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Economic freedom matters not only for the benefit of the wealthy or middle income South Africans but reforms will improve the conditions and future prospects of the poorest members of the population. And as the Free Market Foundation’s Eustace Davie says below, government can continue to leave the poor mired in poverty, or it can reform is policies for a better future. This comes after South Africa slipped out of the top 100 in this year’s Economic Freedom Index, and is only the 13th highest placed African nation. And what’s more concerning, is that South Africa has fallen 63 places since 2000. Government can lay ignorant of such reports, but the evidence is piling up to what would be deemed maladministration in any listed company. And change always has to start at home, enter the ANC. – Stuart Lowman
By Eustace Davie*
SA’s economic freedom ranking for 2016 has declined from 93rd to 105th out of 159 countries according to the Economic Freedom of the World: 2016 Annual Report (EFW) released on 15 September. The drop from the year 2000 is remarkable: SA was then ranked 42nd, 63 places above its current ranking.
The country’s rating declined from 6.74 (out of 10) in 2013 to 6.64 in 2014. Within the Sub-Saharan African sphere, South Africa is now behind Seychelles (36), Rwanda (49), Uganda (54), Botswana (59), Liberia (65), Kenya (71), The Gambia (73), Zambia (78), Tanzania (93), Namibia (94), Swaziland (95), and Lesotho (102).
Mauritius, rated 7.98 and ranked joint 5th is the most economically free country in the African sphere. SA’s rating is well above the average for all sub-Saharan African countries, which is dragged down by such unfree countries as Republic of Congo, Central African Republic, Angola, Guinea, Chad, Zimbabwe, Democratic Republic of Congo, Ethiopia and Mauritania, which feature at the bottom end of the listing with the likes of Venezuela, Libya and Argentina. The reasons why the economies of these countries perform relatively well or badly are no mystery: they are the consequence of deliberate policy actions followed by their governments.
Does it matter if SA slips in the EFW ratings? Does it matter if SA follows the demands made by some political activists and abandons monetary and fiscal discipline; destroys the independence of the judiciary by exerting executive control over it; disregards the security of property rights and takes property without adequate compensation or right of appeal to the courts; abrogates the freedom of the press; nationalises health insurance and health care provision; regulates every aspect of business, and generally adopts all the trappings of authoritarian government? According to the EFW study, it does matter. The reason is that countries with greater economic freedom have higher economic growth, higher per capita incomes and fare better on all the United Nations measures of human development. If the government is serious about improving quality of life, it matters.
Full economic report (SA version):
This year’s report includes an analysis, The Critical Role of Economic Freedom in Venezuela’s Predicament by Hugo J. Faria and Hugo M. Montesinos-Yufa, in which the authors find a direct correlation between greater economic freedom and less poverty, or conversely, the authors find worse poverty where there is less economic freedom. The freer countries are, the better their economies perform. During the past two centuries, the per-person income of the world has expanded tenfold, and in the West per-capita income is now 20 times the figure of 1820 (Maddison, 2007).
The key ingredients that underpin the measurement of economic freedom in EFW are: personal choice, voluntary exchange co-ordinated by markets, freedom to enter and compete in markets, and protection of persons and their property from aggression by others. To the fullest extent possible the index uses objective components, but incorporating important matters such as legal and regulatory measures requires the use of data based on surveys, expert panels and generic case studies. Complete methodological details of the compilation process are provided in the EFW publication. The index measures the degree of economic freedom in five major areas: 1. Size of government: expenditures, taxes and enterprises 2. Legal structure and security of property rights 3. Access to sound money 4. Freedom to trade internationally, and 5. Regulation of credit, labour and business.
Governments world-wide cannot afford to ignore the compelling evidence contained in EFW. Economic freedom provides what politicians keep promising their people: higher incomes, better living conditions, greater personal and financial security and a better overall environment in which to live. SA’s government could improve the lives of its people, which is its declared objective, by adopting policies that are more consistent with economic freedom.
SA’s lowest economic freedom scores are in: government consumption as a percentage of total consumption (4.37), top marginal tax rate (5.50), top marginal tax rate and payroll taxes (5.00), integrity of the legal system (3.33), regulatory costs of sale of real property 4.39, business costs of crime (2.95), , freedom to own foreign currency bank accounts (5.00), regulatory trade barriers (4.94), international capital controls (0.77), hiring regulations (2.48), centralised collective bargaining (3.87), administrative requirements (3.15), and bureaucracy costs (3.11). Anyone familiar with SA’s economy will immediately recognise that the study highlights aspects that have the most negative consequences for the economy.
