Economic unfreedom in SA

Neil Emerick says govt interference
has cost us dearly, with our
post-2009 GDP growth averaging just 1.9% a year
Economic Freedom – The Key to Prosperity
The Economic Freedom Fighters (EFF) want ‘economic freedom’ for the
black majority, to be achieved by nationalising mines and expropriating
land without compensation. The African National Congress (ANC) has
similar ambitions, as the Freedom Charter shows. But the EFF/ANC idea
of economic freedom contradicts the general global understanding of
the term, which emphasises individual choice, protection for property
rights, and respect for market principles.
Economic freedom, in the true sense of the term, stimulates investment
and employment. It makes for faster economic growth and increased
prosperity for all, including the most poor. Economic freedom can also
be measured and its benefits assessed in terms of hard statistical data,
as the Fraser Institute of Canada has been doing for many years via its
global index of economic freedom.
Once apartheid ended, South Africa could have risen steadily up the
Fraser Institute’s index. Instead, as state intervention has intensified, so
its ranking has deteriorated, as the 2014 index again reveals. If South
Africa follows the EFF/ANC narrative still further, it could slip into the
‘least free’ category of countries. In such states – which include both
Zimbabwe and Venezuela – growth is negative or minimal, and poverty
intensifies for everyone except a small political elite.
The EFF, the ANC, and economic freedom
In the May 2014 general election, Julius Malema and his flamboyant
Economic Freedom Fighters won 25 seats in the National Assembly
and 6% of the national vote. The EFF say they want ‘economic
freedom’ for the black majority, to be achieved through the
nationalisation of the mines, the expropriation of land without
compensation, and a state-directed programme of industrialisation
behind high tariff walls and other barriers to global trade. Since
many of these proposed interventions are barred by the
Constitution, the EFF also wants ‘the dismantling of the elite pact
forced on the people in 1994′. Moreover, as Mr Malema recently told
President Jacob Zuma, the ANC ‘can no longer make the excuse of
[not having a] two-thirds majority [to change the Bill of Rights]
because the EFF can give it to you now’.
Few commentators take the EFF very seriously, for its 6% of the
vote lags far behind the 62% won by the ruling African National
Congress (ANC) in the last election. However, the ANC in fact has
many of the same ambitions as the EFF. For example, the Freedom
Charter of 1955 speaks of transferring ‘the mineral wealth beneath
the soil, the banks, and monopoly industry’ to ‘the ownership of the
people as a whole’. It also pledges to ‘re-divide the land among
those who work it’. Moreover, the ANC regularly describes the
charter – drawn up some 60 years ago with significant communist
input – as its abiding policy ‘lodestar’.
In addition, the ANC remains deeply committed to a national
democratic revolution (NDR) aimed, among other things, at
‘eliminating’ existing property relations. The ruling party shares this
objective with its allies in the tripartite alliance: the Congress of
South African Trade Unions (Cosatu) and the South African
Communist Party (SACP). Both Cosatu and the SACP openly
identify the NDR as providing the fastest and most direct route to
socialism and then communism.
In the interim, the tripartite alliance remains intent on bringing about
‘radical socio-economic transformation’ in this ‘second phase’ of the
national democratic revolution. Like the EFF, the ANC also claims
that increased state intervention will bring about ‘economic freedom’
in South Africa. This makes it important to understand what the
ANC and EFF mean by this term.
The ANC and EFF definition of ‘economic freedom’ is based on
Marxist ideology, which is adamant that ‘economic emancipation’
can never be achieved under capitalism. In addition, though South
Africa gained its independence from Britain more than a century
ago, both the EFF and the ANC proclaim a continuing need to free
the country from the ‘economic bondage’ of its colonial past.
