The world is changing fast and to keep up you need local knowledge with global context.
The Economic Freedom report was launched in 1996 to measure the ability of individuals to make their own economic decisions. The Free Market Foundation (FMF) analyses several indicators such as regulation, size of government, property rights, government spending and taxation to produce its findings. This year’s report captures 2020 data and, therefore, the effect of Covid-19-related restrictions. South Africa’s results are pretty damning, with the high unemployment rate and rising taxes reflecting its decline. Ivo Vegter gives an in-depth analysis of the report, demonstrating the economic consequences of the lack of economic freedom – low growth, failed service delivery, high unemployment – which are visible for all to see. FMF director Eustace Davie says that there is no reason why South Africans should not be as economically free, or even more so, than people living in Estonia, Mauritius or Ireland. “The people of South Africa should demand that their country sets out to become one of the freest in the world, just as Mauritians set out to do and achieve in 20 years.” Sadly, with a government that seems hellbent on stifling economic freedom through nationalising state-owned enterprises, the chance of that seems slim. This article was first published on the Daily Friend. – Asime Nyide
South Africa’s decline reflects poor economic freedom indicators
By Ivo Vegter*
The annual Economic Freedom of the World Report scores major components of liberty in countries around the world. South Africa continues to fall in its rankings, tracking its economic decline.
The Fraser Institute’s Economic Freedom of the World Report 2022, this year covering data up to 2020, was released worldwide on Thursday by its global partner institutions, which in South Africa is the Free Market Foundation.
It measures the degree to which countries’ policies and institutions support economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to enter markets and compete, and security of the person and privately owned property. Forty-two data points are used to construct a summary index, which is then adjusted to measure the extent to which women have the same level of economic freedom as men.
The degree of economic freedom is measured in five broad areas: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation.
Using these data points, it calculates ratings for 165 countries and territories, and ranks them accordingly.
For the second year in a row, Africa is represented in the top 10, in the form of Mauritius, which this year ranks 9th (down from 8th last year) alongside Hong Kong, Singapore, Switzerland, New Zealand, Denmark, Australia, the United States, Estonia, and Ireland.
Globally, economic freedom fell sharply in 2020, thanks to the lockstep implementation of draconian pandemic lockdowns. In one year, ten years of progress in economic freedom was wiped off the accounts.
Still, since 2000 economic freedom has generally improved, alongside rising prosperity, falling poverty, and many other correlated measures of quality of life.
The lowest ranked countries this year are the Democratic Republic of Congo, Algeria, the Republic of Congo, Iran, Libya, Argentina, Syria, Zimbabwe, Sudan, and lastly, our excellent socialist compadres in Venezuela.
Economic freedom in South Africa, up until 2000, was fairly strong, ranking 55th in 1980, 46th in 1990, and 52nd in 2000. Notably, SA’s rating improved substantially during those two decades, from 5.28 in 1980, to 5.86 in 1990, to 6.93 in 2000.
This reflects in large part the transition to democracy. Remember that the apartheid regime was highly interventionist, isolationist, and militarised, with extensive control over major sectors of the economy.
The biggest contributors to the improvement were South Africa’s legal system and property rights, the monetary system (and particularly inflation stability at low levels), and a better regulatory environment.
After the initial dawn, however, things have gone south. Since the year 2000, SA’s rating stagnated while the rest of the world improved, and finally began to decline to 6.55 in the latest report. The country’s ranking dropped to 76th in 2010, 87th in 2015, 93rd in 2019, and 99th in 2020, the most recent year for which data is available. There has not been a new dawn, unfortunately.
This leaves the country stuck in the third quartile of the rankings, in the company of Tanzania, Morocco, and Colombia. Above South Africa in the third quartile we find Namibia, Zambia, Nigeria, Haiti, Russia, and India. Only slightly below SA one finds countries like Lesotho, Laos, Ghana, Vietnam, Brazil, and China.
Besides Mauritius, Cape Verde is the only African country to make it into the top quartile of the rankings. In the second quartile we find Botswana, the Gambia, Uganda, Seychelles, Kenya, and Rwanda.
It ought to be a matter of considerable consternation that these African countries so dramatically outperform South Africa on measures of economic freedom.
