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What’s the best argument against statism?

As a libertarian, my answer is that freedom is preferable to coercion. Freedom also ranks higher than prosperity. For instance, the government might be able to boost economic output by requiring people to work seven days a week, but such a policy would be odious and indefensible.

As an economist, I have a more utilitarian perspective. The best argument against statism is that it simply doesn’t work. Nations with bigger government and more intervention routinely under-perform compared to otherwise-similar countries with small government and free markets.

That’s why I often present my leftist friends with my two-question challenge. I ask them to name a country, anywhere on the planet and at any point in history, that either become rich with statist policies or has experienced superior levels of growth with statist policies.

They never have an answer. Or, to be more specific, they never have an accurate answer since Sweden (their reflex response) became rich when government was small and has stumbled ever since a large welfare state was imposed.

And if they are willing to have an extended discussion, my next step is to compare the long-run performance of market-friendly jurisdictions with statist jurisdictions. Whether we’re looking at Chile vs. Venezuela, North Korea vs. South Korea, or Hong Kong vs. Argentina, the results always show that economic liberty is the recipe for growth and prosperity.

When I ask them to show a statist nation with decades of good results, they don’t have an answer. Or, to be more specific, they never have an accurate answer since China (their reflex response) only started to grow once the economy was partially liberalized.

I’m pontificating on this topic because a reader sent me this very stark contrast between market-friendly Botswana and the statist hellhole of Zimbabwe. I can’t vouch for the specific numbers, though it appears some of them are from the Heritage Foundation’s Index of Economic Freedom.

The obvious lesson is that good policy is producing vastly superior results in Botswana.

But I wanted independent confirmation since not everything one sees on the Internet is true (shocking!).

So I checked Human Progress, the invaluable data portal created by Marian Tupy, and downloaded more than 50 years of data for inflation-adjusted ($2010) per-capita GDP in Botswana, Zimbabwe, and South Africa.

The results, to put it mildly, are stunning. Botswana has enjoyed much faster growth than South Africa and Zimbabwe has suffered horrible stagnation.

South Africa’s anemic performance doesn’t surprise me.

And I guess the gap between Botswana and Zimbabwe shouldn’t surprise me, either. After all, Marian wrote about the difference between Botswana and Zimbabwe back in 2008.

How different, I thought, was Zimbabwe from Botswana, the latter of which is safe and increasingly prosperous. But what accounts for such striking differences between the two neighbors? It turns out that much of the difference stems from the degree of freedom that each populace enjoys.

Here’s some of what he wrote about Botswana.

As Robert Guest of The Economist noted in his 2004 book, The Shackled Continent, “In the last 35 years, Botswana’s economy has grown faster than any other in the world…” According to Scott Beaulier, an economist at Beloit College, “Khama adopted pro-market policies on a wide front. His new government promised low and stable taxes to mining companies, liberalized trade, increased personal freedoms, and kept marginal income tax rates low to deter tax evasion and corruption.” …Economic openness served Botswana well. Between 1966 and 2006, its average annual compound growth rate of GDP per capita was 7.22 percent — higher than China’s 6.99 percent. Its GDP per capita (adjusted for inflation and purchasing power parity) rose from $671 in 1966 to $10,813 in 2005.

And here are some of his observations about Zimbabwe.

…almost all of the country’s 4,000 white-owned farms were invaded by state-organized gangs. Some of the farmers who resisted the land seizures were murdered, while others fled abroad. …The agricultural sector soon collapsed, and with it most of Zimbabwe’s tax revenue and foreign currency reserves. …the government ordered the Reserve Bank of Zimbabwe (RBZ) to print more money, sparking the first hyperinflation of the 21st century. …Mugabe’s answer to the falling economy was to increase state patronage and the intensity of the looting.

Needless to say, nothing has changed in the decade since that article was published. Though hopefully Mugabe’s recent ouster may lead to better policy in Zimbabwe (it would be difficult to move in the wrong direction, though Venezuela is evidence that further deterioration is possible).

Let’s conclude with a video I shared three years ago, but it’s worth a second look since we’re considering Botswana’s comparative success.

By the way, none of this suggests Botswana is perfect. Indeed, it’s not even close.

According to the Fraser Institute’s Economic Freedom of the World, it is ranked #50, which means it isn’t even in the top quartile. And its latest score of 7.37 (out of 10) is well below top-ranked Hong Kong’s score of 8.97.

