Solace in hierarchies...

I found a passage in the Žižek and Gunjević book, God in pain, quite interesting. (I am not putting forth any solutions - it is just a curious passage that I wanted to share).The passage looks at hierarchal structures in society and specifically how to eliminate the "pain" associated with falling in an inferior class structure. I almost paraphrase the entire section (taken from p.66) - most of this is quoted from Jean-Pierre Dupuy in Petite métaphysique des tsunamis.

There are four procedures of hierarchy, whose function is to make the relationship of superiority non-humiliating to subordinates:

1.          Hierarchy itself: Experiencing one's lower status as independent of one's inherent value.

2.       Demystification: The relationship between superiority and inferiority is not based on meritocracy, but are the result of ideological and social struggles. I.e. One's status depends on social processes and not on merits. This helps us to avoid painful conclusions that the other's superiority is a result of merit and achievement.

3.       Contingency: One's position on a social scale depends on a natural and social lottery. I.e. lucky are the ones who were born with better dispositions and into rich families.

4.  Complexity: Superiority or inferiority depends on complex social processes independent of individuals' intentions or merits. E.g. despite me being smarter and working harder, my neighbour's success outweighs mine.

The pillars do not threaten hierarchy, but is supposed to make it palatable. Dupuy  -"what triggers the turmoil of envy is the idea that the other deserves his good luck and not the opposite idea which is the only one that can be openly expressed".

Dupuy further states that it is a mistake to think that a society that thinks it is just and proclaims that it is just will be free of resentment. And in these societies it is the people who occupy inferior positions that will burst out in violent resentment.

Žižek quotes Rousseau's example of perverted self-love: One cares more for the destruction of one's enemies (they serve as an obstacle to one's happiness) as opposed to one's own happiness.

What does this have to do with South Africa?

South Africa proclaims that it is a democracy. It claims that it is just and free. Yet, there seems to be social turmoil every day. There are clear class distinctions and those that fall in the inferior classes are supremely unhappy about it. High income inequality, affirmative action (i.e. exclusive rights for some and isolation for others) and corruption are just a few examples of how unjust the country really is. The consequence is violent uprisings undermining every economic and social activity (strikes, destruction of property, crime are a few examples). South Africans, and many others in the world, then surely make a great mistake (in context of Dupuy) in thinking that South Africa is just and proclaiming it is just.

The ideal of demolishing hierarchy stands in opposition to the idea of making hierarchy palatable. Are we really able to demolish hierarchy? In effect this would imply some form of communism. History is definitely not kind to the examples of communism we have seen - numerous people have lost their lives for this ideal and almost always the ideals were perverted by the leaders who exploited the general population. Is the alternative better? Is it better to accept that things are simply unfair and unequal? That no matter what skills or abilities a person has, that person is subject to factors outside his control, or in the very least try to make something from nothing in what we call capitalist societies (there is no promise that hard work and ability will be rewarded). Unfortunately accepting ones circumstances does nothing to help starving people, and a system that proclaims equality cannot truly promise equality and food portions of the same size for everyone. 

These are deep philosophical questions that touch all of us.

While the South African government has done a great deal to improve the lives of the poor since 1994, it never, or hardly, acknowledges its shortcomings (the opposition parties and newspapers do a reasonable job at highlighting inefficiencies). (We also don't know whether future governments will do any better). Perhaps this is what Dupuy wants - societies should acknowledge its mistakes and maybe people will find solace in that - it is sometimes the government and its policies that constrains me and not my merit or ability and on the other spectrum that this same government that constrains me helps another who might be more in need (not always Pareto optimal, and not always welfare enhancing) It does not make it fair, but it surely helps ease the psychological pain of being unfairly treated.

Is there anything new about South Africa's latest crime stats?

In September 2014 the South African Police Service released its latest crime statistics. In this post we will see whether crime rates have dropped and what provinces remain high crime zones.

I believe that crime breaks communities and unity if left unopposed. The recent South African crime statistics do not deliver any good news. Before looking at some of the numbers, we might try and understand what factors lead to crime. It is also important to distinguish between the types of crimes committed. South Africa seems to be plagued by violent crimes.

