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Why #DataMustFall

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ZimBoth the Independent Communications Authority of South Africa (Icasa) and the Competition Commission are concerned about South Africa’s high data costs. It is about time. Of the 48 African countries ranked by ResearchICTAfrica.net for the first quarter of 2017, South Africa was the 22nd most expensive in which to buy 1GB data. All of South Africa’s main competitors on the continent, including Egypt (1st), Ghana (4th), Nigeria (8th) and Kenya (15th) ranked higher. Our poorest neighbour – Mozambique – ranked second, with US$ 2.27 for 1GB in contrast to our US$7.49.

Consumers have known this for some time. Last year, radio personality Thabo “Tbo Touch” Molefe started a Twitter campaign – #DataMustFall – that went viral. He was subsequently invited to address the parliamentary Portfolio Committee on Telecommunications and Postal Services about the high cost of broadband in South Africa. Said Molefe at the time: “The power of data gives access to education, mentorship, skills training, financial assistance, job searching and recruit.”

Molefe is correct. There is now ample evidence globally to show that internet access at affordable prices is correlated to better job market opportunities. This is especially true in South Africa, where the employment rate is seven percentage points higher in areas connected to the internet than those with no connection. The problem is that economists have struggled to show that this relationship is causal: areas with internet connectivity usually have all the other amenities that are associated with better job market prospects. It then becomes an empirical question of how to separate the effect of internet connectivity from things like education, infrastructure and wealth that also affect job market prospects?

A new NBER Working Paper by Jonas Hjort of Columbia University and Jonas Poulson of Harvard University offers an answer. The two authors exploit the gradual arrival of 10 submarine Internet cables from Europe in cities on Africa’s coast in the late 2000s and early 2010s to identify whether the higher speeds and cheaper data costs created new jobs. First, they show that the arrival of the cables did, in fact, increase average internet speeds and the expansion of the network. They then compare the changes in employment patterns in cities and towns with a bigger versus a smaller increase in access to fast Internet. “In each of three different datasets that together cover 12 African countries with a combined population of roughly half a billion people, we find a significant relative increase—of 4.2 to 10 percent—in the employment rate in connected areas when fast Internet becomes available.” Just as Molefe said: faster and cheaper internet creates jobs!

As with any economic change, there are both winners and losers. Hjort and Poulson show that the faster, cheaper internet reduces employment in unskilled jobs, but “enables a bigger increase in employment in higher-skill occupations”. In other words, just as automation does in the developed world, faster internet in Africa results in a change in the type of skills required. One might expect the consequence to be deeper levels of inequality. Not true, says the authors, especially in South Africa. Faster, cheaper internet enables South African workers of low and intermediate educational attainment “to shift into higher-skill jobs to a greater extent than highly educated workers”. The net effect is that fast internet lowers employment inequality across the educational attainment range in South Africa.

So what types of jobs were created by the arrival of the submarine cables? The authors find that “new and new types” of jobs were created via the “extensive margin” (meaning: new users) and “intensive margin” (meaning: different use of the internet by existing users). Using detailed firm level data, they show that, in South Africa, new firms are established, notably in sectors that benefit from ICT. In Ethiopia, by contrast, existing firms improve their productivity. In other African countries like Ghana, Kenya and Nigeria, firms with access to the faster, cheaper internet export much more, perhaps, the authors suggest, because “website communication with clients become easier”.

Technology is not just a threat to job creation – it is also an opportunity. But as the #DataMustFall movement has shown, fast internet access remains a mirage for most South Africans. That is hopefully changing. Non-profits, like Project Isizwe, want to facilitate the roll-out of free WiFi in public spaces in low income communities, as it is already doing in Tshwane. Similar initiatives are following in South Africa’s other metros. Both Google and Facebook are designing new technologies that could revolutionise connectivity for in rural areas.

Consumers are rightfully angry about the high cost of data in South Africa. Yet it is local entrepreneurs and their employees that should be most upset. As Hjort and Paulson show, cheap data will create more firms and more, better-paying jobs. “Employment responses of the magnitude we document indicate that building fast Internet infrastructure may be among the currently feasible policy options with the greatest employment-creating potential in Africa.”

