south africa

Sputum markets in everything

South African saliva:

South Africans in an impoverished township are profiting from an illegal trade in a precious new currency †‘ saliva.

Tuberculosis
sufferers in Khayelitsha, Cape Town, were found to be selling samples
of their sputum to healthy people to pass off as their own in a scam to
gain medical grants.

An investigation by the West Cape News
identified people with TB charging R50-100 (£4.10-£8.20) for saliva
samples contained in bottles stolen from health clinics.

The
paper said that buyers of the samples were then able to get a card from
a clinic indicating they have TB and use this to fraudulently obtain a
temporary disability grant of R1,010 per month from the department of
social development.

It seems to be a competitive market:

A 54-year-old man told a reporter that he makes an average of R500 per
month from selling his saliva to people seeking to trick their way on
to the benefits system. But he said business was "not good" because so
many people were infected with TB in the township that he had a lot of
competition.

I thank Jonathan Thomas for the pointer.

Symposium on Paul Collier

You will find a Collier essay on democracy and development along with numerous comments, including from Bill Easterly and Nancy Birdsall, all courtesy of Boston Review.

Easterly is not happy:

I have been troubled by Paul Collier’s research and policy advocacy for
some time. In this essay he goes even further in directions I argued
were dangerous in his previous work. Collier wants to de facto
recolonize the “bottom billion,” and he justifies his position with
research that is based on one logical fallacy, one mistaken assumption,
and a multitude of fatally flawed statistical exercises.

Nancy Birdsall suggests that donors support more investment in policing.  She also notes:

The economy of sub-Saharan Africa–including Nigeria and South Africa–is smaller than the economy of New York City.

There is much more at the link.

What I’ve been Reading

1. Zhivago's Children: The Last Russian Intelligentsia, by Vladislav Zubok.  This excellent Belknap book focuses on the question of how the Soviets had much of an intelligentsia at all.  More fun and more readable than expected and consistently interesting throughout.  Soon this book will be put through the occasionally idiosyncratic "Natasha test."

2. Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis, by Guy Sorman.  He is a French classical liberal, defending a market-oriented point of view.

3. Bring Me My Machine Gun: The Battle for the Soul of South Africa from Mandela to Zuma, by Alec Russell.  An excellent book which shows how messed up this country is likely to remain.  Zuma in particular is a nasty piece of work.

4.

The East, the West, and Sex: A History of Erotic Encounters, by Richard Bernstein.  When I first saw this book I swore I wouldn't read it or buy it.  Then the excellent reviews started piling up.  Eventually I broke down.  It turns out the writing is superb and it has plenty of informative content.  But you know what, it is still a bad book and it leaves a bad taste in my mouth.  The always-excellent Laura Miller reviews it.

5. The Book of Psalms, translated by Robert Alter (my favorite Biblical translator).  Recommended.

Fly by the minute

Taking a cue from the cellphone industry, an upstart South African
airline is selling flights by the minute and allowing customers to buy
tickets and book flights via text message.

Airtime Airlines takes to
the sky later this month, offering three flights a day from its base in
Durban to Johannesburg, Cape Town and Port Elizabeth. Passengers
purchase minutes much like they would for a prepaid cell phone and
redeem them for a ticket. Fees are assessed according to the length of
the flight – say, 75 minutes for the run from Durban to Johannesburg –
and could save as much as half of what competing airlines charge.

Here is the article.  It’s not yet clear whether they have managed to lease planes, but here is another part of the business plan:

The cost for Airtime minutes can fluctuate, presumably according to
promotions and market factors, so topping off
becomes an exercise comparable to fuel hedging. Buy a big block of
minutes when you think they’re at their cheapest and you look smart,
unless the price drops again the next day. Then again, it might go up.
The price recently rose from 3 Rand to 5 Rand, meaning the cost of a
round-trip flight from Durban to Cape Town climbed from about 750 Rand
($81) to 1,250 Rand (about $134). Still that’s cheaper than the $200 it
would cost on South African Airlines.

But can you sell minutes short?  I thank Christopher Balding for the pointer.

Johannes Fedderke and the importance of good governance

File him in the category underappreciated economists.  Does good governance matter for growth?  Could there be a more important question for economists? The standard cross-sectional growth tests do not show much of a robust effect.  But Johannes, along with co-authors Robert Klitgaard and Kamil Akramov, has a 150-page paper showing that if you take all the relevant heterogeneities into account yes, Adam Smith and Doug North were right after all.

