SA’s 50 Year Tradition of Heavy-handed State Intervention Continues

As the cry goes out for “Economic freedom in our lifetime”, it is crucially important we share a common understanding of the idea. This is not an easy task. Commentators across the ideological spectrum claim the term as their own, or attribute different meanings to the words.

Isaiah Berlin, for example, framed the debate in terms of ‘positive’ and ‘negative’ freedoms. Positive liberty expressed the idea of being free to accomplish the goals one sets for oneself, or the degree to which that is possible. Negative liberty, on the other hand, he defined as freedom from restriction or coercion by other people. It is a more restricted form of freedom, and includes don’t steal, don’t commit fraud, don’t harm others and so on.

Positive liberty can lead to claims for social rights such as housing, education and health care, social rights that a government can provide only because they are paid for by other members of society. If you have the right to a house, someone has to pay to provide the materials and time required to build that house. Similarly, with health-care, education, or the growing number of other claims laid against the state. If you believe that these claims are valid, it’s difficult to know how far government would go before there would be no more taxes it could impose.

The classical liberal view of economic freedom is narrower. It takes the long-standing human tradition of private property and argues for its incorporation in political institutions. Under the classical view, individuals are free to trade their private resources with other similarly free agents, without restriction from third-parties.

These two definitions of economic freedom are miles apart, and are the two extremes that fuel contemporary political debate. To inform this debate, it’s important to understand what each definition of economic freedom would have as its result. It was this question that inspired the development and continued publication of the Economic Freedom of the World report.

It is two decades since Michael Walker of the Fraser Institute in Vancouver debated this idea with the great economist Milton Friedman and agreed that a formal definition – suitable for academic analyses – was required. Today this definition finds expression in a report that draws its data from credible and public reports – such as the World Bank Development Indicators and the Global Competitiveness Report – and incorporates this data into a useable index with five important categories.

The categories answer a simple question: To what degree does the individual decide (or to put it another way, to what degree does the state intervene) in certain economic decisions? The category headings are (a) Size of Government (b) Judicial Systems (c) Sound Money (d) Freedom to Trade with Foreigners, and (e) Regulation of Credit, Labour and Business. All these categories analyse, from slightly different angles, the degree to which we are allowed to hold property and trade it with others.

In 2011, South Africa continues its trend toward higher levels of government intervention and slips four places further down the Economic Freedom rankings to 87th. Top of the freedom list is Hong Kong, Singapore, New Zealand, Switzerland and Australia. Significantly, the United States drops two places to 10th. At the bottom of the list we find Democratic Republic of Congo, Angola, Venezuela, Myanmar and Zimbabwe.

The 2008/2009 period was particularly dramatic in economic terms as governments transferred massive financial debts to their own books and attempted interventions on an unprecedented scale. These actions may be viewed harshly by future generations as the sovereign debt crisis plays itself out. The increased level of intervention shows up in lower scores across the board in this year’s report. The World score for ‘Size of Government’ has fallen from 6.4 to 6.3. More importantly, ‘Freedom to Trade with Foreigners’ fell from 6.7 to 6.5 – a portent of protectionism, tried and failed during the last great depression.

Unfortunately, South Africa continues its 50 year-old tradition of heavy-handed state intervention. We rank 113th in terms of Size of Government. The large involvement in the economy by our parastatals and relatively high tax rates contribute to our poor ranking in this category.

South Africa drops an incredible 55 places to 107th in the regulation of private credit — a function of our National Credit Act. We also remain poor performers relative to the rest of the world in terms of labour law. In the Hiring and Firing category, we rank 123rd. For Collective Bargaining, we’re 119th, and Bureacracy Costs leaves us at 103rd. If nothing else, these results show that the entire country is being harmed by the amount of red-tape imposed on its entrepreneurs.

All the data available from the report is present in a software version that includes the entire set of data from the World Bank Development Indicators. This software makes it easy for researchers to test the economic freedom variables against real-life outcomes. For example: Does more economic freedom create longer, healthier lives and higher levels of income? (The answer – by the way – is yes to both.) Using statistical correlation, we can learn from those countries that have implemented successful policies, rather than those that continue to increase the role of their governments to the detriment of their citizens.

The Economic Freedom of the World report plays an important part in the on-going debate about our political institutions and the role government should play in our economic lives. South Africa should carefully monitor its policy options in light of the devastating poverty and unemployment so prevalent in our society. Though history plays a role, it cannot be perpetually blamed for disappointing policy.

AUTHOR Neil Emerick is a Council Member of the Free Market Foundation. This article, which may be republished without prior consent but with acknowledgement to the author, is adapted from his foreword to the South African edition of the Economic Freedom of the World: 2011 Annual Report. The views expressed in the article are the author’s and may not necessarily be shared by the members of the Foundation.

Note: The Economic Freedom of the World: 2011 Annual Report (together with the software programme for analysing the data) is available from the FMF at R150.00 per copy.

FMF Feature Article/ 22 September 2011