Capping doctors' fees is not the answer

Allow private institutions to train more doctors in SA, but beware social inequity...

Here's a quote from a free-market article at Moneyweb by Jason Urbach:

It is laudable that the Minister is concerned about the nation's health and that he is taking the issue seriously, but the cure that he is proposing will be more harmful than the problem he is trying to address. There is an obvious way to decrease prices in the private sector. Increase competition. But this would require the Minister to put an end to the "old boys club" that dominates the medical fraternity by dissolving the government created monopoly responsible for training doctors in SA. The Health Professions Council of South Africa (HPCSA) determines the number of places available for trainee doctors and has limited them to approximately 1,400 positions each year. A number that has remained relatively unchanged since the 1970's despite the fact that the demand for these positions increases every year. In 2006, it was estimated that 15,794 prospective students applied for these coveted positions.

I'm not so convinced by Urbach's argument that: "Because of the time and expense involved in obtaining a Certificate of Need for medical personnel and facilities, and other long, complicated bureaucratic procedures that delay the introduction of new medical technologies and stifle competition, the cost of healthcare is driven up." Private provision of healthcare services is expensive in SA. A common free-market explanation is that government red tape increases the costs of provision, forcing providers to increase fees. There is certainly some truth to this argument, but in this case regulatory costs seem insufficient explanation for high tariffs and an argument for some kind of market failure is more compelling.

However, Urbach makes some excellent points, including a recommendation to allow private institutions to train doctors:

A long-term strategy to alleviate the chronic staff shortages requires the government to relax the controls on tertiary education facilities, make entrance to these facilities less restrictive, and allow the private sector to provide a large percentage of tertiary medical education for doctors. Private education facilities could operate on either a for-profit or non-profit basis and would relieve a significant part of the burden currently faced by the public sector.

Such an allowance would amount to ending the government-controlled monopoly on doctor training. Such a proposition is quite controversial because the costs of studying at an fully private tertiary medical school would be enormous, and such education would thus be to the exclusion of the majority of South Africans.

Cape Town Libertarians first meet

Yesterday a motley group of Cape Town libertarians met up to discuss their common political philosophy. This was the first such gathering, bringing together unaffiliated scholars, members of the Free Market Foundation, members of the Cape Party and authors of this blog. The occasion was a resounding success! If you'd like to get on our mailing list, please write to us.

Fear the boom and bust

This video is both funny and topical!

"John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there's a 'boom and bust' cycle in modern economies and good reason to fear it."

Knock-on effects of the Transnet strike

"BMW South Africa group communications and public affairs GM Guy Kilfoil said it had become clear that service and international competitiveness were not Transnet’s first priorities, spurred on by the fact that the parastatal could act as a monopoly."



"BMW South Africa currently exported its vehicles through the Durban port, which belonged to Transnet. However, the vehicle manufacturer had just completed a second test run through the Maputo harbour, in neighboring Mozambique. Kilfoil said there was no detailed business study on this available yet, but added that it was clear that port charges at Maputo were lower than those at Durban."

Ironically, how many jobs would be lost if BMW South Africa moved one of its production facilities to Maputo due to unreliable electricity and freight rail supply? This would be a clear example organised labour in South Africa contributing to unemployment.

Full article at Creamer Media.

Transnet strike costs farmers R1bn
Similar effects in the agricultural industry...

"A transport strike in South Africa, now in its third week, has resulted in farmers losing over $127 million, putting jobs in the agricultural sector under threat..."

"In the past year, the agriculture sector has shed more than 100,000 jobs and only 30,000 were created in the first quarter, Minister of Agriculture, Fisheries and Forestry Tina Joemat-Pettersson said, adding: 'These jobs are now under threat as the sectors themselves are facing production losses.' "

Full article at Creamer Media.

South Africa's very own Fannie and Freddie

by Galen Sher

Improving rates of land ownership has extensive socioeconomic benefits for a country. In South Africa, where many working citizens do not own their own property, finding ways of improving land ownership is critical for our development. A popular approach is the US model of Fannie and Freddie - government institutions that extended credit to low-income earners and guarantee loans to low-income earners issued by private banks.

They did so successfully and profitably for a number of years, greatly improving the proportion of Americans who owned their own homes. Unfortunately the incentive structure around them allowed them to fuel a bubble in the residential housing market and moreover to pose an enormous systemic risk to the US financial system.

South Africa is poised to launch our own institution in a similar vein: a large fund that guarantees loans made to low-income (i.e. riskier) borrowers, with the aim of increasing the number of SA home owners.

Over at Moneyweb, Chris Blaine published this piece on 19 April. I have commented in italics.

JOHANNESBURG - Government has put together a billion rand fund to put a "floor" under banks' "gap" market loans. Is this the US subprime market reinvented for SA?

Minister of Human Settlements Tokyo Sexwale announced that he has briefed banking executives on government's plans. These will be announced in Sexwale's budget speech on April 21. This is so as to "not surprise them".

