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Posts Tagged ‘globalization

What explains the rise of populism?

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Donald Trump

Consider the following thought experiment: Sibusiso and Thulani each own a firm that competes with the other. In each of the following scenarios, Sibusiso’s firm outcompetes Thulani’s. Which of the four do you consider unfair competition?

  • Sibusiso works hard, saves and invests his profits, and invents new techniques and products, while Thulani’s products change little and he loses market share.
  • Sibusiso finds a higher quality input supplier in the US, which makes his products better and he therefore takes market share from Thulani.
  • Sibusiso outsources some of his services to Bangladesh, where workers work 12-hour shifts under hazardous conditions, earning very low wages.
  • Sibusiso brings Bangladeshi workers into South Africa under temporary contracts, and puts them to work at lower than minimum wages.

From an economic perspective, each of these scenarios have a similar result: there are winners as well as losers as they expand the economy. But people generally react very differently to them. Most people are happy with scenario 1 and 2: even if someone loses (Thulani and his employees), this comes through what is perceived as fair competition from Sibusiso. It is scenario 3 and 4 that creates problems: when Sibusiso ‘breaks’ local laws (even though it may be perfectly legal in the foreign country), his competitive advantage, and by implication international trade, is viewed as unfair.

In a provocative new NBER Working Paper, Harvard University economist Dani Rodrik use this example to argue that too-rapid globalisation – the increasing use of scenarios 3 and 4, of outsourcing production to the developing world or of employing immigrants – is the underlying cause for the rise of populism across the developed world. The ‘losers’ from globalisation feel that foreigners – abroad or as immigrants in their own countries – have taken unfair advantage of then, stealing their jobs. They have chosen the politics of populism as a way to ‘punish’ this rapidly globalising world.

Economists know that free trade creates both winners and losers, and that the winners almost always gain more than what the losers lose. If the winners could perfectly compensate the losers, everyone would be better off from a free-trading world.

But Rodrik argues that such compensation is not always easy, and rarely happens. Aside from Europe, where an extensive social safety net was institutionalized to support ‘losers’, most countries failed to find a way to sufficiently compensate those that suffered the consequences of open borders. Make no mistake: open borders resulted in massive global gains, notably for the poor of China and India. But in each country, as trade theory predicts, there were losers. In Rodrik’s words: “People thought they were losing ground not because they had taken an unkind draw from the lottery of market competition, but because the rules were unfair and others – financiers, large corporations, foreigners – were taking advantage of a rigged playing field.”

There are many new studies to back up this claim. In a 2016 paper, David Autor and his co-authors show, for example, that the trade shock of China joining the World Trade Organisation aggravated political polarisation in the United States: districts affected by the shock moved further to the right or left politically, depending which way they were leaning in the first place. Analysing the Brexit vote, Italo Colantone and Piero Stanig show that regions with larger import penetration from China had a higher Leave vote share. They repeat the study for fifteen European countries, showing that China’s entry into the WTO had similar political consequences across Europe. In a 2017 working paper, Luigi Guiso and his co-authors use European survey data to draw even more precise conclusions: the more individuals are exposed to competition from imports and immigrants (the higher their economic insecurity), the more they vote for populist parties.

To summarise: because there were uncompensated losers from global free trade, argues Rodrik, there were political consequences. Rodrik then constructs a model to explain this populist rise on both the left and the right. According to the model, there are three different groups in society: the elite, the majority, and the minority. Says Rodrik: “The elite are separated from the rest of society by their wealth. The minority is separated by particular identity markers (ethnicity, religion, immigrant status). Hence there are two cleavages: an ethno-national/cultural cleavage and an income/social class cleavage. An important implication of this reasoning is that even when the underlying shock is fundamentally economic the political manifestations can be cultural and nativist. What may look like a racist or xenophobic backlash may have its roots in economic anxieties and dislocations.”

Populists who emphasize the identity cleavage target foreigners or minorities, and this produces right-wing populism. Those who emphasize the income cleavage target the wealthy and large corporations, producing left-wing populism. The large numbers of immigrants into Western Europe has resulted in the rise of right-wing populists, for example, while Latin America, because of large disparities between rich and poor, has seen more left-wing populism. The United States, argues Rodrik, falls somewhere in the middle – with Donald Trump on the right and Bernie Sanders on the left.

