If you were university educated in South Africa, you are likely to be in the market at various times in your life for a large LED backlit LCD panel with a high refresh rate and more HDMI inputs than you will ever need. You will also quite likely have a market-oriented, Anglo-Saxon view of government’s role in industrial policy and international trade. Thus you would probably say “yes, import cheap TVs from China so I can buy a cheap TV and not pay for inefficient local firms to manufacturer expensive, inferior TVs.”

If you are a TV snob, you will still want free imports of Chinese TVs to keep the prices down of competing, but fancier Sony and LG models from Japan and Korea.

If you are a little cynical, you might say South Africa could never have the manufacturing capability and scale to produce all the components and assemble them into a modern LCD TV. That’s not actually the debate I ant to pursue now, so in that case let’s say the alternative would be to locally assemble sets made with significant local components, even if the LCD panel itself were imported. Of course, the reason South Africa doesn’t have the scale to produce the panels themselves at the moment is a function of industrial policy decisions decades go. There is no absolute reason we couldn’t have that capability. But, that debate is related but separate post.

If you never completed Grade 8 (that I still think of s Standard 6) then you probably would rather have a job than a Chinese TV and even a single HDMI input or output is one too many. Also, you don’t care about free international trade leading to optimal allocation of economic resources or the World Trade Association for that matter.

But you wouldn’t necessarily be wrong.

Reason #1
A large-screen LCD TV is not a factor of production of any industry that I’m aware of. Restricting cheap imports won’t increase the costs of a domestic industry an therefore won’t reduce the competitiveness of a local company or industry.

So far so good.

Reason #2
The Chinese will still buy or raw natural resources even if we don’t buy their TVs. We aren’t a sufficiently big market for them in the first place. We don’t reduce our exports but we do reduce our imports. This grows the local economy.

This does assume that over time, the higher prices of Imported TVs will discourage their purchase for other goods or encourage purchase of South African made TVs. It also assumes,NAND this is where things get more complex quickly, that our currency won’t strengthen to reflect the reduced imports. A strengthened currency would make all our exports less competitive and imports more competitive, leading to higher imports and lower exports across all industries and consumption.

Reason #3
Te burden if higher prices will fall on the wealthy, whereas the boom of greater employment will fall on the less wealthy, even increasing total demand for labour.

A critical question is what sort of labour.

If it is skilled labour, then our right skilled labour market will have wage pressure without increased employment and there will be a transfer of wealth from television set consumers to skilled labour and an increase in the cost of production of many other industries. All in all not a great outcome. We’ve damaged several industries and are reliant on the relative consumption habits of skilled labour versus television set consumers to see what this means for domestic versus import consumption.

If the demand is for unskilled labour, or separate but well-timed government education and training policies provide unskilled labour with the necessary skills, the result is far more appealing. Wages won’t increase as unemployed resources are put to work. So, no damage to other industries. The productive capacity of unemployed persons is put to work in an economically productive way. The country is producing more things domestically so all the additional money spent on more expensive TVs is employed back into the economy. The recently newly employed are likely to focus their purchases on domestically produced items (especially since TVs are now made locally)

Assuming the caloric requirements of these newly employed persons are not much different from during their unemployed years, the opportunity cost for the economy as a whole of paying them to make TVs less efficiently than the Chinese is zero. There is noting better they could have done with their time.

The arguments of comparative advantage totally break down when there is significant unemployment in one country. Free trade is centred on the idea that countries should focus on producing goods where they have a comparative advantage. Quotas and tariffs distort the true comparative advantage leading to suboptimal solutions.

There are other ways of achieving a similar result. Taxing TV set consumption to pay for skills training and subsidised public transport might lower some of the restrictions on supply and demand imbalances in the labour force, but without the focus on growing a particular industrial sector that will give rise to a cluster of related industries, developed scale to lower costs, eventually gain efficiencies and export to African markets with lower cost than the Chinese.

