2014 and the Business Cycle: Continuing Recovery and Another Year of Opportunity in the Stockmarkets?

First off, Happy New Year to all my Econoblog readers.  If you want a review of 2013, rather than rabbittng on here, I thought I would just point you to a wonderful article in The Atlantic on the Most Important Economic Trends in 2013 which you can find here. In this Econoblog I want to look ahead to what might happen in 2014, as some eminent economists have been doing at the most recent American Economics Association meeting..

As the business cycle is now in heading into the later part of the cycle, with the danger of recession and deflation receding, most countries will experience accelerating growth this year.  Although markets are jittery about the Fed’s signal to taper monetary policy, this is long overdue in my view, and will only have a marginal effect on economic growth in the US and other developing countries.  The economic process of re-invigorating the economy through stimulus has now done its magic, and in North America, Europe and now Japan, the growth dynamic has started to take on a life of its own, so that the agents of stimulus can now withdraw their assistance as a catalyst for economic growth.

So there are 2 further issues here – first, how will economic growth be distributed among the developed countries, and second, given what is going on in the developed world, what are the prospects for the developing countries.

Although the consensus is almost uniformally positive for the US for 2014, it is still probably the most uncertain country in the developing world to forecast for 2014, as there are so many factors that might impinge upon economic growth rates. The most notable are fiscal matters and the political problems in Congress, the ongoing taper, and when the actual tightening of monetary policy will begin, how movements in long term interest rates will impact the housing market and also lastly, how the dollar will behave during the upcoming year.  If the current truce in Congress yields more bi-partisan consensus on how to move ahead in other contentious areas (such as immigration reform, for example), then this could boost growth as confidence is at least partially restored in the US political process.  Given a brighter fiscal outlook, this would mean that Fed purchases of government bonds could be slowed much more quickly than Mortgage backed securities (MBS), which would allow a residual boost to the housing market rather than propping up a shaky Federal government credit rating. Longer term interest rates are key in determining the course of mortgage rates, and if the Fed keeps these low enough for long enough, the housing market could really boom, setting off a real investment boom in the rest of the economy.  Of course everything could go the other way as well, leading to a further downgrade in the credit rating of US debt, a Fed that ends up having to reverse the taper because of a sagging labor market, and a housing market that experiences a bubble because of prices rising too far too fast. 

In my view, the history of economic cycles points to a positive future though for the US, and although some of the shorter term cyclical effects will be present, the dominant longer term cyclical features will push the US forward without any major internal economic dislocations, leading to another good year for both the housing and stock markets.  This of course implies another bad year for the bond market with yields moving upwards to levels more typically associated with this stage of the business cycle.

But perhaps the best opportunities in North America lie not in the US, but in Canada.  The Canadian market has been extremely stable through the recent turmoil and the Canadian stockmarket has really not shown much of a return compared with its US counterpart, which in my opinion is almost counter-intuitive, but is probably based on the perception that Canada has an economy based much more on commodities than the US does.  Nevertheless, in my view the Canadian market still has much less downside risk that the US market does, and much more upside.

Japan and the EU have less potential for growth as demographic factors restrain both entities. The fact that Abenomics seems to continue to deliver the goods will push Japanese markets higher and lead to the deflationary threat receding.  In the EU the resurgence of the northern member states will continue and the Southern member states will start to emerge from the difficult deflationary period they have been in. 

The biggest risks, but also the biggest rewards in 2014, lie in the developing world.  Developing country markets were rocked by the initial announcement of a taper, but now that the ongoing taper and then tightening has been priced into the markets the real effects on the developing markets should be apparent. As monetary tightening occurs in the US, so the liquidity glut will start to disappear, putting some pressure on developing countries.  Now the big question is, how big will the impact be on countries like the BRICSA countries.  Brazil should be cushioned by the massive infrastructure spending going on there for the Olympics and the World Cup, while Russia really is not dependent on the stimulus as it is natural resource prices that really drive the Russian market.  South Africa is certainly not a large holder of US bonds so the taper will likely have minimal effects on that country.  No, the biggest risk is in both China and India, where both countries have a significant interest in holdings of US debt. 

