequality and its historical evolution. Still, there is much we don’t yet measure, which is why we need more (historical) statistics, not less, much like Piketty called for yesterday: “We need data to have a better conversation about inequality in South Africa.”

More data allow us to test our hypotheses about how the world works. Because we believe, much like other (social) scientists do, that theories help us to explain and understand the world better than simply ‘having an opinion’. Astrologers have an opinion. Homeopaths have an opinion. But I don’t rely on them to tell me why I am ill. Social scientists (yes, all of them, even historians) construct theories about how the world works, and then use evidence (quantitative or qualitative) to test the relevance of these theories.

Which is why I find it surprising that very few of the commentators at yesterday’s Piketty lecture actually engaged with Piketty’s theory at all. I assume everyone actually read the book – or at least the first chapter that summarises the thesis quite nicely. But did any take the trouble to read at least some of the critiques? This paper is a good start, written by an economist and political scientist. It actually uses South Africa as a case study (in comparison to Sweden) to show why Piketty’s measurement of inequality misrepresents what actually happened in both countries during the twentieth century. Or there is this (rather long) response from Deirdre McCloskey, certainly no proponent of the mathematical direction economics took in the 80s but also not averse to fighting with numbers.

And why did no one – not even Piketty himself – make an effort to gather historical data on wealth inequality in South Africa? With little effort and using Reserve Bank data, a PhD student at Stellenbosch could calculate wealth and income rates for South Africa going back to 1975. Instead of finding the same U-shaped rebound in private accumulated wealth as Piketty did for rich countries, she found that in South Africa the wealth-to-income ratio has been relatively low and stable at about 250% for the past 40 years.

This is important not only because it shows that social context and institutions matter, but because it could have very real policy implications. The Davis Tax Committee’s recent recommendation on estate duties is partly motivated by extensive references to Piketty’s book. Acccording to the Financial Mail, the committee suggests that the rules should change so that tax revenue from estate duties increases by about 10 times. Here’s Stan du Plessis, dean of Economic and Management Sciences at Stellenbosch and PhD supervisor of the student, on the topic: “The Davis Tax Committee and everyone else in SA assumed that since inequality is so high in SA, what Piketty was saying must also hold true for SA. It does not.” That is what economists do.

Land expropriation is another policy of choice to reduce inequality. Piketty argues that because land redistribution have reduced inequality in Brazil, for example, it should work in South Africa too. Not quite: I don’t know much about farming, but I do know that most land in South Africa is not as fertile as in tropical Brazil. Here a farmer needs a lot of capital equipment to be productive, which in turn requires large scale farming to be profitable. It also requires management and technical expertise. Those things, in contrast to land, are difficult to expropriate and transfer. Why not, instead, give poor, black South Africans a choice: I am quite confident that not all would prefer to become farmers. Offer them shares (at massively discounted rates, perhaps subsidised with the income from the wealth tax) in companies listed on the Johannesburg Stock Exchange. To begin with, the SA government owns shares in several listed companies too: if these are transferred to poor South Africans, they have liquid capital which they can – if they so choose – either sell and buy land or hold on to earn dividends. This is what BEE is all about, and in the few cases where it was implemented correctly, like in Naspers selling discounted shares to black South Africans, it has created immense wealth. Giving someone land without the necessary scale, capital and skills to work it (especially someone living in a city, like most South Africans now do), dooms them to a live of subsistence farming.

Piketty’s other proposal of a higher minimum wage also fails to acknowledge the excellent work of South African economists over the last few years. Yes, a higher minimum wage in the United States might not increase unemployment (because it is off a low base and much lower than the median income level), but to recommend such a policy in a country with an unemployment rate above 30% is not only irresponsible but disastrous. New research by labour economists in my Department at Stellenbosch shows a stark rise in unemployment, 4.8% in the Western Cape of mostly temporary workers, following the increase in the Western Cape minimum wage on farms two years ago.

Because data allow us to test and improve our models, certain theories become generally accepted. One of them is the likely impact of a wealth tax. I am not necessarily against a limited wealth tax (for political economy reasons), but what Piketty and his commentators failed to do was spell out the likely effects of such a tax. So let me attempt to do so. A wealth tax favours the young and punishes the old. Young people, like me, have many debts. If the wealth tax is instituted on net wealth (which I think is what Piketty argues for), then it will have a limited impact on me but will tax my parents heavily, who have paid their debts during their lifetime. So here are my options: either I live frugally now, saving carefully and repaying my debts, only to be taxed by government when I’ve done so, or I stop saving and buy a fancy new car, because that’s better than giving it to government. Rather than growing my savings, I would instead find ways to consume all my earnings. (This is why Bill Gates suggests a progressive consumption tax instead. Piketty warns that consumption is difficult to measure, which is true. But it actually encourages saving, investment and accumulation, something a wealth tax does not do.)

