Deregulating the economy: A matter of urgency

Small business is widely acknowledged as the engine of economic growth in both developing and developed economies. The South African government also recognises this. President Ramaphosa said during the 2019 SONA (state of the nation address):

“Given the key role that small businesses play in stimulating economic activity and employment – and in advancing broad-based empowerment – we are focusing this year on significantly expanding our small business incubation programme.”

Government-run business incubators will undoubtedly incur some costs on the fiscus on an ongoing basis, even if we put aside the question of the efficacy of government-run incubators. There are easier and likely more effective ways of promoting small business, boosting economic growth and creating jobs.

I analysed the Fraser Institute’s Economic Freedom of the World (EFW) index with the aim of identifying the sub-variables that would have the greatest positive impact on gdp per capita growth. It turns out that reducing/eliminating administrative requirements (applying for permits, government reporting requirements, regulations etc) could add as much as 0.21 percentage points to the gdp per capita growth.

In practical terms, this means that government should have an official policy of minimal interference in business. In particular, adding new compliance rules periodically even if some are eliminated, is counter-productive.

Every minute spent filling out a government form or trying to understand some new regulation is a minute not spent producing. The cumulative effect of this can be devastating to a developing economy such as ours.

The basic problem in South Africa is that while engaging in rhetoric about how important entrepreneurs are and how we need them, politicians simultaneously introduce laws and regulations that make it harder for these entrepreneurs to do what they are good at. It seems that government may be suffering from an inability to understand constraints: whatever “good” thing you aim for and try to achieve is at the cost of achieving something else.

Regulations on business are a case in point. Government recognises that entrepreneurs are necessary for solving South Africa’s socio-economic problems but it also wants to achieve other objectives like: favouring unionised workers in employment contracts, collecting the different kinds of taxes it levies, sector-specific objectives etc. It never acknowledges that some of these objectives contradict others. This means that government needs to prioritise. Politicians need to decide what is most important to their constituents and develop policy that reflects these priorities. Unfortunately, we do not live in a world where you can have it all, at the same time.

South Africa is currently ranked 98th in terms of the EFW’s administrative requirements variable. Rwanda is ranked 3rd in the world and, in 2017, had a gdp per capita growth rate of 3.57% while the same figure for South Africa was 0.07%. This is a clear indication that South Africa will soon be overtaken by countries like Rwanda in terms of standard of living if the necessary reforms are not elevated to being a matter of urgency.

The medicine for what ails this country has been discovered, tried, tested and proved over hundreds of years. It is simply a matter, even if some vested political interests find it to be bitter, of whether, to develop a prosperous country, we are indeed willing to take it.