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Posts Tagged ‘innovation

How do we build a prosperous, decolonized South Africa?

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I recently attended an academic conference at the University of the Free State on the topic ‘Decolonizing Africa’. Much of the debate was, understandably, about the past: about the lingering effects of the (Atlantic) slave trade, European colonization that included the imposition of largely artificial borders, and the post-colonial failures of independent Africa. But at the final keynote, delivered by Prof Alois Mlambo of the University of Pretoria, the discussion turned to the future. How do we build a prosperous, decolonized South Africa?

One unescapably emotive topic is land reform. The expropriation and dispossession of land in South Africa is the root, many agreed, of the severe levels of inequality that plague the region. But how to correct this past injustice was not so easy; in the audience, too, were several Zimbabwean scholars quite critical of that country’s land reform programme. Over lunch, one Zimbabwean student told me the tragic story of his grandfather, a former farm worker on a white farm turned successful tobacco farmer after land reform, only to lose his land because he was considered ‘too successful’ by the ruling ZANU-PF party. The farm is now dormant.

Getting land reform right is fraught with difficulty. Not everyone that suffered land expropriation wants to return to farming – by far the largest number of recipients of successful land claims in South Africa choose the cash instead of the land. (This is often ignored by politicians and commentators when simply taking the hectares transferred as measure of land reform success.)  And even when recipients choose to return to the land, they often struggle to support themselves because of the small size of land allocated, or a lack of capital investment, or a lack of technical or management skills. There are also political consequences: because land recipients, like those in Zimbabwe, often do not receive title deed to the land they are given, they become ensnared by the political party that gave them the land. Why do people still vote for ZANU-PF despite the state of the economy? Because they worry a vote for the opposition means that they might lose their land. Most worryingly, it is often the original farm workers who lose the most, like the Zimbabwean student’s grandfather.

This is not to say that some form of wealth redistribution is not imperative. But whereas land (and the minerals it contained) was clearly the most productive resource when it was expropriated in the nineteenth century (which is the reason it was expropriated), a valid question is whether it still is the most productive. Of course, people value land not only for its economic uses: there are a myriad of historic, cultural and religious reasons why the land of your ancestors are treasured. But as a redistributive policy aimed at creating a more equitable society, is land reform the best way to create prosperity for those who suffered historical injustice?

Think of the fastest growing companies globally: which of them still rely predominantly on land ownership? AirBnB is a great example: it is the world’s largest accommodation service, without owning any property! For AirBnB and the myriad other unicorns that have created incredible wealth for their founders and shareholders, it is not land or physical property that creates wealth, but science and technology. (Even farmers know this: that is why they are investing in science to improve their crops and in technology to mechanize production.)

In the twenty-first century, land is what you buy with your wealth, and not the reason for your wealth. A quip about Stellenbosch wine farmers summarize this well: How do you make R1 million farming in Stellenbosch? You spend R2 million.

Prof Mlambo remarked that India and China, both with a history of colonisation, is not growing at above 5% because they have redistributed land. They have prospered because they embraced science and technology. Consider this: in the 2015/2016 academic year, 328,547 Chinese students studied in the United States; only 1,813 South African students did. (If you account for population size, 7 times more Chinese than South Africans students study in the US.) Take South Korea, a country with roughly the same population size as South Africa: 61,007 South Koreans traveled to study in the US in 2015/2016, 33 times more than South Africa.

So how would a redistribution policy look that takes science and technology seriously? I don’t have the answers, but here are some suggestions. Most of us would agree that education is key, but the South African education system has not made much progress in the last decade and it is unlikely to do so in the next. Redistribution must start at the first year of life. Publicly funded but privately run nurseries will remove the gap between the rich and poor that has already emerged when kids arrive at school. For primary and secondary education, a voucher system that incentivize private schools for the poor is an option. At tertiary level, we need more and better-funded universities, notably in science and technology. (It would help to send more of our smartest students abroad to study at the frontiers of science – they will return with new ideas and networks to propel our industries forward.) Visas for and recruitment of skilled immigrants can boost research and entrepreneurship. Improve free wifi access and invest in renewable energies. The private sector, because that is where most innovation occur, can be incentivized through appropriate legislation to offer shares to workers – or to those living in communities where they operate. There are a myriad of innovative possibilities.