Except, of course, one type of investment which cannot be (directly) taxed: education. So expect to see parents, because they cannot leave their children a large physical inheritance, spend even more on educating them. Surprisingly, this will likely increase inequality in South Africa even further. As economists know very well and as Kuben Naidoo, Deputy Governor of the South African Reserve Bank, so eloquently put it yesterday, “the major increase in inequality in South Africa is as a result of rising skills and not wealth accumulation”. Even if all the gains from the wealth tax is spent by government on education (unlikely to be the case), we will continue to have a schooling system that is horribly unfair. A lot of tax money so far has failed to fix the problem; South African economists that have measured these things clearly show that more school resources (like higher teacher salaries or buying more books) help little to improve education outcomes. Why is that likely to change if we add even more money to the mix?

Wealth taxes are most likely to reduce investment and social mobility, exactly the opposite of what is necessary to fix South Africa’s economy. Yes, we may get the richest billionaires to cough up some more of their wealth to government. But will it really matter to the kid from Soweto or Soshanguve whether Nicky Oppenheimer or Johann Rupert or Patrice Motsepe has R8 billion or R4 billion in wealth? Not a lot.

What will matter to that kid is whether he will get a fair chance in life. That is unlikely to happen if we don’t fix our education system first and make it easier for people to do business and create jobs. A wealth tax that discourages investment and raises the cost of education is not going to help, and might even have a perverse impact.

I agree that we need to address South Africa’s massive inequality. To correct this wrong is the reason many economists choose to study economics in the first place. And I also understand Piketty’s appeal: he proposes three policies that are relatively easy to implement and requires little more than political will. But, unfortunately, these policies are disconnected from the real world, the world which South African economists study. In a best case scenario these policies will reduce inequality marginally in the short run; a worst case scenario is that they inhibit investment and put further limits on social mobility by raising the returns to quality education.

I realise that I cannot convince everyone about the need to study economics. As an economic historian I’ve had my own gripes with the mathematisation of the discipline. But to ignore the theories of human behaviour that economists construct, theories that have been empirically shown to be worth keeping, is wrong. Opinions without facts are not worth listening to, as Hans Rosling perfectly explained. Let’s encourage our students to engage with Piketty’s theories, test them against the evidence, and keep them and use them if they apply to South Africa. Or improve them if they don’t.


What do Pope Francis and Julius Malema have in common?

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Beautiful but poor: The Transkei is still largely untouched by capitalism Source:

Beautiful but poor: The Transkei is still largely untouched by capitalism. Source: Tyler Brown

Pope Francis and Julius Malema live worlds apart. But both have a deep dislike – one might even say hatred – of an economic system in which trade, industries, and the means of production are largely or entirely privately owned and operated for profit. This system is called Capitalism.

During a march in Limpopo yesterday, Malema again pronounced the EFFs anti-capitalist sentiments. An Economic Freedom Fighters retweet summarised it best: (The) EFF HAS DECLARED WAR ON #CAPITALISM; MALEMA: THIS IS A DECLARATION OF WAR AGAINST EUROPEAN CAPITALISM.

And a month earlier, Pope Francis made an arguably more eloquent (and damning) critique of capitalism:

Time, my brothers and sisters, seems to be running out; we are not yet tearing one another apart, but we are tearing apart our common home. Today, the scientific community realizes what the poor have long told us: harm, perhaps irreversible harm, is being done to the ecosystem. The earth, entire peoples and individual persons are being brutally punished. And behind all this pain, death and destruction there is the stench of what Basil of Caesarea – one of the first theologians of the Church – called “the dung of the devil”. An unfettered pursuit of money rules. This is the “dung of the devil”. The service of the common good is left behind. Once capital becomes an idol and guides people’s decisions, once greed for money presides over the entire socioeconomic system, it ruins society, it condemns and enslaves men and women, it destroys human fraternity, it sets people against one another and, as we clearly see, it even puts at risk our common home, sister and mother earth.

Ouch. If the Pope and Malema are against it, who on earth wants to be for it?

