Governments oftentimes are spectacularlyincompetent. And when thathappens, it creates an opening for the private sector to step up in rather unexpected ways.
I’ve even created a semi-serious, semi-satirical series to commemorate these examples.
None of these places are libertarian, of course, but each of them illustrate how markets can provide surprising benefits. In most of the examples, markets are even providing so-called public goods.
Today, we’re going to revisit South Africa because of a remarkable report in the Wall Street Journal.
Written by Alexandra Wexler, it shows how the private sector is providing road repair, fire protection, and traffic control.
South African insurers are joining other private companies in taking over public services, such as security, healthcare, education and mail delivery… Insurance companies…have decided that it is cheaper for them to fill in where the state has fallen short. …Discovery Ltd., a $5.5 billion financial-services company, says its Pothole Patrol—made up of eight repair vehicles and 40 staff—has filled in 150,000 potholes in South Africa’s economic capital of Johannesburg… Discovery in June 2022 also joined with a private fire service, Fire Ops SA, to launch its Fire Force service. …Discovery says the blue firetruck responded to 172 building fires between Fire Force’s launch through the end of January. …On Feb. 20, the blue Discovery-branded truck was dispatched to a fire in Johannesburg’s leafy Highlands North suburb, where Fire Ops’ Captain Wade Hugo said his team had the blaze under control about 15 minutes before the city’s fire services arrived at the scene. …OUTsurance Group Ltd., a $3 billion financial services company, first started deploying men and women on motorbikes, known as pointsmen, in 2005. They direct traffic in four municipalities, including Johannesburg and South Africa’s wine capital, Stellenbosch, when traffic lights break down and roads are congested.
Sounds to me like South Africa’s local governments should be abolished and replaced by the private sector.
David Friedman and Bryan Caplan certainly would agree.
What’s particularly interesting are the examples of how private governance is evolving in developing nations.
These are real-world example of “anarcho-capitalism” and they exist for the simple reason is that governments have utterly failed to provide core “public goods” such as crime control.
Now we have a new case study. The U.K.-based Economist reports on the development of a “private parallel state” in South Africa.
Situated in the north of Johannesburg, Steyn City has shops, a school, generators, a petrol station, golf, 50km of biking trails, fishing dams, 24-hour security and a dinosaur-themed playground. There is even a helipad; but residents need never leave. …estates like Steyn City, which account for nearly one in five property transfers (a proxy for sales)…represent a broader demand: for a sanctuary in a country where the state cannot seem to curb crime or provide decent services. And it is not just the rich who are fending for themselves. So, increasingly, is everyone else.
Incidentally, we have similar “estates” in the United States, such as The Villages in Florida and other private communities and residential developments.
But let’s focus on South Africa and why people are opting for private alternatives to government.
The article notes that a growing number of citizens are choosing private schools (akin to what’s happening in India).
Since 1997 the number of pupils in private schools has tripled, from 236,000 to 703,000… The increase is not happening in the most expensive schools, which are, in fact, becoming easier to get into, because so many well-heeled South Africans are emigrating. “The growth is in the low-to-mid range of the market,” says Lebogang Montjane, the head of the Independent Schools Association. …Private fees are priced to be affordable for the black middle class. Spark costs 28,050 rand ($1,800) a year for primary school.
There is also a section on private health care.
But the part about public safety is even more remarkable.
Security is the clearest case of where private companies are replacing the state. In 1997 there were roughly as many police officers (110,000) as active security guards (115,000). Since then officer numbers have increased by 31% (to 144,000) but the number of private guards has ballooned by 383% (to 557,000). Gun-carrying watchmen and ubiquitous surveillance cameras that feed footage to security firms’ operation rooms are everyday sights in suburbs and high-walled estates. …the sense that the state cannot protect citizens—underlined dramatically last year when the country saw the worst civil unrest since apartheid—is widely felt.
Here’s the bottom line.
Some South Africans emigrate to escape failing public services. But most cannot leave, or do not want to. Instead, argues Gwen Ngwenya of the opposition Democratic Alliance, they slip across an imaginary border, migrating, as it were, into the arms of “the private parallel state”.
The obvious takeaway is that the failing parts of government should be eliminated and, in tandem, the tax burden should be reduced so that it’s easier for citizens to pay for the private alternatives that actually work.
But that’s a very unlikely outcome.
