The PBO Director shortlist

The post of Director of the South African Parliamentary Budget Office (PBO) has now been vacant for almost two years after the previous Director resigned under a cloud.[1] That means two Parliaments (the 5th and 6th) have been in violation of their own legislation – the Money Bills Amendment Procedure and Related Matters Act (2009, amended 2018).[2]

I worked for two years at the PBO, leading some of its most important projects at the time, and have written at length in the past about its failures (e.g. on nuclear procurement), its importance, why the filling of the Director position is crucial and my own role in trying to remedy the institutional rot/dysfunction. Some of that accountability work is ongoing.

It took over a year for MPs to agree that the post should be advertised and almost a year has elapsed since then before the shortlisted candidates were finally decided on in a meeting on 4 September 2020. While it is possible that the Covid-19 pandemic delayed the process, it was already glacial prior to that and there was little impediment to finalising the list via a virtual meeting of the kind that eventually took place. The previous meeting of the committee took place in December 2019.

Given the broader political dynamics in the country, it seems likely that the delay has been the result of:

  1. Political lobbying as to who should be deployed to this post (paid at the level of a Director General but with only a small staff complement)
  2. Lack of prioritisation of the issue given widespread institutional challenges across all three arms of state and the relative disregard of the role of legislatures.

As reflected in the minutes of the Parliamentary Monitoring Group, there are 9 candidates on the shortlist. These include: the current chairperson of the Financial and Fiscal Commission (FFC), a former CEO and acting chairperson of the FFC, the current acting deputy director general of the Budget Office in the National Treasury, and all three current deputy directors of the PBO. Originally the committee staff had shortlisted 8 candidates but one further candidate (the Treasury official) was added during the meeting. The minutes of the meeting suggest some inconsistency in the application of the experience requirement, with candidates having 10 – 12 years experience being shortlisted and others with more years not being shortlisted. (This may be because of different notions of what constitutes experience for this purpose but it is not clear).

Candidates will need to go through a clearance process by the State Security Agency at the highest clearance category (‘Top Secret’). The discussion in the committee reflected the lack of knowledge of the PBO’s functioning among both the Parliament officials informing the process and MPs themselves. All parties appeared to be of the view that a PBO Director likely would not need to handle classified information. As the first staff member of the PBO to have received classified information through formal channels on behalf of the Office, I can attest to the fact that this is incorrect. What role the SSA should play in relation to this kind of process is of course another matter, since in principle it presents an opportunity for the Executive to interfere in an undesirable fashion (albeit that seems less likely under the current administration).

In principle, candidates should also meet the requirement of being ‘fit and proper persons’. [Declaration: this requirement followed from an amendment to section 15 of the Act which I proposed as part of a public submission in 2018 and was accepted by MPs]. In practice it is unclear at this point how this requirement will be checked. And whether information from the public will be solicited for this purpose. My view is that it should be: if you have any such information on any of the candidates, I suggest sending it to the secretary of the committee.

The nature of PBOs is such that it should be protected from political influence and partisanship of all kinds, not least in the appointment of its staff. Furthermore, whoever is appointed should be able to put whatever personal and institutional views they may hold, or have held, aside and conduct their analysis and research in a competent, fully public interested, non-ideological and non-partisan way. Unfortunately, this seems highly unlikely in the South African case. Instead, what is likely to happen is that the appointed candidate will be the one who is seen as most amenable to whatever the agenda is of the grouping(s) that holds the greatest sway over the appointment.

 A faction within the governing ANC along with some opposition MPs and civil society organisations will favour a ‘Treasury-aligned candidate’. (Note: this need not necessarily by a candidate from Treasury, though such candidates may well fit the bill). An alternative faction in the ANC along with other opposition MPs and different civil society groupings may favour a more ‘anti-Treasury’ view. There are 4-5 candidates who, in my view, can be reasonably located in one of these two categories. But one should also not rule out the possibility of an opportunist whose objective is really just to secure the post and sells themselves to one or both parties as necessary. As the reader will see, I am not convinced that any candidate is likely to be appointed who is squarely committed to what the role truly requires.

I will refrain from publicly speculating about how I think the process will, or should, play out in terms of the candidate who is ultimately selected. However, in the past I have indicated that given the historical dysfunction of, and misconduct in, the institution an outside candidate is likely to be preferable. And I continue to hold that view. Parliament partially sabotaged any such candidate by allowing staff renewals and appointments under a brief reappointment by the previous Director, thereby leaving any new Director with some staff who may be a liability. However, a suitably motivated and strategic new Director should be able to improve conduct and culture – as well as remove staff who resist that process.

The PBO is an institution with great potential to serve the public good. One can only hope that the current Parliament makes an appointment that puts it back on the right path, rather than consigning it to further stagnation and membership of a list of institutions with highly paid staff that do little for the public good. It is welcome that much/all of the process will be in the public domain. But as we saw with the appointment of the current Public Protector, transparency of that sort does not mean substantive transparency or guarantee a good outcome.

Note: I did not apply for the position in question and have no material or other interest in the outcome except to the extent that I am invested in the public interest role the PBO is supposed to play.

[1] This article incorrectly says one year.

