Growth, economic freedom and a contented society

Government is reported to have identified six constraints that are preventing the SA economy from growing at the hoped-for rate of 6%. They are said to be: currency volatility, delivery, import-parity pricing, infrastructure backlogs, regulation, and skills shortages.

The Economic Freedom of the World: 2005 Annual Report identifies a slightly different set of problems. The most prominent are: excessive government consumption expenditure; government enterprises playing too large a role in the economy; top marginal tax rates that are too high; concerns over the integrity of the legal system; restrictions on owning foreign currency; restrictions on foreign capital transactions; minimum wages that affect employment; regulatory barriers to hiring and firing, and government price controls in the economy. These are the areas in which SA achieved a low score (50% or less) out of the 38 components used to construct a summary index for the 127 countries for which data were available. They also indicate to us what policy issues need to be addressed in order to increase our level of economic freedom.

A decade of analyses has provided ample evidence that there is a close correlation between economic freedom and growth. SA, for instance, has greater economic freedom now than we had in 1990 and our ranking has improved from 62nd to joint 38th during a period that has been marked by increased economic freedom worldwide. So SA has been doing many of the right things and it shows up in the improved growth rate.

One of the ‘right things’ has been the improvement in our rating on ‘access to sound money’ from 5.8 (out of 10) in 1990 to 8.0 in 2003. Reserve Bank Governor, Tito Mboweni, is therefore justified in believing that monetary policy is being well handled. If his call for the abolition of exchange control is heeded, the rating will become even more creditable. And government’s concern over volatility of the exchange rate requires the Reserve Bank to be even more conservative about monetary policy, not less so, as some interest groups are claiming.

Relatively high government expenditure is justified by the need to take care of the people who were disadvantaged by apartheid. However, when we look at the problems caused by rampant crime we must surely conclude that some of the spending that has nothing to do with poverty alleviation could be utilised much better in reducing crime. Research shows that most governments could carry out their core functions, including their welfare tasks, on a great deal less money as a proportion of GDP than they are inclined to spend.

Government has, at last, recognised to some extent that it is the private sector that is responsible for bringing about economic growth. However, that recognition has to translate into positive action towards the private sector. Anyone who has driven a span of oxen knows that to get the best out of them you have to coax them, not beat them half to death. My observations lead me to believe that our private sector is starting to feel that it is being constantly lashed with disincentives in the form of new legislation and regulations, is expected to perform at increasing levels, and receives very little recognition for its efforts. The hounding of people who want nothing more than to be able to concentrate on running an efficient business is not the way to achieve economic growth. What the private sector has achieved despite the burdens that have been imposed on it is nothing short of remarkable.

Deputy President Phumzile Mlambo-Ngcuka is heading a review that seeks ways to improve the growth rate of the economy. She has already indicated that a change of attitude may be on the cards, which would be most welcome. Is it not time to once again start talking about that non-racial society we all spoke about with such passion when we were in the depths of apartheid and continued to discuss until the cash registers started ringing in our ears? Not for the sake of the ‘persecuted’ but for the sake of those who are not tasting the fruits of our democracy. High on the list are the unfortunates who are made unemployable by our labour laws. Then there are the consumers, many of whom are poor, who will get the best goods and services at the best prices from firms that are owned and managed by people who are most efficient at doing so. In the end, if we want high growth, we must allow consumers to direct the economy by buying or declining to buy what suppliers offer them.

Having a large part of the economy owned and controlled by government is a deterrent to growth. Instead of the consumers, for instance, choosing between fully competitive electricity suppliers, transport suppliers or telecommunications suppliers, they are limited to the services supplied by public enterprises or government-licensed enterprises. Government should not attempt to fix what does not work. It should sell off these enterprises to the highest bidders, without statutory protection, and let the new owners fix them while they provide the best and lowest-cost services to their customers in an effort to keep out competition. Alternatively, if government is insistent that public enterprises are capable of competing with private firms, allow open competition in all the areas of the economy in which public enterprises operate and allow consumers to support their suppliers of choice. That will remove many of the complaints about delivery.

Taxation and regulation, including price controls, remain on the list of items that require attention. Lower taxes leave money for reinvestment in the hands of the most productive people in the economy. It provides them with the incentive to be even more productive. Everyone benefits, including consumers, the people filling the new jobs that are created, and even the fiscus, which gathers more tax at low rates from a bigger economy. Unnecessary regulation imposes costs in time and money that can be more productively employed. Very often the cost of regulation is a dead loss because no one benefits from it.

Government is moving in the right direction in many respects. Unfortunately, some of its arms are intent on moving in the opposite direction at the same time. A great deal of time and energy could be saved if government policy makers would take note of the successes achieved by the most economically free countries and utilise that knowledge and experience for the benefit of all South Africans. That is the surest route to achieving a contented society.

Author: Temba A Nolutshungu 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/ 29 November 2005 - Policy Bulletin / 11 August 2009