Why? Because government programs in developing nations generally exist to provide patronage to friends and supporters of the politicians.
The purpose of government schools is to provide over-paid patronage jobs to teachers, not to educate children.
The purpose of government health care is to provide over-paid patronage jobs to providers, not to cure sick people.
The purpose of government security is to provide over-paid patronage jobs to cops, not to fight against crime.
So long as this corrupt system works for politicians, there’s no reason to expect changes.
P.S. At some point, South Africa will go bankrupt. In theory, this should lead to long-overdue changes. In practice, it will mean a bailout from the International Monetary Fund, which temporarily will prop up the current system of corruption and waste.
Hindering the efficient allocation of capital and making it more difficult for companies to distribute profits to owners by banning or restricting “stock buybacks“
Discouraging job creation and reducing take-home pay with a new federal mandate/entitlement for paid sick leave.
A professor from Yale Law School, Daniel Markovits, argues in a column in the New York Times that the virus is a great excuse to impose a wealth tax.
Our extraordinary battle against the pandemic should draw on the immense reserves that the most privileged among us have accumulated over decades of abundance. To achieve this goal, America should institute a wealth tax. …the relief effort should be funded through a one-time wealth tax imposed on the richest Americans… An exemption for the first $2.5 million of household wealth would exclude the bottom 95 percent from paying any tax at all and leave the top 5 percent with total taxable wealth of roughly $40 trillion. A 5 percent tax on the richest 5 percent of households could thus raise up to $2 trillion. …this one-time wealth tax…appeal ought to cross partisan lines. …A wealth tax would fund the relief effort in a way that gives meaning to shared sacrifice in the face of a universal threat.
My initial suggestion for Professor Markovits is the same one I put forth for Bill Gates. He should lead by example and donate a big chunk of his income, as well as the bulk of his savings and investments, to the IRS.
As an Ivy League professor, I’m sure he’s comfortably positioned as a member of the infamous “top 1 percent” of taxpayers, so he can be a guinea pig for his idea. To make things easy, the government has a website for him to use.
But let’s set aside snark and focus on the economic consequences. This issue deserves serious attention, not only because it is a threat in the United States, but also because it’s becoming an issue in other nations.
Argentine Economy Minister Martin Guzman has backed the idea of a wealth tax on the country’s rich…to…find money to help cope with the Covid-19 pandemic. The tax would affect 11,000 people with fortunes of at least $2 million, Guzman said… He spoke in an interview with journalist Horacio Verbitsky, published on the website El Cohete a la Luna. President Alberto Fernandez, in a separate interview, spoke of the need for wealth redistribution.
The South African government will consider a proposal for a one-off wealth tax during an economic recovery planning meeting… Such a tax could assist Africa’s most industrialized economy as it bounces back from the coronavirus outbreak and a five-week lockdown that is scheduled to be lifted on 30 April. The proposal comes from a group of economists, led by former South African National Treasury budget chief Michael Sachs.
The big problem with all of these proposals is that they ignore the crippling economic impact of wealth taxation.
The important thing to understand is that such taxes impose very punitive implicit tax rates on saving and investment. As seen in the accompanying chart, the actual tax rate depends on how well affected taxpayers are investing their money.
And it doesn’t take extreme assumptions to see that many taxpayers will face implicit tax rates of more than 100 percent!
In a normal economy, a wealth tax is a big mistake. But we’re now dealing with the very painful economic fallout from the coronavirus.
We will have a desperate need for lots of private capital if we want to restore prosperity as fast as possible, which is why imposing a wealth tax nowadays (in addition to other forms of double taxation that already exist) would be a catastrophic blunder.
P.S. Some people argue that a one-time wealth tax, similar to what Prof. Markovitz proposes and what South Africa is considering, wouldn’t have adverse economic effects because it penalizes productive behavior in the past (and there’s no way for people to reduce work, saving, and investment that already took place). But as I explained when debunking IMF arguments for a one-time wealth tax, this assertion is flawed because a) people will adjust their behavior when such a tax is discussed, b) people won’t trust it is a one-time tax, and c) the money will be used to finance a larger burden of government spending.
Sadly, there’s not much to cheer about. Here’s the meager list.
Amendment 73 rejected in Colorado – As part of a plan to expand the burden of government (for the children!), the left wanted to gut the state’s flat tax and replace it with a so-called progressive tax. Fortunately, voters realized that giving politicians the power to tax the rich at higher rates would also mean giving them the power to tax everyone at higher rates. The proposal was defeated by 11 percentage points.
