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Posts Tagged ‘infrastructure

An ode to optimism

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Stef

When I began my postgraduate studies – in 2004 as an Honours in Economics – I had to choose a supervisor for my mini-dissertation. I wanted to work on infrastructure investments, and approached prof Stef Coetzee, then affiliated to the Stellenbosch Business School, because of his expertise in development economics and his proximity to the world of business. He agreed – and I eventually produced a mini-dissertation twice the length of what it should have been.

Prof Coetzee was a wonderful guide for a naive but enthusiastic student. He certainly had the academic expertise to dismiss most of my ideas; he had completed a Masters degree at Stellenbosch University’s Economics department in 1973, the department where I now work, and a PhD at the University of the Free State in 1980. In the above picture, taken on 2 February 2018, Coetzee (on the left) appears with three former Stellenbosch classmates, prof Eon Smit, Hannes le Roux and prof Philip Mohr, men who have all had a profound impact on the South African academic landscape.

Yet prof Coetzee were never dismissive of my attempts to think boldly about the infrastructure that was required to put South Africa on a higher growth trajectory. Perhaps that is because he had experience of leading big teams and organisations, and thinking outside the box. He was a former rector of the University of the Free State, director of the Centre for Policy Analysis at the Development Bank of Southern Africa, and would later be CEO of the Afrikaanse Handelsinstituut.

But I’d like to think that it was also his personality to be open to new ideas, and optimistic about putting them into practice. Because of social media like Facebook, we could reconnect the last few years. Even when things were going badly with the economy, he would be optimistic that things would turn around.

He expressed these views in a chapter he wrote for a book I edited on what students should know when they go to university. Written a decade ago, but still relevant today, here is a short summary:

What do the above challenges and opportunities mean for us as South Africans? Probably the most important is that it leaves the younger generation with a future full of opportunities! The opportunities may be different from in the past, but it will definitely be exciting. The general expectation is that the economic growth of developing economies will in the near future be higher than that of developing economies and will also provide bigger investment opportunities.

Secondly it is also clear that exceptional leadership will be required in order to position South Africa as one of the foremost developing economies. Insight on South Africa within the world and the African context will be necessary to develop the correct policies and strategies.

Thirdly it appears that the opportunities will stretch across a wide spectrum and be multi-dimensional and multi-disciplinary. We are going to need scientists, academics, teachers, business people, farmers, doctors, nurses, and engineers to make South Africa a competitive country, but also one that can handle some the most important problems.

Fourthly new skills will be required in a fast-changing world: better flexibility, the ability to work in multi-cultural contexts, better language skills, excellent technological skills, innovation, creativity and the ability to work in teams on different continents, to name but a few.

Fifthly the future will place bigger demands on young people to achieve breakthroughs on political, economical, social, technological and environmental level. It will simultaneously provide exciting opportunities.

Prof Coetzee passed away on Saturday. Despite attempts to do so last year, we never had the chance to meet up again in person. His last few messages to me were, as always, optimistic, despite his illness and setbacks. He was optimistic about the South African economy, about my career, about the Springboks.

Now that I have my own students to supervise, I have a deeper appreciation of the role that supervisors can play in students’ lives. This, then, is a belated thank you to prof Stef Coetzee, my first supervisor who, unbeknownst to both of us, steered my own academic journey into a more optimistic future.

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Written by Johan Fourie

October 29, 2018 at 08:00

The politics of infrastructure

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Cape Town railway historic

What type of infrastructure would be best for South Africa’s future? The answer, of course, depends on your point of view. If you live and work in Gauteng, your answer might well be to expand the Gautrain network. Or if you reside in Cape Town, you might prefer investments in desalinization plants. Your occupation may also be relevant. If you’re a miner, you are unlikely to support the expansion of renewable energies. A trained software engineer? Well, you’re likely to support large investments in telecommunications infrastructure.