Here is what the literature says about the determinants of crime (some might seem intuitive):

·         Poverty causes crime, but also, crime can cause poverty (Anderson, xxx). For South Africa the impact of poverty is not that large, but still statistically significant. Anderson (xxx) finds that a R1000 increase in monthly expenditure increases the probability of a robbery by about 7%,

·         Robberies are higher in wealthier areas. For South Africa this can be up to 25% higher in wealthy areas compared to their not so wealthy neighbours (Demombynes and Ozler, 2005).

·         Crimes in South Africa could be a lot higher than reported (Newham, 2002). I don't think it is too much of a stretch to assume that a large number of crimes go unreported. Police corruption, misplacement of documents or the fear of a victim might explain some of this under-reporting.

·         In some cases it is believed that unemployment causes crime.

·         Cultural deviance or cultural conflict can also explain crime (Eide, 1999).

·         The probability of being caught and the type of punishment are also determinants of crime. Criminals weigh the costs and benefits of committing a crime and then act on those calculations. This assumes that many criminals behave rationally and that crime is not always sporadic but often well planned. Other factors that criminals might take account of in committing a crime include tastes (perhaps the criminals are bloodthirsty, perhaps they have an affinity for stealing only small items such as jewels), ability (this includes intellectual and physical) and punishment (the severity of punishment if caught) (see Eide, 1994).

·         The Law commission in 1997 and 1998 tracked over 15,000 and found that only 6% of serious violent crime tracked followed a conviction over this period.

·         Age is an important variable. In a country like South Africa where a large proportion of the youth are unemployed and uneducated one ought to expect high crime rates.

·         Blackmore (2003) show that a higher income per capita, drug related use, urbanisation and the unemployment rate are all important factors that determine crime in South Africa. I am not necessarily a fan of using per capita income as this could be correlated simply with inequality increases.

Some stats

To make the comparison easy across provinces I indexed the various crimes so that crime per 100000 people in 2005 equals 100. This allows us to compare crime rates in 2014 relative to 2005. Obviously we would want all related crime to be below 100 - i.e. this represents a drop in crime.

As an example the map plot illustrates sexual offences in three periods. In 2005 all the provinces have the same colour (remember that we indexed 2005=100). We can then compare 2009 and 2014 (these are fiscal years, i.e. 2014=2013/14). If a province has a darker colour then it implies that it has less crime compared to the other provinces. It is also important to read the colours from the scale provided. For sexual offences the Western Cape had the lowest crime rate while the Eastern Cape and Limpopo had the highest in 2014

When we look at murder rates we see that Gauteng, Mpumalanga and KZN improved the most. 

The Northern Cape improved the most in terms of reducing aggravated robbery in 2014.

Finally I wonder whether overall crime has dropped significantly. The figures show marginal improvements for some provinces, but also a worsening of crime in other provinces. The national figure hardly shows any improvement.

It would be interesting to do a counter-factual analysis of what crime would have been without the security precautions that some households have (armed response, dogs, electric fencing, etc.) vs. a counter-factual of what crime would have been like when holding police service employment constant at 2005 levels. This would also help us make more informed decisions whether employing more police officials and raising their salaries would make a dent in crime.

Finally, do you feel safer? This mental conflict causes psychological problems and an irrational fear. This is one of the sad side-effects of a country with high crime rates. 

UPDATE 24 October 2014:
I recently saw that StatsSA publishes a survey on crime perceptions. This survey shows that there is indeed under-reporting. People also do not feel safe (no surprises there). Thought this was interesting though. 

References

Anderson, M.D. (). The effect of poverty on crime in South Africa: A GMM and IV approach.

Blackmore, F.L.E. (2003). A panel data analysis of crime in South Africa. South African Journal of Economic Management Science, 6(2003): 439-458.

Demombynes, G and Ozler, B. (2005). Crime and local inequality in South Africa. Journal of development economics, 76: 265-92.

