The South African Trap

So I’m in Cape Town, and the wealth inequality is insane. It is like nothing I have ever seen – not in India, not in Malaysia, certainly not in Kenya. Take the 1% from Australia and put them in the same city as Kibera, and you have Cape Town. Half an hour from where I’m staying is a township of 450k people with a HIV prevalence of 30%, where people live in corrugated iron shacks that regularly burn down due to jerry rigged electricity supplies. My neighbour, meanwhile, owns two new BMWs, and I regularly see people driving absolutely fucking ridiculous brand new sports cars through town.

I am also working with census data, and it has revealed something I had never quite got into order in my head before. South Africa is young. 45% of the population in under 25, 30% are kids. Of its 53 million residents, only 36 million are adults of working age. Of these, only 20 million are “economically active” – available for, or undertaking, paid work. Of those, only 15 million are currently employed. I knew about the age structure, but what I hadn’t previously grasped is that it is a problem for redistributive taxation. Like, a big one.

South Africa has, as far as I can tell, a nearly identical income tax system to Australia’s. There’s a tax-free threshold, then a tax rate that starts at 18% and rises to 40%. Unlike Australia, however, bureaucracy here is completely insane and the government’s ability to actually collect tax from recalcitrant citizens is probably compromised. Wiki tells me that of South Africa’s 15 million employed adults, only 3.5 million paid tax in 2012. Of course, in addition to problems with collection, many people will also be earning below the tax free threshold.

I have always been frustrated by Australia and other Western countries wringing their hands about ageing populations and shrinking tax bases, while strongly restricting immigration from lower and middle income countries. However, I’ve also been aware of the issue of high income countries benefiting from the migration of skilled people from middle income countries, who are replaced by skilled people from lower income countries. South Africa pays to train doctors who migrate to Australia and the UK. Those South African doctors are replaced by doctors who were trained in Congo and Malawi, at significant cost to the those countries. Some of those doctors are replaced by well intentioned people from high income countries, either permanently or temporarily via organisations by MSF – but not enough of them, and not sustainably. This pattern is repeated on every continent. In effect, lower income countries subsidise the skilled labour markets of higher income countries. This is, needless to say, both unjust and profoundly destructive for people in lower income countries.

But the census and employment data made me realise something else. The loss of doctors and other skilled professionals is not only an issue because it reduces the number of people able to provide essential services – it also shrinks the tax base in lower and middle-income countries, and from the top, since they lose high-income earners who would contribute the most tax. The problem is compounded even further, for countries like South Africa, by the family structures of those people relative to lower-income citizens of the same country.

Almost half of Australia’s population is both economically active and employed, compared to only 30% of South Africa’s population. The majority of people in Australia who are not economically active are aged over 65, and many of them have superannuation, which reduces their reliance on redistributive taxation. In South Africa, in contrast, the majority of people who are not economically active are either children, people who are ill or disabled, or women staying at home to care for one of the first two groups. Each of those groups is reliant either on adult relatives to earn income, or on redistributive taxation, for survival. South Africa has a system of “grants” (benefits) provided for children and people with disabilities, although they are meagre, and these are funded through taxation.

Now, not only does the migration of high earners erode the tax base from the top, it also increases the ratio of people who are economically dependent on others (kids and the disabled) to people who are earning and paying tax. High income earners tend to have fewer children than low income earners, or in many cases, they are young people who are yet to have kids at all. They are also generally unable to bring ill or disabled relatives with them to higher income countries (although they can, and often do, send money home). So the migration of a doctor from South Africa to Australia removes a high-income earner, eroding the tax base, but probably does not remove a sufficient number of people who are economically dependent on redistribution for the country to break even.

South Africa is a country of staggering wealth inequality, but the demographic and economic factors I’ve just described make it extremely difficult to address that problem through redistributive taxation alone. If South Africa were to increase its top tax rate, this would potentially hasten the rate of skilled emigration, further exacerbating the problem I’ve just described. If all skilled high-income earners left South Africa the inequality would obviously be reduced, but the poverty of the worst off would actually be exacerbated by the reduced tax revenue.

I regret to say I do not have a magical solution to this problem, although something I would like to see in a more just world would be higher income countries compensating lower income countries for the loss of skilled workers. I wrote about this issue obliquely last year, discussing how long it will take the health systems in the Ebola-affected countries to recover from the epidemic, since they cannot afford to train sufficient numbers of health professionals to replace the hundreds who died. Australia and other high-income countries are currently being subsidised by lower income countries who pay to train medical and other skilled staff, who then emigrate. I don’t think the solution to that is to restrict skilled migration even further, but perhaps we should be compensating those countries not only for the skilled workers they’ve lost, but also for the erosion of their tax bases. Looked at in this way, foreign aid is not actually charity – it’s the payment of a long overdue and very substantial bill. We owe much more than we think.

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One Response to The South African Trap

  1. Peter says:

    This is an interesting angle. Are you saying the Congo-trained doctor in South Africa makes less than the doctor they replaced? Is that why the tax base is shrinking?

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