According to the Economic Freedom of the World: 2007 Annual Report, launched by the Free Market Foundation today in Cape Town and Johannesburg, SA has improved its economic freedom rating from 6.7 to 6.8 (out of 10). But, not such good news, it has moved down six places in the world rankings from 54th to 60th out of the 141 countries measured, to share this ranking with Lesotho, Thailand, Kyrgyzstan, Montenegro, Malaysia, and Trinidad and Tobago.
In the 2005 report, SA was ranked 34th and had an economic freedom rating of 6.9, its highest level since the ratings commenced in 1980. SA is sliding down the rankings because it is virtually standing still and being overtaken by countries that are steadily increasing their levels of economic freedom.
Zimbabwe is also standing still in the rankings and remains at the bottom of the list at 141 with a rating of 2.9. Botswana, the freest economy on the African continent, ranked 27th five years ago, has moved down to 38th. Also because of a static rating allowing it to be overtaken by countries following more progressive economic policies.
Mauritius is the new rising economic freedom star, not only in the African region, but also in the world. Mauritius is rated at 7.5 and ranked 22nd up from 7.0 and 39th. This island state is likely to move even higher up the rankings as it is in the process of introducing further reforms such as reducing tax rates, removing price controls, cutting back tariffs, improving the ease of doing business, and relaxing regulations. Mauritius appears set to become Africas Hong Kong. Hong Kong has been first in the economic freedom rankings for many years. In order to make its citizens more prosperous, the government of Mauritius is intent on attracting to its shores people with capital, skills and spending money. With the declared intention of being in the top 10 of the World Banks Ease of Doing Business index, Mauritius is creating an attractive business, working and consumer environment.
Milton Friedman was, in the words of James Gwartney (one of the compilers of the EFW reports) the godfather of the Economic Freedom of the World project. From the outset in 1985 when the project got underway and despite the complexity of the task, Friedman maintained that economic freedom could be measured. He further maintained that the objective of the project had to be the development of a scientific instrument, based on objective data, and that the ratings of countries should not be influenced by the subjective judgements of the compilers. In these endeavours he had the whole-hearted support of Michael Walker, then Executive Director of the Fraser Institute of Canada, which is the lead organisation in the Economic Freedom Network, a network of institutes in over 70 countries that annually publish the report.
Given the strict criteria developed on Milton Friedmans insistence, the compilation of the EFW reports is a mammoth task, taking at least 18 months to complete after the close of each calendar year for which figures are being compiled. The compilers use data from the IMF, World Bank, World Economic Forum, PRS Group and similar institutions, and contained in publications such as the World Development Indicators, International Financial Statistics, Government Finance Statistics Yearbook, World Competitiveness Yearbook, Doing Business, World Competitiveness Report and International Country Risk Guide. The 2007 rankings are therefore based on 2005 data.
The 2007 report contains two tributes in a dedication to Milton Friedman, the first, written by Robert Lawson is titled the Greatest Economist of the Twentieth Century. The second, by Michael Walker, is called To Change the World.
There can be no doubt that Milton Friedman changed the way people view the world, and in the EFW reports he leaves behind a legacy that will benefit mankind well into the future. The reports are a yardstick for good economic governance. Governments can no longer plead ignorance; if they truly wish to improve the lives of their citizens they have in EFW a guide that informs them what policies they need to follow, or refrain from following, in order to achieve their meritorious objectives.
New Zealand (3 8.5), Estonia (8 8.0), and Ireland (9 7.9) are in the top ten in rankings and ratings. All three are economic success stories with 5-year compound average growth rates of 3.8, 7.2 and 6.1 per cent respectively. Per capita GDP of these three countries (PPP in current 2004 US dollars) was New Zealand $23,413, Estonia $14,555 and Ireland $38,827. To place these figures in perspective we note that the comparative per capita incomes of the UK and SA were $30,821 and $11,191 respectively.
SA can have similar success by increasing its level of economic freedom. The first step would be for government to examine the evidence and conclude that increased economic freedom is the most rapid route to achieving increased general prosperity and a simultaneous reduction in poverty. Then it would need to address the areas in which SA policy is inconsistent with economic freedom. The problematic areas, with 2005 ratings out of 10 (0 low/10 high) are: Government consumption expenditure 4.8; Government enterprises and investment (4.0); Top marginal tax rate (4.5); Integrity of the legal system i.e. crime (4.2); Tariff rates (3.6); International capital market controls (3.9); Minimum wage (3.4); Hiring and firing regulations (2.4); Centralised collective bargaining (3.8); Administrative requirements (3.3); and Bureaucracy costs (4.5).
Most important of all is the direction of change. If all sectors of government made a concerted effort, in their areas of responsibility, first, to desist from actions that harm economic growth, it would be a giant step in the right direction. And then, secondly, to adopt and implement growth-oriented policies designed to bring about high economic growth, the lives of all SAs people would rapidly improve.
An important proviso is that government should examine the evidence contained in the rigorous EFW studies, adopt policies that work; discard the ones that do not, and vigorously pursue those that will result in high economic growth.
Author: Eustace Davie is a 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 authors and are not necessarily shared by the members of the Free Market Foundation.
FMF Feature Article/ 04 September 2007
Publish date: 05 September 2007
The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.