Growth demands greater economic freedom

The successful agreement of the Trans-Pacific Partnership (TPP) between the 12 TPP negotiating nations in the first week of October was a historic achievement. The TPP negotiating countries represent nearly 40 percent of global gross domestic product from the Americas to Asia and the agreement thus represents the largest regional trade accord in history. The agreement has been five years in the making and promises to deliver increased prosperity for the citizens of the partner nations through increased levels of economic and individual liberties. 

The main aim of any free trade agreement (FTA) is to allow goods and services produced within the partner countries to flow more freely across political borders without artificial constraints and hold-ups. Many large multilateral organisations such as the World Bank and the International Monetary Fund (IMF) have regularly promulgated advice based on the belief that freer trade generates predictable and positive consequences for economic growth and poverty alleviation. This premise is based on the theory of comparative advantage, the basic principle of which is that member countries are able to specialise in goods and services that they can produce relatively more efficiently than their trading partners and hence reap the benefits of mutual exchange. In other words, trade is a positive sum activity; both trading partners gain, and the pursuit of the gain provides the motivation for exchange.

The partner nations to the TPP agreement have also realised that although trade liberalisation is a necessary condition for growth it is not necessarily sufficient. There are complementary conditions, such as macroeconomic stability, credibility of policy, enforcement of contracts and the respect of private property rights, without which the benefits of openness may fail to materialise. Thus, in addition to phasing out thousands of tariffs and other barriers that hamper trade between the partner countries, the TPP agreement also includes provisions that uphold private property rights, including intellectual property rights, as well as including provisions that improve individual liberties in countries such as communist Vietnam by increasing citizen’s access to the internet, which has traditionally been severely restricted. 

The South African government would do well to recognise that whilst the rest of the world is moving toward increased economic freedom and civil liberties, the current trajectory of South Africa is largely sending the country in the opposite direction. The country has plummeted down the ranks of indices such as the Fraser Institute’s Economic Freedom of the World (EFW) index. The index reliably demonstrates that countries with greater levels of economic freedom tend to grow faster and be more prosperous. The foundations of economic freedom are personal choice, voluntary exchange, freedom to compete and security of privately owned property. SAs decline in both absolute terms, from a rating of 7.09 in 2000 to 6.88 in 2013, and relative terms, from a ranking of 42nd to 96th over the same period is of great concern as the decline has correctly predicted a worsening of conditions in the country.

Government would do well to take steps to stop the slide down the economic freedom ranking but has given no indication of taking note of the indicators that show clearly that the economy is becoming less free and is paying a heavy price – a result which is reflected in a drastic decline in economic growth and in persistent massive unemployment. The country is sorely lacking the basic institutions of economic freedom, which include its fundamental foundations, personal choice, voluntary exchange, freedom to compete and security of privately owned property. Without increases in these central freedoms it is difficult to envisage how South Africa will grow and become more prosperous.

The commitment by each of the TPP nations to uphold basic economic freedoms as well as personal and civil liberties through this historic agreement, shows a willingness to change their economic policies and should be applauded. South Africa’s government, watching the TPP agreement unfold, must realise that it has it directly within its power to reform the South African economy and adopt policies that will increase growth and reduce poverty. Note: An abridged version of this article was published in Business Day and bdlive on October 22

Author: Jasson Urbach is an Economist and director of 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 members of the FMF.         

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