Well, actually, history is. #awkward

Let’s look at what’s happened to world poverty since 1936, when the Pope was born. Or since 1981, when Julius Malema was born. The remarkable thing is that in 1936, more than half of the world’s people were living in extreme poverty (56%). In 1981, the year that World Bank data starts, 43% of the world’s people were still living in poverty. In 2011, that figure had fallen to 14%. In short, global poverty has fallen enormously in the space of Pope Francis’s lifetime. And the reason? The ‘dung of the devil’: capitalism.

Here’s another statistic to baffle the mind: As The Economist reports, in the decade between 2003 and 2013 (which includes a global financial crisis), the income of the median-person in the world has doubled. Yes, doubled! Why? Because India and China have opened their economies, encouraged innovation, reduced state-involvement and allowed economic growth to improve the living standards of their people.

And all of this has happened despite immense global population growth; in 1936, there were roughly 2.7 billion people, and in 1981 there were 4.5 billion.

We are not only more affluent, but we also live longer. And healthier: we have eradicated illnesses, like smallpox, and we have access to modern medicine that can fight diseases from the common cold to tuberculosis that in the past would have likely killed us.

Blame capitalism for reducing poverty in China: The Shanghai skyline in three decades

Blame capitalism for reducing poverty in China: The Shanghai skyline in three decades

Even the poorest of the poor have access to services that the richest of the rich could never have imagined in 1936. With the press of one button, a cellphone now has access to the world’s information on Wikipedia. It is estimated that 90% of the world’s population has watched at least one episode of Idols, an unthinkable share only two decades ago. And most governments now provide free or affordable schooling and sometimes even university education – a luxury product in 1936 (just ask anyone older than 80).

Of course, capitalism is not perfect. The market cannot and does not solve everything; no economist in their right mind would claim this. Adam Smith, the father of economics, was clear about how the state should create the rules and institutions for the ‘invisible hand’ to do its thing. And those people that, for whatever reason, are excluded should be taken care of by state institutions like pension funds, disability insurance and free schooling.

We can also just ask the poor. If capitalism is so bad, why is it that poor people in non-capitalist countries want to migrate to capitalist countries? Why is it that poor, rural people in South Africa migrate to the cities (where ‘European capitalism’ arguably has a bigger footprint)? Is it because, and this might sound radical to some, they believe they can attain a better life for them and their children in these capitalist places? I think so.

I appreciate the leadership qualities of the Pope and Malema; they are charismatic and have large numbers of followers that look to them for guidance. That is even more reason they need to understand that people are not poor because of capitalism, they are poor because of not having enough capitalism. (Replace the word capitalism with innovation, as Deirdre McCloskey suggests, and suddenly the ideological blinkers fall off.) Here is Venezuelan economist Ricardo Hausmann:

In poverty-stricken Bolivia, Francis criticized “the mentality of profit at any price, with no concern for social exclusion or the destruction of nature,” along with “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

But this explanation of capitalism’s failure is wide of the mark. The world’s most profitable companies are not exploiting Bolivia. They are simply not there, because they find the place unprofitable. The developing world’s fundamental problem is that capitalism has not reorganized production and employment in the poorest countries and regions, leaving the bulk of the labor force outside its scope of operation.

As Rafael Di Tella and Robert MacCulloch have shown, the world’s poorest countries are not characterized by naive trust in capitalism, but by utter distrust, which leads to heavy government intervention and regulation of business. Under such conditions, capitalism does not thrive and economies remain poor.

The ANC, in a discussion document released last week, knows this. It says

capitalism remains the dominant socio-economic system on a global scale. In the era of globalisation, there has been much technological progress which has opened up vistas for human progress and created the basis for the alleviation of poverty on a grand scale.

Spot on. Excellent. But then:

However, the rampant unregulated practices of the past 30 years, including appropriation of most of national income by a few, have undermined its legitimacy.

That is incorrect. Poverty has fallen significantly in South Africa over the last 30 years (the ANC should know better, they ruled for 21 of those 30 years). What has undermined the legitimacy of the ruling government is its inability to get capitalism (or innovation) working in places like the former bantustans (see picture), where conditions are not much better than they were 30 years ago. Where capitalism has worked – in the main metros – it has created jobs and wealth and a better life for all (although for some more than for others). Where capitalism has not been allowed – where chiefs still prevent private ownership, for example – poverty has remained high and living standards low.

If the Economic Freedom Fighters and others continue their campaign in South Africa to discredit capitalism as the solution to poverty, we will never alleviate it, especially not in those regions where the problem is acute. If Pope Francis continues to discredit capitalism in his speeches to the poor and destitute of the world, they will continue to remain poor and destitute. (The conspiracy theorists would say that that is what the church wants. That would be silly, because the church benefits from a rich flock. Ask John Oliver.)

