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Posts Tagged ‘growth

A moment to remake South Africa

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At the dawn of independence, it fell on the first generation of African leaders to choose a new economic paradigm to deliver economic freedom to their people. In the Cold War between capitalism and communism, these African leaders almost unilaterally preferred a third option – ‘African socialism’ – a potpourri of policies built on the ethic of egalitarianism grounded in African history and culture.

At the second annual LEAP Lecture at Stellenbosch University in October 2017, Emmanuel Akyeampong, professor of African history at Harvard University, returned to the topic of ‘African socialism’ following independence, and its consequences for the continent. In countries as diverse as Ghana, Tanzania, Senegal and Guinea, he notes, the new policies were, ultimately, attempts to industrialise, to break away from the agriculture-based systems of the colonial economies.

In Kwame Nkrumah’s Ghana, for example, plans were drawn up for massive infrastructure investments. Sadly, many of these projects never got off the ground, or were only finished much later. In one project, for example, Nkrumah convinced the Russians to build a railway from Kumasi to Ouagadougou, the capital of Burkino Faso, but the railway was never completed.

The most extreme version of ‘African socialism’ was Julius Nyerere’s umajaa (villagization) campaign in Tanzania in 1967. This essentially meant the collectivization of all forms of productive capacity, notably in agriculture; Tanzanians, Nyerere believed, must learn to free themselves from dependence on European powers by becoming self-reliant.

Nyerere’s bold vision, and those of his contemporaries, failed miserably. Says Akyeampong: “The 1980s put paid to the concept and the vision, as steep economic decline resulted in what has been called Africa’s ‘lost decade’; the most notable architect of African socialism, Nyerere, conceded that his attempt at ujamaa had failed and stepped down from power in 1985; and the collapse of the Soviet Union in 1989 marked the triumph and ascendancy of capitalism.”

But Akyeampong is less interested in the reasons for their failures than in the boldness of their visions.  “It is the vision of bold and broad transformative change that I find admirable and worthy of emulation, and the desire to lift entire populations out of poverty and give them a decent life.” This optimism and boldness was not limited to the African leaders themselves; even the World Bank, soon after independence, remarked: ‘For most of Africa, the economic future before the end of the century can be bright’.

As I listened to Cyril Ramaphosa deliver his first State of the Nation address, I was reminded of that special moment in time when monumental change seemed possible. The general mood seems to have lifted after Jacob Zuma’s departure. Is this another moment when the trajectory of history seems to shift gear?

We should, of course, learn from history. Utopian visions of the future can easily become a justification for social engineering. While a powerful state can quickly transform society, it can do so at the cost of freedom. This is not the route I have in mind. Instead, this opportune moment can be used to redefine the social contract, to implement a nuanced set of social democratic policies with two explicit aims: economic security and economic freedom. In short, we want to live in a just and prosperous society.

How do we achieve that? Security requires that people have a basic standard of living. One policy proposal that has attracted a lot of interest is the basic income grant, a small monthly grant (of say R752, the lower-bound poverty line) to every South Africa, regardless of income. This would replace the child support grant. Every person with an ID document will be required to open a bank account (perhaps with a new state deposit bank), which will be linked to their SARS account. To partially fund this, VAT will increase. A tax on consumption means we incentivise savings and investment, the heart of creating economic prosperity.

There are many such policy options. State ownership of some assets, like aeroplanes and television stations, make little sense. These can be sold to pay off national debt and lower personal income taxes. Government can also save by reducing the number and size of departments and keeping the increases in the public wage bill to less than inflation.

As South African cities have some of the longest transit times in the world, infrastructure investment in urban areas – notably in public transport and housing – needs urgent attention. Water and electricity can benefit from innovations like desalination and solar panels. Broadband access can be expanded through incentive programmes.

