Johan Fourie's blog

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Posts Tagged ‘China

Cities are the future

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Photo by Marcia Valle

Brazil is a fascinating country to travel to as a South African. It is vibrant, slightly chaotic and mesmerizing all in one, and, beyond the airports and major tourist areas, quite a challenge for someone with no knowledge of Portuguese. I was invited to a rural university town in the state of Minas Gerais in May to deliver a series of talks. From the airport in Belo Horizonte my driver, hell bent on showing off his Grand Prix skills, took me on a five-hour rollercoaster ride through the hilly countryside. What was formerly a coffee and sugar plantations (and mining) region, were now mostly vacant, most of the land reclaimed by veld and forests. The language barrier prevented me from inquiring in detail what was happening, but from what I could gather, his answer was simple: People are moving to the cities. They want better lives.

Rapid migration to cities is a global phenomenon. People ‘vote with their feet’ for better economic opportunities, and in South Africa, as in Brazil, they vote for the bright lights of the cities. Poverty in South Africa is largely a rural phenomenon. Yes, townships on the periphery of cities house many poor residents, but these residents have better lives than those in the former homelands many of them come from. The search for a better life for them and their children is why they moved in the first place.

Those of us with a romantic view of life in the countryside may think that this flood to the cities can be reversed by, for example, policies that would expand land access or improve rural living standards. But lack of land is not the reason people migrate to cities in large numbers, not in South Africa and also not in Europe, China or Brazil. In several European countries, rural areas have been abandoned, taken over by forests (and returning wildlife). The European policy-makers have done their best to prevent this, by offering expensive agricultural subsidies to its farmers (at the cost of farmers in Latin America, India and Africa), but this has just slowed the inevitable. Farms are now being bought up by rich city-folk that want weekend getaways – cities are what creates wealth, the countryside is for spending it. In China, because of the disastrous policies of Mao, land was equally divided amongst the citizens. Yet with the onset of modern economic growth in China since the 1980s, millions of families have relocated to the cities, first to fill jobs in low-skilled, labour-intensive sectors, but as the economy has grown and wages have increased, to more skill-intensive sectors. Their children will attain much higher living standards than their parents and grandparents could ever dream of. Despite a history of severe inequality, the story is no different in Brazil. Rich and poor move to cities, because that is where their living standards are most likely to improve.

Trying to slow down urbanization is futile; in fact, it is likely to do more harm than good. Cities are where people prosper: they have access to employment opportunities, better schools and clinics, electricity, water and sanitation and access to a greater variety of social institutions and entertainment, like churches and sport clubs. But because cities are so attractive, that also results in higher levels of inequality, as new poor migrants from the countryside continually fill the gaps left by those that were formerly poor but have worked their way up. Inequality in cities should thus be interpreted with caution: it is a consequence, rather than a break, on progress. The poor care less about the Gini coefficient and much more about the possibility of social mobility – the possibility to escape poverty.

Evidence of how migrants’ living standards improve is provided in a new paper by Ivan Turok and Justin Visagie. They track rural migrants to South African cities between 2008 and 2014. Before their move to the city, 80% of these migrants were living below the poverty line. Six years later, they results show, ‘the level of income poverty for these migrants (now living in an urban environment) had more than halved to below 35%. Meanwhile, the poverty level for individuals who remained in the countryside stayed very high at 70%.’

It is for this reason that some economists are proposing a somewhat contentious poverty-alleviating policy: subsidies to help those in rural areas to migrate to cities. A new paper by David Lagakos, Ahmed Mobarak and Michael Waugh use an experimental programme of migration subsidies in Bangladesh to calculate the effect on migrant welfare. They find that for the poorest households, the welfare gains from migration subsidies are higher than unconditional cash transfers or a rural workfare program costing the same total amount. ‘This suggests that conditional migration transfers may be a useful way to raise the welfare of poor rural households in the developing world.’

The influx of migrants are and will continue to be difficult for cities, already suffering backlogs and scarce resources, to manage. But there are ways to support them. National and provincial governments can do more to give cities control over land and infrastructure they own, like Metrorail. Greater private sector involvement can speed the provision of basic services, notably in housing and internet connections. Political competition, like what has happened in Johannesburg, Pretoria and Port Elizabeth, will help to push out bureaucratic incompetence (and corruption) and promote service delivery.

Urbanisation is the key to future prosperity, in South Africa, Brazil and elsewhere. Any policy to keep people in rural areas amounts to a policy to keep them poor. While city governments are battling to tackle existing infrastructure backlogs, they should recognise that they offer the best hope for people to escape poverty.

**An edited version of this article originally appeared in the 7 June edition of finweek.


Written by Johan Fourie

June 30, 2018 at 06:54

How a pair of glasses – and a cup of tea – can change the world

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Cup of tea 4

I got my first set of eyeglasses at the age of 16. I vividly remember sitting at the back of the physics class and squinting to read the formula on the board, and the embarrassment of having to move to the front. I also vividly remember the joy of facing my friend in the nets when, wearing new contact lenses, I could finally ‘read’ his spinners.