In considering these issues it is critically important for policy makers to remember that it is not for the benefit of the wealthy or even middle income South Africans that the less-free aspects of the economy need to be reformed. The reforms will improve the conditions and future prospects of the poorest members of the population. The government can either leave the poor mired in poverty or reform its policies and provide them with a better future.
- Eustace Davie, Director, Free Market Foundation
Free Market Foundation media release
South Africa ranks 105 out of 159 countries and territories included in the Economic Freedom of the World: 2016 Annual Report, released today by the FMF in conjunction with Canada’s Fraser Institute.
Last year, South Africa ranked 93.
“South Africa has steadily lost ground on the EFW rankings,” said FMF Director, Temba Nolutshungu. “It is tragic that a country ranked 42nd in the world in 2000, just outside the top 25% of countries in the world, should have fallen 63 places in the rankings in 15 years to a point where it now ranks in the bottom 35%. Studies have shown that there is a significant though not immediate correlation between economic freedom, economic growth and human welfare so a steady and dramatic decline in economic freedom in the country should not be taken lightly. It is time for government policy to start taking the country in the other direction – towards economic freedom, high growth, a high demand for labour, prosperity and justice for all.”
Hong Kong again tops the index, continuing its streak of number one rankings, followed by Singapore, New Zealand, Switzerland, Canada, Georgia, Ireland, Mauritius, and United Arab Emirates. Australia and the United Kingdom tied for 10th.
“Hong Kong is still number one, but because democracy is the best safeguard of freedom, if China, which ranks low in economic freedom, encroaches on Hong Kong, we can expect Hong Kong’s ranking to fall,” said Fred McMahon, the Dr Michael A. Walker Research Chair in Economic Freedom with the Fraser Institute.
The 2016 report was prepared by James Gwartney, Florida State University; Robert A. Lawson, Southern Methodist University; and Joshua Hall, West Virginia University.
It is based on data from 2014 (the most recent year of available comparable data) and measures the economic freedom (levels of personal choice, ability to enter markets, security of privately owned property, rule of law, etc.) by analysing the policies and institutions of 159 countries and territories.
“Economic freedom leads to prosperity and a higher quality of life, while the lowest-ranked countries are usually burdened by oppressive regimes that limit the freedom and opportunity of their citizens,” McMahon said.
The 10 lowest-ranked countries are: Iran, Algeria, Chad, Guinea, Angola, Central African Republic, Argentina, Republic of Congo, Libya and lastly Venezuela. Some despotic countries such as North Korea and Cuba can’t be ranked due to lack of data.
Other notable rankings include Germany (30), Japan (40), France (57), Russia (102), India (112), China (113) and Brazil (124).
According to research in top peer-reviewed academic journals, people living in countries with high levels of economic freedom enjoy greater prosperity, more political and civil liberties, and longer lives.
For example, countries in the top quartile of economic freedom had an average per-capita GDP of US$41,228 in 2014, compared to US$5,471 for bottom quartile nations.
Moreover, the average income in 2014 of the poorest 10 per cent in the most economically free countries (US$11,283) dwarfed the overall average income in the least free countries (US$5,471). And life expectancy is 80.4 years in the top quartile of countries compared to 64 years in the bottom quartile.
The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 nations and territories. It’s the world’s premier measurement of economic freedom, measuring 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.
— The Fraser Institute (@FraserInstitute) August 9, 2016
South Africa’s scores in key components of economic freedom (from 1 to 10 where a higher value indicates a higher level of economic freedom):
– Size of government: changed to 5.54 from 5.55 in the last year’s report
– Legal system and property rights: changed to 5.79 from 5.81
– Access to sound money: changed to 8.04 from 8.17
– Freedom to trade internationally: changed to 6.71 from 7.04
– Regulation of credit, labour and business: changed to 7.11 from 7.15
“It is unusual for a country’s scores in every economic freedom component to decline from one year to the next as South Africa’s has done between 2013 and 2014,” said FMF director Eustace Davie. “Another dubious ‘achievement’ by South Africa is a 63 place drop (42 to 105) in the economic freedom rankings in the past 15 years. The only countries that achieved larger declines during the same period were Argentina 121 (35 to 156) and Venezuela 65 (94 to 159),” he said.
Hong Kong has the highest level of economic freedom worldwide, with a score of 9.03 out of 10, followed by Singapore (8.71), New Zealand (8.35), Switzerland (8.25), Canada (7.98), Georgia (7.98), Ireland (7.98), Mauritius (7.98), United Arab Emirates (7.98), Australia (7.93), and United Kingdom (7.93).
Other notable countries include the United States (7.75), Germany (7.55), Japan (7.42), Russia (6.66), India (6.50) and China (6.45).
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