Let us learn from that one true source of wisdom: history. India and China have managed to reduce poverty dramatically by embracing capitalism, not rejecting it. South Korea have managed to reduce poverty dramatically by embracing capitalism, while North Korea, by rejecting capitalism, could not. Pope Francis and Julius Malema should embrace capitalism if they really cared about the plight of the poor.

Cricket and election fantasies

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Lunch-time cricket at St. George's Park: socialism or the free market?

Lunch-time cricket at St. George’s Park: socialism or the free market?

Here’s what I’d do if I was elected to lead the good people of South Africa tomorrow:

  • I would allocate half the South African budget to Test Cricket. I’d buy out the BCCI and organise a Test League of Nations, to be played in South Africa.
  • I would build fantastic new stadiums, with 120 000 capacity, all around the country. Construction companies would build these stadiums free of charge to show their support for the new government.
  • I would reclassify the ‘unemployed’ as ‘spectators’. Unemployment solved! I’ll give free t-shirts and make these new grounds the only places where you can get your monthly social grant, but only after you’ve watched five days of cricket.
  • I would nationalise forests and tanneries and require them to only make bats, wickets and cricket balls.
  • I’d change the school curriculum to only focus on subjects relevant to cricket: history (cricket history, of course), math (to be able to understand the Duckworth-Lewis system), languages (to allow ex-players to become articulate commentators after their playing careers) and music (to practice playing the various instruments necessary for a stadium band).
  • I would abolish trade with countries that do not play cricket. I’ll call these countries anti-revolutionaries.

This is what happens when you spend three days watching some of the best Test Cricket South Africa has ever produced. (For those unfamiliar with Test Cricket, here is an attempt at an explanation.) South Africa beat Australia in an epic encounter at St Georges Park, Port Elizabeth, and I was fortunate to watch three of the four days live. South Africa, having been beaten convincingly in the first test, had a point to prove, and they did. Centuries by AB de Villiers, JP Duminy and Hashim Amla, and excellent bowling by Vernon Philander, Dale Steyn and Morné Morkel showed why South Africa is the No. 1 ranked test team in the world. Newlands, the venue of the third and final test match in the series, is going to be epic.

Over the same weekend that the Proteas beat the Aussies, two of South Africa’s main opposition parties – the DA and the EFF – released their election manifestos. Perhaps the less said about these manifestos the better. While there is much to applaud in the DAs attempt at realistic expectations, their promise of 8% growth is as fantastic as the fiction that the EFF managed to dish up. I think the EFF missed an opportunity here: their left-leaning policies and energetic (perhaps even inspirational) leadership is attractive to a large segment of society, and understandably so. The fervour of their rhetoric, when the economy is stagnating and improvement is slow, could have attracted a significant segment of black voters (unfortunately, given their biased policies, non-black support would have been weak regardless). But their fanciful manifesto – promising to double wages in the public sector and nationalise 60% of all mines and banks – is much like those email scams I get daily: they are not written for those that can discern right from wrong, but instead for the small percent gullible enough to believe that they can be true. Perhaps in South Africa that is actually a sizeable share of voters.

What could a more realistic EFF manifesto have looked like? I like the idea of additional bursaries for university students, and the fact that we would encourage students to study abroad (I fear, though, that the choice of recipient foreign universities will depend not on quality but political inclination). I also like the ideas of making history a compulsory subject (although, again, probably to teach a very specific type of history), of linking education and training with community service, of special courts for corruption, of moving towards green energy, and even of moving parliament to Pretoria. Instead of 60% nationalisation (see how well that’s working for Zimbabwe), why not advocate a special profit-tax on mining companies (much like Australia has done)? Instead of a higher public wage bill, why not advocate performance-determined wage increases, much like the private sector? Why not emphasize infrastructure spending, which has always been a state-led initiative?

The mantra of the EFFs election manifesto is to build a strong ‘people-led state’ that can, for example, create 1 million small businesses in the next five years. It was lunch on day 3 of the Test Match when I read this. In front of me, on the field, thousands of kids were running around, playing backyard cricket, and the realisation suddenly dawned on me: what we are trying to do in South Africa is much like lunch-time mini-cricket. Two days earlier, Sunfoil (the sponsor) organised official mini-cricket matches to be played by several hundred kids. It must have been a very difficult thing to plan: all the kids had to be brought from schools in the vicinity, buses needed to be organised and paid, t-shirts needed to be printed, each mini-match required a parent or teacher to referee (presumably they were not paid), and bats and balls and wickets had to organised for each of the 20 or so matches played during the lunch break. There was also little incentive to play well: each kid were only allowed to bowl and bat three balls, regardless of how good they were. Some excellent young batsmen, for example, faced a bowler so poor that the ball never even reached them. But it was all planned, so once their three balls were up, they had to move on the next station. Equal, but pretty dull.