In the ANC/EFF perspective, South Africa was long subject to
‘colonialism of a special type’: a system in which the white minority
was effectively a colonising power and the black majority was its
colony. White wealth, they say, thus has nothing to do with skills,
enterprise, or technological advantage but derives solely from a
ruthless exploitation of the black majority. The only way to
overcome this historical injustice and bring about ‘economic
freedom’ from persistent oppression is through a comprehensive
redistribution of land and other resources from white to black South
The ANC/EFF concept of economic freedom is very different from
the general understanding of this term across the world. Definitions
of economic freedom have, of course, varied to some degree since
1776, when Adam Smith published his famous book, The Wealth of
Nations . However, the term usually connotes individual liberty,
freedom to trade, and respect for market principles, property rights,
and the rule of law. Since the late 1980s, the concept has been
further refined by the Fraser Institute of Canada, which (in
combination with other scholars) has found a way of measuring
economic freedom and quantifying the benefits it brings.
The beginnings of the economic freedom index
The idea of defining economic freedom in a measurable way
emerged in 1984, at a meeting of the Mont Pelerin Society, a group
formed in 1947 to study the virtues and defects of market-oriented
economic systems. Delegates asked whether George Orwell’s
powerful book 1984 had erred in predicting the emergence by that
year of an all-encompassing and intrusive totalitarian state. The
spread of democracy to many countries suggested that Orwell had
been off the mark, as political freedom had become widespread. But
the Fraser Institute’s Michael Walker raised the question whether
political freedom and economic freedom were the same thing. In
response, Milton Friedman said it would be fruitful to define
economic freedom in measurable terms and then start looking for
empirical evidence of its effects.
Following on from this Mont Pelerin meeting, Professor James
Gwartney of Florida State University and his post-graduate student
Robert Lawson (now a professor at the O’Neil Center for Global
Markets and Freedom in Texas) came up with the idea of creating an
‘index’ of economic freedom. Data used in compiling the index
would have to be verifiable, not based on perception, they stressed.
This meant it would have to be drawn from empirical reports and/or
national accounts, which could easily be verified. Countries would
then be allocated a score from 1 (the worst for economic freedom)
to 10 (the best), based on the distribution of the underlying data.
In 1989/90, an initial index was compiled and made available to
interested parties. This assessment covered 79 countries and was
based on 11 variables. Some commentators complained that the
index contained too few variables. How could economic freedom be
defined and measured in such scant terms? However, when people
looked at which countries came out high or low on the index, its
outcomes seemed to pass a general ‘sniff’ test.
The Fraser Institute came in to help in the early 1990s, and the first
edition of the index was published in 1996. It then covered 102
countries and canvassed 17 variables. By 2014, the index had
expanded to evaluate 152 countries in terms of more than 50
variables. It had also assembled data covering more than 40 years,
allowing it to track trends from the early 1970s.
Five categories of economic freedom
The index has five categories, each of which incorporates various
sub-categories. Its data is drawn from international reports, such as
the World Development Indicators compiled by the World Bank, the
International Country Risk Guide compiled by private risk analysts in
the PRS Group, and the Global Competitiveness reports of the World
Economic Forum and the Swiss-based Institute for Management
The five categories are: (1) Size of Government; (2) Legal Structure
and Security of Property Rights; (3) Sound Money; (4) Freedom to
Trade with Foreigners; and (5) Regulation. Scores are aggregated
within each category and are given equal weight when they are
combined to give a single index total. In analysing the significance
of these scores, commentators often assign countries to one of four
quartiles, ranging from the ‘most free’ to the ‘least free’.
Size of Government
This category looks at the extent of government spending relative to
the rest of the economy. The more expenditure there is by the
government, the fewer choices business or consumers are likely to
have. For example, if the government dominates health-care or
education, then there are fewer opportunities for entrepreneurs to
explore different methods and levels of service in those spheres.
Also relevant is the role of state-owned enterprises, which often
have monopoly rights over energy, telecommunications and the like,
thereby restricting competition and undermining the vibrancy of an
Legal Structure and Security of Property Rights
This category assesses judicial independence and the impartiality of
the courts, along with the extent to which property rights are
protected and contracts enforced. Its emphasis, in a nutshell, is on
the extent to which the rule of law is upheld.
