Johan Fourie's blog

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Posts Tagged ‘Zimbabwe

How religion shapes an economy

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Harare billboard

Source: Her Zimbabwe

Drive around Harare and you will notice something very peculiar. Billboards across the city do not advertise the latest car model or data bundle or washing powder. In Harare, by contrast, almost every billboard advertises church services. They all follow a precise formula: next to the photo of the charismatic spiritual leader is the date of the event and a promise, best summarised in this example: ‘Freedom from poverty/freedom from disease/freedom from barrenness.’ The implication: join us to improve your material welfare.

On my visit last year, I spoke to several university students who attend these services. One told the incredible story of a pastor who arrived one Sunday morning at his church with a truck full of bricks. These were ‘blessed bricks’, he proclaimed; one of them built into your house would, according to the good pastor, alleviate you from material want. According to the student, he sold each of the 10 000 bricks on the truck for $10. The last few ones even fetched as high as $50. Do the math. It would seem that at least one person’s material welfare did improve significantly.

This and similar stories by the students reminded me of something that had happened five centuries ago. By the 16th century, the abuse of indulgences – a payment to reduce the punishment for sins – had become a serious problem that the Catholic Church in Europe recognized but was unable to restrain effectively. A young German professor of theology, Martin Luther, rejected the belief that freedom from God’s punishment for sin could be purchased with money, and penned his Ninety-Five Theses to the door of All Saints’ Church in Wittenberg on 31 October 1517, a date now considered the start of the Protestant Reformation.

Luther’s movement, and the ones it would kindle elsewhere, heralded an era of prosperity across Northern Europe. The Catholic city-states of Southern Europe – think Venice – were some of the wealthiest in 14th and 15th century Europe. But by the 17th and 18th centuries, these had been supplanted by cities in the Protestant North, notably in Holland and then England.

Many scholars have linked the Protestant Reformation – at least indirectly – to this reversal of fortunes. German sociologist Max Weber, for example, argued that the Reformation encouraged the ethics of hard work, thrift and efficiency, and that this resulted in a change in savings behaviour by the followers of the new religion, with consequences for investment and growth. Others highlighted the impact the new religion had on literacy and education, as it emphasized adherent’s ability to read and write, and that this channel of causation was what propelled the North forward. But proving these theories empirically was difficult.

A new NBER Working Paper by Davide Cantoni, Jeremiah Dittmar and Noam Yuchtman posit another channel and finds empirical support for it. The authors assemble a new, highly disaggregated dataset on the degrees received by German university graduates for more than 2000 German towns in the period following the Reformation. They then split the sample in two: those students that qualify with religious degrees, and those with secular degrees. The authors are also able to identify the occupations of these German graduates, and split the occupational sample in two: those who find work as monks and priests, and those who find work in administration and the private sector.

The results are remarkable. In those areas that experienced the Reformation, two things happen. First, the Protestant university students increasingly studied secular subjects, especially degrees that prepared students for public sector jobs, rather than church sector-specific theology. Graduates of Protestant universities, in contrast to universities that remained Catholic, also increasingly took secular, especially administrative, occupations.

Second, the Reformation affected the sectoral composition of fixed investment. In Protestant regions, new construction shifted from religious toward secular purposes, especially the building of palaces and administrative buildings, which reflected the increased wealth and power of secular lords.

In short, the Protestant Reformation changed the preference for physical and human capital investment from unproductive to more productive activities. Importantly, this reallocation was not caused by preexisting economic or cultural differences. The interpretation is therefore that it was the Reformation, and not some other underlying factor, that resulted in this shift to the secularization of graduate degrees and the workforce.

This had profound long-run consequences. With more students studying secular subjects and more of them finding jobs in the public or private sector (instead of the religious sector), a process of cultural and intellectual change was set in motion that culminated, ultimately, in the enlightenment, the scientific revolution and modern economic growth.

