How Rwanda surpassed SA: The importance of economic freedom

Economic freedom correlates strongly with economic growth. There is no longer any doubt about this for anyone who witnessed the extraordinary rise of the countries in the former Eastern Bloc after the fall of the former Soviet Union.

Countries like Estonia and Georgia have experienced unparalleled increases in prosperity along with economic freedom as reflected in their ranking in the most recent Economic Freedom of the World (EFW) annual report.

Indeed, Estonia is considered a technological hub rivaled only by Silicon Valley in the United States.

Closer to home, Rwanda is now the hottest investment destination on the African continent. It has rocketed past South Africa in the EFW to fill 2nd position on the continent after Mauritius.

This has led to that country being consistently one of the top five fastest growing economies in the world.

That Rwandans are now even producing their own smartphones is quite extraordinary when you consider that the country was experiencing the worst genocide since the holocaust around the same time that South Africa was becoming a democracy.

If we look at the graph below showing the two countries’ performance according to EFW, we see that Rwanda surpassed South Africa between 2007 and 2008.

Rwanda is not only at a higher point than South Africa but is also trending upwards while South Africa is trending downwards in terms of economic freedom.

If we look at the GDP per capita growth for both nations, we see that since surpassing South Africa, that not only has Rwanda had higher annual rates of growth, but South Africa has not come close to matching Rwanda’s growth.

In fact, the last time this happened was in 2003, the same year that South Africa reached its highest recorded Economic Freedom score under President Thabo Mbeki.

The EFW index is divided into 5 areas which contain 43 component variables. Between 17 and 19 July, the Free Market Foundation (FMF) will be hosting an Economic Freedom audit of South Africa.

There will be five sessions representing the five areas of the EFW, during which South African experts in those areas will chair discussions between government representatives and the international researchers who compile the annual EFW index.

We hope this will allow policy-makers to see how the EFW can be used in their own specific areas of competence towards reaching the larger development goals that government has set for the country.

The EFW is comprehensive, so any ministry will find variables that apply specifically to their area of competence, whether it’s the budget (Area 1: Size of government), the judiciary and property rights (Area 2: Legal system and property rights), protecting the value of the rand (Area 3: Sound money), attracting FDI (Area 4: Freedom to trade internationally) and the rules that small business owners have to comply with (Area 5: Regulation).

Bonang Mohale, former CEO of Business Leadership South Africa and Free Market Luminary Award recipient, will host the session on freedom to trade on the 18 July.

Former judge of the Supreme Court of South Africa, Rex van Schalkwyk, will chair the session on the Legal System and Property Rights on 19 July. These are just two of the experts who will be participating in this enlightening and exciting seminar.

To attend, all you have to do is register on the FMF’s website.

If we are serious about solving the myriad developmental challenges facing this country, we need to start thinking about adopting the policies that are known to cause higher levels of economic growth and prosperity.

I hope to see you at the audit event. I have said before that policy-makers should start benchmarking policy against useful indices like EFW.

We have seen in our comparison between South Africa and Rwanda just how important this one index is for predicting which economy will grow “much faster than the population.”

This is the very thing that President Ramaphosa has highlighted as being the main focus of his government for the next five years.

Mpiyakhe 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 first published on City Press on 4 July 2019.

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