The next day, nothing was scheduled. There was no sponsor organising anything, no ‘people-led state’ to ensure that hundreds of kids played cricket. And yet, there were several thousand kids on the pitch, playing their hearts out. How? How could this happen when nothing was planned? In fact, all that was done by the ‘state’ was to open the gates to the field.

That is the metaphor of the free market, of course. Kids brought their own bats and balls. Each mini-game had their own rules, their own number of players, their own parental supervision. They were encouraged to be innovative; some were using shoes as wickets and other mini-games even had umpires and commentators. Some kids played brilliantly well – there really is a lot of talent in the Eastern Cape! Those that had the talent and training could show off their skills to an appreciating audience. Others, with different talents and skills, either stayed on the embankment to sing and dance with the band or were running around as fielders. Different, but thriving.

There is a complication to this story, though. These were probably not the same kids playing on the different days. On the first day, I suspect that most kids were from poorer communities in and around PE, while those on the second and third day were from families whose parents were able to buy tickets and take their children to the ground. For whatever reasons, the kids from poorer neighbourhoods would not have had the opportunity to play cricket at all if their participation hadn’t been planned. How to allow free play, then, in a situation where not everyone has access? Perhaps the state is necessary to help with transport. Perhaps a larger share of the field should be dedicated to kids from poor neighbourhoods. Perhaps they should be given more or better equipment by the state, although that clearly removes the incentives to innovate as was obvious on days 2 and 3.

These are difficult questions, with even more difficult answers. But what was clear to me was that, between the Day 1 experiment in socialism, and the Days 2 and 3 experiment in the free market, the free play experiment worked much better. Those are also the policies I’d vote for.

Written by Johan Fourie

February 25, 2014 at 07:12

Remaphobia and post-apartheid economics

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Why Nations Fail authors, Daron Acemoglu and James Robinson, have recently written a series of blog posts on South Africa. One of these, The Fear of Oligarchy, argues that the “African National Congress (ANC) were so concerned that alienating the white elite would be very costly, they ended up with a society even more unequal than the one they inherited”. They argue – using a mind map that link prominent black politicians to private sector firms – that “white capital” gave the ANC political elite a stake in the private enterprise economy. “Perhaps the major driver of the lack of effective reform in the extractive economic institutions of Apartheid is not just that the ANC elite were fearful of collapse but also because they started seeing their personal interests in the continuation of the same economic institutions.”

This is reminiscent of professor Sampie Terreblanche’s views of the “secret meetings” that took place at the CODESA negotiations to end Apartheid, in which white capital absorbed the black political elite to protect their own interests. The high inequality today, Terreblanche argue, is a result of the black elite selling out to the greed and selfishness of “neo-liberal democratic capitalism”.

These explanations for South Africa’s high current inequality omits three important facts. Firstly, South Africa’s post-1994 economy has grown surprisingly well. While we’ve not reached the stellar growth rates of China and India, South Africa maintained growth rates between 2 and 6% for 14 years after what is universally considered a remarkable political transition. Why is this important? Because this growth has not only benefited the rich, as many pundits tend to suggest. In fact, several research papers over the last few years show explicitly that poverty in South Africa has declined, especially after 2000. Had the political transition been less smooth – and ANC leaders been less accommodating of “white capital” or, more broadly, of “the market” – this remarkable achievement of persistent, positive growth in the face of some pretty severe economic and social challenges (high debt levels, unequal social spending, high political expectations) would certainly not have been possible. We don’t know the counterfactual, of course, but Zimbabwe post-2000 does point to one possibility. Few of the thousands of immigrants that entered South Africa over the last few years would be positive about President Mugabe’s enthusiasm to fight the forces of white capitalism.

Secondly, the mind map of connections between politicians and the private sector should not be all that surprising. Most former politicians, in any democracy, often take up private sector positions, either as business leaders within the organisations or as advisers on the Board of Directors. While there are several (recent) examples of blatantly corrupt deals within the South African political system, the media have so far done a good job of exposing these, and these officials were axed (often only after severe media pressure, but still). Perhaps Acemoglu and Robinson should rather compare the level of political-private sector connections between South Africa and the United States, say, or Japan, or India. Not to mention China, or Russia. The results might be surprising.