Fast and cheap internet is probably the simplest way to alleviate South Africa’s high unemployment conundrum. Policy-makers should take note.

*An edited version of this first appeared in Finweek magazine of 24 August 2017.

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Written by Johan Fourie

August 30, 2017 at 10:56

The rhetoric of economic transformation

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Spot the entrepreneur: Oprah is not fabulously wealthy because of redistribution of wealth, but because she was a more innovative and efficient entrepreneur than her talk-show competitors

Spot the entrepreneur: Oprah is not fabulously wealthy because of the redistribution of wealth, but because she was a more innovative and efficient entrepreneur than her talk-show competitors

This week, Jacob Zuma, appointed for a  second term as president of South Africa, announced his cabinet. He will have 35 ministers and one deputy-president: I’m happy to see Pravin Gordhan move to the Ministry of Co-operative Governance and Traditional Affairs, where he can only improve the inter-governmental workings of provinces and municipalities.  Nhlanhla Neneis is our new Minister of Finance. He has been schooled for this position, but it remains to be seen if he can withstand the pressure to relax the fiscal reigns as Gordhan and Trevor Manuel did before him. Naledi Pandor returns to Science and Technology, a capable minister for an important if peripheral post, and Aaron Motsoaledi can continue the good work he has been doing in healthcare.

But, as expected, Zuma also rewarded his allies with new and important positions, in spite of some having atrocious track records. All and sundry agree that Tina Joemat-Pettersen had a terrible first term as Minister of Agriculture, Forestry and Fisheries (AFF). She has returned, now as Minister of Energy, a vital portfolio given South Africa’s inability to supply enough electricity for its growing demand. A sinister commentator might say that this appointment paves the way for even bigger corruption scandals in a department where massive public investments are urgently needed – think nuclear or fracking. The new minister in agriculture is Senzeni Zonkwana, long-serving head of the National Union of Mineworkers and president of the South African Communist Party. His deputy will be Bheki Cele, who was the National Commissioner of the South African Police Service until October 2011, when he was suspended from duty, due to allegations of corruption.

The appointments in the Agriculture, Forestry and Fisheries portfolio signal a strong emphasis by the president on land reform, which is part of his vision to ‘transform the economy’. Here’s an excerpt from his inaugural address:

Economic transformation will take centre-stage during this new term of government as we put the economy on an inclusive growth path. As the National Development Plan outlines, the structure of the economy will be transformed through industrialisation, broad-based black economic empowerment and through strengthening and expanding the role of the state in the economy.

So let me ask the obvious question: Is this really the best way to transform an economy? Does history suggest that this is indeed a road to economic transformation? Are there not better alternatives available?

But perhaps it’s best to start with a question of definition: what is ‘economic transformation’? I suspect it is not ‘transformation’ in the sense of an ‘industrial revolution’ that our president refers to. Because if you want an industrial revolution – as happened in England in the nineteenth century, and in the US in the early twentieth century, and in several Asian economies at the end of the twentieth century, and is happening in China now – it is not with affirmative action or expanding the role of the state in the economy where you would start. Instead, economic transformation is about encouraging entrepreneurs to imitate or innovate ideas, processes and technologies that will help businesses become more productive. It is the farmer adding another tractor and harvester, a digital irrigation system and genetically-modified seeds. It is the miner using improved drilling equipment, a more efficient air ventilation system, and more affordable railway transport to the ports. It is the retailer building a better distribution network, using cellphones for digital payments, finding markets that are underserviced. It is the software programmer writing a new app that allow millions of users to save time and money.

The rise of inventors like James Hargreaves (Spinning Jenny), Henry Ford (assembly plant), Kiichiro Toyoda (founder of Toyota) or Yang Yuanqing (CEO of Lenovo Computers, the frugal innovator as The Economist notes) did not come about because of broad-based empowerment policies or a bigger state. It was because the incentives of those societies allowed inventors and innovators to prosper from their brilliant ideas, sometimes with state aid, yes, but the entrepreneur, not the politician, was always the most important. The reason England experienced an Industrial Revolution was due to relative factor prices (high wages, cheap energy -> incentives) and the scientific revolution and the ideology of the Enlightenment (generation of useful knowledge, a patent system that protected new innovations and free-trade economic policies -> rhetoric). To transform, entrepreneurs must make use of comparative advantages and be encouraged to do so (or, at least, not be prevented from doing so).