An important – but often underappreciated – role of government is to choose the type of infrastructure that is destined to shape the country’s future development path. This choice is never neutral though: for every decision, there are winners and losers. Choose to build a new coal-fired power plant? That will benefit coal mine owners and workers, while the users of electricity, were the costs of alternative sources to fall rapidly, will pay. Choose to build a high-speed train network across the country (a hyperloop, perhaps!), then users of this network, likely to be high- or middle-income South Africans, will benefit, while long-distance bus services, taxi operators and rental cars will pay. The government’s job, in theory at least, is to choose the projects that will maximize the benefits and minimize the costs.

But things are never that simple. A research paper that will soon appear in the European Review of Economic History, written by Alfonso Herranz-Loncan and myself, investigate the infrastructure in the Cape Colony built during the second half of the nineteenth century. Before the discovery of diamonds in 1867, the few railways that existed (in and around Cape Town) were privately-owned and largely unprofitable. But the discovery of diamonds and the rush to the mines meant the demand for fast, affordable inland transport increased exponentially. The Cape government had to react.

They did. They bought the few existing lines, and then began to the process of connecting Cape Town to Kimberley, finally achieved in 1885. The connection to the booming diamond region brought huge economic benefits: we estimate that the railway may account for 22-25 percent of the increase in income per capita in the Cape during the diamond-mining period (1873-1905). This is a massive share for a single investment and a clear indicator of the transformative power of railways during the first era of globalisation.

But these benefits were not equally shared by everyone. Surprisingly, the government itself earned a meager 3.7% average return on its capital. Had a private firm built the railways, far fewer branch lines would probably have been built. As Stellenbosch PhD student Abel Gwaindepi now shows, the government incurred huge debt to build this infrastructure, and although the government did benefit through customs duties and other tariffs, the main beneficiaries were the owners of the diamond fields. The railway link between Cape Town and Kimberley could now transport the machinery and foodstuffs required to feed the growing Kimberley population. Western Cape wheat farmers, who supplied the mines with food, was another group of beneficiaries. It is not entirely coincidental that it was also these two groups – mine owners and Western Cape farmers – who had formed a political alliance in Cape parliament.

Of course, it was not only mine owners and Cape farmers that benefited. As detailed reports of passengers show, Cape Colony residents from all walks of life used the railways. But, ultimately, it was tax payers who had to foot the debt that were incurred, and often these tax payers were spread across the entire colony (far from the direct benefits of the railways) – and after unification in 1910, the rest of the country. And the location of the railways meant that those with less political influence – like Basotho farmers, who were of course producing wheat much closer to the diamond fields – lost out. Here is one missionary report from 1886, the year after the railway line was completed: ‘Basutoland, we must admit, is a poor country… Last year’s abundant harvest has found no outlet for, since the building of the railway, colonial, and foreign wheat have competed disastrously with the local produce.’

The nineteenth-century Cape railways contributed significantly to economic growth, but it inadvertently also had distributional consequences: some benefited more than others, and some even suffered as a result of its construction.

The lessons for today? Politics shapes the type of infrastructure that’s built. And infrastructure shapes the direction of economic development. So the key question is this: Are we building the type of infrastructure that will put South Africa on a path of broad-based economic development, or is the choice of infrastructure determined by the self-interest of those with decision-making power, much like Cecil John Rhodes and his cronies during the late nineteenth-century?

Put differently, when we choose a new power-generating facility or national air carrier or telecommunications license, do we consider the benefits for society as a whole or the benefits for a specific interest group?

*An edited version of this first appeared in Finweek magazine of 5 October 2017.

Africa should invest in itself

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africaconstruction

Imagine you receive the news tomorrow that an unknown, distant family member has passed on and left you a bequest of a million dollars. What to do? Spend it immediately on luxury consumption – a round-the-world trip, perhaps – or invest it offshore and live off the returns, thereby smoothing your consumption and protecting the wealth for your own and your children’s futures? There is another option, though: immediate investment in yourself, say by enrolling at Harvard for an MBA. This way you not only boost your personal future income, but more educated parents tend to have more educated (and healthier and connected) children, thus boosting the prospects of future generations.

