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Posts Tagged ‘South Africa

A radical solution to land ownership

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Farmland

What if I could offer you the following three outcomes – 1) an increase in government revenue to the extent that a Basic Income Grant (BIG) can be afforded, 2) a substantial decline in wealth inequality, and 3) a sustainable solution to the land crisis – with just one policy intervention? Fantastic, you’d say, but naïve and, frankly, absurd. There is no policy that we know of that can tackle these immense societal challenges, all in one go.

Wait, I’m not done yet, I’d answer. This policy would make it much easier to build infrastructure, get rid of derelict buildings, would ramp up GDP per capita significantly, and would foster social cohesion.

Seriously? Don’t be ridiculous, you’re dreaming, you’d respond. And to do this, I’d continue, we’d need to do two things that seem almost directly opposed to one another. We need to expand markets. You might nod in agreement, something sensible for the first time. Oh, and we must abolish private property altogether.

This, in short, is the recommendation by two economists, Erik Posner and Glen Weyl, in their new book Radical Markets. Critics seem to agree that this is something worth discussing; Kenneth Rogoff calls this ‘perhaps the most ambitious attempt to rethink democracy and markets since Milton Friedman’.

Although their ideas have huge implications for democracy and immigration too, I will focus here on their first chapter, and probably the one most relevant to South Africa currently: property. They propose a Common Ownership Self-Assessed Tax (COST) on wealth. Property, they argue (like many economists before them), are inevitably monopolistic, and monopolies create inefficiencies in the market. Their COST aims to remove these allocative and investment inefficiencies by introducing a live auction for every asset in society.

So, how does it work? Let’s take Khulekani. His young family has just expanded, and so he wants to buy a new house. He would go to a website – let’s call it UmhlabaWethu.co.za – and open a sort-of Google Maps that will allow him to see every property in South Africa, valued by the owner of the property. He can then decide to buy any property, by just clicking on the property, at the price the owner has listed. The ‘right to exclude’, one of the central tenets of private ownership, is therefore waived in this new system. Every property owned by a company or individual (or government!) must be valued and listed.

So, what prevents owners from just making excessively high valuations, making Khulekani’s attempt at buying a house impossible? Tax. In this system, each owner will pay an annual tax on the self-assessed value of their property, thereby waiving the ‘right to use’, the second central tenet of private ownership. The authors explain: ‘In the popular image of private property, all benefits from use accrue to the owner. Under a COST, on the other hand, a fraction of this use value is revealed and transferred to the public through the tax; the higher the tax, the greater the fraction of use value transferred.’

In other words, all property in South Africa would be on a permanent auction, where the current user of the property determines the price (but pay for that price in tax). It’s almost like Uber, for property.

Imagine a private investor wants to build a high-speed monorail in Cape Town. To do this at present would be almost impossible, as owners of properties on the intended route would hold out for a high price, knowing that they have monopoly bargaining power. A COST would allow an investor to go online and buy up all the properties at the listed price, combine them, and start building the monorail. (Of course, they must also value that property, and pay tax. If another investor believes they can build a more profitable monorail, they might just buy-out the original investor’s right of use.)

Or imagine that the property tax is returned to citizens as a Basic Income Grant. By the authors’ rough calculations, every US citizen from a similar system could receive $20000 annually, which for most would be far less than they would be paying in tax. By their estimates, it would only be the richest 1% property owners that would be paying more than they receive – and often a lot more. This not only reduces inequality (by 4 Gini points, according to their estimates), but it also acts as a subsidy for the poorest.

In South Africa, COST tied to a BIG could do far more to alleviate poverty and address inequality than a policy like expropriation. Unproductive land would be a direct cost to all society: higher property values paying more tax mean that more can be redistributed to everyone. As the authors note, ‘a world in which everyone benefits from the prosperity of others would likely foster higher social trust, a factor essential to the smooth operation of the market economy’.

‘The sharing of wealth would be in accord with many commonsense notions of justice. Wealth is rarely created solely by the actions of the people who are paid for it under capitalism. They normally benefit from the help of friends, colleagues, neighbours, teachers, and many other people who are not fully compensated for their contributions. A COST would better proportion the distribution of wealth o the labour that created it.’