The discussions revolved mostly around the "gap" market, defined as those earning R3 500 to R9 000 per month. This is the group that finds it most difficult, if not impossible, to access bank credit explained Sexwale.

The broad idea is that the fund will insure banks against losses from loans made to the "gap" market. Sexwale says this will not only enable banks to lend, but will raise the cap of what banks will commit to the sector.

Government loan insurance (partial insurance, I hope!) allows banks to price their loans lower than they should be priced, given the cost of capital and the true riskiness of the people receiving the loans. This insurance makes loans cheaper and hence more affordable to low-income borrowers. The overall cost of providing a home loan to a risky borrower does not change, but the cost is shared between the bank and the taxpayer.

The fund is essentially to give banks confidence to make loans they wouldn't have before. A bank executive heading for the exit just after the meeting commented that if the banks could've made money from a market they would be in there already.

This insight was mirrored by Cas Coovadia of the Banking Association. Somehow though, Sexwale believes that this government "insurance fund" will allow banks to make responsible loans compliant with the National Credit Act.

A major difference between the (arguably failed) US system and the proposed SA system is that SA has the National Credit Act, which imposes stricter conditions on SA banks' lending than US banks faced. These stricter lending practices should mitigate, but will not eliminate, the risk of 'liar' loans and 'ninja' loans, etc that took place in the US.

Sexwale acknowledged that the US, and global, economy was brought to its knees as a result of banks making loans to people they knew could never repay them. He spoke of local bank Unifer as an example to bear in mind. It lost billions through dodgy loans leading up to the small-bank crisis.

Interestingly, when asked if the fund will insure loans for specific groups in the "gap" or everyone, Sexwale responded "everyone". It will be interesting to see if this really is a colour-blind scheme in implementation.

The scheme must be colour-blind for it to be constitutional in SA.

So what's the difference between this SA government initiative and the US subprime implosion?

Sexwale said we have proper regulations in place, banks that value their reputations... and "[we] trust the banks aren't run by crooks".

I'm afraid this explanation is simply not good enough. The crookedness or otherwise of SA bank managers has little to do with the sustainability of such a housing scheme. Minister Sexwale needs to have a clear policy in place for dealing with the house-price inflation that will accompany such a policy.

This intervention will divert taxpayer resources from productive economic activity towards a low-return housing investment. This tax-and-spend system creates capital inefficiency that is frowned upon by hardline libertarians. Personally, I see the potential social benefit of such inefficient capital investment. At the very least therefore I don't think this is a clear-cut debate to be argued purely on the basis of philosophical principle. Rather, I think this debate poses a cost-benefit problem that could be investigated through a thorough economic analysis.

Importantly Sexwale and the bank executives said they are working as a team to make this scheme workable. Hopefully this will result in a system that benefits those intended. Details were scarce as the scheme seems to be still in its early phase.

SA banks could benefit handsomely from such a policy, depending on the extent of the government guarantee. Can I hear anyone shout "Rent-seeking"?

The fund is envisaged to start at R1bn, but Sexwale said that as the economic cycle improves he could approach Treasury to provide more guarantees, further underpinning bank loan books. This sounds a bit like chasing the cycle though, something US banks did as the housing bubble grew.

The question lingers, if the banks could really make money in the "gap" market then surely they would be there already? Does this scheme not privatise profits and socialise the losses just like America did?

On the first question above: largely, yes, if there were money to be made here then SA banks would probably already be investing here. There are various reasons why SA banks may have avoided this market even if it were profitable, but let's ignore these for brevity. Let's assume that there is no money to be made in this market segment - but surely profitability is not a necessary condition for government investment? Just because this would be a loss-making exercise does not make this bad policy. Government projects are often unprofitable.

Another issue is that government has been criticised over its implementation of plans. In fact, a similar discussion such as Monday's one happened in 2005. From the sounds of Monday's briefing, nothing has happened in the five subsequent years.

No comment!

No reason to change 3.5% margin for Prime interest over the Repo rate

South Africa's 4 big banks conventionally set their Prime Interest Rate to be 3.5% higher than the SA Reserve Bank's Repo Rate. Over the past year questions have been posed as to whether this understanding between banks could be seen as collusion and whether this fixed 3.5% margin should be more competitive.

Source: Business Day

"THERE are no compelling reasons to change from the current fixed spread of 350 basis points between the repo and prime rates, a report compiled jointly by the Reserve Bank and the Banking Association of SA has concluded.

It follows, therefore, that there should be a single prime rate for all banks, they said after looking at the role of the prime rate and the prime repurchase rate spread in the banking system. They undertook the study after a meeting last year on the spread between the rates, which was attended by then Bank governor Tito Mboweni , executives of SA’s five large banks and the association.

The report also suggested that the “prime overdraft rate” should only be referred to as the “prime rate”, with a clear understanding that its role had changed from an actual “lowest” or “best” lending rate to that of a reference rate to which banks linked floating interest rates on loans and advances.

The report concluded that the size of the spread between the repo rate and prime was immaterial to the setting of lending rates, as prime was primarily used as a reference rate or benchmark for pricing loans.