Given the negative announcement effect of the Fed’s taper, I believe that possibly the best performing markets will be in Canada, parts of Latin America, Africa and parts of Europe next year. Now I have put my neck on the line, let's see what happens!

2012 Preview: Coupling and Economic Growth

Happy New Year for 2012 to all my blog readers.  Having just returned from spending the festive season in South Africa (St. Francis Bay and Cape Town to be exact), with a stop in Dubai on the way out, I wanted to reflect on the global economy and its prospects in 2012.

While on the plane, I was reading the Xmas/NY edition of The Economist, and it struck me that the notion of "coupling" and "decoupling" has really not gone away, but at the same time has not been properly explored in academic circles in economics.  And whether we like it or not, when we talk about prospects for different parts of the globe it is all within the context of some kind of international business cycle, which is mostly determined by what goes on in the US.  So as I am doing more research which looks at economic cycles right now, I have also been interested in trying to characterize how different the US cycle is from cycles elsewhere, not in terms of the size of it's ups and downs ( - it's amplitude to a physicist) but more in terms of its shape, compared to other economies.  The first place though to start should be within the US itself though and here the dynamic graphic above comes into play.  This is an Oldham coupling mechanism (taken from this Wikipedia page) where the cycles are clearly not in sync and amplitudes are quite different.as well, but all three wheels have the same cycle periodicity.  This is something like what we see in economics, except of course that there isn't the regularity that we see here because economies are not "pinned" together like these wheels are.  Nevertheless, the fact that there is cycle dependency is what interests me in terms of my research and this is one of the research themes I will be exploring in more detail this year.

If this type of coupling is one of the processes that is at work then it (partially?) explains why certain economies (like India's and China's) have much more growth volatility than does the US and other developed economies. Given that you accept the idea of a loose international synchronization of growth rates, then the good news is that 2012 will likely be markedly better for economic growth than most of the pundits expect - and I think we're already seeing that in the US employment numbers released in the first week of the year.

So what does this mean in terms of finance and investment?  Apart from following the general advice about keeping quite a lot of funds in US stocks and avoiding European stocks given the problems with implementing the austerity measures in the euro area, the Standard and Poor's downgrades, together with the cuts to public expenditure in the UK, there seems to be little consensus on what else to do with your money in 2012.

So where else is promising? I think Africa has still a lot of unfilled potential, and particularly those corporations based in South Africa or US corporations or European corporations that operate in Africa.  Parts of East Asia, in my view, are also still interesting - India, Malaysia, Indonesia and Taiwan in particular, but China is worrying, given the large property bubble that still exists there.  South America also still has potential, but is largely dependent on central banks being able to restrain inflation while ensuring growth.

But my main point in this posting is that prospects everywhere are extremely dependent on the international business cycle, which in turn is determined largely by what happens in the US and Europe.  While the US increasingly looks to be doing better, Europe still has large clouds hanging over its prospects in 2012.

South Africa's New Growth Plan - A (non-Nobel) Outsider's Evaluation

Recently the South African ANC government headed by President Jacob Zuma published a New Growth Plan which is to guide policymakers and businesses in terms of the future growth path of the economy. The Economic Development Minister, Ebrahim Patel, got nobel Laureate Joseph Stiglitz to write a review which was widely published in South Africa endorsing the government’s New Growth Plan. Of course getting an endorsement from a Nobel Laureate is always a good strategy to build credibility for what is clearly a new and somewhat controversial direction for South Africa, but Nobel approvals aside, in my humble opinion there are some clear pluses to the plan and some definite minuses and problems with it as well. I deal with the pluses and minuses as I see them below, but where I was most disappointed was with the macroeconomic policy proposals. A copy of the plan is available at
http://www.moneyweb.co.za/mw/action/media/downloadFile?media_fileid=9594