This is a radical proposal. It might have unintended consequences that we cannot currently imagine. That’s why the authors propose a piecemeal adoption of these policies. That is a sensible approach. Experimentation will be needed, perhaps even within one municipality first.

But the radical economic transformation that COST can accomplish is a lesson in how creative thinking – and perhaps a willingness to put away our ideological differences – can help find solutions to a problem that we had thought to be insurmountable.

*An edited version of this article originally appeared in the 13 September edition of finweek.

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The cost of crime

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South Africa Gang Violence

It is almost something that defines South Africans: having lived through the traumatic experience of a violent crime or, at the very least, know someone that have. 19016 murders were committed in the country in 2016/2017, according to the South African Police Service, or 34.1 murders for every 100 000 people. (Contrast Afghanistan at less than 7 murders per 100 000 people, Argentina at less than 6, Kenya at less than 5, India at less than 4, Iran at less than 3, and Ghana at less than 2.) Almost the same number of attempted murders as murders were reported to the police. On average, 109 men and women were raped each day. In 2016/17, there were 22,343 incidents of house robbery recorded, or 61.2 each day.

These statistics are nothing less than shocking. They explain why most South Africans list crime as their number one concern, far above access to land or inequality, and why those that decide to emigrate list ‘improved safety and security’ as the top reason for leaving. Given the widespread concern, one would expect that safety and security would be a top research priority at South African universities. It is not. A 2017 World Bank study by leading social scientists reports: ‘There is a dearth of research on crime in South Africa, which is particularly problematic in this country given the extraordinary high crime rates reported here.’ The study begins to fill the gap, but the results show why understanding the causes of criminal behaviour is so difficult.

Surely poverty is the most obvious explanation for crime? Well, consider that the province with the second highest murder rate in the country is the Western Cape (with 51 murders per 100 000 people), and the province with the lowest murder rate is Limpopo (with 14 murders per 100 000 people). The Western Cape is, of course, much more affluent than Limpopo. This suggests that poverty is not the main reason for crime. Perhaps, then, inequality is what matters. The authors of the World Bank study answer this emphatically. Using a sophisticated regression analysis, they conclude that ‘we did not detect any relationship between inequality and violent crime, nor between unemployment and any crime type.’ If it is not poverty and inequality, then what?

We know, for example, that the victims of most violent crime often know the perpetrator. The 2016 Demographic and Health Survey reveals that 17% of women aged 18 to 24 had experienced violence from a partner in the 12 months before the survey. Economists in the US have developed sophisticated household bargaining models to explain this form of violence, but more could be done to test these models in the South African context.

If there is a dearth of research on the causes of crime, there is even less known about the consequences. The costs of a traumatic experience can be multifaceted for the victim, from the direct medical costs to the life-long psychological and emotional pain. And the effects on family and friends, their relationships and interactions, their productivity and future plans, are enormously difficult to quantify.

A new NBER working paper attempts to measure one, often forgotten, cost of domestic violence: the effect on children in utero. Because crime statistics is difficult to get past university ethics committees, it is difficult to track the victims of crime over time in order to measure the effect of the traumatic experience on later-life outcomes. The three authors of this study, Janet Currie, Michael Mueller-Smith and Maya Rossin-Slater, use a unique source of linked administrative data from New York City. They combine birth records with information on maternal residential addresses with the exact locations and dates of reported crimes to compare the outcomes of women who have a reported assault in their home in months 0 through 9 postconception to those who experience an assault 1 to 10 months after the estimated due date.

Their results are startling. Women who suffer from domestic violence during pregnancy, especially during the third trimester, have as much as 50% higher rates of births that are very low birth weight (less than 1,500 grams) and are very pre-term (less than 34 weeks gestation). The likelihood of induced labour also increases for these women.

The authors then do a back-of-the-envelope calculation of the costs of US domestic violence. ‘We calculate an average social cost of $41,771 per assault during pregnancy. Assuming that 2.6 percent of pregnant women experience an assault—the national victimization rate estimated from survey data—this figure translates into a total annual social cost in excess of $4.25 billion.’