These findings have important implications for South Africa too. South Africa joined the WTO in 1995 and liberalised our complicated tariff schedule, opening our borders to foreign competition. There were many winners from cheaper imports, notably consumers, but some firms and industries struggled, leading to job losses, often concentrated in certain regions. And although South Africa rolled out an impressively comprehensive social safety net for a middle-income country, they could not compensate all the losers, especially as the global financial crisis hit in 2007 and unemployment began to worsen. It is not entirely coincidental that the first large-scale xenophobic attacks on foreigners happened in 2008 (what Rodrik would call right-wing populism) and that the ANC shifted left with the election of Jacob Zuma as South African president in 2009.

Even if globalisation creates more winners than losers, the losers, like Thulani and his employees, may feel that the system is rigged, and retaliate by voting for more populist parties. As South Africa stumbles into another recession, this may have profound consequences for the ANC’s December elective conference – and the national election in 2019.

*An edited version of this first appeared in Finweek magazine of 10 August 2017.

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Written by Johan Fourie

August 14, 2017 at 16:47

Books to make you think this summer

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

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

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

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

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

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

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

Written by Johan Fourie

November 29, 2016 at 14:06

When did South Africa globalise?

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A panel from the frescoes in the Assembly Room, Mutual Building in Cape Town, painted by Le Roux Smith in 1942. The fresco illustrates the importance of agriculture and shipping to the economy of the Western Cape in the early half of the 20th century (Source: Wikipedia 2013)

A panel from the frescoes in the Assembly Room, Mutual Building in Cape Town, painted by Le Roux Smith in 1942. The fresco illustrates the importance of agriculture and shipping to the economy of the Western Cape in the early half of the 20th century (Source: Wikipedia 2013)

Globalisation is a controversial phenomenon. Not only are its effects debated, but even its definition is murky. The standard (Wikipedia) definition sees it as the international integration of markets and cultures. But measuring globalisation is tricky. When is a market integrated, for example? Is it when goods are traded between Region X and Region Y? What goods? How frequently? And at what price? And this is only trade in goods. What about the movement of people, ideas or the integration of cultures?

Economists have narrowed a definition of economic integration to the notion that prices in an integrated market will move together. Thus, if markets are integrated, an external shock in one market – like a flood destroying wheat crops – will also affect the wheat prices in those markets that usually rely on those farmers’ exported goods. There are, of course, several ways to measure this co-movement, with many technical nuances. It is best to think of economic integration – and, when this happens on an international scale, globalisation – as a reduction in transport costs to a sufficient level that would allow frequent trade in the products people consume most frequently, like wheat.

The next question is obvious: according to this definition, when did globalisation begin? Was it in antiquity, when the Roman Empire spanned several continents? Or when the economies of the East linked with Europe via the Silk Route (made famous by Marco Polo’s thirteenth century travels)? Or in 1492 when Columbus arrived on the Eastern shores of the Americas? Or when Vasco da Gama sailed around the Cape to India in 1498, opening a sea trade route to the East that would sea European powers compete for the regions rich trade resources?

No. Globalisation is a relatively recent phenomenon. While these earlier historical episodes certainly saw the establishment of new links across long distances and borders, little changed for the average global citizen. The effects of wars and famines were mostly restricted to the regions it occurred; in other words, external shocks in some regions had little impact on others. That is, until the nineteenth century when new technologies like steam power and lower trade barriers made the trade of everyday goods – and, in particular, agricultural produce like wheat and other grains – a profitable enterprise. In a series of papers during the early 2000s, Kevin O’Rourke and Jeffrey Williamson use wheat prices to show how prices within Europe and North America began to move together somewhere in the middle of the nineteenth century. Several papers since has confirmed their results, and asked additional questions about its causes.

Wheat price trends in the UK and South Africa

Wheat price trends in the UK and South Africa

When did South Africa globalise? I found it surprisingly difficult to find an answer, so Willem Boshoff and I collected wheat prices for South Africa (at the Cape Town and Durban ports) from 1837 to 1910 and compared it to similar prices for England (and other countries). We will present the results on Saturday at the Economic History Association conference in Washington D.C. What is clear from the graph is that the trend of South African wheat prices shows no similarity to those of England before the 1870s and then, remarkably, seems to move closely with wheat prices in London. It is not incidental, we believe, that diamonds were discovered only a few years earlier, which resulted in large inflows of capital and migrants. But – and this we still cannot answer – if integration happened throughout the Western world during this period, what causal role did the discoveries of minerals in the interior of South Africa have?

More importantly, can we really just look at wheat prices, and only at prices at the country’s ports? To check this, with the help of some students (and my brother), we collected monthly wheat prices for several commodities – wheat, potatoes, mealies, cattle, sheep and tobacco – across about 20 South African towns. Using a basket of these goods, we find that prices were much less integrated within South Africa even before the Second South African War. As expected the War didn’t help, and it was only after 1906 that we see prices beginning to exhibit co-movement that is typical of an integrated market. The political unification of 1910 was thus solidified by the economic integration following the War. The opening and expansion of the railway lines, both the trunk and branch lines, would have played an important role.

