Economic freedom in South Africa continues to stagnate

The latest report of the Fraser Institute’s Economic Freedom of the World (EFW) has just been released and South Africa continues to lag behind the rest of the world.

This year (which uses the 2017 data) South Africa fell two places from 99 to 101 in the world on the EFW Index.

The immediate implication of this is that two more countries are economically freer than South Africa, following the nine countries that surpassed the country the year before.

According to the index, South Africa experienced an improvement in four of the five areas of the EFW, which is why the index score improved from 6.58 to 6.61.

In the legal system and property rights area, South Africa regressed from 5.19 to 5.05.

The biggest drop was in the protection of property rights, which is not a surprise given the governing ANC’s decision to adopt land expropriation without compensation as policy last year.

Indices such as the EFW help in measuring policy reform progress.

Economic freedom is essential to economic prosperity: there’s no shortcut, no way to circumvent the laws of economics.

People are most productive when given the freedom to be productive. Indeed, this is what you see when you look around the world.

The countries with the greatest degree of economic freedom are also the ones with the highest GDP per capita as well as the lowest levels of poverty.

The best argument that those who despise freedom can offer is to point to inequality.

All well and good, except that the countries with the highest levels of inequality tend to be the ones in the third quartile (25%) of the EFW.

How can we explain this? Why are the freest countries not the most unequal if capitalism causes inequality? Conversely, why are the least free countries not the most unequal?

The short answer is: I don’t know, but I think it is possible to make reasonable, logical guesses as to what’s going on.

The freest countries are not the most unequal simply because free economies are the most dynamic and meritocratic, it is possible to make it from the bottom of the pile in society to the very top.

This is why you see billionaires coming from all walks of life in these countries.

Even a South African laaitjie such as Elon Musk, the CEO of SpaceX, can become a billionaire in the US while in South Africa the only ones who become rich are those connected either to politicians or to someone who is already rich.

Countries in the fourth quartile are not the most unequal because by the time a country gets to that stage, the capital base (wealth) has been so destroyed that everyone is essentially poor, except, perhaps, for a few politically connected individuals.

The third quartile is made up of the most unequal countries simply because they have the greatest government interventions.

Without the state having direct control of the entire economy, private capital gets used to fund the cronyism and corruption enabled by the state intervention.

The EFW is a very useful tool. Our government should consider using it to measure progress towards reform.

Other indices that complement the EFW should also be used.

Not only are the most economically free countries the wealthiest, they also, contrary to popular belief, don’t contain the most unequal societies.

It is countries in the third quartile of the EFW, where South Africa sits, that tend to be the most unequal.

Dhlamini is a data science researcher at the Free Market Foundation. The views expressed in this article are those of the author and not necessarily those of the Free Market Foundation.

 This article was published on City Press on 12 September 2019

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