Monday, 30 January 2012

A new tax on businesses to be paid to municipalities?

IOL today reported that the SA Local Government Association (SALGA) is backing a new tax on businesses to be paid to municipalities. Aparently, "with municipal debt nationwide totalling well over R60 billion, the National Treasury said that at least one metropolitan government had mooted the new tax" and it has also been discussed at a MinMec meeting. The article goes on to report that Mr Jan Hattingh, the Treasury’s chief director of local government and budget analysis explained that the proposal has been discussed at a Budget Forum, but there is a process to follow: Salga would have to propose the tax to the Treasury, followed by consultation with the Financial and Fiscal Commission and the Department of Co-operative Governance and Traditional Affairs.

At this point one should note that there are few details available about the above proposal. Will the tax be levied at local level? Or will SARS collect and Treasury redistribute? Before we get to the obvious objections to taxing businesses during an economic downswing and the #epicfail of  local government in South Africa, it is worth to briefly mention the theory of taxes and spending at sub-national level. What sort of tax would be sensible or fair?

According to the ability-to-pay principle, the burden of a tax should be shared according to taxpayers' ability to pay - firms with bigger payrolls or profits, pay more. This is best when typical public goods are supplied that are non-rival and non-excludable in consumption and equity is an important consideration. The alternative is the benefit principle - the tax burden is shared out among taxpayers in accordance with the benefits they receive. This is best when the tax is a user charge and the link between tax income and spending is more direct.

Proponents of fiscal decentralisation argue that provincial or local governments may be more efficient at allocating resources since they are closer to the people and better able to determine their demand for public goods and services. In an economist's perfect world, the decentralisation of spending responsibilities is also followed by revenue-raising capabilities. Since the people are closer to government they should also be able to better monitor taxes and spending and if they do not like it, vote with their feet and move somewhere else.

The implication is that the proposed tax may be neither sensible nor fair. It is not clear that the businesses will be paying a user charge for a local good or service supplied according to their preferences. If the aim is only to repay some of the debt of ill-managed municipalities, allowing them to set rates will precipitate a tax competition race to the bottom with the more solvent municipalities setting lower rates and drawing in businesses. If government wants prevent this and administer a uniform tax centrally, there is no sense in setting up another tax to do it. A simple structure is always more efficient.

My final point has already been made in the responses to this tax proposal on Twitter: Pouring more money into municipalities is not the solution to improved service delivery.

This relates to earlier work by myself and some co-authors (See Krugell, Otto & van der Merwe, 2010 in the SAJE no less) where we examined indicators of the ability of municipalities to supply services. We constructed a service delivery index and had a close look at the places that were able to improve delivery.

Our results showed that:
Different municipalities face different challenges reflecting socio-economic conditions and municipal competence. The analysis showed that urban municipalities with higher population densities and greater GDP per capita are able to provide better access to services, while improved service delivery attracts people. Improvers have, on average, fewer vacancies, more spending on goods and services in proportion to the total budget, and they relied much less on grants income relative to rates income.
Re-reading this I realise it is a long story to make a simple point - a new tax on business at municipal level is a bad idea.

Saturday, 28 January 2012

SMMEs - more research needed

This week I came across  a number of mentions of the importance of small business and entrepreneurship for economic growth, employment creation etc. At the ERSA workshop policymakers (Treasury, dti) presented it as received wisdom that SME's create the jobs. There was also a discussion to and fro on Twitter:

And finally, Grant Thornton released the results of their Q4 International Business Report. The survey shows that over-regulation is a key constraint to business expansion in South Africa. 

Academics, of course, would like to know more. The 2010 Grant Thornton report indicates that 350 firms are surveyed and they are mostly medium to large (100-399 workers). My questions are what kind of regulation is limiting growth? Is it ownership regulations, labour regulations, tax regulations, environmental regulations? Are the impacts different for smaller and larger firms, younger and older ones? Are there differences between exporters and non-exporters? Complying with regulations, or not having to comply with them, is often closely linked to paying bribes to corrupt officials, but the report makes no mention of whether firms also consider corruption when they are asked about regulations. What are the costs of regulation in terms of money and time and what do firms do to minimise them?

