The poor do get richer – in a free economic environment!

The rich do get richer, and if they do not, the poor are in desperate trouble. Wealth creating entrepreneurs become richer only from serving consumers. In the last two decades, rich countries grew faster – 2.3% per capita in real terms – than poor countries' 0.6%. Not all rich countries, of course. Ireland, Luxemburg and Singapore grew fast while Switzerland, Taiwan and Japan lagged badly and Kuwait marked time. Not all poor countries, of course. China, Mauritius and India grew fast while Congo-DR, Ukraine and Sierra Leone shrank fast. None of the 33 currently richest countries went backwards in per capita incomes, unlike 34 of 85 poorer countries.

How can this be? Wouldn't we expect low-income countries to grow faster than high-income countries? Aren't poor people more desperately inclined to fend off starvation, clothe and house themselves better, and acquire more of the trappings of material prosperity? Isn't the marginal value of each extra rand bound to be greater when the worker has fewer rands to begin with? Likewise isn't capital's higher productivity in capital-poor poor countries supposed to draw in capital investment from capital-rich rich countries? And don't poor countries get all the catch-up benefits of adopting proven technologies?

Conversely, aren't rich people luxuriously inclined to sacrifice some working-hours and income in pursuit of leisure and pleasure? Don't they tend to support assorted indulgent policy goals other than mere growth-oriented ones? Quality of life, save the environment – that sort of fuzzy stuff? Yes, probably. But such urges and opportunities are not the whole story, are they? Being at liberty to pursue them is also important.

It turns out that people in poor countries often lack the freedom to do what comes naturally. When you adjust for the level of economic freedom, low-income countries do indeed grow more rapidly than those with higher initial levels of income. Of our rich-group and poor-group sprinters, China has been growing twice as fast as Ireland for decades, from very far behind. The main reason almost half the poor countries are shrinking, instead of at least growing slowly, is that they lack enough economic freedom even to mark time.

The Free Market Foundation of Southern Africa participates in the International Economic Freedom Network to produce the annual Economic Freedom of the World (EFW) index. Averaged for the last two decades, this index explains almost two-thirds of country-to-country variation in current per capita incomes. As scattergrams go, it's quite a 'thin sausage'. Adding Harvard economist Jeffrey Sachs' variable, the percentage of a country's population residing in the tropics, raises explanatory power to 75%.

So greater economic freedom brings faster growth. Over time, that means seriously higher incomes. On average, 33 rich countries now enjoy over $25,000 annual per capita income. 85 poor countries get by on $2000. That's using a rich-poor 'divide' of $10,000 in constant 1995 US$ as reported for 2001 by the World Bank. Sadly, South Africa's per capita income figure was $4068, just below 1970's $4100.

Higher income naturally brings material blessings like 672 mobile phones per 1000 people rather than 112. But critics of capitalism keep searching hopefully for ways to illuminate the downside of growth and prosperity. So what else might we consider? What about non-material blessings like average under-5 child mortality of 6, rather than 77 per 1000 live births? The UN's Human Development Index at 0.91 rather than 0.65? A 94% literacy rate rather than 77%? Longevity of 78 rather than 62 years?

Rich countries' fertility rate is only 1.7 per woman, down from 3.4 for poor countries. Only 19% of their population enjoys the rural life, as opposed to 50% for poor countries. They make themselves save 26% of income for rainy days and investment, rather than 17%. They wrestle with 348 personal computers per 1000 people rather than 43, and are yakked at by 1590 radios per 1000 people rather than 349. Prosperity's not all roses if you don’t like all the things prosperity buys!

In the poor countries, 40% of under-5s are short for their age, and 29% are under-weight. The World Bank reports no similar malnourishment numbers for rich countries, so feel free to guess. But isn't it better to be rich and healthy than poor and sick?

As well as actual long-term economic freedom, its rate of change contributes to growth and prosperity. Fast-growing China, though still not rated as particularly free, has been liberalising progressively for decades – at least in provinces emulating Hong Kong's historical laissez-faire policies and growth. So have both the rich countries and the poor countries taken as groups.

In this context, we can appreciate why South Africa has been left to watch the world go by. Our per capita incomes have marked time since 1970 because our economic freedom is as low now as it was in 1970. After falling steadily from 6.7 to 5.3 (out of 10) during 1970-1990, it rose again to 6.8 in 2001. The recent improvement would bode well for the next decade's growth, except that the rating is likely to fall again now, considering some of the policies that are being followed.

To paraphrase what they say about happy families, there is only one path to growth and prosperity. Short of war, however, there are endless ways to prevent the happy outcome. The 'developmental' state seems set to subject many of them to trial and error, now that government shares international financier George Soros' rejection of 'market fundamentalism'. This may serve Soros’ and government's self-interest, but it would serve citizens better to do what works everywhere else, promote economic liberalisation by every possible means.

Author: Jim Harris is a freelance researcher and writer. 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 \18 May 2004