ON THE MONEY
Solutions should be based on evidence, not flaky tweets
Fake news isn’t even needed to spread bad policy ideas
If Twitter were all you had to go on, you’d be sure that economic policy was set by whoever could whip up emotions most readily. You’d have no idea that hundreds of thousands of academics around the world dedicate their careers to thinking through different policy options, testing alternatives and studying data. You might also be unaware that teams of economists and other social scientists in our National Treasury, Reserve Bank, universities and research centres are actively studying the best ways to address our challenges of poverty and inequality.
Twitter’s singular contribution to the history of ideas is to have created a space in which bad ones can spread fast. A study by academics at the Massachusetts Institute of Technology found that fake news was 70% more likely to be retweeted than verified news. Fake news, of course, is a different problem to bad policy ideas per se, though fake news is often calculated to build public support for bad policy. On Twitter in South Africa, fake news isn’t even needed to get some bad policy ideas to spread.Two recent examples are the ideas of a sovereign wealth fund and a state bank. Both have been propounded in the strongest terms 180 characters can contain.
One response is that these two things exist already. You could argue that the Public Investment Corporation is effectively a sovereign wealth fund. And you could argue that not only do we already have a state bank, we have several, including the Land Bank, Development Bank of Southern Africa, Post Bank and Industrial Development Corporation, among others. Between those the government has the biggest retail banking branch network in the country, the largest infrastructure funder, the largest industrial development funder and the largest dedicated rural development funder.
Of course, in the world of bad policy ideas, no one tries to explain what it is that is missing from the status quo, or why this wide range of institutions has failed to fill those gaps. They also never suggest that the mandates of these institutions could be amended to address genuine issues, rather than the considerably more expensive and complex demand to build a new institution from scratch.
The dominant academic view on publicly owned banks is that they perform worse than banks owned by other shareholders – in a financial sense, but more surprisingly in social outcomes too. Government-owned banks tend to be used for political ends, backing the activities of political allies rather than what makes business or social policy sense. These are not my views – they are based on research by social scientists. A search on Google Scholar will quickly lead you to their work.Our already-existing state banks do a not-too-bad job in their respective mandates, though there have been episodes that starkly illustrate the risks. Consider how the Guptas were backed by the IDC in their Oakbay Resources listing, leading to losses for the IDC of over R300-million.
Sovereign wealth funds are similarly debated in the absence of clarity or research. First off, what do we mean by the term? The exemplars of the idea are those like Norway and the United Arab Emirates. But when one looks at closely, it is clear that South Africa could never emulate them. They were created specifically to trap profits earned from oil sales and to prevent them from entering their domestic economies. By doing that, these countries ensured that their currencies did not appreciate and destroy other economic activity. These sovereign wealth funds invest in assets around the world and avoid domestic assets. Norway’s oil fund owns on average 1.3% of every listed company in the world. The main reason SA could not emulate this is because we run a current account deficit. We are net recipients of savings from the rest of the world. We need what foreign earnings we generate to actually enter our economy to finance our imports. Trapping it into a sovereign wealth fund would weaken the rand and leave us ever more reliant on foreign capital flows.
Of course the UAE and Norwegian examples are not the only ones. Often, large state pension funds are described as sovereign wealth funds (Norway has one of those too). They do invest in their domestic economies, with the aim of generating returns to meet future liabilities to pensioners. The PIC certainly qualifies in this sense. So if that is what we mean by a sovereign wealth fund, we already have it.
Debates on policy ideas should happen with reference to evidence. We have social scientists able to gather evidence and test ideas. They could do a much better job of entering the public debate themselves. But the rest of us would do well to let our views be guided by the evidence, not the tweets.