No Justice, No Profit

Via Mahalonobis, HedgeFundGuy spins a tale both theoretical and empirical on the toll of expropriation of social capital: Amy Chua's book World on Fire tells the world what libertarians have been saying for a while- democratization is more often than not a tool for expropriation (an advance auction on stolen goods, as a wise man once said). Apropos of the earlier realization that perhaps up to 80% of First World economies' GDP are due to institutions and other intangible social capital:

One case she didn’t get much into was South Africa, which I think is a great example because here you have a case of moving to democracy, and also many compulsory affirmative action programs that amount to expropriation—perhaps just deserts for aparthied, but in effect very much like taking gringo oil fields in Bolivia, Chinese businesses in Indonesia, or white farms in Zimbabwe. And in fact a January NBER article entitled Why South Africa Incomes Declined, addresses the fact that average incomes of South African men and women fell by about 40 percent between 1995 and 2000, and that there has been little improvement since then. The authors address various hypotheses, and find all wanting. Included is the hypothesis that the emigration of whites after 1993 was at issue, even though in the article they note that perhaps "250,000-plus whites left South Africa since 1994, many of them young and talented.” I would think that is significant, and so I looked further and see the authors were convinced this did not matter because most emigration occurred prior to 1995 and the mean age, education (measured in years of schooling), and demographics did not change enough (whites going down from 16% to 12%--percentagewise pretty large to me). But 250,000 young, entrepreneurial people out of an economy that had been managed by 5 million whites is equivalent of 12 million business people leaving the US, which I would imagine to be catastrophic. Such human capital is poorly reflected in the “mean years in school” metric applied to the country. That’s going to leave a mark for a long time, well after 1995 when most of this occurred.

He goes on to quote W.D. Hamilton on the fragility of social networks. I imagine that Ecuador will soon find out, like Venezuela and Argentina (and Chile under Allende) how impoverishing that truth really is.

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I don't want to detract from

I don't want to detract from your main point re social capital, but as a South African those statistics don't really seem to gel with our day-to-day reality. The SA economy is not without its serious problems (including the brain drain), but I think you'd be hard pressed to find a local economist who believes that the 2006 South African economy is in worse shape than the 1994 South African economy.

Either way, there are a number of issues which affect the South African context.

First, the ANC government spews a fair amount of anti-market rhetoric to keep some constituents happy, and are by no means rabid free-marketers (which government is?), but when it comes to economic issues, they've proven themselves to be infinitely more competent, pragmatic and market-friendly than their apartheid predecessors.

Second, an issue you have to factor in is how deeply perverted South Africa's economic fundamentals were due to apartheid. Even without forced wealth redistribution, many adjustments and corrections (for better or worse) still have to shake themselves out.

Put simply, South Africa under apartheid was far more interventionist than anything we have now, and on balance, I'd submit that South Africans enjoy a great deal more economic freedom now, than we did prior to 1994.

Great comments Colin. From

Great comments Colin. From what I've read, apartheid South Africa was a heavily interventionist state that gave too much power to racist unions, among other things. Wasn't there a book by Walter Williams about this? Perhaps it was someone else.

I too must thank Colin

I too must thank Colin :mrgreen:

Focussing just on the South

Focussing just on the South African example I think some caution is advised. For the first point I'd like to know how the 40% decline is arrived at.

If its US dollar based then it's pretty easy to understand and misses the other side of the tale. The currency depreciated from about R4: $1 in 1995 to R12: $1 in 2001 due to speculation, negative foreign exchange reserves through an oversold forward book and general panic in 2001 from Argentina's default. Since then the currency has moved to R6: $1 while foreign exchange reserves are a positive net $21 billion now. Admittedly it is still down but where does that leave the comparison?

The other problem is that under the National Party state the focus leant more to a form of national socialism and examples were numerous: Sasol was set up as a state project at enormous cost to the economy, the cement industry was a regulated cartel, the largest steel/iron miner cum producer in the country was only privatised in 1989, tax rates were over 40% for industry and individuals, inflation in the double digits, foreign exchange heavily regulated and emigrants barred from moving their money offshore with them when they left, communications were all publicly owned and television was only allowed into the country in the late seventies, the motor industry enjoyed protectionist import tariffs of up to 120% - with the clothing and textile industries being similar and billions of dollars worth were wasted on 'Mossgas' near Mossel Bay over the course of several years.

One result was also that many jobs or economic sector that were uneconomically unproductive and had to be shed when the economy rejoined the internationally fold. Like its sports teams the country had fallen behind.

Yes, plenty is still wrong and much remains to be done, however declining tax rates and increasing liberalisation has helped locally.