Eide, E. (1994). Economics of crime. Stavanger, Rogaland Mediesenter, 158 p.

Eide, E. (1999). Economics of criminal behaviour.

Newham, G. (2002). Tackling police corruption in South Africa. Centre for the study of violence and reconciliation.

South African Law Commission, Conviction rates and other outcomes of crimes reported in eight South African police areas. Research Paper 18, Project 82 (sentencing)

Just how bad is a country's debt for growth

Yes I know that I have a previous entry on the effects of public debt on economic growth. That, however, only focused on South Africa.

Once again public finances bother me. I can't quite wrap my head around why some countries are able to sustain such large amounts of debt and not be in any danger (according to rating agencies) of default while other countries with comparably smaller debt are at risk of defaulting. The common marcro reasons cited for this are long-term growth rates, low interest on bonds, little debt denominated in foreign currency, the maturity of debt and stable and low inflation. Political factors are also important. These include weeding out corruption, have proper expenditure plans in place and don't have domestic strife (investors seem to hate this).

I wish I had time to do a counter-factual and determine how better or worse a country would have been without increasing its sovereign debt. For now we will have to settle with a (hopefully) interesting figure just to get us interested. The scatterplot illustrates the relationship between debt and economic growth for advanced and emerging economies (five year averages from the IMF). A striking feature of the figure is that there is a negative relationship between economic growth and low debt. There is a positive relationship between debt and economic growth for advanced economies between 25%-50% of debt to GDP. Higher values of debt/GDP >50% seems to have a negative effect on economic growth. For EM countries the positive relationship between debt and GDP occur between 35%-100% of debt/GDP. This is indeed a very big range.

What this figure tells us is that aggregating numbers like this tells us very little about the real effects of debt. To really understand the consequences of accumulating debt one has to look at a lot of micro factors (the reasons for accumulating debt, the maturity of debt, etc.). This would be difficult to accomplish since many countries hardly report these variables necessary to do any useful analysis. There is also no reason to believe that debt thresholds are static. The evolution of fiscal policy and the macroeconomic landscape change frequently. We should expect that these thresholds would also change.

Should South Africa tax the rich more?

It is an interesting question. One that is no doubt supported by many people. In my view there is some scope in raising taxes for top income earners, but I think the same also holds for middle to lower income earners. If the objective is raise taxes to finance the deficit gap then raising the top income tax rate might not do much. Let us look at some of the data to understand why.

For the analysis I use SARS revenue collection data obtained from the National Treasury website. They break taxable income and assessed taxes by 24 income categories. The data is slightly dated - the most updated is in 2012. Some basic summary statistics of the data show that:

• Tax as a percent of taxable income is about 20.2% - implying that this is the average tax rate
• There were 14 million (m) taxpayers
• Only 5.8m were liable to pay income tax
• There are about 52m South Africans (See StatsSA 2011 census)
• Of the 52m, roughly 34m are of working age (although it is from ages 15-65)
• This means that about 17% of the working age population contribute to income tax

Given the high unemployment rate it is no surprise that only a small percentage of people contribute to income tax. We can calculate the effective tax rate of the income groups (this is plotted below). It is clear that there are two tax slopes: R60,000 - R150,000 and one from R150,001-R5 million and above.  This does not correspond to the hump-shaped statutory tax rate schedule. This is interesting for two reasons: i.) that some people earn additional income other than salaries and wages such as dividends and interest that cements these linear slopes, or ii.) it could mean that there is the possibility to introduce additional tax thresholds (this often over-complicates the tax system).

We want to compare these rates to the proportion of total revenue collected by income group and analyse how this stacks up to the proportion of tax payers. We see that the majority of income is collected from people who earn R150,000 and above. This corresponds to the number of tax payers in that income category (the number of tax payers above R1.2 million decreases significantly). About 86% of total revenue collected comes from the wealthy 30% of people - meaning that 70% of people only contribute about 14% of income tax revenue collected.

