Submission Overview to NDP

01 April 2012
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Submission to the National Planning Commission on the National Development Plan

 

Economic Overview

 

South Africa’s Economy from an Economic Freedom Perspective

 

 

 

  1. Misconceptions about capitalism / free markets/ economic freedom / free enterprise

Many misconceptions about the nature of capitalism, free markets, economic freedom, and free enterprise, cause politicians to make decisions that are harmful to the economies of their countries, the best interests of citizens, and inescapably, to the objectives they themselves claim to be intent upon achieving. In this paper these concepts are used to describe, not ideologies, but similar attributes of a state of being; circumstances in which people peacefully engage with each other in voluntary exchanges free of third party intervention.

 

This contribution to the debate in which the National Planning Commission is engaged, provides a vision of the South Africa economy based on the use of economic freedom to improve conditions for all the country’s people.

 

  1. Governance that is consistent with economic freedom

The primary function of government is to achieve the most congenial conditions for interactions between citizens. Limited government supporters maintain that such conditions would be achieved if government were to concentrate almost exclusively on keeping citizens safe; with the accent on (a) a professional, well-trained and impartial police force to apprehend criminals, deter people from committing crimes, and reduce crime to a minimum; (b)  a highly efficient, learned, and independent judiciary, which has the task of impartially dispensing justice, determining the punishment to be meted out to the guilty, and adjudicating in civil disputes; and (c) an army to defend citizens from invasion or the threat of foreign invasion.

 

Government can do more for the welfare of the people of South Africa by doing less. Many interventions in the economy over the past decade have been costly, have not had the positive results that they promised, and have interfered in the ability of businesses to efficiently conduct their affairs. Increasingly, the country’s people are being strangled by red tape, are operating in an environment characterised by uncertainty due to constant rule changes, and find themselves fearfully looking over their shoulders, waiting for the next threat to their ability to earn a living.

 

The poor business and jobs environment in South Africa is reflected in this country’s poor showing on the economic freedom ratings as well as almost all rankings and ratings that compare various aspects of country economies. Most disturbing is the apparent belief that the problems in the economy can be solved by a more authoritarian approach, for government to intervene to an even greater extent in the economy, to be more prescriptive, and to burden the country with additional red tape and a larger and costlier bureaucracy. Comparing economies across the world shows clearly that authoritarian government leads to economic decline, unemployment and poverty, and produces strong arguments for government to deliberately free up the economy. What South Africa needs is a programme of action to increase the economic freedom of its citizens, and to place the country in the top ranks of countries for ease of doing business.

  

  1. Graphic illustration of the benefits of economic freedom

The graphs below illustrate simple relationships between economic freedom and other indicators of economic freedom. The graphs begin with data on the relationship between economic freedom and the level of per-capita GDP and economic growth. In recent years, numerous scholarly studies have analysed these relationships in detail. Almost without exception, these studies have found that countries with higher and improving economic freedom grow more rapidly and achieve higher levels of per-capita GDP.

 

Many of the relationships illustrated in the graphs below reflect the impact of economic freedom as it works through increasing economic growth. In other cases, the observed relationship may reflect the fact that some of the variables that influence economic freedom may also influence political factors like trust, honesty in government, and protection of civil liberties. There is consequently not necessarily a direct causal relationship between economic freedom and the variables considered below. Scholarly investigation is required to control for other factors. Nonetheless, the graphs provide some insights about the contrast between the nature and characteristics of market-oriented economies and those dominated by government regulation and planning. For purposes of the following graphic illustrations the data from 1990 to 2009 has been broken into four quartiles, ordered from least free to most free. (Gwartney, Lawson and Hall, Pg 20)    

 

 

 

 

 

 

 

 

 

Source: Economic Freedom of the World Annual Report 2011

 

 

 

 

Source: Economic Freedom of the World Annual Report 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Economic Freedom of the World Annual Report 2011

 

 

 

 

Source: Economic Freedom of the World Annual Report 2011

 

 

 

 

 

 

 

 

 

 

 

 

Source: Economic Freedom of the World Annual Report 2011

 

 

Source: Economic Freedom of the World Annual Report 2011

 

 

  1. Improving South Africa’s overall economic freedom rating

Empirical studies, such as those published in Economic Freedom of the World[i] (EFW), which has measured levels of economic freedom in more than 100 countries over more than three decades, suggest that greater economic freedom results in higher economic growth rates. An accumulating body of literature analysing the relationship between economic freedom and investment, income, growth, reductions in poverty, improvements in human welfare, co-operation, tolerance, peaceful relations, entrepreneurship, and honesty in government, has found positive consequences for the people of countries with high and increasing levels of economic freedom. The National Planning Commission (NPC) appears to be asking similar questions to those posed by the various authors that have carried out the analyses and the literature therefore offers a fruitful source of answers to some of the NPC’s questions regarding South Africa’s most troubling problems.

