Prosperity is a matter of choice, not chance

Creating prosperity is not miraculous – it is what people do when they are allowed to go about their peaceful business in a safe and secure environment. The “miracle of poverty” is that it is the consequence of deliberate policy decisions.

The new book, The Habits of Highly Successful Countries, published by the Law Review Project and released on 25 October 2006, describes how the policy choices of governments determine whether countries become prosperous or mired in poverty. It is a matter of choice. However, policy makers need information to copy proven successes, anticipate pitfalls and avoid failure but they seldom get it: our new method of measuring outcomes counteracts the pressures from vested interests, self-serving bureaucrats, ideologues and sensationist media –- and aims to relieve long-suffering citizens of the exorbitant costs of re-inventing the wheel.

The “20/20” method simply takes the 20 best and the 20 worst policies (or anything else you want to measure) and analyses the common traits among them to determine how they became best or worst. Policies are generally implemented without objective or reliable information on whether intended consequences are likely to materialise, what risk there is of perverse unintended consequences and which policies have been tried elsewhere and succeeded or failed.

Our focus has been South Africa but the technique can be used anywhere. For successful policies to be adopted, policy makers everywhere need to ask the Policy Maker’s Question for every policy goal: which policies cause which consequences?

They need to know why some countries are rich and others poor; what explains high and low levels of crime and corruption; which factors give longer healthier lives; why illiteracy is often rampant where education budgets are biggest; why Africa has been the only regressing continent for a generation; why the average South African was poorer in 2004 than in 1970; what makes some Third World countries prosperous and others destitute and so on: governments need their policy mix to coincide more with the world’s winners and less with its losers.

South Africa, for example, resisted enormous temptation, pressure and criticism when it persisted during its first decade with “neo-liberal” economic policies. Should it have done so? Yes, according to the world’s experience. It reversed the country’s declining score on economic freedom and related indices when it took office in 1994. On the Economic Freedom of the World Index (EFW, published yearly by the Fraser Institute) South Africa’s rating declined from 6.9 in 1970 to 5.3 in 1990 (zero is unfree, ten is free). From transition in 1994, it rose back to 6.9 in 2003. By 2003, South Africa had climbed the ladder from below the halfway mark (70th out of 120 countries) to join the upper third, as the world’s 38th freest economy.

Paradoxically, a “left wing” revolutionary regime reversed the economic dirigisme of its “right wing” supposedly pro-market predecessor. It applied market “fundamentals” – a term used by Minister of Finance Trevor Manuel – and wondered why it was not rewarded with instant success. Our research revealed that many, but not all the “fundamentals” were in place. However, the extent of the success that has been achieved was predictable from the increase in economic freedom inherent in lifting the yoke of apartheid in 1994.

Frustrated by relatively low growth during the first decade of democracy, there is now talk among policy-makers of reversing policies – of rejecting “market fundamentalism” and embracing a greater role for government. If this policy is pursued, the evidence suggests that it will be tantamount to snatching defeat from the jaws of victory.

The evidence in our report suggests that higher growth of six per cent or more will be achieved if the earlier trend, the very policy directions that are currently under fire from the government’s critics, are sustained and intensified. On the other hand, if there is increased tax-and-spend and government plays a greater role in the economy, there will be only unsustainable short-term growth at the direct expense of long-term prosperity for which solid foundations have been laid.

Our research followed consultations with politicians, government advisors and others on correlations between economic freedom and prosperity, discussing such international comparative analyses as the EFW, UN, World Bank or other think-tank assessments.

Policy makers are subjected to challenging realities: they serve disparate constituencies, deal with influential vested interests, make decisions under pressure, implement policies with unpredictable consequences and promote party political interests. They are bombarded by a surfeit of facts, theories, ideologies, opinions and rival objectives competing for scarce resources.

They lack the tools found in business, such as profit incentives and financial statements that reveal the efficacy of their policies. One of the few helpful options is to make international comparisons.

People directly involved in policy-making and implementation complained that an index of many variables – 38 in the EFW index – is of limited practical value, because policy makers will not or cannot prioritise all of them. Individual variables are the responsibility of different ministries and are subject to distinctive and complex demands in the world of political reality.

We determined that only the most important few factors, perhaps five or six, are likely to be statistically significant individually and that some would be significant only in combination with others. We identified a short list of policy priorities – what is truly important to do and to avoid.

Our analysis provides considerable certainty about probable causes and consequences but it is not prescriptive: it answers policy makers’ questions and is an aid, amongst others, to good government.

This 20/20 technique can be adapted to any country and to any policy, not only to guide governments but also to assess their performance and bring them to account. It allows governments to choose the policies of winners and avoid the policies followed by losers. It is a tool for growth, prosperity and freedom.

Author: Leon Louw is Executive Director of the Free Market Foundation (Southern Africa) and of the Law Review Project. 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/ 24 October 2006 Policy Bulletin / 05 May 2009