But you don’t have to be fast to win a race. You simply need to be quicker than your competitors. And, on the continent of Africa, Botswana has the most economic freedom.

P.S. I fully expect South Africa to move in the wrong direction, at least in relative terms if not absolute terms.

P.P.S. If you liked the “story of two neighbors” comparison of Botswana and Zimbabwe at the beginning of this column, you’ll probably enjoy this comparison of Detroit and Hiroshima and this comparison of Hong Kong and Havana.

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There’s an easy way to judge whether countries have good economic policy or bad economic policy. Simply look at the Fraser Institute’s Economic Freedom of the World and check out a nation’s absolute score as well as how it ranks relative to other nations.

The EFW report even allows readers to see how nations score in the five major policy areas the are used to produce the overall grade. These categories are:

  • Size of Government – A measure of the burden of taxes and spending.
  • Regulation – A measure of intervention and red tape.
  • Sound Money – A measure of monetary stability and financial freedom.
  • Freedom to Trade Internationally – A measure of liberty to engage in cross-border commerce.
  • Legal System and Property Rights – A measure of the quality of governance.

This last category sometimes doesn’t get enough attention. I sometimes refer to it as the rule-of-law measure. It’s basically a way of trying to estimate whether government is doing a good job with institutional public goods. The variables used include 1) Judicial independence, 2) Impartial courts, 3) Protection of property rights, 4) Military interference in rule of law and politics, 5) Integrity of the legal system, 6) Legal enforcement of contracts, 7) Regulatory costs of the sale of real property 8) Reliability of police, and 9) Business costs of crime.

Let’s look today at property rights. And I’m motivated to address this issue because of some horrifying news from South Africa. The Wall Street Journal opined on the issue this morning.

No country ever became rich through its government’s seizure of private property (exhibit A: the Soviet Union), but politicians in South Africa want to give it another go. That’s the disheartening news from Cape Town this week, where the National Assembly voted 241-83 on Tuesday to start a process to amend the constitution and allow land expropriation without compensation.

When I saw the headline and read the opening paragraph, my initial instinct was “so what?” After all, the whites probably stole the land from the blacks in the first place.

But then I found out that issue already has been handled.

Post-apartheid, the government bought land and offered compensation to South Africans whose property had been forcibly seized after 1913. Many of those claims are now settled… According to a 2016 Institute of Race Relations survey, less than 1% of South Africans think land is one of the country’s “serious unresolved problems.” Unemployment, public services, housing and crime rank far higher.

What’s actually happening is hard-core leftist populism. And it may turn South Africa into another Zimbabwe.

Julius Malema of the far-left Economic Freedom Fighters party…believes the state should be the “custodian” of the nation’s property… His party says the expropriation “should apply to all South Africans, black and white.”

Huh? Stealing property from everybody, regardless of race, while calling your party Economic Freedom Fighters?!?

I guess their idea of freedom means freedom to loot, which is sometimes called – rather perversely – positive liberty. But I shouldn’t laugh too hard because the United States actually had a president with the same twisted mindset.

In any event, the WSJ reminds us that this won’t produce good results.

The idea is likely to duplicate the awful experience of Zimbabwe during the Robert Mugabe era, a case study in the reality that bureaucrats can’t distribute resources more efficiently or productively than private markets. Mugabe’s confiscations spooked investors, the agricultural industry collapsed, and a once prosperous country became known for hyperinflation and poverty. …the ruling African National Congress is supporting the measure to distract attention from its own failed statist economic policies, which have produced subpar growth and denied opportunity to poor South Africans. …South Africa needs more capital, more investment and a favorable business environment. Seizing private property has produced misery everywhere it has been tried.

This is very troubling, especially since South Africa, compared to other nations on the continent, maintained semi-decent policies after dismantling the racist apartheid regime.

I wrote back in 2014 about South African economic policy and shared data about the nation’s EFW score. I was worried about the trend, and I’m now even more pessimistic.

Since today’s topic is property rights, let’s look at the global scores from the International Property Rights Index, which is published each year by the Property Rights Alliance.

As you can see, South Africa currently is in the second quintile. Best score of any African country, and above some European nations as well.

But if the South African constitution is changed and land expropriation is allowed, it’s a foregone conclusion that the country will suffer a precipitous fall in the rankings.