 

The Economic Freedom of the World: 2011 Annual Report states that, “the key ingredients of economic freedom are: personal choice, voluntary exchange coordinated by markets, freedom to compete in markets, and protection of persons and their property from aggression by others.”

These fundamental core ingredients, established with the involvement of many eminent economists, have been utilised as a basis for measuring and comparing the world’s most important economies. The government cannot afford to ignore what the EFW figures are telling us about the South African economy.

 

The EFW index measures the degree of economic freedom present in five major areas: (1) Size of Government: Expenditures, Taxes, and Enterprises; (2) Legal Structure and Security of Property Rights; (3) Access to Sound Money; (4) Freedom to Trade Internationally; and (5) Regulation of Credit, Labour and Business. The index is derived from 42 distinct variables measuring various aspects of the economies of the countries in the foregoing five areas. The full data set is available from http://www.freetheworld.com/datasets_efw.html

 

A close examination of the South African economy utilising the analyses contained in the EFW studies will provide a clear insight into the factors and institutions that make up a free economy and the benefits that citizens can expect when their country becomes freer. This examination will be carried out utilising the areas and factors published in Economic Freedom of the World: 2011 Annual Report. It will focus on those of the 42 variables in the five major areas of the economy in which South Africa has the poorest ratings, with suggestions as to how the ratings, measured from a low of 0 to a high of 10 could be improved.

 

Area 1: Size of Government (Overall rating 5.02)

 

The South African government is currently embarking on increasing its role in the economy. The stated intention is to improve the economy and lives of the country’s people. This initiative no doubt reflects the views of the socialist/communist members of the tripartite alliance. This development is unfortunate as all the indicators predict that this policy will lead to less rather than more economic growth, with unfortunate consequences for the poor and unemployed.

 

A fallacy involved in decisions on increased government participation in an economy was described by the 19th century economist Frédéric Bastiat who wrote about what is “seen” and what is “not seen”. When government builds bridges, roads, harbours and railways, using current and future taxpayers’ money, the activities are immediately visible. What are not visible are the thousands of investments that taxpayers would have made if the additional taxes and other resources taken to carry out the public works had not been taken from them. This does not suggest that infrastructure is not necessary; it does suggest that they can be done without imposing an impossibly high cost on the country’s people. 

 

An alternative and more promising approach for government to embark upon, rather than the massive initiative it has in mind, is to reduce rather than increase the role of government in the economy. Such a reduction, if done in an innovative and bold manner, would bring about far-reaching benefits for the people of South Africa, especially the poorest among us. It would also give the economy an impetus that no other policy would be capable of doing.

 

Instead of burdening government, the economy, and the country’s people with huge debts and high taxes, the government should consider a massive reduction in its participation rate. It should also carefully examine the areas of the economy that are currently reducing the freedoms of the people. In the following paragraphs we will examine the specific components of the economy that the EFW report has identified as being problematical. 

 

A.        Government consumption (Rating 4.26)

 

Government consumption expenditure has been relatively high as a percentage of GDP for many years; higher than can generally be afforded by a developing country. This expenditure could be reduced considerably by utilising the substantial state assets accumulated prior to 1994 to improve conditions for the people. Every low-income person who is legitimately and permanently living in a state-owned house, or on state-owned land, should be given freehold title to the property. On community owned land, freehold title to homesteads could be given without disturbing the traditional processes of the communities. This substantial transfer of property (called “dead capital” by Hernando de Soto) from the state to the people would transform the lives of low-income South Africans, reduce the level of government’s consumption expenditure, and bring about a transformation in the lives of the affected people. It would also allow a metamorphosis of the artificially created apartheid “townships” into towns and suburbs through transformation of the land use in these areas.

 

C.        Government enterprises and investment (Rating 2.00)

 

On size of government South Africa is ranked 97th out of the 141 countries rated in the EFW report. The lowest rating is on “government enterprises and investment”. It stands to reason that the greater the percentage of ownership and control of property and the means of production, the less space there is for the population to invest in, thus reducing their freedom of activity. In making large investments in the provision of services such as electricity, railways, harbours and airports, government also tends to crowd out the private sector’s ability to borrow funds to finance its enterprises. If government were to sell such enterprises so that those services are run by privately owned companies, there would be increased competition and substantially more investment could be drawn from foreign sources. This would lighten the load on the government budget and on taxpayers. The benefits are innumerable, not least of which will be the substantial funds that would be available from the sale of public enterprises for government to invest in improving conditions for the poor.

 

In the component measuring government enterprises and investment, the second worst of all 42 ratings in compiling the index, South Africa has a rating of 2 out of a possible 10. And government appears intent on making this even worse. If we were merely dealing here with differing opinions, any one of which had the potential to produce positive outcomes for the economy, a high government participation rate would not be marked down so badly in this component of the EFW study.

