In the year 2000, South Africa ranked 42nd in economic freedom but has since been surpassed by 54 other countries. Many of those rising countries are in Africa, which means that, not only is South Africa losing its standing in the world, it may be destined to fall behind in Africa also.
We continue to see that the Economic Freedom of the World Index (EFW) is a reliable predictor of future economic performance and standard of living. The EFW index measures the extent to which individuals within a particular country enjoy the liberty to produce, exchange, and interact with one another with minimal interference from governments. Economic freedom is the key ingredient, a relative abundance of which characterizes those countries that have the most vigorous economies. Over time they tend to exhibit high income growth, relatively low levels of unemployment, high per capita incomes, and rising standards of living.
In a community that enjoys economic freedom, human life flourishes. But freedom is not free: it requires active maintenance. Every community exists in a political context. Every country that is ranked in this EFW annual report is an autonomous political jurisdiction with some form of government, and it is that government’s presence in the lives of its residents that is really being measured. To what extent does the government protect, rather than restrict, civil society?
A country that is not blessed with a critical mass of people who are actively striving to protect and promote personal liberty is destined to lose, however gradually, the liberties that it has. In this sense, economic freedom is much like a capital good, the result of investment and the continuous attention of its stewards. Such investment yields its benefits over time, and the sooner the community invests, and the more it adds to its capital stock of freedom, the greater will be its resultant standard of living at any point in time.
This can be seen when comparing the EFW ratings between countries and their changes over time. Those with high ratings (on a scale from 1 to 10), especially those with a history of high ratings, generally enjoy high per capita incomes. Those countries whose ratings have been rising over time tend to have high economic growth rates and rising incomes. The opposite is true of those countries with low EFW ratings and of those whose levels of economic freedom are falling.
This year’s EFW index, which draws on data from 2013, shows that South Africa has declined in absolute terms to an overall rating of 6.74 (out of 10) and has fallen relative to other countries to rank 96th in economic freedom. The revised data for 2012 show that South Africa fell from a rating of 6.77 and a ranking of 89th. Among the 157 countries rated this year, South Africa is in the middle of the third quartile.
Five years ago, South Africa became associated with another group, the BRICS, which consists of Brazil, Russia, India, China, and South Africa. Using the EFW chain-linked summary ratings to compare, only Russia and China have shown unambiguous upward trends in economic freedom during the past 10 to 15 years. Both Brazil and India showed slight upward movements but then partially retraced to show a fairly flat trend. This means that although South Africa has the highest absolute freedom rating among the BRICS, it has been losing its relative standing.
Twelve years ago, among the BRICS nations, South Africa had the highest per capita gross domestic product (GDP) at current prices, according to the International Monetary Fund (IMF). Since then, it has been surpassed by Brazil, Russia, and China. Even when using purchasing power parity (PPP) data, the end result is the same. Brazil, Russia, and China all have higher per capita GDP’s and Russia, China, and India all increased their relative standings quite significantly compared to South Africa. The two BRICS with the clearest improvements in economic freedom, Russia and China, were the two with the strongest relative gains in GDP per capita.
South Africa’s current government has failed to improve on most categories of economic freedom. Government consumption has increased. Tax burdens have not been reduced, but all the talk has been about planned rate increases. Property rights are under threat. There are lower scores for judicial independence, impartiality of the courts, the protection of property rights, integrity of the legal system, regulatory costs of the sale of real property, and the reliability of police. The business costs of crime continue to be a tremendous burden.
Of the five major categories, Sound Money shows the best results. But both money growth and inflation rates have been high and are rising. Related, but in the category of Freedom to Trade Internationally, controls on the movement of capital and people have worsened considerably. Restrictions on foreign ownership and investment have also tightened, and capital controls in general have remained onerous. New visa regulations restrict the freedom of foreigners to visit, and this has wrought havoc on the tourism industry.
Regulations on private-sector credit have worsened. Labour market regulations remain one of the worst drags on the economy, threatening the viability of the mining and manufacturing sectors. Corruption is perceived to be worsening at all levels of government. The only bright spot is in the subcategory of Hiring Regulations and Minimum Wage, but if the current consultations led by the Deputy President result in an effective national minimum wage, then even that brightness will be extinguished and unemployment will almost certainly be higher.
The category, “Government Enterprises and Investment,” has deteriorated drastically since the year 2000 and the score has remained low for the past five years. This counts overinvestment in more than 700 state-owned firms, but underinvestment in and mismanagement of the largest, Eskom, which is an essential service and one of the very few that might justify state ownership. Politicisation of Eskom, and of most everything the government touches, is a direct constraint on economic growth and the standard of living for most South Africans.
Author: This article by Dr Richard J Grant, Professor of Finance & Economics, Lipscomb University, Nashville, Tennessee, and Publications Editor of the Free Market Foundation, forms the preface to the South African edition of the Economic Freedom of the World: 2015 Report. The article may be republished without prior consent but with attribution.