Why economic freedom is vital for SA's future prosperity

06 November 2020
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South Africa is no Venezuela, which ranks at the very bottom with one of the worst performing economies in the world. But neither is it close to the top of the list and among the best. The Economic Freedom of the World Index tells a sad tale of South Africa's decline in recent years.

South Africa is in the bottom half, wedged between the corrupt Russian Federation and Tanzania - which doesn't recommend it highly at all. 

Why is economic freedom important? Something often overlooked in debates. In terms of performance, it is no coincidence that the freer the economy the more prosperous the people. The hard data, too, shows there is longer life expectancy, greater social tolerance, more equality between the sexes, and a host of other indicators. Why?

A prime reason is the difference in bureaucratic management as opposed to profit management. In the bureaucratic system, you have small cliques of individuals trying to solve a problem. Often the incentives to solve the problem are rather perverse and many social problems, if solved, would put the bureaucrats out of a job.
In depoliticised markets, the incentives are quite different. There, you are rewarded financially if you solve a problem. The grocer who delivers food to willing customers is rewarded with sales. In addition, compared to a small band of bureaucrats half-heartedly seeking a solution, in markets you can have hundreds, thousands, or tens of thousands all working on solutions. Which solution will work is only discovered over time but the more people working on them the quicker they are discovered.

But, politics often punishes problem solvers.  Politically managed systems typically create perverse incentives - they reward bad behaviour and punish the good. It is well known in political circles the world over that a government agency ending the year with a surplus often sees its budget cut the next year, while those who run out of funds are given more. Departments that are run efficiently get cuts and departments that waste get rewarded.

An acquaintance who once worked in the U.S. Pentagon said they would scurry about at the end of the fiscal year buying everything and anything to deplete the department budget to avoid cuts the next year. It's like a physician being given a bonus if he has more patients die and punished if he doesn't.

If you don't think this is what happens, explain South African Airlines. It is badly managed and running in the red and, just recently, a subdivision of the airline, SAA Technical, had to refuse it service because of non-payment of debts. The government's solution was to throw another R10.5 billion at the 'doctors' caring for this dying airline. 

In so doing, they did not please the International Monetary Fund to whom they had gone begging for R70 billion for Covid-19 response. A government that proclaimed it didn't have the money to save lives was happy to throw billions to save inept bureaucrats who imagine SAA to be a national treasure.  

So, when, for the first time the new South Africa sought a loan from the IMF, it pleaded poverty with regard to Covid but found billions to waste on a giant economic sinkhole. That isn't the way to build confidence and should rightfully make future loans harder to secure. Mr. Hill-Lewis, the Shadow Minister of Finance rightfully noted, "Now it seems likely that the SAA bailout will be funded by cutting Covid stimulus expenditure earmarked for public employment programmes and for rail infrastructure." This would be contrary to the Letter of Intention the government sent the IMF when seeking the funds. 

The reality is SAA management has no incentive to solve problems. That's too much work. All they need to do is continue to fail and wait for the next life raft from the government, loaded with funds earned by the hard work of South Africans. The hard-working taxpayers are then punished once again with higher taxes while the SAA management is bailed out yet again.

I admit being baffled as to why the ANC government is so intent on saving this albatross around their neck. As a current American resident, I'm used to a strutting politician too egotistical to admit his numerous disastrous mistakes. But SAA predates the ANC government. 

SAA is itself a creation of the apartheid regime, a government that had nothing but contempt for economic freedom at the time. So why is the ANC making this problem of the old Nationalist government their own special cause? They often have pointed the finger of blame at the National Party and yet, this time when warranted, they rush in to embrace the errors of the past and make them their own. 

This article was first published on City Press on 29 October 2020

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