[2] For those who don’t know: most legislation is introduced by the Executive and then approved by Parliament, but in special cases Parliament may draft legislation itself – most notably in relation to the conduct of its own affairs. The Money Bills Act is one of the few such pieces of legislation.

Economic justice will not be televised

(Riffing on Gil Scott-Heron: https://www.youtube.com/watch?v=qGaoXAwl9kw)

Economic justice
Will not be televised
It will not be delivered
Like a fast food dinner
By white men
Using black economists
To front for them.

Economic justice
Will not be televised
It will not be delivered
By VAT zero-ratings
That benefit the rich
More than the poor.

Economic justice
Will not be televised
It will not be delivered
Like fast food transported by exploited workers
By commissioned research
Elevating the status of a few white men
Using black economists
To front for them.

Economic justice
Will not be televised
It will not be brought to you
Like a hot take
By the tentacles of institutes
Wrapped around civil society initiatives
To promote themselves.

Economic justice
Will not be televised
It will not be delivered
Cold
Like emailed interventions
To protect sexual harassers.

Economic justice
Will not be televised
It will not be brought to you
By men
Defending sex ‘not consensual’.

Economic justice
Will not be televised
It will not be delivered
By the festivities
Of ideological cliques
Shouting about reform.

Economic justice
Will not be televised.

Commentary on VAT zero-rating

Since early 2017 I have been engaging with, and advising, some South African civil society organisations on public finance matters. While I naturally have my own views about many issues, the purpose of this engagement is really to help individuals in these organisations understand the issues well enough to make up their own minds. (Some other economists have the more specific agenda of influencing civil society organisations to support their – the economists’ – positions; an approach which I think is evidently dubious).

One important issue that arose with the tabling of the 2018 Budget was the increase in value-added tax (VAT) by one percentage point to 15%. My view on this matter was that there were major procedural and legal problems with how the increase has been brought into effect and that the National Treasury could have done more to protect poor South Africans from the incidence of new revenue measures. The position of civil society has subsequently honed in on the prospect of expanding VAT zero-rating and increasing various forms of social expenditure.

Some of the demands relating to social expenditure that I have seen seem loosely related to the actual VAT incidence claimed by Treasury, but that is a separate issue. More specifically, I recently argued -in an op-ed in Daily Maverick – that zero-rating itself could be of limited value or even counterproductive. A version of that piece with hyperlinks is provided below for anyone interested in reading some of the background references.

Unfortunately, it appears that no-one currently has the appetite to challenge/query the constitutionality of the VAT Act.

Continue reading “Commentary on VAT zero-rating”

Moralising hullaballoo around circulation of The President’s Keepers is misplaced

There was an outcry on South African social media on Saturday the 4th of November, when a PDF version of investigative journalist Jacques Pauw’s book The Presidents Keepers began being circulated online and via the WhatsApp messaging service. A number of prominent media, academic and other South African personalities took to social media to criticise the sharing of this file as ‘theft’, ‘stealing’, ‘immoral’ and ‘pirating’. At best, none of those assertions reflect the nuanced complexities around copyright and the public good. At worst, they merely illustrate misinformed armchair moralising.

There appear to be three different, but often overlapping, premises for these arguments. First, that copyright infringement is illegal. Second, that circulating the book as an electronic file will reduce sales and harm profits for the author and publisher. Finally, that there is something inherently morally wrong in circulating a book in a way that allows people who haven’t paid to read it. I want to argue that only the first argument may be correct and that, even then, it doesn’t follow that it is immoral to distribute the book this way.

Illegality

Whether distributing a PDF version of a book you have purchased or received, without any expectation of private gain, is illegal is a question for copyright experts. The illegality could arise in relation to the converting of the original ebook into an electronic form that could be distributed, and the actual distribution itself. To my knowledge, no-one has been attempting to profit from distributing the PDF file and that has legal as well as moral significance.

Even if such distribution is illegal under copyright law, that does not make it inherently immoral: laws inform moral reasoning, are also informed by it, but need not coincide with it. Pauw’s book provides a great example. It is clear that someone would probably have had to break a law in order to give Pauw some of the information he uses, but from a moral standpoint that can be justified by an appeal to the broader public interest. If, for example, the president was letting cigarette distributors make cabinet appointments in return for cash – arguably a treasonous offence – then breaking tax or intelligence laws to reveal this is surely the morally right thing to do. (As a result, in some instances such actions are protected by other laws, in the form of whistleblowing legislation).

A more complex perspective from economics

The more interesting issues relate to the overall impact on the public good of distributing the electronic version of the book. The moralising critiques expressed above appear to be entirely unaware of a large literature, in economics and other disciplines, on the ‘social welfare’ effects of copyright, and copyright infringement.

In economics the fundamental starting point of the literature is that constraints on the distribution of knowledge and information – defined to include everything from the computer code for spreadsheet software to fiction novels – are bad. The reason is simple: in the modern world it is almost costless to reproduce and transmit information, so if that information yields meaningful benefit to a significant number of people then it is socially inefficient for them not to be able to access it. The critical counterweight to this, is that in order to encourage people and institutions to produce such information they need to be able to collect a reasonable return: if people know that information is freely distributed after it has been produced, the producers may realise they will not get a reasonable return and therefore not produce it in the first place.