A prosperous society requires an educated populace and work for them. Investing in early childhood development is key to eradicate large discrepancies that already exist when kids arrive at school. Incorporating the private sector in secondary and tertiary education, perhaps through a voucher system, is one way to not only improve the quantity of seats in class, but also provide opportunities for entrepreneurs at the local level. We should also welcome immigrants with skills with open arms; they not only bring much-needed expertise, but they often build new businesses that create jobs and improve living standards.

Cyril Ramaphosa has a window of opportunity in the first few months of his tenure. He can dare to be bold, and should do so. Says Akyeampong: “We need the bold and transformative vision of the likes of Nyerere and Nkrumah to ensure that come 2050 we do not find ourselves in the same predicament as on the eve of independence, when our new leaders, coming out of decades of repressive colonial economic policies, were faced with what appeared to be insurmountable challenges.” What will economic historians, fifty years from now, say about Ramaphosa’s moment to remake South Africa?

*An edited version of this article originally first appeared in the 15 March edition of finweek


Do management consultants really add value?

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That good managers matter for corporate success, should be a surprise to no-one. Early economists like Alfred Marshall, back in the nineteenth century, already noted the importance of good management practices to drive productivity. But because managers and the way they behave is such a difficult thing to quantify, economists have struggled to measure how important good management practices are in explaining firm success.

In 2008, five leading economists from Stanford University and the World Bank, tackled this difficult question. They wanted to know whether investing in good management practices improve productivity and profits, and so, between 2008 and 2010, they conducted a large field experiment in India. They approached large, multi-plant Indian textile firms and divided them in two groups. For one group – the treatment group – they gave five months of extensive management consulting through a large international consulting firm. This included a month of diagnosis, where the consulting firm would find opportunities for improvement, and four months of intensive support for the implementation of these strategies. In contrast, the other group – the control group – received only one month of diagnostic consulting, but no intensive follow-up.

At the end of the study, in 2011, they tested the performance of the firms in the two groups. The results, published in the Quarterly Journal of Economics in 2013, were quite remarkable. Even with just four months of follow-up, those in the treatment group saw an increase of 11% in productivity, and an increase in annual profitability of about $230 000. Interestingly, firms also spread these management improvements from their treatment plants to other plants they owned, creating positive spillovers that resulted in returns that far outstripped the initial investment.

What made the difference? The authors suggest two reasons for the improvements: First, owners delegated greater decision making power over hiring, investment and pay to their plant managers. “This happened in large part because the improved collection and dissemination of information that was part of the change process enables owners to monitor their plant managers better.” Second, the extensive data collection necessary for quality control, for example, led to a rapid increase in computer use. Better information management resulted in better performance.

The concern with the study, though, was that it failed to measure the persistence in performance. Did the differences between the treatment and the control group wither away as soon as the management consultants left, or did they persist for a month, a year, or even longer? To answer this question, almost the same team of authors returned to India in 2017 to measure the performance of the firms eight years after the initial intervention. Their results appeared in an NBER Working Paper last month.

It seems that management practices do persist. Despite the fact that several firms (in both the treatment and control group) dropped some of the management practices that were initially proposed by the consultants, the difference between the two groups were still large – worker productivity is 35% higher in the treatment group compared to the control group. The spillover effects, in particular, were still there: in fact, in most cases, the plants that did not receive treatment but were part of the same firm, were indistinguishable from the plants that did receive management consulting services. As the authors note: While “few management practices had demonstrably spread across the firms in the study, many had spread within firms, from the experimental plants to the non-experimental plants, suggesting limited spillovers between firms but large spillovers within firms”.

The authors were also able to collect information on the reasons certain management practices were dropped over the period of 8 years. Three reasons were frequently mentioned: the new management practices faded when the plant manager left the firm, when the directors, notably the CEO and CFO, were too busy, and when the practice was not commonly used in many other firms. “The first two reasons highlight the importance of key employees within the firm for driving management practices, while the latter emphasizes the importance of beliefs.”

There were other surprising consequences of intervention too. Not only was worker productivity higher in the treatment group, but treated firms continued to use consulting services in the years following the initial intervention, not only improving their operational management practices, but also their marketing practices.

