New FMF index reflects negative trend

South Africans celebrated their first decade of democracy, unaware that their freedoms had started declining after nine years of improvement. The decline has shown up in the Free Market Foundation’s (FMF’s) new index, which measures South Africa’s progress towards freedom and transformation. The annual index, called the South African Freedom and Transformation Index (SAFTI), fell from 6.4 in 2002 to 5.9 in 2003.

The index is compiled annually for the FMF by experts in the fields of rule of law, financial markets, labour, education, privatisation, health care, civil liberties, taxation, international trade, capital mobility, and a basket of other recognised components of economic freedom. It measures South Africa’s progress towards freedom and transformation on a scale of 0-10, where zero represents no freedom or transformation and 10 complete personal liberty and uncompromised transformation. Transformation is regarded as normalising South Africa towards a free, democratic and prosperous country with equal rights and justice for all in accordance with democratic values under the rule of law. The substantial reversal and fall in a single year is a serious setback for hopes of economic recovery, job creation and poverty relief. It is in conflict with world trends, except in respect of civil liberties, which declined worldwide in response to 9/11.

The latest Economic Freedom of the World (EFW) index (2003) produced by the International Freedom Network consisting of 60 policy institutes around the world, including the FMF, rated South Africa at 6.8 (out of a possible 10). That placed it joint 42nd with Zambia out of the 123 countries for which data are available. The EFW index is derived from figures published by independent sources such as the Global Competitiveness Report of the World Economic Forum, the International Country Risk Guide, Freedom House and the World Bank.

The new SAFTI index starts with a base of 6.4 (out of 10) to correspond with what the experts expect South Africa’s 2002 rating to be in the forthcoming EFW report. Since the FMF's panel considers local factors in more detail than the EFW index and use different weightings for the composite index, the SAFTI index may diverge slightly from the EFW index. But it will always be a preview a year ahead of what might be expected in the definitive and influential EFW annual rating.

Each expert on economic aspects of the SAFTI index considers annual changes in such factors as government size, levels of interventionism, compliance and enforcement costs, small business impacts and secondary consequences. During the year under review, South Africa lost more freedom than it gained due to changes in levels of legislation and regulation.

SA continues to perform badly on law and order. There was virtually no change during the year regarding civil liberty and South Africans continue to benefit from the substantial gains made with the disappearance of apartheid and the institution of constitutional democracy. There is, however, an ominous exception: asset forfeiture, which involves the seizure of assets of people not proven guilty of any wrong-doing, who may never be charged, and who are rendered effectively defenceless by the loss of their assets. Capital and trade controls and taxation show little change, though budget plans to boost state spending and deficit borrowing may further depress the country’s SAFTI rating in future years, especially since the present decline reduces the likelihood of the faster growth hoped for by the Minister of Finance.

The year 2003 was an extraordinarily bad one for our financial market score. New laws like the Prevention of Organised Crime Act, the Financial Intelligence Centre Act, and the Financial Advisory and Intermediary Services Act increased the role of bureaucracy in the economy dramatically, imposed massive enforcement and compliance costs, and had devastating regulatory impacts on SMMEs. Many more South Africans were rendered unbankable and uninsurable. The poor will get substantially less financial services, insurance and formal credit.

The labour market is in terminal crisis with labour regulation having pushed unemployment to one of the highest levels in the world. The right to work and labour mobility were low and falling. In the interests of what has become known as the “labour aristocracy”, the application of anti-employer laws and preferential policies against increasingly supine employers were intensified. The inevitable consequence is likely to be continued labour-averse business practices, including technology substitution for labour and capital flight. The plight of unskilled labour has been exacerbated by the extension of minimum wage and other restrictions of freedom of contract to more sectors.

The trend away from freedom, flexibility, context-specific and community based education continued. All training and education needs prior SA Qualifications Authority (SAQA) approval, which imposes huge costs, reduces choice and curtails competition and innovation.

The early promise of privatisation accompanied by liberalisation, in harmony with global trends, also suffered a setback during 2003. Privatisation proceeds fell R11bn short of the Treasury's 2002 R12bn target. Privatisation has been subverted by neither-fish-nor-fowl “restructuring” into public-private-partnerships (PPPs) and outsourced concessions without disposal or transfer of control, especially for the big four: Telkom, Eskom, Transnet and Denel.

Mineral rights were nationalised without compensation during 2003, and may become the subject of disruptive and costly constitutional litigation, which will exacerbate the negative message nationalisation sends to local and international investors. Delays bedevilled the sale of smaller public enterprises and prevented the emergence of competition for Telkom.

Intervention in private health services and pharmaceuticals increased amidst confusion and negative publicity regarding South Africa’s stand on intellectual property rights. This resulted and will increasingly result in diminishing provision of private health products and services to the poor, and to small and remote communities. It will also result in a diminished product range. Compulsory community service/conscription was applied incrementally across the medical profession, and plans were announced to prescribe where doctors may practise, and where hospitals, clinics and medical equipment may be located. A systematic and resolute tendency towards nationalised health care is apparent at the expense of freedom of choice for patients and cost-reducing competition amongst providers.

If South Africa is to fulfil the ideal of true freedom, democratic values, equality and prosperity for all, the trend towards personal and economic freedom which characterised the early years of transition will have to be re-instated. Thanks to the development of indices such as EFW, and now SAFTI, what must and must not be done for nations to prosper is no linger subject to informed debate. The government can and should get policies such as GEAR and NEPAD into top gear with confidence and purpose, failing which the economy will continue stagnating as it has for 35 years. Few South Africans realise that in constant dollar terms the average inhabitants of this country are now poorer than they were in 1970.

Author: Leon Louw is the Executive 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 Free Market Foundation.

For more information contact Leon Louw on (+27)(11) 884 0270 or (+27)(84) 618 0348.

FMF Feature Article\11 May 2004

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