All five of the major areas have contributed to South Africa’s decline, except the sound money category.
Inflation erodes both wages and savings. It undermines property rights by deflating the value of cash. Perhaps even more important than the absolute inflation rate is the volatility of inflation. Without being able to predict prices, businesses and individuals cannot effectively plan for the future, and the economic environment becomes riskier for all.
The South African Reserve Bank is one of the few institutions that has held the line and has remained highly responsible and conservative; it has arguably been too conservative in recent years, especially compared to the stimulus support offered by central banks in developed countries since the start of the pandemic.
Despite a relatively high rating of 8.2, South Africa ranks only 101st in the world on measures of sound money. This performance will undoubtedly fall dramatically if the South African Reserve Bank were ever nationalised.
Legal system and property rights
Protecting people and their rightfully acquired property is the most important function of government, which is why a sound legal system is a central element of both economic freedom and civil society.
South Africa’s legal system and property rights rank 56th in the world, which is by far the best ranking in any category, although its rating in this area is relatively low and has substantially declined since 2010.
Unsurprisingly, given that the ANC is hell-bent on implementing expropriation without compensation, the property rights protection score has fallen sharply.
Having failed to muster the two-thirds support it needed to amend the Constitution to permit expropriation without compensation, the ANC is now pushing through legislation to permit expropriation with nil compensation, which the ANC argues is an entirely different thing. (Semantically, the absence of compensation and zero compensation are indeed different, like the difference between a null value and zero. Practically, of course, they are identical.)
The government is also pushing through an amendment to the Deeds Registries Act which will require the registrar of deeds to record the racial classification of property owners. This will reracialise property ownership, as it was under the apartheid regime. This implies that government will know the race of the victim when it expropriates property.
Despite the then-deputy chief justice Raymond Zondo’s excellent work on the Commission of Inquiry into State Capture, the score for impartial courts has also fallen. This is likely a consequence of the Legal Practice Act of 2014, which subjects both attorneys and advocates to the Minister of Justice instead of to independent professional associations, as well as the shamefully political goings-on at the Judicial Service Commission.
Size of government
The size of government, the freedom to trade internationally, and the regulatory burden on the economy have all become worse.
The size of government is a measure of government spending, taxation, and government-controlled enterprises. As it increases, government decision-making displaces individual choice, which reduces economic freedom.
In South Africa, the tax burden remains stubbornly high, and likely exceeds the optimum point of the Laffer Curve. Besides for the billions government wastes on failing state-owned enterprises, it is also hard at work expanding its control over the economy by pursuing expansive and expensive new projects, such as a universal basic income, National Health Insurance, a State Bank, and a second Eskom.
Ideologically, the government is wedded to the ‘developmental state’, in pursuit of the National Democratic Revolution, as a route towards socialism.
Even when President Cyril Ramaphosa said that it is the private sector, not the state, that creates jobs, he backtracked a week later under pressure from the ANC’s alliance partners. This government is incapable of shrinking.
As a consequence, South Africa ranks a woeful 117th out of 165 on the size of its government.
Economic freedom cannot exist without the freedom to trade. If trade is restricted when the counterparties are foreign individuals or companies, economic freedom is reduced.
The minister of trade, industry, and competition, Ebrahim Patel, who spent a decade as economic development minister before taking office in 2019, is a sworn enemy of foreign trade. He is dead set on establishing a self-sufficient economy within South Africa’s borders, despite evidence that autarky reduces not only aggregate global prosperity, but also economic performance at home.
Regulatory trade barriers and compliance costs for importing and exporting are the biggest drags on South Africa’s performance on international trade, which at a rating of 5.8 and a ranking of 123rd out of 165 is the worst across all major categories.
No doubt Patel’s many new import tariffs in recent years will bring these figures down further.
On the final category, regulation, South Africa also performs poorly. Labour regulations have long been an obstacle to employment, but the decline in this category’s rating is driven by worse credit market regulation and worse business regulation.
The report indicates that private sector credit is a major concern as individuals and businesses are heavily overextended, hiring and firing regulations as well as centralised collective bargaining remain major impediments in the labour market, and the administrative requirements and bureaucracy costs of operating a business are especially burdensome.