Invented in Italy in the 13th century, eyeglasses were initially used by scribes to allow them to remain productive long after their natural eyesight had deteriorated. But the technology improved over time, and has allowed me and many generations of young and old, male and female, doctors, soldiers, clerks, truck drivers, computer scientists and athletes with hyperopia (farsightedness) to remain productive members of society.

But many millions are not so lucky. The World Health Organization estimates that at least 20 million Africans are visually impaired, and hopes to reduce this figure by 25% by 2020. Many of these are children in schools, struggling to read the board or their prescribed books. This is an example, it seems, where developmental efforts should be focused: an inexpensive solution with long-term benefits for the recipients.

A new study published in the Journal of Development Economics attempts to measure the gains from just such a programme. Paul Glewwe, Albert Park and Meng Zhao report the results from a randomized control trial in Western China that offered free eyeglasses to rural primary school students. Almost 10% of primary school students in these areas have poor vision, but very few of them wear glasses. The authors find that wearing eyeglasses for one academic year increased the average test scores of students with poor vision by an amount equivalent to 0.3 to 0.5 years of additional education.

That is a massive economic return to a small investment, which should raise the question: Why don’t parents make this investment themselves? For poorer families, it seems that eyeglasses are still too expensive. But other factors matter too: parents often lack awareness of their children’s vision problems, and it seems like girls are more likely to refuse wearing glasses. Maybe it’s time to introduce more glasses-wearing female characters in children’s programmes. (Apart from 78-year old Carl in Up, I can think of few Pixar/Disney movies with a lead character with glasses.)

This type of research allows policy-makers to identify the low-hanging fruit of development. Whereas more textbooks, or higher teacher salaries, or even deworming programmes (all policies that have been tested in schools) can be expensive, free eyeglasses will, with a small initial investment, yield large returns for the (often marginalised) individual and society.

Initiatives to improve health can have many other benefits too. Randomized control trials have been done on the impact of everything from washing hands and better toilets, to home-visitation programmes for teenage mothers and promotion programmes aimed at reducing open defecation. (Eliminating open defecation in rural villages, it is found, can increase child height significantly.)

South African researchers are making progress in identifying the low-hanging fruit for local communities. Ronelle Burger and Laura Rossouw, two researchers at Stellenbosch University, are investigating the impact of the Thula Baba Box, a box filled with baby products, clothes, information brochures, basic medicines, toys and other items, and given to young mothers. If the results show a large, positive impact on maternal and child health, there is no reason why the Thula Baba Box cannot be provided, free of charge, to all mothers in the country. Not only is it morally just, but it is a clever investment strategy too.

Sometimes, though, the low-hanging fruit can be as basic as a cup of tea. A new study by Francisca Antman of the University of Colorado-Boulder investigates the custom of tea drinking in 18th century England. One of the unintended consequences of tea drinking, which happened even among the lower classes, was an increase in the consumption of boiled water. She finds that regions in England with lower initial water quality had larger declines in mortality after tea drinking became widespread. This ‘accidental improvement’ in public health, she argues, happened at the same time as people were moving into cities, thus providing a healthy pool of labour needed for industrialization.

The next time you sit down with a cup of tea and a good book (remember those glasses!), remember the profound effect those simple ‘technologies’ have had, and, with the help of researchers and government funding, are still likely to have in much of the developing world.

*An edited version of this first appeared in Finweek magazine of 30 June.

How to boost South Africa’s tourism

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South Africa’s tourism industry has had a tough time of late. The optimism after the 2010 World Cup has given way to pessimism following the visa regulations saga that did nothing but hurt the local tourism industry. A rough calculation on recently released tourism numbers suggests that the additional rise in tourism numbers from the World Cup (on which South Africa spent billions) was completely nullified by the new visa regulations. Thankfully that blow has now been softened by changes to the regulations.

Tourism is vital to South Africa’s economy, often more so than other industries, for at least two reasons: It is labour-intensive, and this labour is often female and unskilled; for roughly every 9 tourists that visit South Africa, one job is created. More importantly, its impact is spatially dispersed. Whereas labour-intensive manufacturing is almost always concentrated in large metropolitan areas, tourists travel not only to Cape Town but also to Clarence, Clanwilliam, or Coffee Bay. In a research paper published in Local Economy, Gareth Butler and Christian Rogerson reports the results of interviews with black employees of tourism establishments in Dullstroom, a Mpumalanga retreat known for its fly-fishing and agribusiness. The authors find that most employees are recruited with little more than a high school certificate, but then gain valuable skills through on-the-job training (mostly improving their computer literacy) or, for some, more formal tertiary qualifications, including university degrees paid for by the employers. In short, the tourism sector provides opportunities in areas where there are few alternative income sources.

