Eustace Davie is a Director of the Free Market Foundation.
The views expressed in the article are the author's and not necessarily shared by the members of the Foundation.
This article may be republished without prior consent but with acknowledgement to the author.
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This article was first published by Business Day on 21 March 2023
Countries that place their people first do not have state monopolies
The most striking positive evidence for putting the people first is revealed in the amazing results achieved by former communist-dominated countries that have adopted free market policies. We can find them by looking through the Economic Freedom of the World (EFW) Annual Reports, which provide an overview, in this case, of the economies of 162 countries, for the years 1980 to 2020. (Available at Economic Freedom of the World: 2022 Annual Report | Fraser Institute)
Economic transformation by former communist countries
One such country is Georgia, which is ranked as the 15th most economically free country in the world in the 2020 EFW rankings, which is a remarkable achievement. What benefit did the average Georgian reap, if anything, from the adoption by their government of free market policies. And if they did benefit from better policies, what were they? Changes that stand out are:
The result was that according to the World Bank records, Georgia’s GDP per capita, (measured in 2017 Constant International US dollars) grew in 24 years (1995 to 2019), from $3,244 to $14,989 per annum)
- A low flat tax of 10% has been in place for 12 years (since data has been available).
- Government reduced its level of investment.
- A sound money policy has been maintained.
- Regulatory restrictions on the sale of real property were reduced.
- The reliability of police increased to almost twice that of South Africa’s.
- Consumers and businesses have benefitted from a high level of freedom to trade internationally,
- Everyone has gained from a less-intrusive regulatory regime.
Four more former communist countries are in the top twenty of the world’s most economically free countries – their EFW Rankings and GDP growth per capita, (also measured in 2017 Constant International US dollars) from 1995 to 2019 (24 years) were:
South Africa - EFW Ranking and GDP growth per capita 1995 to 2019 was:
- 11th Lithuania – GDP per capita grew from $10,640 to $37,184.
- 14th Estonia – GDP per capita grew from $2,731 to $36,153.
- 18th Armenia – GDP per capita grew from $2,913 to $4,318.
- 19th Latvia – GDP per capita grew from $9,599 to $31,039.
- 90th South Africa – GDP per capita grew from $9,830 to $13,852 an increase of $4,022 in 24 years (67.88 per annum). An extremely low, almost static GDP growth per capita compared to the average growth of $475.20 per capita achieved by Armenia. These results send a message to South Africans to change course. The policies that are currently being followed are not working for the benefit of the people. What the country is currently experiencing is a transfer of resources amongst the population and not economic growth.
What must change?
The economy must become people-driven and not government driven. South Africans, if free to peacefully pursue their own interests, can only improve their own lives by improving the lives of others. Economist and philosopher Adam Smith described this phenomenon about two and a half centuries ago when he said, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
Removal of barriers to entry into the market
For South Africa to become thoroughly people-driven it is, for instance, imperative that barriers to entry into the labour market be removed. One of the serious barriers to entry is the minimum wage law, which prevents unemployed people from entering into employment contracts on mutually agreeable terms with employers.
The minimum wage law is probably the legislation that has the cruellest outcomes for the most vulnerable and needy people. An aspect that does not receive attention is, for instance, the disparity of incomes between urban and rural people. The result of the imposition of the same minimum wage across an entire country is that more rural than urban people will be kept out of jobs by the labour laws.
The EFW analyses focuses on biases in the laws of countries, that have depressing effects on their economies. Removal of those depressive effects are shown to lead to an improvement in the lives of the inhabitants. Or on the preferred effects of laws that provide the greatest level of individual liberty.
Findings on the benefits of greater economic freedom
The compilers of the Economic Freedom of the World publication have compiled tables reflecting the consequences for the inhabitants of countries that have greater or less economic freedom. They have grouped the findings to show what can be expected by four groupings:
These are their findings regarding the 2020 Country results:
(Countries with greater economic freedom have higher per capita incomes)
- Least Free 2. Third freest 3. Second freest 4. Most free
- Economic freedom of the world and income per capita:
- $6,542 2, 4,122 3. $ 23,234 4, $48,251
Economic Freedom and the Income share of the Poorest 10%
(The share of income earned by the poorest 10% of the population is unrelated to economic freedom.)
- 2.69% 2. 2.15% 3. 2.30% 4. 2.92%
Economic Freedom and the Income Earned by the Poorest 10%
- ,736 2. ,641 3. $5,654 4. 4,204
(The amount of income, as opposed to the share earned by the poorest 10% of population is much higher in countries with higher economic freedom)
Public officials who work in glass offices tend to provide better service:
The first Georgian Ambassador to South Africa revealed that when his country became independent, the government took over a police force that was not serving the public very well. The government encouraged the police force to improve its service by building new police stations for the use of the police force. The work areas were entirely enclosed in glass so that the police on duty were at all times visible to observers. According to the Ambassador the service to the public improved considerably.