The last study that was able to answer these type of questions was Neil Rankin's 2006 paper: The regulatory environment and SMMEs. He described data from the 2003 World Bank Investment Climate Assessment (ICA) survey and provided a comprehensive analysis. He concludes that: 
Labour regulations are the most commonly mentioned regulatory constraint to growth. Exporting firms and those with a higher proportion of unskilled workers are more likely to mention labour regulations as a constraint than other types of firms. The response to labour market regulations differs by firm size. Larger firms are more likely to outsource or sub-contract whilst smaller firms are more likely to do nothing. It is unlikely that this is because they are not constrained by these regulations but rather because they lack the resources to respond.
Rankin also finds that small firms face higher costs in tax compliance, which is particularly worrying considering this week's reports that South African firms face high effective tax rates (2nd highest among the biggest 60 economies according to Mike Schussler's analysis).

The piont is that we need to know more about SME's, what obstacles they face and whether they generate growth and create employment. Following Neil's 2006 paper, using 2003 data, only the 2007 ICA survey contains enough information for detailed analysis, but that is rather dated already. What has happened since the global recession started in 2008? Now if only someone like Grant Thornton would involve a couple of academics in the next round of the survey...

Tuesday, 24 January 2012

ERSA workshop

This week I am attending the ERSA workshop Contemporary Analysis of International Trade. The workshop is built around what Jim Fairburn calls FUGSA - the Feenstra User Group SA - and Jim, Lawrence Edwards and Neil Rankin have been covering a number of topics in International Trade based on Feenstra's book.


On Monday Jim discussed the link between trade and growth in three parts:

  • The links between trade and productivity,
  • Growth and monopolistic competition, and
  • The empirical evidence on trade and growth.
Neil Rankin followed with a presentation on models and evidence on firms and international trade. The key framework is the Mellitz model and building on an explanation of the model, Neil presented some interesting points:

  • Few firms export and exporters are diffferent - they are typically large, established firms that are capital intensive and use high-skill labour, they are more productive and pay higher wages.
  • Multi-product firms that exporting to multiple countries are rare, but they contribute the bulk of the value of exports.
  • There are more single-product firms exporting to a single country but the values are low.
  • Exporters are significant importers of inputs.
This simplifies a much longer and involved explanation of firms and trade, but clearly raises some interesting issues:

  • Is it self-selection or can exporters learn by doing? Who are the so-called "born global" firms?
  • Looking at U.S. evidence it does not seem to help to aid or develop small-firm exporters. Policy should rather support firms to grow big and some will export.
  • If exporters import inputs it does not seem to be sensible to weaken the exchange rate to support exporters.
Today saw presentations on anti-dumping, micro-evidence on price setting and product market evidence of African integration, but I accidentally deleted my UPAD notes and won't comment off the cuff anymore than saying it was interesting. If the slides are shared, I'll add the stories!

Thursday, 19 January 2012

Fuel cells and a special economic zone for platinum?

Today saw this interesting article on The Engineering News' website: the DTI is considering the establishment of a special economic zone (SEZ) for platinum linked to the production of fuel cells.

"DTI director-general Lionel October tells Engineering News Online that a DTI team is working with the participants to determine the economic viability of establishing a central platinum hub with satellites to allow for locational flexibility.
“Some of the provinces and our local companies have been working on moving into the commercialisation of fuel-cell technology, so definitely this could be one area that we designate an SEZ,” says October.
The South African government is hoping its new SEZs Bill and policy will create the framework for the development of new industrial nodes outside of the traditional industrial heartlands".

As with these sorts of plans and the articles about them, much is made of South Africa's supply of platinum and the global demand for fuel cells. I do not know enough about the industry to evaluate the size or value of this opportunity, but the last part of the quote has me worried - the traditional heartlands are agglomerations because they work.

The article goes on to say:
"October makes the point that South Africa’s SEZs must be designed to offer quality infrastructure, and that the incentives that go with them must be seen as "top-ups" rather than their central purpose".
and further:
"A prime location is being sought for the creation of a kind of ‘Platinum Valley’ that emulates the great Silicon Valley success of the US".

The geographical economics literature clearly shows that enduring agglomerations are build on both internal and external economies of scale. Surely, the North West province has the internal economies in the mining of platinum, but it is not clear that this is the case in the production of fuel cells. Is there a market failure here that requires a "big push" of infrastructure development or top-up incentives? I am not sure. This may be an academic's concern but I would like to see a hard-hitting study of the fuel cell product space. Would the SEZ have the thick (high-skilled) labour market, specialised suppliers of intermediate inputs and knowledge spillovers to sustain a real agglomeration?

