SA at 54th overtaken in economic freedom rankings

SA’s economic freedom ranking for 2006 has declined from 49th to 54th out of 141 countries according to the Economic Freedom of the World: 2008 Annual Report (EFW) released on 16 September. In 2000 SA was ranked 41st, 13 places above its current ranking.

The country’s rating improved from 6.97 (out of 10) in 2000 to 7.05 in 2005, and then declined marginally to 7.03 in 2006. Despite its slightly improved rating, a net 13 countries became economically freer and moved above SA in the rankings during the last six years.

SA was overtaken by the Bahamas (7.15), Cyprus (7.35), Guatemala (7.06), Honduras (7.35), Hungary (7.46), Kuwait (7.62), Latvia (7.27), Lithuania (7.40), Oman (7.32), Slovak Republic (7.61), South Korea (7.42), Malta (7.53) and Zambia (7.09). After 2000, Georgia (7.29), Kazakhstan (7.23) and Mongolia (7.20) were added to the list of countries measured and have moved into the ranking above SA. Three countries, Argentina (5.85), Botswana (6.77) and Greece (7.03) lost ground against SA.

Mauritius, rated 7.26 and ranked 41st is the most economically free country in the sub-Sahara African sphere, followed by Zambia 51st, South Africa 54th, Botswana and Kenya 60th, Ghana 66th, Uganda 69th and Namibia 71st. SA’s rating is well above the average for all sub-Saharan African countries, which is a dismal 5.71, dragged down by such unfree countries as Zimbabwe, Angola, Republic of Congo, Niger, Guinea-Bissau, Central African Republic, Chad, Rwanda, Togo, Gabon and Malawi, which feature at the bottom end of the listing with the likes of Myanmar, Venezuela and Nepal. The reasons why the economies of these countries perform relatively well or badly are no mystery: they are the consequence of deliberate policy actions followed by their governments.

Does it matter if SA slips in the EFW ratings? Does it matter if SA follows the demands made by some political activists and abandons monetary and fiscal discipline; destroys the independence of the judiciary by exerting executive control over it; disregards the security of property rights and takes property without adequate compensation or right of appeal to the courts; abrogates the freedom of the press; nationalises health insurance and health care provision; regulates every aspect of business, and generally adopts all the trappings of authoritarian government? According to the EFW study, it does matter. The reason is that countries with greater economic freedom have higher economic growth, higher per capita incomes and fare better on all the United Nations measures of human development. If the government is serious about improving quality of life, it matters.

This year’s report includes an analysis, Economic Freedom and World Poverty by Seth Norton and James Gwartney, in which the authors find a direct correlation between greater economic freedom and less poverty, or conversely, the authors find worse poverty where there is less economic freedom. In measuring non-pecuniary poverty effects in developing countries it was found that in mostly unfree economies 72.6% of the population has access to clean water, compared to almost 100% in mostly free economies. In mostly unfree economies 72.1% of the population receive adequate nourishment, while the figure is 97.5% in mostly free economies. For every 1,000 births on average, 64 more babies per year survive in freer economies than in unfree economies. Freer economies have more than twice as many physicians than mostly unfree economies. The UN’s Human Poverty Index improves from 63.9 for the mostly unfree to 93.7 for the mostly free economies.

The key ingredients that underpin the measurement of economic freedom in EFW are: personal choice, voluntary exchange co-ordinated by markets, freedom to enter and compete in markets, and protection of persons and their property from aggression by others. To the fullest extent possible the index uses objective components, but incorporating important matters such as legal and regulatory measures requires the use of data based on surveys, expert panels and generic case studies. Complete methodological details of the compilation process are provided in the EFW publication. The index measures the degree of economic freedom in five major areas – 1. Size of government: expenditures, taxes and enterprises 2. Legal structure and security of property rights 3. Access to sound money 4. Freedom to trade internationally, and 5. Regulation of credit, labour and business. In total, the index is comprised of 42 distinct variables.

Governments world-wide cannot afford to ignore the compelling evidence contained in EFW. Economic freedom provides what politicians keep promising their people: higher incomes, better living conditions, greater personal and financial security and a better overall environment in which to live. SA’s government could improve the lives of its people, which is its declared objective, by adopting policies that are more consistent with economic freedom.

SA’s lowest economic freedom scores are in: government consumption as a percentage of total consumption (4.79), top marginal tax rate (5.0), top marginal tax rate and payroll taxes (4.00), integrity of the legal system– including the effects of crime (4.00), legal enforcement of contacts (3.93), freedom to own foreign currency (5.00), international capital controls (0.77), minimum wages (2.09), hiring and firing regulations (2.16), centralised collective bargaining (4.04), price controls (5.00), business regulation – administrative requirements (2.81). Anyone familiar with SA’s economy will immediately recognise that the study highlights aspects that have the most negative consequences for the economy.

In considering these issues it is critically important for policy makers to remember that it is not for the benefit of the wealthy or even middle income South Africans that the less-free aspects of the economy need to be reformed. The reforms will improve the conditions and future prospects of the poorest members of the population. The government can either leave the poor mired in poverty or reform its policies and provide them with a better future. To borrow a phrase from Milton and Rose Friedman, government is “free to choose”.

Author: Eustace Davie 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 Foundation.

FMF Feature Article / 16 September 2008