In recent times, a third dimension has been added to the literature: the role of behavioural and institutional norms. Specifically, the second dimension above is based on a narrow notion of market interaction in which people only pay for something if they are forced to. But it is well-established across a variety of disciplines that human beings often behave in other ways, reciprocating when they don’t have to. The implications of this for markets can be seen from the rise in online organisations, such as Wikipedia, that create and distribute information freely on the basis of a model under which people voluntarily contribute.

Different groups with different consequences

It should be fairly obvious in applying these three perspectives to the case of Pauw’s book, that simplistic moralising is misplaced. If we want to think through the issue systematically, it is useful to distinguish four groups:

  1. People who already have bought the book
  2. People who were going to buy the book (i.e. they want to and can afford to) but have not yet done so
  3. People who would like to read the book but cannot afford to read it
  4. People who were not going to read the book, whether or not they could afford it.

Initially we can ignore the fourth group: receiving the file makes no difference to them.

One of the strange things about modern publishing is that having the (more expensive) hard copy of a book often doesn’t entitle you to a searchable electronic version. So some people in the first group might benefit if they would later use an electronic version as well, and it would be hard to argue that this is morally or legally illegitimate.

The main interest, however, is in groups two and three: in a basic economic model, the ‘net effect on social welfare’ of distributing the file will depend on the relative numbers of people in these groups, as well as the behaviour of those in group two on receiving the PDF. The well-being of those in group three increases because they can now read the book, whereas cost had prevented them from doing so. What happens to the well-being of those in group two depends on their behaviour, but it certainly will not decrease. The future profits of the publishers and author, on the other hand, depend only on the number of people in group 2 and their behaviour.

As regards group three, it is useful to be reminded of the role that Jacques Pauw is playing. He is an investigative journalist who has a long track record of reporting matters in the public interest. The people who gave him the information used in his book almost certainly did so to bring it to the attention of the South African public, not to make the author or his publishers rich. In other words, the standard concern in the economics literature applies: we want the producers of knowledge to earn a fair due, but we also want the broader social good to be well-served. Given the nature of Pauw’s book, it is not a stretch to argue that it should be disseminated as widely as possible – those who cannot afford the book, the vast majority of South Africans, should not be excluded from reading it.

My own view is that the vast majority of people who were going to buy the book anyway (group two) are unlikely to change their minds just because they received the PDF. One reason is that many people, such as myself, still prefer to read hard copy versions. Another is the principle of reciprocity I noted above: assuming people won’t pay simply because they do not need to ignores vast literatures in psychology, experimental economics and real-world institutions that survive and thrive on the opposite assumption. Furthermore, the hype associated with the distribution of the file could even cause people in group four (who weren’t going to buy the book) to now either read it or buy it.

Some concluding thoughts

In conclusion, let me make a few final points.

First, since we don’t know how different people will react to receiving the ‘pirated’ version of the book, we simply cannot say whether it will increase or decrease sales and profits for the author and publisher. It seems at least as likely that they will increase as decrease, given the arguments I have made above.

Second, given the threats from both the South African Revenue Services and the State Security Agency, it seems reasonable to infer that the PDF file was circulated primarily in anticipation of a possible withdrawal of the book. A second motive may have been to get as many people reading it as possible, because of the serious implications its revelations have for our democracy. In that context, it is hard to understand assertions about ‘theft’.

Third, it is ironic that moralisers implicitly reject the possibility that people might buy the book anyway, out of a spirit of reciprocity, while appealing to recipients to delete the file and buy the book. Essentially, they are presuming, in rather patronising fashion, that only their moral incantations will get people to behave in this way.

Finally, it is important to remember the role that investigative journalists play as conduits of information in the public interest. It is perverse to argue that the first priority in this kind of case is profit when what makes it worthy of such strident commentary is precisely its relevant to matters of national interest.

Fortunately, the author of the book seems to have a more nuanced appreciation of these issues than those ostensibly defending his interest.

There will surely be more such incidents and hopefully we will be able to have a more informed, and less moralising, public exchanges in future.

 

Declaration: I received two, unsolicited copies of the PDF file containing the book. I didn’t distribute these further, but have filed a copy away: either in the event that I cannot get a hard copy version, or so that once I have done so I can easily search the electronic copy for reference purposes.

Disingenuous economics

Today a new paper in the World Bank Research Observer by Banerjee, Hanna, Kreindler and Olken announced that there is “no systematic evidence” to support the view that social transfers discourage work. Under different circumstances I might be pleased by this, since I have long believed that claims about welfare-induced voluntary unemployment are mostly ideology-driven garbage. But I am not happy about this paper.

The reason is that the way in which it is written implies that the ‘welfare-induced laziness’ thesis is something conjured up by policymakers and members of the public from thin air. To quote:

despite these proven gains, policy-makers and even the public at large often express concerns about whether transfer programs discourage work.

