Economic freedom globally up but SA tumbles down

ECONOMIC FREEDOM in South Africa deteriorates rapidly. The country has tumbled 12 places and is now firmly embedded in the bottom half of the 162 countries and territories evaluated in the Economic Freedom of the World: 2018 Annual Report. This report by the Fraser Institute confirmed SA’s decline from position 82 to 94 due to anti-freedom policies and practices.

In 2003 SA almost made it into the most-free quartile ranking gaining position 45.  Now the country is a 3rd quartile fixture, being three consecutive years in the bottom half.

The Economic Freedom of the World Report  is the world’s premier measurement of economic freedom, evaluating and ranking countries in five areas: size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally and regulation of credit, labour and business. (See full report).

Hong Kong and Singapore again top the index, retaining their first and second rankings.  New Zealand, Switzerland, Ireland, the United States, Georgia, Mauritius, the United Kingdom, Australia and Canada (tied for 10th) round out the top 10. World-wide, there was slight progress.

The 2018 report (prepared by James Gwartney, Florida State University; Robert A. Lawson and Ryan Murphy of Southern Methodist University; and Joshua Hall, West Virginia University) is based on 2016 data, the most recent year with comparable data.

Economic freedom correlates with higher income and a longer life

People living in countries with high levels of economic freedom enjoy greater prosperity, more political and civil liberties, and longer lives. Countries in the top quartile (25 per cent) of economic freedom (such as the U.K., Japan and Ireland) had an average per-capita income of US$40,376 in 2016 compared to US$5,649 for the bottom quartile countries (such as Venezuela, Iran and Zimbabwe).

2018 EFI The difference economic freedom makes

The poorest 10% of the “most free quartile” had a per capita income almost double the per capita income of the least free 25% countries.

The life expectancy is 79.5 years in the top quartile of countries compared to 64.4 years in the bottom quartile.

Fred McMahon , Dr. Michael A. Walker Research Chair in Economic Freedom at the Fraser Institute, observes: “Where people are free to make their own choices in pursuit of opportunities, they lead more prosperous, happier and healthier lives.

South Africans’ economic choices are diminishing

South Africa’s scores had deteriorated in all five key components of economic freedom (from 1 to 10 where a higher value indicates a higher level of economic freedom):

2018 EFI SA's decline in economic freedom

  • In component “Size of Government” SA slipped by 8% due to a larger and more intrusive Government. The shocking evidence at the Zondo Commission about how a Cabinet Minister (Zwane) and senior officials of the ANC tried to arm-wrestle the banks into providing services to the Gupta companies, is just one proof of the SA governmen’s approach.
  • Component “Legal system & Property Rights” suffered due to less secure property rights, a lower integrity of the legal system and slippage in the impartiality of the courts.
  • Freedom to trade internationally” declined by 8% with compliance cost of importing and exporting (a 58% deterioration) and regulatory trade barriers (39% worse) the biggest culprits.
  • The main contributors to the economic freedom decline in the “regulation” component were the demand for bribes and favour-payments (a 62% deterioration in the period) and bureaucratic burden costs (a third worse than 12 years before).
  • Only the “Sound Money” component was up (only slightly) mainly thanks to inflation remaining under control. (High inflation limits the freedom of economic choice. The 2018 deterioration in the exchange rate and the subsequent increase in fuel prices have a similar negative effect on individual and household freedom).

Overtaken by Botswana, Kenya, Tanzania & Cape Verde and trailing Mauritius by 86 positions

The result is that South Africa has been overtaken by several African countries on the economic freedom ranking. An analysis of the Economic Freedom Report data reveals what has happened on the Zuma-Ramaphosa watch from 2012 to 2018.

2018 EFI SA overtaken by Botswana Cape Verde

Botswana, ranked below South Africa in 2012, has improved its position by 23 positions whilst South Africa is now ranked 29 places lower than in 2012.  Where Botswana was breathing in SA’s neck in 2012 (two positions lower), SA has slipped by twenty nine notches in this period and now trails Botswana by fifty places on the Economic Freedom Index.  In the period, the Cape Verde has improved its position by 15 notches and is now just ahead of South Africa on the rankings.   Kenya and Tanzania also hauled South Africa in.

