A Twisted Tale of Two Countries

Tale I – Norway

The Norwegian Oil Fund now owns 1.7% of all European shares – this for a country of 4.7 million people.  It’s also known as the Petroleum Fund (Oljefondet in Norwegian) or The Government Pension Fund – Global.

The Fund is effectively a country pension fund – save up now during the “earning years” while the oil still flows and use this savings pool to supplement government revenues when the oil dries up.

Norway is transforming its current oil-based wealth into a sovereign fund based on the economic progress of the world.

It’s a more traditional approach to saving than Dubai’s transformational gamble to turn itself into a lasting financial centre. A few years ago it would have looked like the dull, conservative, less effective approach. Now, although stock market declines have hurt the fund, the higher risk nature of Dubai’s approach looks like speculation on a national scale.

This is not to say the citizens of Norway are entirely happy about this plan. Many want increased current spending so that they can have better, cheaper services now. Concerns have also been raised around the suitability of stock markets as an appropriate asset and how the enormous fund manages ethical decisions.

Despite the valid debate around the fund, it’s clear that this Norway is a country and a people with its collective eye set on fiscal discipline and the future, with controlled resistance to populist demands.

Tale II – South Africa

South Africa has modest GDP per capita and frightening income inequality to undercut our incredible nature resources in chromium, antimony, coal, iron ore, manganese, nickel, phosphates, tin, copper, vanadium, salt, natural gas and of course gold, gem diamonds, platinum and of renewed relevance, uranium.

Although only 15% of South Africa’s land is arable, exports also extend to agricultural products including citrus fruit, deciduous fruit, sunflower seeds, sugar-cane maze, solid wood, pulp and wine.

Our share of global gold production in the 1970s was just more than two-thirds at 67.7%.   This dropped to 9.8% in 2008, behind both China and the US. Our absolute production is also massively down on its peak.

In many ways South Africa is now where Norway will be in 20 years – a glorious history of natural resource extraction mostly in the past and 50 million citizens recovering from the hangover of easy money. (I’m deliberately leaving aside the very real, arguably more important issue of how many of those 50 million citizens benefited at all…)

In 2009. South Africa has a mere 5.6m taxpayers and 13m citizens relying on social grants. Each taxpayer is supporting two other people through wealth transfer. Our population is still growing so that an increased tax base can pay for old age state pensions and increased grants for a period. However, even in good times our GDP barely grows in real terms above the rate of population growth (I’ve blogged before that we should measure growth in real GDP per capita rather than just growth in real GDP.) Our population growth will slow down as it has done in all countries as incomes have risen and the population becomes more educated.

We have an 8% national budget deficit this year and can barely afford to keep our road network and electricity supply maintained. New social grants, social security and national health insurance are likely to result in a higher tax burden and increased cross-subsidy. Philosophical discussions around income inequality and the merits of redistribution aside, increased taxes without proportionate increase in value and services will discourage businesses and people from staying in South Africa.

The End of Easy Money

Unlike the Norwegians, South Africans have their best natural resource years behind  them. Money was not put aside in the past, so now the country must succeed on a more equal footing with the rest of the world. The “boring” bits of the economy, like improved education, skills, technology, enabling infrastructure, reliable laws and property rights, appropriate taxes and sensible government investments in positive ROI projects which cannot better be provided by the private sector are now more important than ever.

And maybe an aspirin for the headache from the night before.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

Join the conversation

1 Comment

  1. You mention that 5.6m taxpayers were supporting 13m grant recipients.

    Data that is a few years out of date (released around the time of the small business tax amnesty, which I’d have to dig up) showed only 1.8m individual taxpayers declaring >R10,000 per month income. Compare this to the IEC’s advertisements of 22m or 23m registered voters!

    In the US, the top 5% of taxpayers pay more tax than the next 95% combined. It’s difficult to take seriously the idea that somehow the wealthy must be taxed more and that the middle class(!) are paying more than their fair share, even if it seems like the PC thing to say.

    I’d love to dig up more detailed data for ZA and evaluate the proposed general health scheme.

Leave a comment

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.