Which brings us back to the pastors of Zimbabwe. In a country devoid of private sector opportunities, religious entrepreneurship is a popular calling for charismatic individuals. But if the brightest young minds choose professions in the religious sector – and the little surplus capital that there is, are used to fund mega-church buildings (as you will find when you drive around Harare) – then Zimbabwe is experiencing exactly the opposite of the Protestant Reformation. Selling ‘blessed bricks’ is the modern equivalent of the sixteenth-century indulgences sold for salvation.

The result? Productive investments in human and physical capital becomes investments in unproductive activities. The circle of poverty is strengthened, exploited by religious entrepreneurs who themselves profit from others’ hardship. Are we returning to the Middle Ages, or will our generation’s Martin Luther rise up?

*An edited version of this first appeared in Finweek magazine on 16 November 2017.

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Written by Johan Fourie

January 4, 2018 at 10:57

Here we go again

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Gigaba (1 of 1)

Late last night, South African president Jacob Zuma fired Pravin Gordhan and Mcebisi Jonas as Minister and Deputy Minister of Finance, and appointed Malusi Gigaba (pictured) and Sifiso Buthelezi in their place. With this move, he has gained the keys to Treasury. Aside from Finance ministry, Zuma appointed 18 new ministers and deputy ministers, including Fikile Mbalula, the former Minister of Sport, as Minister of Police. Bathabile Dlamini, Minister of Social Development, whose incompetence was recently exposed when her actions risked the well-being of 17 million South Africans, remains in her portfolio.

It all sounds so familiar. In December 2015, Zuma fired then Minister of Finance Nhlanhla Nene and replaced him with Desmond van Rooyen. After the rand plummeted more than 5%, Zuma was forced to reverse his decision and appoint Pravin Gordhan in the position three days later.

I wrote a post immediately after the appointment of Van Rooyen. Most of the points I raised there are now valid again. Zuma has captured Treasury – with a Zuma-loyalist in charge, he can now sign off on projects that benefit him and his backers, the Guptas.

The question, again, is what to do. And again I have to say, I don’t know. I see calls on social media for mass action, but I am not too sure Zuma and his cronies would pay much attention. Blog posts, I fear, will also not have much of an impact. What I will do, however, is to encourage Treasury employees, many who are brilliant economists and also good friends, to remain in office, despite the obvious challenges that they will face with a Zuma-loyalist at the helm. How long, though, can one remain honourable and incorruptible in an environment where you might become complicit in whatever shady nuclear or other deals Zuma has up his sleeve?

What this reminds me of is a tweet by veteran Zimbabwean businessman Trevor Ncube:

If something doesn’t happen soon to reverse this process of decline – and this can only happen when Zuma is gone, although that will only be a start – we risk destroying the progress we’ve made since 1994. The irresponsible actions of last night will hurt the economy badly, from a weakening currency (which has already fallen by more than 3%) to almost definite downgrade, which means more money spent on paying loans than building roads, houses and clinics. And if Zuma’s pet projects, like a nuclear deal with Russia, is signed, the cost for South African taxpayers – and the opportunity costs for South Africa’s poor – will be horrific.

Prepare for a bumpy ride.

The invisible barriers of international trade

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police-road-block-in-zimbabwe

One of the biggest barriers to deeper economic integration in Africa is the excessive trade costs that prevent regional trade. Import tariffs have traditionally been an important source of revenue for poorer countries, and it has taken several spaghetti-like agreements to reduce these. Although an agreement has been signed to create a Free Trade Area from the Cape to Cairo, none of the 26 countries have ratified it. Import duties remain between most African countries.

But tariffs are only of the costs of trade. It takes time to move a container from Johannesburg to Kinshasa, and the journey by land is often filled with tales of unscheduled delays and red tape. I remember traveling through the Victoria Falls border post between Zimbabwe and Zambia a few years ago and asking the truck drivers how long they had to wait to cross into Zambia. Their response: ‘A couple of days, if we are lucky’. This is no way to encourage regional trade.