This third option, in a nutshell, is what three new papers in the Journal of African Economies suggest for developing countries that have jumped on the Sovereign Wealth Fund-bandwagon. Sovereign wealth funds (or SWFs) are state-owned investment funds designed to preserve the high returns from non-renewable resources, like oil, for future generations. A quarter of the world’s economies still depend on non-renewable resources, and more than half of them now have some type of SWF, including many recently established funds in Africa: consider, for example, Ghana (2011), Angola (2012), Nigeria (2012) and Senegal (2012). Others, like Kenya, Tanzania and Mozambique, are finalising SWF policies. And these funds matter: Sovereign Wealth Funds are a quarter of Algeria’s GDP, 40% of Botswana’s GDP and over 100% of Libya’s GDP.

There is good reason for the turn to this type of investment fund. SWF have many good properties, as the experience of Norway since 1990 have shown. It converts temporary resource revenue into a permanent investment income. Best to keep it offshore, too, so as to avoid domestic inflation, real exchange rate appreciation and the contraction of other traded sectors (also known as Dutch disease). And why invest locally when all profitable investment opportunities would presumably have been financed already at the world interest rate if the capital account is open? For these theoretical reasons, and because of the practical successes of SWF across the world – Norway, Chile, Saudi Arabia – many African countries followed suit.

But the authors of the three Journal of African Economies papers question this logic. They argue that many African countries do not have open capital accounts, meaning that there are still many profitable opportunities to invest within Africa. Why then send precious investment funds abroad when the highest returns can be reaped locally? To return to our earlier metaphor, why invest your long-lost family member’s bequest in stocks on the JSE, when you don’t even have a high school education yet. Invest in yourself first!

In Africa, the focus should be on infrastructure. One set of authors, Rabah Arezki and Amadou Sy, argue for three stages of financing infrastructure with the help of SWFs: First, involve development banks, who are often more informed about viable investment projects, in the first phase of large projects that are often the riskiest. Second, offload more mature projects to arms-length institutional investors like SWFs. Third, develop an African bond market to facilitate this offloading.

The maintenance of infrastructure in Africa is of particular concern, and SWFs can play a role here. Arezki and Sy calculate that at least one-third of Africa’s investment needs are in maintenance, and suggest bundling construction and maintenance services in private-public partnerships as one way to overcome this (by making sure builders have an incentive to minimise maintenance costs).

South Africa does not have a SWF, although the idea of a supertax on mining profits has been mooted before. If we did decide to go this route, as many of our neighbours seem to do, the question becomes: who gets to choose how the funds are spent? Anthony Venables and Samuel Wills, another set of authors, argue that it should be done through the usual budgetary process; in South Africa’s case, that will be through Treasury. Another author, Joe Amoako-Tuffour, argues instead for a more independent SWF that take direct positions in investments. Whatever strategy is followed, it is important to remember an additional reason for Sovereign Wealth Funds: to minimise the misuse of resource rents by politicians.

There is no better example of this than the second smallest nation in the world: the Pacific island of Nauru with a population of 10000. In their paper, Samuel Wills, Lemma Senbet and Witness Simbanegavi note how the island, made almost entirely of phosphate, was the richest country in the world in the 1960s. Two-thirds of the phosphate revenues were invested in a Trust, which peaked at $100 000 per person. In 2004, after some questionable investment decisions that included a cruise ship that never left port and a Lamborghini for the police chief (to drive on an island of 21km2), the fund had only $3000 per person left.

The lesson is that we do not live in a world of benevolent dictators. Politicians make bad decisions often, and state-owned investment fund should be structured to avoid their misuse. But going to the extreme and parking all resource returns offshore is also not the answer for many African countries. Investing in local infrastructure and its maintenance may provide far higher returns for future generations – if the possibility of misuse can be curtailed.

*An edited version of this first appeared in Finweek magazine of 8 September.

Written by Johan Fourie

October 4, 2016 at 10:20

Our watershed… opportunity

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SlingShot: Could this device make water infrastructure redundant?

SlingShot: Could this device make water infrastructure redundant?

South Africans are gearing up for a tough summer. While loadshedding (the frequent power shortages that plagued the country since 2008) has eased, a new issue came to the fore this week: watershedding. In areas of Germiston and the East Rand, water shortages have been reported and watershedding between 10am and 3pm is on the cards. While the heatwave and drought across the country are the immediate cause of the shortages, there are far deeper structural problems that is likely to make watershedding a common feature of daily life in South Africa in the near future.