This, despite endless promises that government will address the ease of doing business and cut red tape. It is yet to be seen whether the team led by former Minerals Council president, Sipho Nkosi, in the Office of the Presidency, which is dedicated to reducing red tape, will have any impact on these ratings. It is hard to be optimistic on this score.
The economic consequences of the lack of economic freedom – low growth, failed service delivery, high unemployment – are visible for all to see.
It is no surprise, then, that South Africa’s GDP growth rate last looked a little lively in the mid-2000s. Per-capita GDP, which rose sharply until 2008, has been on a steady decline since in 2013, and fell off a cliff in 2020.
It is by now well established, and this year’s report reconfirms, that economic freedom is strongly correlated with a wide range of desirable socio-economic outcomes.
GDP per capita, for example, declines sharply as we move from the first quartile of most free countries to the fourth quartile of least free countries.
In fact, because South Africa’s unemployment is so catastrophically high, thanks to anti-employment policies of the government and stridently communist labour unions, the country’s GDP per capita, at $5 659 for 2020, isn’t anywhere near the average of $14 122 for the third quartile. It actually sits below the average of $6 542 for the least free countries in the world.
Those on the left often say that the poor become poorer while the rich become richer, but an analysis of the share of income of the poorest 10% against a country’s economic freedom ranking shows that there is no such relationship. Although the two measures are mostly unrelated, the share of a country’s income earned by the poorest 10% is highest in the first quartile of most free countries.
On nominal income earned by the poorest 10%, the difference between free and unfree countries is stark. While in the most free countries, the poorest 10% earn on average $14 204, in the least free countries, they earn a meagre $1 736.
Life expectancy, too, is strongly correlated with economic freedom. People in free countries can expect to live 14 years longer than people in unfree countries.
Likewise, infant mortality is inversely correlated with economic freedom. In the least free countries, 37 babies die per 1 000 born. In the most free countries, fewer than five die per 1 000 born.
Poverty rates are strongly correlated with economic freedom as well, no matter which poverty line one chooses. In unfree countries, one can expect ten to fifteen times more people to live below any given global poverty line. In the third quartile, where South Africa lies, the averages are not much better.
School enrollment is correlated with economic freedom. The United Nations World Happiness Index is strongly correlated with economic freedom. So are (lack of) conflict, positive environmental outcomes, less corruption, more entrepreneurship, higher economic growth, better human rights, more immigration, higher income, more investment, better labour conditions, higher trade, and any number of other desirable outcomes not specifically mentioned in this year’s report.
This year’s report includes a chapter devoted entirely to policies that would foster a better environment for doing business, but the entire report can be read as a how-to guide for making a country prosperous.
A focus on improving a country’s performance on any and all of the 42 measures the Fraser Institute uses would increase its overall economic freedom ranking, which will inevitably result in the positive outcomes indicated by the correlations mentioned above.
Conversely, pursuing the ANC’s ideological policy agenda of a National Democratic Revolution, towards greater government control of the economy, directing businesses to commit to specific targets on employment and investment, assessing ‘market needs’ and orchestrating production accordingly, and investing taxpayer money into ‘state-led growth’ that never materialises, will inevitably make it harder to reach these desirable outcomes.
The Economic Freedom of the World Report 2022 should serve as a manual for good economic management of the country. Sadly, it is unlikely that ANC cadres will even read it.
There also needs to be a shift in the mindset of voters, who often view socio-economic issues as problems that the government must solve. In fact, socio-economic problems are resolved exactly when government gets out of the way and allows a vibrant private sector to produce, to trade, and to compete to fulfil the broadest possible set of individual needs and wants.
As Phumlani Majozi, a fellow member of the Council of the IRR, said at the report’s launch: ‘We should judge policies by their outcome, not by their intention.’
The views of the writer are not necessarily the views of the Daily Friend or the IRR. If you like what you have just read, support the Daily Friend.
- Ivo Vegter is a freelance journalist, columnist and speaker who loves debunking myths and misconceptions, and addresses topics from the perspective of individual liberty and free markets. Follow him on Twitter, @IvoVegter.
- Clem Sunter backs GG Alcock, applauds township entrepreneurs, tells Malema they’re lighting a path to true economic freedom
- Violence and looting devastate SA; the only way out is economic freedom – FMF
- The rise of Mauritius continues
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.