There are, of course, many countries that have tried to follow different routes. Latin American countries are infamous for attempting state-sponsored industrialisation, and failing. Russia, through mass murder and communist policies, transformed their economy from agriculture to industrial at the start of the twentieth century, only to stagnate later. Communist China before the market reforms was a basket case with a few rich state officials (much like North Korea today). Closer to home, Ghana, Nigeria, Kenya and Tanzania are growing rapidly not because of a larger state, but because their entrepreneurs are finding opportunities to exploit.

The policies proposed by president Zuma are, ironically, exactly the opposite of what is written in the NDP. The South Africa of 2014, it seems, believes that we can grow prosperity through a large state and the transfer of wealth. We won’t: not because we are somehow incapable of making it happen, but simply because it has never worked before. This is harsh, but true. Yet – I understand the reason for this sentiment. Our massive inequality and the populist appeal of ‘economic revolutionaries’ will make a large state that can ‘redress’ the past appealing. The truth is that our woeful education system and rigid labour laws make it difficult for the poorest to take advantage of market opportunities, which leaves them with little alternative but to absorb the populist sentiments. If you were poorly-educated, living in poverty and hopelessness, would the illusions of prosperity that the populists promise not seem very real too?

There are no easy answers. If we stay the course of a market approach, there is little doubt that inequality will remain, simply because of the massive inequalities in education. If we choose to encourage entrepreneurship, for example, many of those entrepreneurs may be white South Africans (people like Koos Bekker) who will become extraordinarily rich (Naspers is now the largest internet company outside China and the US). Even though this will boost economic growth and reduce poverty (which is the reason the US is rich), it won’t affect the distribution of income (which is the reason America is also massively unequal).

Instead, we have decided on a different type of economic transformation: redistribute existing wealth. In some sectors this will be relatively successful: Naspers has, for example, made thousands of black South Africans prosperous by offering them shares at discounted rates several years ago. This is black economic empowerment at its best. But the economic transformation the president envisages is, most likely, not limited to such slow adjustments of our income distribution, especially if change needs to happen within the political deadline of five years. So instead of encouraging imitation and innovation of our entrepreneurs, we could expect to see policies that attempt to transform ownership. Expect agriculture to see the first of these radical transformations.

Thomas Piketty argues that inequality exists because capital grows faster than the economy. This implies that the rewards to the owners of capital (rent from land, buildings, equipment) grow faster than the returns to workers (wages). While this may be true, it is a very static way to explain the exponential growth the world has seen over the last two centuries. Here’s Deirdre McCloskey’s view neatly summarised by Evan Davis:

McCloskey has long argued that economists are far too preoccupied by capital and saving. She doesn’t even like the word capitalism, on the grounds that capital is not what got us where we are today. ‘If Scotland is trying to become Holland, then capital accumulation is how to do it. That will double your income, maybe triple it.’ But for her, that sort of accumulation is a scratch-card-sized prize — and the lottery jackpot beckons. She enthuses about the Great Enrichment of the 19th century. ‘What happened, understand, is not 100 per cent growth, but anywhere from 2,900 per cent growth to 9,900 per cent growth. A factor of either 30 or 100.’

That jump in incomes came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists.

Professor McCloskey has a point, of course. Think of the Bill Gates and Steve Jobs, big wealth accumulators in recent times. It wasn’t the magic of compound interest on capital that made them rich; it was intellectual property. They created billions of dollars of business from virtually nothing at all. If you measure the profits as a return on the small amount of initial capital invested, then it looks huge; but capital was no more important an ingredient of the original Apple or Microsoft than cookies or cucumbers.

And to me, this is one big distinction at the heart of the wealth equality debate: whether capital — past accumulation of savings — gets to devour the future, or whether the future is created afresh by each generation. This argument is a struggle between those who think riches are created from riches, and those who think riches are created from rags. Are big profits best viewed as a generous return on capital, in the way that worries Piketty? Or as coming from innovation that ultimately benefits us all?