Poor infrastructure is another significant barrier. The massive distances between major economic centres means that the unit cost of transport is high. A new paper in the Review of Economic Studies by Tufts University economist Adam Storeygard confirms this. Storeygard measures the impact of the oil price increases between 2002 and 2008 on the incomes of African cities. He compares two types of cities: those with a port on the coastline, and those of similar type but 500 kilometers inland. Using satellite imagery over the period, he finds that the oil price shocks increased the size of port cities by 7% more than in cities in the hinterland. The take-away: high transport costs retard growth. And because many African cities are located far from the coast, the high transport costs of poor transport infrastructure explains why African manufacturers find it difficult to compete with manufacturers in Asia and Europe. Just think of the difficulty manufacturers in landlocked countries like Malawi or Zambia face.

But even where better physical infrastructure reduces transport costs, other, ‘softer’ trade barriers often remain. Corruption, for example. Traveling into Malawi on my trip of a few years ago, we were pulled off the road a few kilometres after the border post by an armed man, and then required to return to the border post because we needed ‘additional insurance’. That was a $50 payment that went straight into the friend of the armed man’s pocket.

The effects of these ‘invisible’ trade barriers on trade and consequently economic performance have been hard to quantify, though, until now. In a new American Economic Review paper – ‘Corruption, Trade Costs, and Gains from Tariff Liberalization: Evidence from Southern Africa’ – Sandra Sequeira of the London School of Economics and Political Science finds that a reduction in tariffs between South Africa and Mozambique in 2006 had a very limited effect on trade. This is surprising: one would expect that lower tariffs would lead to higher levels of trade. And yet, the sharp decrease in tariffs had basically no effect (in technical terms, the elasticity of imports to tariff changes was very low).

mozambique-and-malawi-border-postWhat explains this surprising result? Sequeira uses a novel dataset of exporters’ bribe payments between South Africa and Mozambique to show that the decline in tariff rates at the border resulted in a 30% decline in the probability of bribe payments and a 20% decline in the average bribe amount paid. In other words, the lower tariffs did not actually reduce firms’ trade costs, it just shifted paying corrupt border officials to actually paying the tariffs as required by law, boosting government revenue. That is also why the elasticity of imports was so low: because costs did not fall in practice, there was no concomitant increase in trade.

Sequeira’s innovative study shows that high tariffs explain why corruption thrives. Remove the tariffs and the ability to solicit bribes vanishes. But don’t think that trade will suddenly blossom. Bribes keep trade costs lower than what they would be if tariffs were fully paid; lowering tariffs only lower the amount corrupt officials receive.

This has important implications for policy-makers: first, lower tariffs may actually result in an increase in tariff revenue as traders switch from paying bribes to paying the now more reasonable official tariffs. Free trade agreements  (with zero tariffs) may not result in a significant fall in revenue either, because much of the revenue goes into the pockets of corrupt officials in any case, and will likely lead to greater transparency; Sequeira finds, for example, that trade statistics also improve when corruption practices decline.

But don’t expect free trade agreements like the one being discussed at the moment to result in a large increase in regional trade. As long as other barriers, like delays, severe red tape and poor infrastructure, remain, regional trade in Africa is likely to remain too weak to foster the economic development it promises to deliver.

*An edited version of this first appeared in Finweek magazine of 17 November.

Written by Johan Fourie

December 8, 2016 at 21:17

How Zuma’s words disempower black South Africans

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Who wears South Africa's diamonds? Source: BBC

Diamonds (and colonialism) are forever. Source: BBC

Black South Africans have suffered a lot over the last two centuries. I am an economic historian and, together with some of my students, have recently begun a project which hopes to quantify the material inequalities between black and white South Africans over the last 200 years. It is not easy, because the colonial records have often ignored the black experience. And yet, there are clues everywhere. From early nineteenth-century government payrolls (where black translators earned one-tenthousandth of what the white governor earned) to mid-twentieth century cadaver heights (where blacks are significantly shorter in height than their white compatriots).

All this evidence points to the incredible material injury of black South Africans. And this is to say nothing of the psychological scars and social strife that has accompanied this material hurt.

