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January 15, 2004

Thinking short term

The Economist has a special report on Sub-Saharan Africa in their current issue. I have cut & pasted a full article on South Africa below (it is subscription only). This is what I found interesting:

...There are many more blacks at university than ten years ago, but most choose soft subjects such as education and social sciences. In 2002, only 3,300 black high-school students (1% of the total) passed higher-grade maths. In the same year, only 246 of South Africa's 19,000 chartered accountants were black. Thabo Mbeki, South Africa's president, said he was disturbed, when he attended a graduation ceremony last year, to see that virtually all the students had specialised in “Biblical studies, Biblical studies, Biblical studies”.

This could be lifted out of a passage describing the New Economic Policy in Malaysia or the petrol-kingdoms of the the Arabian peninsula-where Islamic Studies is the main area of study for indigenous peoples, while "market dominent minorities," tend to go into more rigorous and practical fields like engineering or business (or come with degree in hand in the case of Saudi Arabia). There is some of this going on in the United States, with the expansion of "Studies" programs focused on identity politics.

In the United States this might be sustainable for an indefinite period, but in places like Saudi Arabia or Malaysia, where parasitic majorities are milking productive minorities, this is a recipe for future disaster. It is obviously cheaper in the short term to promote underqualified people, rather than bullying individuals into more practical fields, but in the long term all it does is defer structural transformations in societies that need to happen. I suggest that places like Saudia Arabia, Malaysia and South Africa get draconian fast-target groups who avoid the sciences and pre-professional tracks, and compell them to study in those fields for at least a few years. Science and business can be dull & dry, and if you are guaranteed a plush management position with a more "interesting" plan of study, why wouldn't you do it? People are rational actors....

Africa's engine
Jan 15th 2004
From The Economist print edition

For the whole continent's sake, as well as its own, South Africa needs to do better

“SOUTH AFRICA is very welcoming,” says Trevor Ncube. Two years ago, Mr Ncube, a jovial young Zimbabwean businessman, bought the Mail and Guardian, a struggling South African newspaper, and turned it around. Given where he comes from, it is not surprising that he finds his new surroundings congenial. Back home in Zimbabwe, the two independent weeklies he owns are constantly harassed and threatened with closure. In South Africa, a publisher's worries are more mundane: advertising rates, circulation figures and tough competition.

Africans flock to South Africa for the same reason that Mexicans head for California. The country accounts for 45% of sub-Saharan GDP. “South Africa works,” says Mr Ncube, and he is right. This becomes apparent as soon as you step off the plane. Johannesburg's airport is gleamingly first-world. The people behind the desks at passport control are courteous and efficient. Wave your plastic at Avis or Budget, and in no time you are speeding into town in a locally built Toyota. The phones connect, the wine is delicious and you are free to do pretty much what you want. Other Africans are envious.

In some ways, South Africa's recent history has been inspiring. Only ten years ago, 90% of its people were denied full citizenship. At the height of apartheid, blacks were barred from good jobs, schools and neighbourhoods (unless employed to mow a white person's lawn). Young whites were conscripted to strafe neighbouring countries. Violent protests made black townships ungovernable.

The collapse of the Soviet Union prompted the African National Congress (ANC), the main black liberation movement, to abandon socialism. This made majority rule a less frightening prospect for white South Africans. After long negotiations, the apartheid regime allowed a proper democratic election in 1994, which the ANC easily won. The much-predicted civil war never happened, and now seems inconceivable.

The first decade of democracy has not been trouble-free. More South Africans now die each month from AIDS than were killed during the two decades of political violence before liberation. The fear of violent crime blights most South African lives. The murder rate is lower than a decade ago, largely because political killings have stopped, but South Africans are still five times more likely to be murdered than Americans are.

The government is popular, though, largely because of its efforts to improve life for those who suffered under apartheid. It has built 1.4m brick homes for the poor, and delivered free water, up to a modest limit, to 26m of South Africa's 45m people. The ANC has also established Africa's largest welfare state, most importantly through the provision of old-age pensions, which have transformed black grandmothers into the main breadwinners for many rural families.

All this was done without printing money. Fiscal discipline has been exemplary: the government's budget deficit has been reduced from 9.1% of GDP in 1993 to an estimated 2.4% in 2003. Economic growth, which averaged a miserable 0.6% a year between 1981 and 1993, ran at a more respectable 2.8% a year between 1994 and 2002, outstripping population growth of 1.8%. South Africa is much freer than ever before, and a bit more prosperous.

Liberation has brought prosperity for some...

But that prosperity has not been evenly spread. The black middle class has grown bigger and wealthier; the government promotes blacks on principle, and private firms are obliged to do the same, under a raft of laws mandating “affirmative action”. According to Sampie Terreblanche, a left-wing academic, the richest 25% of blacks saw their incomes rise by 40% between 1974 and 1994 (as the worst apartheid restrictions on what they could do for a living were relaxed), and by a further 30% since 1994.

