Economic freedom most rapidly reduces poverty

South Africa’s Economic Freedom of the World ranking this year is 110th as compared to 46th in 2000 out of the countries measured. Does it matter that the ranking has dropped 64 places in 18 years, to below Swaziland and just above Namibia and Lesotho? Should we be worried that SA has gone down so badly in the rankings? 

The answer is that it does matter. The reason is that countries with higher levels of economic freedom produce the best economic results. The most economically free country in the world is Hong Kong. The most economically unfree country of the 162 countries studied, is Venezuela. Very unfree countries, such as Cuba and North Korea cannot be studied because there is no data available for them.   

Government policies that deliberately set out to increase economic freedom, energise the people to improve conditions in their country. Higher levels of policy certainty and less red tape make it easier for people to do business. Hong Kong is an outstanding example of a country whose people became wealthy because the government did not interfere in their lives but concentrated on keeping them and their property safe.

At the end of the 2nd World War, people who had fled because of the Japanese invasion of Hong Kong flooded back. The British administration did not turn away refugees, so Hong Kong also became a haven for people escaping from China and Vietnam. The small territory, as a result, became home to a huge number of unemployed people. The government could do nothing for the unemployed people except to stay out of their way and out of the way of the people who were prepared to employ them.

The government allowed entrepreneurs to innovate and find ways to employ the refugees in what some people described as sweat shops and slave labour. For instance, they churned out millions of small plastic toys that were exported and ended up in children’s lucky packets around the world. They were provided with plastic, equipment to melt it, and moulds into which to pour the plastic and make the toys. The toy makers were paid according to the numbers they produced. This sounds like a terrible way to make a living but at least it allowed them to put food on the table.

Many small factories were started by relatively poor people who hired even poorer people to manufacture a great variety of goods. There was a surplus of labour, wages were low, and working conditions were not good. Living conditions were also not good. People hired beds to sleep in on a rotation basis, for instance one bed would be slept in by three people paying for specific eight hours slots in each 24- hour day. By 1980 this had all changed and employers complained of a shortage of labour.

The worst thing a government can do under circumstances of mass unemployment is to tell jobless people what work they are allowed or not allowed to do, and to punish employers who give them jobs which government bureaucrats believe are not “decent jobs”, at wages that the bureaucrats think are not “decent wages”. There are almost 10 million unemployed people in South Africa according to Stats SA, 2 million more than the total population of Hong Kong.

What South Africa needs now is a “voluntary exchange economy”, like Hong Kong’s in the 1960/80’s, which had a flat tax rate of 15% and low levels of regulation. On a visit to Hong Kong, economist Milton Friedman gained first-hand experience of what became the first Asian economic miracle. He later wrote that in 1960 “… the average per capita income in Hong Kong was 28 per cent of that of Great Britain; by 1996, it had risen to 137 per cent of that of Britain”. He concluded that “the only plausible explanation for the different rates of growth is socialism in Britain, free enterprise and free markets in Hong Kong”.

If you want to know whether the economy of a country is free, ask these questions: Is the government small and does it consume less than 15% of resources? Does the government ensure that the people and their property are protected? Is there a shortage of labour? Does it see itself as a servant of the people? Is the legal system sound, does it function well, and is the judiciary independent? Does the country have sound money that keeps its value, with low to zero inflation? Does your country have free trade with other countries with no or few import tariffs and restrictions? And, lastly, can businesses operate without bureaucrats constantly breathing down their necks? If the answer to every question is “Yes!” you are living in a free economy. 

Eustace Davie is a Director at the Free Market Foundation

This article was first published in City Press on 11 October 2018

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