Many might groan at trying to put a number on these tragic experiences, but quantifying the social costs – in other words, the costs for society – of domestic violence is one way to help governments prioritise preventative and remedial expenditures. The high rates of domestic violence and abuse in South Africa, particularly of women during their most fertile years, suggests that the costs of domestic violence would be significantly higher here compared to the US. And because domestic violence is more likely to be suffered by women from poor households, this may suggest, according to the authors, ‘an important and previously understudied mechanism by which early-life health disparities perpetuate persistent economic inequality across generations’.

Violence, in all its manifestations, is costly for society, which is why we should invest more resources into understanding its causes and consequences. Domestic abuse, in particular, seems to carry not only a cost for the current generation, but is likely to affect the next generation through its intergenerational effect on children in utero. Understanding and preventing it may be one of the key ways to fight deepening inequality and poverty persistence.

**An edited version of this article originally appeared in the 16 August edition of finweek.

Written by Johan Fourie

September 19, 2018 at 08:00

Making South Africans more productive

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Drone

Economic growth is defined, in its most basic form, as doing more with less. Economists often overcomplicate things. We talk about ‘an increase in gross domestic product (GDP) per capita of 2%’ when in fact we could simply say ‘the average South African produced 2% more than last year’. More production translates into greater incomes. Take India and China. At an average growth rate of 7%, these countries will double their production/output/income in 10 years. In contrast, if South Africa continues to grow at 2% it will take 36 years to double our income. That is why South Africans are so upset: we see millions of Indians and Chinese growing wealthier, transforming their countries from subsistence breadbaskets to industrial and ICT powerhouses, while we are frustrated by the meagre increases in our living standards.

The Indians and Chinese also show that it is only economic growth that will allow us to escape poverty. We cannot redistribute ourselves rich. Even if incomes were equalised in South Africa, we would still be poorer than those Americans who live below the poverty line. The unescapable truth is that if we want to prosper, we need to make South Africans, all of us, more productive; we need to get South Africans to produce more than they do at the moment.

With an unemployment rate upwards of 30%, this would not seem to be too difficult a task. A lot of people are able and willing to work – to produce stuff – but they currently cannot find employment at the price they are willing to work for. How we address this mismatch is a question that should occupy the minds of the smartest people in our society. Perhaps we need more students to study growth theory, industrial organisation, labour economics and economic history – compared to India and China, for example, too few South Africans take up graduate studies in Economics. But perhaps we also need more scientists, entrepreneurs, tinkerers, coders, designers, educators and experimenters with the vision and ability to make their fellow citizens more productive. In short: we need more people like Norman Borlaug.

An agronomist who completed his PhD in plant pathology, Borlaug became fascinated as a student with the productivity of crop farming. In the 1940s, he moved to a research unit in Mexico where he began developing high-yield, disease-resistant wheat varieties. His wheat varieties, combined with modern agricultural production techniques, soon improved Mexican farmers’ incomes, and then spread to other countries. By 1963, Mexico became a net exporter of wheat. Between 1965 and 1970, wheat yields nearly doubled in Pakistan and India. In 1970, Borlaug was awarded the Nobel Peace Prize for leading the ‘Green Revolution’, a massive transformation of agricultural productivity in mostly Latin America and Asia.

A new NBER Working Paper by three economists spell out just how consequential this revolution was. They use variation in geography combined with the exogenous timing of agricultural research successes in high-yielding crops to measure the effect of the high-yielding crops on output. The results are startling: they find that a 10-percentage point increase in the share of area under high-yielding varieties in 2000 is associated with a massive 10-15 percentage point increase in per capita GDP. To put that differently, if a country moves from having no high-yielding crops to having half its crops of the high-yielding type, then income will almost double. That is why Borlaug is considered to have saved almost a billion people from starvation.

Higher agricultural output, in a Malthusian world, usually results in fertility increases as food becomes more abundant. But the authors also show that this was not the case with the Green Revolution. Higher agricultural yields actually reduced population size, as parents chose quality over quantity.

The paper also shows that the new high-yielding crop varieties, in contrast to what many environmentalists believe, actually benefited the environment. Increases in the area under high-yielding varieties has, the authors find, tended to reduce the amount of land devoted to agriculture – ‘improvements in the productivity of food crops actually lead to intensification of agriculture on a smaller land area, preventing expansion on the extensive margin’.

