Greater economic freedom can reduce poverty in Africa

Africa has the dubious distinction of contributing 18 of the last 25 countries ranked in the Economic Freedom of the World: 2008 Annual Report (EFW) released on 16 September. While South Africa has slipped from 49th to 54th in the rankings, it remains third in Africa and in the top 40 per cent of countries measured.

In the 2008 Report, Seth Norton and James Gwartney include an analysis of “Economic Freedom and World Poverty.” Policymakers, academics, and concerned citizens have been discussing the issue of poverty for decades, the authors explain. And one region of the world, sub-Saharan Africa, dominates the discussion. Norton and Gwartney take on the question “Why Is the Poverty Rate of Africa So High?” and look to three indicators: Legal Structure and Security of Property Rights, Freedom to Trade Internationally, and Business Regulations.

In order to address this question, we will consider the individual African countries and their policies. First, we will look to Botswana, which has for two decades competed with Mauritius for the top African ranking, but has slipped 19 places behind its rival in the rankings. We will then examine several African countries that have improved in the rankings.

The EFW Report offers profiles of 141 countries, 37 of which are in Africa (or off the African coast, such as Madagascar and Mauritius).

Botswana: the success story?
South Africa’s neighbour, Botswana, has declined in the rankings: the country’s overall ranking moved from 38th in 2005 to 60th in 2006 (with a corresponding drop in rating from 7.23 to 6.96 out of 10). Among the countries that have overtaken Botswana in the rankings are several Central and South American countries: Honduras (7.0), Mexico (6.98), and Nicaragua (6.99), two Caribbean island countries, the Bahamas (7.15) and Trinidad and Tobago (7.07), and a neighbouring country, Zambia (7.09).

One reason that Botswana has fallen in the rankings is because government has grown. Government enterprises and investment for 2006 is 33.34% of the GDP, compared to 25.32% of the GDP in 2005. Government spending fuelled by diamond revenues (Botswana is the world’s largest producer) is increasing at a higher rate than GDP. According to the CIA World Factbook, the GDP growth rate slowed from 3.5% in 2005 to 3.3% in 2006.

As the Economist points out, the government is driving the economy and private sector investment is minimal. The unemployment rate is at 18% (“The southern star” 27 March 2008). Although Botswana has long been praised as “the southern star,” increased privatisation and diversification are needed to ensure long term growth.

African countries which have improved
Burundi (132 -131), the Central African Republic (138 -134), the Democratic Republic of Congo (137 -130), Cote d’Ivoire (114 -107), Ethiopia (125 -121), Ghana (86 - 66), Madagascar (110 -106), Mali (106 -100), Morocco (100 -95), and Nigeria (129 -111) have all improved on their previous EFW rankings. Seven out of ten have experienced increases in GDP growth rates between 2000 and 2006.

Among African countries that have scored a summary rating above six from 2000 to 2006, seven out of ten have seen increases in GDP growth over the six-year period. These countries include Kenya, Namibia, Morocco, South Africa, Tanzania, Uganda, and Zambia (not included, but consistently scored above six: Botswana, Mauritius, and Tunisia).

Ghana has improved its ranking and seen increases in its rating since 1980, the first year of study. Between 2005 and 2006, Ghana experienced significant increases in the areas Legal Structure and Security of Property Rights (5.02 to 5.74), Access to Sound Money (7.38 to 8.21), and Freedom to Trade Internationally (5.44 to 6.79).

In annual budget statements and the Poverty Reduction and Growth Facility (PRGF), the government of Ghana has emphasised the importance of a decentralised, democratic environment, increased privatisation and improvements to social services. As a result, Ghana has risen in the EFW rankings, but more importantly, the economy has seen consistent, high levels of growth (4.3%, according to the CIA World Factbook).

In Doing Business 2009 the World Bank ranked Ghana as “the best place to do business in West Africa”.

Zambia: a new southern star
Zambia has overtaken South Africa in the rankings for 2006 (Zambia is 7.09; South Africa is 7.03) and is second only to Mauritius among African countries. The wealthiest country in sub-Saharan Africa at its independence in 1964, it was among the poorest twenty years later. A new economic programme of liberalisation, privatisation and diversification is responsible for the country’s recent economic growth.

A decrease in the size of government has improved the country’s ranking in the 2008 EFW (from 7.82 in 2005 to 8.19 in 2006). The privatisation of government-owned copper mines plays an important role. In order to maintain high growth rates and reduce poverty, the government of Zambia must continue with privatisation as part of a wider free market economic policy.

Despite a fall in ranking in the 2008 EFW report, Mauritius has consistently been near the top among African countries (for 2006 Mauritius received an overall rating of 7.26 and a ranking of 41st). Mauritius receives its highest ratings in Access to Sound Money, Freedom to Trade Internationally, and Regulation of Credit, Labour, and Business.

Since independence in 1968, Mauritius has emerged from a low-income agricultural economy to a middle-income highly diversified economy. The government created an export processing zone (EPZ), diversified the economy (by encouraging the financial sector, tourism, and other service industries), and formed social and economic alliances (including membership in the SADC, COMESA, and ACP). The EPZ attracted investment by lowering trade barriers such as tariffs, quotas, and business regulations.

In 2006 less than 10% of the population was below the poverty line.

In their analysis of economic freedom and poverty, Norton and Gwartney argue that EFW indicators – specifically Legal Structure and Security of Property Rights, Freedom to Trade Internationally, and Business Regulations – are correlated with economic outcomes. Sub-Saharan Africa has low EFW scores in these areas and also high levels of poverty. Despite past poor performances, there is reason for optimism. Ghana, Zambia, and Mauritius are either improving or maintaining good EFW scores and reaping the benefits of higher economic growth.

African governments need to adopt new policies in order to improve the quality of life of their citizens. The 2008 EFW report highlights areas that need reform. The governments should therefore utilise the information contained in the EFW reports to formulate policies that will increase economic freedom, bring about high economic growth, reduce poverty, and, in time, allow their countries to join the ranks of the world’s prosperous nations.

Author: Laura Grube, a graduate of Beloit College, is a visiting U.S. Fulbright Student with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the Foundation.

FMF Feature Article / 30 September 2008
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