The Rainbow Nation is fading – Economic Freedom of the World: 2014 Annual Report

According to the Economic Freedom of the World: 2014 (EFW) figures the glorious future the Rainbow Nation looked forward to in 1994 appears to be fading away.

Since being ranked 41 in 2000 among the top 40% of countries measured in EFW, South Africa has plummeted down the index in both relative (rank) and absolute terms (rating). Now ranked at 93, South Africa has sunk into the bottom 40% with a score of 6.73 on a scale of 10, which is less than the average economic freedom score of the 152 countries analysed. After several years in 2nd place, South Africa’s claim of being an African leader is tarnished as it now comes in at 8th place amongst the African countries.

Using 42 distinct variables to create an index ranking countries based on economic freedom, which is measured in five areas: size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally, and regulation of credit, labour and business, the EFW report provides indicators as to how economies are faring. An improving economic freedom score indicates improved political and economic policies leading to greater welfare of the general population. A declining economic freedom score indicates the reverse.

The reasons South Africa is sliding down the scale are quite visible for all to see. Without the creation of strong barriers to prevent employment, millions of people would not suffer unemployment. Without a properly functioning legal system and a reliable policing system to combat crime, an economy cannot function properly. With a government that insists on expanding its activities despite the repeated demonstrations that the competitive private sector could perform the same functions more efficiently and at substantially lower cost, economic growth must suffer.

By contrast, Mauritius is the most economically free country in Sub-Saharan Africa. Ranked 20 in 2000 with an economic freedom score of 7.60, Mauritius has advanced up the rankings to a ranking of 5 with a score of 8.09, after Hong Kong 8.98, Singapore 8.54, New Zealand 8.25 and Switzerland 8.19. This improvement was no accident. The Mauritian government, after wide consultation with the general public, embarked upon reforms to free up the economy and make the country attractive for investment by local and international investors. The programme has been spectacularly successful, with a high level of economic growth and a rapid increase in per capita incomes; an approach that is certainly worth emulating.

To compare the changes in the scores of the two countries in the five areas of measurement between 2000 and 2012 is instructive. On size of government, South Africa’s score declined from 6.45 to 5.38, whereas the score of Mauritius improved from 7.37 to 7.95. The 2.57 difference in the size of government represents a very substantial difference in the way in which the governments are behaving towards their citizens. The South African marginal personal income tax rate is 40% compared to the 15% of Mauritius. South Africa’s government consumption expenditure increased from 22% of GDP in 2000 to 27% in 2012. That of Mauritius declined from 16% to 15%. Government enterprises and investment in South Africa increased from 18% of total investment in 2000 to 39% in 2012, indicating that government is crowding out the private sector. By contrast, that of Mauritius declined from 28% to 24%.

Increased economic freedom has highly beneficial consequences; the higher the rate of increase, the better economies perform. During the recent difficult economic years, the Mauritius economy grew by 3.2% per annum in both 2012 and 2013, and its current unemployment rate is 8%. South Africa’s economy, however, grew by only 2.5% in 2012 and 1.9% in 2013, and its current unemployment rate is 25.5% (which equals a shocking 8.3 million unemployed when discouraged work seekers are also included). In 1996, South Africa’s GDP per capita (measured on PPP basis in real terms) was slightly higher than Mauritius $9,519 (SA) versus $9,477 (Mauritius). By 2000, the average Mauritian was earning $11,356 whereas the average South African was still earning the same as in 1996 ($9,519). In 2013 the average Mauritian was earning $16,652 whereas the average South African was earning $12,106.

The top ten countries in Africa and their ranking (out of 152) and economic freedom scores (out of 10) are: 1. Mauritius 5 (8.09), 2. Rwanda 29 (7.53), 3. Botswana 54 (7.26), 4. Uganda 65 (7.22), 5. Zambia 65 (7.13), 6. The Gambia 76 (6.99), 7.Kenya 77 (6.98), 8. South Africa 93 (6.73), 9. Tanzania 94 (6.71), and 10. Swaziland 95 (6.69). The bottom five African countries and their rankings and ratings are Republic of Congo 151 (4.58), Zimbabwe 149 (4.92), Chad 146 (5.12), Burundi 145 (5.21) and DRC 144 (5.24).

South Africa does not need to continue its descent on the EFW rankings. If government were to concentrate on improving the areas where South Africa has an economic freedom score of less than 5 out of 10, which means functioning at less than 50% of the optimum, there would be a significant turnaround in the country’s economic fortunes. Those areas requiring attention are: Size of Government - government consumption (3.82), government enterprises and investment (4.00), Legal System and Property Rights - integrity of the legal system (4.17), legal enforcement of contracts (3.93), reliability of police (4.59), business costs of crime (2.75), Freedom to Trade Internationally - capital controls (0.77), Regulation - hiring regulations and minimum wage (4.43), hiring and firing regulations (1.55), centralised collective bargaining (2.84), administrative requirements (3.20), and bureaucracy costs (3.11).

Whatever else it chooses to do, the first step towards improving economic freedom in South Africa would be for government to refrain from instituting any actions or policies that further erode this country’s citizens’ economic freedoms.

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 author's and are not necessarily shared by the members of the Foundation


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