The authors position themselves, as economists rigorously assessing evidence, against the puzzlingly misguided ‘policymakers’ and ‘public at large’. From this, one would think that economists do not hold such beliefs and have not contributed to them. But you’d be wrong. In fact, a paper published in the World Bank Economic Review in 2003 by Bertrand, Mullainathan and Miller (BMM) claimed that the South African old age pension led young, black men in pension-receiving households to reduce their labour supply. This had a significant impact in South African policy circles, leading a number of local social scientists to challenge the findings of the paper.

Posel, Fairburn and Lund (2006) argued that BMM didn’t adequately account for migration, which changed the conclusions. When I was a Master’s student at UCT in 2006 I wrote a term paper – using data kindly provided by Posel – arguing, further, that BMM’s result using cross-sectional data couldn’t possibly be robust to household formation dynamics:

The primary aim of this paper is demonstrating that, based on existing evidence, one can make at least as strong a case that the pension influences household formation, as that it affects labour supply.

I referred to the BMM paper as a case of ‘perverse priors’. A different approach to the same point by Ranchod (2006) examined the effect of losing a pensioner and his findings called into question the conclusion about labour supply of young men. Ardington, Case and Hosegood (2009) later used panel data to show that differences between households along with migration could explain the finding, rather than an actual reduction in labour supply. To quote them:

Specifically, we quantify the labor supply responses of prime-aged individuals to changes in the presence of pensioners, using longitudinal data collected in KwaZulu-Natal. Our ability to compare households and individuals before and after pension receipt, and pension loss, allows us to control for a host of unobservable household and individual characteristics that may determine labor market behavior. We find that large cash transfers to elderly South Africans lead to increased employment among prime-aged members of their households, a result that is masked in cross-sectional analysis by differences between pension and non-pension households. Pension receipt also influences where this employment takes place. We find large, significant effects on labor migration upon pension arrival.

So, in the South African case, it was well-regarded, US-based economists publishing in a World Bank journal in 2003 who gave credence to the idea that grant receipt led to idleness. Much effort was expended debunking those claims and preventing them from having harmful effects on progressive social policy. It is, therefore, rather outrageous that in 2017 another set of well-regarded, US-based economists publishing in a World Bank journal can pretend as if this never happened.

In my view, this kind of behaviour is characteristic of the failure of critical self-reflection, and taking of responsibility, in economics as a discipline. And it should serve as a cautionary tale to non-economists and economists alike.

Decolonising the South African economics curriculum

This week I attended the ‘Scholarship of Teaching and Learning (SOTL) in the South‘ conference hosted by the University of Johannesburg, where I presented a paper entitled: “What would an (South) African economics curriculum look like?”. (A project I have gestured at previously when commenting on discussions around UCT’s economics curriculum – here, here – and promised to do a follow-up on).

The paper can be found in the published conference proceedings here [pdf]. The short slide presentation can be downloaded from here [pdf].

The conference itself was interesting and included a number of different perspectives, and opinions, on the question of  ‘decolonisation’. The conclusion I came to was that there are two main aspects to this issue: institutional change and disciplinary change. And in both cases we need to start talking details, because that’s where the really hard work will start and become apparent. In this context, my paper aims to make a contribution in relation to the discipline of economics.

In the end, my discussion of what should go in the curriculum is very limited. One reason is because of the word limit for contributions, but the main reason is that I found there to be many preliminary issues that required fleshing-out first. Some of the more provocative, and important, assertions I make are that:

  • Demographic transformation of faculty is important in its own right, but should not be conflated or confused with substantive transformation of the curriculum
  • Changing content by introducing certain topics is important but need not lead to the imagined outcomes, it depends on the framing of those topics (e.g. North American economic history arguing that slavery was not such a bad thing)
  • The awkward reality that South African academic economics and its institutions is largely characterised by a weak attempt at imitating a lagged, conservative version of the neoclassical mainstream
  • A substantively ‘decolonised’ curriculum would be much more challenging than the standard mainstream curriculum – so concerns about ‘lowering of standards’ are misplaced in that context
  • Our biggest challenge is the massive gulf between what an ideal, decolonised curriculum looks like and what we (African economists) actually have the capacity to do.

Feedback on any and all aspects of the paper are very welcome.

I intend to get into much more detail regarding an ‘ideal curriculum’ in a second paper, hopefully with some collaborators.

 

Edit: here is the stand-alone version of my final paper submitted to the SOTL proceedings.

Phase II of pro-nuclear arguments: notes from Nuclear Power Africa 2017

On the 18th of May I attended Nuclear Power Africa, a full day programme on nuclear energy within the broader African Utility Week. I was a little surprised to be invited as a panelist given what I had written previously (here and here) and because I anticipated that an industry conference would be heavily pro-nuclear. As it turned out, I may have been the only panelist who did not have some kind of, direct or indirect, interest in large-scale nuclear procurement proceeding in South Africa. Unsurprisingly, I was also the only panelist arguing that the current case for nuclear is flawed in various respects.

Summary of my argument

I provided my graphical, one-page summary in a previous post. The basic argument is as captured in my previous articles, but let me briefly repeat it.