Positive trends – I’m having to scrape the bottom of the barrel, but I suppose a drop in support for bad ideas has to count as good news, right? On that basis, I’m encouraged that the notion of universal government handouts became less popular in 2018. Likewise, I’m glad that there’s so much opposition to the carbon tax that some supporters of that new levy are willing to throw in the towel.
Now let’s look at the bad news.
Here are the worst developments of 2018.
Aggressive protectionism – It’s no secret that Trump is a protectionist, but he was mostly noise and bluster in 2017. Sadly, bad rhetoric became bad policy in 2018. And, just as many predicted, Trump’s trade taxes on American consumers are leading other nations to impose taxes on American exporters.
The Zimbabwe-ization of South Africa – My trip to South Africa was organized to help educate people about the danger of Zimbabwe-style land confiscation. Sadly, lawmakers in that country ignore me just as much as politicians in the United States ignore me. The government is moving forward with uncompensated land seizures, a policy that will lead to very grim results for all South Africans.
More government spending – Ever since the brief period of fiscal discipline that occurred when the Tea Party had some influence, the budget news has been bad. Trump is totally unserious about controlling the burden of government spending and even routinely rolls over for new increases on top of all the previously legislated increases.
I’ll close by sharing my most-read (or, to be technically accurate, most-clicked on) columns of 2018.
In first place is my piece explaining why restricting the state and local tax deduction was an important victory.
Second place is my column (and accompanying poll) asking which state will be the first to suffer a fiscal collapse.
And the third place article is my analysis of how rich nations can become poor nations with bad policy.
For what it’s worth, my fourth-most read column in 2018 was a piece from 2015 about political and philosophical quizzes. And the fifth-most read article was some 2012 satire about using two cows to describe systems of government.
I guess those two pieces are oldies but goodies.
Now for the columns that didn’t generate many clicks.
My worst-performing column was about how DC insiders manipulate so-called tax extenders to line their own pockets.
Next on the least-popular list was a piece that looked at proposals to make taxpayers subsidize wages.
And the next-to-next-to-last article explained how expanding the IMF would increase the risk of bailouts and bad policy.
I’m chagrined to admit that none of these columns reached 1,000 views. Though I try to salve my ego by assuming that many (some? most?) of the 4,000-plus subscribers eagerly devoured those pieces.
The other noteworthy thing about 2018 is that I posted my 5,000th column back in July.
And I also shared data indicating that I’m relatively popular (or, to be more accurate, I get a lot of clicks) in places like the Cayman Islands, the Vatican, Monaco, Bermuda, Jersey, and Anguilla.
I’m at the Capetown Airport, about to leave South Africa, so this is an opportune time to share some thoughts on what I learned in the past seven days.
1. Land Seizures – The number-one issue in the country is a plan by the government to impose Zimbabwe-style land confiscation. I already wrote about that issue, so I’ll cite today an editorial from the Wall Street Journal.
South Africa needs another enlightened leader like Nelson Mandela, but it keeps electing imitations of Robert Mugabe. President Cyril Ramaphosa confirmed recently that his government plans to expropriate private property without compensation, following the examples of Zimbabwe and Venezuela. …Supporters of expropriation claim black South Africans own less than 2% of rural land, and less than 7% of urban land… But the government’s 2017 land audit used questionable data… The Institute of Race Relations estimates black South Africans control 30% to 50% of the country’s land. …Mandela insisted that land reform is best achieved through a “willing buyer, willing seller” principle, as it is in other democracies with a strong rule of law. …snatching private property is about as destructive a policy as there is. The ANC was founded as a revolutionary party, and the tragedy is that it won’t let the revolution end.
To be sure, whites generally got the land illegitimately in the first place (something settlers also did to the Indians in America), so it’s not as if they are the angels in this conflict.
I’m simply saying that copying Zimbabwe-style policies would be catastrophically destructive to South Africa’s economy. Rich landowners obviously will be hurt, but poor black will be the biggest victims when the already-shaky economy goes under.
It’s unclear at this stage how far the government will push this policy. But since the nation already has suffered the biggest year-over-year decline in the International Property Rights Index, any additional steps in the wrong direction would be most unfortunate.
By the way, the news of property rights isn’t all bad. Here’s a video showing how poor people are getting titles to their homes.