So what can be done to increase the numbers of tourists visiting South Africa? The most obvious answer is: make it as easy as possible for foreigners to temporarily enter our country. Enough has been written about the absurd visa regulations and their harmful effects. Let me just add this: in an attempt to prevent child trafficking, the regulations has hurt far more South African children by reducing the income (possibilities) of their mothers, women who would have found work in the tourism industry had more tourists been allowed to enter. TS Eliot’s ‘most of the evil in this world is done by people with good intentions’ comes to mind.

Making it easy for tourists also includes better and affordable transport to the country. More flights might require competitive airport landing slots. So, too, would efficient and safe border posts. And once they are here, allow them to use services that they trust, like Uber taxis and Airbnb accommodation (with the upshot of even more dispersed beneficiaries).

Advertising can help. Many countries try to boost their international image, for example, by hosting events. South Africa did this in 2010 with the FIFA World Cup and will do so again in 2022 with the Commonwealth Games. The tourism increases from the World Cup, as María Santana-Gallego and I show in a Journal of Sports Economics paper, was large and continued for a few years after the event. But a new paper in the Journal of Economic Perspectives by two gurus of sports economics, Robert Baade and Victor Matheson, warns against hosting mega-events. They find that ‘in most cases the Olympics are a money-losing proposition for host cities; they result in positive net benefits only under very specific and unusual circumstances’. Moreover, ‘the cost-benefit proposition is worse for cities in developing countries than for those in the industrialized world’. Ouch. Those who dream of a Durban or Johannesburg or Cape Town Olympics better take note.

Industry support, as with other economic sectors, seems to be of little help; often, the best governments can do for exports (tourism is formally: travel service exports) is to ensure a safe and open business environment. One of the first reactions to the Paris attacks in November last year, for example, was the fear that terrorism will harm France’s massive tourism industry. Paris was the world’s third most visited city in 2015. France remains, by a large margin, the world’s most visited country. Travel and tourism services contribute 9.1% to its GDP (South Africa is slightly higher at 9.4%, but significantly below New Zealand, for example, at 17.4%).

The fear seems justified: of course tourists would prefer to travel to places where they are less likely to be killed, or mugged, or even required to pay a bribe. And in a recent working paper, I (with María Santana-Gallego and Jaume Roselló-Nadal) find exactly that: a 1% increase in the ratio of terrorist attacks per 10 000 inhabitants reduce tourist arrivals by 2.3 %. We also measure the link between crime, corruption and tourism. We find that the effects of terrorism and crime are greater for leisure tourism than for business tourism but that corruption affects only business tourism.

Safety and security remains a central concern when traveling to South Africa. And even though the statistics show that tourists are safe, the perception of safety is what matters most. (Consider the actual versus perceived threat of Ebola. Trevor Noah did his best to dispel those misconceptions.) But the good news is that we also find that tourists from more unstable countries are more tolerant of terrorism, crime and corruption in the destination country. The rapidly expanding middle classes of China and especially India (cricket!) offer excellent opportunities for the South African tourism industry; on aggregate, the perception of crime and corruption, the statistics show, will have less of an effect on their decision to travel.

South Africa has many wonders to delight leisure and business tourists. Let’s welcome them with open borders and convenient regulations. And if you’re in the tourism industry, perhaps it’s good to shift focus to new markets where perceptions of safety and security are less likely to play a deciding role.

*An edited version of this first appeared in Finweek magazine of 16 June.

Written by Johan Fourie

July 15, 2016 at 05:58

High-speed rail in South Africa: too costly to consider

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On Thursday, Business Day reported that “the Department of Transport will commission its first independent, nationwide study into the cost and feasibility of high-speed trains between major cities, running at speeds as high as 400km/h”.

“The future of rail is high speed,” Mr Vilana said. In the “intermediate” term, the focus of the government, through state-owned commuter rail company the Passenger Rail Agency of South Africa (Prasa), was on getting “higher speeds” of between 140km/h and 160km/h on the narrow-gauge infrastructure.

“Certainly, going forward, we need to move to high-speed, standard-gauge rail,” said Prasa strategic network planning GM Hishaam Emeran.

For high-speed rail to succeed it must offer a “competitive journey time of about four hours over distances of 800km-1,000km”, he said, after which the trains would start to compete with airlines.

In the discussions on high-speed trains, “Durban to Johannesburg features strongly”, he said, adding that Cape Town to Johannesburg was also being mooted, “but that is a bit on long side … (unless) you start building key intermediate stops such as Kimberley or Bloemfontein and it starts opening up — you get a different picture then”.

There was also “huge demand from Polokwane to Gauteng, and then even further north. The feasibility studies will indicate where that is necessary,” he said.