Management consultants often get a bad rep, but random control trials like these – experiments that are costly and time-consuming – clearly demonstrate the advantages, in profits and productivity, of investing in good management practices. Successful firms thrive because of good managers. The key is to hang on to them, empower them with the ability to make decisions, and free up their time.

*This article originally appeared in the 1 March edition of finweek.

Written by Johan Fourie

April 6, 2018 at 15:21

Four high-growth scenarios for Africa

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Can African countries sustain the relatively high growth rates they attained since 2000? At the start of 2017, putting aside the newsworthy political shifts and the fear of many that the developing world has entered a ‘secular stagnation’, this remains the most vexing question for those of us on the African continent.

It is not a question with an easy answer. The stellar economic performance of several African countries has created an ‘Africa rising’ narrative where further progress – and catch-up to the developed world – seems inevitable. A more pessimistic counternarrative argues that this growth, from a low base, is largely the result of favourable commodity prices and Chinese investment. Both narratives had, unfortunately, made little use of either economic theory or history.

Enter Dani Rodrik, professor of International Political Economy at the John F. Kennedy School of Government at Harvard University, who tackles this question in a new paper in the Journal of African Economies. He first shows that many African economies have indeed improved since 2000, but that many, including Senegal, the DRC, the Ivory Coast and Zambia, remain on levels below those immediately following colonialism (around 1960). The second fact he establishes is that the rapid growth of the last dozen years has not lead to a large structural transformation of the economy. Whereas rapid growth in south-east Asian economies during the late twentieth century resulted in the growth of manufacturing, a more productive activity than subsistence farming, high growth rates in Africa have not had any effect on the relative size of manufacturing. In fact, in many countries, the size of the manufacturing sector has actually declined since 1975.

Rodrik attributes these changes not so much to factors unique to Africa – like a poor business climate or weak institutions or bad geography – but to a global trend of deindustrialisation. Even Vietnam, a country which has recently experienced rapid growth, has not seen much growth in manufacturing.  And Latin American countries, which have decidedly better institutions than three decades ago, have also not seen much growth in manufacturing. Technological change – the move to automation, for example – is one likely reason.

So despite high growth rates, African countries have not industrialised – and, in fact, may have even begun to deindustrialise. This is why Rodrik is pessimistic about Africa’s future growth prospects. He nevertheless concludes by considering potential scenarios in which Africa can indeed sustain high growth, and identifies four possibilities: 1) To revive manufacturing and industrialise, 2) To generate agricultural-led growth, 3) To generate service-led growth and 4) To generate natural resource-led growth.

Let’s start with agriculture. Although many African countries have a lot of potential to expand their agricultural sectors, productivity in the agricultural sector remains low. Many farmers are subsistence producers, with low economies of scale. Such a scenario will require a reversal in the current trend away from agriculture. A recent study by Diao, Harttgen and McMillan show clearly how the share of agriculture is falling, particularly as women older than 25 are moving to the cities and into manufacturing and services. This trend seems irreversible, even if changes to technology (like seed varieties or market access opportunities) or institutions (like private property) are made, which means that an agricultural-led high growth scenario seems highly unlikely.

A natural resource-led strategy also seems unlikely for most African countries. Yes, most countries on the continent are well-endowed with resources, but the problems of the Natural Resource Curse and Dutch Disease are well known. It may be an option for some small economies, like Botswana has shown, but one has to question to what extent it can be sustainable beyond a certain level of income.

A third option is to reverse the trend of deindustrialisation. Because a growing manufacturing base seems to be, at least if we consider past examples of industrialisation, the only way to increase labour productivity over a sustained period of time, this is the option preferred by many development agencies. Yet there are many obstacles in the way of a thriving manufacturing sector, including poor infrastructure (transport and power in particular), red tape and corruption, low levels of human capital, and political and legal risk. But as explained earlier, Rodrik believes that even if these (very difficult) barriers can be overcome, it is not clear that manufacturing will return. The Fourth Industrial Revolution may completely alter the nature of manufacturing away from absorbing unskilled labour to capital and knowledge-intensive production. As I’ve said before, it is dangerous to follow a twentieth-century blueprint when production technologies are so different.