Poor blacks, however, have grown poorer. Mr Terreblanche calculates that the income of the bottom 45% of blacks halved between 1974 and 1994, and has contracted by another 10% since then. The main reason is that unskilled South Africans are finding it harder to find work. Unemployment among blacks has increased from 24% in 1970 to 40% in 1994 and more than 50% today. That people should have lost their jobs during the turbulent latter years of apartheid is not surprising, because the country was getting poorer. But why, as South Africa has grown richer over the last decade, has it continued to shed jobs?

Three factors seem important. First, under apartheid, blacks were deliberately deprived of education, leaving millions of them, as Mr Ncube puts it, unemployable. Second, the ANC has brought in new laws that make labour more expensive. Third, growth has not been nearly fast enough to make up for these structural problems.

...but not for others

There are two types of labour law. One sort is designed to improve working conditions, by mandating higher minimum wages, overtime rates, more maternity leave and so forth, and also makes it harder to sack anyone. This is marvellous for those who already have formal jobs, but it makes South African firms go into contortions to avoid hiring. The unskilled have lost out the most. “Look at that guy hawking oranges,” says James Lennox, head of the South African Chamber of Business. “If I was allowed to pay him what he would accept, I could create thousands of jobs.”

The other kind of labour law is designed to redress the wrongs of apartheid by compelling firms to promote more blacks, women and disabled people. Firms above a certain size are obliged to provide the government with annual reports outlining how they plan to make their workforce more “demographically representative” (ie 75% black, 50% female, etc) at all levels. Firms find this a hassle.

About half of South Africa's middle managers and a quarter of top managers are now black, up from hardly any a decade ago. Blacks have been promoted especially fast in the public sector. The government can pursue racial targets more easily, because it has no competitors and does not need to make a profit to survive. This makes the state less efficient. Since so many underqualified people have been promoted, the government has to hire an army of consultants to help them, who form what Ferial Haffajee, a local journalist, calls “a parallel bureaucracy”. Since, under “affirmative procurement” rules, black-owned firms can charge more and still win government contracts, fewer roads, bridges and houses for poor people are built than would have been without these rules.

Private companies compete fiercely for black talent. A black with sought-after skills is typically paid 15-20% more than a similarly qualified white, according to headhunters. Supply cannot match demand. There are many more blacks at university than ten years ago, but most choose soft subjects such as education and social sciences. In 2002, only 3,300 black high-school students (1% of the total) passed higher-grade maths. In the same year, only 246 of South Africa's 19,000 chartered accountants were black. Thabo Mbeki, South Africa's president, said he was disturbed, when he attended a graduation ceremony last year, to see that virtually all the students had specialised in “Biblical studies, Biblical studies, Biblical studies”.

Nonetheless, the government is convinced that many more blacks would have been promoted had racist white bosses not blocked their way. The director-general of the labour ministry, Rams Ramashia, threatened firms that failed to obey South Africa's new racial laws with being “fined to bankruptcy”.

The government is also trying to promote black share ownership. It has promised to issue a “black empowerment charter” for every industry, setting targets for the proportion of shares that must be transferred to blacks. Charters for the oil, mining and banking sectors have already been published. Details vary, but the general thrust is that about a quarter of South African shares should be in black hands within a decade or so.

Who will fund this colossal transfer of wealth? The total cost, according to Azar Jammine, chief economist at Econometrix, a consultancy, could be about 700 billion rand ($110 billion). That is equivalent to 10% of the country's money supply every year for ten years. Black South Africans do not have that kind money, nor could South African banks provide it without risk to their solvency. The government could foot the bill, but that would add ten points to inflation for a decade and lower the growth rate from 3-4% to 1-2%, estimates Mr Jammine, unless the assets somehow become more productive under their inexperienced new owners.

In practice, the cost will probably be split between the banks, the government, the firms divesting shares and the blacks buying them. Firms may win points for helping the government achieve its other objectives, by providing better training for blacks, for example. Some shares will go to funds with broad black ownership, but overall, the charters look like a hideously expensive way to enrich a small number of black people, many of whom will, on past form, be senior members of the ruling party. Empowerment, as currently practised, “has created no new products or independent new companies that are not propped up by large white corporations,” laments Moeletsi Mbeki, a prominent commentator and the president's brother.

Add value or fail

South Africa has a strong democratic culture, with a free press, an independent judiciary, a feisty trade-union movement and a large middle class. There are too many checks and balances for it ever to succumb to crude tyranny of the sort so common north of the Limpopo river. But the fact that the ANC faces no plausible electoral challenge is worrying.

South Africa's government is not particularly corrupt, but it could become so. If it remains in power for too long, the ANC could evolve into the kind of patronage machine that has so damaged virtually every other African country. Probably most of South Africa's black tycoons have links to the ANC. Cyril Ramaphosa, one of the richest, was the party's secretary-general, and the man who first promoted the idea of “empowerment charters”.

Looking further ahead, South Africa needs more genuine black entrepreneurs: people who build up their own businesses from scratch, rather than parlaying political connections into a chunk of a firm that someone else built; people who actually create wealth. Currently the whites pay most of the taxes, but their number is in long-term decline. Someone will have to take up the slack.

Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved.

Posted by razib at 02:42 PM