When is revenue lost?

In respect for Nelson Mandela’s death and funeral, many retailers closed yesterday for the day. This Business Day article claims a R300m loss for the retail industry as a result.

Except, no. Some fraction of those sales might be permanently lost, but the income hasn’t been spent and the cash still sits in shoppers’ pockets. The R300m is mostly just delayed.

There will be some impact where closed shops sacrifice sales to open shops.

There might even be some small amount of decreased consumption and therefore increased saving. The article headline wasn’t, “Retailers sacrifice means an increase of R300m in personal savings.”

This is part of an ongoing trend (probably for hundreds of years) for journalists, even respected financial journalists working at a respect newspaper, to seek the most impressive headline. It also reflects our very human tendency to ignore second order effects. Which is a pity because that’s where the really interesting analysis lies.

Sewing seeds of manufacturing growth

The NY Times has a fascinating article on the increasing demand for American made goods, particularly textiles, and the limited supply of labour with the relevant skills.

There is plenty more to the story than just manufacturing increasing in the US – it also includes an historical perspective on the sources of labour in the textile industry over the last two centuries.

The relevance for me and South Africa is – even with our 40% duties on imported textiles, why are we still shedding jobs? In the US, it’s been a desire for higher quality, more reliable quality, shorter turnaround times, cheaper transport costs and a growing discomfort with safety conditions in Asia.

The higher average incomes in the US also make price less of a overriding factor than in South Africa. The COSATU t shirts that were made in China at least once is a clear reminder of how cost impacts buying decisions above almost all else in big parts of our economy. I don’t know whether the quality of our production and the appreciation for buying locally made products is great enough locally yet. The NY Times article spend several paragraphs talking about the need for strong English and Maths skills. We’re still struggling with our legacy of broken education even while we fail current learners. None of this helps to take advantage of these trends.

Manufacturing growth in the US and other developed markets is also driven by increased automation. Higher real wage are less critical when automation in eras decreasing the amount of labour required. Possibly counterintuitively, this increases the demand for labour in developed countries even while decreasing global demand for labour.

Wages for cut-and-sew jobs, the core of the apparel industry’s remaining work force, have been rising fast — increasing 13.2 percent on an inflation-adjusted basis from 2007 to 2012

If you look at a graph of the share of US GDP that goes to labour compared to capital, it’s been a steady decrease for decades. I can only imagine the same is true in South Africa. The increased use of automation (including new robots that work more interactively with humans in auto plants) may drive this even further.

So is this a story that bodes well for South Africa? We should be a low (lower than the US and Europe anyway) wage producer so developed market manufacturing should hurt our export industry. Given that we import textiles from China, should we maintain hope – against all experience of the last two decades – of regaining a meaningful textile industry? Or do we need to recognize that Africa should be our biggest export area and we should leverage our proximity, both geographical and cultural, and focus on our competitive advantages over the Chinese? Where is our Industrial Policy in any of this?

How to force a conclusion from a study [updated]

So a study commissioned by the alcohol industry demonstrates that banning alcohol adverts will be a bad thing.  Consider me unsurprised and cynical.

I don’t know that the impact would necessarily be positive. I don’t know how much of an impact banning ads will have on consumption, but it does seem that the alcohol industry lobby, cunningly called the “Industry Association for Responsible Alcohol Use”, which is a bit of ridiculous PR spin, doesn’t seem shy to manipulate each part of the debate in their favour.

From the article:

“Qualitative and quantitative research by Econometrix shows that alcohol advertising is not a significant factor in determining consumption and has little or no effect on alcohol consumption per capita in South Africa,” said Jeffrey at the press briefing.

And then, some harder stats on the economic impact

  • Gross domestic product: An estimated reduction of 0.28% of GDP was to be expected.

  • Employment: 11 954 jobs was estimated to be cut.

  • Fiscus: Total tax income will decrease by R1 783-million; and

  • Trade: Exports would decrease by R225-million and imports would decrease by R304-million.”