Ours is an increasingly globalised world, although it certainly is not true that the world is flat. Many African countries remain isolated from the global economy, mostly because of extremely poor infrastructure. The reason that South African incomes are so much higher than that of our African neighbours is at least partly due to our early entry into the global economy. One of the vital lessons of economic history is that, as Gary Fields summarised it, if you’re poor, you cannot get rich by selling to yourself.

Written by Johan Fourie

September 16, 2013 at 22:29

Planetary Apartheid

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Laurence Wilse-Samson, PhD student at Columbia, writes the following in the soon-to-be-published South African Economic History Annual:

It thus appears to me that a deep knowledge of South African economic history would bring the added reward of new perspectives into old and important questions in political economy and economic development. For example, a central feature of the 20th century South African economy was the control of labour. There is perhaps here an analogy to various issues around globalisation. When, increasingly, in the 1960s and 70s, white mine owners wanted to “outsource” routine tasks to (far cheaper) black workers, white unionized miners responded with strong and prolonged action against this “unfair competition”.

Obviously, the nature of enforcement of such protectionist measures is different in the globalisation process from that of the cruel Apartheid regime. For example, pass laws, influx control and job reservation restricted the movement of black South Africans (and the 1913 Natives Land Act denied them property rights on “white land”). However, some of the economic logic is similar, and the argument of unfair competition sounds a little like what one might hear in Western Europe or in the US. The barriers against movement across nations are today just as strong and strongly enforced if less barbaric than those that existed within the Apartheid state. 

The barriers to movement imposed by the Apartheid authorities are of course not identical to the high barriers to immigration that is now commonplace in all countries of the globe. But there are parallels. As The Economist recently noted, it is increasingly difficult for even highly-educated folk to move to the United States, or Britain, countries that used to be welcoming to immigrants. The anti-immigrant sentiment in much of Europe still influence political ideologies. If you’re South African, obtaining a Schengen Visa to travel in Europe is not easy; one official of a European country that will remain unnamed given that I am forced to apply there again soon, told me, when I complained about the excessive fees (R1200), that “you can be lucky we allow you at all”. And even here, in South Africa, it is time-consuming and expensive to appoint a foreign national, and poorer immigrants are not always welcomed by the locals, as the 2008 xenophobic attacks attest to.

Laurence’s analogy, though, is pertinent. We are easy to criticise within-country division (like South African or, more recently, Israeli Apartheid), but easily support between-country barriers to entry (Mexican immigrants to the US, Senegalese immigrants to France, or Zimbabwean immigrants to South Africa, for example). Laurence’s point is that we can use the Apartheid experience to identify (and perhaps estimate) the impact of high barriers against movement. If Apartheid taught us one thing, it’s that spatial segregation imposes severe transaction costs that make trade expensive. Just ask those residents in townships on the outskirts of cities or, even more poignantly, those in the former homelands. These individuals remain far removed from the high-quality services, notably education, that they, more than anyone, need to break free from the poverty trap. Economists know that the free movement of individuals will create a more prosperous world: trade theory suggests that the free movement of goods and services across national borders (globalisation) would tend to equalise factor rewards, but a far quicker way to reduce global inequality is to allow the free movement of people. The US during the first phase of globalisation (the end of the nineteenth century) is a good example. If we are serious about the condition of the global economy, why are we making it increasingly difficult for migrants to move?

It is ironic that those countries that supported the fight against Apartheid most vehemently are now the ones building fences and raising barriers to prevent people from moving there. I’ve heard many explanations for this: to protect local jobs, to keep some cultural (or religious) homogeneity, for safety and security reasons, or that very Verwoerdian of ideas, to help the countries where the migrants originate from develop independently (in economic jargon, to help them combat the brain drain). Incidentally, all of these were also justifications for Apartheid.

If we are so appalled by within-country barriers, why then do we allow a planetary Apartheid?

Written by Johan Fourie

November 5, 2012 at 21:47

The lives of our grandchildren

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A provocative recent NBER Working Paper by Robert Gordon concludes that US economic growth will slow considerably over the next century to the extent that the lives of our grandchildren will not be very different from ours. The reason for this, according to Gordon, is that many of the inventions over the last 150 years have been “one-time-only inventions, which “limits the potential for a continuing stream of equally basic inventions”. Says Gordon: “Such essential improvements of human life as the conversion from rural to urban life, the speed of travel, the temperature of rooms, and the near-elimination of brute-force manual labour, have already been achieved.” While these innovations have considerably improved our productivity, he argues that more recent innovation, like Google and Twitter and the iPad, has focused less on labour-saving technology and more on “a succession of entertainment and communication devices that do the same things as we could before, but now in smaller and more convenient packages.”