This should not come as a surprise. There has been several warnings in the media about the likelihood of watershedding over the past few years, well before the heatwave and drought made the situation acute. On 25 June, Niki Moore wrote the following in the Daily Maverick:

The reason for any potential water shedding is almost a mirror image of why we have load-shedding. Since 1994, millions of people have been added to the water grid with very little thought being given to increasing the capacity of water storage or water intake plants. Combined with mismanagement of water, non-payment for water, huge water wastage through lack of maintenance and neglect, and poor governance through corruption, we are facing a high noon of water shortages that might start affecting us in as soon as a few months.

Well, that was pretty accurate. But watershedding – a shortage of water – is only one concern. The more serious one is the pollution of existing drinking water, which is likely to have serious health consequences. Here is Anthony Turton on the water crisis:

The possibility of major public health crises in the short to medium term is growing and can no longer be discounted. We could soon see a major bloom of toxic cyanobacteria, especially in the light of the increased water temperatures likely to result from the El Nino Southern Oscillation now evident in southern Africa. The growing risk to both companies and individuals needs to be anticipated and understood, so that remedial action can be taken as quickly and effectively as possible.

The reason this is unlikely to happen, he argues, is political:

All available data suggests there is little in South Africa’s water sector to be optimistic about. The level of politicisation has become so high that decision-making is no longer rooted in hydrological realities. Ideology is regarded as paramount, while reality counts only as a secondary factor. The ideological filters in place make it very difficult to carry out any serious technical assessment of water quality or management. In addition, no serious attempt is currently in place to embark on evidence-based policy reforms.

Perhaps the greatest failure of the new order since 1994 has been deteriorating water quality. This has been caused primarily by massive failures in the management of municipal wastewater treatment plants, which have made the State the biggest polluter of water in the country. This looming disaster could have been avoided by more rational and less ideologically-driven policy choices. We need to challenge this approach if we are to re-invigorate our democracy and extricate ourselves from the horns of the dilemma arising from the politicisation of water in a highly water-constrained national economy.

So what can be done about this? The easy but unsatisfactory answer is that local government elections are next year, and South Africans should use this opportunity to demand change. But much of the problem is more systemic and pervasive than local governments can solve on their own; as Turton argues, the “first essential requirement is a new and technically robust national strategic plan for managing, conserving, and augmenting the country’s limited water supplies”. National elections, though, are only in 2018, and it is difficult to envisage dramatic change.

Instead, South Africans will have to find solutions to the water crisis outside the remit of government. This is difficult with a water utility, which is the epitome of a natural monopoly and the reason the state is almost always involved. But just as the case with loadshedding, technology may provide a solution.

Last night, I watched a 2014 documentary about the SlingShot, a device developed by the creator of the Segway, Dean Kamen, to purify water. Much like Elon Musk has created the PowerWall to allow households access to electricity at all times, the SlingShot is a device which would allow anyone able to convert contaminated and filthy water (or even seawater) into drinkable water. The device has been tested in Ghana, South Africa and in several Latin American countries. It has the support of Bill Clinton and the CEO of Coca-Cola.

I’m a technoptimist. I don’t know whether this particular technology will be successful, but as Estian Calitz and I argued in this 2009 paper, technology will allow public goods to be increasingly viewed as private goods, or natural monopolies to be made into competitive industries. Cell phones are a good example, breaking down the need to have large, fixed-line networks that doesn’t make sense to build more than once: i.e. the natural monopoly of Telkom. Elon Musk’s PowerWall, coupled with renewable energy generation, will break the natural monopoly of Eskom. Perhaps Kamen’s SlingShot (or a similar device) will do the same for water.

South Africans have many reasons to be pessimistic about the future. But, as David Landes writes in the Wealth and Poverty of Nations, it pays to be optimistic.

In this world, the optimists have it, not because they are always right, but because they are positive. Even when they are wrong they are positive, and that is the way of achievement, correction, improvement, and success. Educated, eyes-open optimism pays; pessimism can only offer the empty consolation of being right.