 

A policy of divestment of public enterprises would create the following huge benefits for the economy;

  • Government enterprises could be converted into public companies with listings on the stock exchange and all low-income people could be given shares. Designated unit trusts could be appointed to exchange shares in the new companies for units in their trusts at a specified rate for a specified minimum period to give share recipients an investment alternative. The new public companies should, in the interests of all citizens, not be given statutory monopolies in their fields of activity.
  • The following benefits could be expected:
    • Low-income people would be enriched by the shares they would receive and the need for welfare expenditure would decline.
    • The new public companies would be subject to the disciplines of the market place, would be able to raise capital without putting pressure on the Treasury or taxpayers, and would rapidly expand their businesses and increase their services.
    • Matters relating to the activities of the new companies would be removed from the political arena and become routine economic matters.
    • Open competition would function in all aspects of the activities of the new companies to the benefit of citizens.
    • The EFW rating of South Africa would improve and the country’s attractiveness to investors would increase considerably.
    • There would be an improvement in GDP.

D.        Top marginal tax rate (Rating 6.00)

 

South Africa has a high marginal tax rate by international standards, which reduces savings and investment. The marginal income tax rates of countries that have more competitive rates than South Africa are: United Arab Emirates 0 per cent, Russia 13 per cent, Mauritius 15 per cent, Hong Kong 17 per cent, Singapore 20 per cent, Botswana 25 per cent, Costa Rica 25 per cent, Brazil 28 per cent, and Kenya 30 per cent.

 

On each reduction of Russia’s marginal tax rate, first from 80 per cent to 30 per cent, and then to 13 per cent, the total tax receipts increased. According to economist Arthur Laffer, tax reductions cause taxpayers to spend more time on increasing their incomes and less time on plans to minimise their tax liabilities. They also decide at some level that taking the risk of illegal tax evasion is not worth the taxes saved. If the government were to embark on the asset transfers to low income people as suggested above, it would be in a position to make the country more tax-competitive to attract investment and arguably increase the total tax receipts in the process.

 

Area 2: Legal Structure and Security of Property Rights (Overall Rating 6.16)

Economic freedom cannot exist in an environment in which the rule of law and security of property rights are not respected and maintained. The rule of law is one of the founding principles of the South African constitution but there is an inadequate understanding of what it means and how it is to be implemented.

 

South Africa scores badly on two of the seven components measuring the country’s legal structure:

 

E.        Integrity of the legal system (Rating 4.7)

 

This component is based on a section of the International Country Risk Guide which deals with “the strength and impartiality of the legal system” and “popular observance of the law”. South African courts, which have maintained a good reputation under difficult conditions, appear to be under increasing pressure from government regarding decisions that have gone in favour of citizens in disputes with government.

 

New legislation from various government departments attempts to create quasi-courts and invest them with powers equal to the High Court. Increasingly, government officials are invested with discretionary powers that are inconsistent with the requirements of the rule of law. The separation of powers between the executive and the judiciary is in danger of becoming blurred, which is antithetical to the proper application of the rule of law. A high level of criminality and low rate of apprehension in cases of serious crimes are disturbing, as is the low conviction rate.

 

The 2011 rating for this component was 4.17 out of 10 and it will require a great deal of intensive effort to improve conditions to the point where citizens and outside observers build up confidence in the legal system, which is critically important if there is to be high growth and rapid alleviation of poverty.

 

F.         Legal enforcement of contracts (Rating 3.93)

 

This component is based on the World Bank’s Doing Business estimates for the time and money required to recover an undisputed debt. The time from the filing of the case to the date of payment and the cost of a case as a percentage of the debt are taken into consideration in arriving at the rating.

 

Efficient and well-functioning courts are necessary to ensure that justice is delivered swiftly and at a cost that can be afforded by average citizens who become involved in civil disputes.

 

Discretionary Powers and the Security of Property Rights

 

There is a long history of philosophers, judges, and scholars warning against the granting of discretionary (arbitrary) powers to executive arms of government. Increasingly, in South Africa, law and regulation is being determined by civil servants and not by Parliament. The Constitution should prevent Parliament from abdicating its powers and Members of Parliament should be required to maintain vigilant supervision over all laws and regulations that are promulgated. The following excerpts give an indication of the historical roots of this controversy:

 

In 1624 Sir Edward Coke warned the English Parliament in his Institutes of the Laws of England “to leave all causes to be measured by the golden and straight mete-wand of the law, and not to the uncertain and crooked cord of discretion.” Though the two meanings of “arbitrary” were long confused, it came to be recognised, as Parliament began to act as arbitrarily as the king, that whether or not an action was arbitrary depended not on the source of the authority but on whether it was in conformity with pre-existing general principles of law. The points most frequently emphasised were that there be no punishment without a previously existing law providing for it, that all statutes should have prospective and not retrospective operation, and that the discretion of all magistrates should be strictly circumscribed by law.

