South Africa is ranked 42nd out of 123 countries on economic freedom index

South Africa and Zambia share 42nd place in the world on the economic freedom ranking contained in the Economic Freedom of the World: 2003 Annual Report released today. Although SA’s ranking improved from last year’s joint 47th its rating remained the same at 6.8 out of a possible 10. Zambia improved from 60th to join SA in overtaking countries like France, Greece, Peru, the Bahamas, Argentina and the Philippines, all countries whose ratings declined. Hong Kong (8.6) retains the highest economic freedom rating, followed by Singapore (8.5), the United States (8.3), New Zealand (8.2), and the United Kingdom (8.2). The rankings of other large economies are Japan, 26; Germany, 20; Italy, 35; France, 44; Mexico, 69; China, 100; India, 73; Brazil, 81; and Russia, 112. The bottom five nations are Guinea-Bissau, Algeria, Zimbabwe, the Democratic Republic of the Congo, and Myanmar. Other nations, for which data are not available, such as North Korea and Cuba, may have less economic freedom. This 7th global economic freedom report ranks 123 nations on 38 variables with data provided at five-year intervals back to 1970. This allows readers to track the progress of countries across three decades and clearly identify trends in economic policy in the countries analysed. Although our “instant information age” demands instant data this meticulous analysis provides fascinating and valuable information about economic trends within and across countries. The Annual Report, published by Canada’s Fraser Institute in conjunction with South Africa’s Free Market Foundation and 57 other independent institutes from around the world, ranks countries on their level of economic freedom. "Freeing people economically unleashes individual drive and initiative and puts a nation on the road to economic growth," says Nobel Laureate Milton Friedman, who participated in the series of conferences that helped formulate the method used for measuring economic freedom. "In turn, economic prosperity and independence from government promote civil and political liberty". According to the report economic freedom is based on personal choice, voluntary exchange, freedom to compete, and protection of persons and property. This requires a policy framework consistent with the rule of law, property rights, limited government intervention, freedom to trade, and sound money. The report seeks to capture the extent to which countries follow these desirable policy options. The current ratings are based on 2001 data, the latest year for which comprehensive information is available. South Africa moves up the rankings by standing still Although SA’s overall economic freedom rating remained unchanged between 2000 and 2001, there were numerous declines and advances in the component ratings. The largest decline was in the rating on regulation of credit, labour, and business, with administrative obstacles to new business accounting for a substantial part of the deterioration followed by time spent with government bureaucracy, collective bargaining and ease of starting a new business. On flexibility in hiring and firing SA rates an abysmal 2.2. Aggrieved South Africans will not be surprised to note that the “hassle factor” has shown up in the figures. On legal structure and security of property rights SA receives a lower rating on the impartiality of the courts but improved ratings on judicial independence and protection of intellectual property. The integrity of the legal system overall is rated very low (3.3 out of 10), a rating that is based on political risk and is derived from the International Country Risk Guide. The category “access to sound money” continued to show improvement with better control over the money supply and reduced inflation variability. Again this will come as no surprise, as SA’s monetary management has been steadily improving. Government involvement in the economy declined slightly with reduced transfers and subsidies accounting for a marginally higher rating. SA’s rating improved on 11 variables, declined on 6 and remained the same on 21, leaving us with the same rating overall. If holding still can be counted as a success, SA succeeded during the review year. Slow progress since 1995 Not unexpectedly, comparisons over a longer period of time throw up greater changes in various parts of the economy. SA’s overall rating increased from 6.2 to 6.8 over the six years from 1995 to 2001 but this apparent small change conceals more than it reveals. For instance, if SA was still rated at 6.2 it would share 69th place in the rankings with Mexico, Tanzania, Cyprus and Lithuania, so relatively small overall improvements require significant policy