Or do you prefer simple regressions which meet the eyeball test?

Here is the full paper.  Here is Johannes’s long paper on South African economic history.

The best two sentences I read this morning

Charge 80% per year on a loan in the U.S. and you’re called a usurer.  Charge 80% on a loan in Latin America or Africa and you can be a poverty-alleviation charity.

That is Dean Karlan and Jonathan Zinman, in today’s WSJ, "In Defense of Usury," p.A18.  Karlan and Zinman discuss their study showing that micro-credit borrowers in South Africa are better off for receiving the money, even when they pay very high interest rates.

How similar are your country’s products?

The network maps show that economies tend to develop through closely
related products. A country such as Colombia makes products that are
well connected on the network, and so there are plenty of opportunities
for private firms to move in to, provided other parts of the business
climate allow it. But many of South Africa’s current exports–diamonds,
for example–are not very similar to anything.

If the country is to develop new products, it will mean making a big leap. The data show that such leaps are unusual.

Tim Harford explains.  Here are maps of product interrelations.

Auditing natural resource revenues

When my editor and I were exchanging drafts of this piece, my spam blocker wouldn’t let them through.  There is too much talk of Nigeria and diamonds!  Here is one excerpt:

Paul Collier, an economics professor at Oxford University,
has a new and potentially powerful idea.  In his recently published
book, “The Bottom Billion: Why the Poorest Countries Are Failing and
What Can Be Done About It” (Oxford University Press), Professor Collier
favors an international charter – some widely publicized guidelines
that countries can voluntarily adopt – to give transparency in spending
wealth from natural resources.  A country would pledge to have formal
audits of its revenues and their disposition.  Imagine
PricewaterhouseCoopers auditing the copper revenues of Zambia and
issuing a public report.

It’s not as futile as it might sound:

Professor Collier’s proposal at first glance seems toothless; a
truly corrupt country probably wouldn’t follow the provisions of the
charter, which, after all, is voluntary.  Yet citizens could pressure
their government to follow such a charter, and the idea of the charter
would create a focus for political opposition and signify international
support for concrete reform.

Foreign corporations would bring
further pressures to heed the charter.  Multinational companies that are
active in corrupt countries might receive bad domestic publicity.
Eventually the companies might push for adherence to the charter, even
if the charter limited their ability to bribe.  In another context, De
Beers has been stung by bad publicity about “blood diamonds,” and the
company is now a force for positive change where it operates.

In
the optimistic case, a few poor countries start abiding by the charter.
Those countries prosper and attract more investment and status in the
international community.  The pressure to adopt the charter would then
spread.  Of course, promoting the charter costs relatively little and
the potential benefits are significant.  International pressures did
eventually force a change in South African apartheid.  So maybe they can
improve other countries as well.

Did you know that Tony Blair was already promoting such a charter?  And the Nigerian government (really) already commissioned a private sector audit and now has enacted a version of this idea into law?  We’ll see how that goes, but Nigerian flirtation with rule of law ideas is one of the underreported stories of this year.

Paul Collier’s The Bottom Billion is a very exciting and important book.  It is rare to read something on economic development that is true, non-trivial, and potentially useful.  I recommend this book highly, it is also short and easy to read.  Here is a good review of the book by Niall Ferguson.

Here is the whole column.

Behavioral economics and poverty

Mullainathan worked with a bank in South Africa that wanted to make more loans. A neoclassical economist would have offered simple counsel: lower the interest rate, and people will borrow more. Instead, the bank chose to investigate some contextual factors in the process of making its offer. It mailed letters to 70,000 previous borrowers saying, “Congratulations! You’re eligible for a special interest rate on a new loan.” But the interest rate was randomized on the letters: some got a low rate, others a high one. “It was done like a randomized clinical trial of a drug,” Mullainathan explains.

The bank also randomized several aspects of the letter. In one corner there was a photo—varied by gender and race—of a bank employee. Different types of tables, some simple, others complex, showed examples of loans. Some letters offered a chance to win a cell phone in a lottery if the customer came in to inquire about a loan. Some had deadlines. Randomizing these elements allowed Mullainathan to evaluate the effect of psychological factors as opposed to the things that economists care about—i.e., interest rates—and to quantify their effect on response in basis points.