 

The philosopher John Locke, in his Second Treatise on Civil Government, was concerned with the practical problem of how power, whoever exercises it, can be prevented from becoming arbitrary: “Freedom of men under government is to have a standing rule to live by, common to every one of that society, and made by the legislative power erected in it; a liberty to follow my own will in all things, where that rule prescribes not: and not to be subject to the inconstant, uncertain, arbitrary will of another man.”

 

Sir William Blackstone, in Commentaries on the Laws of England described the importance of the separation of powers: “In this distinct and separate existence of the judicial power in a peculiar body of men, nominated indeed, but not removable at pleasure, by the Crown, consists one main preservative of public liberty; which cannot subsist long in any state, unless the administration of common justice be in some degree separated both from the legislative and also from the executive power. Were it joined with the legislative, the life, liberty, and property of the subject would be in the hands of arbitrary judges, whose decisions would be regulated only by their own opinions, and not by any fundamental principles of law; which, though legislatures may depart from them, yet judges are bound to observe.”

 

The rule of law requires that government should enact only such laws as are general in nature, are applicable to everyone including itself, and which do not attempt to bring about particular outcomes. The rule of law was described by Nobel Laureate Friedrich Hayek in his book The Constitution of Liberty:

 

The conception of freedom under the law ... rests on the contention that when we obey laws, in the sense of general abstract rules laid down irrespective of their application to us, we are not subject to another man’s will and are therefore free. It is because the lawgiver does not know the particular cases to which the rule will apply, and it is because the judge who will apply them has no choice in drawing the conclusions that follow from the existing body of rules and the particular facts of the case, that it can be said that laws and not men rule. Because the rule is laid down in ignorance of the particular case and no man’s will decides the coercion used to enforce it, the law is not arbitrary. This, however, is true only if by “law” we mean the general rules that apply equally to everybody.

 

Total power became so much a part of previous administrations that the elements of despotism are not recognised by most South Africans, not even by those who suffered most as a result of the bias and discretionary powers contained in legislation. In order to create the free society for which the majority of South Africans have been yearning for so long, it will require a conscious effort on the part of government to root out all provisions of a despotic nature contained in existing legislation. It will also be essential to ensure that no new despotic legislation is added to the statute book.

 

The infamous apartheid period was only possible because the rule of law was ignored and extensive arbitrary powers were given to the civil service to follow differing rules in dealing with different citizens of the country. The greater part of those arbitrary powers continue to exist and there is clear evidence that the civil service is asking for even greater powers. Citizens need protection against this trend. Two possible methods of affording that protection are:

 

  1. That the Members of Parliament resolutely refuse to approve any legislation that is not in accordance with the rule of law as described above, and particularly, that they refuse to approve provisions in legislation that grant arbitrary discretionary powers to the civil service.
  2. That the courts have the task of reviewing and controlling the acts of the administrative branch of government, especially to ensure that they do not exceed the powers that Parliament intends to grant when approving legislation.

 

Area 3: Access to Sound Money (Overall Rating 7.92)

 

Access to sound money is one of the areas of measurement in determining what level of economic freedom exists in a country.  

 

Depriving an economy of sound money with relatively stable purchasing power deprives economic decision-makers of accurate information upon which to base their decisions. In a sound money environment, prices most closely reflect what is actually happening in the economy and act as messengers that tell producers where there are shortages and surpluses. Price increases should be an indication of an increase in the demand for a product or service but currency debasement leads to price increases that are indicators of a reduction in the purchasing power of money rather than an increase in demand for any particular product. Currency debasement is therefore one of the most significant burdens that can be imposed on any economy as it interferes with the ability of producers to supply the needs of consumers.

 


 

D.        Freedom to own foreign currency bank accounts (Rating 5.00)

South Africa’s foreign exchange controls result in a low rating for this component. Abolition of exchange controls would not only improve the rating but also improve the economy and the prospects of Foreign Direct Investment and foreign trade and investment in general.

 

An opportunity for South Africa to become Africa’s financial “Hong Kong”

 

Given the problems faced by the dollar, South Africa has the opportunity of instituting a gold-backed rand, abolishing exchange controls, allowing private banks to open currency accounts in any currency of their choosing, and have South Africa become the financial “Hong Kong” of Africa. Operating in an open and flourishing financial market the South African banking system would easily absorb the thousands of people with a vested interest in the retention of exchange controls who are currently employed in the Reserve Bank and elsewhere to implement and monitor exchange controls. Legal Tender laws could be confined to the payment of taxes in order to allow importing and exporting firms to conduct their business in any currency of their choice, including the payment of salaries and wages. The notion of “foreign reserves” would disappear along with the existing implicit guarantee that the Reserve Bank will provide foreign exchange to any legitimate importer who requires it to pay for imports. 