Maybe the watershed moment for South Africa is when we realise that the promise of a better life for all lies not in the next elections, but instead in embracing new technologies.

Written by Johan Fourie

November 12, 2015 at 09:44

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

Game changers for the South African economy

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GamechangerMcKinsey & Company recently published a report entitled ‘Game changers: Five opportunities for US growth and renewal’ in which they highlight five industries which they believe will drive US growth over the next decade. The five are: shale gas, trade competitiveness in knowledge-intensive goods, big-data analytics, investment in infrastructure, and a more effective system of talent development. The report attracted a lot of media attention and also received the support of notable US economists, including Laura Tyson at Berkeley, a candidate to replace Fed boss Ben Bernanke.

Shale gas

I think the report has some relevance for South Africa too.  South Africa, according to this list, has the 8th most technically-recoverable shale gas reserves in the world. I know there is some debate about the environmental impact of fracking – and this is certainly no space to debate that. (An overview of the debate is available here.) But it is difficult to deny that shale gas offers very real benefits for the economy. South Africa has about half the recoverable shale gas reserves of the US. According to McKinsey, shale gas alone could add $690 billion a year to US GDP and 1.7 million jobs by 2020. Even if we only add a tenth of that figure, we will increase our GDP by around 20%. And jobs: recent figures show that the narrow unemployment rate is now 25.6% (which translates to about 4.7 million jobless South Africans). The need for job creation has never been more obvious.

Not only does South Africa have rich shale reserves, but we have the skills to exploit it. South Africa’s mining sector is one of the best developed in the world, with the deep gold mines of the Witwatersrand necessitating the early adoption of capital- and knowledge-intensive technologies. With other reserves in decline (and the concomitant labour unrest), what better time to retrain our chemical engineers and mining technicians to take advantage of the massive potential shale gas offers?

Growth in the shale gas sector will not only add to production and reduce unemployment, but cheaper oil will stimulate many other sectors of the economy where oil is a major production input, including agriculture and manufacturing. Here’s Tyson: “Growth in shale energy will mean more investment, production, and jobs in the energy sector itself. Lower gas prices will boost manufacturing production, particularly in downstream industries like petrochemicals and primary metals that use natural gas as fuel and feedstock.” The exploitation of shale gas meant that the US stopped importing oil. In contrast, oil is currently (by far) South Africa’s largest imported product; in 2012, we imported R220 billion of oil and it’s been increasing by 8% since 2008, much faster than GDP. Exploiting shale gas would reduce our need for foreign reserves, reduce input costs for agriculture and manufacturing, and stimulate the creation of jobs across the economy.

Infrastructure

Cheap oil will also reduce construction costs for infrastructure, which McKinsey lists as another growth sector of the future. South Africa has an ambitious infrastructure investment programme too, notably in electricity, road and rail transport, and port efficiency. While the 2010 World Cup was a catalyst for many investment programmes, some of the investment was more successful (the airports, the Gautrain) than others (several stadiums). The focus now is on building the productive engine. Reliable electricity, as well as lower transport costs (in terms of fees, but also reliability and speed), is certainly necessary if our economy is to thrive.

But more can be done: the most important infrastructure of the future will arguably be broadband connectivity. While progress is being made, especially in metropolitan South Africa (and in towns like Stellenbosch), progress is much to slow in rural areas. Fortunately, the private sector can make a meaningful contribution here: Microsoft has launched a pilot project in the rural Limpopo province that aims to deliver high-speed and affordable broadband to local communities using so-called “white spaces” technology. Such initiatives are to be commended, but, perhaps with the support of the various layers of government, should become the rule rather than the exception.

Our transport connections to the rest of Africa also remain weak. Exporting goods to Zambia, for example, requires a delay of up to a week at border posts. There is still no bridge over the mighty Zambezi between Botswana and Zambia which inhibits any trade in perishable products. If South African firms are to take advantage of the growth of African consumers, then connecting the continent should be a key concern of policy-makers.

Big-data

Big-data is not only a geeky catchphrase, it’s driving some of the most remarkable revolutions in productivity. McKinsey estimates that efficiency gains from big-data can result in an increase of 1.7% of US GDP, mostly through productivity gains in the retail, health and government sectors. All three sectors are large sectors in the South African economy.