Their results suggest at least three lessons. First, there is huge potential for improving living standards in developing countries through new crop varieties remains. This is especially true in many African countries, where adoption is far from universal, and agriculture is still an important sector. Second, new biological technologies are available to increase productivity of some crops, both by increasing yields and by reducing costs – for example, disease-resistant varieties that minimise the need for spraying with costly pesticides. Third, ‘technology continues to have a huge potential for improving incomes in the poorest places on our planet’. Indeed, the authors’ results suggest that the investments in the development of high-yielding crops have been ‘the most successful form of foreign aid to developing countries in the past half century’.

By itself, land reform in South Africa will not be enough to improve living standards, as the rest of the continent’s poor agricultural productivity attest to. What is needed is large investments in developing new technologies – universities, research institutes and the research capacity of state-owned enterprises, with the help of foreign donors like the Bill and Melinda Gates Foundation – to improve the productivity of our farms and factories and fibre-optic networks.

‘Whoever makes two blades of grass to grow upon a spot of ground where only one grew before,’ writes Jonathan Swift in Gulliver’s Travels, ‘would deserve better of mankind, and do more essential service to his country, than the whole race of politicians put together.’

Technology and scientific advancement is often last in line when the menu of economic policies are discussed in South Africa and on the rest of the continent. But technology that can ‘make two blades of grass to grow upon a spot of ground where only one grew before’ – or, in a more general sense, can make South Africans produce more with less – is the only way we can escape the stasis of the last decade, regardless of what South African politicians repeatedly promise.

**An edited version of this article originally appeared in the 19 July edition of finweek.

Written by Johan Fourie

August 27, 2018 at 08:00

What universities can teach us about job incentives (or how to make South African researchers more productive)

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Freedom

Let there be little doubt: academics have the best jobs. When we teach, we get to fill young, smart minds with ideas we care about and believe in. When we undertake research, we get to explore these ideas further, understanding the world and how it works a little bit better. We work in tranquil settings (most of the time), surrounded by like-minded individuals in search of (the) truth, or, for those of us who shy away from people, books that do the same thing. Sometimes we get to travel to nice places to meet more like-minded people and share our ideas. Sometimes we even take sabbaticals, a time to reflect more deeply about the world and how it works without the need to do anything else. And best of all: even if we do not do most of these things, we have job security for life.

Universities are some of the oldest institutions. Although the role of professor has changed somewhat over the centuries – we used to have to earn our income when students paid to enter our classrooms! – the system of academic tenure, where an appointment is permanent and one cannot be fired except under extraordinary circumstances, has been around for more than a century. It is a decidedly different system than the private sector, where the biggest incentive for working hard is to not get fired.

While South African academics get tenure almost immediately after their appointment (it varies, but there is usually a probation period), ‘getting tenure’ is a big thing in the US. The first five years after appointment is a race to publish in top journals. If your tenure evaluation comes up, and you have not published well enough, you won’t get it, and you will have to move somewhere else, or quit academe. Once you get tenure, though, all the incentives to publish are removed; continued research depends entirely on the goals and objectives you set for yourself.

Here are two very different systems that are perfect for analysis. In the first, the incentives are clear: publish or perish. In the second, there are no external incentive like the overt threat to job security. Which of the two systems produce the best results?

Before answering this question, it is perhaps useful to ask why the system of academic tenure was introduced in the first place. There were mainly two reasons. First, tenure provides academic and intellectual freedom to pursue new avenues of inquiry. Second, it provides a sufficient degree of economic security to make the profession attractive. It is the first of these – the unencumbered pursuit of truth – that is still upheld as the indisputable defense for tenure.

Does this defense stand up to empirical support? Three economists, Jonathan Brogaard, Joseph Engelberg and Edward van Wesep, used their own profession to find out. In a paper published in the Winter 2018 issue of the Journal of Economic Perspectives, they measure the research output of almost a thousand academic economists in the five years before tenure and the ten years after. They not only measure the quantity of output, but also the quality. They create two measures: ‘home runs’ are papers that are highly cited (in the top 10% of papers published in the same year) and ‘bombs’ are poor-performing (papers in the bottom 10% of citations that year).