High-speed rail is not a new idea, and it is enticing: it could provide South Africans and tourists with an affordable and safe way to travel long-distance, could reduce our dependence on oil, and, much like the 2010 FIFA World Cup and the Gautrain, could signal South Africa’s rise as an emerging power on the continent. Also, other countries are doing it: it’s difficult to imagine travelling in Europe without using the high-speed rails that permeate the landscape. But high-speed rail is not just a developed-country phenomenon any more. China has a vast rail network that is continually expanding: according to ChinaTimes, the country has recently completed “a 2298 kilometer line between the capital and Guangzhou which will cut the travel time between the two cities from 22 hours to just eight, with bullet trains travelling at 300 km per hour. The journey will take passengers through six provinces, 28 cities, 35 stops in major cities such as Zhenzhou, Wuhan and Chengsha, providing rapid rail service to 400 million people in the country’s heartland.” Many other developers, from Turkey, to Taiwan, to Turkmenistan, have high-speed trains.

Economic theory suggests that infrastructure is a key building block of economic growth: it facilitates lower transport costs, boosting trade and market integration. (Read a longish overview here.) Several economic history papers also show the significant long-term implications of rail infrastructure: Dan Bogart proves that transport revolutions before and during the Industrial Revolution decreased freight charges by 95 percent in real terms from 1700 to 1870 implying an annual TFP of more than 2 percent, meaning that “transport improvements were major factor in raising the standard of living in Britain and were as significant as other innovations”. Alex Moradi and Remi Jedwab show how two railway lines built in Ghana between 1901 and 1923 unintendedly opened vast expanses of tropical forest to cocoa cultivation, allowing Ghana to become the world’s largest producer. And in a recent essay, Bantu Mahali, a graduate student at Stellenbosch, shows how Free State farmers in the 1880s successfully agitated the colonial government to remap the proposed railway line to the mines in the interior to avoid passing through Basotho territory, then the bread-basket of the rapidly growing mining settlements. The result was that affluent Basotho farmers lost huge market share to cheap imports from the United States and Australia from where grain could be transported at a much lower cost to the mines (a distance of more than 8000 km!) than the grain grown on the slopes of the Drakensberg mountains just 300 km away. Incidentally, because of the persistence of railway lines, those spatial patterns still exist today.

High-speed rail seems to be the panacea to our problems. So I’ve let my imagination run wild and mapped what the ideal high-speed rail system would look like: Stage 1 would see a connection between Durban and Johannesburg, and between Johannesburg and Louis Trichardt (the North-South corridor). Stage 2 would extent this network to East (Maputo through Nelspruit) and West (to Gaborone through Rustenburg, and to Bloemfontein through Welkom). Stage 3 could see Bloemfontein extend it’s network to Kimberley and Maseru. Stage 4 would then link Bloemfontein to Cape Town through the arid Karoo. Further stages could be added extending north into Africa.


But, in truth, this can be no more than a pipe dream. The reason: it is simply too expensive. China currently builds the world’s cheapest high-speed rail, at $24 million per kilometre of line. (Germany is double that, Korea slightly lower at $40 million.) A railway line between Johannesburg and Durban would be about R120 billion (assuming a distance of 500 km and an exchange rate of R10/$), less than the R160 billion touted by Japan International Consultants, but still significantly more than the Medupi power plant that is currently under construction. If all the links on my map above were to be built, the (very conservative) costs would total R1 128 000 000 000 (or R1.1 trillion). That would double South Africa’s current external debt.

And these are just the construction costs. Land has to purchased to allow the new rails to be built (remember, South Africa’s existing railway lines are all smaller-gauge, which means they will have to be replaced entirely by standard-gauge on which these high-speed trains run). Land is probably cheap in the Karoo, but less so in the urban centres. And then there are the operational costs: these will hopefully be covered by user fees, but who will pay if they are not? In an earlier study, Estian Calitz and I looked at the financing options for the Gautrain and other such infrastructure projects. The construction of the Gautrain was financed by government (i.e. South Africa’s current and future tax payers), while the operational costs are paid for through user charges (tickets). The same model would apply to high-speed rail, but it is unclear whether there will be enough users to even cover operational costs. A plan to build a high-speed rail between Sydney and Melbourne in Australia was recently abandoned for these exact reasons.

A South African high-speed rail network sounds like a great idea. And there’s no doubt many will benefit from the greater freedom that low-cost travel brings. But, unfortunately, the cost of construction is simply too great, the opportunity cost simply too high. High-speed rail cannot be an option, at least for the foreseeable future.

Written by Johan Fourie

June 2, 2013 at 09:57

A roadmap to prosperity

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Image by Erik Johansson.

Image by Erik Johansson.

