FMF index reflects declining trend

The Free Market Foundation’s (FMF’s) annual South African Freedom and Transformation Index (SAFTI) fell from 5.9 in 2003 to 5.8 at the end of 2004. The index is compiled annually for the FMF by experts in the fields of rule of law, financial markets, labour, education, privatisation, health care, civil liberties, taxation, international trade, capital mobility, and a basket of other recognised components of economic freedom.
SAFTI measures SA’s progress towards freedom and transformation on a scale of 0-10, where zero represents no freedom or transformation and 10 the ultimate in personal liberty and uncompromised transformation. Transformation is regarded as normalising South Africa towards a free, democratic and prosperous country with equal rights and justice for all in accordance with democratic values under the rule of law.
The one-point fall in the index reflects a trend towards increasing regulation in various sectors of the economy. Each piece of regulation adds to the compliance costs imposed on firms and requires additional government expenditure on enforcement. The departmental officials who are preparing and shepherding the regulation through the statutory processes appear to have lost sight of the fact that South Africa is a developing country that cannot afford high regulatory costs. Excessive regulation reduces the possibilities for economic growth, job creation and poverty relief.
Small firms are worst affected by red tape and taxation, which detracts from their ability to carry out their vitally important functions in the economy, such as job creation. In most countries, small firms are the job creators – the employers of young, old, unskilled, and otherwise handicapped individuals. They teach skills to the unskilled on the job and provide experience that is essential to increased employment opportunities. A rapidly growing economy that creates wealth and raises everyone’s average incomes will always be lightly regulated. Excessive regulation is, without doubt the reason why SA’s small firms produce a relatively lower level of GDP than other countries and also one of the reasons why we have one of the highest rates of unemployment in the world. The small firms sector will therefore be waiting expectantly for the reforms promised by the President.
The latest Economic Freedom of the World (EFW) index (for 2002) produced by the International Freedom Network consisting of 60 policy institutes around the world, including the FMF, rated South Africa at 6.8 (out of a possible 10). That placed SA joint 44th with five other countries, including France, out of the 123 countries for which data are available. The EFW index is derived from figures published by independent sources such as the Global Competitiveness Report of the World Economic Forum, the International Country Risk Guide, Freedom House and the World Bank. Since the FMF's panel considers local factors in more detail than the EFW index and uses different weightings for the composite index, the SAFTI index has diverged from the EFW index. It provides a preview two years ahead of what might be expected in the definitive and influential EFW annual rating.

Each expert on economic aspects of the SAFTI index considers annual changes in such factors as government size, levels of interventionism, compliance and enforcement costs, small business impacts and secondary consequences. During the year under review, South Africa lost more freedom than it gained due to changes in levels of legislation and regulation.

SA continues to perform badly on law and order. There was virtually no change during the year regarding civil liberty but South Africans continue to benefit from the substantial gains made with the disappearance of apartheid and the institution of constitutional democracy. There is, however, an ominous exception: asset forfeiture, which involves the seizure of assets of people not proven guilty of any wrong-doing, who may never be charged, and who are rendered effectively defenceless by the loss of their assets.
Capital and trade controls and taxation show little change, though budget plans to boost state spending and deficit borrowing may further depress the country’s SAFTI rating in future years.

The trend away from freedom, flexibility, context-specific and community based education continued. All training and education needs prior SA Qualifications Authority (SAQA) approval, which imposes huge costs, reduces choice and curtails competition and innovation.

The early promise of privatisation accompanied by liberalisation, in harmony with global trends, has suffered further setbacks. Government has decided to try and increase the efficiency of public enterprises rather than to sell them. However, the real test of efficiency is the ability to compete effectively against all comers for the business of consumers, which does not happen because South Africa’s public enterprises are statutory monopolies. If government wishes to retain public enterprises, it should remove the prohibitions on local and international competition in the sectors in which those enterprises operate. By doing so, it will ensure that its policies do not compromise the interests of consumers. Until this occurs, the country’s potential SAFTI score is reduced by the barriers to entry into the commanding heights of the economy.

Mineral rights were nationalised without compensation during 2003, and this may become the subject of disruptive and costly constitutional litigation, which will exacerbate the negative message nationalisation sends to local and international investors.

Intervention in private health services and pharmaceuticals increased amidst confusion and negative publicity regarding South Africa’s stand on intellectual property rights. This resulted, and will increasingly result, in diminishing provision of private health products and services to the poor, and to small and remote communities. It will also result in a diminished product range. A systematic and resolute tendency towards nationalised health care is apparent at the expense of freedom of choice for patients and cost-reducing competition amongst providers.

If South Africa is to fulfil the ideal of true freedom, democratic values, equality and prosperity for all, the trend towards personal and economic freedom which characterised the early years of transition will have to be re-instated. Thanks to the development of indices such as EFW, and now SAFTI, what must and must not be done for nations to prosper is patently clear.

Author: Leon Louw is the Executive 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.

For more information contact Leon Louw on (+27)(11) 884 0270 or (+27)(84) 618 0348.


FMF Feature Article\31 May 2005