Our retail chains (Shoprite and Pick ‘n Pay, for example) are expanding into the rest of Africa at rapid speed and will need to innovate to stay ahead of the rising interest from foreign retailers, including Wal-mart, who recently purchased Massmart, a South African group. Innovations in big-data analytics can offer exactly that: the interaction of payment systems and mobile technology, for example, could significantly lower transaction costs, which is why the major international payment companies – Visa and Mastercard – are increasingly looking at Africa as a laboratory for innovation. The rise of mobile networks across Africa opens new possibilities for big-data analysts. One such local technology, Mxit, the social network developed in Stellenbosch, now has more than 50 million registered members, sending on average more than 500 thousand messages per day. Pondering Panda, a research firm, use these members to undertake surveys for marketers and political analysts.

South Africa’s private health care is of the highest quality in the world, which is why South Africa’s Medi-Clinic could buy the largest private hospital group in Switzerland as well as hold a controlling share in Emirates Healthcare, a private healthcare group in the United Arab Emirates. But private healthcare companies have access to large quantities of confidential patient information, information that will be increasingly difficult to manage, protect and analyse. Similarly, all governments have access to vast amounts of personal information. Advances in computing and programming can transform this sea of data into insights that create operational efficiencies. It is clear that big-data analysts will be highly sought-after in the future South African job market.

Talent development and knowledge-intensive industries

While South Africa’s primary and secondary education system struggles to escape its poor performance, less emphasis has been put on the excellent performance of South Africa’s universities. According to this measure, seven of the top ten universities are in South Africa (the top four are South Africa, and for some unknown reason the University of Pretoria has been excluded from the list. In my opinion, it should be number 4). Two African universities – the University of Cape Town and the University of Stellenbosch – has recently made the The Times Higher Education ranking as two of the top 500 universities in the world. This excellence means that South Africa increasingly draws the best and brightest students from across the continent, much like American Ivy League institutions draws the best and brightest from across the globe. Moreover, studying in South Africa is also significantly less expensive than in Europe, the US or Japan, and because English is the lingua franca at most universities, students from outside Africa increasingly opt to study in South Africa.

This is perhaps the most important resource South Africa should exploit. We need to recognize the contribution of these immigrant scholars, and make it easy for them to visit, and easier for them to stay here. There is a perception that they steal South African jobs; on the contrary, it’s educated folk like these who create jobs through innovation and entrepreneurial activity. The US is a great example: Sergei Brin, one of the Google founders, was an immigrant from Russia, and a South African, Elon Musk, started PayPal, Tesla Motors, SpaceX, and is now working on a high speed rail between San Francisco and Los Angeles known only as the Hyperloop. (He will release more details about this on the 12th of August). The McKinsey report acknowledges that talent development should be done with a long-term view: while this sector will make the smallest contribution in 2020 of the five game-changing sectors listed, it could “achieve a dramatic ‘lift-off’ effect by 2030, adding as much as $1.7 trillion to annual GDP”. That’s four times South Africa’s current GDP. The active recruitment of the continent’s best talent – Africa’s own Sergei Brin or Elon Musk – to settle in South Africa is therefore a potential game-changing policy that will, in the long-run, lead to significant gains for the South African economy.

Just do it, Mr and Mrs Policy-maker.

Four lessons from railways in Ghana

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Railways in Ghana: The growth of cocoa production along the railroads are clearly visible. Source: Jedwab and Moradi (2012); Figure 4.

In times of economic crisis, transport infrastructure are often the first items slashed from the government’s budget. This is because 1) it’s easy to do so: there are few consumer, labour or other electoral groups that feel strong enough about the unbuilt railway or airport, and 2) like a frog in boiling water, we only notice the decline of the infrastructure over an extended period of time (and when it’s already too late): small potholes don’t attract the anguish of protesters, but wait a few years and those same potholes might double or tripple the time and cost of traveling. Any politician trying to cut government expenditure on education or health would face the (election) gallows, but cut transport infrastructure investment and few will notice.

