Earlier this week, Daron Acemoğlu and Simon Johnson, both from the Massachusetts Institute of Technology (MIT), together with James A Robinson from the University of Chicago were awarded the 2024 Nobel Memorial Prize in economics. They were rewarded for their exploration of the connection between a country’s societal institutions and economic development.
The theory that the scholars put forward in their key papers and books is that societal institutions can be divided into two categories: inclusive and extractive. Their work investigates how these societal institutions were introduced in different countries during colonisation and how this, in turn, shaped the prosperity of nations.
They argue that inclusive institutions – which enforce property rights, protect democracy and limit corruption – foster economic development. But extractive institutions give rise to a concentration of power and limited political freedom. This, in turn, results in a small elite taking control of a country’s resources, which stifles economic development.
The hypothesis is that colonial powers were most interested in brutally extracting riches in resource-wealthy but inhospitable regions. Because they weren’t invested in settling for a longer term, this led to low quality institutions that have remained in place for centuries and led to today’s poor economic outcomes.
By contrast, in more hospitable places, colonialists settled and tried to create wealth. This led them to build democratic institutions that benefited people living there – albeit not for altruistic reasons. Among the case studies they use is the difference between Mexico and the US.
They also use various case studies to dispel other contentions that natural resources, climate and cultural tendencies, etc, are responsible for the differences in the growth rates across different nations and cities.
As Johan Fourie writes in an article for News 24, Acemoğlu and Robinson explored how these ideas relate to South Africa in works apart from those for which they won the Nobel prize. They argue that the creation of a dual economy in South Africa was a direct consequence of colonial policies, which divided the country’s resources and labour along racial lines.
Fourie sums up how their 2019 work, The Narrow Corridor, shows that a balance of power between the state and society is crucial for fostering liberty and building inclusive institutions. The narrow corridor means getting the balance right between state capacity and liberty.
The key takeaway for investors is that economic growth and market stability are deeply connected to the quality of a country’s institutions. Countries with inclusive institutions are more likely to offer stable investment environments that foster long-term growth. Conversely, extractive institutions, which concentrate power and limit freedoms, often lead to volatile markets and economic underperformance. Investors should thus consider the institutional health of nations when making decisions.
South Africa’s democratic government, unfortunately, has a poor track record in building an environment that limits corruption, and the political elite have clearly extracted much from society over the last decade or two. Following the recent formation of the Government of National Unity (GNU) in which the balance of power has shifted from an ANC majority, the strength of our democracy is being tested, requiring us to closely watch how we navigate the narrow corridor between state intervention and economic liberty towards an environment that fosters inclusive growth. Only if this is achieved do we believe that South Africa will then offer an attractive investment destination.
“Nations fail today because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction.”
– Daron Acemoğlu , MIT Economist.
Global News
- US Vice President Kamala Harris has turned questions about her nearly four years in office into attacks on Republican rival Donald Trump’s record in a heated interview on Wednesday on Fox News, her first appearance on the conservative network. Trump backed out of an interview with CNBC, marking the second time this month the former president has cancelled a mainstream press interview. A new CNN Poll of Polls average of national polling continues to find no clear leader with just weeks until election day.
- The International Energy Agency has indicated that oil and natural gas prices will probably be lower over the next five years. Oil and natural gas supplies will increase in the second half of this decade if the conflict in the Middle East and Russia’s war in Ukraine don’t derail current trends.
- Gold has soared 30% this year and is trading above $2,700 an ounce, a record level. The price increase comes amid ongoing tensions in the Middle East as traders also weighed US data that kept alive bets on the Fed’s interest-rate cuts.
- US retail sales strengthened 0.4% in September, more than forecast in a broad advance, illustrating resilient consumer spending that continues to power the economy. This comes after August’s figure, unadjusted for inflation, increased 0.1%.
- The European Central Bank delivered the third cut in borrowing costs this year on Thursday, driven by gloomy signals for private-sector growth and a steeper-than-expected slowdown in euro-zone prices. That brings the deposit rate to 3.25% from a peak of 4%. According to sources, European Central Bank officials see another interest-rate cut in December being highly likely, with inflation to settle at 2% faster than envisaged.