If Zimbabwe has taught us anything, it is that politics may triumph over economic logic. Land reform in Zimbabwe was not an economic strategy in as much as it was a strategy to keep the ruling party in power. It has had severe economic consequences, as anyone visiting Zimbabwe today can attest. The real radical economic transformations of our age – just in my lifetime, the Chinese has managed to reduce the share of people living in absolute poverty from 88% to less than 2% – have not come from redistributing an unproductive twenty-first century resource. It has instead been the result of investments in science and technology. Any attempt to redistribute with the purpose of building a more prosperous society should take this as the point of departure.

*An edited version of this first appeared in Finweek magazine of 29 June 2017.

What do Pope Francis and Julius Malema have in common?

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Beautiful but poor: The Transkei is still largely untouched by capitalism Source:

Beautiful but poor: The Transkei is still largely untouched by capitalism. Source: Tyler Brown

Pope Francis and Julius Malema live worlds apart. But both have a deep dislike – one might even say hatred – of an economic system in which trade, industries, and the means of production are largely or entirely privately owned and operated for profit. This system is called Capitalism.

During a march in Limpopo yesterday, Malema again pronounced the EFFs anti-capitalist sentiments. An Economic Freedom Fighters retweet summarised it best: (The) EFF HAS DECLARED WAR ON #CAPITALISM; MALEMA: THIS IS A DECLARATION OF WAR AGAINST EUROPEAN CAPITALISM.

And a month earlier, Pope Francis made an arguably more eloquent (and damning) critique of capitalism:

Time, my brothers and sisters, seems to be running out; we are not yet tearing one another apart, but we are tearing apart our common home. Today, the scientific community realizes what the poor have long told us: harm, perhaps irreversible harm, is being done to the ecosystem. The earth, entire peoples and individual persons are being brutally punished. And behind all this pain, death and destruction there is the stench of what Basil of Caesarea – one of the first theologians of the Church – called “the dung of the devil”. An unfettered pursuit of money rules. This is the “dung of the devil”. The service of the common good is left behind. Once capital becomes an idol and guides people’s decisions, once greed for money presides over the entire socioeconomic system, it ruins society, it condemns and enslaves men and women, it destroys human fraternity, it sets people against one another and, as we clearly see, it even puts at risk our common home, sister and mother earth.

Ouch. If the Pope and Malema are against it, who on earth wants to be for it?

Well, actually, history is. #awkward

Let’s look at what’s happened to world poverty since 1936, when the Pope was born. Or since 1981, when Julius Malema was born. The remarkable thing is that in 1936, more than half of the world’s people were living in extreme poverty (56%). In 1981, the year that World Bank data starts, 43% of the world’s people were still living in poverty. In 2011, that figure had fallen to 14%. In short, global poverty has fallen enormously in the space of Pope Francis’s lifetime. And the reason? The ‘dung of the devil’: capitalism.

Here’s another statistic to baffle the mind: As The Economist reports, in the decade between 2003 and 2013 (which includes a global financial crisis), the income of the median-person in the world has doubled. Yes, doubled! Why? Because India and China have opened their economies, encouraged innovation, reduced state-involvement and allowed economic growth to improve the living standards of their people.

And all of this has happened despite immense global population growth; in 1936, there were roughly 2.7 billion people, and in 1981 there were 4.5 billion.

We are not only more affluent, but we also live longer. And healthier: we have eradicated illnesses, like smallpox, and we have access to modern medicine that can fight diseases from the common cold to tuberculosis that in the past would have likely killed us.