2. Mandela’s Legacy – I remarked on my Facebook page that Nelson Mandela should be viewed as a great leader. I was one of many people who thought South Africa would descend into civil war between the races. Mandela deserves an immense amount of credit (along with unsung heroes in the South African community of classical liberals, such as Leon Louw of the Free Market Foundation) for ensuring the nation enjoyed a peaceful transition.
Did Mandela have some misguided views? Of course. He was a socialist, at least nominally. And he joined the South African Communist Party at one point.
But so what? Thomas Jefferson and George Washington were slaveowners, yet we recognize that they played key roles in the founding of America. Simply stated, people can do great things yet still be imperfect.
3. Race – Notwithstanding South Africa’s peaceful transition from apartheid to democracy, the nation faces some major race-related challenges. Simply stated, blacks are relatively poor and whites are relatively rich. And that’s what leads some politicians to pursue bad policy, such as class-warfare taxation and the aforementioned land confiscation.
To make matters even more complicated, there is also a significant – and very wealthy – Indian minority. Indeed, they are the ones who have benefited most from the end of apartheid, which has aroused some racial resentment.
Last but not least, there is also a significant mixed-race community that is culturally separate from native blacks (they speak Afrikaans, for instance).
4. Dependency – I wrote about this problem in 2014 and my visit has led me to conclude that I understated the problem. Simply stated, South Africa is not at the stage of development where it can afford a welfare state. Western nations didn’t travel down that path until the 1930s, after they already reached a certain level of development and could afford to hamstring their economies.
5. Labor law – Similarly, South Africa also has European-style labor protection laws, which discourage job creation. Such policies reduce employment in developed nations, but they cripple employment in developing nations.
By the way, if you want a great understanding of South Africa’s economic challenges, you should buy South Africa Can Work by Frans Rautenbach.
6. Corruption – In addition to the anti-market policies described above, South Africa also has a pervasive problem with political sleaze. Simply stated, politicians have been using government as a means of looting the public.
Here are some excerpts from a report in the New York Times.
…city officials drove across the black township’s dirt roads in a pickup truck, summoning residents to the town hall. …the visiting political boss, Mosebenzi Joseph Zwane, sold them on his latest deal: a government-backed dairy farm… The dairy farm turned out to be a classic South African fraud, prosecutors say: Millions of dollars from state coffers, meant to uplift the poor, vanished in a web of bank accounts controlled by politically connected companies and individuals. …In the generation since apartheid ended in 1994, tens of billions of dollars in public funds — intended to develop the economy and improve the lives of black South Africans — have been siphoned off by leaders of the A.N.C. …Corruption has enriched A.N.C. leaders and their business allies… that is just a small measure of the corruption that has whittled away at virtually every institution in the country, including schools, public housing, the police, the power utility, South African Airways and state enterprises overseeing everything from rail service to the defense industry.
That last sentence is key, though the reporter never made the right connection. The reason there is so much corruption is precisely because the government has some degree of power over “every institution in the country.”
Here’s another excerpt, which is noteworthy since it overlooks the fact that the government created laws requiring black shareholders and directors. Needless to say, that system wound up enriching politically connected blacks rather than ordinary citizens.
A smattering of influential figures, like the current president, Mr. Ramaphosa, amassed extraordinary wealth. They were allowed to buy shares of white-owned companies on extremely generous terms and invited to sit on corporate boards. They acted as conduits between the governing party and the white-dominated business world. Some of the A.N.C. leaders who were left out of that bonanza quickly found a new road to wealth: lucrative government contracts. The public tap became a legitimate source of wealth for the well connected, but also a wellspring of corruption and political patronage, much as it had been for the white minority during apartheid.
7. Crime – The biggest quality-of-life problem in South Africa is crime. The homes of successful people are often mini-fortresses, with big spiked walls topped by electrified wires. Large aggressive dogs and private security patrols also are ubiquitous. Sadly, the government doesn’t do a good job of policing, yet it also makes it difficult to legally own firearms.
8. Education – To be blunt, government schools in South Africa generally are a disaster. Reminds me of the mess in India, except there isn’t a similar network of private schools to give parents better options.
Much of the problem is the result of schools being run for the benefit of unionized teachers (sound familiar?) rather than students. There is some movement in the Cape province to allow charter schools, so hopefully that reform effort will bear fruit.