I’m only at chapter 14 of Deirdre McCloskey’s Bourgeois Dignity (there are 46), but it’s already been worth the read. I wish I could prescribe it to all our Economics students, not only because it’s clever and brilliantly written but also because it’s entertaining, at least as entertaining as discussing the causes of the Industrial Revolution can be. While most of the book is about the Industrial Revolution of 200 years ago, the first few chapters deal with growth today: why some countries prosper, and why other’s take longer to do so. (In the end, we’ll all be rich. My quip, not hers.)

There are many memorably passages, but Chapter 13 mentions South Africa, and I’d thought I’ll follow her advice and “borrow” her ideas. Here’s selected paragraphs from pages 121-124:

England in the eighteenth century could not possibly have experienced the present-day Chinese growth rate of real incomes per head of 10 percent per year, even in its greatest booms. The doubling of income per head in a mere seven years that the Chinese rate implies could not happen before very recent times, with gigantic piles of already-invented ideas such as the power loom or the light bulb or the printer circuit waiting to be borrowed, if one will but let people use them for the profit due a person with a newly borrowed idea, and cease from sneering at and stealing from and executing those who earn the profits. The historian of technology David Edgerton speaks of “the shock of the old,” in which people – even very poor people in the favelas of Brazil – keep finding new uses for old technologies, such as sheets of corrugated iron.

China and India, in other words, can take off the shelf the inventions laboriously developed by the Watts and the Edisons of the past three centuries – and by the Chinese and Indian inventors of earlier centuries, together with the Incan potato breeders and the brass casters of Benin, all of whose inventions had been taken up eagerly by the curious Westerners. Indians invented fine cotton cloth, which then became the staple of Manchester, but latterly in its fully mechanized form became again the staple of Mumbai. The Chinese invented mass-produced pig iron, which then became the staple of Swedish Uppland and English Cleveland and American Gary, but latterly with some additional chemical engineering the staple of the Kamaishi Works in Japan and now the Anshan works in China. And so Sweden in the late nineteenth century and then Japan in the early and middle twentieth century and China in the early twenty-first century caught up astonishingly quickly.

Richard Easterlin would agree with the speed implied by the metaphor of “taking technology off the shelf”. He wrote in 2003 that “since the early 1950s, the material living level of the average person in today’s less-developed countries…, which collectively account for four-fifths of the world’s population, has multiplied by threefold”, much faster than presently rich countries grew in the nineteenth century. It has led to Paul Collier’s Top Four to Six Billions. Similarly rapid has been the rise in life expectancy and the fall in fertility and the rise of literacy: on all counts, notes Easterlin, it is “a much more rapid rate of advance … than took place in the developed countries in the past”.

Good policies are boringly similar: rule of law, property rights, and above all dignity and liberty for the bourgeoisie. The happy countries end up looking similar, because each has automobiles, computers, higher education. Good policy allows taking technology off the shelf, and achieving a pretty good life for ordinary folk in two or three generations. It has happened repeatedly, as when the United States adopted British manufacturing, or Germany the same. Consider such recent miracles of leaping over putatively inevitable stages as Taiwan or Hong Kong or Singapore. Perhaps we should stop being gob-smacked every time it happens. Give people liberty to work and to invent and to invest, and treat them with dignity, and you get fast catching up.

In other words, what does not need much scientific inquiry is how the Indians and the Chinese, having been denied innovation for decades by imperial edict and warlord pillaging and socialist central plan and lack of widespread education, can get rich quickly by gaining peaceful access to well-stocked shelves of inventions, from the steam engine to the forward contract to the business meeting. Routine economics predicts that, after decades of disastrous economic luck, the misallocations and spurned opportunities will be so great that considerable fortunes can be made pretty easily, and the average income of poor people can be raised pretty easily, too. If Brazil and South Africa can be persuaded to adopt the liberal economic principles that are presently enriching China and India (and that had enriched Britain and Italy more slowly and therefore less obviously), there is no reason why in forty years the grandchildren of presently poor Brazilians and South African cannot enjoy something pretty close to Western European standards of living. That’s not ideological prejudice, some neocon fantasy in support of American imperial power. It’s a soberly obvious historico-experimental fact, which has already curbed American power. On the other hand, if Brazil and South Africa persist in unhelpful economic policies (such as South Africa’s labor laws based on German models), they can retain a gigantic, unemployed underclass and an inferior position relative to the United States, just as long as they find that attractive.

If it’s so infallibly simple, why are we so unfailingly ignorant?

Written by Johan Fourie

May 5, 2013 at 17:46


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China is often the scapegoat for South Africa’s economic ills. A recent Briefing Paper by Rhys Jenkins of the University of East Anglia and Laurence Edwards of the University of Cape Town does much to reinforce this view (the authors kindly sent me the paper, read a newspaper report here). In short, the paper argues that Chinese imports of manufactures has harmed the domestic manufacturing industry and particularly employment. While industrial production in South Africa grew by 14% between 2001 and 2010, “this increase would have been around 5% higher in the absence of increased Chinese import penetration.” The paper finds that at least 77,751 jobs were lost since 2001 to China, while only 4,080 jobs were created by South African firms finding new markets in China. The authors also argue that on average South African exports to the top ten exports markets in sub-Saharan Africa “would have been almost 10% higher ($900 million more) had it not lost market share to China between 2001 and 2010”. The message: China is the evil dragon that is destroying South African manufacturing jobs and especially hurting the poor.

