Did you know that the countries with the highest inequality in the world have a lot of seemingly unrelated economic indicators in common?
These indicators aren’t something mainstream commentators and leaders talk about because it seems the penny hasn’t dropped yet. Worse, I don’t see many in academia making the connection either.
South Africa has kicked the spending and deficit can far down the road. The road has come to an end, and we can no longer just spend more in the hope that things will get better.
The Covid-19 crisis has brought that end closer.
Indicators that add to inequality and poverty in emerging markets
- High unemployment
Firstly, all countries with high inequality have a very high unemployment rate in common. All five Southern African Customs Union (Sacu) countries – Botswana, Eswatini, Lesotho, Namibia and South Africa – are among the 10 countries in the world with the highest unemployment and the top 12 most unequal societies too. There is clear evidence across the world that high unemployment is a very good indicator of high inequality.
Select world inequality rankings
Source: The Economist’s Pocket World in Figures, 2020 edition. Countries selected on tax and employee compensation data availability.
Simply put, too few people working increases poverty levels and inequality.
- High tax to GDP
Secondly, many might not see high tax-to-GDP ratios as an inequality indicator, but it is clear that many emerging markets that have high tax burdens also have high inequality. All five Sacu countries are among the top 30 highest taxed countries in the world.
Emerging markets tax burden: Taxes collected as a percentage of GDP in 2017
- High government wage bill
Add a high government wage bill as percentage of GDP, along with the high tax burden and one finds the third fact: emerging countries with higher total government wage bill as a percentage of GDP is a very good indicator of high inequality.
Namibia and SA lead the world in shouldering the burden of government wages.
Government compensation in Brazil, Eswatini and Botswana are also among the world’s highest.
Notably, the world’s most developed market, Sweden, has a lower wage bill than the average for the Sacu countries.
Ten of the top 12 highest emerging market wage bill countries for which we have recent data are also among the top 20 most unequal societies in the world.
This, combined with the high tax burden, means that most of the tax money goes to consumption expenditure and to a small group of citizens.
In fact for emerging countries, high government wage burdens are a very good indicator of inequality, as more often than not civil servants who get the large chunk of GDP are in the top 10% or 5% of earners in those countries.
It also means governments do not have much left to pay for medicine, books or roads.
Government wage bill as a percentage of GDP for 2016 or later
Note: Data includes that from central government plus local and other tiers of government, apart from Angola, Malawi, Namibia, Nigeria and Mozambique (central governments only), India (excludes state government), while Zambia and Angola’s data exclude local government. Honduras seems to be missing local government data.
High government debt
In the fourth instance, government debt burdens and government interest payments relative to the size of the economy are also good indicators of stress in an economy. The burden of government interest payments as a percentage of GDP in SA is the fourth highest among major emerging markets; our government deficit is also one of the highest. Brazil also has a high government deficit, as do many SADC countries.
Government debt is not an obvious indicator of inequality but more of a leg iron for potential growth to close the poverty gaps and the ability of infrastructure to lift growth.
If there is little growth there will be no improvement in poverty and unemployment levels.
Many of the countries with very high inequality have high government-debt-to-GDP levels, with the very clear exception of Botswana. Interestingly, the reverse also seems generally true in that lower debt-to-GDP countries have less inequality as is the case in Eastern Europe, Turkey and Thailand – with India and in a sense Argentina the exceptions in the reverse angle.
Major emerging markets’ government debt to GDP
Note: All data is for general government, except Angola, Namibia, Zambia Mozambique, Rwanda, Eswatini, Lesotho, Botswana, Honduras and Malawi, which are central government only.
The problem is that some governments and many academics seem to believe that spending more will solve inequality and poverty. This is pertinently untrue for emerging markets at least, and most economies. Even reserve currencies will implode at some stage with the debt burdens being imposed.
The real problem is not spending, but to fix inefficiencies and crime.
South Africa and southern Africa generally have failed to fix government efficiencies, badly-run state-owned entities (SOEs), and government functions such as public transport. Instead, corruption has engulfed every facet of life in government and the destruction just continues.
It is downhill from here because the kitty has run dry.
With deficits of over 14% this year and nearly 10% next year it is silly to think government debt will remain below the level of the country’s GDP.
Fifty-two percent of this year’s non-interest expenditure is financed by debt. That is not even close to sustainable. Over 40% is normally a clear sign of a debt or hyperinflation crisis.
With an extreme tax burden that is crushing growth potential, and spending that is mostly on consumption by government and a presidency that relies on a predominate government and SOE-based trade union federations, it seems unlikely that the country will be able to run a sustainable spending and tax regime.
The hard-left trade union-inspired government spending and taxation will not go away easily.
But as debt levels rise to closer to 100% of GDP, the room to do things will be crushed.
Government will not be able to tax more in a very weak economy without fully destroying the already-cracked golden egg.
In short it’s over if we do not make massive reforms.
If we do not, I can tell you that universities will close, the Passenger Rail Agency of SA (Prasa) and Gautrain will no longer be around, social grants will become worthless, and hospitals will be empty places that employ doctors who can prescribe but not provide a Panado.
Inequality and poverty will rise even more. Unemployment will rush higher too. Interestingly, all nine of the highest unequal countries in the world (with unemployment data) have unemployment rates higher than 13% generally, while the top seven have unemployment rates of about 20% and above.
So if government spends more it will at a stage have to tax more and that will chase away even more potential – or future employers, which increases unemployment and creates even more pressure for government to employ more civil servants and raise taxes yet again while cutting books, medicine and infrastructure spending.
This is a bad cycle and the shouting for a universal basic income grant will threaten the currently employed with even more taxes and the richer folk with wealth taxes.
We are getting closer to this very bad scenario …
A scenario where the country will take crushing measures like changing pension regulations, begging from the International Monetary Fund (IMF) or hitting the rich with ever higher taxes.
I am not a pessimist by any means but we honestly need to pray that the finance minister can get it right this time, as the data mentioned above will kill growth and hope in this economy.
Yet the penny has not dropped for those who earn a cheque from the government.
As for academics, they will need to understand these facts quickly or they will find themselves unemployed too, as a government that needs so much money will end up closing universities and departments.
Many a union thinks another 20% increase will drop inequality and unemployment because people will spend more – er, yes: on cellphones, imported clothes, cars and champagne. The four imported Cs.
If SA just spends and spends then our children will leave and work elsewhere.
Mike Schüssler is an economist at economists.co.za