South Africa’s public finances are precarious, with stubbornly low economic growth, under-collection of tax revenue alongside additional tax measures, rapid growth in net liabilities (national debt and contingent liabilities such as debt guarantees to Eskom) and of course the recent downgrades – with the possibility of a potentially very damaging downgrade of local currency debt still looming on the horizon.

Liabilities_v3_blog

Meanwhile, electricity demand has not just failed to keep-up with the forecasts from the 2010 Integrated Resource Plan (IRP) on which the need for 9.6GW of nuclear was originally based, it has actually fallen. The following graph is striking:

Demand_IRPs&actual

The red dotted line is the original IRP 2010 baseline forecast, the blue dotted line represents a scenario in the IRP 2010 update (from 2013, but controversially never finalised) entitled ‘Adrift in troubled waters’, and the black line represents actual electricity distributed (based on StatsSA data).

There are, furthermore, various ‘qualitative’ concerns about the programme. Among these:

  • Nuclear power projects are particularly prone to many of the ills of ‘mega projects, including cost overruns
  • This concern is compounded by the fact that in the South African case the urgency behind the project appears to be due to rent-seeking behaviour (corruption) at the highest political levels
  • There is a danger of being locked-in to non-competitive markets (e.g. for nuclear fuel) and increasingly outdated technologies.

There is no chance that a nuclear programme will be financed without government guarantees, whether direct, through Eskom or through power-purchase agreements. This means that ultimately government will carry the associated risks. Combine that fact with the above context and I suggest the conclusion is obvious: there is no case for investing in nuclear now. At best, we could revisit the question in 3 – 5 years’ time depending on trends in economic growth and electricity demand.

Notable pro-nuclear arguments and associated debates

Given the above, it was interesting to hear what proponents of nuclear were using to bolster their position.

The arguments for the urgency of nuclear procurement keep evolving, which is a bad sign: it suggests that a decision has already been taken (for other reasons) and attempts are being made to manufacture substantive arguments after the fact. So even while we engage with these arguments, the issue of motive should not be forgotten.

There are two particularly notable issues that came up at Nuclear Power Africa: the argument that policy models which fail to recommend nuclear are flawed; and, the claim that nuclear procurement will be good for the economy and an important part of industrial policy. Despite somewhat more sophistication on some dimensions, I want to suggest that these new arguments are unconvincing, the case for nuclear remains weak and therefore motivations for advocating it appear dubious.

Are planning models for electricity generation capacity wrong?

One of the most damning arguments against the plan to procure 9.6GW of nuclear energy for South Africa is that the models used to plan energy supply no longer recommend nuclear. The notion that 9.6GW of nuclear was needed came from the Department of Energy’s 2010 Integrated Resource Plan (IRP). That was based on the assumption of significant growth in energy demand, which has not happened – as shown by the second graph above. Furthermore, the cost of renewable energy in South Africa – as established by recent rounds of competitive bidding – has fallen significantly since then. When these factors are taken into account, the base model used for the IRP and similar models used by the Council for Scientific and Industrial Research (CSIR) and Energy Research Centre (ERC) do not recommend nuclear. It has been argued (by Anton Eberhard who participated in the Eskom ‘War Room’) that artificial constraints had to be placed on the model used for the draft 2016 IRP in order to produce an outcome in which nuclear is recommended.

The response to this at Nuclear Power Africa, from engineers and economists aligned to institutions pushing for nuclear, was to rubbish the models. This is evidently problematic. If you think a model of this kind has important flaws, then the correct approach is to have a debate about the model structure and parameters. Running the model then rubbishing it because the outcome doesn’t suit your pre-existing conclusion is misguided or disingenuous.

Relatedly, it is concerning that there continues to be a remarkable level of disagreement on even fairly basic technical claims. In a separate session on renewable energy, Tobias Bischoff-Niemz of the CSIR argued that their model accounts for issues like the variable availability of renewables; in the nuclear power session, Eskom’s Chief Nuclear Engineer argued the opposite. And while pro-nuclear speakers cited the example of Germany’s expensive electricity as an illustration of what would happen if South Africa increased its reliance on renewables, Bischoff-Niemz had argued that this was due to Germany investing heavily in renewables at a time when they were much more expensive. It should not be hard to objectively assess these claims.

Economic growth, economic impact and industrial policy

On the economic front, two economists who were in favour of nuclear argued that energy investment must be based on the energy demand associated with the desired level of economic growth. By contrast, I argue that building energy capacity on the basis of wishful thinking could have severe negative consequences for public finances. Rates of growth in economic activity and energy demand are far below what was used to inform the 2010 IRP. It is very unlikely that economic growth will reach the 6% annual growth aimed for in the National Development Plan (NDP) any time soon, if at all. Even the 4% Eskom assumed in its last major tariff application seems improbably optimistic. At best, if economic growth is supposed to be the basis for nuclear procurement, then we should wait a few years in order to get a better sense of the trajectory of growth and how new technologies are affecting the link between growth and the need for electricity from the national grid.

A second set of arguments was put forward by an economist for the Coega Industrial Development Zone, near to where the first nuclear plant might be located. She argued that nuclear procurement would have a significant positive impact on the economy and that even if there was over-investment in energy generation capacity this would be good for industrial development because of low electricity prices.