Nothing of this is new, of course. South African trade unions and clothing and textile firms have lobbied government for protection in the form of tariffs and quotas for nearly a century (yes, the first tariffs were introduced during the Great Depression in the 1930s). As the authors’ own numbers show, most of the job losses in the clothing and textiles industry occurred before 2001 when China officially joined the World Trade Organisation (170 000 vs 139 000). China’s imports, therefore, are only the final nail in the coffin of an industry that was on life support for too long.

The main focus of the paper is on counting job losses, but little is said of the benefits of trading with the Chinese. (While they do mention that “there are positive benefits to consumers from the availability of cheaper consumer goods”, they conclude that “as far as industrial employment is concerned, the effects are clearly negative”.) As any trade economist should know, the main benefit of international trade is a fall in prices: consumers are able to buy things more cheaply than they could before, allowing them to purchase more of the same things, or more of different things, or even save more. Did China’s imports of clothing and textiles reduce prices? The figure below, using published South African CPI data, suggests an unequivocal yes.

Consumer price indices for food and clothing goods in South Africa. Courtesy of Johann van Eeden (see reference below).

What does this mean? It means that, while food prices increased by more than 50% between 2001 and 2007, clothing and footwear prices fell by 30%. The poorest South Africans, which spend the highest proportion of their budget on food and clothing, were thus able to substitute the higher food prices with the lower clothing prices. Look at what happened at the end of 2007. After successful lobbying by trade unions, the government decided to increase protection in the clothing and textiles industry: they negotiated with China a quota on clothing and textiles imports (which is, incidentally, illegal under WTO rules). The consequence? A rapid increase in the price of clothes. Even now, South Africans pay between 35% and 45% on imported clothes. Imagine paying R200 less for that Levi jean of R600. Imagine adding all those R200’s and spending it somewhere else in the economy: buying healthier food, going on holiday, or even paying off the home loan quicker. Add all those R200’s together and you will create far more jobs elsewhere in the economy than trying to protect those clothing and textile workers who will anyway be undercut by low-cost producers (even if it’s not China).

That is not to deny that some people have not lost their jobs. But the knee-jerk response is that, because unemployment is a major social issue in South Africa, we must do our best to protect as many jobs as possible. Economists, better than anyone, should know that there is not a fixed number of jobs available globally. That notion died in 1776. If China is growing, employing more people, it is to the benefit of the South African economy: we not only get more stuff cheaper, but we also have a growing market to export to. And this is happening, our exports to China has grown by 33% annually to China between 2007 and 2011 (and, remember, there was the small matter of a global recession). Just ask the cotton farmers (exports to China increased by 44% annually), polystyrene producers (by 146% annually) or lobster fishermen (by 469% annually). And, by the way, these are actually also labour-intensive industries. Given this evidence (which I retrieved from, the 4,080 jobs claimed by the authors seem absurdly low.

More importantly, the authors fail to think about the underlying reasons why China’s imports are so cheap. No, it’s not only because of bare-bones wages; it’s because their workers are more productive at that wage level. But this is also a static picture: China is growing at unprecedented rates, which also means their wages are increasing. In fact, I suspect China won’t be the main exporters (and competitors) of cheap clothing soon; it will be countries like Bangladesh and Tanzania that will compete in this market. In fact, when South Africa imposed quotas on Chinese exports in 2008, it wasn’t as if our domestic industry benefited: imports simply switched from China to these countries (imports from Pakistan increased by 55%, Bangladesh by 660%, Myanmar 197%, Sri Lanka by 728% and even Italy by 120%) (see Johann van Eeden and Taku Fundira’s paper on this). Given our relatively high wages, no protection will allow us to compete in this market.

China has grown rapidly over the last two decades causing significant changes in most countries of the world, creative destruction which have evidently caused some industries (like the clothing and textiles industry in South Africa) to contract and suffer job losses. But the benefits have also been monumental: even with higher tariffs, the average price of a clothing item is actually lower in 2010 than it was in 2000. This is remarkable considering that the prices of all other goods have increased by more than 50%. This has yielded significant (but less publicly proclaimed) benefits for the poorest of South Africa’s poor. South African producers have also been able to exploit the growing Chinese market, which will allow us to pay for the cheap imports from China. Moreover, China’s growth has also allowed it to invest more in South Africa, and Africa, when many had thought it too risky.

Rather than fearing the evil dragon, we need to realise, the sooner the better, that this dragon’s our friend.

