An alternative approach to righting past wrongs

Generations of black South Africans suffered incalculable harm as a result of apartheid. However, the chosen path to rectification of the past damage is not necessarily the right one. What the country needs is the opposite of what we had in the past, not more of it. Apartheid denied economic freedom to everyone but particularly and most harshly to black people.

In free economies life expectancy is more than 20 years higher than in unfree economies. Average incomes of the poorest 10% of the freest populations are higher (R45,660 in 2002), than the average incomes of upper-middle-income countries (R34,120 in 2002). Adult literacy is higher, infant mortality is lower, access to treated water is higher, corruption is lower, civil liberties are greater and free economies have the highest levels of human development as measured by the United Nations’ Human Development Index. Governments of developing countries therefore have no better policy option for improving the quality of life of all their citizens than to increase economic freedom.

The economics of preferential policies
If South Africans had lived through half a century of economic freedom instead of apartheid, everyone would have been better off: blacks infinitely so and whites a great deal better off. Comparisons between the American South and North, for instance, show that most whites in the South would have been a great deal better off without slavery. Yet if this is true, does it have any relevance today? Can such a notion guide us in our attempts to repair past damage?

Can preferential policies in reverse correct the harm done in the past? Thomas Sowell, in his book Race and Economics had this to say on attempts to deal with the issue in America: “Perhaps the greatest dilemma in attempts to raise ethnic minority income is that those methods which have historically proved successful – self-reliance, work skills, education, business experience – are all slow developing, while those methods which are more direct and immediate – job quotas, charity, subsidies, preferential treatment – tend to undermine pride of achievement in the long run. If the history of American ethnic groups shows anything, it is how large a role has been played by attitudes – and particularly attitudes of self-reliance . . . all emphasise the importance of this factor, however mundane and unfashionable it may be.”

High growth economic policy
High growth, such as the 7.2 per cent per annum achieved by South Korea over a 20-year period, doubles incomes every 10 years, and that country would arguably have done even better if it had liberalised its economy earlier. That is the kind of growth rate that SA needs to rapidly reduce unemployment and poverty. It will and can be achieved in SA, not by reducing the level of economic freedom, but by maintaining and increasing it.

As it happens, increased liberalisation of the economy and very substantial asset transfers can be made without tampering with the constitutionally protected property rights of citizens. The apartheid government accumulated huge industrial investments and added to the already substantial land and property holdings of the state. These assets can be utilised for purposes of a giant once-off asset transfer to the poorest members of the population to bring about the most rapid possible poverty relief.

Critics will suggest that poor people will act irresponsibly if they receive a sudden windfall. Some may but most probably will not. Many poor people are thrifty and will remain so. If the labour laws are changed to allow the poor to legally employ the poor, recipients of an asset transfer from the state will be able to start myriad small businesses and create a large number of productive jobs. People who are economically active in underdeveloped areas can at the same time be given tax breaks for five to ten years to allow them to build up capital. Such an empowerment process would be broad-based, would not involve interfering in the management of businesses, would lead to accelerated economic growth and would not create the disincentives for local and foreign investors of the currently envisaged empowerment system.

Cornerstones of economic freedom
Personal choice, voluntary exchange, freedom to compete, and security of privately owned property are the cornerstones of economic freedom. Such desirable conditions are achieved in an environment characterised by the rule of law. Research shows that the prosperity of societies is highly dependent on the extent to which their legal systems and courts protect these essential freedoms.

Divergence from economic freedom typically takes the form of excessive government expenditure, taxes and ownership of enterprises; lack of access to sound money; restraints on international trade such as tariffs, quotas, and currency exchange and capital controls; failure of the legal system to protect property rights and enforce contracts; and excessive regulation and government interference in the functioning of business and credit and labour markets.

Since 1994 the SA government has controlled government expenditure and taxes, reduced deficits and borrowing, improved the soundness of the currency by reducing inflation, reduced taxes on foreign trade and gradually relaxed exchange controls. It has not disposed of its large public enterprises, has maintained a relatively well-functioning legal system but not gained adequate control over the unacceptably high crime rate, and allowed over-loaded courts to result in inadequate access to justice.

However, the most disturbing aspect of the government’s policy direction in the recent past, from an economic freedom point of view, has been the multiplicity of regulations imposed on businesses and its failure to respect the property rights of individuals and firms. Mineral rights have been nationalised and government-prescribed transfers of ownership of shares in businesses is being demanded. These latter developments reduce economic freedom in the country and consequently cannot fail to be economically harmful. Although the political dynamics are understandable, given the harm done to black South Africans by the apartheid government, this does not change the probability of harm to the economy, and most worryingly, to the vast majority of black people in the country.

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 Free Market Foundation.

FMF Feature Article/ 28 June 2005 Policy Bulletin 26 May 2009