Mauritian reform should alert SA government

According to the latest Economic Freedom of the World report, SA slid dramatically down the rankings from 37th to 53rd. The index published in Economic Freedom of the World: 2006 Annual Report, measures the degree to which the policies and institutions of countries are supportive of economic freedom. The foundations of economic freedom are personal choice, voluntary exchange, freedom to compete and security of privately owned property.

One of the key objectives in compiling the EFW index is to establish whether relationships exist between economic freedom and economic growth and wealth. The findings in the report unambiguously support the fact that economic freedom is strongly related to prosperity and growth; countries that are economically free tend to grow faster and be more prosperous.

Research in the 2006 report found that countries with more economic freedom have substantially higher per capita incomes. The top 25% of the freest economies in the world have per capita incomes of $24,402 (R180,000) while the least free economies for which data were available have per capita incomes of $2,998 (R22,000). Furthermore, for nations scoring in the top quarter of the index, the average income of the poorest 10 per cent of the population was $6,519 (R48,000) compared to just $826 (R6,000) in the least free nations. This shows that economic freedom benefits everyone – both poor and rich get richer together.

According to the index, SA has been getting progressively worse in the area of Freedom to Exchange with Foreigners. In 2004 SA received a rating of 7.6 out of 10 (with 10 being the best) in this area – in 2005 it was rated at 7.3 and this year 6.9. The recent introduction of quotas limiting the amount of clothing imports from China is likely to lead to a further deterioration.

Quotas are a particularly damaging form of intervention. Governments arbitrarily decide on the level of restriction they deem necessary to protect local manufacturers. The restrictions open the door for corruption because customs officials are given the power to decide which importers’ goods will be allowed entry and the quantities each will be entitled to import.

Quotas will be worth millions of rands and the temptation to bribe and be bribed will be substantial. The result is that certain influential importers are given preference over others. Furthermore, quotas are set without any scope for adjustment to future changes in demand. Some importers, realising the potential to fill a gap in the market, may then resort to smuggling to accommodate increased demand.

Instead of SA clothing manufacturers continuing to lobby for increased protection they should learn from their SADC counterparts based in Mauritius who have developed products for niche markets. Having invested in some of the most sophisticated manufacturing plants in the world, Mauritian manufactures are able to quickly turn orders into finished goods.

While Mauritius has fallen from 35th to 40th on the EFW rankings it remains well ahead of SA. It has a GDP per capita of USD 5,260 (R38,713) against SA’s slightly lower USD 4,960 (R36,506). In order to counter its perceived loss of competitiveness Mauritius has embarked on reforms aimed at increasing economic freedom and improving the business environment.

Studies show that a government wishing to see its economy grow must take the direction of change seriously. A trend towards greater economic freedom results in increased economic growth while the reverse trend reduces growth. The consequences may not be immediately apparent but they are no less certain.

In 1995 Mauritius was ranked 17th on the index with a rating of 7.4 (now 7.0). SA ‘s ranking was 48th in 1995 (rating 6.3), advanced to 37th (rating 6.9) and then fell back to 53rd (6.7) in the latest ratings. The Mauritian government is currently taking firm action in the right direction to correct the situation while from its actions the SA government does not appear to recognise the potential problems that await the country if economic freedom continues to decline.

The Mauritian government has openly admitted that it has set itself the target of achieving a top 10 position in the World Bank’s “Doing Business” report. This announcement sends positive signals to international investors that Mauritius is committed to accepting and accommodating investments. Local investors also benefit from an environment that is conducive to doing business.

SA should take a leaf out of the Mauritian book of reform. Indeed, if the SA government really wishes to help SA manufacturers of clothing and textiles it should similarly make the environment in which they operate more conducive to doing business. This could be achieved by substantially reducing the taxes it imposes on the clothing manufactures and reducing their costs of doing business.

Author: Jasson Urbach is an economist with 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/ 07 November 2006