Written by Johan Fourie

September 5, 2012 at 10:43


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We all do it at the start of the year, some more obstreperously than others (prediction #27: dictionaries will be eclipsed by “Google define”). So here’s my top 12:

1 – Peace on earth

No, I’ve not recently read “How to win a pageant and influence people” nor have I any aspirations to win the Nobel Peace Prize (although, as I’ve always said, my greatest aspiration in life is to be quoted in a Nobel speech). I simply think that 2012 might be the year with the greatest likelihood to be the most peaceful in the history of mankind. Gone are (most of) the tyrants that started 2011 full of faith that they will see out another year “in office”. While their removal, by their subjects or by God, may exacerbate conflict in their respective regions – imagine Kim Jong-un believing himself destined to conquer South Korea – I suspect these skirmishes will be restricted to the margin. The superpowers (read: China, Europe and the US) will have their domestic issues to deal with and would not want to get overextended abroad. Of course, international conflict, civil war and crime will continue to make headlines, but on a per capita basis – given the escalating global population – I predict that the world will be more peaceful place then ever before. (Which, incidentally, is what most “experts” apparently predicted at the start of 1914…)

2 – European fiscal integration

It is the only solution for Europe’s continuing malaise and fortunately Europeans are beginning to realise this. There are serious constraints to further integration, of course, the most important of these is probably the difference in the way social security systems are financed between Germany, for example, and France. (In Germany, the current generation pay their own pensions; in France, future generations – who will be smaller in number – will pay for the current generation’s pensions.) But these are trivial problems in the face of the alternative, a fragmented Europe, where each country resorts back to its own currency, imposing higher trade barriers and isolation. A federal model, based on the US system with some tweaks, offers the only positive outcome for a continent in crisis.

3 – Silicon Africa

Africa will increasingly become a hub for technology exports. Yes, while many parts of the dark continent are still, well, dark, the lights of technological innovation are being lit in the most unlikely of places. In the most immediate future (read: 2012), the attention will be on mobile technology. Kenya has taken the lead, but Nigeria and South Africa are fast catching up (and with their greater access to capital, will most likely purchase these start-ups, only to be dwarfed later by the Googles and Facebooks). Also expect some of the smallest and poorest African countries to join Silicon Africa, notably Uganda, Angola, Ghana, Ethiopia, Rwanda and Tanzania. This should not be surprising, as I’ve attempted to show in earlier research. The relatively high transport costs of containers and the relatively inexpensive communication costs (including internet access) will create a disincentive to export manufactured goods and allow African countries a comparative advantage in service exports. Travel services (tourism) is one area where this is already evident (although this sector is highly subject to stability and security; the terrorism attacks on the East coast can have serious consequences for tourism growth), but IT services will follow soon. Mobile is the first step in this movement, although we’ll have to wait beyond 2012 to see second-generation applications emerging.

4 – Obama 2.0

Barack Obama will win a second term in office and begin to find the charisma that made him the hero of the free world in 2008. Perhaps he focused too much on issues that were less important to voters in the midst of a recession, but a (slowly) recovering economy will help him realign his priorities and push for “change”. It will, of course, be helped by the fact that there is no serious Republican contender, an obvious consequence of the ideologically bankrupt sectarianism of the Republican Party. Once elected, Obama will push for a more integrated US economy (which might mean a greater focus to lower trade barriers, but we’ll have to wait till 2013 for Doha), greater incentives for innovators and entrepreneurs, more investment in infrastructure, education reform and higher taxes.

5 – Building BRICS

The world’s largest democracy is perpetually quashing domestic issues which leaves it little scope for contributions on the international stage. 2012 will see India becoming a more important stakeholder in international affairs, especially as mediator between the stagnant West and expanding East. Brazil will continue to grow on the back of high food demand (and higher food prices), especially from China. We’ll also see more pessimistic predictions of the Brazilian FIFA World Cup and Rio Olympic Games. December protests in Russia will continue and become more severe; the 2014 Winter Olympic Games could suffer as a result. China will get new leadership, but don’t bet against them religiously adhering to the blueprint of the previous. South Africa will realise that Nigeria is the more deserving African country to be included in this group of emerging economies; how about “On the BRINC” as the next business blockbuster?

6 – Oscillating ANC

Closer to home, expect statements from ANC officials and their alliance partners to become even more tumultuous than previous years. The stakes are high at the ANC policy conference in June and each stakeholder would want the upper hand as deliberations begin. This tumble drier policy would have little impact on what actually happens on the ground, both in terms of actual ANC fiscal and monetary policy (which will be dictated by Trevor Manuel and Pravin Gordhan, perhaps with some marginal tweaks to appease different factions) and private business (and the JSE), which will now have become used to political ramblings of all sorts. At the end of the year, it’s a race between Jacob Zuma and Kgalema Motlanthe at the ANC elective conference in Manguang. The safe money is on wily Zuma, but don’t be surprised if Motlanthe manages to bring together an eclectic assortment of vocal supporters. As a risky investor, I’d go for Motlanthe; he’s in any case a better opponent to Helen Zille in a national election and probably a better president.