“What we found stunned me,” he says. “We found that any one of these things had an effect equal to one to five percentage points of interest! A woman’s photo instead of a man’s increased demand among men by as much as dropping the interest rate five points! These things are not small. And this is very much an economic problem. We are talking about big loans here; customers would end up with monthly loan payments of around 10 percent of their annual income. You’d think that if you really needed the money enough to pay this interest rate, you’re not going to be affected by a photo. The photo, cell phone lottery, simple or complicated table, and deadline all had effects on loan applications comparable to interest. Interest rate may not even be the third most important factor. As an economist, even when you think psychology is important, you don’t think it’s this important. And changing interest rates is expensive, but these psychological elements cost nothing.”

Mullainathan is helping design programs in developing countries, doing things like getting farmers to adopt better feed for cows to increase their milk production by as much as 50 percent. Back in the United States, behavioral economics might be able to raise compliance rates of diabetes patients, who don’t always take prescribed drugs, he says. Poor families are often deterred from applying to colleges for financial aid because the forms are too complicated. “An economist would say, ‘With $50,000 at stake, the forms can’t be the obstacle,’” he says. “But they can.” (A traditional explanation would say that the payoff clearly outweighs the cost in time and effort, so people won’t be deterred by complex forms.)

Thanks to a reader — his name mistakenly deleted from my email — for the pointer.

What I’ve been reading

1. Lynn Freed, Reading, Writing, and Leaving Home – Her message is that to be a great writer you must be brutal in exposing the truth and somewhat brutal period; a short memoir of female South African ambition, recommended.

2. Robert Irwin, Dangerous Knowledge: Orientalism and its Discontents – Western study of Orientalism was not always racist or biased, a useful corrective to Edward Said.

3. Roy Richard Grinker, Unstrange Minds: Remapping the World of Autism – One of the better books on the topic, by an anthropologist with an autistic daughter, most interesting for its cross-cultural perspectives.

4. Charles Clover, The End of the Line: How Overfishing is Changing the World and What We Eat.  Yes the topic is "overfished," but this book stands above the others.  Among other virtues, it has a good treatment of which regulations and property rights management systems are actually working.

5. ESPN-NBA; there is more logic on this site than almost any blog, worth the price.

The Peace Corp.

Private security companies like Blackwater have thrived in Iraq, where
the US military has relied on them for everything from guarding convoys
to securing the Green Zone. But these companies recognize that the
demand for their services in Iraq will eventually diminish, and
Blackwater, for one, is looking for new markets….When Kofi Annan was UN undersecretary general for
peacekeeping, he explored the option of hiring the South African
private military company Executive Outcomes to aid in the Rwandan
refugee crisis. He ultimately decided against the option, declaring
that ”the world is not yet ready to privatize peace." 

The world still appears to be unready-and representatives of
private military companies believe that’s shortsighted. ”When
traditional peacekeepers can’t provide an adequate response because of
their home country obligations, there’s an alternative that should be
openly and frankly discussed. And that’s a private professional group,"
says Chris Taylor, Blackwater’s vice president for strategic
initiatives….

…When the world’s governments and multilateral organizations
have proven as ineffectual as they have in Darfur, should they turn to
the private sector for help? In the absence of a viable alternative, is
the international community’s aversion to what some call ”mercenarism"
stronger than its will to fight genocide?

From the Boston Globe.

No doubt there are some issues to be addressed but this objection from  David Isenberg, senior analyst at the British American Security Information Council, is farcical.

”How do you ensure oversight, compliance with international
humanitarian law, follow the rules of warfare, rules of engagement,
comply with the Geneva Conventions, and the whole bureaucratic panoply
of rules that come into play?"

How indeed.  But after Guantanamo, Abu Ghraib, secret CIA prisons etc. how can anyone claim that this is an argument against privatization?

Thanks to David Theroux for the pointer.


Addendum
: Matt Yglesias has some sensible and surprisingly positive thoughts on the peace corp question. In the comments LaFollette Prog writes "If Doctors Without Borders decides to hire a regiment of Doctors With Heavy Artillery and starts capping some Janjaweed ass, it might improve their fundraising efforts in rural America…"

Opposite Day: Tyrone on the minimum wage

"Minimum wage, bah humbug.  It is easy to defend.  Tyrone snorts at you.