Blame capitalism for reducing poverty in China: The Shanghai skyline in three decades

Blame capitalism for reducing poverty in China: The Shanghai skyline in three decades

Even the poorest of the poor have access to services that the richest of the rich could never have imagined in 1936. With the press of one button, a cellphone now has access to the world’s information on Wikipedia. It is estimated that 90% of the world’s population has watched at least one episode of Idols, an unthinkable share only two decades ago. And most governments now provide free or affordable schooling and sometimes even university education – a luxury product in 1936 (just ask anyone older than 80).

Of course, capitalism is not perfect. The market cannot and does not solve everything; no economist in their right mind would claim this. Adam Smith, the father of economics, was clear about how the state should create the rules and institutions for the ‘invisible hand’ to do its thing. And those people that, for whatever reason, are excluded should be taken care of by state institutions like pension funds, disability insurance and free schooling.

We can also just ask the poor. If capitalism is so bad, why is it that poor people in non-capitalist countries want to migrate to capitalist countries? Why is it that poor, rural people in South Africa migrate to the cities (where ‘European capitalism’ arguably has a bigger footprint)? Is it because, and this might sound radical to some, they believe they can attain a better life for them and their children in these capitalist places? I think so.

I appreciate the leadership qualities of the Pope and Malema; they are charismatic and have large numbers of followers that look to them for guidance. That is even more reason they need to understand that people are not poor because of capitalism, they are poor because of not having enough capitalism. (Replace the word capitalism with innovation, as Deirdre McCloskey suggests, and suddenly the ideological blinkers fall off.) Here is Venezuelan economist Ricardo Hausmann:

In poverty-stricken Bolivia, Francis criticized “the mentality of profit at any price, with no concern for social exclusion or the destruction of nature,” along with “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

But this explanation of capitalism’s failure is wide of the mark. The world’s most profitable companies are not exploiting Bolivia. They are simply not there, because they find the place unprofitable. The developing world’s fundamental problem is that capitalism has not reorganized production and employment in the poorest countries and regions, leaving the bulk of the labor force outside its scope of operation.

As Rafael Di Tella and Robert MacCulloch have shown, the world’s poorest countries are not characterized by naive trust in capitalism, but by utter distrust, which leads to heavy government intervention and regulation of business. Under such conditions, capitalism does not thrive and economies remain poor.

The ANC, in a discussion document released last week, knows this. It says

capitalism remains the dominant socio-economic system on a global scale. In the era of globalisation, there has been much technological progress which has opened up vistas for human progress and created the basis for the alleviation of poverty on a grand scale.

Spot on. Excellent. But then:

However, the rampant unregulated practices of the past 30 years, including appropriation of most of national income by a few, have undermined its legitimacy.

That is incorrect. Poverty has fallen significantly in South Africa over the last 30 years (the ANC should know better, they ruled for 21 of those 30 years). What has undermined the legitimacy of the ruling government is its inability to get capitalism (or innovation) working in places like the former bantustans (see picture), where conditions are not much better than they were 30 years ago. Where capitalism has worked – in the main metros – it has created jobs and wealth and a better life for all (although for some more than for others). Where capitalism has not been allowed – where chiefs still prevent private ownership, for example – poverty has remained high and living standards low.

If the Economic Freedom Fighters and others continue their campaign in South Africa to discredit capitalism as the solution to poverty, we will never alleviate it, especially not in those regions where the problem is acute. If Pope Francis continues to discredit capitalism in his speeches to the poor and destitute of the world, they will continue to remain poor and destitute. (The conspiracy theorists would say that that is what the church wants. That would be silly, because the church benefits from a rich flock. Ask John Oliver.)

Let us learn from that one true source of wisdom: history. India and China have managed to reduce poverty dramatically by embracing capitalism, not rejecting it. South Korea have managed to reduce poverty dramatically by embracing capitalism, while North Korea, by rejecting capitalism, could not. Pope Francis and Julius Malema should embrace capitalism if they really cared about the plight of the poor.

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