South Africa is being held to an undistinguished level of economic freedom

Johannesburg, 21 August 2003
It has been my practice on these occasions to comment on the progress of economic freedom and economic growth in South Africa. Unfortunately, this year there is not much to be said on the subject. The government continues to pursue sound fiscal and, on the whole, sound monetary policies, but apart from this they seem to be content to hold the country at an undistinguished level of economic freedom, with a mediocre rate of economic growth, so that intransigent problems of poverty remain, which, with fast growth, could be dealt with very quickly.

It is worth noting that except at a very high level of economic freedom, growth essentially follows on an improvement in freedom even at quite a low level. We have seen this in India and at the moment it is happening in Russia and Ukraine. In 2001 and 2002, the most recent years for which we have figures, these two countries both averaged about 7 per cent growth, about double South Africa’s rate. Their absolute level of economic freedom is lower than South Africa; but the improvement in the last five years has been spectacular. If this rate of growth is to be maintained, the rate of improvement will have to be maintained as well. It is only at very high levels of freedom that high levels of growth can be sustained indefinitely. The recent history of India has illustrated this point too.

We must also remember that partially developed or underdeveloped countries are inherently capable of growing at a far higher rate than highly developed countries. What would be a spectacular rate of growth for the United States or Switzerland is a lack-lustre rate for partially developed countries like South Africa or Russia.

What makes a country less than fully developed is that part of its population has not been drawn into the modern economy, but exists either as traditional peasants or as people engaged in very unproductive activities in the informal sector, or actual unemployment. It is the possibility of drawing these people into formal employment, and so increasing their productivity by a huge margin, that makes really rapid growth possible. Countries which refuse to do this, are doomed to remain underdeveloped.

This was indeed the story of the Soviet Union. Until it eventually became a closed oligarchy with no constituency at all, the Soviet Government considered that it represented the labour aristocracy, the people employed in formal industry. In order to protect these people from competition, they massacred or enslaved the people in the informal sector, and they locked the peasants out of the towns, attaching them to the land on the so-called collective farms, which were, in fact, state farms worked by state serfs. This is why, for all the pretensions of the Soviet Union, Russia is today a partially developed country not unlike South Africa.

The irony of it is that the people who were supposed to benefit from the policy only benefited in the very short term. In countries which absorbed their whole population into employment, like Japan or Hong Kong, the general level of industrial wages rose to be far higher than was ever the case in the Soviet Union where the rural people lived in abject poverty, but the urban people (apart from the highly privileged senior government servants) lived in anything but affluence. By 1990, the standard of living of the workers in Japan was fully double that of the Soviet Union.

While I am dealing with the more general issues, there is another one which is worth mentioning. A considerable effort is being made around the world to make people believe that the move towards economic freedom which swept the world in the 1980s and 1990s, has run out of steam, even that it has been discredited. This is not true. Those countries which continue to move in a free market direction continue to reap rewards in the form of high economic growth with all the social benefits which follow from it.

What has happened is that the huge vested interests which want to preserve the modern big state have again got their act together and are again putting out a steady stream of propaganda in support of their agenda. They are in fact conservatives – they want to preserve the existing institutions of the state and in spite of their constantly telling us that they are progressive, their positions are the familiar conservative positions. They are uncertain. They do not believe in theories; stick to the devil you know. Yet they are in a far weaker position than the old conservatives whose clothes they have borrowed. The old conservatives were at least trying to preserve institutions of considerable antiquity which could truthfully be said to have stood the test of time. The same can certainly not be said for the modern big state which reached its full development only in the nineteen fifties, and was already showing signs of radical failure in the nineteen seventies. Then the old conservatives really were rejecting new and unproved theories, some of which like Marxism, were indeed totally wrong and proved disastrous. The free market is not a theory cooked up by an unemployed German a hundred and fifty years ago like Marxism. It is an institution which has evolved with human society, whose origins are ancient but whose most recent manifestations are extremely modern. Above all, it has a most impressive track record. The advocates of Free Markets are not asking people to buy a theory,. They are asking them to look at evidence, to learn from experience, and to do what has been proved to work.

Finally, and very importantly, the “post-modern:” scepticism, which today’s “progressives” are fond of, sits ill with the big state. The big state was developed in the Twentieth century on the basis of the belief then prevalent that the experts knew virtually everything and could solve any problem if only they had the power. If indeed we know very little, and can be sure of almost nothing, how can anybody possibly be trusted with the power of the big state?

If these arguments are cogent why do they not prevail? I am afraid that this brings us back to the vested interests behind the big state. They are formidable. First of all, they include all politicians, opposition as well as government. The bigger the state, the more power and prestige politicians will have, and for those who are so inclined, the more scope there will be for corruption.

Then there are all public servants, except perhaps the most humble. As Parkinson pointed out in his famous law, the status of senior public servants depends on the number of people under their control, and, it may be added, on the amount of money which passes through their hands. Every senior public servant has a direct interest in expanding the department in which he or she works,

Finally, and perhaps, most serious, there are the intellectuals, all those who, perhaps finding real science difficult, devote themselves to explaining human society – economists, sociologists, political scientists and the like. The market has relatively little use for such people, though of course it has some for those whose theories work and have real skills; but the big state offers them apparently boundless power and prestige as the “experts” who know how power should be used. It is no coincidence that Marxism had such an appeal to intellectuals. It never was a working class ideology and there is no known case where the majority of any working class embraced it. It was an ideology invented by an intellectual; to serve the material and emotional needs of intellectuals. Marx said that ideologies served the interests of those who create them. In the case of his own ideology, he was absolutely right.

So, when someone says that “The market left to itself cannot do it”, we must check very carefully what “it” really is. The market is very bad at enriching politicians. Nobody, as far as I know, ever made a fortune by being President of Switzerland. And the market is very bad at providing lush, prestigious and power-filled jobs for intellectuals, or any jobs at all for those who are unable or unwilling to deliver real goods.

The consequence of all this is that overwhelmingly strong though the case for free markets is, it will not prevail in its entirety, and will only make progress with difficulty. Nevertheless, the history of the last twenty years reminds us that reality does eventually triumph over vested interests. We have a long, probably perpetual battle ahead of us, but there is no reason why we should not advance.

Chairman’s address to the AGM of the Free Market Foundation

Author: Michael O’Dowd is the Chairman of the Free Market Foundation. The article is his Chairman’s Address to the Annual General Meeting of the 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 they are not necessarily shared by the members of the Free Market Foundation.

FMF Article of the Week\21 August 2003
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