Their results are emphatic: publication and home run rates rise to tenure, peaking in the year a researcher comes up for tenure and a researcher’s first year as tenured faculty, but then fall off a cliff, with publication and home run rates 15% and 35% lower in years 2 to 10 after tenure. Most surprisingly, bomb rates, publishing papers that get very few citations, increase by 35% after tenure.

The authors consider various reasons that might explain this drop in productivity and success. Perhaps this is just a ‘time since PhD’ effect, in that older people are less productive, but the authors find no evidence to support this. Perhaps it is the rise in service, teaching and other nonacademic obligations post-tenure, but that would not explain, for example, why researchers publish more bomb-papers. Perhaps tenure encourages researchers to take bigger risks and branch out into new, explored areas of research. The authors measure this by looking at where the authors publish, and find no difference in the number or uniqueness of co-authors or journals. Perhaps the averages mask elite researchers’ performances. But even if the authors only limit their analysis to the top US universities, the results hold true. Perhaps it takes time for truly novel research to gain traction. But when the authors limit the sample to papers with 20 year lags, the results stay the same.

What emerges from their analysis is that tenure is bad for research productivity. This is not necessarily to say that the tenure-system is bad: had it not been there, the number and quality of PhD students that aim for academic positions would probably have been lower. The possibility of future economic security is the incentive that really matters in drawing the sharpest minds into the field.

But it does suggest two things. On a practical level, giving tenure too early may be a bad thing. The South African system almost assumes tenure at the time of appointment; I don’t know anyone that has not received a permanent appointment for failure to publish. By extending the timing of tenure to at least five years, and making ‘not getting tenure’ a realistic threat, the South African government can get more research for their proverbial buck. At a more general level, the study clearly shows how important incentives are. A world where permanent employment is guaranteed with no performance appraisals is a world where output falls and innovation dies. Even academic economists sometimes need reminding of that.

**An edited version of this article originally appeared in the 21 June edition of finweek.

Written by Johan Fourie

July 19, 2018 at 07:30

Cities are the future

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MinasRuines

Photo by Marcia Valle

Brazil is a fascinating country to travel to as a South African. It is vibrant, slightly chaotic and mesmerizing all in one, and, beyond the airports and major tourist areas, quite a challenge for someone with no knowledge of Portuguese. I was invited to a rural university town in the state of Minas Gerais in May to deliver a series of talks. From the airport in Belo Horizonte my driver, hell bent on showing off his Grand Prix skills, took me on a five-hour rollercoaster ride through the hilly countryside. What was formerly a coffee and sugar plantations (and mining) region, were now mostly vacant, most of the land reclaimed by veld and forests. The language barrier prevented me from inquiring in detail what was happening, but from what I could gather, his answer was simple: People are moving to the cities. They want better lives.

Rapid migration to cities is a global phenomenon. People ‘vote with their feet’ for better economic opportunities, and in South Africa, as in Brazil, they vote for the bright lights of the cities. Poverty in South Africa is largely a rural phenomenon. Yes, townships on the periphery of cities house many poor residents, but these residents have better lives than those in the former homelands many of them come from. The search for a better life for them and their children is why they moved in the first place.

Those of us with a romantic view of life in the countryside may think that this flood to the cities can be reversed by, for example, policies that would expand land access or improve rural living standards. But lack of land is not the reason people migrate to cities in large numbers, not in South Africa and also not in Europe, China or Brazil. In several European countries, rural areas have been abandoned, taken over by forests (and returning wildlife). The European policy-makers have done their best to prevent this, by offering expensive agricultural subsidies to its farmers (at the cost of farmers in Latin America, India and Africa), but this has just slowed the inevitable. Farms are now being bought up by rich city-folk that want weekend getaways – cities are what creates wealth, the countryside is for spending it. In China, because of the disastrous policies of Mao, land was equally divided amongst the citizens. Yet with the onset of modern economic growth in China since the 1980s, millions of families have relocated to the cities, first to fill jobs in low-skilled, labour-intensive sectors, but as the economy has grown and wages have increased, to more skill-intensive sectors. Their children will attain much higher living standards than their parents and grandparents could ever dream of. Despite a history of severe inequality, the story is no different in Brazil. Rich and poor move to cities, because that is where their living standards are most likely to improve.