The major pluses as I see them are: i) clearly expressing the government’s strategy in one coherent document with justifications for the choice of “growth-drivers” so that everything is there in detail for all to see – hopefully that will lead to some consensus on certain parts of the Plan and maybe other parts being dropped or re-worked; ii) the acknowledgement that it is the private sector that is the major job creator in the economy, although recognizing the state’s role as a “growth enabler”; iii) the combining of macro and micro policies into one policy document; iv) the inclusion of “stakeholders” in the process for implementing the Plan; v) the concern for rural development, particularly in the previously self-governing “Bantustans”; vi) the emphasis on environmentally sustainable growth; and vii) the idea of establishing a sovereign wealth fund in the mining sector. The first plus is self evident, as is the second, the third is just the economic approach, but perhaps a couple of the latter points require some elucidation.

One of the hallmarks of Germany’s success as an economy is rooted in their “corporatist” approach to economic management – this involves inviting all stakeholders in a business or industry to partake in important decisions, whether it is wage increases (obviously done at the industry level when Unions have significant bargaining power), shift work hours, expansion of operations or product line. Business, unions, state governments or federal government often met to make sure that everyone was “on the same page”, so to speak. This is important as it allowed proper flow of information and led to an avoidance of strikes and better management shop floor relations. If what the government has in mind is more of a “stakeholder” decision-making process in industrial development then it is clearly to be welcomed. After the strikes that hit South African industry in the middle of 2010 and the threat of lower investment from major multinational sources of FDI, if this represents a move to a more “corporatist” economic structure then it is to be welcomed.

The concern for development of the rural areas in South Africa is clearly also stressed in the plan. With the proper policies in place, in fact these areas have the most catching up to do and therefore the greatest potential for economic growth. Allowing private businesses to flourish in these areas requires the agrarian economy to become more streamlined but also the infrastructure needs to be in place to allow non-agrarian businesses to take off. In this day and age this requires good and reliable energy supplies as well as broadband internet connection. This is where competition with government specifying what is required might yield the best results. Financing is also usually a major constraint on the private sector in rural areas so the idea of a state owned bank to stimulate lending in rural communities is interesting and I believe worthwhile considering. But I hope that the government also looks at the idea of what in the US is called a “credit union” or in the UK a “building society”. These are non-state-owned and not-for-profit financial institution models, and might work better in some rural communities than a state-owned bank.

So what about the problems that I see with the report? The biggest problem that I can see here is the lack of analysis of exchange rate regime options. The report clearly advocates managing the exchange rate, but I don’t see any evaluation of what would work best for the country, nor a clear rationale for the “soft peg” option of keeping the currency undervalued in the report. I am guessing that the Chinese model of a managed low and competitive currency is the major inspiration for the new formulation of macro policy, and it is clear that many other elements of the report are subservient to this – in other words lower interest rates are achieved through a more lax monetary policy, and a stricter fiscal policy compensates for this, but to prevent inflation there has to be wage and/or price controls in place (which includes “collective bargaining” and caps on executive pay inflation). But would a policy that works well for China work well in the South African context? And what of the severe criticism that China is facing for its foreign exchange policy? Would South Africa really want to play “currency wars” with other countries? [See http://www.pretorianews.co.za/patel-s-plan-to-weaken-rand-is-no-answer-1.1001210 for a South African article reviewing this issue].

Let’s take a step back from this issue for a moment and look at another aspect of the current “problem” with the high value of the rand. As a reasonably frequent visitor to South Africa, I recognize that the exchange rate has appreciated in real terms, but this is nearly all due to capital inflows into the “emerging markets” because of the more rapid recovery from the economic downturn here, combined with the flow of capital into the mining and minerals sector of the economy as commodity prices recover. This will not continue forever, and in fact many economic commentators are expecting these flows to slow and maybe reverse in 2011 ( - see the latest edition of The Economist). In this case the currency may depreciate quite rapidly. So if the exchange rate is perceived to be a problem right now, it may cease to a problem in a year’s time. What is more important though is deciding on what the most appropriate exchange rate regime is for South Africa in the longer term ( - and I am available for a much cheaper rate than a Nobel economist would charge to analyze this!) The main point is that if the exchange rate is to be the anchor for macroeconomic policy, there needs to be a discussion on what the policy should be and how the policy is to be implemented. If you are going to use an anchor, you should make sure you’re using the right anchor, and in the right way!

