Which way to greater prosperity for all?

Trevor Manuel has once again produced a budget that pleases many people. As the government’s financial messenger, he has every right to take pride, not only in the country’s improved economic performance but also in his own prudent fiscal management.

South Africa is one of very few countries that managed during the last decade to contain and in some years even reduce total government expenditure as a percentage of GDP. This was achieved, not by cutting government expenditure, but by ensuring that it increased more slowly than the growth rate of the economy.

Our 2004 Economic Freedom of the World (EFW) report shows, as would be expected, that SA became more economically free upon abandoning apartheid, a system that constituted both political dictatorship and government dominance of the economy. While democracy gave us political freedom, it also gave most people some things that are even more valuable to them in their everyday lives: constitutional protections such as property rights, equality before the law and freedom to trade; economic freedoms that were denied to them in the past. It is these freedoms that allow economies to grow rapidly, lifting the masses out of poverty.

South Africa, with an index rating of 6.8 out of 10, was joint 44th out of the 123 countries listed on the EFW index. At this level, we just creep into the top 40% of economically free countries but when we compare GDP per capita, we are much further down the scale than most countries in that top bracket. Most other countries with the same level of economic freedom have much higher average incomes. However, countries such as El Salvador, Jordan and Peru have lower per capita incomes than ours. What then, should the governments of these apparently non-performing countries be doing?

Governments with sluggish economies may be tempted to try and drive their economies to higher earnings levels by increasing their own involvement. They may adopt a top-down approach to economic development, absorb even greater proportions of available resources and interfere increasingly in the activities of the private producers of goods and services. And the result would be less growth and lower incomes. We merely need to look at the abysmal record of the apartheid government for confirmation that massive state intervention does not work. They gave us 20 years of a shrinking economy. Naturally, every intervening government believes that it will intervene more wisely, or run enterprises more efficiently, but no government ever has the necessary information or risk-taking ability to do the job more efficiently than the private sector. The reason is that governments almost never go bust, only their taxpayers do.

The good news is that those countries with high levels of economic freedom and relatively low incomes are ready for take-off. Their governments need to display patience while making every effort to give their electors even greater levels of economic freedom. Ireland improved its rating from 5.8 to 7.8 between 1975 and 2002, with spectacularly beneficial results. Increasing economic freedom involves removing barriers to entrepreneurship and competition, such as rigidities resulting from protection of government-monopoly enterprises, excessive regulation, interference in property rights and the management of firms, obstacles to the free movement of labour, high taxes, prohibitions on transfers of money, and barriers to investment by, and trade with, foreigners.

South Africa is one of the countries that is ready for take-off, and the government should pay careful attention to the environment in which its entrepreneurs are expected to operate, especially the legal environment. Proper application of the rule of law is a pre-requisite for take-off, which means that there has to be a clear separation of powers between the executive, legislative and judicial arms of government. To comply with the rule of law, the executive should not attempt to exercise arbitrary discretionary powers that have not been conferred on it by the constitution, or by legislation that specifies objective criteria for the exercise of those powers. A legal system that is filled with uncertainty as to what the law intends, and what the courts may decide, is not conducive to high levels of entrepreneurial activity and economic growth.

Consumers of goods and services are, in the final analysis, the ultimate reason for the institution of governments and the existence of producers. They exist in order to serve citizens-as-consumers. That being so, they need to take their instructions from citizens-as-consumers. Elections are a proxy for determining the political wishes of citizens as consumers of government services but their economic wishes are expressed in the prices they pay or decline to pay for goods and services in the market place. Such prices, including the price of labour, should therefore be freely formed in open and voluntary exchanges, free of government intervention. The source of all prices must be the consequence of the subjective value judgements of consumers, otherwise consumers receive less satisfaction in the goods and services available to them, and producers don’t know what to produce.

Many elements of the SA economy are very sound. However, government several years ago said it was looking for a growth rate of at least 6%, which would be achievable if the currently unemployed all had jobs. And it is to the private sector that we must look for the majority of those jobs. What we need is an economy in which entrepreneurs have an environment that is conducive to success in meeting the wishes of consumers, which they do most effectively when all prices are the consequence of consumer judgements and none of official determinations. We need certainty in law, continued fiscal and monetary discipline, internationally competitive tax rates, the absence of exchange controls, consumer sovereignty, reduced regulation, and benign governance of entrepreneurs. Some of these conditions have been promised, but if we can have them all, SA will rapidly achieve greater prosperity and a general reduction in poverty.

Author: Eustace Davie is a director of the Free Market Foundation and the author of Jobs for the Jobless: Special Exemption Certificates for the Unemployed. 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/ 01 March 2005