Without economic freedom, South Africans will never grow their own wealth pies

26 October 2020
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South Africa has experimented with economic freedom since 1994, but not embraced it to the extent that would yield significant material outcomes for the most vulnerable in society. Many commentators wax-lyrical about the country's potential. That potential means little if there are myriad roadblocks to economic liberation, and every bit of momentum is quickly stopped by government slamming the brakes.

One could be forgiven for throwing their hands up in despair at the unyielding negative news cycle. However, we must not let our frustration obfuscate the fact that if South Africa radically transformed its policy landscape, substantial economic growth would result. This requires a break with the ideas and policies that came before, where the state assumes all manner of control over people’s lives, decisions, and affairs. By adopting what has worked elsewhere, without exception, South Africa could finally see that radical growth that is needed to improve the lot of the poor.

In the latest edition of the Economic Freedom of the World (EFW) report published by the Fraser Institute, South Africa was ranked at 90 out of 162 countries and territories. In the year 2000, we were ranked at 58. We have steadily been sliding down the rankings of economic freedom, and most South Africans are worse off for it. For many, the only 'way out' has become the very state assistance that put them in their miserable position in the first place. And that fiscal runway is running out quickly.

The EFW measures economic freedom across five areas: Size of Government, Legal System and Property Rights, Sound Money, Freedom to Trade Internationally, and Regulation. A Gender Legal Rights Adjustment was also recently added, which attempts to examine the extent to which women particularly enjoy economic freedom.

A country's level of economic freedom can tell you a lot about the quality of life there. Countries in the top quartile "had an average per-capita GDP of $44,198 [R733,579] in 2018, compared to $5,754 [R95,502] for nations in the bottom quartile." In terms of life expectancy, in the top quartile it is 80.3 years, as compared to 65.6 years in the bottom quartile. Finally, and most importantly for the South African context: "In the top quartile, 1.7% of the population experience extreme poverty [R31.56 a day] compared to 31.5% in the lowest quartile." Greater economic freedom is truly transformative for poorer citizens.

At its base, economic freedom focuses on individual agency and dignity, a sense of dynamism to engage with and influence the world. From that base, the concept expands into concrete actions such as the trading of goods and services (ranging from the biggest corporations in the world, to the 70-year-old lady trying to sell oranges on the side of the road). When a government interferes in sectors of society, it inhibits people’s ability to trade with each other, to engage on terms they agree are acceptable. 

We shouldn't be surprised that there is social tension in our society when the regulatory deck is stacked against ordinary people. When economic freedom is diminished, only a select few can lobby government  to favour them in policy decisions. The majority is always excluded. Nothing can shake up the status quo and challenge established economic players more than radical economic freedom. 

According to StatsSA, South Africa's unemployment rate rose to 42.0% through the second quarter of this year, on the expanded definition. All the government stimulus in the world cannot create the jobs needed to make a dent in such a devastating number. Per Fin24, "Government lost almost a quarter of tax revenue in the first four months of the fiscal year." The consequence of this will be cuts in social welfare services. Astonishingly, there is even talk that money could be reallocated from services for poor South Africans and given to SAA. 

When people's economic freedom is restricted, negative consequences result. The COVID-19 virus had its own effect on people's lives and livelihoods. Added to this was the country's hard lockdown, that restricted economic freedoms further and had the most devastating effect on the poor. We aren't going to help anyone by pursuing a path redistributing the dwindling fiscal pie – people need economic freedom to grow their own wealth pies.

Retaining the status quo is not radical. Only pro-economic freedom reforms – deregulation, privatisation, and liberalisation – could qualify as radical given South Africa's history. That a compelling case can be made for a social safety net is without doubt. But that safety net cannot exist without the economic growth needed to generate sufficient revenue for the government to use. And, despite decades-long attempts at relying on the state to lead us to the promised land, the reality is simply that, without economic freedom, South Africa will never experience meaningful growth. 

What would pro-economic freedom policies entail? Strengthening property rights, especially in rural communities would unlock the economic potential of presently dead capital. Injecting labour market fluidity, as opposed to the state imposing barriers that stratify different groups, and price out young people. And further, introducing tax exemptions and a lower tax rate generally for small businesses and individuals across the board. Current legislation bogs down entrepreneurs and businesses in mountains of red tape – the time that people have to spend on taming the bureaucracy needs to be slashed dramatically.

Government does not need a silver bullet to solve our problems. Economic freedom does not portend to bend the rules of reality, to give shortcuts. We tend to overthink the solutions that are right in front of us: We don’t need yet another social compact, or 3-day summit. Freedom, it is conceded, can be scary and unpredictable. But the EFW shows that if countries adopt the necessary policies, they’ll see the commensurate improvements in quality of life metrics. Economic freedom is radical, but it is also crucially common-sense. Without conscious implementation of pro-economic freedom policies, transformative economic growth cannot happen.

This article was first published in the DM168 newspaper on 17 October 2020

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