One of the reasons economic historians investigate the past is because they believe that history has valuable lessons that can inform the tough decisions of policy makers face. Rémi Jedwab and Alexander Moradi, in a recent Working Paper, show just how important transport infrastructure can be to aid a country’s development. They investigate the construction of two railways in early twentieth-century Ghana. The railways were built for the extraction of minerals and for political and military reasons (to connect the main cities in the interior, to help in transporting troops in times of war). But, surprisingly to many of the colonial governors, the railroads had a much bigger economic impact: because of reduced transportation costs, many subsistence farmers switched production to cocoa, a rich cash-crop. Using detailed GIS census data of farm production, the authors show that those farms that were closest to the railroads benefited the most. The benefits were immediate, and within a decade most farmers were successful cocoa producers, making Ghana an example of the positive impact of colonial policies. But the railroads also had long-term benefits: using recent census data, the authors show how cities arose closer to the two railroads and how, later, once the boom in cocoa prices had ended, manufacturing and the service sector benefited from the lower transport costs of the railways.

It’s a great economic history paper: its lessons are applicable to all government policy makers faced with tough budgetary cuts or “planning commissioners” that are responsible for the long-term economic vision of a country.

The first lesson: transport infrastructure may have very different (positive) consequences than initially envisaged. The Ghanaian colonial governors had thought that mining would be the most important beneficiary of the project. Palm oil and even tourism were also touted as potential industries that could benefit, but few thought that cocoa would become the cash crop of choice. Even in the much less complex colonial economies, policy makers simply could not predict the sector with the most potential.

Lesson two: the type of transport infrastructure that was built (in this case, railways) cut the transport costs between local producers and the export market by more than 50%. Before the railways, only a few farmers had invested in cocoa production (it takes several years for a tree to produce) and these farmers had two ways to get their cocoa to market, either loading it on their heads and walking it to market (costing 30-60 pennies per kilometre), or rolling it in casks (23 pennies per kilometre). The railway reduced this price to 11.3 pennies per kilometre, suddenly generating not only huge profits for those closest to the export market, but also allowing many farmers in the interior of Ghana to shift to cocoa production profitably.

Lesson three: the public sector had to fund the initial cost of building the railway; there was no private sector to do this initially (and no bank would have been willing to fork out money for a project that had no definite returns). Even though modern transport infrastructure has become ‘excludable’ (see Calitz and Fourie (2009) and Fourie (2006) for an overview), because the beneficiaries are not always evident up front, it remains a public good that needs government support.

Lesson four: transport infrastructure results in long-run spatial changes that has important development consequences. As the authors show, agriculture next to the railroads has now been replaced by manufacturing and service industries. Most of the largest urban areas are along the railroads, and those people living closer to the railroads have a higher likelihood of access to better education, health, water and sanitation services.

I’m not advocating some Sachsian splurge in infrastructure spending. Building a railway through some of the poorest provinces in South Africa, like the former Transkei region or rural Limpopo, may yield few benefits. As many travellers in South Africa will also point out, railroads need accompanying services, such as timely, reliable and safe trains. (This is perhaps one topic which Jedwab and Moradi can expand on.) South Africa has a well-connected rail network, but the service is not what it should be.

But maybe railroads are not the transport infrastructure of the future. Let’s take broadband. What will the affect be of a high-speed broadband connection (and affordable services) to households living in the former Transkei? Unfortunately, these days it’s not simply about producing cocoa and loading it onto the railways destined for some international consumer. To access the digital highway requires a computer and the skills to use it. But that should not be a reason for not building broadband links, but rather a call to improve education and access to services in these rural areas.

It’s easier and cheaper to do this in cities: connecting the Khayelitshas, Grassy Parks, Durbanvilles and Constantias will benefit entrepreneurs and businesses in Cape Town by reducing internet costs for every industry that uses the web (lesson 2) although the beneficiaries are unknown, even invisible (lesson 1). The social benefits will outweigh the private ones, and no private firm will be able to recoup the social benefits, which is the reason government should foot the bill (lesson 3). Broadband in cities will make it a more appealing place to work and live, providing more people with a higher standard of living (lesson 4).

Siyakha: let’s build.

Written by Johan Fourie

November 27, 2012 at 21:29