This suffering is much longer than the colonial experiences of many other Africans on the continent. Although Van Riebeeck already arrived in 1652 and first contact with the isiXhosa’s at the infamous Fish River was more than a century later, this was still much earlier than the colonial experiences of other African countries, which started around the end of the nineteenth century. True, many countries across Africa suffered the vulgarities of the slave trade, most pronounced during the seventeenth and eighteenth centuries. But South Africa’s colonisation, I would argue, was worse, with Europeans subjugating complex agricultural societies to material inferiority by taking their lands, stealing their cattle and, above all, exploiting the minerals that they had claim to. (Is it not ironic that the Queen of England still wears Africa’s most prized diamond?)

When and where black societies adjusted to the new reality of colonialism – proverbially pulling themselves up by their shoelaces – they were punished, either through higher head and hut taxes to ensure that they remain docile labourers, or through more sinister (but also more effective) policies, like building a railroad circumventing the black areas, excluding blacks from the vote despite their immense contribution (to both sides) during the Second South Africa War, or, most infamously, by providing rubbish education (with the 1953 Bantu Education Act). For two centuries, at least until 1994, whites did their best to discourage, disrupt and, when those two did not work, destroy, African innovation and entrepreneurship.

All this changed in the new South Africa, for although blacks were (and many remain) at a serious disadvantage, there was no one to now stand in their way. And so, we witness the rise of the black middle class and the black diamonds. Sandton today is perhaps the epitome of this black entrepreneurial class; confident, successful, prosperous. South Africa has moved from a nation of between-group inequality (i.e. white vs black inequality) to a nation of within-group inequality. As an example, if all of South Africa’s whites were to leave the country tomorrow, the Gini coefficient (the measure social scientists use to quantify the inequalities of a country) would remain exactly the same. Over the last two decades, millions of black South Africans have escaped poverty and moved into the middle class; some studies estimate that this group is now close to 5 million people, larger than the total white population. And yes, whites have prospered too, despite their complaining and moaning about everything from BEE to racial quotas in the Springbok team. None of this hurt them (on aggregate), and the only things that do hurt – violent crime, corruption, blackouts – hurt black South Africans even more.

But the post-1994 South Africa is not a narrative about a minority group that represents less than 10% of South Africans. Instead, it is a story of a people rising up from the depths of economic and social deprivation. It is a remarkable story of courage, determination, and perseverance and triumph-against-all-odds. Black South Africans have claimed their birth right and begun to overturn centuries of injustice. They have had to skill up, build up collateral, educate the next generation, all with relatively little support from a government that first had to steer a sinking ship through shallow waters. And more: they have had to reconcile with racists, so magnanimous a step that we forget it is called a miracle.

And yet, when Jacob Zuma blamed apartheid for Eskom’s blackouts and when he branded Jan van Riebeeck the scapegoat for the country’s high levels of inequality, he changed the narrative again. Suddenly, South Africa was not a country where black South Africans had the agency to affect their own destiny, but one where whites had (again) the starring role. This tiny minority, Zuma implied, was the lead actor in the South African story; his statements suggest that black South Africans are, at best, supporting characters, much like in the days before 1994. While whites are up in arms at being blamed for everything, they are happy to be part of the conversation again, happy to be listened to, happy to have their say. (For, really, why should South Africans otherwise care about the opinions of a former presidential secretary?)

Zuma does this, I would argue, because it gives him legitimacy (much like Bob Mugabe gets legitimacy by blaming the whites in Zimbabwe, now less than 1% of the population). But Zuma is wrong. While this may still be a country home to millions of whites, it is certainly not a country about them. By blaming whites, Zuma is denying black South Africans the right to take ownership of their own future.

Written by Johan Fourie

February 3, 2015 at 10:43

South Africans need higher EQON

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BrainScang

The much maligned measure of intelligence – IQ – has an equivalent that measures emotional intelligence – EQ. I vaguely remember studying this in industrial psychology, but, as with most things I’ve studied, I had to go to Wikipedia to get the exact definition: “EQ is the ability to monitor one’s own and other people’s emotions, to discriminate between different emotions and label them appropriately, and to use emotional information to guide thinking and behavior.”