 

South Africa rates well on three out of the four components in the area Access to Sound Money yet there are members of the Tripartite Alliance in government that are constantly criticising the Reserve Bank, arguing for a loose money policy. As it is, the Reserve Bank, while managing the rand better than the manner in which many of the world’s currencies have been managed by their central banks, has in recent times excessively increased the quantity of notes and coins in issue, causing inflation to increase beyond the bank’s inflation target. The target should, in fact, be zero debasement of the currency

 

One of the problems facing countries worldwide is that the world’s reserve currency, the US dollar, has been seriously debased, causing its purchasing power to spiral downwards. As many commodities are priced in dollars for purposes of international trade, commodity prices, including gold, have increased to record heights. Countries that have currencies that have been debased to a lesser extent than the dollar find themselves in the position of having “strong” currencies. Their exporters are clamouring for a more rapid debasement of the local currencies to keep pace with the debasement of the dollar so that their products are not “priced out of the market”, a course that will lead to hyperinflation. As keeping pace with dollar debasement is a path to worldwide fiat currency destruction, all countries wishing to have stable currencies will have to consider linking their currencies to a commodity such as gold.  

 

The World Crisis is a Financial and Currency Crisis

 

Capitalism, and by inference economic freedom, is being blamed for the global crisis that has caused recessions in most countries and threatens to do a great deal more harm before a measure of stability returns. Some commentators erroneously describe the tumult as a “crisis of capitalism”. The truth is that it is a “crisis of government” together with a “crisis of central banks”.

 

The world crisis is a financial crisis caused by the debasement and manipulation of currencies. All governments, without fail, have instituted monopoly control over the creation of national currencies. All of them, since the removal in 1971 of the discipline exerted by gold in monetary systems, have debased their currencies to a greater or lesser extent. Since 1961 the rand has lost 90 per cent of its purchasing power compared to the US dollar. During the same period the US dollar lost 87 per cent of its purchasing power as measured by the Consumer Price Index. The debasement of the rand and US dollar occurred at the expense of South African and US citizens.

 

The most visible cost is the erosion of peoples’ purchasing power, especially those with fixed incomes or long term fixed investments. The less visible cost is the quantity of malinvestment that occurs, which is investment that takes place based on the erroneous signals that money manipulation sends to investors. For instance, the excessively low interest rates that resulted from monetary inflation in the US misled home purchasers into basing their purchasing decisions on a belief that the low interest rates would persist. They based their decisions on the “affordability” that existed at the time of their purchases, with the encouragement of the US government and its agencies. The private banks may have acted recklessly under the circumstances but without the dollar debasement and concomitant low interest rates engineered by the Federal Reserve none of this would have happened. Hardly a crisis of capitalism!

 

Area 4: Freedom to Trade internationally (Overall rating 6.40)

 

South Africa’s rating and ranking in the area of international trade could improve considerably by removal of the restrictions that result in extremely low ratings in two components of the rating. The critics of foreign trade fail to realise that if imports are halted there is no purpose whatsoever in exporting, that in the absence of imports South Africa would merely accumulate investments in foreign countries as the Chinese government has been doing with a substantial part of the proceeds of China’s exports.

 

A (iii)   Standard deviation of tariff rates (Rating 3.93)

 

According to the EFW study “compared to a uniform tariff, wide variation of tariff rates exerts a more restrictive impact on trade and, therefore, on economic freedom.”

 

Government protection of local industries involving the application of different tariff rates to different types of goods implies knowledge of potential economic outcomes that the tariff setters cannot have. By implication, tariffs are pro-producer and anti-consumer. Can government be sure that the overall outcome for citizens of South Africa will not be better in a zero tariff environment such as that maintained in Hong Kong? In such an environment, investors are compelled to seek out economic opportunities in areas where South Africa has a comparative advantage. In a no-tariff environment, consumers have the benefit of the best quality goods at the lowest prices. In many cases the goods are subsidised by the taxpayers of other countries which results in a transfer of wealth from the citizens of the exporting country to those of the importing country. There appears to be no good reason to reject such transfers.

 

E (iii)   Capital Controls (Rating 0.77)

 

The international monetary fund reports on 13 types of capital controls and South Africa’s exchange controls will include a large number of them. Abolition of exchange controls and removal of restrictions on the operation of foreign currency accounts by private banks (as discussed in the area Access to Sound Money) would considerably improve this rating.

 

Area 5: Regulation of Credit, Labour and Business (6.96)

The lowest ratings in this area are in respect of components dealing with labour, administrative requirements and bureaucracy costs.

 

B (i)     Hiring regulations and minimum wage (Rating 4.43)

This component of the rating is based on the World Bank’s Doing Business Hiring Index, which is described as follows: “The difficulty of hiring index measures (i) whether fixed-term contracts are prohibited for permanent tasks; (ii) the maximum cumulative duration of fixed-term contracts; and (iii) the ratio of minimum wage for a trainee or first-time employee to the average value added per worker.” Countries with higher difficulty of hiring are given lower ratings.

