(1 of 5 on Economic Freedom of the World)
Government should drastically reduce its role in the economy to increase economic growth
October 8 2015
Despite the evidence reflected in the Economic Freedom of the World (EFW) and other reports that high levels of government involvement in economies of countries is detrimental to economic growth, the SA government continues on a course of government expansion. According to an 8 October Moneyweb Today report, “Minister of Public Enterprises Lynne Brown told the Black Management Forum (BMF) on Tuesday that there will be no privatisation of State-owned companies on her watch”. “Not for basic services anyway” she said, adding that, “a poor woman in Kuruman should be able to afford electricity”.
It appears that the Minister is not aware that SA’s government-owned monopoly electricity supplier, Eskom, has at least tripled its average electricity price since March 2009 and is constantly asking for further price increases “to keep the lights on”. If government had opened the electricity market to private generating companies as proposed in its 1998 White Paper we would not have the electricity shortage we now have. Having the possibility of electricity blackouts hanging over her is not the only problem “the poor woman from Kuruman” has to contend with, she also faces the prospect of ongoing well-above-inflation electricity prices. Then the chances of her and her family not being able to get jobs is compounded by the investments lost to the SA economy because of the unreliability of the electricity supply. Government should seriously consider taking another look at its 1998 White Paper.
“From three decades of studying the effects of advances and declines in economic freedom ratings and rankings it has become clear to me that they accurately predict improvements and declines in both economic conditions and civil liberties enjoyed or endured by the inhabitants of the countries measured” says FMF director Eustace Davie.
The drastic decline of 54 places in SA’s Economic Freedom of the World (EFW) ranking, from 42nd in 2000 to 96th in 2013, and the direction of change 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 validity of the predictive value of EFW scores can be checked by observing the economic improvements or retrogression in the economies of countries that have experienced such changes. When entire economies are generally free they function best. Substantial government interventions in a specific area of an economy can have a disproportionate retarding effect, despite a reasonable level of economic freedom in other areas of the economy.
SA’s lowest rating is in the area of “government enterprises and investment”. It stands to reason that the greater the percentage of ownership and control of property and the means of production in the hands of government, the less economic space there is for the population to invest in. The crowding out of the private sector by government reduces the freedom of activity of individuals and companies.
“The persistent decline in South Africa’s economic freedom ranking and rating from 42nd (7.08) in 2000 to 96th (6.74) in 2013 is distressing and reflects what people can see happening around them” said, FMF director, Temba Nolutshungu. “The decline in economic freedom is the result of government’s insistence on dominating the economy and crowding out the private sector, which has a negative impact on growth, employment, poverty reduction and individual liberty”.
In making large investments in the provision of services such as electricity, railways, harbours and airports, government tends to protect the enterprises by granting them statutory monopoly status. Statutory monopolies of any kind, whether public or private, will always have detrimental consequences. Such monopolies, protected from competition by government legislation and regulations, will inevitably behave badly and end up charging consumers more than they would have paid if the particular market had been open to competitors.
If SA’s state-owned enterprises (SOEs) were to be in private hands, they would face open competition and substantial investment could be drawn from foreign sources. This would lighten the load on the government budget and on taxpayers. The potential benefits are innumerable, not least of which would be the potential for reduced tax rates and resultantly higher private sector investment and accelerated economic growth.
Note to the editor
The 2015 Economic Freedom of the World (EFW) Annual Report, co-published by the Free Market Foundation, was launched worldwide September 14.
On the most comprehensive measure of economic freedom available, a decade ago South Africa ranked 41 out of 144 countries measured. This year, we ranked a poor 96 out of 157 countries measured – a substantive deterioration in just over ten years.
FMF will be distributing five media releases each covering one of the five broad areas detailed in the EFW report: size of government, legal structure, sound money, trade, regulation of credit.