The economic impact argument is entirely unconvincing. If government indirectly borrows a trillion Rand, either from current or future generations, to invest in anything now that will have an initially large, positive impact on the economy. To paraphrase the famous economist John Maynard Keynes: even if the government just buried that money in the ground and let people dig it up, that would have a large positive impact. The more important question, then, is whether the expenditure is worthwhile: will it provide better social and economic value than alternative investments, and will the debt that future generations have to pay be worth it? At present the answer to both these questions for nuclear is ‘no’. And that also means that this proposal would be bad for the stability and sustainability of public finances.

The argument relating to industrial development is similarly problematic. The positive view that once existed of the extremely low electricity prices South Africa had in the 1990s has been revised. Those low prices were the result of poor management of infrastructure investment: overinvestment in earlier periods followed by a failure of tariffs to include the costs of future investment requirements. But worse still, there is little evidence that the resultant low cost of electricity had any sustainably positive effect on industrial development. The energy-intensive industries that benefitted most are not the most employment-intensive, and have become less so since then. Diverting scarce resources to such industries through an inefficient energy subsidy is a poor argument for nuclear and a bad strategy for Eskom as a state-owned enterprise.

Overall, then, while the arguments for nuclear may be becoming marginally more diverse and sophisticated, but they remain profoundly unconvincing.

The issue of energy generation and industrial policy is, however, a very interesting one on its own regardless of the nuclear debate. Somewhat serendipitously, the Trade and Industrial Policy Strategies (TIPS) Annual Forum happening this week, on the 13th and 14th of June, is on the related topic of “Industrialisation and sustainable growth“.

Some thoughts on the Finance Minister’s adviser and his critics

The debate around the new Finance Minister Malusi Gigaba’s new adviser, Chris Malikane, has gone beyond the deeply flawed proposals he has made, to claims about his academic credentials and integrity. I want to agree that the proposals are flawed, but that some of the attacks on Malikane are as well. Furthermore, they draw attention to some serious issues in South African academic economics that require mature discussion.

Most of the 8-page ‘manifesto’ published, and extensively publicised in various articles and interviews by Malikane, is not worthy of serious analysis. (Although one effort to take it seriously, by Charles Simkins, is worth reading – as is the more acerbic piece by Richard Poplak). It is primarily a political document and contains no substantive content relating to economic policy and public finance. There’s a crude Marxist analysis of class, and a shopping list of things that should be nationalised and services that should be provided. The only interesting assertion is that the working class should throw their weight behind those black South Africans who have become an elite through corrupt government tenders, rather than through credit-based black empowerment schemes. Like the other assertions, no serious justification is provided. But it certainly explains why Malikane’s radicalism has found favour with Gigaba, whose predecessor appeared to be successfully blocking a range of efforts at tender-related corruption by individuals associated either with the President or the Gupta family. The thinking from Gigaba – a man better known by some for tabloid stories, tailored suits, expensive ties and appearances on Top Billing – may have been that Malikane would provide some solidity to the fig leaf of ‘radical economic transformation’, while Malikane – who has otherwise been quietly exerting influence in left-wing, or trade union movements for some time – clearly thought that his revolutionary moment had arrived.

Some have attempted to defend Malikane on the basis of his academic credentials – to the point of also insisting that his evidently wrong-headed proposals (such as ‘expropriating banks’) cannot be criticised except through detailed academic analysis. At which point it is useful to invoke a phrase attributed to the Italian computer programmer Alberto Brandolini: “The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it”. Just because the minister’s adviser has published some academic papers on other subjects does not mean we must presume that his manifesto carries additional weight. Indeed, the primary disappointment for many who had  reasonably high opinion of Malikane up to this point is quite how threadbare his analysis and proposals are.

Where things are getting messy, however, is in attacks on Malikane’s academic credentials. These in fact open-up a big can of worms regarding the state of South African academic economics. (One reason I have been delayed in writing a comment on the Malikane’s saga is that I had been drafting a conference paper on what ‘decolonisation of the curriculum’ might mean for South African economics).

Understanding Peer Review in Economics

It turns out that the issue of decolonising economics is closely related to some of the misguided aspects of attacks on Malikane. The first, by Stuart Theobald, starts off well enough by noting that Malikane’s published, peer-reviewed work either has relatively little relation to his recent arguments or even – in some cases – seems to contradict those arguments. This is a particularly useful point to make for those who, naively, argue that Malikane’s arguments must be substantive because he has published some academic papers. Where Theobald strays into dangerous territory is in his inferences about Malikane’s integrity and assertions about the wonders of academic peer review.

Theobald’s characterisation of peer review in economics makes me suspect that he has never published anything in the discipline. Very few academics I have come across or read, including Nobel prize winners, have such a rosy view of the peer review process; in practice it is far from the notional ideal of a meritocratic system in which originality and quality are what determine publication. And any problems – of cronyism, bias toward researchers in certain institutions, ideological influences and so forth – are amplified if the basic thrust of your work is critical of, or very different to, the dominant narrative. It does not surprise me that Theobald, given his demographic, views on economic policy and his area of work (banking and finance), might not be able to appreciate this.