But this is not a post about South Africans’ emotional intelligence. Instead, I want to propose another measure: Economic intelligence, or EQON (pronounced with a click to sound hipster). What is economic intelligence? I’ve borrowed from the other EQ: It is the ability to monitor one’s own and other people’s economic behaviour, to discriminate between different economic actions and label them appropriately, and to use economic information to guide thinking and behaviour.

Reading the press, and especially the comments on a news site like News24, is a nightmare for anyone with a basic understanding of economics. See, economists disagree a lot. If you ask ten economists what will happen to the economy, you will get eleven different answers. (Forecasting is a game only the brave or ignorant play, and it is actually a very small part of what economists do.) But even though economists debate many things, this is not to say that they don’t also agree on many things. We all study the same laws and theories that guide our thinking. We know that if demand increase, prices will tend to increase too. Of course there are assumptions, and we can debate those assumptions. But the theories hold, most of the time.

Which is why it is often excruciating to read comments on news or business sites which report about issues that impact the economy. Take the recent ban on chicken imports from Europe. Because of bird flu, South Africa has closed imports from several European countries to ensure that bird flu doesn’t spread into our borders. How will this policy impact us? It is indeed necessary to protect consumers of chicken to the harmful effects of chicken, but there should be no doubt that consumers will lose because a ban on imports will inevitably push prices higher. This is indeed what has happened after the tariffs on chicken imports increased. But there are winners too: South African producers – mostly oligopolists like Rainbow Chicken and County Fair – will benefit through higher prices and a larger market share. One commentator saw this as a positive step: “Thank God”, he said. “Let’s grow our own industry.”

It would indeed be great to grow our own industry, but at what cost? Should all South Africans pay double for their largest source of protein so that we can create a couple of hundred additional jobs? Do the math: if 50 million South Africans pay only R1 more per month for chicken, we would ‘lose’ R600 million a year. Are producers really going to create 6000 new jobs at R100 000 a job? No, they’re not. The bird flu epidemic is bad, not only for European producers but also for the South African economy too, and especially the poorest South African consumers, who now will be forced to either switch to more expensive proteins are to go without it. That’s why nearly all economists would agree that trade is beneficial for a country, because it allows consumers to improve their living standard much higher than if they had to only bought locally produced goods.

Another thing that most economists would agree on, is that immigration is a good thing. Last month News24 reported that close to 200 000 Zimbabweans are applying for a special extension of their visas. The comments all reflected the following sentiment: “Send the f#ckers back. That’s why there’s no jobs for our guys (sic).” But economists know that immigration is not a zero-sum game. When 10 people immigrate to South Africa, the don’t steal the 10 jobs of South Africans. Many immigrants become entrepreneurs, employing locals. Many work very productively in existing firms, allowing those firms to expand and employ more people. Immigration, especially of well-qualified individuals like the ones moving to South Africa, is a boon not a bane to the economy. We should welcome them with open arms, give them citizenship and let them contribute to the economy to the benefit of everyone else.

Let me give a third example. Economics 101 teaches us that a price floor such as a minimum wage creates a disconnect between the amount of labour supplied and the amount of labour demanded. We call this unemployment. If the minimum wage increases, this disconnect will become larger still, meaning unemployment will increase further. There are exceptions, of course. Sometimes the markets are not competitive, or there are information asymmetries, or there are counterveiling shocks in the rest of the economy that mitigates against the rise in minimum wages. But, in general, a higher minimum wage leads to higher unemployment.

Which is exactly what I predicted two years ago when, after the labour unrest in November 2012 on Western Cape wine farms, the government implemented a higher minimum wage for farm workers. What has happened since? Well, according to Carmen Louw of Women on Farms, “more than 73,000 jobs were lost in the Western Cape farm sector after the statutory minimum wage was raised by more than half in the wake of the violent farm worker strikes of 2012.” Seventy-three thousand! That is nothing less than tragic.