9. Concluding thoughts – I’ll close with a couple of random non-policy observations. First, South Africa still has some quasi-independent tribal kingdoms. Not exactly the Swiss model of federalism, but it’s better than nothing. Second, it is possible to have multiple wives (I thought of Oscar Wilde’s famous saying when I heard that). Third, everybody should visit South Africa for the scenery and wildlife. I spent a day at Kruger National Park and it was breathtaking even though I barely scratched the surface (by the way, Frans also wrote a great book about the Park).
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.
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.
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.
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 Journalopined 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.
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?
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.”
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.
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.
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.
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.
There are many reasons why I’m not a big fan of the United Nations. Like other international bureaucracies, it supports statist policies (higher taxes, gun control, regulation, etc) that hinder economic development and limit human liberty by increasing the burden of government
Some people tell me that I shouldn’t be too critical because the U.N. also helps poor people with foreign aid. Indeed, the U.N. has a very active project to encourage rich nations to contribute 0.7 percent of their economic output to developing nations.
I generally respond to these (in some cases) well-meaning folks by explaining that there’s a big difference between good intentions and good results. If you examine the evidence, it turns out that redistribution from rich nations to poor nations is just as counterproductive as redistribution within a society.
An article in The Economist succinctly summarizes the issue. It starts with the rationale for foreign aid.
After the second world war, a new “development economics” came to dominate policymaking…, often at the urging of international institutions such as the World Bank. It argued that poor countries were victims of a vicious circle of poverty… The answer? Rich countries should provide the capital, in the form of foreign aid. …poor-country governments should plan their economies and…competition should be restricted through monopoly rights and barriers to foreign trade.
It then describes the revolutionary thinking of the late Peter Thomas Bauer, a Hungarian-born British economist who said the developing world needed economic freedom rather than handouts.
Lord Bauer set out alternative theories that, from the 1950s to the 1970s, were heresy. …Opportunities for private profit, not government plans, held the key to development. Governments had the limited though crucial role of protecting property rights, enforcing contracts, treating everybody equally before the law, minimising inflation and keeping taxes low.
Moreover, Bauer explained that foreign aid generally had a negative effect because it put resources in the hands of government, thus leveraging more statism. Which is the last thing these nations needed.
Aid politicised economies, directing money into the hands of governments rather than towards profitable business. Interest groups then fought to control this money rather than engage in productive activity. Aid increased the patronage and power of the recipient governments, which often pursued policies that stifled entrepreneurship and market forces. Indeed, aid had proved “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”
Writing for the U.K.-based Spectator, Daron Acemoglu and James Robinson explain that foreign aid has a very poor track record.
The idea that large donations can remedy poverty has dominated the theory of economic development — and the thinking in many international aid agencies and governments — since the 1950s. And how have the results been? Not so good, actually. Millions have moved out of abject poverty around the world over the past six decades, but that has had little to do with foreign aid. Rather, it is due to economic growth in countries in Asia which received little aid.
Meanwhile, the nations getting the most handouts have remained mired in poverty.
In the meantime, more than a quarter of the countries in sub-Saharan Africa are poorer now than in 1960 — with no sign that foreign aid, however substantive, will end poverty there. …huge aid flows appear to have done little to change the development trajectories of poor countries… Why? …economic institutions that systematically block the incentives and opportunities of poor people to make things better for themselves, their neighbours and their country. …The problem is that their aspirations are blocked today…by extractive institutions. The poor don’t pull themselves out of poverty, because the basic ability to do so is denied them.
What exactly are “extractive institutions”?
At the top of the list would be bad government policy, which creates a system in which politicians, bureaucrats, and insiders get unearned wealth via corruption and cronyism.
The authors give some powerful examples.
To understand Syria’s enduring poverty, you could do worse than start with the richest man in Syria, Rami Makhlouf. He is the cousin of President Bashar al-Assad and controls a series of government-created monopolies. He is an example of what are known in Syria as ‘abna al-sulta’, ‘sons of power’. To understand Angola’s endemic poverty, consider its richest woman, Isabel dos Santos, billionaire daughter of the long-serving president. …every major Angolan investment held by dos Santos stems either from taking a chunk of a company that wants to do business in the country or from a stroke of the president’s pen that cut her into the action.
To be sure, we have examples of insider favoritism and undeserved wealth in rich nations, but it’s a matter of degree. Cronyism is an undesirable feature of our economy, but it’s a defining feature of nations in the developing world.