What about other problems in the plan? The emphasis on “labour-based production methods” is rather strange in this day and age. We live in a world where capital enhances labour productivity and therefore leads to higher wages. Why would a country want to encourage methods that specifically use labour-based methods? I understand the need to reduce unemployment rates, but this is best done by having a booming economy with major injections of capital as China and many other countries in South East Asia have discovered, rather than “labour-based production methods”.

Another problem is that the manufacturing sector strategy is not well-thought out in my view – phrases such as “supporting activities that can generate employment on a large scale and meet basic needs at lower cost in the short to medium term, while sustaining development of more knowledge-intensive industries for long-run growth” when referring to manufacturing industries, do not make a lot of sense to me. The manufacturing sector’s objective is not to create jobs – it is to create products that consumers and other businesses want so as to make a profit. Jobs are the welcome by-product of this objective.

Lastly, I would like to make two suggestions that I hope might help in the micro part of the report. In terms of industrial product development, the establishment and fostering of University-industry linkages has been shown to be very advantageous in many countries (UK, US and Canada, for example). If South Africa is serious about its future then it needs to attract research talent from around the world and make sure that industry can benefit from the research that Universities do. Lastly, I believe that reducing the high cost of access to broadband in South Africa really needs to be an absolute priority if the country’s citizens and businesses are to be able to take advantage of global technological opportunities, and not get left behind, as many African countries will be.

China and Africa – not a win-win situation?

Every time I visit South Africa at some point I end up in a store called Woolworths.  Now for people in the US Woolworths is synonymous with a failed chain of stores that catered mainly to the working classes and might be thought of as the Walmart of the 1960s.  There was also a Woolworths in the UK which went out of business but the Woolworths in South Africa used to be owned by the venerable UK chain store of Marks and Spencers known for its quality merchandise and good value for money.  In the 1980s Marks and Spencers decided to go global opening chains in Canada, South Africa and even France – in South Africa it decided to use the Woolworths brand name. When Marks and Spencers downsized in the 1990s it sold off its Woolworths chain in South Africa but the store still has the reputation of supplying quality merchandise.

On my latest trip to Woolworths I was surprised by certain changes.  For example, on previous visits there were always clothes and other items made in South Africa, Lesotho, Swaziland and Mozambique ( - all Southern African countries) – but this time I struggled to find anything that wasn’t made in China.  I eventually found some linen shirts made in Bangladesh, but absolutely nothing that was made in Southern Africa.  Now to me this is extremely disconcerting.  It means that African manufacturing companies are struggling to compete with Chinese manufacturers.  In fact the latest manufacturing output statistics for South Africa show a decline in output which continues a worrying trend for a country that relies on commodities and should be the manufacturing engine for most of the rest of Africa.  Recent statistics on capacity utilization at http://www.engineeringnews.co.za/article/low-capacity-utilisation-weighs-on-sas-2011-investment-outlook---absa-capital-2010-12-14 also underscore this.  

So why is this?  Unskilled wage rates are hardly high in Africa so this must be mostly to do with the Chinese exchange rate.  Now there has been plenty written about China’s undervalued exchange rate on the US and Europe, but not a lot has been made of the effects of China’s undervalued exchange rate on the rest of the world.  But China’s exchange rate policy has impacted developing countries as well, with Mexico’s maquilladoras struggling to compete and Indian companies also struggling with competing with China’s rapidly expanding industrial complexes. But although the US and Europe have criticized China, not much has been forthcoming on the issue from African politicians.  One of the most important reasons why Africa is not as anxious to criticize China as the developing world is that huge amounts of money have been flowing into Africa to buy up land and upgrade infrastructure – money that probably wouldn’t have flowed to Africa otherwise. 