- UK inflation dropped below the Bank of England’s 2% target for the first time in more than three years, pushing investors to bet on a quicker pace of interest-rate cuts in the coming months. Consumer prices rose 1.7% in September compared to a year earlier, down from a pace of 2.2% previously, the Office for National Statistics said on Wednesday.
- UK prime minister Keir Starmer rejected the idea that the country could raise capital gains tax as high as 39% as he tried to reassure investors that he’s leading a pro-business government. Decisions in the budget on 30 October will be determined by whether such taxes will help growth or not.
- China’s economic growth slowed in the three months to September but was generally better than economists had been forecasting. Gross domestic product expanded 4.6% in the third quarter and 4.8% for the first nine months of the year, just below the annual target of “around 5%”. Industrial output in September rose the fastest in four months, while retail sales grew the quickest since May. Markets were lifted by People’s Bank of China governor Pan Gongsheng’s announcement that the bank is starting its support program for share buybacks.
- China’s 200 million-strong army of retail investors has become a source of weakness instead of helping the market turn the corner. Its $9.7 trillion stock market experienced a rapid boom and bust starting late September, when central bank stimulus pushed the benchmark CSI 300 Index 25% higher in five days of trading. Many small investors who came late to the party were caught out when equities then slumped and were forced to beat a hasty retreat.
- Biden administration officials have discussed capping sales of advanced AI chips from Nvidia and other American companies on a country-specific basis, according to sources. The approach would set a ceiling on export licenses for certain countries in the interest of national security. Officials are focused on Persian Gulf countries that have a growing appetite for AI data centres and the deep pockets to fund them. It’s unclear when this will happen.
- A disappointing update from chip equipment maker ASML sparked a global rout in the sector. Shares in ASML fell as much as 5.8% Wednesday, after plunging 16%, the most in 26 years, on Tuesday. The decline in ASML, which has lost more than $65.3 billion in market value after it said it would only get in half the orders analysts expected on Tuesday, is forcing investors to reevaluate the health of the sector.
- Morgan Stanley traders and bankers joined the rest of their Wall Street rivals in posting better-than-expected revenue, fuelling a 32% profit surge for the third quarter and sending the shares up the most in almost four years. Revenue from the trading business rose 13% it said on Wednesday. The bank’s stock soared as much as 8.2%, the biggest intraday increase since November 2020. They closed up 6.5% to $119.51, pushing this year’s gain to 28%.
- Goldman Sachs Group’s profit soared 45% in the third quarter on a surprise increase in equity-trading revenue and a resurgent investment-banking business. Investors have been sending Goldman shares higher this year as the bank abandons major parts of its consumer-banking push and positions itself to benefit from a rebound in investment banking. The stock has posted the biggest gain among the top US banks this year, advancing 34%, and reached an all-time high on Tuesday.
- Shares in LVMH, which owns Dior, Tiffany, and Fendi among others, dropped on Wednesday after it warned about an “uncertain economic and geopolitical environment” and its latest earnings disappointed analysts. LVMH, which is run by French billionaire Bernard Arnault, said sales for last quarter fell 3% from a year earlier. Shares in LVMH fell as much as 7.5% in Paris trading, bringing the decline this year to 21%. Shares of other fashion and lifestyle brands, including Hermès and Kering, the owner of Gucci, also fell.
- As at Thursday’s close the S&P 500 was up 0.45% for the week.
Local News
- President Cyril Ramaphosa said on Monday that ideological differences among members of the GNU will not impede the sustainability of the newly formed coalition government. The government’s target of 3% growth by 2025 requires the adequate functioning of the 10-member administration, the presidency says.
- South Africa and the US are planning a meeting next Monday to sort out differences between the two countries and outline how they can form a stronger “strategic partnership”. The local US embassy confirmed that the meeting was expected to be a “cornerstone” of future relations between the two countries. The outcome may include a bilateral trade agreement, which would be more targeted than the unilateral preferential trade arrangement the US now offers under the umbrella of the African Growth and Opportunity Act.