So what does all this mean?
Acemoglu and Robinson basically reach the same conclusion as Lord Bauer.
When aid is given to governments that preside over extractive institutions, it can be at best irrelevant, at worst downright counter-productive. …Many kleptocratic dictators such as Congo’s Mobutu Sese Seko have been propped up by foreign aid.
Now let’s shift from looking at nations where failure has been subsidized by foreign aid and instead consider the success stories of economic development. Are there any lessons we can learn?
Well, if you look at the ranking from Economic Freedom of the World, you’ll see that the formerly poor East Asian jurisdictions that are now rich also have something else in common. They rank very high or somewhat high for economic freedom
In other words, there is a recipe for growth and prosperity. Nations that restrain the size of government and allow markets to flourish enjoy growth.
Yes, both nations are capable of much stronger growth with further improvements in policy, but it’s nonetheless good news that there’s been considerable improvement.
Let’s address one more issue that arises in the debate about foreign aid.
Professor Noah Smith of Stony Brook University, in a column for Bloomberg, debunks the myth that poverty in the developing world is a legacy of colonialism.
…the stolen-wealth theory is wrong. Oh, it’s absolutely true that colonial powers stole natural resources from the lands they conquered. …the stolen-wealth theory is wrong…because the theory doesn’t explain the global distribution of income today. …The easiest way to see this is to observe all the rich countries that never had the chance to plunder colonies. Germany, Italy, Sweden, Denmark and Japan had colonial empires for only the very briefest of moments, and their greatest eras of development came before and after those colonial episodes. Switzerland, Finland, and Austria never had colonies. And South Korea, Taiwan, Singapore and Hong Kong were themselves colonies of other powers. Yet today they are very rich. They did it not by theft, but by working hard, being creative, and having good institutions.
Amen. And notice that he also mentions the tiger economies of East Asia.
P.S. Given what I wrote the other day about the statist proclivities of the OECD, here’s an item that shouldn’t surprise anyone.
Even though South Africa already has an excessive burden of government, the Paris-based bureaucracy wants that nation to impose even higher taxes to fund even bigger government.
…considerable revenues will be needed in the years ahead to expand social spending and infrastructure in order to raise growth and well-being. …there is some scope to raise further revenue, particularly through broadening the base of these taxes further. …An important additional source of revenue is environmentally related taxes.
Yup, you read correctly. The bureaucrats at the OECD want people to believe that South Africa’s main challenge is that government isn’t big enough. Heck, they actually want readers to believe that a more bloated public sector will “raise growth and well-being”.
What’s especially remarkable about the OECD’s anti-empirical approach is that fiscal policy is where South Africa get its lowest score in Economic Freedom of the World. It’s almost as if the tax-loving bureaucrats at the OECD are trying to keep that country from prospering.
When asked about the most worrisome statistic for a nation, I don’t say it’s the top marginal tax rate, even though I think class-warfare taxation is very poisonous for long-run economic performance.
Nor do I say it’s the burden of government spending relative to private economic output, even though the size of the public sector gives us a good idea of the degree to which labor and capital are being poorly allocated.
My answer, for what it’s worth, is that a nation is doomed when a majority of its people decide that it is morally and economically okay to live off the labor of others and want to use the coercive power of government to make it happen.
For lack of a better term, we can call this a country’s Dependency Ratio, and it’s a measure of eroding social capital. To what degree, in other words, has the entitlement mentality replaced the work ethic and the spirit of self reliance?
But before continuing further, I want to provide two important caveats.
1) The Dependency Ratio is not the percentage of households that get money from the government. That’s an important number, to be sure, but it includes people who get money but don’t have an entitlement mentality. A good example is that Social Security recipients in America get checks from Uncle Sam, but only because they had no choice but to pay into the system and did not have the freedom to use that money instead for a personal retirement account. In many if not most cases, they don’t see themselves as part of a “takers” coalition.
2) From a practical perspective, the Dependency Ratio is a good concept, but I’m not aware of a methodologically sound way to calculate a nation’s entitlement mentality. And there’s definitely not good data for purposes of doing international comparisons (though this polling data suggests that the problem is much more severe in nations such as France than it is in the United States). So you have to rely on imperfect proxy measures, such as the share of households getting payments, the size and cost of the bureaucracy, and overall social welfare spending.