Why should the Chinese target attractive industries for growth through strong industrial policy and South Africa doesn’t? Why are the Chinese so uniquely well placed to target LG and Samsung?

There are a hundred problems with this scenario, including possibly the choice of TV as the product, but there is more to this discussion than the Washington Consensus would have you believe. Disagree, please comment below!

The article does understate the problem that Germany’s success is significantly export driven – not everyone can export for obvious reasons.

Also, the author notes that consumption has grown more slowly than economic growth without understanding that is exactly the source of an export-encouraged boom. Growth in consumption will also grow imports!

It’s a good piece of legislation, even if at times some aspects of it may result in greater costs than benefits.

TimesLive has a story about the alleged noncompliance of medical schemes with the CPA.

Some of the issues may have merit, but this struck me as particularly troubling:

According to the act, it is unfair when a consumer is discriminated against on the grounds of age.

Our constitution explicitly allows discrimination on actuarially sound rating factors that have both a statistical and causal link. This is how insurance is South Africa still uses underwriting to select homogenous groups of risks and to limit anti-selection by policyholders. If widespread anti-selection were to occur, then life insurance would not be viable.

Medical Schemes in South Africa have only very limited underwriting options in order to provide as many citizens as possible with fair health coverage. “Late joiners” are charged a premium since they haven’t contributed to the societal risk pool since they were most healthy and therefore haven’t paid “their fair share”. This has to do with a specifically identified risk rather than general discrimination based on age. These restrictions are important to maintain the solvency and viability of medical schemes.

Some schemes prevent women who fall pregnant within nine months of joining the scheme from claiming for the pregnancy even though they pay full premiums

This point is more tricky, but it does again reflect a misunderstanding. “Full premiums” on an actuarial sound basis have probably not been paid, since the fair premium for a member who joins just to get pregnancy benefits and hasn’t contributed at other times would be much higher than the premium that is charged. This one is a little more grey and while I feel the rules are entirely fair, they may not be viewed that way by a particular judge on a particular day.

Some schemes require that members give three months’ notice when terminating their membership, whereas the act deems 20 business days to be reasonable

This might reflect the desire to not have members leave a scheme immediately after having utilized the maximum benefit available to them before joining another scheme. I don’t know how much of this behavior would ever happen, so this might also ultimately be changed.

Many schemes don’t enforce the allowed waiting periods for members joining. If some of these other changes were to be made, I would expect these provisions would be more regularly used. Of course, that is another of the problems cited with medical schemes arising from the CPA.

All in all, we may see some changes, but by and large these comments reflect a lack of appreciation for the actuarial realities of managing a health scheme with community rating.

When I say “doesn’t seem right” I’m referring mostly to the fairness of it, but I’m also wondering how it can possibly be true.

Of course the analysis if by the Authors’ Guild, so they are naturally likely to be biased towards authors. Specifically, I don’t care how many examples they quote – I’d like to see the real data or at least a random sample of data.

They don’t talk about sales volumes, but although higher volumes might still make authors better off than the pure margin analysis shows, I expect it will have an even better impact for the publishers.

The comparison of ebooks against hardcovers is an interesting choice. I would imagine there are far more paperback books sold each year – a more thorough analysis would consider that as well.

I read another recent story about John Locke making a fortune by leveraging the low cost of ebooks and the price elasticity of books. By dropping the price of his books to 99c he is making more money than when he was selling them for ten times that.  I don’t see how that isn’t a boon to authors from ebooks.

Ultimately, it probably isn’t ebooks that are bad for authors as much as it is the pricing model of current ebooks (in this case basically Amazon but also Apple with their iBook Store).

As I said at the start – I don’t know enough about this. If anyone can shed some light, please comment away!

One of the reasons given is:

Satawu previously warned that Aarto will result in job losses, as drivers will lose their licences once the maximum amount of demerit points are exhausted, and have a negative impact on the economy.

This demonstrates two of my favourite principles:

1. Almost everything is partisan. So partisan and self-interested as to make it blind to anything and everything else.
2. Economics is a mystery.

