Beware the citizens of nowhere
Europe's high-spending social contract depends on people paying in during their productive years. A growing number aren't.
Dubai’s success has many parents. There’s the low taxes and political stability and easy business regulations. And there’s the relatively permissive social environment, a big selling point compared to its neighbours. All of these attract foreign workers who make up a large majority of the population and keep the economy growing.
The real stroke of brilliance, though, is expelling all of these people once they’re no longer productive. You’re welcome in Dubai for as long as you’re working, but as soon as you retire it’s back on the plane with you, off to burden the healthcare system of whichever country you came from.
People in all societies follow broadly the same age-productivity curve. As children and young adults, we take resources from the state in the form of education. During our working years, most of us contribute more in taxes than we receive. Then when we retire we become net beneficiaries again, receiving pensions and healthcare. The contrast is particularly high in Europe, with its high taxes and generous welfare.
Dubai has hacked this curve. The city is built around attracting people in their net contributor years with low taxes and a fun lifestyle. Children born to expats have no citizenship rights, nor access to free education. And as soon as foreigners stop being productive, whether through unemployment or retirement, their visas are revoked. With expats making up more than 90% of the population, this makes for a very happy budget.
But it’s a terrible deal for those expats’ countries of origin, particularly rich countries that spend more on their citizens during their unproductive periods and which don’t generally benefit from workers’ remittances.
Imagine a child born in Germany. His education and other early needs are paid for by the German state. As soon as he graduates from university, he goes to Dubai and spends his whole career there. Then at 65 he returns to Germany, where he will benefit from heavily subsidised healthcare until the end of his life. Across his lifetime, he has taken resources worth hundreds of thousands of euros from the state and contributed almost nothing.
This is an extreme example. But as work becomes more mobile, it’s worth thinking about what might happen in a world where large numbers of people spend their productive years in countries other than their own.
Mobile elites
In October 2016, a few months after Britain voted to leave the EU, then-prime minister Theresa May used her party conference speech to pour salt into Remainers’ wounds. “If you believe you’re a citizen of the world, you’re a citizen of nowhere,” she said. “You don’t understand what the very word ‘citizenship’ means.”
Liberals were furious. But May, whose stilted manner hides a penetrating intellect, was right. Citizenship is a set of rights and responsibilities towards an organised group, typically in modern times a nation state, that has a huge impact on life outcomes. You can’t just declare yourself to be above it.
She was right, too, in applying this critique to the European context. I wish I could be a citizen of Europe, but unless the EU evolves into a federal state like the US or India, the term is nonsense. I may feel culturally European but legally I’m British and, since last year, Belgian.
The EU does have some – but crucially not all – the characteristics of a nation state, and that can be a source of tension between its members. For example, having a single market but no shared taxation allows some EU states to profit from sweetheart deals with tech giants, undermining their neighbours’ tax bases in the process.
Likewise, citizens’ ability to live and work anywhere in the EU is a tremendous privilege, but one that is ripe for abuse as workers become more mobile. If an EU country could attract large numbers of working-age Europeans, only a few of whom would retire there, it would be funding its economic growth with its neighbours’ human capital. Ironically in the context of May’s comments, Britain was very good at this before Brexit.
Welfare arbitrage
Beyond Europe, the rise of digital nomadism may tempt more places to act like Dubai, welcoming highly educated foreigners during their productive years without paying for their education or retirement. It’s a win for the receiving countries and a win for those individuals, who get their welfare back home; but at a certain level it’s not sustainable for the countries of origin.
A similar thing has happened at the corporate level over the past couple of generations. Many employers used to have lengthy graduate schemes where they would invest heavily in young people, on the understanding that they would then serve long careers with the company. But as workers began job-hopping that calculation changed, and the graduate schemes were cut back.
At the national level, Europe’s expensive welfare states will at some point come under pressure for the same reason: the beneficiaries are under no obligation to pay back the investment.
There is no easy fix. Some countries restrict dual citizenship, forcing their citizens to give up their rights when they take on another nationality. But that doesn’t work with people who are born with a second nationality, which is an ever greater privilege than acquiring one. And it doesn’t work for places like Dubai, which don’t give citizenship to expats no matter how long they stay.
A better option might be the US system of universal taxation, whereby citizens pay for the privilege of being American regardless of where they live and work. The system is badly implemented in many ways but the principle is interesting, and morally sound.
Both the rights and the responsibilities of citizenship are greatest in the high-tax, high-spend countries of Europe, which are therefore most vulnerable to working-age people dodging the ‘responsibilities’ half of the equation. Within a generation, this is likely to become a political debate. Until then: Go East, young man, go East.