Just to see how unequal the tax distribution is we calculate the Gini coefficient. A measure of 1 means absolute inequality and a measure of 0 implies absolute equality. We compare taxable income with tax assessed (see Figure below). There is a more unequal distribution of collecting taxes compared to taxable income with a Gini of 0.652 vs. 0.558. A heavier weight from on the 50th to 70th percentile vs. what they actually earn. This does not imply that these people pay more than what they should (how much each should pay is a philosophical and economic question left for a later blog entry). It means that there is a decent sized middle-class that pays taxes.

But just how much additional tax can the government collect from simply raising tax rates? It is very difficult to get a decent estimate. If there are no adverse behavioural responses to an increase in tax rates then the calculation is simply mechanical, i.e. take the lump sum amount add the amount of revenue above the threshold times the rate. Unfortunately there are many behavioural effects of taxes. People may not work as hard as they used to (despite the same working hours), lower income households might stop working altogether if they are able to receive better benefits from being unemployed. 

In the next post we will look at some of these effects and try to arrive at preliminary conclusions.

For now it suffices to know that the tax burden is disproportionately higher than on a small number of individuals. We know that tax inequality is slightly higher than income inequality (the middle class pay a slightly higher share of taxes compared to their incomes relative to the rest of the income distribution from the SARS sample data). 

What is that - we are giving more money to Eskom?

The South African government's policy on Eskom is interesting. Definitely not in a good way.

Eskom has received about R60bn in loans from government not too long ago. Now government is giving Eskom another rescue package. And, what has Eskom achieved? It seems like very little but empty promises. The delivery of power stations have been delayed. New project costs are well above estimates. Makes me wonder what project finance plans these guys have in place and why no one is being held accountable for crippling the South African economy. It is definitely not fine that more people are out of jobs because of bad economic planning. It is a crime, and it seems like a perfect one since no one is held responsible.

There are two very funny parts about the Eskom saga: People pay taxes to bail out Eskom. They don't get free electricity for this. On top of that, they have to pay Eskom's tariffs. And then on top of that, they have to pay municipal taxes that add a markup on Eskom's tariffs. These markups differ from municipality to municipality. It seemed like the Treasury was swayed by a possible downgrade. The ironic part about a bailout is that it will put more pressure on the government's finances and could lead to a possible sovereign downgrade.

What does all of this mean? While I don't think that South Africa's debt is such a big problem in comparison with many other countries, it seems like rating agencies disagree (they have been wrong in the past...hint: financial crisis and mortgage backed bonds). It means that there will be an increase in government's effort to consolidate its deficit and reduce its debt. If not, brace yourselves for a downgrade. These are the consolidation options government has:

1. Decreasing government spending. What will they decrease? It will be stupid to cut back on infrastructure spending since this is the only component of SA's government spending that is productive (i.e. there is some future benefit that can be discounted). They will struggle to decrease the wage bill - employment is largely supported by government. They will struggle to cut real wages since they will face formidable opposition from unions. Health? No. Education? No. So it seems like government will not really cut back on spending.
2. Raising taxes. I do not think it is the right environment to raise corporate income tax. The economy is still too weak, and businesses will not stomach this (and yet we have corporate profits doing just fine...?). There are also some papers that argue that an increase in corporate income tax only temporarily decreases growth. But we can't really afford a reduction in GDP at the moment. Perhaps there is room to raise taxes for the upper income households. Of course they won't like this since they already contribute the majority of SA's PIT collection. And the additional revenue collection from raising the upper threshold tax rate will be too little. Perhaps government will finance the Eskom bill and the wonderful wage bill by increasing VAT? To be honest, I think this is the most real response to their problem. It is, however, political suicide. But that should not dissuade the ANC too much now - they have recently won the general election.
3. A miraculous increase in economic activity that does not rely on electricity. Electricity constraints has played it share in a slumpy growth environment. So where will this miraculous growth come from? 
4. Inflation. Nope...SA will not be able to inflate away its debt problems. The inflation increases will definitely be outweighed by interest rate increases. South Africa is an inflation targeting country after all.