Capital and saving will not make South Africa prosperous, regardless of whether it is in rich or poor, black or white hands. If we want our children’s children to be better off, we need to design policies that encourage our farmers, miners, retailers and software programmers (and talk-show hosts!) to invest in innovation. And we need our leaders, especially the president, to change the discourse on economic transformation away from the redistribution of wealth towards the empowerment of entrepreneurs.

The incentives for entrepreneurs

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Vast volumes have been written on the importance of entrepreneurship in building prosperity. Entrepreneurs innovate, identify new markets, implement new systems and process, connect labour, capital and technology in novel ways; in short, entrepreneurs make stuff more efficient than before. But measuring the contribution of ‘entrepreneursip’ to growth has been difficult, given the unquantifiable nature of entrepreneurial traits: motivation, creativity, risk-taking, to name a few. In a recent working paper, Sascha Becker and Hans Hvide claim to have found an answer to the question: Do Entrepreneurs Matter? They consider Norwegian companies between 1997 and 2008 and identify 500 firms where the founding entrepreneur died. This exogenous shock they show had strong negative consequences for these firms, regardless of firm size, age and location. Interestingly, more qualified entrepreneurs had a larger negative impact. (Read the review here.) Entrepreneurship clearly matters.

The more important (policy) question, though, is how to cultivate entrepreneurship. How important is formal education in creating entrepreneurs? (What type of education?) Does access to finance play a role? Rules and regulations? Inequality?

Koos Bekker at the World Economic Forum

Koos Bekker at the World Economic Forum

William Baumol, in his famous 1990 paper, suggests an alternative framework for thinking about entrepreneurship. Instead of (attempting to) cultivate entrepreneurship, he assumes a given stock of entrepreneurs in all societies. (Just as one would assume that there is a given stock of land-handed people in all countries, instead of trying to ‘cultivate’ left-handed individuals.) The important question, Baumol suggests, is how to change the incentives for entrepreneurs so that they participate in what he calls “productive” activities. Here is his central hypothesis: “the exercise of entrepreneurship can sometimes be unproductive or even destructive, and whether it takes one of these directions or one that is more benign depends heavily on the structure of payoffs in the economy – the rules of the game.”

Baumol use historical examples to show how the incentives for entrepreneurs – in essence, the risk-taking individuals in society – determined whether they were involved in productive or unproductive activities. Where warfare was the most likely activity to yield wealth, ‘entrepreneurship’ was rewarded through war spoils, with destructive consequences for the economy. In other societies, incentives were directed to rent-seeking, i.e. spending resources on obtaining a larger share of existing wealth, instead of growing the wealth, also known as redistribution. The most successful entrepreneurs, in this context, were those that could extract as much wealth from the state.

These ideas are particularly relevant for South Africa. The rules of the game changed dramatically for white South Africans during the late 1980s and early 1990s. Gone were the days where the state could be relied on for support, where rent seeking could be a profitable exercise. Instead, as I’ve written before, it was Afrikaner entrepreneurs that came to the fore after 1994 – Jannie Mouton, Michiel le Roux, Christo Wiese, Koos Bekker. Much of this success has been built on export markets: between 1998 and 2013, Naspers shares increased by more than 1900%, largely due to investments in China, Russia and Brazil. The Financial Times recently dubbed Bekker the “exemplar of the post-apartheid Afrikaner”.

But how has the post-1994 “rules of the game” changed incentives for black South Africans? Have Black Economic Empowerment facilitated productive or unproductive activities by black entrepreneurs? Where are the highest financial rewards for black South African entrepreneurs: to sell to a market, or to sell to government? In the former, competition is rife and global; in the latter, competition is protected because only BEE-rated businesses compete. It seems the incentives are heavily biased in favour of (unproductive) government contracts.

Here is the key question for policy-makers: What can we do to modify and improve the rules of the game (the reward structure of the economy) so that entrepreneurs – black and white – change the type of activities they engage in (from unproductive to productive)? Allocating more entrepreneurial resources towards more productive activities is the key to building a prosperous future.

Written by Johan Fourie

March 28, 2013 at 07:13