Pundits have, of course, predicted the end of innovation before (and the decline of the United States). Gordon himself notes four classic examples where pessimism turned out to be unfounded, including the president of IBM in 1943 who said “I think there is a world market for maybe five computers”, or Bill Gates’s quip that “640 kilobytes ought to be enough for anyone”. But while mentioning these errors, Gordon fails to heed their lessons.

It wasn’t that these individuals were unnecessarily pessimistic about the future; they, and almost everyone else, could simply not imagine the possibilities that these new technologies would create. There is no reason to expect that we have a greater capacity today to envisage what the future might be like any better than intellectuals and business leaders of the mid-twentieth century, or even late-nineteenth century. There is also no reason to suggest that all “one-time” inventions have been discovered: a recent cover of The Economist noted the dramatic change in production and distribution that 3D printing might entail. Mobile technology may fundamentally alter our mode of exchange. Are existing roads and vehicles really the most optimal way of transport (if we include speed, safety, and cost)? And power lines to distribute electricity? There are still countless ways to make humans more productive, especially if all costs (like the impact on the environment) are priced into the market.

Gordon’s contention that many technologies developed in the early twentieth century (the automobile and flight, for example) reached their peak in mid-century is questionable. Gordon uses the example of aircraft: “air travel by 1970 had been completely converted to jets with no further increase in speed”. Speed is, of course, not the only criterion that should be used to judge efficiency: planes are much safer today than in the 1960s and 1970s and, most importantly, also cheaper, more frequently used by the median citizen. Moreover, these days we also have Skype for that meeting with someone on the other side of the world, lowering transaction costs dramatically. A more personal example may be more apt: even though a modern dentist looks very much like his 1960s counterpart, the diversity of dental services offered is much greater today (and the experience is much more pleasant).

Gordon also only focuses on the United States. Surprisingly, globalisation is perceived to be negative for US growth, causing greater inequality. But globalisation also broadens the scope for adopting ideas and innovations discovered elsewhere, today much faster than in the past. Apple has created excellent products, but is also in competition with Samsung, a South Korean conglomerate. Samsung may have used ideas from Apple, but would Apple have built a mini if it wasn’t for Samsung’s Note? In telecommunications and computer services where network economies are increasingly important, global competition may be the only antidote to local monopolies. Moreover, the vast majority of the world can still benefit from the twentieth century discoveries. Such productivity increases elsewhere will create larger markets for US producers, driving further innovation (and more “homesourcing”).

But Gordon also neglects the two most important reasons to be optimistic about the future. While noting the six “headwinds” of an ageing population, a lower level of education, greater inequality, outsourcing, climate change and household and government debt, the innovations of the last two decades (notably in information and telecommunications technology) have caused what Daron Acemoglu calls a “rights revolution”: in ‘The World Our Grandchildren Will Inherit’, he argues that greater political freedom is the ultimate cause of long-run increases in living standards, and the expansion of political rights will make the world a better place for our grandchildren. Perhaps its not only political freedom though. Perhaps its social freedom. A more integrated world, results in a more peaceful and – most importantly – cooperative world. A world of greater trust. And, as Stan du Plessis argues in this TEDx Stellenbosch video, human prosperity is founded on our ability to cooperate.

There is no reason to suspect that we will cooperate less in future. As social media and telecommunications expand, humanity will continue to move closer together, even though there will always be resistance to change. Ideas will spread faster across a greater number of people than in the past. The reward for innovation is greater, the pool of beneficiaries larger.

For Gordon, the heyday of productivity growth was the period 1928 to 1950, but not everyone at the time thought that it was. Here’s John Maynard Keynes in 1930 on Economic Possibilities for our Grandchildren: “We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down – at any rate in Great Britain, that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.” He continues: “I believe that this is a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another. The increase in technical efficiency has been taking place faster than we can deal with the problem of labour absorption, the improvement in the standard of life has been a little too quick.”

Gordon makes the same mistake as Keynes’s contemporaries. As Stan says in his TEDx talk, once you’ve swallowed the blue pill of economic progress, there is no way of going back.  Our only constant is change, and it will also be true for our grandchildren.

Written by Johan Fourie

October 26, 2012 at 14:56