First let us clear out some garbage.  The minimum wage should not be $50 an hour, and simply citing this possibility does not serve as an effective reductio.  And yes racist South African labor unions supported minimum wages, but wouldn’t you expect them, vile as they may have been, to support higher wages in any case?

We know the empirical evidence on minimum wages is mixed.  I am familiar with the Card-Krueger smackdowns but at the end of the day you have to work hard to get a big effect on employment.  Most importantly, all of these studies miss the longer-run effects that make a legally binding minimum wage such a good idea.

Don’t obsess over static neoclassical economics, where you start with a firm, a competitive market, and a set of marginal products already in place.  Think dynamic and look at the longer-run.  If you ban jobs beneath some hourly wage, you will end up with more jobs above that wage.  Ex ante, companies can set up their production to mesh with high-wage rather than low-wage jobs.  Surely we should prefer an economy with higher marginal products, higher wages, and higher median income.  Yes this redistributes a bit of wealth from capital but what an efficient way to do so.  And we all know that long-run dynamic gains tend to swamp one-time static losses.

Don’t expect to pick up these effects in any study with a short time horizon.

Furthermore there is more slack in the system than many economic models would indicate.  As a young’un, I worked in a supermarket.  When they raised the legal minimum wage, they raised my wage as well.  I was happy.  No one fired me.

Minimum wages probably lower the net amount of government intervention in an economy.  Lower minimum wages would mean higher welfare payments to make up the difference.  Ever heard of EITC?  In reality, minimum wages and EITC work together to keep the poor at decent standards of living.  More importantly, they keep poor workers in the private sector rather than letting them become wards of the state.  Try living on the minimum wage (much less beneath it), and without the safety net of your parents, if you don’t get my point.

Perhaps you think the minimum wage is an excessively blunt policy instrument, given that many near-minimum jobs are held by upper middle class teenagers.  Fair enough, but this also means that the minimum wage doesn’t put many of those people out of work.  We can go back to focusing on the net effects on the poor.

Tyler, what is really your problem with the minimum wage?  Free market economists love to bash it because they can posture as friends of the poor.  They can pretend that basic economics has great relevance.  They can claim to know something useful, rather than facing the fact that opposition to big government really means opposition to massive income transfers.  Since the American public is not willing to go this route, free market economists have to focus their yapping on the minimum wage and the (actually quite small) benefits of free trade.

Tyler, don’t you agree?  Tyrone signs off."

There he goes again.  As a child, he would never even sit straight at the dinner table.  Readers, if you now wish to refresh yourself, try this, or perhaps even this.  And maybe someone over at CrookedTimber is up for Opposite Day, but on some other topic…?

Uncovered interest parity — why does it fail?

Brad DeLong asks:

This is one of the most puzzling puzzles in macroeconomics: that foreign-exchange speculators are not very good at linking domestic money and bond markets to the foreign exchange market. Not enough money seems to be engaged in betting that a currency with a high nominal interest rates will not decline in value fast enough to make investing in its securities unprofitable. Why not? It’s an easy thing to do.

James Hamilton [correction: *Menzie Chinn*] adds more.  What are the main hypotheses for why high nominal interest rate currencies appear to outperform the market?

1. The so-called "peso problem."  Someday the roof will cave in on these currencies.  The Asian financial crisis was only a small disruption compared to what will happen someday.  Our current data set is incomplete and does not represent the real population.

2. Holding crummy currencies is riskier than CAPM and variants indicate.  Most likely, the relevant investors are not and cannot be well-diversified.  So their high pecuniary returns are offset by the risk they bear.  If thirty percent of your wealth is in the South African Rand, the relevant measure of your risk may be the variance of that currency, not the covariance of that currency with some broader international market portfolio.  Economic theory usually measures risk by looking at the latter.

3. Many investors stay away from crummy, high nominal interest rate currencies for fear of what their wives (or bosses, consider an agency problem at a financial firm) would say, should they lose money.  The relevant markets are segmented.  This is linked to #2.

4. This used to be a puzzle, but now the profit opportunity has been identified.  The supposed additional risk of the high nominal interest rate currency is phantom.  People now jump into high nominal interest rate currencies, at least when such investments are appropriate to restore an equilibrium of risks and returns.  We should expect the paradox to disappear in future data sets.

Observation: Do not ever write or say "CAPM model."  Do not ever write or say "ATM machine."