Thirdly, what is “white capitalism” anyway? Most of the companies Acemoglu and Robinson include in their mind map are not wholly white-owned. They are publicly listed companies on the stock exchange, their shares owned not only by white South Africans, but predominantly by large pension funds (who control the money of all South Africa’s pensioners, including blacks) and also by foreign investors. To blame “white capital” is to blame an non-existent foe, to attack a straw man.

The ANC leaders after the 1994 transition had few better alternatives. Trevor Manuel, Thabo Mbeki and Tito Mboweni’s macroeconomic policies were spot on – not only to benefit “white capitalism” but for the benefit of all South Africans, especially the poor. What was lacking was effective microeconomic policies and, especially, the implementation and execution of these policies.

Those that dwell on whether the ANC peacemakers sold their soul in 1994 have remaphobia, a fear of facts. The reason South Africans still face severe problems today are not due to the greediness of the ANC officials who negotiated peace in 1994, but because these leaders (and their successors) struggled to create or sustain the institutions required of a successful democracy: most notably, a public office that deliver the services their citizens require. (In a sense, these services were there before 1994, but only catered toward a select few.) The challenge was – and still is – to extend these services to all South Africans.

Written by Johan Fourie

July 26, 2012 at 21:04

What recession?

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Too much has been made of the Great Recession. While global growth has slowed in 2008 and 2009, we are still living in an age where most of the world population’s income is increasing. These increases translate into millions of people being lifted out of extreme poverty every year. This year, 2012, the average person’s income will rise, not fall, which also means that their standards of living will probably increase. In fact, the income of the average person on earth has never been as high as it is today.

How is this possible in the face of what is now generally accepted as the greatest recession since the Great Depression? Why can I be so sure when the European Union is in a severe debt crisis and US politics makes it nearly impossible to boost the fragile economy? With all the noise in the North, most have missed that the rest of the world is, in fact, booming.

The graph, for example, shows the average person’s GDP growth rate across all countries of the world for which data is available. (For all my calculations, I use the 2011 World Development Indicators which can be downloaded online.) This is not the same as the average GDP per capita growth rate, which is weighted by the income of each country (regardless of how many people live in that country) and the most widely used as an indicator of global prosperity. Here, I weight by population of each country. Thus, in the new measure, China and India contribute much more to the growth rate than they would if total income is used as weight. In contrast, the US would weigh only 4.5% (in 2010), even though it represents a much greater share of global income (23% in 2010).

What does the graph tell us? It suggests that the first decade of the new millennium has been the most prosperous for the average person in the world, ever. The 2008/2009 recession certainly had a negative impact, but different to the negative global growth rate reported of 3.4% in 2009, the average person’s income actually increased by 1.5% in 2009. And this dip seemed to be short-lived: in 2010, the average person’s income growth rate rebounded to a high 3.1%, the third highest recorded growth rate for the last 40 years! (I should add that earlier growth rates should be even lower, but because data is not available for many smaller countries early on, they are excluded.)  How is it possible that GDP per capita weighted by income is negative while GDP per capita weighted by population is positive? Well, a disproportionate number of people in rich countries’ incomes fell, while the incomes of most people in poorer countries (that would contribute little to global income) increased. So, while the fall in incomes were larger in absolute terms than the increases (in 2009, that is), a greater number of people’s incomes increased (and considerably so) rather than declined.

Why is this important? The crisis – for the first time – is mostly a developed country phenomenon. So, too, are the pundits and the media that report their daily dosage of pessimism about the future. Even in South Africa, where I live, the woes of European and US markets dominate financial news. We hear about China’s staggering 9.8% growth rate, yes, but don’t know about Uruguay and Ethiopia’s 8% growth rates, nor discuss the 7% growth of Turkey, Turkmenistan and Thailand (all 2010). Sure, some of these rates are from a very low base. That’s not the point. Growth is essential for these countries’ citizens to partake in the global economy. A growing middle-class will buy more goods, creating new markets and perhaps offer the fragile developed world economic salvation (if they can fix their own internal struggles).

The message should be that the world is growing, even if some regions are struggling. The tide is lifting, but not from its usual source. Economic Armageddon is not near. Capitalism is safe. In fact, the future looks quite bright for the average global citizen.

Written by Johan Fourie

January 31, 2012 at 16:40