Maybe we are still thinking about industrialisation in a 20th century framework. In a recent NBER working Paper Richard Baldwin makes some interesting points about building and joining supply chains after globalisation's second unbundling, but I'll leave that for another post.

Wednesday, 18 January 2012

Embed this tweet

I have read about this and tried many times to embed a tweet and all of a sudden the new Twitter kicked in and here we go. It is a slightly random one, but hopefully a taste of more to come.

The spatial distribution of manufacturing

Today I have been busy with some background reading for a presentation at the ERSA Workshop next week and have had a look at Fedderke and Wollnick's The spatial distribution of manufacturing in South Africa (2008). It captures a number of the things that make South Africa's spatial economy unique and shows the direction for further work in this field.

The paper used data from the manufacturing census 1970 to 1996 and looked at regional specialisation and industry concentration at provincial level. Their description of the data showed that manufacturing value added is dominated by Gauteng. However, they did not find a consistent trend towards regional specialisation or despecialisation.

Over the period Mpumalanga, the North West and Limpopo caught up from a low base. In KwaZulu-Natal, the size of the manufacturing sector grew by 80 per cent over the 26 years. Manufacturing value-added in Gauteng doubled from 1970 to 1982, but then declined through 1996. Between 1993 and 1996, when the economy was starting to open up, all provinces experienced specialisation.

The analysis of industry concentration showed that the most concentrated industries, apart from Iron & Steel and Motor manufacturing, are smaller industries.

In their model of the determinants of geographical concentration Fedderke & Wollnick examined measures of scale, linkages and technology. Their results showed the following:
  • Internal scale economies encourage concentration.
  • Industries with low labour intensity and extractive industries with high capital intensity are dispersed.
  • Concentration of human-capital-intensive industries reflects SA skills shortages.
  • High industry-specific productivity gradients are associated with concentration.
Throughout, South Africa's unique geographic dispersion is showcased: first, through a manufacturing sector closely linked to resource extraction and thus to first-nature geography's luck of the draw, and second, through human/labour geography that was adversely influenced by the era of grand Apartheid. The key question is, what has happened since 1996? Since democratisation, extractive industries and large-scale manufacturing has become less important and services have grown, the economy has been opened up and people are more mobile, but is there evidence of agglomeration forces driving local growth?

Stay tuned for more this semester...

Cities and the fixed-gear bike index

The Priceonomics blog has an excellent post on US cities and their fixie index. They started with the notion that fixed-gear bikes are a strong indicator of "hipsterness", but found that Portland and Brooklyn may not be the fixie/hipster agglomerations that they are made out to be. It is the American cities that are growing and highly educated that tend to have thriving bicycle communities. It is highly recommended reading.

Tuesday, 17 January 2012

A few thoughts about economic indicators

This is not geographical economics, but last week saw some interesting posts about economic indicators and I thought that I can write a bit more about it. It started with The Economist's misery index which looks at the unemployment rate and inflation rate as indicators of economic gloom. According to their daily graph South Africa lies fourth out of 92 countries.

This solicited different responses in the Twitterverse. Some were glad that it seems that unemployment is below 25% according to the EIU and others argued that our unemployment is structural rather than cyclical and implies a different kind of gloom. Prof Frederick Fourie's "Three worlds, three discourses" paper about the unemployment debate links up with this.

During the week Classic Business (on Classic FM 102.7) hosted a show in which they asked guests what they think the economic indicators are that South Africans should obsess about. There were some interesting points of view. Economists are of course interested in the performance of the economy, but cannot afford to wait for quarterly GDP or unemployment statistics. They are particularly interested in predictors or leading indicators of economic performance:
  • Dennis Dykes (Nedbank) looks at credit numbers as advanced warning about what might happen with interest rates. They give a feel of what is happening with consumption demand, the housing market and corporate loan demand (fixed investment spending).
  • Loane Sharpe (Adcorp) mentioned notes and coins in circulation as an indicator of consumer buoyancy, arguing that economic performance depends on a consumption-oriented middle class and emerging informal sector.
  • Tony Twine (Econometrix) said that NUMSA vehicle sales data take the greatest proportion of his time. He is interested in the macro forces that drive auto sales numbers - if you have the vehicle sales data, you can figure out the macro forces. He says that vehicle sales is such an important indicator since passenger car sales is a barometer of economic activity and  truck sales an indicator an of what is happening with fixed capital formation.
This is exactly the sort of things that I think our third year Economics students should start to get interested in.