Which brings us to the issue of whether Malikane is dishonest for publishing work with conclusions he does not agree with. My short answer: no. It might be inadvisable, and it is something I personally try to avoid doing (at some cost), but the system is structured in such a way that it can self-sabotaging to only publish what you believe rather than what you can do. (Some have suggested that there should be betting markets in which economists show their confidence in their empirical claims by putting money on it). Either you will publish in journals not recognised by your peers, or your career will stall at a junior level – and the associated administration and teaching burdens limiting the very time you need for that ‘against the current’ research that is so good it breaks into the mainstream. When co-authors are involved this is even more difficult. These challenges are essentially what Malikane is gesturing at when he says, quoted by Theobald:

Don’t confuse my academic writing and what I believe to be true…you know the business of publishing is so ideologically poisoned that what is published is not necessarily scientific…we sometimes write in order to simply play in the publishing game…not necessarily because we think what we publish is correct…there is heavy ideological repression in academia…

Theobald paints this as sinister and possibly an “act of intellectual dishonesty”. He softens that with a few acknowledgements that Malikane is basically right, but then returns to a naive notion of academic publishing.

Finally, Theobald makes the important point that we should not try and judge Malikane the person but rather “whether he has good evidence and reasoning for his claims”. Unfortunately, he then goes completely off the rails by saying that: “until [Malikane] publishes them in a way that involves assessment by his peers, we must assume he does not”. Which peers? In what journal? I doubt Malikane would have trouble publishing in the Review of African Political Economy, but would Theobald accept that as adequate? (Leaving aside that he is not an academic economist, so it’s not clear what basis he would use).

Regardless, as an academic economist who has also worked in the public sector, I would never accept a policy claim just because someone had managed to publish a paper on it; the idea that successful peer review in economics shows that a claim is ’right’ is completely misguided, and any economist who advised a minister on that basis should also be fired.

There Are Many Flavours of ‘Bogus Economist’

This usefully brings us to the even more problematic contribution by Co-Pierre Georg. Let me start by saying that I was interested, albeit surprised to see – in Georg’s somewhat crudely-stated concern about ‘white male patriarchs’ – channelling critiques I myself have made in the past of untransformed gerontocracies and academics behaving like rent seekers. I have, also, for some time been politely raising concerns with various role players about such dynamics at an organisation where Georg has been an associate for some time; I hope Georg is as vocal on such matters of principle within his institutions, and even when it is personally inconvenient.

The basic assertion of Georg’s article is that people should not trust ‘bogus economists’. Hard to disagree with, but the devil is in the detail. In my draft conference paper on decolonisation, I made some similar critiques of the quality of the local academic economics to those discussed by Georg. Beyond that, though, we are again in swampy terrain. Georg’s assertion basically translates as: ‘people should not trust economists I think are bogus, which obviously doesn’t include me, my co-authors, patrons, friends, etc’. It’s not a new trick, including for fake radicals in economics. In a recent comment an otherwise respected senior scholar in macroeconomics (Paul Romer) published a rather disgraceful attack on various other economists for what he calls ‘mathiness’. Among these was one of the most famous female economists of the 20th century, Joan Robinson, who by virtue of her gender, left-wing views, and being dead, was perhaps an obvious target for Romer. Critiques of excessive or inappropriate use of mathematics in economics are as old as the modern version of the discipline itself. But a close reading of Romer’s critique reveals a petty, self-serving definition of the crime: when economists he doesn’t like use mathematics they are guilty of mathiness, whereas when economists he does like (obviously including himself) use mathematics then it’s done properly. Georg’s argument boils down to a similarly crude skeleton. (Romer, incidentally, was then appointed chief economist at the World Bank – illustrating how dysfunctional economics can be in other places).

Furthermore, Georg peddles a version of how economics can inform policy that is popular with certain types of academic economists, but bears little relation to reality. In this model, people who can write the most complex mathematical equations, estimate the most complex econometric models and get published in high-ranked journals are best-positioned to advise on policy. This might be funny if it were not so misguided and, in its own way, dangerous. There are some individuals who have managed to make the transition from producing cutting-edge academic work (by mainstream standards) to giving good policy advice, but it is the exception rather than the norm. The last thing a finance minister needs is some social incompetent who thinks he can figure-out a policy solution by writing down an equation, running a model or looking for a ‘peer-reviewed solution’. If you need an academic perspective, your adviser talks to a deputy director general who gets someone in the research cluster to do it, or outsources it to an academic like Georg.

Yet Georg goes even further, offering to define for us what a ‘proper academic’ is. But the best he can do in this regard, like Theobald, is to refer to ‘peer review’. I have already made clear that this is a naïve, and in Georg’s case arguably self-serving, use of the notion of peer review. One can tell that Georg, like Theobald, is not exactly familiar with the challenges of swimming against the current. Or, in fact, advising on broad economic policy in the complex South African terrain.