That leaves us with one scenario: services-led growth. Services have traditionally not acted as an ‘escalator sector’ as Rodrik explains. The problem is that services typically require high-skilled labourers, one thing that is in short supply in a developing economy. Rodrik does acknowledge, though, that the past will not necessarily look like the future. “Perhaps Africa will be the breeding ground of new technologies that will revolutionise services for broad masses, and do so in a way that creates high-wage jobs for all. Perhaps; but it is too early to be confident about the likelihood of this scenario.”

I don’t see an alternative, though. Yes, some countries, like Mozambique or Tanzania, will be able to expand their agricultural sectors – but higher productivity will probably mean larger farms with fewer workers. A few small countries will be able to benefit from natural resources – from diamonds to rare minerals like tantalum (used in cellphones and laptops); oil-producing countries will struggle, though, as the cost of renewable energies keeps falling. And some coastal countries may even develop their manufacturing sectors, like Ethiopia and South Africa. But for most of Africa, services offer the only reprieve from low productivity, low-wage jobs. From semi-skilled jobs like call-centres and virtual au pairs (apparently the next big thing) to professional services like accountants and designers and programmers, digital technologies must help leapfrog the barriers of poor infrastructure, bad geography and weak institutions. If it cannot, Dani Rodrik’s pessimistic vision of Africa’s future is likely to come true.

*An edited version of this first appeared in Finweek magazine of 26 January.

The past is the future we fear: notes from 1827

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One of the benefits of studying economics (and economic history) is that you’re a bit more resilient to the populist sentiments of politicians and policy-makers. Especially during election time, facts and fiction are often mixed together in one of those big, black pots, with a touch of fantasy added as special ingredient, and served to expectant ears. We all like to have our ideas about the world affirmed and politicians are good at exploiting this weakness. They tell us exactly what we want to hear. Never let the facts get in the way of a good story.


Lord Charles Somerset

Much has been said in the build-up to this South African elections, for example, about growing inequalities in South Africa. Whether you think severe and persistent inequality is only slightly bad or extremely bad, there is no denying that a highly unequal society, like South Africa’s population, is not only morally unjustifiable but also a barrier to higher rapid growth. And this is not peculiar to South Africa, of course. Mechanisation, globalisation, and various other trends seems to be driving a gap between those with wealth and those without. Even the IMF has acknowledged that this is an issue.

Many ascribe this growing inequality as an inevitable consequence of the capitalism machine. Like Marx predicted, it seems as though the social structures of our societies are crumbling under the corruption of commerce. And it’s not only the lefties that are having a field day: prominent economists, like Brad Delong, are struggling to come to grips with robots hijacking our jobs. But, as Delong notes, this is not the first time that we’ve encountered the problem of inequality. Sometimes the past is the future we fear. During the Great Depression, many in Europe thought that communism was the only way to escape the deprivation that permeated Western societies. The iron curtain, and its collapse, would later show communist claims to a utopian future to be false.

But even in our own history, we have telling reminders that the egalitarian past we so happily paint is all but true. I recently discovered a table in the Records of the Cape Colony (Theal, 1905) that listed wages paid to all government employees of the Cape Colony in 1827. Remember, this is a time before the discovery of minerals, before the abolishment of slavery, yes, even before the Great Trek. This was a society, presumably, without the upheavals and inequalities of modern capitalism, without the corruption and nihilism of the ‘neoliberal’, materialistic world we inhabit today. And yet, Lord Charles Somerset, then governor of the Cape (let’s call him the premier, or the president), earned £10 000 annually (p. 28). In contrast, a bookkeeper in the Office of Collector of Tithes and Transfer Duties (equivalent to someone working for SARS today), earned, on average, £45 (p. 43). That’s right, he (his names was TF Dreyer) earned 222 times less than the president. What does an auditor at SARS earn annually these days? Let’s say a conservative R300 000. Apply the same ratio, and Lord Charles Somerset earned the equivalent of R66 million. Jacob Zuma, officially at least, earns only R2,6  million. Or take Patrick Kelly, a messenger in the Office of Civil Engineering, who earned £9, less than 1000 times that of Lord Somerset. And, of course, these were all white government workers. Had you been black, you could at best wish for a job in the police, at £4 per annum, that is, 2500 times less than the president. (If a policeman today earns R100 000 annually, that would take the president’s salary to R250 million. Zuma could buy a Nkandla every year with that money.)