Although it could cause short- term problems and disruption with existing agreements, any change in the spread, or a change in the benchmark rate, would not change the methodology for establishing actual bank lending rates, the report said,

“A uniform spread helps to create a competitive environment for banks, which enables customers to choose between products and negotiate interest rates based on their credit profile,” it stated.

Finally, it was suggested that because lending rates differed significantly from prime at times, the Bank should closely monitor trends in banks’ actual lending and deposit rates. This would ensure a better assessment of the market forces that drove the pricing of loans, and the extent to which these forces offset or reinforced the monetary policy stance of the Bank. I-Net Bridge"

Should the Western Cape secede from South Africa?

by Galen Sher

The impetus for this blog post is a conversation between Julian and I at the Cape Party's Facebook page. The Cape Party is a political party that contested the 2009 national elections and one of its goals is to "Return the Cape to a Free and Independent State".

Summary
There are two major arguments here for secession:

1. National government is not sufficiently accountable to the people of the Western Cape. Hence it is difficult for people of the Western Cape to drive policy changes or to hold national government to account for unfair practices.
2. Tax revenue raised in the Western Cape should be spent in the Western Cape, or should at least be spent as the people of the Western Cape would like it spent.

Conversation
Here is the conversation at 2 April 2010 as it relates to secession:

GALEN:
If the national government continually "sidelines the people of the Cape" then why not redouble efforts to hold national govt to account? It seems to me that arguing for separation is a real jump in logic. Somewhere down the line, when the Cape government neglects its constituents in Helderberg, should we vote for Helderberg to be emancipated from the Cape govt?

It seems that establishing a Cape Nation won't really make any difference.

JULIAN:
...even if the people of the Cape were vocal and did hold national government to account, what incentive does national government have to actually listen to them? I mean, the ANC & DA support bases lie elsewhere. Also, the ANC doesn't seem to be doing much for their own constituencies (cf. service delivery protests), because it's almost guaranteed their votes.

Cape secession represents a massive decentralization of power, which I think you'll agree is almost always a good thing. Added to that, the Cape Party is campaigning on a platform of even further decentralization & increased political / economic freedom. The CP could campaign for SA to change it's constitution in favour of greater political autonomy for each region, but I think that really would be tilting at windmills.

The most obvious benefit of decentralization is that each community has greater representation in the primary power structures that govern them. That's why the chance of Helderberg being neglected would be lower. Finally, I think if Helderberg really wanted to, they should have every right to secede.

GALEN:
On accountability: we must discuss this within the context of SA's three tiers of government - national, provincial and local. Yes, accountability requires more than vocality - it requires citizens to change their vote. Given that local govt can change hands independently of the other tiers and given that spending is directed at a provincial level, why is further autonomy necessary?

If further regional autonomy is necessary then CP needs to demonstrate why this could only be achieved through seccession.

To respond to ur first question: the national government has an incentive to listen to the people of the WC to the extent that the WC represents 11.4% of SA's registered voters and is the 4th largest province by this measure.

Last sentence and the "right to secede": In any secession group there will be a (usually minority) subgroup which is opposed, and the rights of both groups must be observed. The opposition group would have to be sufficiently small to justify violation of their right not to secede.

JULIAN:
...the problem is that all the taxes are controlled by national government - provinces have no taxation power and local governments can only increase property rates if they want additional revenue.

Spending is not directed/allocated only at provincial level, a substantial part of the budget is given to the national administration to spend as they choose. Added to that, some of the money that is allocated to provinces falls under "conditional grants", which basically means the national government tells the province how to spend it. Added to THAT, the money allocated to the Western Cape is 60% of what it should be. Check the "Division of Revenue Act" discussion, or get in contact with Adrian Kay, he has more info.

Don't forget that money isn't the only issue. Our police, courts, prisons, schools, hospitals, laws etc. are all, at the least, heavily influenced by the national legislature and administration.

Apart from secession, how else could greater autonomy be achieved? What kind of lobbying would convince the ANC that it's a good idea to reduce their power?

Re. the incentive for the ANC to listen to WC population, I'm afraid you'll need to explain to me how having 11% of the vote counts as an incentive. If you were a cutthroat politician, wouldn't you exploit the 11% (who are unlikely to vote for you anyway) in order to win the votes of the other 89%?

Re. your last point: on a practical level, the system the Cape Party is proposing could theoretically allow for a community to keep the policies and laws of SA, or perhaps even become an enclave within the Cape Nation. But on a philosophical level, I don't actually believe in natural rights. I'm a nihilist, so for me right & wrong don't exist, might makes right and all that. But I do like individualist principles, and I think they generally make life better. So for me, "right to secede" translates into the individual right to choose one's government, which (for me) is good. So even if only 51% in an area (which could be very small) want to secede I think they should be allowed to, the practical details can be dealt with according to each case. The "right not to secede" will often translate into "forcing those other guys to live the way I think they should live". Of course, this discussion goes to the very heart of libertarianism...