Feature Article: EFW 2013 report warns of future problems for South Africa

Sometimes a big news story or a persistent stream of smaller, related news reports is a sign of some deeper problem. The recent legal battle between entrepreneur Mark Shuttleworth and the South African Reserve Bank was not a sudden dispute generated by a random event; it was simply the latest and most high-profile example of the difficulties inevitably inflicted on people by the existence and enforcement of exchange control regulations.

Similarly, regular unemployment reports showing more than a quarter of the South African labour force to be out of work have persisted for too long to be surprising. The youth unemployment rate is almost double the average. Such disturbing reports are often followed by calls for new government programmes to “create jobs” and perhaps to train workers to fill those jobs. Despite government’s tenuous record in job creation, governments are also called upon to “preserve jobs” by discouraging companies from terminating employees or eliminating positions.

The Economic Freedom of the World: 2013 Annual Report is a rich source of data that can help us not only to explain past, but also to forewarn us of future problems. Earlier editions of Economic Freedom of the World (EFW) did indeed warn us of each of the problems mentioned above, and more.

The EFW index gives us a general measure of a country’s economic freedom as well as a more detailed breakdown into five broad categories and a total of 42 subcategories. Using the latest available data (which bring us up to 2011) this year’s report shows that South Africa increased its overall index score slightly from the previous year. But this still places South Africa in the third quartile of all the countries studied, ranking 88th out of 152 countries.

In none of the five broad categories does South Africa make it into the top quartile of economic freedom. The weakest category is “Size of Government,” particularly its subcategories of “Government Consumption” and “Government Enterprises and Investment.” These ratings should warn us that government consumes a higher than average (by world standards) proportion of national economic output and has a relatively heavy involvement in the production of, and investment in, some of that output.

What is most disturbing about these particular ratings is that they have been deteriorating since the year 2000. As government consumption and investment grow as a proportion of economic output, the marginal benefit or return from such expenditures falls. At the same time, this growth in government drains resources from the more productive private sector, thereby hindering South Africa’s economic growth, and holding the production of goods and services (as well as the standard of living) below its potential.

South Africa has fallen significantly in four other EFW subcategories since 1995 which have signalled trouble since then. Most glaringly, the rating for “Capital Controls” dropped from the already low level of 2 (out of 10) to the even lower 0.77 level, where it has remained since 2000. This extremely low rating should already have prompted the government to eliminate exchange controls and so end the symptomatic daily losses of opportunity inflicted on South Africans. These losses arise as much from the hassle factor of time lost through delay and paperwork – which reduces competitiveness at home and internationally – as from direct losses through fees and capital misallocation. Most of such losses might seem insignificant and barely visible compared to the Shuttleworth case, but collectively they add up to huge losses of potential wealth. They also result in a loss of respect for the law.

Domestically, the increased burden of business regulation has resulted in a declining score for the subcategory of “Administrative Requirements.” This trend makes it increasingly difficult to do business in South Africa and results in higher-cost products and less production than would have been possible. The source of such costs might not be visible to consumers or voters, but it is painfully obvious to business operators.

Ever-present in the news, and perhaps worsening, are stories of labour unrest. The downward trend in EFW scores for “Hiring and Firing Regulations” as well as “Centralized Collective Bargaining” has been a clear predictor of not only increasing labour strife, but also the persistently high unemployment rates.

When employers and employees are not free to enter into voluntary and flexible employment relationships, the invariable result is fewer people employed. If employers are not free to terminate their relationships with employees who are uncooperative or are made redundant when production declines, then those employers will naturally be reluctant to increase their workforces at any time.

Collective bargaining laws have overridden the rights of employers and individual employees to enter into mutually beneficial relationships. By forcing employers to enter into negotiations with what are actually third parties, governments have unbalanced the employment relationship and increased the likelihood of conflict. This conflict is induced not only between employers and employees (as collectivised in trade unions), but also between the more productive employees and their less diligent brethren who drag down productivity and collective wages.

This year’s EFW annual report also brings us two new chapters, one of which focuses on Africa and juxtaposes EFW data with indices that rank countries by the quality of their political institutions and civil liberty. The other chapter examines the rising popularity of measures of “national happiness” (as distinct from economic growth) and provides a helpful explanation of the relationship between such “life satisfaction” and economic freedom.

This year’s annual report gives South Africa extra attention, and South Africans would, as always, be well served by heeding its lessons.

Author Dr Richard J Grant is Professor of Finance & Economics at Lipscomb University, Nashville, Tennessee and Publications Editor of the Free Market Foundation. This article formed the preface to the South African edition of the Economic Freedom of the World: 2013 Annual Report. The article may be republished without prior consent but with acknowledgement to the author.

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