Of course, even in the face of such glaringly obvious evidence that higher minimum wages hurt poor farm workers, some are still not willing to accept that it’s the most basic economic law that explains the higher unemployment. As Dave Marrs points out in yesterday‘s Business Day, Women on Farms and Cosatu believe it is “a matter of racist and misogynist white farmers taking revenge for the strike by victimising black women, rather than simple economics”. Not a lot of EQON there.

Fortunately, in contrast to IQ and EQ, there is actually hope for those with a low EQON. It helps to remove the ideological blinkers, and focus on the evidence. (This is true for economists too. Again, not all economists agree on everything, and much of the disagreement is an unwillingness to accept the evidence of the opposite school of thought.) But people struggle to understand what evidence is. Is one anecdotal account of a woman losing her job because her chicken farm is struggling to compete against cheap Brazilian imports enough evidence to tell us that chicken imports are bad? No, it is not. Because what of the millions of other stories of consumers, unknowingly, buying more chicken products because of cheap prices. Unfortunately the story of the woman – usually accompanied with a photo of her family – appeals to our emotions much more than the story of cheap food.

Economists can also help to remove the blinkers by doing better research: if we can convincingly show with numbers how immigration improves an economy, or that higher chicken prices hurt consumers, or that higher minimum wages cause people to lose their jobs, and if we can convincingly communicate our results to a public often unwilling or unable to see both sides of a story, then it will be easier to convince people of the merits of our case.

Let the quest for a higher national EQON begin!

Written by Johan Fourie

December 12, 2014 at 09:19

The dangerous appeal of the benevolent dictator

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General Park Chung-hee, South Korean president from 1962-1979

General Park Chung-hee, South Korean president from 1962-1979

Two weeks ago, Alan Knott-Craig Jnr, South African entrepreneur and IT whiz, tweeted the following to his more than 12000 followers:

Young countries are like startups. They need to move fast to find a viable economic model. That’s why dictators are best for young countries.

Dictatorships are appealing. They can transform a country more rapidly than any other mode of government. Consider the widely cited example of South Korea’s General Park Chung-hee. He took over the ineffectual South Korean government in 1962 and imposed a military regime that included giving the president sweeping (almost dictatorial) powers and permitted him to run for an unlimited number of six-year terms. He suppressed the media and instituted morality laws with mandatory curfews and regulations on attire and music. Yet during his 17 years in charge until his assassination in 1979, he oversaw a massive expansion of the South Korean economy, known as the Miracle on the Han River. Relying on cheap wages, South Korea industrialized in the manufacturing of cheap manufactured goods. It invested heavily in new technology and education. Within two decades, the economy had transformed from an impoverished backwater to the host of a very successful 1988 Seoul Olympic Games. Today, Seoul is one of the most technologically advanced cities in the world.

Knott-Craig Jnr is correct that dictators can be best for young countries, as the South Korean example shows. But are they, on average? A new paper by Papaiounnou and Van Zanden shows they are not. The authors build a large database, measuring the length of tenure of each of the heads of states of all countries since 1960. They then regress the length of tenure on the economic performance of a country. Their findings? The longer a president is in office, the worse that country’s economy is doing. They explain:

In all specifications, we find a strong negative coefficient linking years in office to economic growth and the quality of institutions, and a positive coefficient relating years in office and the rate of inflation. In particular, there is enough evidence to suggest that the young states of Africa and the Near East are the ones more severely affected by the ‘dictator effect’. The average country in this region saw its GDP per capita double between 1960 and 2009, implying an average growth rate of almost 1,5% per year; had there been no ‘dictator-effect’ as estimated here, average growth would have at least been 2,38% per year, and GDP per capita in 2009 75% higher than its current level.