Whilst South Africa was lagging Mauritius by 58 notches in 2012, it is now 86 places behind the island country.

The irony is that South Africa’s current mix of intrusive interventions (including BEE) and a toxic concoction of anti-business and anti-investment policies and strategies and inefficient policing that undermine property rights is contributing to the successes and growth in Botswana and Mauritius. This local context is an incentive for productive knowledge to move and relocate.

The Mauritius Corporate and Business Registration Department and the Botswana Companies and Intellectual Property Authority confirmed to EOSA that South African citizens are quite active in registering companies there. Some of the surnames of directors in new Mauritian companies include Botha, Basson, Coetzee, De Bruyn, Meyer, Van der Walt: names that wouldn’t garner any BEE points in the South African context.

It is no Van der Merwe joke that South Africa’s demographic driven economics  (BEE) drives productive knowledge and talent abroad.  Instead of contributing locally to economic growth and job creation,  such talents now assist  Botswana and Mauritius to outperform South Africa in per capita GDP-growth.

Intrusive ideology even determines six months of breast-feeding

The tumbling down on the economic freedom index will unlikely be considered as a warning bell by Government, given its commitment to a central developmental state.

In fact, the stimulus plan that president Ramaphosa announced as “the new beginning” was accompanied by numerous statements indicating government does not realise the economic disaster they have overseen is due to anti-business policies: they put the blame not on policy and approach, but on massive corruption and an insufficient focus on implementation.  Minister of Public Enterprises Pravin Gordhan remarked: “We often get criticised for having nice policies, but not being able to implement… The [stimulus] plan is a fresh start in that there is recognition that, unless government moves, no one is going to move in this economy. The president said we are going to lead as government. That is an important ‘new start’ to the way we do things in government.

It would do South Africa well if the government would try to understand the Fraser Institute’s Economic Freedom Index: Spending some time with the detail, revealed the following:

  • There is an extremely close correlation (r = 0.9552) between the protection of property rights and being economically free, as well as between being economically free and being high growth countries. 2018 EFI Correlation Economic Freedom and Property RightsThe loosening of the wheel nuts of property rights by the Ramaphosa government will (unless quickly checked and re-tightened) cause wobbly wheels with no traction to improve the ranking on the Economic Freedom Index. The result: rather than resembling a Singapore, Hong Kong or a Mauritius, South Africa will move closer to dropping off the cliff like Venezuela.
  • The whole stimulus plan announced ignore the basic fact that rampant crime as well as an erosion of the judicial system – together with policy uncertainty – transformed the country into one where the success rate of crime is much higher than starting a new business. South Africa’s score for the business cost of crime is only better than those of Libya, Guatemala, El Salvador and Venezuela…  This is a key reason why South African companies are hesitant to invest.

The message of the stimulus plan is short and sweet:  Government will drive the recovery process and ensure proper implementation.

This requires two comments:

  1. As long as the belief of a state-determined economy is pursued by enforcing interventions that impacts on individual and economic freedom, so long the drift towards the bottom quartile will continue.  It is a fallacy that South Africa has good economic policies and a “Back to the National Development Plan call” will not enhance economic freedom. The NDP is a document that calls for state-led economic interventions, even deciding on behalf of families how long breast-feeding should take place… Arrangements to … enable working mothers to breastfeed exclusively for the first six months must be put in place for farm workers. (NDP, p 231).
  2. A focus on trying to do (implement) things better, recalls the famous remark by Russell Ackoff:

“When we correct a mistake doing the right thing, things become better. But when correcting a mistake whilst doing the wrong thing, things become wronger.  It is better to do the right thing wrong than doing the wrong thing right…”

The Enterprise Observatory of SA is an independent research entity exploring the dynamics and regularities of the enterprise world. Analyses of our data sets:

  • indicate a spontaneous order with high regularities emerge in the composition of enterprises in localities and regions
  • shed light on the availability of entrepreneurial space and
  • can be applied to foster enterprise friendly environments.

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