US Ekonomie Nuusbrief

Research chair extended

The National Research Foundation (NRF) has recognised the excellent results of Prof Servaas van der Berg and his research group Resep by renewing funding for his national research chair in the Economics of Social Policy for a further five years. This chair has been funded for the past ten years under the South African Research Chairs Initiative (SARChI) of the NRF and the Department of Science and Technology. Funding covers provision for research activities as well as the chairholder’s salary, thereby allowing the Department to use the released funds for more personnel.

This research chair forms the core of Resep (Research on Socio-Economic Policy), a group of researchers within the department that focuses on research in the Economics of Education, Economics of Health, Labour Economics, and analysis of poverty and inequality. About 25 researchers are active in Resep, including some full time departmental personnel, but also full time researchers and PhD or Master’s students. Funding is largely obtained from research projects that Resep undertakes for government and institutions such as the World Bank, UNICEF, UNDP and WIDER (World Institute for Development Economics Research), building on the strong technical skills of the research team. The group’s website explains more about their activities.

In the five year reporting period, the research group attained more than double the target number of PhDs. Tapida Mashakada, Martin Gustafsson, Dieter von Fintel, Paula Armstrong, Nic Spaull, Marisa von Fintel, Cobus Burger, Hendrik van Broekhuizen, Anja Smith, Gabi Wills, Laura Rossouw, Asmus Zoch, Debra Shepherd, Anderson Gondwe and Janeli Kotzé all completed their doctorates, and Kholekile Malindi, Thomas Ferreira and Nwabisa Makaluza are expected to submit their theses this year.

Over the same reporting period, this chair had committed to producing 20 journal articles or book chapters and 40 Working Papers. Actual output far exceeded this target and between January 2013 and March this year Resep had already produced 45 journals articles (24 in international journals), 8 book chapters, 2 books, a large number of research reports (some of which are also really books), and also 45 Working Papers (counting only those on the Department’s Working Papers website). There is also an impressive set of PhDs candidates in the pipeline.

New editor for SEE

The Journal for Studies in Economics and Econometrics (SEE) is a leading South African scholarly journal. The journal had its origin with Prof Jan Sadie, who, being frustrated with the lack of quantitative analysis in South African economics, established a new journal – based at Stellenbosch – with an emphasis on quantitative analysis. Over a number of decades, the journal has become a leading authority on South African economic issues and, under the editorship of Prof Eon Smit (of the Stellenbosch University Business School), expanded its focus to include contributions from across the African continent.

Willem Boshoff, associate professor of economics in the Department, will become the new editor from August 2017. Prof Boshoff is proud of joining the editorial team and has big plans for the journal. “The first step is to enhance the SEE’s prestige by making it more accessible to an international readership. This requires moving to an electronic journal platform serviced by one of the large international publishing houses. The second is to increase the number of readers by catering to topics of current national and scholarly interest.” To this end, Prof Boshoff aims to introduce theme-based editions, with the first edition – on the South African business cycle – scheduled to appear at the end of this year. Prof Boshoff has also secured slots in 2018 for an edition on South African competition policy and one on cliometrics (econometric applications to historical questions). A further innovation is the introduction of short commentaries on each published article, which aims to enhance deliberation and critical engagement with research. Says Prof Boshoff: “I hope that these innovations will further strengthen the position of this excellent journal and bring policy-relevant and critical research to more readers in South Africa and beyond.”

Who benefited from 19th century railways?

In 1870, on the eve of South Africa’s mineral revolution, a Member of Parliament in the Cape Colony, Robert Godlonton, said the following: “Roads and railroads were for the public benefit, and in their construction they should not look forward to profit”. One of the fascinating things about the Cape Colony’s development following the discoveries of diamonds in the South African interior, was the public ownership of railways – and the low rates of return the government received on these investments. A new paper published in the European Review of Economic History by Johan Fourie (associate professor in the department) and Alfonso Herranz-Loncan (Department of Economic History, University of Barcelona) show that the railways between Cape Town and Kimberley, built largely to support the early mining industry, substantially reduced the cost of transport to the interior. Using social savings analysis, the authors calculated that the railways accounted for a massive 22 to 25 percent of the increase in labour productivity between 1873 and 1905.