Trying to slow down urbanization is futile; in fact, it is likely to do more harm than good. Cities are where people prosper: they have access to employment opportunities, better schools and clinics, electricity, water and sanitation and access to a greater variety of social institutions and entertainment, like churches and sport clubs. But because cities are so attractive, that also results in higher levels of inequality, as new poor migrants from the countryside continually fill the gaps left by those that were formerly poor but have worked their way up. Inequality in cities should thus be interpreted with caution: it is a consequence, rather than a break, on progress. The poor care less about the Gini coefficient and much more about the possibility of social mobility – the possibility to escape poverty.

Evidence of how migrants’ living standards improve is provided in a new paper by Ivan Turok and Justin Visagie. They track rural migrants to South African cities between 2008 and 2014. Before their move to the city, 80% of these migrants were living below the poverty line. Six years later, they results show, ‘the level of income poverty for these migrants (now living in an urban environment) had more than halved to below 35%. Meanwhile, the poverty level for individuals who remained in the countryside stayed very high at 70%.’

It is for this reason that some economists are proposing a somewhat contentious poverty-alleviating policy: subsidies to help those in rural areas to migrate to cities. A new paper by David Lagakos, Ahmed Mobarak and Michael Waugh use an experimental programme of migration subsidies in Bangladesh to calculate the effect on migrant welfare. They find that for the poorest households, the welfare gains from migration subsidies are higher than unconditional cash transfers or a rural workfare program costing the same total amount. ‘This suggests that conditional migration transfers may be a useful way to raise the welfare of poor rural households in the developing world.’

The influx of migrants are and will continue to be difficult for cities, already suffering backlogs and scarce resources, to manage. But there are ways to support them. National and provincial governments can do more to give cities control over land and infrastructure they own, like Metrorail. Greater private sector involvement can speed the provision of basic services, notably in housing and internet connections. Political competition, like what has happened in Johannesburg, Pretoria and Port Elizabeth, will help to push out bureaucratic incompetence (and corruption) and promote service delivery.

Urbanisation is the key to future prosperity, in South Africa, Brazil and elsewhere. Any policy to keep people in rural areas amounts to a policy to keep them poor. While city governments are battling to tackle existing infrastructure backlogs, they should recognise that they offer the best hope for people to escape poverty.

**An edited version of this article originally appeared in the 7 June edition of finweek.

Written by Johan Fourie

June 30, 2018 at 06:54

Should South Africa host the 2023 Rugby World Cup?

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South Africa 2023

Tomorrow (Wednesday) we will know whether South Africa will host the 2023 Rugby World Cup. Here are my thoughts on hosting mega-events:

One of my aspirations when I was in high school was to bring the Olympic Games to Cape Town. Imagine a brand new athletics stadium and athlete village at Ysterplaat. Athlone Stadium could play host to sevens rugby, while the breathtaking Cape Town Stadium would host all football games. Newlands Rugby Stadium could be converted into a 20 000-seater indoor gymnastics stadium, Bellville velodrome would play host to cycling, Hartleyvale could host hockey, Camps Bay beach volleyball, Muizenberg surfing, the Waterfront sailing, and Langa could get a brand new boxing venue and swimming pool that could serve the community long after the Olympics is gone. And what better venue to launch the new Olympic code of T20 cricket than Newlands cricket stadium?

The sports stadia would, of course, be just one element of a much bigger infrastructure drive. The largest innovation will be in transportation: a new, world-class international airport, built on the N7 to Malmesbury, would allow Cape Town to lift international arrivals from 2 to 10 million. A new CapeRocket mass rapid rail network would connect the new airport with the city and neighbouring towns of Paarl, Stellenbosch, Somerset West and Simon’s Town, perhaps even Worcester through the Huguenot Tunnel. If a train could take you from Worcester to Cape Town City Center in less than an hour, imagine what that would do to the daily commute – and property prices in rural areas! (That is radical economic transformation, I can hear Cape politicians say.) And an Uber-like app for all city transport, including taxis, now electric, would allow spectators to seemingly move between the different transport modes.