Thursday, 12 January 2012

The City and geography

This week The Economist featured Leaders and Briefing articles on the City of London. The term "the City" refers to the financial district and the articles described the changes in regulation and challenges from competitors that the City faces. I do not want to offer opinions on the regulatory debate, but did like the description of the forces of second nature geography in the articles. The strength of the City lies in a pooled labour market, suppliers of specialised services and knowledge spillovers that reinforce this agglomeration.

Tuesday, 10 January 2012

Home away from home

Everyone knows by now that I am on research leave this semester. In terms of work space this presents a challenge. If I stay at the office there may be more meetings and coffee breaks than papers being written. After reading Fast Company's blog on working from home I realised that the temptations of Twitter may be too strong for me to resist.

Luckily, Statistics came to the rescue and James offered me a spot to work this semester. I moved in today and I am already feeling more quantitative!

Saturday, 7 January 2012

The Gated City, chapter 1

This month I'm reading Ryan Avent's The Gated City. He writes for The Economist and recently had two excellent blogs on geographical economics:

The Gated City is a Kindle Single in which Mr Avent argues that “Our cities are where most of us live, where most of our economic output is produced, and where most of the ideas that enrich our lives originate. When they function well, the act as engines of discovery and opportunity. When they do not, the economy suffers, and the labour force with it”.

Something has gone wrong:
He starts with the concerns about the U.S. economy: slower growth and rising inequality. He also briefly outlines some of the explanations:
  • Worker bargaining power has declined (Krugman)
  • The demand for skills has shifted (Autor)
  • The education system has not been successful at increasing educational attainment (Katz & Goldin)
  • The emerging world is catching up
  • The low-hanging fruit of available land, uneducated population and revolutionary technological innovations are gone and growth has slowed (Cowen).
Mr Avent agrees that there is some truth to all these explanations, but wants to add another: “That America has made its productive locations ever less accessible. The best opportunities are found in one place, and for some reason most Americans are opting to live in another”.
He argues this point by highlighting the productivity of cities, but notes that cities are often reined in “because we worry that urban growth will be unpleasant”. His example is of the San Francisco Bay area, which, despite wonderful climate, culture, innovation and much higher than average wages, have lost residents, while places like Phoenix, Arizona have been growing. This is ascribed to differences in the cost of living, specifically housing. It is a question of supply not meeting demand in the right places and it is often caused by residents who oppose development because they want to “protect neighbourhoods, views and buildings they love from changes they fear”. This, Not-In-My-Back-Yard view has significant consequences.

Mr Avent estimates that migration from costly cities to affordable but less productive ones overthe period 2000 to 2009 may have cost the American economy between 0.25% and 0.5% of GDP per year. Adding the effect of lost innovation of growth, new firm creation and employment, the cost may be trillions in lost output.

Wednesday, 4 January 2012

Megapolitan regions

This week has seen some interesting news coverage of a new book Megapolitan America by Arthur Nelson and Robert Lang. The Atlantic Cities showed a map of large regions of interconnected metropolitan areas.

These megapolitan regions are expected to house two thirds of the U.S population by 2040 and are seen as the interface with the global economy. Such agglomerations drive growth through the external economies that they generate. Economic geographers argue that concentration of economic activity cumulatively causes a thick labour market, specialised suppliers of intermediate inputs and knowledge spillovers 'that are in the air'. The end result is lower costs and faster growth.

The coverage by The Atlantic Cities focussed on the role that infrastructure can play in supporting such agglomerations. The Dallas/Fort Worth International Airport is presented as a success in coordination of infrastructure investment between metro regions.

In South Africa drawing a map like this of economic activity (local GDP) is complicated and the topic of a lot of my data work planned for this year. It is slightly easier to track down exporters through SARS data and work by two of my colleagues (Wim Naudé and Marianne Matthee) show interesting agglomerations.

Exporters typically require the thick labour markets, suppliers of intermediates, knowledge spillovers and infrastructure characteristic of agglomerations. In South Africa the port cities of Cape Town, Port Elizabeth and Durban are key agglomerations but the landlocked Gauteng economy is the powerhouse.

Hopefully I will be taking a closer look at South Africa agglomerations in the year to come. Stay tuned...