7 – Twitternami

Twitter will continue to grow as the pre-eminent social networking tool. Whereas Facebook is much larger and convenient for maintaining contact with long-lost friends and storing photos, Twitter is able to offer one thing that Facebook does not: it makes subscribers more, not less, productive. And in the Darwinian economy, it is greater productivity – and the tools that make it happen – that ultimately determine longevity. Twitter should become our main source of news (I heard about the 2011 Japanese tsunami first on Twitter before any online news network had a story about it; an hour later, I could broadcast it live to my students during a lecture), but also our first port of call for any discussions on topics we find interesting (for me, blog posts on economic history topics or reports from Arsenal scouts). Moreover, it is much easier to “network” through Twitter; when a friend, which opinion you value highly, passes on an interesting tweet, the person responsible for that tweet can be followed immediately by the click of a button. It’s instant peer-review. Those with more followers are probably also those sending out interesting (and perhaps useful) tweets. And you can safely ignore those twits who rant on about their wife’s cooking or their baby’s first words. What better way to network or, as economists like to call it, build social capital? Have a business idea? Why not share it on Twitter with like-minded individuals who might suggest contacts, or even invest? It will be these linkages that will ensure Twitter’s continuing success, and for some Twitteratis, those who’ve built up a large following, even fame and (perhaps) fortune.

8 – The beautiful game

Beauty will make a comeback in 2012. In troubled times, people will be satisfied with fewer goods, but demand beauty in the things they do buy. Apple brought us beauty in simplicity. 2012 will bring beauty in colour and curves. Socrates, the great Brazilian footballer who died last year, believed that beauty comes first, winning a distant second. As sport, and especially football, becomes the new global religion, Socrates will be proven right. Barcelona and Real Madrid’s El Clasico brawls cost both teams fans; in 2012 they will be beautifully benevolent. Watch Holland to win the hearts of Europe, even if they again fail to win Euro 2012.

9 – Our children’s loss

Environmental matters will take a back seat in 2012. Like HIV/Aids, our inability to act will leave a path of destruction evident to all, yet the topic will be considered “boring”. Instead, we will refocus our attention on existing technologies, hoping to do more with less. Those that persevere with currently unprofitable (but innovative) ventures may win the most in the long-run. In South Africa, rhino poaching will continue, even as measures to protect these majestic animals increase. South Africans will want to continue blaming government unresponsiveness, greed or the Chinese. The only way to secure these animals sustainable existence is to legalise the trade in rhino horn. 2012 will not be the year when the rest of South Africa realise this.

10 – Going public

The popularity of public transport will continue to increase worldwide as a result of rising oil prices. More South Africans will also use public transport in 2012. Cape Town’s MyCiti bus network will expand, connecting more Capetonians to the city. In Gauteng, the final Gautrain link to Park Station, Johannesburg will open, with a surge in demand for these rapid train services. Expect plans for expansion to be tabled. The integration of transport will also speed up the integration of racial division that is still prevalent in many of South Africa’s urban areas. Hopefully, racial stereotyping will abate, with a greater focus on local issues and shared goals.

11 – Bookable

While the demise of the book will again be professed, more books will be written in 2012 than ever before. Hard copy book sales will also grow as people realise that not all books are better on the flat screen. Ironically, though, bookshops will continue to struggle. Expect online book retailers to do very well, especially those that compete on price. (I am a loyal supporter of but have recently been converted to which ships free anywhere in the world.)

12 – Class of 2011

Recent graduates will find it hard to get a job in 2012, and even more difficult to rapidly climb the corporate ladder. This will spur them to start their own thing. Starting a business in South Africa will be easier as red tape and tax regulations ease, and funding becomes more accessible. Expect local and foreign Angel investors to be on the look-out for the next innovative start-ups. The main constraint facing entrepreneurs may be weak demand, but there is always a market for a novel idea (according to Adrian Slywotzky and Karl Weber in their recent book “Demand: Creating What People Love Before They Know They Want It”). Recessions inevitably breed inventions and innovations, and 2012 may just be the year of the next big idea.

Bonus 13 – Let’s have some fun

We will have more fun in 2012. Shorter, breakaway weekends to local destinations will be in fashion. Expect guest houses and small hotels in rural towns to do well. Rural retreats may also become fashionable, as workers attempt to get away from the office, which now follows you anywhere there is a mobile signal. Pipe smoking will be in fashion. The Extreme Ironing movement will make a comeback. Cultural festivals will be popular, as will mega-events; expect the London Olympics to be excellently organised and well attended. Now, if just one of the Proteas, Stormers or Arsenal can just deliver a trophy…

Let the games begin!

Written by Johan Fourie

January 22, 2012 at 13:14