In moments of weakness, these dreams return. But then reality kicks in, informed by several years of research on the impact of mega-events. The picture is not a positive one. In short, the Olympic Games is an expensive undertaking which rarely delivers on the promises of spectacular economic growth. Robert Baade and Victor Matheson, two experts in the field, summarises it best: ‘In most cases the Olympics are a money-losing proposition for host cities; they result in positive net benefits only under very specific and unusual circumstances.’ There are exceptions, of course. Los Angeles in 1984 was a financial success for two reasons: it built very few new stadia, and the costs that were incurred were mostly funded by the private sector. Barcelona in 1992, too, is considered a success, uplifting a city to global tourism status to the extent that Catalonians are now trying to curb tourism.

But these are the exceptions that prove the rule. Most cities that host the Summer Olympic Games continue paying for the event long after the closing ceremony. Montreal hosted the 1976 Olympic Games; Canadians finally repaid all of the debt in 2006, 30 years later. Many even argue that Greece’s economic woes of the last decade was a direct consequence of its 2004 Olympic Games expenditure. Most Olympic venues, built specifically for the event, are, at best, used for occasional events, much like the Cape Town stadium that was built for the 2010 World Cup. At worst, these venues fall into disrepair, and become a huge fiscal burden on the local government. Consider, as example, Rio’s Olympic venues only one year after the event!

Ex post studies of mega-events confirm the visual evidence. In a paper I co-wrote with Maria Santana-Gallego in 2011, we found that mega-events like the Olympic Games and Soccer World Cup boost a host country’s tourism by about 7%. This varies depending on whether the event was held during the off-season (like the 2010 World Cup in South Africa, and unlike the Olympics in Athens), the type of event (the Olympics is held within one city, the Soccer World Cup in several cities) and even who participates in the event.

Even if tourism increases substantially, as it did for South Africa before, during and after the 2010 World Cup, these advantages can easily be undone. In a back-of-the-envelope calculation, I have shown that all the tourism benefits South Africa derived from hosting the FIFA World Cup were undone by our ridiculous visa rules in 2015, a classic case of the negative unintended consequences of good intentions without sound analysis.

Despite the evidence against mega-events, cities and countries still line up to bid for them. It seems like an irrational thing to do, but there are very rational reasons cities and countries do so. These reasons are mostly political. The politician who hosts the event, will often not be the one who pays for it. There is an immense feel-good factor associated with hosting mega-events; having watched 8 games of the 2010 World Cup around South Africa, I know these emotions very well. And voters often vote for politicians not based on calculated policy statements, but on how they make them feel. A second reason is that cities can use a mega-event to get a larger share of the national budget.

South Africa 2023 stadiums.png

South Africa wants to host the 2023 Rugby World Cup. There are reasons for and against doing this. On the positive side, no new large infrastructure will be required. The event will also be held during the tourism ‘off-season’, meaning that rugby supporters would likely not displace other tourists. Its bid document projects an economic impact of R27 billion, with R5.7 billion to low-income households. A total of 39 000 temporary and permanent jobs is expected to be created. Sounds like a no-brainer.

But it’s not that simple; there are few things in life that are certain, but that these numbers are inflated is one of them. Cabinet has already approved a guarantee of R2.7 billion which was required World Rugby. The event will require public resources in an era when budgets are already under considerable stress. On the tourist side, South Africa have strong existing links with rugby-playing countries; tourism is therefore unlikely to see much of an increase before and after the event. And the feel-good factor of a tournament the size of the Rugby World Cup is limited if your team don’t win the finals; as a thought experiment, would 1995 have had such treasured memories were it not for Joel Stransky’s final drop goal?

Despite my childhood dreams, we were fortunate to escape the 2004 Cape Town Olympic bid, and even more fortunate to escape Durban’s Commonwealth Games disaster of 2022. Hosting mega-events are expensive parties, with inflated benefits and underestimated costs. (I should add: this is not only true for South Africa, but for Ireland and France, our competitors for the 2023 bid, as well.)

My heart wants us to win the bid; my head says it’s probably not the worst thing if we don’t. Let’s see what happens tomorrow!

*An edited version of this first appeared in Finweek magazine of 19 October 2017.

Written by Johan Fourie

November 14, 2017 at 07:05

Why #DataMustFall

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

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

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

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

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

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

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

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

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

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

Written by Johan Fourie

August 30, 2017 at 10:56