Limits to economy a danger to political freedom

Consistent improvements in the economic welfare of the average man and woman have now been sustained for centuries in the Western world. The improvement in global per capita incomes has been especially impressive over the past 70 years as the process of economic growth has been extended more widely.

Global GDP per head in inflation-adjusted terms has increased on average by about four times since 1950. The world population has increased spectacularly from 2-billion to more than 7-billion over the same period, while those subject to absolute poverty have declined to about 1-billion.

We might summarise these essential conditions for economic development as that of cultivating economic and political freedom. That is, to allow individuals to pursue their interest in higher incomes with as little as possible interference and obstruction from others. To provide the economic actors with freedom to buy and sell, to employ or be employed, to hire or rent, to save and invest largely as they see fit.

To be able freely to set up new businesses with new methods and offerings to compete with the established firms, and to shut them down if necessary. And, most important, for governments to protect these freedoms and the savings and wealth they generate from arbitrary expropriation or violent extraction by other individuals or the government itself. Law and order — the rule of law — are essential ingredients that support free economic action.

Why then do countries fail to adopt the right mix of rules and regulations for the sake of economic progress? Economic freedom is highly supportive of a general interest in a stronger economy. Yet groups with powerful resources may well prevent it from happening. Those with government-favoured ethnic or religiously based credentials that allow them to do business or find employment on preferred terms will resist the competition that might reduce their incomes and influence. They may have valuable licences that keep out the competition — local and foreign — or preferred access to mineral or land rights of great value. The government officials responsible for administering the rules and regulations that govern economic activity will also have an economic interest in the form of well-paid secure jobs with well above average benefits — especially pension rights. They are not natural reformers.

Freedom House has long compared the degree of democratic freedom enjoyed across countries. The Fraser Institute in Canada has pioneered the comparative measurement of economic freedom. The ranking orders of the countries scored for economic freedom by the Fraser Institute and for freedom measured by Freedom House are highly correlated.

A relatively high score for economic freedom may, however, be enjoyed without much political freedom, as in China, Russia and Vietnam. Singapore is the most economically free country according to Fraser (88.4/100) but is only credited with 51/100 points for political freedom. The Scandinavian countries score well on both. Finland, Norway and Sweden register a maximum of 100 points for political freedom. Their scores for economic freedom are in the mid-70s.  The US achieves a score of 86 for political freedom and an impressive 80.3 for economic freedom.

Political freedom without a high degree of accompanying economic freedom appears very unlikely on the evidence. When given the opportunity people have voted for a high degree of economic freedom. Experiments with top-down economic planning (in the Soviet Union and China and Cuba, for example) reveal that it takes the repression of democratic freedoms to deny economic freedom.

Unsurprisingly, SA scores very poorly for economic freedom and better, though not outstandingly well, for political freedom. Its economic freedom score has declined in recent years to 64.5, giving it a low rank of 110 out of 160 countries. The score for political freedom of 79 from Freedom House places SA in the second quartile of free countries. The recent SA trends have been in the wrong direction for both political freedom and economic growth.

Yet the bloated SA government and its state-owned enterprises provide a very good and much improved standard of living for those who work for them or supply them on highly favoured terms. Membership of the governing party has also been a valuable source of higher incomes.

Will these interests be overcome? We can only hope that SA, given the bleak alternative of economic stagnation, makes more of the right freedom-enhancing choices.

• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.

This article was first published on 23 August 2019 on BDLive

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