 

B (ii)    Hiring and firing regulations (Rating 2.49)

This component of the rating is based on the Global Competitiveness Report question: “The hiring and firing of workers is impeded by regulations (= 1) or flexibly determined by employers (=7).” The result is converted for the EFW report to a rating measuring from 0 to 10.

 

The fact that an estimated 7 million people in the country are involuntarily unemployed should send a message to government that the labour regulatory environment is fatally flawed. Government will soon be compelled to choose between changing the labour laws and regulations in order to allow the unemployed to work, marginally reducing the job security of those who are already employed, or face a greater potential threat in the form of widespread civil unrest than that of labour union opposition to the changes. Delaying the labour reforms is making the situation steadily worse, as the unemployed lose skills and become entrenched in possible illegal activities that they have entered into in order to survive. The longer the period of unemployment, the less employable people become.

 

B (iii)   Centralised collective bargaining (Rating 3.58)

The rating is derived and adapted from the Global Competitiveness Report question: “wages in your country are set by a centralised bargaining process (= 1) or up to each individual company (= 7)”.

 

The curtailment of centralised bargaining and replacement with firm-based bargaining in New Zealand led to a substantial reduction in labour disputes. This was carried out in conjunction with a remarkable series of reforms in that country which propelled it up to 3rd place on the EFW rankings and brought about a resurgence in its economy.  

 

C (i) Price controls (Rating 5.00)

 

The survey data of the International Institute for Management Development’s World Competitiveness Yearbook and other data were used to rate countries for this component.

 

Price controls deprive producers and suppliers of information regarding increases and, less frequently, reductions in demand for their products and services. If an increase in demand does not convert into increased prices, the producers and suppliers will be totally unaware of a looming shortage as occurred recently with LP gas. In rare instances, such as happened with price controls on soft drinks, prices declined when the price controls were removed.

 

C (ii) Administrative requirements (Rating 3.33)

 

This component is based on the Global Competitiveness Report question: “Complying with administrative requirements (permits, regulations, reporting) issued by the government in your country is (1 = burdensome, 7 = not burdensome)” and adapted to the EFW 0 to 10 rating.

 

The rating for this component does not adequately reveal the huge and increasingly costly burden being imposed on South African businesses and citizens. The cost is further escalated by the appointment of an army of officials to monitor compliance with the administrative requirements, a cost that has to be borne by taxpayers. The burden in the form of executive and staff time that could otherwise have been spent productively in supplying goods and services to customers is enormous.

 


 

C (iv) Bureaucracy costs (Rating 3.10)

 

This component is based on the Global Competitiveness Report question: “Standards on product/service quality, energy and other regulations (outside environmental regulations in your country are (1 = lax or non-existent, 7 = among the world’s most stringent)?”

 

The bureaucracy costs in South Africa are increasing at an alarming rate and a fashion has developed for legislation and regulations to include fines and imprisonment for compliance failures on the part of business people that are greater than those imposed by the courts on people convicted of crimes such as rape, assault and murder, which is an absurd approach to dealing with people who may have been guilty of nothing more serious than administrative neglect.

 

  1. Comparative Analysis of South Africa’s rankings andratings

5.1       Improvement in South Africa’s ranking and rating post-1994

 

As would be expected, transition to democracy and the abolition of all apartheid controls and prohibitions on black members of the population brought about a substantial increase in economic freedom in the country. In line with the increased freedoms, South Africa’s economic freedom ranking improved from 53rd in 1990 to 42nd in 2000 out of 123 countries for which data were available.

 

5.2       Decline of 42 places in the EFW rankings, from 42nd to 84th 

 

Unfortunately, between 2000 and 2009, South Africa’s ranking has declined from 42nd in 2000 (rating 6.96) to 84th in 2009 (6.39) out of the 141 countries measured. A decline of 42 places in the world ranking of countries is not merely of academic interest, it is a matter for grave concern. There are two potential reasons for a lower position in the rankings. The first is that other countries are freeing up their economies and overtaking South Africa. This accounted for a fall of 15 places in the rankings.  The other is that South Africa’s level of economic freedom declined, accounting for another 27 places in the rankings.

 

5.3       Countries that have overtaken South Africa

 

The figures show that South Africa has been overtaken by African, Eastern European, Middle Eastern, Asian and a few South American countries that have been freeing up their economies.

 

 

2000 ranking

2009 ranking

Change in ranking

Albania

83

12

+71

Lithuania

70

45

+25

Malta

65

46

+19

Romania

112

49

+63

Russia

109

77

+32

Rwanda

105

81

+24

Slovak Republic

77

14

+63

South Korea

54

23

+31

Turkey

96

55

+41

Zambia

50

25

+25

Source: Economic Freedom of the World Annual Report 2011

 

 

5.4       Countries that have become rapidly less free in the past decade

 

From three decades of studying the effects of advances and declines in economic freedom ratings and rankings it has become clear that they accurately predict improvements and declines in both the economic conditions and civil liberties of the inhabitants of the countries measured. The drastic decline of 42 places in South Africa’s EFW ranking and the direction of change is of great concern as it predicts a worsening of conditions in the country. The direction of change is of particular importance as improving EFW scores clearly predict improvements in the economy and declining EFW scores predict a worsening of economic conditions.