And here’s the map accompanying the study. The bottom line is that blue is good and purple/maroon (or whatever that color is…mauve?) is bad.

Switching to other nations, notice that all the Nordic nations are highly ranked. Indeed, they hold three of the top five slots. No wonder they score highly in that part of Economic Freedom of the World. Moreover, they also get very good scores for monetary policy, regulatory policy, and trade policy. Which explains why their economies get decent performance notwithstanding very bad fiscal policy.

And I’m certainly not surprised that New Zealand has the top spot.

The United States also does reasonably well. Not in the top 10, but at least in the top quintile.

P.S. In addition to moving in the wrong direction on property rights, South African politicians are making the tax code more destructive.

P.P.S. There is a country in sub-Saharan Africa to emulate.

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Since there’s a big debate about whether there should be tax cuts and tax reform in the United States, let’s see what we can learn from abroad.

And let’s focus specifically on whether changes in tax policy actually produce “revenue feedback” because of the Laffer Curve. In other words, if tax rates change, does that incentive people to alter how much they work, save, and invest, thus changing the amount of taxable income they earn and report?

I’ve written about how the Laffer Curve has impacted revenue in nations such as France, Russia, Ireland, Canada, and the United Kingdom.

Now let’s go to Africa. In a column for BizNis Africa, Kyle Mandy of PwC explicitly warns that South Africa is at the wrong spot on the Laffer Curve.

At the time of the 2017 Budget in February, a number of commentators, including myself, warned National Treasury and Parliament that the tax increases announced in the Budget, particularly on personal income tax, would likely push tax revenues very close to the top of the Laffer curve, i.e. the point at which tax revenues are maximised and beyond which tax rate increases will actually result in a decrease in tax revenues.

Before continuing with the article, I can’t resist making an important point. The author understands that it is a bad idea to be on the downward-sloping part of the Laffer Curve. As he points out, that’s when tax rates are so punitive that “tax rate increases will actually result in a decrease in tax revenues.”

That’s correct, of course, but it’s almost as important to understand that it’s also a very bad idea to be at the “top of the Laffer Curve.” As noted in a study by economists from the Federal Reserve and the University of Chicago, that’s the point where economic damage is so great that a dollar of tax revenue can be associated with $20 of damage to the private sector.

Now that I got that off my chest, let’s look at some of the details in the article about South Africa.

The evidence…suggests that, in the current environment, South Africa has maximised the tax revenues that it can extract from its citizens and has possibly even gone past that point and is now on the downward slope of the curve. Why do I say this? The last few years have seen significant tax increases… These tax increases saw the main budget tax: GDP ratio increase from 24.5% in 2012/13 to 26% in 2015/16, primarily led by increases in personal income tax. However, since then the tax:GDP ratio has stalled at 26% in both 2016/17 and in the revised forecast for 2017/18. It is not unreasonable to expect that the tax:GDP ratio for 2017/18 may fall below 26% in the final outcome. The stalling of the tax:GDP ratio comes despite significant tax increases in each of 2016/17 and 2017/18 which were expected to deliver ZAR18 billion and ZAR28 billion of additional tax revenues respectively.

Once again, I can’t resist the temptation to interject. That final sentence should be changed to read “the stalling of the tax:GDP ratio comes because of significant tax increases.”

Mr. Mandy concludes his column by warning that the current approach is leading to bad results and noting that further tax hikes would make a bad situation even worse.

…the South African Revenue Service has acknowledged that it has seen a decline in levels of compliance. …So what does all of this mean for tax policy and fiscal policy generally? Simply put, National Treasury have been placed in an invidious position. Increasing taxes further in the current environment could be self-defeating and result in a decline in the tax:GDP ratio. This risk is particularly prevalent insofar as further tax increases in the form of personal income tax are concerned. Increasing the corporate tax rate would further dent investor confidence and economic growth.

The good news is that even South Africa’s government seems to realize there is a problem.

Here are some excerpts from a recent story.