Sound Money
This third component of the index may seem a strange bedfellow to
the others, but a government’s ability to manage the money supply
through the actions of its central bank often leads to high and
erratic rates of inflation, which distort price signals and increase
business and individual risk. High levels of inflation are also a major
disincentive to the savings and investment vital to economic growth,
and represent an effective transfer of wealth from cash-holders (via
creeping tax brackets and reduced purchasing power) to the
Freedom to Trade with Foreigners
This fourth category covers trade barriers such as import tariffs and
exchange controls. When governments raise tariffs or arbitrarily
attempt to choose ‘winning’ industries to support with subsidies and
tax incentives, they distort the business environment. Higher tariffs
make goods more expensive for consumers, while also raising input
costs and eroding the competitiveness of firms wanting to penetrate
export markets. Exchange controls on capital are also extremely
damaging, as they encourage citizens to try to remove their capital
and raise red flags to foreign investors thinking of bringing in money
and skills.
This fifth component of the index is broken down further into the
sub-categories of credit (which covers issues such as the
ownership of banks and the availability of private credit); labour
(which deals with hiring and firing rules, plus minimum wages); and
general regulation (the difficulties in registering or conducting a
business, and whether bribes need to be paid to bypass
Global index outcomes over 20 years
The Fraser Institute’s index of economic freedom is compiled on an
annual basis, allowing comparisons of performance from one year
to the next. However, 20-year trends over the period from 1990 to
2010 have also been compiled, providing a further useful overview.
Data for the two decades from 1990 to 2010 shows that gross
domestic product (GDP) per head in the ‘least free’ countries grew
at an annual average rate of 1.6% over this period. By contrast, the
‘most free’ grew by 3.6% on average, or more than double. Because
of this difference in growth rates, the least free countries recorded
average GDP per head of $5 200 in 2010, while the most free
recorded close on $38 000 – almost seven times higher. Moreover,
the average per capita income of the poorest 10% of people in the
least free countries was $1 200, whereas in the most free countries
the equivalent figure was nearly $12 000, or almost ten times as
Index data also shows that economic freedom helps attract
investment and stimulate economic growth. In 2006, in an article
published in Kyklos , an economics journal, Gwartney and his
colleagues showed that countries with more economic freedom
attract more private sector investment. They also demonstrate
higher levels of economic growth per unit of investment than do
less free countries. Moreover, economic freedom has a direct and
positive impact on economic growth, as a one-unit increase in the
freedom score generates a corresponding 1.5 percentage point
improvement in the long-term rate of economic growth.
Global index outcomes in 2014
The 2014 index identifies the countries with the ‘highest’ level of
economic freedom as: Hong Kong, Singapore, New Zealand,
Switzerland, Mauritius, United Arab Emirates, Canada, Australia,
Jordan and Finland. By contrast, countries with the ‘lowest’ levels of
freedom are: Myanmar, the Democratic Republic of the Congo,
Burundi, Chad, Iran, Algeria, Zimbabwe, and Argentina. Right at the
bottom of the list is Venezuela.
Venezuela is particularly interesting, as the EFF often singles it out
as an important role model for South Africa. In 1990, Venezuela
ranked similarly to South Africa, coming in at 56 th place while South
Africa was one step down in 57 th position. Thereafter, however, the
Venezuelan government began stepping up state controls and
dirigiste interventions.
Between 2005 and 2011, it took control of oil, gas, and gold
operations, nationalised a key steel producer and two major
agricultural suppliers, seized much of the cement industry, and
began expropriating allegedly unproductive farms. It also took over
various banks, while President Hugo Chavez vowed to nationalise
any bank that failed to meet the state’s lending requirements. The
business environment became increasingly onerous for both
domestic and international companies, though this was masked to
some extent by the country’s oil wealth.