There isn’t a lack of taxi drivers. There isn’t a lack of a deep pool of resources of potential taxi drivers just waiting to take the place of a recently vacated driving job.

What really surprised me though is that the taxi industry seems to think they are subject to the law than the average joe driving on the roads today. Given the overloading, dangerous driving, smooth-tired aqua-planing, randomly stopping, unroadworthy taxis on the road, not much law enforcement seems to be happening as it is.

Unless AARTO means the bribes will have to go up since the consequences of not bribing are now more serious?

The economics of a fund manager depends entirely on growing funds under management so that revenues (based on assets under management) grow to be larger than costs (significantly fixed and at most semi-variable). Details of performance fees and the second order impact of investment performance aside, a successful fund manager must attract positive net client cashflow, and lots of it.

Half the 960 available unit trusts have less than R100m in AUM. Some of these may be rapidly growing new funds, but many have been stagnant with slow growth for several years.

The FSB’s attention presents opportunities for consolidation between funds and should place larger funds in a stronger position competitively. Total Expense Ratios (TER) for these funds with significant scale should already be lower than smaller funds. Maybe it’s time the larger funds made more if their size and cost efficiencies. If they are going to take the heat for being too large to be nimble, they might as well reap the benefits too.

It will be interesting to see what this means for white labelled funds and whether the economics of these convince the regulator that they should survive.

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1 The Competition Commission is necessary

Monopolies serve to increase prices for consumers. In Monopoly, the “rents” charged are instantly higher as soon as a player has a monopoly on property in a certain area.

Worse than the increase in prices and decrease in supply, the additional profit for suppliers is not equal to the cost to consumers from higher prices, resulting in an overall “dead weight loss of monopoly” or an overall cost to society.

To date, the Competition Commission has focussed on cartels and price collusion. We can only hope soon they will consider issues of local loop unbundling to provide real competition to the effective monopoly Telkom has on ADSL lines.

2 The easy availability of credit is a useful and dangerous tool

An important consideration in Monopoly is to prevent competitors from owning property (so that you don’t have to pay rent on as many properties as possible) and definitely don’t get a monopoly (so they can increase rents and improve the properties, increasing rents even further).

A key way of doing this is by buying as many properties as possible, even if you mortgage many of them with a fresh injection of cash from the bank and very reasonable repayment terms. Leverage, or borrowing, can provide cost effective (especially after tax considerations) financing for profitable projects. It can be cheaper to raise than equity and increases returns to shareholders.

Leverage also creates significant risks, both in Monopoly and real life. Overextending can make you more likely to end up bankrupt. Also, by artificially increase the supply of funds for purchasing property while keeping the supply constant, the price of property will increase dramatically with distorting impacts on the allocation of resources within an economy.

3 Trading is good for those who trade

Every time two people (or organisations, or countries) trade, both parties are better off than they were before. (A hint, otherwise they wouldn’t have traded.) The trading parties are each better off, and the non-trading competitors are worse off, because a potential trade is now off the table and they are not in a better position otherwise.

There are some plausible arguments for trade restrictions in very particular circumstances. For example, I think I buy the idea of nurturing infant industries, but only if there is a reasonable chance that the industries won’t only grow as far as pimply, sulky adolescents with no drive or ambition.

Other than that, trade is good as it increases prosperity on average, which is one important way to lift more families incomes above the poverty line.

4 Liquidity risk can be the end of you

While buying as much property as possible and mortgaging some to provide additional funds will generally work in your favour and allow you greater control over the board, it also introduces liquidity risk. If you don’t have the funds to pay rent or taxes or fines when they unexpectedly fall due, you will be forced into a fire-sale of houses and hotels at way below replacement cost. You may need to mortgage even more properties, reducing your income generating ability and possibly sending you into a debt trap where your income isn’t sufficient to meet your expenses.

Always watch your liquidity. It has almost become a truism that more businesses fail because of liquidity than solvency or profitability.