Finance minister Malusi Gigaba has received President Jacob Zuma’s stamp of approval for an inquiry into tax administration and governance at the South African Revenue Service (Sars). According to the Medium-Term Budget Policy Statement (MTBPS), tax revenue is expected to fall almost R51 billion short of earlier estimates in the current fiscal year. …The probe also comes amid warnings that further tax hikes could be futile and may even result in a decline in the country’s tax-to-GDP ratio. …National Treasury has introduced various tax hikes over the past few years. The main budget tax-to-GDP ratio increased from 24.5% in 2012/13 to 26% in 2015/16, mainly as a result of higher effective personal income tax rates. But the tax-to-GDP ratio has subsequently stalled at 26% in 2016/17 and in the latest 2017/18 forecast and it is not inconceivable that the final outcome for the current fiscal year could fall below 26%… Gigaba seems to be aware of the dangers of additional tax hikes and warned in his MTBPS that it could be “counterproductive”.

I’m glad that there’s a recognition that higher taxes would backfire, but that’s not going to fix any problems.

The pressure for higher taxes will be relentless unless the South African government begins to control spending. The government should adopt a constitutional spending cap, which would alleviate budget pressures and create some “fiscal space” for lower tax rates.

But I’m not confident that will happen, particularly if the International Monetary Fund gets involved. Desmond Lachman, formerly of the IMF and now with the American Enterprise Institute, writes that the country is in trouble.

South Africa is in trouble. Per capita income has been in decline for several years and its economy is in recession for the second time in eight years. Unemployment remains at over 27%. Meanwhile, the rand is floundering on the foreign exchange market… In view of the favourable global economic environment, the country’s predicament is even more troubling. Interest rates have rarely been lower and capital flows to emerging markets have seldom been stronger. …If South Africa’s economy is performing poorly in this environment, it will probably struggle even more when central banks start to normalise their interest rate policies and when the global economic environment becomes more challenging.

He has the right description of the problem, but I’m worried about his proposed solution.

IMF assistance can hasten restoration of confidence. …An IMF programme would not be popular politically within South Africa but the government does not appear to have any realistic alternative.

Simply stated, the IMF has a very bad track record of pushing for higher taxes.

That doesn’t necessarily mean its bureaucrats will push for bad policy in South Africa, but past performance sometimes is a good predictor of future behavior.

For what it’s worth, the IMF is fully aware that the burden of government has been increasing. Here’s a blurb from the most recent Article IV report on South Africa.

During the past few years, the share of both revenues and expenditures continued its rising trend. The size of general government in South Africa is one of the highest among international peers at a similar level of development. Primary expenditures rose by 1.5 percentage points of GDP between 2012/13 and 2015/16, owing primarily to public enterprise-related transfers (0.8 percent of GDP, including a 0.6 percent of GDP equity injection for Eskom in 2015/2016) as well as relatively generous wage agreements combined with an increase in consolidated government employment (0.3 percent of GDP). In recent years, including the 2017 budget, higher personal income taxation has been the main tax  policy instrument to collect revenue combined with higher excise rates.

And here’s a section of the data table showing the expanding burden of both taxes and spending.

Unfortunately, the IMF never says that this growing fiscal burden is a problem. Instead, the focus is solely on the fact that spending is higher than revenue. In other words, the IMF mistakenly fixates on the symptom of red ink instead of addressing the real problem of excessive government.

So if the bureaucrats do an intervention, it almost certainly will result in bailout money for South Africa’s politicians in exchange for a “balanced” package of spending cuts and tax increases.

But the spending cuts likely will be either phony (reductions in planned increases, just like they do it in Washington) or will quickly evaporate. But the higher taxes will be real and permanent. Just like in most other nations where the IMF has intervened. Lather, rinse, repeat.

Speaking of misguided international bureaucracies, the Organization for Economic Cooperation and Development already has been pushing bad policy on South Africa. The bureaucrats even brag about their impact, as you can see from this Table in the OECD’s recent Economic Survey on South Africa.

The OECD is happy that income tax rates have increased and that there’s more double taxation on dividends, but the bureaucrats are still hoping for a new energy tax, expansion of the value-added tax, and more property taxes.

They must really hate the people of South Africa. No wonder the OECD is known as the world’s worst international bureaucracy.

I’ll close by noting that the country’s problems are not limited to fiscal policy. The country is only ranked #95 by Economic Freedom of the World. And it was as high as #46 in 2000.

Instead of pushing for higher taxes, that’s the problem the OECD and IMF should be trying to fix. But given their track record, that’s about as likely as me playing centerfield next year for the Yankees.

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