The trade off with China in Africa (and indeed in other parts of the world) is a different one from that in the developed world.  In Africa the influx of money from China is not in the form of loans to fund the trade deficits run with China by the US and European countries, but instead is in the form of foreign direct investment in mining and mineral companies and land.  Either way the trade off is not a good one – it is a matter of short to medium term convenience to allow China to buy US and European bonds to keep interest rates low in the developed world, but the purchase of land and foreign direct investment in Africa, although supporting factor prices, is not easily reversed and comes with a major decline in the industrial base and also a sizeable loss of manufacturing jobs. Of course this differs by country with some of the extremely poor agrarian African economies benefitting from the inflow but not losing any industrial base ( - as they never had one to begin with), but the losses for other more industrialized countries (like South Africa and Nigeria) are likely to be much more serious in the long term.

In my mind there is another really important question here which is largely ignored by economists.  Is it in the rest of the world’s interest to have so many products made solely in China and hardly anywhere else?  What happens if there is major political unrest in China or striking workers limit output?  With virtually only one (monopoly) producer of certain articles this means that prices for these articles would skyrocket around the world until manufacturing capacity could be expanded elsewhere.  It would then be in the rest of the world’s interest to allow the Communist authorities to suppress any unrest on economic grounds, while on political grounds there would unlikely be much support for what the authorities end up doing ( - given their record on human rights). 

Thoughts on South Africa's Day of Reconciliation

I am currently in South Africa and today (16th December) is a public holiday to celebrate the 1994 Truth and Reconciliation Commission which was chaired by Bishop Desmond Tutu. The Commission brought together victims of the apartheid regime ( - apartheid literally means “apartness” in Dutch) and some of the implementers of the previous oppressive regimes (particularly the regime under Botha) to tell the truth about what happened during the dark times in South Africa. The Commission is now held up as a model around the world as a way of moving a country forward from vicious divisive regimes towards more egalitarian humanistic and tolerant regimes. Bishop Tutu had to chart a difficult course, not apportioning blame but at the same time allowing reconciliation between oppressor and victim, which usually meant bringing together a white oppressor with a black victim. The world watched in rapt attention as stories of torture, arson, murder and worse were brought in front of a national audience and usually the victims or relatives of the victims.


In my view, Bishop Tutu deserves to be as celebrated a character as Mandela (or “Madiba” as they call him around here) as the Commission itself was an essential part of the bloodless transition from an apartheid government to a multi-racial government, and this public holiday is really a testament to how well Bishop Tutu managed the Commission, allowing the birth of essentially a new nation. And what a country it has become. After successfully hosting the World Cup this year, South Africa is now not only the biggest economy in Africa, but is clearly the most dynamic on the continent. Growth is strong, inflation is under control, migrants flock here from troubled adjacent nations, and the economy is generally still extremely vibrant. Under apartheid, South Africa was once isolated by the rest of the world, but the contrast now couldn’t be greater, with South Africa now incredibly plugged into the rest of the world, with South African leaders such as Thabo Mbeki acting as chief representative to the African Union on the Ivory Coast issue, South Africa being very active in many international organizations, taking a leading role in the World Trade Organization and the United Nations.

But of course progress is always relative. 16 years after the transition from apartheid to a truly democratic society there are still plenty of issues to be addressed. Although there has been a significant transfer of wealth to a newly emerged black middle class here, the vast majority of black South Africans remain uneducated and mired in poverty. In business the Black Empowerment Act requires that a minimum percentage of black South Africans have to be hired in companies with more than 15 employees – and this has certainly helped to transfer this wealth – but in education there is still a divide between the races. Most neighbourhood schools end up serving specific racial communities because apartheid still exists in terms of neighborhoods. Also violent robberies are becoming more widespread, with some shockingly open attacks in very public places – and this doesn’t seem to be a matter of race, but more the lack of effective policing in certain areas.

