Why not be the prettiest developing country in the world?

The ANC has adopted the Gear macroeconomic policy whose key targets are:
  • accelerated privatisation of state assets
  • the creation of employment opportunities
  • low inflation and interest rates
  • bigger growth targets

    Critics of Gear, even within the ANC, say the policy is not delivering on its targets. It might be more correct to say that, judging only by lack of results so far, the ANC is either implementing its adopted Gear policy badly or not at all. For instance, privatisations are few and far between. Unemployment has risen dramatically, as have inflation and interest rates. And GDP still grows by under 3% annually.

    Consider those Gear targets. Cancelling a botched forestry sale to Zama, buying back SAA shares from bankrupt Swissair, and having to remove racial discrimination from the Telkom share offer, while Cabinet affirms that government will never relinquish control of Eskom, Denel, Transnet and Telkom - such things may work against accelerating privatisation. Taxing payrolls in the name of training, imposing minimum wages and unemployment insurance taxes on domestic and farm workers, taxing non-unionised employees' wages for the Numsa-Seifsa combine – such things will work against creating jobs. Constantly expanding the M0 monetary base faster than GDP, forcing down real borrowing rates too far by setting repo rate too closely above CPI inflation – such things boost inflation which is then countered by higher real interest rates later to rein it in. Targeting modest growth, taking none of the necessary liberating steps, nationalising water and minerals, regulating more and more – such things do not lead to faster growth.

    Zoom out again. All the world's socialist experiments with big interventionist government failed, but some such as the Soviet Union and Sweden took generations. Not all the world's capitalist experiments with smaller more laissez-faire governments prospered uniformly, and economic hiccups and crashes abound to delight the critics. So can't we be less black and white, more diagnostic about specific causes of success and failure?

    Indeed we can, with a little suspension of disbelief about the imprecise 'science' of economics. Consider the Fraser Institute's Economic Freedom Ratings for 2000 alongside countries' prosperity in 1995 US-dollars per capita. At the top is Hong Kong with freedom of 8.8 (out of 10) and per capita incomes averaging $24,218. At the bottom is Guinea-Bissau with freedom of only 3.8 and $210. No, Burundi earns less ($141) although it's a bit more free (5.6), and countries like Congo and Myanmar haven't even been rated.

    Those freedom ratings derive from 37 separate measured components in five areas such as size of government and sound money. And every country has its bad policies and its better policies. Choosing the best five area-ratings from among the richest twenty countries would combine into a 9.34 freedom rating, enormously freer than Hong Kong, but there is great policy inconsistency across countries. If governments chose consistently sound policies that supported the rule of law, entrepreneurial effort and greater consumer choice, they would all make their countries inconceivably rich.

    But what if we combine the worst five area-ratings from those richest twenty countries (14 European), whose wealth is measured UK's $21,667 per capita incomes or greater? That means a France-size government (2.5 out of 10), Hong Kong's insecure law and property rights (7.2), Iceland's merely good money (9.0) and unfree foreign trade (6.8), and Germany's over-regulation of credit, labour and business (6.1). That combo-rating of 6.3 matches Guatemala’s overall rating, a country that has average per capita incomes of $1558, and Honduras ($711), Mexico ($3,819) and Paraguay ($1,700), all less free than South Africa's 6.8 and poorer than our $3,985 average incomes.

    The message could hardly be clearer. If a country wishes to have prosperity it needs to pursue economic freedom, not in fits and starts, but in all directions. If it gets some policies wrong, less freedom and less growth follows. So a developing country picks and chooses among the policies of the rich developed world at its peril. The combo-country example above is not unlike South Africa, whose area ratings are government 5.4, law and property 6.5, money 7.5, trade 7.3 and regulation 7.0 for a combined rating of 6.5, 47th out of the 123 countries rated. That is no way to pursue Gear's bigger growth targets!

    The poorest twenty rated countries (17 African) have per capita incomes of $413 or less. Combining their worst five areas of governance would produce a rating far worse than poor Guinea-Bissau's 3.8. But if we look at their better policies such as Haiti's low level of involvement in the economy, Zambia's legal structure and respect for property rights, Uganda's sound money, and Kenya's low regulatory burden, these positive policy factors would combine to give a freedom rating of 7.6, which is comparable to that of Denmark with per capita incomes of $38521 and Luxemburg ($56372)!

    You consequently need all aspects of economic freedom for optimal growth and prosperity. Any single mistake can wreak havoc - not 'market failure' but less growth. But you don't have to apply all possible forms of economic oppression to fail. Socialist government failure has regularly blighted economies without quashing all vestiges of freedom.

    By all means keep the name ‘socialism’ for its emotional attachments but pursue Chinese-style market policies. Implement all the economic freedoms that are by now well known to make capitalist countries successful. Beware of hanging onto much-loved unfreedoms like French taxes and German labour laws that drastically harm growth, jobs and prosperity. And keep up – for example, don't inflate prices at 12% while everyone that matters stays under 3%. You don't (but why not?) have to be the prettiest developing country in the world, but try not to make yourself uglier than necessary.

    Author: Dr Jim Harris is a freelance researcher and writer. This article may be reproduced without prior consent but with acknowledgement to the author. The patrons, council and members of the Foundation do not necessarily agree with the views expressed by the author.

    FMF Article of the Week\28 January 2003
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