I’ve shared all these thoughts because they give the necessary background for today’s main topic, which is South Africa’s dismal economic future.
Take a look at this very depressing chart that appeared in my Twitter feed. It shows what has happened over the past five years in South Africa’s labor market.
This isn’t good news. The number of bureaucrats has risen dramatically while there’s been no growth in the number of people working in the economy’s productive sector.
If this trend continues, it’s only a matter of time before South Africa suffers economic collapse. You can’t have an ever-growing class of people living off a non-growing pool of taxpayers.
However, I realize that the chart only shows five years of data, so it could present a misleading view of trends in the country, particularly if there are policy reforms in other areas that might offset the damage of expanding bureaucracy.
So let’s look at other economic sources to confirm whether South Africa is moving in the wrong direction.
I mentioned above that the Economic Freedom of the World has the best data on the quality of a nation’s economic policy. Here’s South Africa’s performance.
The good news is that South Africa enjoyed a big jump in economic freedom between 1990 and 2000, which isn’t too surprising since the morally abominable Apartheid regime relied on heavy levels of government intervention. Ending that system was a key step in economic liberalization.
But the bad news is that there’s been no improvement since that time. Indeed, South Africa’s score has declined. The fall in the absolute score is minor, but bigger problem is that the nation’s relative score has suffered a big drop. If you look at the blue bars on the bottom, you can see that South Africa had the world’s 36th-freest economy in 2003, but it’s now down to having the world’s 88th-freest economy.
In other words, other nations have moved policy in the right direction while South Africa has been stagnant.
Since I’m a fiscal policy economist, I also looked at what’s been happening to the burden of government spending in South Africa.
As you can see, this chart (based on IMF data) shows that government outlays (left axis) have jumped significantly since the turn of the century.
And since government grew faster than the private sector (violating the Golden Rule), the overall burden of government spending increased (right axis) even when measured as a share of economic output.
I don’t know if the additional spending has been used to pay for additional bureaucrats, social welfare programs, infrastructure, education, or the military.
I suspect all of the above, which helps to explain why South Africa’s fiscal policy score from Economic Freedom of the World has dropped from 6.45 to 5.45 (on a 1-10 scale) since 2000.
More important, I also suspect that the net result is to have lured lots of additional people into government dependency.
First, we have another case of misplaced email messages. Here’s an excerpt from an APreport.
On Friday, the IRS issued a report to Congress saying the agency also lost emails from five other employees related to the probe, including two agents who worked in a Cincinnati office processing applications for tax-exempt status. …The IRS blamed computer crashes for all the lost emails.
Gee, how convenient.
I wonder if the IRS will allow me to claim lost data next time I have a tax dispute?
Second, it’s understandable that the IRS is anxious to hide its internal communication because what does get released shows a partisan and malevolent bureaucracy.
The day that former Internal Revenue Service official Lois Lerner publicly apologized for using “inappropriate criteria” to delay tax exemptions for Tea Party groups, she told her colleagues that they were being “beaten up by the press for all the wrong reasons.” …The documents show Lerner’s efforts to persuade Treasury auditors that there was no institutional bias at the IRS, the agency’s attempts to head off a damaging investigation with a pre-emptive apology, and Lerner’s pep talk to her staff after the apology. …The idea for a public apology to head off the audit came at least a month before. Lerner was set to give a speech at Georgetown University and was “begging” for some newsworthy information, IRS chief of staff Nikole Flax said in an e-mail. “We may want to use it to burst a bubble,” said then-acting IRS commissioner Steven Miller in response. He later joked that Lerner could use the speech to “apologize for undermanaging.”
The libertarian paradise of MexicoDiscovery in June 2022 also joined with a private fire service, Fire Ops SA, to launch its Fire Force service. …Discovery says the blue firetruck responded to 172 building fires between Fire Force’s launch through the end of January. …On Feb. 20, the blue Discovery-branded truck was dispatched to a fire in Johannesburg’s leafy Highlands North suburb, where Fire Ops’ Captain Wade Hugo said his team had the blaze under control about 15 minutes before the city’s fire services arrived at the scene. …OUTsurance Group Ltd., a $3 billion financial services company, first started deploying men and women on motorbikes, known as pointsmen, in 2005. They direct traffic in four municipalities, including Johannesburg and South Africa’s wine capital, Stellenbosch, when traffic lights break down and roads are congested.
International Liberty 