A dictatorship is not the way to grow your economy. Sure there are a few exceptions, but they are exactly that: statistical outliers. A country where the president stays in power longer than two terms will, on average, perform worse than had a new president been elected. Perhaps the main issue is that a dictator, even a benevolent one, may do well in his (it is always men) initial few years. His power to affect change becomes an all-consuming drug that can only be appeased by more power. Consider South Africa’s neighbour, Robert Mugabe. Leading the revolution against white rule, Mugabe emerged not only as the hero of the people but also the one to put Zimbabwe’s economy on the path to prosperity. During the early 1990s, the Zimbabwean economy was often growing at more than 5% per annum. Mugabe was praised in his own country and also abroad; he received honorary doctorates from the universities of Edinburgh, Massachusetts Amherst and Michigan State (all since revoked). But Mugabe, like all dictators before him, could not retire and admire their achievements. Instead, he changed the constitution (which is possible if you are widely admired) and remained in power. Zimbabwe’s economy and people have suffered as a result.

The wise Adam Smith, in his lesser-known Theory of Moral Sentiments, writes about this ‘terrible drug’ as Russ Roberts calls it in his new book How Adam Smith Can Change Your Life:

To those who have been accustomed to the possession, or even to the hope of public admiration, all other pleasures sicken and decay. Of all the discarded statesmen who for their own ease have studied to get the better of ambition, and to despise those honours which they could no longer arrive, how few have been able to succeed?

There is no way of knowing what would have happened to South Korea had General Park Chung-hee not been assassinated. My guess is he would have hung onto power, and pulled the South Korean economy down with him. Robert Mugabe stayed on too long, and Zimbabwe are the poorer for it. The lessons are clear: dictators are bad not because they immediately do bad things, but because they become addicted to power. And to hold on to that power, they distort the institutions – an independent judicial system, a free media, regular elections – that are essential for sustainable and shared growth.

Land reform: a political not economic problem

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Two sides of land reform? Photo by Robin Hammond, National Geographic.

Commercial or subsistence depends on political and not economic objectives. Photo by Robin Hammond, National Geographic.

Minister of Rural Development and Land Reform Gugile Nkwinti kicked off the Land Tenure Summit yesterday by making several statements about land reform that has left me perplexed. Reported here, the minister said that “privately-owned land is a serious problem”, that “we want to correct a particular South African historical problem”, that “it cannot be that the worker will work forever and at the end of their time on earth, have nothing to show for it. It is not right, it cannot be right” and again promoted the department’s radical plan to give half of each farm to the labourers working on it.

The distribution and productivity of land is the most serious political issue facing South Africa. The alienation of Khoesan lands by European settlers had already started soon after Van Riebeeck arrived in South Africa, but it was really the expropriation of land in the nineteenth century (as British settlers arrived in the Eastern Cape and the Voortrekkers moved into the interior of the country) that has created a legacy of injustice. By 1913 when the Land Act was signed, black South Africans (and those living in neighbouring colonies like Basotholand, Bechuanaland and Southern Rhodesia) had lost large territories of their most fertile land. The Land Act consolidated this expropriation, and even may have prevented further expropriation (see my earlier post on this).

There is no doubt that redress is needed. The question, really, is how to affect this redress. The reason Julius Malema and his Economic Freedom Fighters did so well in the recent elections was because he pushed the land reform agenda to priority number one, and he had a plan. The EFF wants “expropriation of land without compensation for equitable redistribution” and propose a system whereby the “State should, through its legislative capacity transfer all land to the state, which will administer and use land for sustainable-development purposes. This transfer should happen without compensation, and should apply to all South Africans, black and white.” The State will then lease the land for 25 years.

My suspicion is that performance of the EFF in the recent elections has forced the ANC’s hand, and they’ve come up with their own plan for land redistribution. The plan will force commercial farmers to cede 50% of their farms to their workers. This is not the forum to critique these plans in detail, but I can point to others who have done so. Read this, and this. My field of expertise is economic history, not agriculture, and so my only recourse is to look at land expropriation in history. It is not a story to smile about: during the process of collectivisation in the Soviet Union, at least 4 million people died of starvation alone, and the recent land reform in Zimbabwe has resulted in large declines in production, malnourishment and close to 4 million Zimbabweans emigrating to other countries, notably South Africa.