A Necessary Debate

 In some ways, the great tragedy of the Malikane saga is that, in principle, he should have been in a position to be a very good adviser – albeit one with strong left-wing views. While the likes of Theobald and Georg might be good advisors at lower levels of the hierarchy on specific issues relating to banking and finance, Malikane’s broad credentials should have made him a better choice for a general adviser to a minister. Given that, fortunately, it looks like his manifesto will have no impact whatsoever – with various politicians suddenly realising that talking-up radical economic transformation is a bad idea if it means emptying the fiscus you had planned on appropriating – the most harm done is to Malikane himself. But he has also damaged the possibility of more open discussions about economic and fiscal policy, which means that in fact those who should be most angry with him are economists (including myself) who believe such a conversation is sorely needed.

The bigger picture that Theobald and Georg’s misplaced attacks draw attention to is the state of South African academic economics. Some time ago as a student I witnessed the destructive consequences of the failure by some, otherwise very respectable, academics to reconcile tensions within the local discipline. The result, I think, has been for many to bury their heads in the sand and hope for the best. Or, less innocently, to set-up fiefdoms in which they can propagate their own views and agendas without the inconvenience of differing views.

To be fair to economists, similar behaviour happens in a range of other South African academic disciplines. However, besides the fact that this is an unhealthy state of affairs, legitimate calls for transformation and decolonisation (appropriately defined) will only ratchet-up these tensions and it would be best to address them openly and as maturely as we can. The position I have come to is in some ways rather obvious: we need to raise standards, but we also need a wide diversity of views and therefore should be pluralist in our approach to defining who is a competent economist (academic or otherwise). In that context, we would be advised to avoid doing things like accusing a fellow academic of not being a ‘proper economist’ or being ‘intellectually dishonest’, when they have a PhD from a very reputable North American institution, some competent publications, and extensive engagement and knowledge of South African civil society. When the institutional winds change, you may find that the knives are in your own back. These are surely not the kind of dynamics we want to encourage.

Reshuffles, downgrades and South Africa’s public finance drama

The last week has been tumultuous for many South Africans, not least if you are an economist concerned with public finances and the associated political economy dynamics. I had predicted that the President would make another attempt at a finance ministry-targeted reshuffle some time from the end of March onwards. The basis for that prediction was the timing of Parliament’s recess period, as I discuss in greater detail in this article.

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Zapiro: “Shift happens”

The new Minister has been brought in on the back of the President’s (empty) rhetoric about ‘radical economic transformation’ to benefit the majority of poor, black South Africans, but he is known more for his snappy dressing than radicalism; if the FT is correct about his favoured brand, then two of his many ties would equate to the proposed new monthly minimum wage. The combination of supposedly radical rhetoric with personal profligacy is on its own questionable, but there are many more reasons to be concerned.

It was therefore not a great surprise to many analysts when S&P downgraded South Africa’s foreign currency sovereign debt rating to sub-investment grade (‘junk’). After the downgrade by S&P, which I had also expected having paid close attention to presentations at their one-day conference in Johannesburg only a couple of weeks earlier, I provided some commentary with an emphasis on the reasons for the downgrade and possible economics and public finance implications. One of these interviews, with Ayabonga Cawe at PowerFM, is available here. In the first interview I did, on KayaFM, I made a deliberate point of stating that we should not allow anyone to mystify the obvious: that Gordhan has been removed for similar reasons to Nene, implying ‘capture of the state’ (as per the Public Protector’s report). In that context, the new finance minister simply lacks credibility and any statements made about continuity and protecting the fiscus will likely be taken with a pinch of salt.

With the inconvenient oversight of Minister Gordhan removed, the South African Revenue Services announced its final revenue collection figures for 2016/17 in a chummy press conference with the new Minister. This attempted to paint a R30bn revenue undercollection (relative to the revenue forecast in the 2016 Budget) as a success, because it exceeded the 2017 Budget forecast (i.e. the one revised down by R30bn) by R0.0003bn… Unfortunately, many journalists reporting on that event were taken in by the claims of success. I had already dealt with much of this in an article in the Finance Mail. In fact, given concerns about SARS delaying refunds to inflate collection figures, and given inadequate data submitted to Parliament, I have submitted a formal request for more detailed data to SARS and hope to follow-up on that in due course.

Needless to say, the capture of the Finance Ministry makes Parliament’s oversight role even more critical. But as I have argued in some detail (here and here), and ventilated in my CCMA case, the Parliamentary Budget Office is neither equipped, nor inclined, to provide the robust analytical support expected of it under the Money Bills Act (2009). I will have more to say about this in due course.

After the decision by S&P, Fitch has now also downgraded South Africa’s foreign and local currency sovereign debt rating: setting the stage for more dramatic consequences if another agency also downgrades local currency debt to ‘junk’.

These are dangerous times for the South African fiscus, economy and society at large.

Placeholder: A South African economics curriculum

In some previous posts [here and here] I discussed my experience of, and thoughts about, the University of Cape Town (UCT)’s undergraduate economics curriculum. I committed to writing a final, constructive post on what I think a South African economics curriculum (not particularly limited to UCT, or undergraduates) should look like.

That intention was partly overtaken by events and time constraints, but mainly I decided that the question deserved more lengthy treatment than just a blog post. So I am drafting a paper, which I hope to present at a few, relevant conferences/workshops, and once that draft is completed I will post a summary here.