- Minister of Trade, Industry, and Competition, Parks Tau, declared South Africa “open for business” during the third Business Forum Southern Africa & Indian Ocean held this past Tuesday and Wednesday. Tau encouraged French businesses to seize the opportunity to invest in a nation characterised by stable governance and a resilient democracy. There are about 500 French companies operating in South Africa, employing nearly 70,000 people.
- Bailouts for cash-strapped South Africa’s state-owned enterprises have cost taxpayers R456.5 billion over the past nine financial years, and the bill is set to rise to R520.6 billion by the end of March next year, according to National Treasury. The aid has been financed by increasing borrowing and cutting back on other areas such as infrastructure and essential goods and services. Eskom has received most of the bailouts: It will have received a total of R496 billion by the end of the current financial year. Transnet requested R61 billion late last year.
- Business Report columnist Adil Nchabeleng has questioned whether Rand Water is another Eskom 2.0 in waiting given the water crisis currently plaguing Johannesburg. Rand Water, a state-owned company water utility, has announced that it has asked the three main metros in Gauteng, the City of Ekurhuleni, the City of Johannesburg, and the City of Tshwane Metropolitan, to institute a level one water restriction due to its dams and reservoirs operating from a low capacity level
- Transnet’s high debt of about R230 billion and a maintenance backlog of more than R70 billion were among the most serious stumbling blocks to its recovery plan, the utility told the Parliamentary Portfolio Committee on Transport on Wednesday. The logistics operator said, despite these challenges, the implementation of a recovery plan had shown positive results, with a notable 28% improvement in coal corridor performance, and a total of 771 metric tons of rail freight transported over 24 weeks.
- The Road Freight Association says the decision last week by the Durban High Court temporarily interdicting Transnet from concluding a multi-year deal to bring in private participation at the Durban Container Terminal Pier 2 has left it disheartened because of the legal delays. The court found the approach of Transnet in identifying ICTSI as the preferred bidder was “potentially flawed and prima facie unfair to the other bidders”. The matter is now heading back to the courts.
- The South African Private Practitioners Forum, South Africa’s largest association of medical specialists, has started legal action against the National Health Insurance (NHI) Act. It filed its application in the high court in Pretoria on 1 October, asking the court to review and set aside the president’s decision to sign the NHI Act into law, and declare it invalid, news out today indicated.
- Ramaphosa says the government is committed to supporting the motor industry and is committed to updating a white paper to support the sector. This comes after motor industry leaders said government should incentivise the local production of hybrid cars in the wake of declining demand for EVs in Europe, South Africa’s main export destination. The motor industry contributed 5.3% to GDP and, at R270.8 billion, accounted for almost 15% of the country’s exports in 2023.
- For the first half of 2024, combined turnover among the six largest retailers – Shoprite, Spar, Pick n Pay, Woolworths, Clicks, and Dis-Chem – reached R330 billion, a 9.4% increase. According to Trade Intelligence’s latest Corporate Retail Comparative Report, this is driven mostly by price inflation and expansion strategies as real volumes remain stagnant.
- Pick n Pay anticipates a 10%-20% decline in headline earnings per share for the first half of 2024, despite a strong performance from Boxer and ongoing recapitalisation efforts, it said in a trading update yesterday. The group reported mixed results across segments yesterday, with online sales surging 60.6% amid challenges in the core Pick n Pay brand. It expects its results for the year to be an improvement on last year.
- Food producer Premier Group expects its first-half earnings to rise as much as 35% thanks to its focus on margin management and cost-saving initiatives. The group said in a trading statement yesterday that it expected headline earnings per share for the six months to the end of September to be 25%-33%, while earnings per share are expected to rise 27%-35% compared with a year ago.
- As at the time of writing, the rand was 1% weaker against the dollar, and the ALSI was 1.2% up for the week.
Sources: Dynasty, Business Report, BusinessLIVE, CNN, Bloomberg, AFP, Daily Maverick, NYT, Moneyweb, Reuters, News24, etc.