Yet knowing that something has failed in the past – and even knowing that it will fail again – is usually not enough reason for politicians not to attempt it again. In the absence of alternatives, my sense is that black voters will be happy to go along with any plan to redress land, because it will by implication by more fair than the counterfactual, which is to continue the status quo. (This reminds me of why the National Party won the 1948 elections. The ‘racial issue’ had come to dominate the national agenda after the Second World War but the United Party under Jan Smuts had not articulated a clear plan to tackle this issue. Instead, DF Malan proposed a clear plan of separation, of apartheid. Sometimes all you need to win is a plan, even if it is a bad one.)

So what are the alternatives to the Minister’s proposed plan? It depends on your objectives. If the only criterion is to redress past injustice, land expropriation, either fully or, as the Minister suggests, partially, seems like a solution, right? But what are the consequences of such a policy? One can only speculate, but it is likely that commercial farms will see large-scale disinvestment. Farm prices will collapse, forcing other farmers, who have used their land as collateral for loans, to also sell their properties. Movable assets will be sold to provide some capital for a new life in the city. (Other perverse outcomes: expect more golf courses, light industry parks, gated communities and rural retirement villages, and conservation parks and holiday resorts as farmers shift into other industries not affected by the policies.)

Little of this will benefit the new owners. Land is only as useful as the capital investments on it, and without capital (or, at least, new investment in the farm), many of the new owners will find it increasingly difficult to continue the earlier outputs. The state can help, of course, but the state is not a bank who can easily make decisions about which risks to take and which to avoid. (See my earlier post on Tito Mboweni’s plans for a state bank.) Where the new owners are not former workers, an even more serious issue arises: skills and experience. Farming is an increasingly scientific industry. Our agricultural colleges are simply not producing enough graduates nor would they have the experience to take over the immediate operation of large-scale commercial farms producing for the export market. Learning-by-doing is really the only option, which is why this opinion piece by Peter Curle is a useful read. He suggests that the principles of successful BEE transactions could easily be applied to the agricultural sector. This would mean that farmers are able to choose their black shareholders, train them, and be partly responsible for – and benefit from – their success. That is a system that gets incentives right.

The government could, of course, also take another approach. Given that the agricultural sector employs large numbers of unskilled labour (and has the potential to employ more), it could focus on improving the productivity of existing farmers. To do this, the most obvious thing is to identify the currently most unproductive land. That turns out to be communal and state land, not privately-owned land. (And certainly not foreign-owned land, which seems to get all the blame, but is in fact a tiny share of land owned in South Africa.) The power of traditional leaders, however, prevent such communal or traditional lands from being used more productively. In a recent working paper, Daniel de Kadt, PhD-student at MIT, explains why these traditional leaders continue to have such a powerful hold on the ANC:

We argue that traditional leaders, whose power depends on the state, may be incentivized to strategically support political parties who can guarantee their survival and provide them with rents. We study this quid pro quo in the Apartheid-era Bantustans of South Africa. We show that an alignment between the state party and the chiefs maps to increased political support for the party. Further, we provide quantitative evidence consistent with chiefs acting as clientelistic brokers. Our results suggest that chiefs boost African National Congress (ANC) vote-share by 8.2 percentage points in the Bantustans. This translates into roughly 4.5% of the ANC’s total vote-share, and a distortion in the national vote of 2.5 percentage points. This distortion is pivotal in determining whether the ANC is able to alter South Africa’s constitution.

You could also translate it thus: The poorest of the poor South Africans live in Bantustans on communal lands. They, however, are being held ransom by their chiefs who are in cahoots with the ANC, who rely on their support for 2.5 percentage points in each election.

To eradicate the legacy of colonial land expropriation, a thriving agricultural sector is key. The problem is not “privately-owned land”, as the Minister seems to think. Policies that affect commercial farms will only hurt workers and the consumers of cheap food, exactly those people that suffered because of the initial land expropriation. The solution lies in tackling the unproductive, communal lands that is currently held by chiefs or the state. If these areas can prosper, not only will it pull millions of poor South Africans out of poverty, but it will create the necessary skills and capital to allow faster land reform elsewhere. Yet this most important step is unlikely to occur any time soon. That is because poverty alleviation and real redress is not an economic problem, but a political one.