changes. Being 42nd in the rankings places SA in the second quintile (second 20%) of economically free countries with an average GNI per capita, PPP (US$ 2001) of $12,666, life expectancy of 68.74, income level of $4,653 for the poorest 10% of the population and an average growth rate of 1.88% for the period 1992-2001. At the top end of this quintile we find Japan, Norway, South Korea, Sweden and Taiwan, so SA has some way to go in order to catch up. Factors that have improved our rating since 1995 have been the abolition of military conscription, increased freedom to own foreign currency, improved access to sound money and foreign capital, reduced likelihood of military interference in the affairs of the country, a reduction in the mean tariff rate, less regulatory trade barriers, less variability of tariffs, a reduction in transfers and subsidies, less likelihood of irregular payments to government officials, reduced government consumption expenditure as a percentage of total consumption, and greater freedom to own foreign currency. This is an impressive list of gains. Unfortunately they were partially offset by freedoms lost. There were increased restrictions on foreign capital transactions, a reduction in the integrity of the legal system, reduced competition from foreign banks, increased regulation of labour markets and especially reduced flexibility in hiring and firing, increased collective bargaining, and a significant increase in the regulation of business. Had these retrogressions not occurred SA would have enjoyed a substantially higher rating.. Comparing SA’s economic freedom rating and rate of economic progress with that of Ireland is instructive. SA’s 1995 rating was 6.2 (2001 rating 6.8) compared to Ireland’s 8.2 (2001 rating 8.0) and SA’s GDP per capita (constant 1995 US$) was $3,863 in 1995 and $4,068 in 2001 (an increase of 5.1%) whereas Ireland’s was $18,472 in 1995 and $29,401 in 2001 (an increase of 59.17%). Imagine if South Africa was rated at 8.2 in 1995 and the GDP had grown at the same rate as Ireland’s to R22,500 in 2001 instead of the R14,441 reported by the SA Reserve Bank. All South Africans would have been a great deal better off and the world would now be calling SA the African economic miracle. As Ireland has shown, all it takes is sound policies and political resolve – its economic freedom rating was 6.7 in 1990, slightly behind where SA’s is now. Botswana outperforms the rest of Africa Botswana continues to outperform the rest of the African continent. In 1970, Botswana’s per capita GDP was US$590, less than the sub-Saharan average of US$609. After three decades of relatively high economic freedom, Botswana’s per capita GDP rose to US$3,950 while in most of the rest of Africa, where economic freedom levels were dismal, per capita GDP shrank to US$564. In the 2003 report, Botswana was rated at 7.1, the 26th highest level of economic freedom, tied with eight other nations including advanced nations like Japan and Norway. Changes South Africa should make South Africa can increase its economic freedom by taking a few bold steps. Abolish exchange control to free our currency markets and increase foreign investment and trade. Abolish monopoly protection of the inefficient state industries and sell them. Privatisation of SA’s state industries with simultaneous deregulation would be a large plus for economic freedom. Reduce the crime rate to improve the ability of South Africans to ply their trades freely. Reduce taxes and government consumption expenditure, which are too high for a developing country. Government must select policies that will produce the highest GDP growth to improve conditions for all South Africans as rapidly as possible, particularly the poorest members of the population. It is significant that the poorest 10% of the population of the most free countries earned $6,681 per annum (PPP US$ 2001) whilst the lowest 10% of the least free countries earned $873 (PPP US$ 2001). It is therefore infinitely better to be poor in an economically free and prosperous country than in an economically unfree and poverty-stricken country. There can no longer be any doubt. People’s lives are enhanced in every way by greater economic freedom. Source: Eustace Davie is a Director of the Free Market Foundation. This article may be reprinted without prior consent but with acknowledgement. The views expressed in the article are the author’s and they are not necessarily shared by the members of the Free Market Foundation. FMF Article of the Week\8 July 2003 Subscribe to Weekly Email If you would like to receive our weekly email which includes the Feature Article, a list of new Policy Bulletins and the latest Regulation Update please email us at fmf@mweb.co.za.