There can be no growth without true economic freedom

21 August 2015
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The FMF has an increasingly important role to play in South Africa, not only in relation to economic policy but in other critical policy areas as well.

To compare South Africa internationally, our economic freedom score has declined dramatically. Between 2000 and 2012, our ranking dropped from 41st out of 123 countries to 93rd out of 152 as measured by the annual Economic Freedom of the World (EFW) reports. This decline in economic freedom has had severe negative consequences for economic growth in South Africa.

The EFW reports have been published annually since 1980 by Canada’s Fraser Institute and publicised by the Economic Freedom Network, a worldwide network of 89 free market organisations that co-publish the reports. Milton Friedman believed that if economic freedom could be measured with greater accuracy, researchers would be able to identify more clearly the key elements affecting the performance of economies and was closely involved in establishing which methods to use.

We look forward to the 2015 EFW report (measuring the 2013 year) which will be out in the next few weeks. Watch out for FMF notices and events relating to its release.

The EFW report describes the cornerstones of economic freedom as (1) personal choice, (2) voluntary exchange co-ordinated by markets, (3) freedom to enter into and compete in markets, and (4) protection of persons and their property from aggression by others.

 Economic freedom exists when people can choose for themselves and engage in voluntary transactions without doing harm to others or their property.

While the world rankings of most African countries have declined substantially since 2000, there are some extraordinary exceptions that are following policies that are substantially freer than the rest such as Rwanda (which has shown the greatest improvement in its ranking) and Mauritius. South Africa, on the other hand, has suffered the greatest decline. The following table shows the change in rankings of a few selected countries:

Country

2000

2012

Changes

Mauritius

20

5

+15

Rwanda

102

29

+73

Ghana

101

98

+3

Botswana

39

54

-15

Tanzania

88

94

-6

Kenya

55

77

-22

Uganda

51

57

-6

South Africa

41

93

-52

Nigeria

109

125

-16

Lesotho

106

111

-5

Namibia

70

109

-39

Zimbabwe

118

149

-31

The only improvement in South Africa’s economic freedom ratings since 2000 was in the area of sound money (7.85 to 8.10 out of 10). Abolition of exchange controls would improve this rating even further.

All our other ratings declined. One that has an undoubted negative impact is the excessive growth of government. Our size of government ranking declined from 6.45 to 5.38 out of 10. A country is not economically free when the economy is increasingly dominated by government and state owned enterprises. When the state crowds out private enterprise, efficiency declines and costs rise. State-owned monopoly enterprises do not provide goods and services as efficiently as private firms. One of the main reasons is the absence of the profit and loss incentives and disincentives, coupled with reduced accountability. Another is that politics tends to displace economic considerations. Excessive growth of government size and influence, as shown by EFW research, has an undoubted negative impact on an economy.

Some of the other ratings that impact most negatively on our economy (all rated out of 10) are Integrity of the legal system 4.17, Legal enforcement of contracts 3.93, Reliability of police 4.59, Business costs of crime 2.75, Capital controls 0.77, Hiring and firing regulations 1.55, Centralised collective bargaining 2.84,Regulatory admin requirements 3.20, Bureaucracy costs 3.11.

All the evidence shows that if our economy is to grow rapidly, reduce unemployment, and reduce poverty and inequality, the first requirement is for government to reduce -not increase - its role in the economy. We need the courts and the legal system to function properly. The police must contain crime by arresting and charging criminals and keep people and their property safe. The labour dispensation must be changed to allow the unemployed to compete for jobs and red tape must be cut drastically. We know from historical evidence and our own observations that these changes will make a difference.

 Economic turmoil is worldwide and the world’s governments are responsible. They have spent too much, incurred too much debt, intervened too much in the lives of their fellow citizens, and debased the currencies under their control. These activities have resulted from collectivist/socialist ideas which do not have successful economic results. It is time for the world and our own country to institute economic freedom in order to raise living standards, reduce poverty and inequality and bring about peaceful co-existence.

The EFW studies confirm the historical evidence and our observations, show us which factors have the greatest impact, and suggest what requires the most urgent attention. They provide the recipe for economic success; all we need is for our and other governments to follow it. 

Author: Ayanda Khumalo is the Chairman of the Free Market Foundation. This article is an excerpt from the Chairman’s Report to the Annual General Meeting held on 19 August 2015. The article may be published without prior consent but with acknowledgement to the author

 


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