Understanding Geoarbitrage (Yes, It’s A Word)
Updated: Nov 12, 2021
While the past year has had many challenges, a positive outcome is that we have embraced technology and had our eyes opened to the possibilities of working outside a traditional office environment. In his New York Times bestselling book, Tim Ferriss coined the term geoarbitrage – moving to an area with a lower cost of living while maintaining the same or a higher income.
For many people, daily commutes and in-person meetings have been relegated to the past – and this is just the beginning of a new era that builds on technology in novel and unanticipated ways. In The 4-Hour Work Week, first published in 2007, New York Times best-selling author Tim Ferriss taught readers how to escape the 9 to 5 routine and live anywhere they wished. He encouraged people to forget the outdated concept of retirement and a deferred life. High-tech shortcuts, embracing a mobile lifestyle, and using virtual assistants were high on his agenda.
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“The world has changed dramatically and the pandemic has shaken up our preconceptions,” says Sarah Nicholson, Commercial Manager of personal finance website JustMoney. “At a time of economic uncertainty and reorientation, many of us are considering new ways of living and working.”
In his book, Tim coined the term geoarbitrage – moving to an area with a lower cost of living while maintaining the same or a higher income. If you’ve dreamed of working on a sunny beach, using one hand to type an email, while reaching for a frosty cocktail with the other, this could be your answer.
Delegation and outsourcing
There are two aspects to geoarbitrage. The first involves moving operations or outsourcing tasks to drop production costs. According to Andrew Bradley, CEO of Fiscal Private Client Services, this aspect of geoarbitrage focuses on getting the best outcome in the most cost-effective and efficient way.
This can be achieved in part through delegation and outsourcing.
He explains that the simplest examples of this are where people employ workers for tasks they themselves could do, but either prefer not to do, or cannot do efficiently. “Doing the task is not an effective use of their time, so they get someone else to do it for them. This allows them to perform tasks they prefer doing or are better equipped to do,” says Bradley.
He believes that everyone should do this to some extent. “For example, I would employ a painter to paint my home. I could do it, but not very well and it would not be a good use of my time because I specialise in a different area. I would also not get much enjoyment out of it,” says Bradley.
“It’s best to delegate a task I’m not specialised in so that I can perform a task I prefer doing and am better at. With technological advances, geoarbitrage now allows this principle to be extended into many new areas – especially employing people in other regions, countries and continents.”
Earn more and live low-cost
The second aspect of geoarbitrage involves relocating to optimise your income and reduce your costs. Bradley says that geoarbitrage is taken to the next level when people or companies are based in one country where they spend their money, while they earn from another country.
“Imagine a person is based in South Africa but offering their services in the United Kingdom (UK). For every pound they earn, they effectively make over R20. The cost of labour in South Africa is a lot lower than the UK, so it would make sense for a UK company to hire a South African.”
“If you live in South Africa and earn in American dollars or British pounds you would have a better standard of living than if you were earning South African rands. Similarly, you could earn in South Africa but live in a lower-cost country, such as Zambia,” he explains. Bradley says that in a local context we’re also seeing people move to smaller towns, such as Montagu and Vrede, where the living costs are significantly lower, but they continue to earn Cape Town and Johannesburg salaries.
In theory, Bradley believes that any profession could participate in geoarbitrage.
“For example, some construction workers and engineers go to work in Dubai on a contract and then come back to live in South Africa. However, this creates havoc with families. It can be very disruptive with the demands of travelling for work and then returning home for time off,” says Bradley.
Find out more about how you are taxed when working for a foreign company here.
He points out that geoarbitrage works better for virtual workers who can stay at home while working remotely and offer their services globally – for example, graphic designers, online teachers, and IT developers. For example, they are paid in American dollars but live in South Africa and spend in Rands. “Achieving this objective is not trivial. It will not be possible for many people – unless agencies develop to provide this service.”
As a point of departure, he suggests that you start working on finding clients in another country. He explains that it’s tough enough building a reputation and business in your own town, province and country, let alone achieving that in another country. “When doing this, make sure you’re paid a premium to what you would be paid in your own country for the same service. If you have to do some traveling, that’s a cost you need to factor in. If you have to travel frequently, it will take a toll on your family. You need consider this also.”
Bradly says that the Covid-19 lockdown experience has taught us that working remotely can suit certain professions. “The consequences of this are far broader than most people anticipate. It may be pleasing to know that you can stay at home in Pretoria and work for a company in Johannesburg without travelling. But soon the company will realise that if you are working remotely, you may as well be in Mumbai. This will create a global workforce for many industries, making it a lot more competitive. The best qualified, hardest workers, living in the lowest-cost areas will have a huge advantage,” he explains.”
In addition to this, he believes that there are huge social, political, economic, and tax consequences, as countries and governments come to terms with how they manage and deal with these dynamics. “As this trend develops there will be significant social upheavals in many countries,” he adds.
“Aim to keep yourself up to date, because emerging technologies are fundamentally altering the way we live and work,” says Sarah. “While change can be scary, there are extraordinary opportunities, too.”