Unfortunately as well, racism is still alive in South Africa. Much of it is now covert in public, but it is still quite apparent when you speak to older anglos and Afrikaaners in private. For someone usually used to a reasonably multicultural environment, there are certain very obvious signs. First, I haven’t seen any multi-racial couples – I’m sure there are some, but they are definitely not common – and I haven’t seen one in the Port Elizabeth area. Second, despite the transfer of wealth to the new black middle class, the whites still hold the majority of the wealth, certainly in terms of their average per capita income. Third, most places I have been to, either to eat or drink or shop, clearly serve one specific racial community ( - the clear exception being gas/petrol stations). Fourth, land ownership is extremely important in terms of transfer of wealth, and although no one would wish a Mugabe-style forced transfer of farms to black farmers, many land claims by black farmers are still stuck in limbo years after the original claim. So nearly all agricultural means of production clearly still lies in white ( - mostly Afrikaaner) hands.

Like the Civil Rights movement in the US, though, letting the effects of de-segregation filter through to the roots of society will take time, and will probably only take visible effect one generation after the actual initial change. I am positive though that if South Africa can retain its democratic principles, its commitment to good business practices and keep a lid on corruption, it will prosper. South Africa is a country that has a lot for the rest of the world to admire – the weather, the scenery and the incredible cultural diversity here, but I think perhaps the transition to a better, more egalitarian politics is one of the most important things for the future of this country.

The Developing World and the Recovery Phase

As we enter the recovery phase of the business cycle, it is becoming increasingly apparent that there are big differences from a macroeconomic perspective between what is going on in the developed world and the developing world. The economist highlighted this in a recent issue which talks about the economic advances made in South America (cover on left).

It seems obvious to me that although there is a lot of hand-wringing about what is going on in the US (QE2, November elections, corporate stockpiling of cash), the fact remains that the US housing market has been the source of the global economic downturn, so that means that until that is sorted out and confidence fully returns, US economic growth will remain skittish. 

Of course that is not the case elsewhere.  As the Economist makes clear for South America, things have changed there in the last decade, and the outlook for growth and prosperity is much brighter than it was even 10 years ago.  Lula is now the hero of Brazil, having brought stability and prosperity to a once hyperinflation-plagued country, and despite the media focus on Hugo Chavez of Venezuela, there are other success stories (such as Chile, Belize and Costa Rica) south of the Rio Grande. 

And while I've been enjoying the great 9.4% return on my Latin American mutual fund, I am not unaware of the fact that in other parts of the world growth has been much more spectacular.  India must be the standout here, with even The Economist (once again) highlighting this fact on its most recent cover ( - "How India's growth will outpace China's").  To me, China has always been problematic as a trading partner, not only because it is still officially a communist state, but also because it manipulates its currency and it's virtually impossible to hold any Chinese stocks ( - all the China mutual funds you see are really Hong Kong mutual funds).  So yes, India will likely be the place to be over the next expansion phase of the business cycle.

In all this Africa is a bit of a "dark sheep".  Although South Africa is a great place to invest, and the Zuma government hasn't turned out to be as nasty as it might have been - partly because of people like Helen Zille in the wings, making sure that the government doesn't get away with too much - it's future is more uncertain.  Mandela's influence is clearly waning, and what happens after his moderating influence is absent is anyone's guess.  Hopefully Zimbabwe will not be the example to follow!  Elsewhere in Africa, long-term stability is still not assured.

But what about Europe?  More about this next time.

Economics and the stockmarket

OK, so much for posting every 1-3 days.  I just have too much going on right now - and my career unfortunately (or maybe fortunately) doesn't depend on this. 

So some random thoughts today from my own thinking about the current state of the global economy and the financial markets. 