5 The world is full of randomness, but it always helps to calculate the numbers

In Monopoly, the player “roles the dice and moves the mice” so to speak. There is plenty of luck around and skill can seem to disappear in an avalanche of random numbers.

Nassim Taleb (of Fooled By Randomness fame) would suggest that in everyday life we underestimate risk and overestimate skill. I tend to agree with this overall comment. It doesn’t mean that we should try to use our skill as much as possible.

Did you know that certain properties are relatively more valuable than others? The properties just after Jail are more likely to be hit than others, since several cards and one square on the board send the player to jail. Similarly, several chance cards require the player to advance a certain way, making the squares immediately after a chance square less likely to be hit. The cost to benefit of houses on certain squares are better than others, and the best bang for buck is somewhere between 2 and 3 houses per property.

It’s important to be aware that risk and uncertainty exists, but it’s more important to understand risk in a way that allows informed, risk-aware decisions to be made.

Identify, measure, mitigate and monitor risk!

Are all the lessons good?

Slightly tongue in cheek, there are a few other lessons of dubious validity:

1. Stay in jail and make more money
2. You get to keep the money if the bank makes an error in your favour
3. You can take as long as you want to repay your mortgage and only have to pay 10% interest
4. If the bank runs out of money, it can always photocopy some more
5. When the game is over, you can forget about the debt you have and walk away

Regulations and Big Bank Buildings

Why have banks historically had impressive  marble-slathered floors and columns, high ceilings and ornate, heavy front doors? Would you really deposit your salary and savings into an operation run out of a caravan parked on a corner on your way to work?

The fixed, permanent high-investment nature of the impressive buildings is one way that banks can  communicate their seriousness, their high investment requiring a long-term relationship with a large customer base to recoup their upfront costs and their inability to up and off and disappear with all their assets overnight. This communication of financial strength and longevity gives customers the confidence to trust in them and bank with them.

If you’ve thought about this for more than a few seconds, you should be asking an important question. “How do Internet-only banks, with their apparent lack of real, physical assets and high upfront investment in their operations support this argument?”

The answer is that the world has moved on in the last hundred years or so. Banking regulations and rules, smarter prudential supervision, deposit insurance (in some countries) generally provide an additional safety net not present in the past when the huge, expensive bank buildings were constructed. We now have greater trust and confidence (even after the testing and trying of the Global Financial Crisis) that our money is safe with a regulated bank.

In fact, in South Africa, I’m not aware of a retail depositor losing money in a regulated  bank in decades. The financial  crisis in the US, in which many banks failed (41 that I’m aware of) no individual depositors have lost money. Northern Rock in the UK was fully guaranteed by the Bank of England.

We have many reasons to be confident in our banks, and thus the physical demonstration of stability is no longer required.

Would you fly on my airline?

I have a plane. You don’t know when it was last inspected, let alone service, and certainly not by whom. You can’t be sure that the pilots are trained, awake and  sober. We’ll land at airports we chose, but you won’t know whether we considered weather conditions, have working communication with air traffic control or whether we bothered to check that the runway is long enough for our type of aircraft.

Did I mention that our prices are very low?

Somehow I doubt that our low prices are much of an incentive. In fact, I would argue that many passengers would choose to fly on a carrier where the prices reflected sufficient profit and margins for investment in safety and maintenance, for paying trained pilots and not skimping on fuel because cash flow was tight.

Choosing a strong, profitable airline as as proxy for a safe airline

Many would choose airlines with strong balance sheets and long histories of profitable trading. Airlines could differentiate themselves through safety records and the use of highly paid independent safety inspectors and consultants.

Sure, the prices would probably be higher than the are today. This might be a strong recommendation for safety regulations in that they may well increase the number of passenger miles flown since they lower costs subject to a minimum level of safety enforced through the rules.

The safety regulations, imposed by a credible regulator and inspector, give us confidence to fly on airlines irrespective of other indicators as to the safety or otherwise of plans and the training of staff. The regulations fill the requirements of fancy bank buildings and strong financial track records.