Unfortunately, it seems that the government is left with no choice but to bail out Eskom. But this time at least fire people who are not doing their jobs. Make sure Eskom employees do not get crazy salaries. And dammit, make sure that pay raises are linked to productivity growth and not some stinking measure! Make sure there are proper loan conditions. And open the debate for competition. The days are gone when South African electricity is cheap. A single supplier of electricity has market power - and market power in the hands of evil men mean high prices. And yes they can charge super high prices since most of us need electricity (the price elasticity of demand is very inelastic).

South Africa's unemployment curse

We know that SA unemployment remains stubbornly high. Despite various policy changes over the last twenty years not enough has changed. In this post I point the blame-finger at the lack of good education.

The current unemployment problem in South Africa reminds me of England during the 1800's: Sylvia Nasar paints a rather vivid image of England in her book Grand Pursuit - a rich nation stricken with poverty. Unemployment was high, people were uneducated, communities were poorly developed and it seemed like the rich were simply getting richer at the expense of cheap labour. This last point does not necessary hold for South Africa. While the British are going through some economic turmoil currently, the average life of a single human being is much better than a South African. Somehow the English have escaped the 1800's problems, and somehow current-day South Africa is facing a situation that could resemble an 1800's England 

As I see it there are mainly three problems that broadly explain unemployment in South Africa (there area lot of good academic papers on this subject - I don't intend to contradict or necessarily improve on that work):

1. Labour is unskilled
2. There is a wage premium mismatch
3. The structure of education is brittle and outdated

I will discuss my views on each point separately (they are definitely related too)

(1) Labour is unskilled

Labour is unskilled because the quality of education is shocking. South Africa, as an example, scores very low in mathematics and science relative to other countries (just look at the Pirls and Timss results). Why? We don't have enough teachers, we do not have skilled teachers, we do not provide proper study materials for students, infrastructure is nonexistent in many rural areas (although I think that this is the least of the problems, still severe though), only the rich can afford good private schools etc...

Why don't we have enough teachers when South Africa's current greatest economic problem requires us to have many more skilled teachers? This is a simple economics problem. If there is such a high demand for teachers, then why don't wages increase in proportion to the demand (assuming there is a shortage of the supply of teachers)? Or is real growth in teacher wage bill capped by the quality of teaching they offer?

One would think that SA's high education expenditure would solve these issues, yet there is little change in educational outcomes. One of the things I am curious about is how much of the education spending actually goes into teaching versus the administrative aspect. I.e. by how much do wages change for government employees administrating education vs. wages for actual teachers? I am also curious about a comparison of the employment uptake for teachers vs. administrators in government. 

Expect a bleak South African future if the current problems in education are not solved. A low knowledge base exacerbates the problems of the unskilled unemployed and reduces economic growth. Slower future growth will result in more unemployment and most probably increased political turmoil.

(2) - Wage premium mismatch

I often ask myself why critical skills (engineering, education, medicine, science) wages are on average way below wages of finance and management executives. The word critical for me would imply a shortage of these skills or super high demand for these skills - as a result real wages should rise by a lot. The problem is not about critical skills alone, we do not seem to have the ability to absorb such labour and create industries that utilise such labour effectively? South Africa seems to outsource a lot of critical infrastructure projects to foreign nations while perfect solutions could exist back at home. As a consequence we do not utilise the critical labour as much as we should and hence this could explain in part why real wages in these industries are not comparable to finance.

The wage premium mismatch is also exacerbated by South African unions. Let me first state that I think unions serve a valuable economic function and are necessary. My problem with unions in South Africa is that they take an explicit communist stance without any real cause. Marx prophesied that capitalism will cause a drop in real wages over time and result in longer working hours where the lives of people become more miserable. Real wages across sectors have been rising since the fall of apartheid and working conditions have improved for labour. It is true that income inequality has risen. My view is that income inequality is more important for social stability than anything else. Household income and poverty are a more important variables to look at when comparing how people's lives have improved over time - poverty and household income across all income deciles have increased. I feel rather bemused at the crazy wage demands that unions make given that real wages have risen over time, poverty has decreased and household income has increased. Another concerning factor is that the demands for an increase in real wage growth for unskilled labour seems to outpace wage growth for skilled labour. I am not saying that this is wrong - since unskilled labour work just as hard as skilled labour and often suffer physical consequences for that labour; but it does violate certain economic principles and has the potential to destabilise the economy further - I don't think anyone would dispute that union unrest over the last couple of years have hurt the SA economy.