MilanovicCapitalism does not necessarily lead to higher inequality, especially not in the very long run. (In more thorough research, Dieter von Fintel and I showed that the eighteenth century Cape Colony was also severely unequal.) But even in the short run, capitalism isn’t always bad. An excellent example is South Africa’s own recent history: Branko Milanovic of the World Bank recently tweeted South Africa’s Gini coefficient for the last decade. While income inequality is slightly higher in 2010 than in 2000, the pattern is decidedly mixed over the decade. Our spending is less unequal in 2010 than in 2000. These changes in inequality also masks the rapid declines in poverty that the country has seen since 1994. A SALDRU report by Arden Finn, Murray Leibbrandt and Ingrid Woolard of UCT shows the incredible gains that a free market (with help from the state) has allowed: From 1993 to 2010, a multidimensional index of poverty has fallen by 29 percentage points from 37% to 8%. These are dramatic improvements, often unappreciated.

The past is a scary place. The future is brighter than we think. We still have problems to solve, but the we are in far better shape to do so. Let’s remind politicians of that this elections.

Written by Johan Fourie

April 3, 2014 at 15:00

Africa 2050

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I had the opportunity recently to talk to a group of local and international students about Africa’s past and current development trends; an economic history peep show of everything from the neolithic revolution and Jared Diamond, through slavery, colonialism, independence, and dictatorship, to the rapid growth of the last decade. As a final assignment, I asked the following question: This is the year 2050. Write a history of African development, 2010-2050.

Perhaps because we are an optimistic species (and because our generation believe that the future is malleable, that we have agency to affect change), the general impression I get from reading the students’ responses is that our children will live in a better Africa than the Africa of our parents and the Africa of us. This, I want to emphasise, is a remarkably different world than the one inhabited by our great great grandparents, who could wish for little more than that most of their offspring live to childbearing years. In good times, this happened. But when famine or war or disease struck, the best one could hope for was survival. This is certainly not the future of Africa that my students envisage, however. According to the sample of experts in my class, the Africa of 2050 will be an improved, more prosperous place to live.

Several themes appeared repeatedly: a more stable political environment, investments in power generation, better transport and telecommunications infrastructure and greater skill levels. US-student Matthew DeAngelis writes:

After access to electricity became essentially universal, high-speed Internet access was quick to follow. While much of Africa is still using slower broadband connections rather than the faster fibre optic technology which is the standard in most of the world, this access to information has quickly and cheaply revolutionized almost every aspect of African life. First, the Internet has changed education in Africa. Historically, rural Africa has faced a problem with its schools not being able to afford basic libraries or educational materials. As computers and Internet access became incredibly cheap in the 2020s, these schools now had access to knowledge which was simply unimaginable previously. This access to information allowed hundreds of millions of Africans to get the basic education necessary to pursue careers in skilled and semi-skilled industries, and was one of the most important factors in lifting rural Africa out of poverty.

Second, as more jobs were created in online companies, a lot of employment became decentralized, and many Africans began working online from home. This meant that people no longer had to move to the cities to find decent employment. With basic skills and a decent Internet connection, one could make a living practically anywhere in the world. This opportunity for employment meant that many rural families now had the education and the money to begin sending their children to receive tertiary educations. While the vast majority of students attending university are still urban and upper class or middle class, many more poor and rural students are receiving degrees from technical colleges. The employment prospects for individuals with these degrees have been very good since Africa’s technological revolution, as semi-skilled and skilled labour is necessary to maintain and upgrade the existing infrastructure.