The railways did not benefit everyone equally, however. Using 1905 traffic data, the authors show that it was especially the mining district of Kimberley that benefited most from the construction of the railways, lowering the costs of food and fuel. Western Cape wheat farmers, too, gained access to a fast-growing market. Other territories, though, like Basutoland, lost market access after the railways were built. A German missionary, Robert Germond, wrote the following in his diary of 1887: “Basutoland, we must admit, is a poor country… Last year’s abundant harvest has found no outlet for, since the building of the railway, colonial and foreign wheat have competed disastrously with the local produce”. This spatial reorganisation of economic activity was not entirely accidental; it was the result of the political influence of major diamond mine investors – like Cecil John Rhodes – and Western Cape farmers – like Rhodes’ alliance partners, the Afrikaner Bond. The invisible hand, then as now, is often guided by politics.

Staff members attend Barcelona summer school

Summertime in Barcelona offers a multitude of rewards, not least of these being the Barcelona Graduate School of Economics (BGSE) Summer School. We were just two amongst the approximately 200 attendees school this July/ August. The courses offered in finance, data science and economics are just one-week long (in other words, intensive!), with world-class academics and practitioners as the presenters. We enrolled to take courses in Economics of Education (presented by Prof Derek Neal of the University of Chicago), Labour Economics (presented by Prof Robert Shimer of the University of Chicago) and Gender Economics (presented by Libertad Gonzalez of BGSE). Although the focus of the courses, much like the majority of the attendees, tended to be from the developed world context, we found the insights gained and opportunities for peer interaction to be invaluable. Kholekile was even able to present some of his PhD research to students and lecturers from the labour economics track, and, in my opinion, he took the questions "fired" by the professors in his stride. We would encourage anyone interested in getting exposure to cutting-edge thinking (and some Barcelonan sun) to seriously consider taking one of the many courses offered by the BGSE Summer School. You can find the full catalogue of their courses from this year at http://www.barcelonagse.eu/study/summer-school.

How to soften banking crises

“Macroprudential policy with convertible debt”, Journal of Macroeconomics, (2017), DOI: https://doi.org/10.1016/j.jmacro.2017.07.003

It has now become widely accepted that many financial institutions were undercapitalized both prior to the 2007 global financial crisis and thereafter. A number of central banks, such as the Bank of England and the South African Reserve Bank, have since instituted macroprudential policy as part of their mandate to ensure financial stability.

Specifically, the purpose of macroprudential policy is to limit systemic financial distress, with the ultimate objective of curtailing macroeconomic costs associated with that financial instability. While bank capital adequacy rules (as in Basel III) provide a coherent framework for macroprudential policy, it neglects the barriers to external equity financing. In other words, raising additional capital through rights issues or retained earnings faces various constraints such that capital is scarce precisely when financial institutions need it most.

Contingent convertible debt (CoCos) provides an answer to equity issuances during banking crises and recessions. CoCos are debt instruments which automatically convert into common equity when, for example, a bank's capital-asset ratio falls below a predetermined level. The main objective of CoCos being to replace the lost capital of a financial institution in a timely manner. Simply put, CoCos are designed to spread losses more widely amongst bank creditors rather than taxpayers through a government bailout; they do not share in profits during good times, and they automatically convert into equity to absorb losses during bad times. The effects of CoCos on financial stability and their implications for the real economy have not been studied in a quantitative general equilibrium framework. This paper aims at filling that gap in the literature. The results show that CoCos mitigate the stability trade-off between the real economy and the financial system in episodes of financial distress.

The Journal of Macroeconomics (1979) publishes theoretical and empirical articles that span the entire range of macroeconomics and monetary economics. The journal is associated with reputable academics and high quality papers. This paper will be published in a special issue on “Banking in Macroeconomic Theory and Policy” along with established researchers Claudio Borio, Michał Brzoza-Brzezina, Leonardo Gambacorta, Marcin Kolasa, Jean-Christophe Poutineau, and Gauthier Vermandel. [Current articles in press include established researchers such as John B. Taylor, Robert L. Hetzel, Peter N. Ireland, David Laidler, and David Glasner, as well as recently influential academics: Josh Hendrickson, Scott Sumner, David Beckworth, Miles Kimball, and Michael Belongia.]