This brings us to out final problem - and a proposed solution

(3) - The structure of education is brittle and outdated

We know that the current curricula is something to laugh at and does not provide our children with the best opportunities for life. We also know that circumstance plays an unfair role in deciding what type of education a particular child receives - wealthy parents are most likely to send their children to top private schools while poor parents have no choice but to send their children to a rural school where teachers do not even show up for work. Apart from these choices, malnutrition and creating a safe environment are also important factors that help explain the success of education.

If we know that this is a problem, perhaps the greatest challenge that a democratic South Africa is faced with, why isn't the government and private sector doing everything to change this? The effort just seems so feeble and pathetic. The myopic nature of government and the private sector will create social and economic problems for ages to come.

Some solutions:

First, education should be provided for free to give children equal opportunities to go to decent schools. Second, university graduates would do well if they spend 6 months to a year being placed in a school to teach an accepted good quality curricula - some people might be unhappy with this, but it is a low cost effective solution and should not be too difficult to implement. Third, teachers need to get a good education and incentives should be put in place to become teachers or lecturers that train teachers. This could be in the form of higher wages, better subsidies etc.

Once this is in place one can start to revamp the school system in its entirety. All students receive the same curricula up until grade 7. From grade seven children get placed. Children who score above a certain mark (let us call this X1) are placed in classes that do proper training in mathematics, science, history and language - these children will be eligible to go to university and study courses that fill critical skills. The children's incentive is that they get to choose their study path. Children who score below the above threshold, but obtain still reasonable marks (X2), i.e X2<score<X1, are also trained in the sciences and are also allowed to go to varsity - but they are not allowed to study engineering, science or medicine. They still have an incentive to work hard - they get to go to university. Finally, children who score below an accepted threshold (X3) are placed into various training colleges that teaches them skills as artisans, administrators, construction and other services. This way we make sure children obtain skills (something that is presently lacking) and are placed in jobs where there is a demand. It will also encourage children to work harder if the do not want to work in these industries.

I really do not see an alternative to the pressing education gap in South Africa. The entire school system is not working and needs to be completely overhauled.

Obviously this is my take on part of the unemployment-skills problem in South Africa. I have no doubt that there are many holes in my arguments. I urge you to help come up with a solution that is better than this, something that is realistic. Or, if you spot serious gaps in my approach, fill them with details that improve it. If we all want to live happily ever after in South Africa then we all need to take this problem very seriously.

In the next couple of blog posts I will try and provide some data on some of the problems I highlighted. I would like to compare real wages across jobs (unfortunately the labour categories in the labour force survey are rather limited). If possible, I would like to compare the wage bill for teachers vs. the wage bill for education administrators in government. I would also like to know how much of of our infrastructure projects are outsourced to foreign national companies vs. domestic companies - can we explain the differences? Finally it would be interesting to get a view on how many critical skills positions are advertised as opposed to not so critical skills - hopefully this will give us a view on the demand for these skills and possibly analyse whether there isn't any mismatching problem.

For some bedtime reading on the huge returns of education on economic growth and reducing income inequality read this and this.

Should the SARB react to a potential asset price bubble?

Yes the title is slightly misleading - are we sure that there is an asset price bubble? Well, house prices and stock prices have increased, despite low economic growth for the last few quarters. Credit extension to households continue to increase. All of this smells like a bubble.

Let us put our differences aside for the moment and continue from the previous posts regarding the conduct of monetary policy. Should the SARB do something about asset price bubbles? If so, should they prick the bubble, mop up the effects after it bursts or do something else?

I am not sure about the right answer. Roubini believes that central banks should burst it. In it he highlights the reasons for and against (check out the reference list).

I think the SARB is facing one of its toughest trials yet. Good luck!