While some of highlighted the rise of industries, Ama Serwaa Kusi of Ghana believes Africa’s success will be due to investments in agriculture:

The continent at this stage even though still remains agriculturally-oriented, has implemented the necessary technology to better assist production. Agriculture-tech schools have been established in many of the countries, where young men and women are taught how to operate on large scale of lands with complex and simple technology, which is effective. A larger percentage of other agricultural workers are those who have studied abroad in Scandinavian countries and have come back to successfully implement the ideas they have studied overseas. Due to this, brain drain has rapidly dropped in many of these African countries and has successfully contributed to production.

South Africa’s Nandipha Piliso believes Africa will also finally realise its comparative advantage in tourism:

Africa, has over the past forty years established itself as a major tourist destination, this has also influenced the continent’s economic growth. The tourism industry has led not only to economic growth but also a commitment to the establishment of infrastructure. Greater investment into infrastructure ensured that the continent was and still is capable of hosting tourists from across the world. After the 2010 Soccer World Cup that was hosted in South Africa, tourism increased not only in South Africa but on the continent as a whole. Many African leaders realised that hosting international sporting events was the best way to further increase tourism on the continent. In light of this, African leaders united and decided to help the city of Durban in South Africa bid for the 2024 Olympic Games. The games were hosted successfully; once again the continent experienced a boom in tourism. Other African countries were encouraged to bid, although Africa has not hosted another Olympic Games, countries such as Morocco and Kenya are hopeful that they will be hosting the upcoming Olympic Games on the continent.

Through private-public partnerships, says US-student Jorgia Hanlin, these economic gains will also translate into better living standards:

By 2030, many African nations could realistically say their populace had access to the most basic needs aforementioned. As stressed, no one approach was adopted by all; each country went about achieving this basic development depending on the structures already in place. For many countries, this required finding a balance between the private sector development and government intervention. For development to become a possibility, the government first had to reach out to these areas before the private sector could enter the market. The government first established health care, supplemented nutrition, and education systems that would help bring rural children into the world of health, literacy, and modern technology. To accomplish all of this, the government enlisted the help of the private sector to physically make these things possible. The government paid firms to construct buildings, provide food, create schools, build infrastructure, and also train and employ the people necessary for the upkeep of these facilities, which included teachers, custodians, cooks, doctors, nurses, and technicians. This allowed development to occur toward a specific goal—higher standards of living for everyone—while still allowing the market to operate efficiently and stimulate economic activity.

Luisa Wu of Taiwan argues that this progress in living standards was helped by innovation in health care:

In 2050, it is very possible that a treatment for wiping out HIV in the human body would have been found. Recent research have found that patients who accept stem-cell transplants unexpectedly get rid of the HIV virus in their bodies. Although stem-cell transplant will not directly become a treatment because of its extremely expensive cost, scientists will learn from these stem cell transplant cases and find a treatment.


And, finally, US-student Kristin Buhrow notes South Africa’s role in the future history of Africa:

Initiative in research and government policy has positioned South Africa as not only the “Gateway to Africa” but Africa’s gateway to the world through its progressive vision of continual development.  With careful action and a continued focus upon education, trade, and infrastructure, the growth exhibited in the past forty years will not stop for many years to come, and the goal of African development, equality, health, and economic growth will be reached by way of continual, gradual advancement in many fields.

Are these pipe-dreams or the blueprint of our future?

PS: I help coordinate a Doing Business in Southern Africa five-week course at Stellenbosch University every July. The course brings together academics from various fields and includes several field trips to companies and incubators. Visit our International Office Summer School page for more information.

Written by Johan Fourie

July 18, 2013 at 07:37

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

What recession?

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

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

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

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

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

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

Written by Johan Fourie

January 31, 2012 at 16:40