First, unlike most of the previous economic downturns, the US caused this downturn, so coming out of the current recession will require the banking sector regulatory framework to be fixed so as to instill some confidence in both domestic and foreign firms and investors that nothing like this will happen again.  Also the US housing market is still not good and there is a threat of a collapse in the commercial real estate market which makes things risky in terms of a new wave of corporate bankrupcies.  In this sense the US is likely to come out of the recession late compared to other countries.  Put in economic language, the US usually drives the international business cycle, but this time it will lag the international business cycle.

Second, the state of the euro area is in flux right now.  There is no certainty about a European Monetary Fund (EMF) coming into existence, which would calm the markets and also instill some confidence in the future of the euro area.  There is also considerable doubt about how sustainable the Greek fiscal austerity measures will be from a political perspective, so this still creates some risk of contagion to other euro area member states.

Third, the Chinese economy has done remarkably well over the past few years, but the housing market there is precarious, and the bubble could burst quite easily, creating asset deflation and causing some banks and loan providers to be in serious trouble. 

So what does this all mean for where to put your money?  If you're keeping it in the US right now I'd put it into technology stocks as this is where the US clearly has a comparative advantage and will benefit from the pick up in economic activity that will clearly come first in the rest of the world.  Other than that I'd pick a Canada fund if you really want to be in North America as the Canadian dollar tracks the US dollar, and also the Canadian economy really doesn't have the (fiscal and real estate) downsides of the US economy.

I would take a sizeable amount of what you have and put it abroad - the emerging economy funds, Eastern European, Japanese and Gold funds are all good and will likely give you a better return over the next few years than you'd get from a US stock fund.  Nordic funds are also probably a good bet as apart from Finland none of them are members of the euro area, and also African funds will likely do well (if you can find any!) as the Chinese are continuing to buy up land and develop resources there.

Anyway, please let me have any comments you might have...I am actually thinking of starting a website solely devoted to offering this type of service!!

South Africa and the FIFA World Cup

South Africans are really gearing up for the FIFA World Cup soccer championship, which will be held in an African country for the first time in the event’s history. There is a lot of speculation that the event will draw a lot of foreign visitors to the country to see the matches and support their national squads, plus of course the new infrastructure which would add to the nation’s capital stock and also help to spur more South Africans to play soccer and focus all the nation’s ethnic groups on a single sport (for a change).


But as any sports economist will tell you, economic benefits from building new stadia or hosting sports events in the long term are usually marginal to say the least. Montreal’s massive debt due to the construction of the Olympic Village in the east end in order to host the 1976 Olympics, plus the demolition of 6 of the 10 stadia that were constructed by Japan and South Korea to host the 2002 World Cup are regularly trotted out as examples to demonstrate that hosting an international sporting tournament doesn’t necessarily having lasting effects in terms of productive new infrastructure.

But here I think the cynics are wrong. South Africa these days is a dynamic place – developing rapidly despite the high unemployment and wrenching poverty in parts – and has always had large numbers of sports fanatics in proportion to the total population, perhaps not on a par with Australia but still well up there. So I believe that the capital investment will pay off down the road, and especially as South Africa is a developing country with need for new infrastructure that other developed countries who have hosted these contests really didn’t need.

Here in South Africa though, all the attention is on the short-term benefits of hosting the event. I think these will be minimal and for several reasons. First, South Africa is not exactly next door to any other regular World Cup participating countries, and most other African countries tend to be poorer than South Africa. This is not the case in Europe, was not the case in Asia, and was not the case in South America either. Airline ticket prices will be high for most avid soccer fans in terms of getting to South Africa, and as any economist knows, price and quantity demanded are inversely related, so less foreigners should be expected than would otherwise be the case. This is already in evidence with the ticket sales made so far – over ¾ are to South Africans, the US has the second highest ticket sales, followed by the UK.

Second, most of the world is still not in a mood to spend large amounts of money on international travel – what might seem like fun and would result in minimal cause for dismissal in good times might not seem like such a good idea in a down economy with lots of unemployed workers eager to replace existing workers.