 

 

2000 Ranking

2009 Ranking

Change in Ranking

Argentina

32

102

-70

Belgium

13

42

-29

Bolivia

43

86

-43

Botswana

35

68

-33

Egypt

53

74

-21

Greece

48

75

-27

Iceland

12

63

-51

Ireland

7

26

-19

Israel

56

81

-25

Italy

34

66

-32

Jordan

30

55

-25

Malaysia

44

64

-20

Mali

73

94

-21

Nepal

96

113

-17

Netherlands

9

31

-22

Philippines

41

80

-39

Portugal

21

52

-31

South Africa

42

84

-42

Spain

24

50

-26

Sweden

18

34

-16

Trinidad and Tobago

33

64

-31

United States

3

10

-7

Uruguay

46

68

-22

Venezuela

101

121

-20

Source: Economic Freedom of the World Annual Report 2011

 

The validity of the predictive value of EFW scores can be checked by observing the economic improvements or retrogression in the economies of countries that have experienced such changes. When entire economies are generally free they function best. Substantial government interventions in a specific area of an economy can have a disproportionate retarding effect, preventing it from functioning properly even though there is a high level of economic freedom in other areas of the economy. 

 

 

5.5       Greatest improvements in EFW ratings and rankings between 1990 and 2009

 

Countries that have shown the greatest improvements in their rankings (1990 and 2009 rankings shown) and EFW ratings (measured out of 10) over the past two decades are shown in the following table. All these countries have overtaken South Africa in the ratings and rankings.

 

 

1990 Rank

2009 Rank

Change in ranking

Albania

99

12

+87

Bulgaria

101

35

+66

Cyprus

45

15

+30

Nicaragua

113

59

+54

Peru

102

28

+74

Uganda

112

39

+73

Zambia

108

25

+83

Source: Economic Freedom of the World Annual Report 2011

 

5.6       What is Albania doing right?

 

Comparing Albania, as an example, to South Africa we find the following differences in ratings (out of 10) for the various areas of activity measured (1) Size of Government – 9.06 vs. 5.02 (2) Legal Structure and Security of Property Rights – 6.19 vs.6.16 (3) Access to Sound Money – 9.63 vs. 7.92 (4) Freedom to Trade Internationally – 6.50 vs. 6.40 (5) Regulation of Credit, Labour and Business – 6.44 vs. 6.42 (6) Summary rating – 7.54 vs. 6.39.

 

The largest differences between the economies of Albania and South Africa are: (1) Direction of change – Albania’s EFW score has risen steadily as it has introduced reforms; South Africa’s score has declined as the level of economic freedom has been eroded. (2) Size of Government: General government consumption expenditure for Albania is equivalent to 10.43% of GDP, SA’s is 25.53%; Government enterprises and investment is a substantial 28.93%, SA’s is a massive 40.63% (and scheduled to increase),  Albania’s marginal tax rate is 10%, SA’s 40% (3) Albania does not have foreign exchange controls, South Africa does.   

 

5.7       Remarkable progress in former Eastern Bloc countries

 

Eight former centrally planned countries have made remarkable progress during the past decade and a half (1995 to 2009). Five of these countries are in the top 40 of the EFW rankings. Other currently high ranking countries in this grouping are the Czech Republic, Latvia and Lithuania.

 

 

1995 Ranking

2009 Ranking

Change in ranking

Albania

99

12

+87

Bulgaria

107

35

+72

Czech Republic

71

58

+13

Estonia

76

19

+57

Hungary

59

17

+42

Latvia

94

62

+32

Lithuania

96

45

+51

Slovak Republic

78

14

+64

Source: Economic Freedom of the World Annual Report 2011

 

The “advantage” these former Soviet-dominated countries have is that their people have lived under communist authoritarian rule and want no more of it. There is a certain amount of consistency in the policies revealed by the EFW analyses across these countries. Most of them have relatively high subsidies and transfers as the state has the responsibility of caring for the elderly who had no opportunity to save for retirement under communism. Albania, Bosnia and Herzegovina, Bulgaria, the Chez Republic, Estonia, Kazakhstan, Latvia and Mongolia have marginal tax rates of 10% and many more of the countries in the region have tax rates of 20% and less. A general problem the former communist countries face is building up the integrity of their legal systems and ensuring the independence of their judiciaries. Almost without fail the monetary systems are managed exceptionally well, inflation rates are low and there are no foreign exchange controls. International trade is relatively open and regulation not excessive.

 

Remarkable improvements in EFW rankings and ratings, and improved economic results are their reward.       