There’s almost certainly an inconsistency here.  Let’s take that third bullet first. How is tax income decreasing? Since there is “no impact” on alcohol consumption from advertising, there will be no lower volumes of booze sold and therefore no loss of sin taxes. Ceteris paribus, alcohol industry companies will make higher profit, resulting in higher income taxes. Nowhere is there mention of higher profits to shareholders, greater returns on investment or reduction in prices. So I don’t see how the quantitative work here talks to the earlier conclusion that there won’t be a reduction in volumes consumed.

Again, it’s not that I alone possess perfect knowledge of what will happen to alcohol consumption, but it’s disingenuous to claim that it won’t lower consumption but then model the impact of lower consumption!

The other bullets are also interesting. Lower GDP and lower employment says something important and subtle or important and wrong about our economy. If consumers simply spend less, their savings will naturally increase and imports will decrease (based on the mix of imported versus locally produced alcohol). An enhanced savings rate is a key ambition of National Treasury. It’s not clear that this scenario is based for our economy at all. We haven’t yet talked to the higher profits to shareholders and investors, or more likely, price reductions in booze, resulting in an off-setting increase in consumption but possibly even greater savings, depending on the price elasticity of booze. Again, potentially further good.

Now in reality, it’s very likely that consumers will substitute at least a portion of their alcohol consumption with consumption of other goods and services. And what we’re saying is that whatever these things are, they will employ fewer people and contribute less to the economy that the production of alcohol. This just seems a stretch that really needs to be justified.

It’s also fairly clear that the analysis has not considered an increase in labour productivity through lower alcohol consumption, which will increase GDP.  Additionally, I see no analysis of the possible savings in healthcare costs associated with alcohol consumption (both medical things like heart disease and accidental death and injury).

The thing is, until the report is released in detail, all we have is an attention grabbing headline with no way of evaluating whether it’s actually carefully thought through and objectively evaluated, or whether it’s just massively disappointing work.

Update: Full report is available here

While the report is quite extensive and covers some of the points I’ve raised, it reads clearly as a piece of propaganda rather than objective research.

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LAC Seminar 2013 live tweeting complete list

A few people have mentioned that they found my “live blogging” or tweeting of the 2013 LAC Seminar in Cape Town and Joburg useful. I used the hastag #LACseminar2013. I’m repeating all of them here in case they’re useful in a slightly more long-lived medium of my blog. I didn’t cover all the sessions – below is all there is and yes, in reverse order for bizarre reasons I’m not going to go into now.

@23floor: Also, envisaged that product specifications, including commission, must be filed with regulator #LACseminar2013 #microinsurance

@23floor: And yes, a range of market conduct, board composition requirements are envisaged for micro insurance #LACseminar2013 #microinsurance

@23floor: Raw (cleaned and anonymize) data *might* be released publically. I would definitely support this. Data should be open #LACseminar2013

@23floor: PA90 understates mortality on average, but more under for males and only a little over for females #LACseminar2013 Continue reading

Open mortality data

The Continuous Statistical Investment Committee of the Actuarial Society does fabulous work at gathering industry data and analysing it for broad use and consumption by actuaries and others.

I can only begin to imagine the data horrors of dealing with multiple insurers, multiple sources, multiple different data problems. The analysis they do is critically useful and, in technical terms, helluva interesting. I enjoyed the presentation at both the Cape Town and Johannesburg #LACseminar2013 just because there is such a rich data set and the analysis is fascinating.

I do hope they agree to my suggestion to put the entire, cleaned, anonymised data set available on the web. Different parties will want to analyse the data in different ways; there is simply no way the CSI Committee can perform every analysis and every piece of investigation that everyone might want. Making the data publicly available gives actuaries, students, academics and more the ability to perform their own analysis. And at basically no cost.

The other, slightly more defensive reason, is that mistakes do happen from time to time. I’m very aware of the topical R-R paper that was based on flawed analysis of underlying data. Mistakes happen all the time, and allowing anyone who wants to have access to the data to repeat or disprove calculations and analysis only makes the results more robust.

So, here’s hoping for open access mortality investigation data for all! And here’s thanking the CSI committee (past and current) for everything they have already done.