Third, it is the winter in South Africa – one of the nicest things about coming out here is to escape the northern hemisphere’s winter chill – winter in South Africa is not quite snow and ice, but it is hardly hot and humid in July in South Africa, so this will tend to lead to shorter visits by those “in the know” and perhaps even shorter visits by those “not in the know”. Of course I could well be wrong here, and those "not in the know" might end up boosting clothing sales in July!!

OK, I don’t wish to sound like a killjoy, and really I hope the economic boost from hosting the World Cup is significant, but what with prices being quite high in South Africa because of the strong Rand, plus the above reasons, I wouldn’t want to oversell the short term stimulus from the event.

Of course the long run is a different matter. If South Africa mounts a successful event, and people around the world get to see what a great place this is, I think it could really put the country on the map as far as international tourism goes, and mark a turning point in the views of international investors in the stability and maturity of the country. Here the knock-on effects ( - or externalities as economists call them) could be significant.

Go Bafana Bafana ( - the name of South Africa’s national soccer team)!!

Some thoughts on the South African economy

Currently I’m vacationing in South Africa on the Indian Ocean side of the tip of Africa at a place called St. Francis Bay, which is near to Humansdorp, which in turn is west of Port Elizabeth. It’s a place I know quite well as I’ve been coming here now for years – my first visit being back in 1982 if you can believe it. South Africa, is a commodity-rich country with an extremely diverse population and a troubled past, although it is by far the most successful African country and has experienced a massive influx of workers in recent years.


Apart from the great weather and generally friendly people you encounter here, I usually pick up some interesting gifts at great prices, and often end up spending more money than I’d usually like, partially as prices here are so reasonable. Labor here is plentiful and this leads to low costs for goods and services produced in this country or imported from neighboring countries.

But this visit things are different. For the first time when I convert prices in South African Rands (SAR) into US dollars I’m finding that prices are at or above what I’d pay for comparable items in the US. Interestingly the Europeans I’ve run into are finding exactly the same, so the implication is that the Rand is out of line with what economists call the purchasing power parity.

(You can skip this next paragraph if you’re an economist).

So what is purchasing power parity or PPP? It is the idea ( - and probably the oldest idea in economics), that (identical) goods or services should cost the same wherever you buy them. When you use the same currency it’s called the “law of one price” as you’d expect the same item to have identical cost whether you buy it in Jo’burg or Cape Town. Obviously there are small variations in price within a country, but by and large, the “law” holds. When comparing things internationally you obviously have to use the exchange rate, which means that you convert the price in US$ by the current exchange rate into SAR and then compare it with what the price is in South Africa. If prices are generally higher in South Africa we’d say that the Rand is “overvalued” compared to PPP, and conversely if prices are generally lower in South Africa the Rand would be “undervalued”.

At any rate, it is clear to me that the Rand is definitely “overvalued” compared to what it’s been on my previous trips out here. That does not encourage me and other visitors to spend and will likely mean that tourist revenues from spending will be quite a bit lower this season than they were last season. It also means that South African exports of goods and services will likely be falling in value as well, as foreign importers decide to source the products they were buying from South Africa from somewhere else – China for example!

This beggars another question though - why is the Rand so strong? The answer most commentators will give is that South Africa is a commodity-exporting country, and that commodity prices are high right now as we are beginning to come out of the global recession and demand for these products is beginning to outstrip supply.

Given the rate of inflation that South Africa has compared to say the US dollar, the Rand should have been losing value, not holding roughly constant over the past year. Given this “inflation differential” continues into the future, the Rand will likely suddenly lose value at some point in the next 6 months or so, given that the foreign exchange market starts to divert its attention back to other issues other than recovery from the global recession! I’m wondering whether this will happen before or after the FIFA World Cup happens here…I would suspect after…

But more on that next time….in the meantime the beach is calling!!