 

5.8       Changes in EFW rankings and ratings for some African countries between 2000 and 2009

 

Improvements and declines in the EFW scores of a selection of African countries over the past decade are shown in the following table.

 

2000 Ranking

2009 Ranking

Change in ranking

Botswana

35

68

-33

Ghana

90

37

+53

Kenya

46

36

+10

Malawi

114

97

+17

Mauritius

20

17

+3

Namibia

64

70

-6

Rwanda

105

81

+24

South Africa

42

84

-42

Uganda

55

39

+16

Zambia

50

25

+25

Source: Economic Freedom of the World Annual Report 2011

 

News reports about events in these African countries tend to corroborate the fact that gains and losses in economic freedom lead to improvements and deteriorations in their economies. Ghana’s economy, for instance, receives positive mentions in press reports. While the country has benefited from the discovery of oil, the country also benefited from a reduced government participation rate in the economy, a reduction in the marginal tax rate, abolition of exchange controls and a reduction in the rate of increase in the growth of the money supply and the volatility of inflation.

 

5.9       EFW rankings for the currently most free economies and changes between 2000 and 2009

 

The rankings and ratings for the world’s freest economies, which consist of small and large territories and countries, provide evidence that economic freedom provides benefits to citizens whatever the size of their economies.

 

 

2000 Ranking

2009 Ranking

Change in ranking

Hong Kong

1

1

0

Singapore

2

2

0

New Zealand

5

3

+2

Switzerland

4

4

0

Australia

10

5

+5

Chile

28

6

+22

Canada

8

7

+1

United Kingdom

6

8

-2

Oman

39

9

+30

United States

3

10

-7

Finland

16

10

+6

Source: Economic Freedom of the World Annual Report 2011

 

Events in the economies of the freest countries and territories in the world clearly reflect that more economic freedom results in better general conditions for their populations and declines in economic freedom signify troubled times. A decline in the United States’ rating from 8.45 to 7.58 and its ranking from 3rd to 10th in a decade warns of a potential substantial deterioration in the outlook for the country’s economy. The decline in the US economic freedom rating results from an increase in the involvement of government in the economy, a large decline in the quality of the legal structure and security of property rights, reduced freedom of the American people to trade internationally, government intervention in private sector credit, and a significant increase in bureaucracy costs.

 

  1. Conclusion

All well-disposed people wish to see South Africans develop into a thriving nation with high economic growth, low unemployment, high per capita incomes, low crime rates, high life expectancy, excellent education, high quality healthcare, and all living together contentedly in enduring peace. While all may share the same end goals, there will be a vast difference in views on how those goals are to be achieved.

 

Modern democracies have strayed so far from the original philosophy supposedly undergirding the concept of a free society that elected governments have become guilty of neglecting their primary “limited government” purpose.

 

Criminality has increased in most countries, policing budgets are inadequate, police forces are understaffed, police officers are not properly selected, paid, or trained, or given the status they need to efficiently carry out their functions. If budgets and priorities were to be determined by citizens in referendums they would be inclined to demand better selection, better training and higher salaries for the police, and vote the necessary funds to achieve the objective of a crime-free society, even if it meant having a policeman/woman on every block in every city and town in the country, and on patrol in every rural area. In addition, citizens would be inclined to vote to remove laws and regulations that create victimless crimes and increase bureaucracy.

 

In order to dispense justice in a manner that gives citizens the greatest degree of confidence and trust, the law courts must function entirely separately from government. In order to achieve that objective, the officers of the courts must be properly paid, the resources must be adequate to ensure that the courts can deliver justice expeditiously, and the selection process must be carried out entirely on merit. In a budget referendum this branch of government would also receive a vote to ensure adequate funding. For instance, if there is to be an inquiry into the functioning of the South African judicial system it should be carried out by a judicial commission selected from senior retired judges from countries with similar judicial systems, not by a government department or a group of political appointees.

 

The size and cost of a defence force should be appropriate to the potential threat to the country’s citizens from a foreign invasion. A referendum on a budget vote for a defence force is likely to reflect the concerns or lack of concern of citizens regarding such an eventuality, and also the views of citizens regarding fighting wars on foreign soil.

 

Above all, policies should be based on evidence of past success and failures, wherever they might be. Institutions that make a positive contribution to the welfare of the country’s people, such as a Constitution and Bill of Rights that protect citizens from authoritarian government, a judicial system that functions according to the rule of law, secure property rights, and a central bank that ensures that the country has sound money and a non-inflationary environment, deserve the support and protection of all the country’s people. Without sound institutions no country or its people can prosper.

 

 

 

Prepared by:

 

Eustace Davie

Director

Free Market Foundation



[i] James Gwartney, Robert Lawson and Joshua Hall et al, Economic Freedom of the World: 2011 Annual Report, Fraser Institute (Free Market Foundation - South Africa Edition)


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