Without regulations, we might have a more profitable airline industry, not because of the costs imposed by the regulations themselves but rather because of the removal of pricing power.

The hype and hoopla around this topic is fueled by our feelings as consumers of being charged too much big big monopoly companies. So I should start by saying that I’m not saying that we are paying too much. I’m not saying that because I don’t know enough about the costs of providing cellular services in South Africa. Maybe we are, maybe we’re not. Also, I’m not saying there aren’t monopolistic practices in the market – again I simply don’t know. Given the other stories torn from inside companies by the sharp teeth and salivating jaws of the Competition Commission, it’s understandable that many suspect consumer-unfriendly play by most large South African companies, particularly those in industries with a small number of players.

What I am saying is that most of what you read in the news about interconnect is horribly misguided.

The biggest misconception is that interconnect fees are an expense for cellular providers, and that the removal of this expense would allow them to reduce tariffs to consumers. Well, it is an expense, but it is also a source of revenue. Every time one company pays an interconnect fee, another company is receiving it.

Interconnect does not change the total amount of profit within the cellular industry. It may redistribute it a little, and there may be negative medium term competitive implications arising from interconnect, but lower interconnect won’t automatically increase profits that could allow competitive price lowering for the benefit of consumers.

TechCentral has an interesting article: Bain warns consumers not to expect cellular price cuts.  Of course, it also include some done-to-death flawed statements (whether from Bain or inserted by the zealous staff writer) such as:

Because new players have few customers at first, most calls on their networks will be to networks of other operators. High interconnection fees make it difficult for them to enter the market.

It’s not that this statement is incorrect (it is in fact correct) it’s just that it is horribly misleading because it only presents one side of the story. I’ve reworded it to provide the stunning insight:

Because new players have few customers at first, most calls to their networks will be from networks of other operators. High interconnection fees make it profitable for them to enter the market.

If you are a small cellular operator, most people calling your customers won’t also be your customers. You get to charge them an interconnect fee for most calls. You can model this in a spreadsheet (I’ve done it) and provided two basic assumptions hold, interconnect is irrelevant as a primary force. Fees in and expenses out equate .

1. “Cellphone users must make calls, on average, equally to all other subscribers independent of network.” If Cell C customers are more likely to call Cell C customers rather than a random cellphone user in South Africa, the numbers start to change. Although I don’t have info to back this assumption up, it feels reasonably robust.
2. “Customers on all networks must, on average, make the same number of calls.” This is actually where the problems arise and the true cost of interconnect exists.

Why is assumption #2 a problem? Think about the goal of competition for consumers: “Profit maximising companies see to increase volumes by lowering prices, gaining market share and thus making more profit. Provided Marginal Revenue is above Marginal Cost, companies should cut prices.”

So, what happens with interconnect fees above “true” cost of completing the call? When a company seeks to lower its prices, below that of the competition, its customers will make more calls than average. (This is intuitive and also expected from a downwards sloping demand curve.)

Company A reduces its call rates. Company A’s subscribers will make more calls (incurring interconnect expenses for Company A paying to Companies B, C and D) but customers of Company B (and C and D etc.) won’t be making more calls into Company A. Thus, Company A pays more interconnect and receives no more interconnect. Its costs have just gone up, pushing up Marginal Cost to a point where it doesn’t make sense to lower prices.

Voila – a perfect pricing system to force prices higher and higher. If Company B raises it’s prices, its subscribers will receive more calls than they make, resulting in more interconnect revenue than expenses for Company B. If the interconnect fee is sufficiently above the true cost, the reduction in profit form lower call volumes will be more than offset by the much  higher profit from interconnect fees being greater than interconnect expenses.

So interconnect fees need to come down to true cost plus a fair profit margin. It has little to do with interconnect being an expense factored into retail tariffs, but rather a function of the competitive pricing actions it encourages.