Those involved in compiling the index quickly realised that a
dramatic decline in economic freedom was taking place in
Venezuela. This meant the country offered a real-life means of
testing whether increased state intervention and control would in
fact generate the prosperity promised by the government. Sadly for
Venezuelans, the opposite occurred. Rampant inflation, corrupt
governance, and economic devastation have been the main fruits of
the nationalisation and other state controls implemented by Chavez.
Moreover, as Venezuela has sunk to the bottom of the index, so
poverty has grown.
Also particularly relevant is the performance of Hong Kong,
Singapore, South Korea and Taiwan. The EFF often identifies these
as countries for South Africa to emulate, claiming that these nations
pursued heavily interventionist policies and reaped exceptional
economic growth as a result. However, the economic freedom
scores of these countries over 30 years suggest a different story.
Both Hong Kong and Singapore have led the economic freedom
index for the past 30 years. South Korea and Taiwan have been in
the top 30 for the same period, while in the 2014 report, Taiwan was
ranked as the 18th most free country out of 152. To the extent that
these nations have pursued state-led industrial policies, this has
been against the background of high levels of private ownership and
entrepreneurial freedom.
Longer-term trends, going back as far as 1970, further illustrate this
point. In 1970, countries in the bottom decile of the index had
average GDP per capita of $1 182, while in 2011 the equivalent figure
was $1 224, showing these countries had experienced virtually no
growth at all over 40 years. However, over the same period,
countries in the top decile – including Hong Kong and Singapore –
went from average GDP per head of $13 384 in 1970 to $29 886 in
2011, a doubling of income between generations.
South Africa’s performance since 1994
In the 1995 report, South Africa was ranked 46th out of 123
countries. Since then, however, South Africa’s ranking has fallen
significantly, putting it 93 rd out of 152 countries in 2014. This puts
South Africa alongside the likes of Mexico, Haiti, Tanzania, and
Swaziland. While South Africa still scores relatively well in the areas
of judicial impartiality, private ownership of banks, and the freedom
of foreigners to visit, it scores particularly badly on ‘hiring and firing
regulations’ (142nd out of 152) as well as on ‘centralised collective
bargaining’ (139th), ‘business costs of crime’ (136th) and
‘government consumption spending’ (123rd).
Government expenditure in South Africa, as a percentage of GDP, is
now among the highest in the world. If increased government
expenditure truly boosted economic growth, South Africa would
have one of the highest growth rates in the world. Instead, high
consumption spending by the state has undermined growth. Hence,
growth in GDP per capita has been minimal, averaging 1.6% since
1995 and coming in at 0.6% in 2013.
Contrast this with Hong Kong’s growth in GDP per capita of close to
2.6% over the same period. This difference in percentage points may
not seem much, but compounding rates in fact make for very
meaningful differences. At Hong Kong’s growth rate, average
incomes will double in 28 years. South Africa will take 44 years to
achieve the same doubling.
The prognosis for South Africa
Already, diminished economic freedom in South Africa has cost the
country heavily. Since 2009, the annual rate of economic growth has
averaged a mere 1.9%, putting South Africa far behind many other
sub-Saharan African countries significantly less well endowed with
infrastructure, mineral wealth, and other resources.
Slow growth has compounded the unemployment crisis, especially
among the relatively unskilled African majority. The number of
unemployed South Africans, on the official definition that excludes
those not actively seeking work, has thus more than doubled under
the ANC’s watch, rising from roughly 2m in 1994 to more than 5.2m
in 2014. On the expanded definition, which counts discouraged
workers, the picture is even worse, the number of jobless South
Africans having risen from 3.7m in 1994 to some 8.3m in 2014.
Many of the unemployed are young people aged 15 to 24, among
whom the official unemployment rate is 52%. On the expanded
definition, youth unemployment stands at a staggering 65%.
At present, South Africa remains within the third quartile (one up
from the ‘least free’ category) of the countries measured by the
index. Though the heavy hand of the state has been increasing, the
country still enjoys a significant measure of economic freedom. This
has helped to sustain growth, albeit at low levels. It has also allowed
extensive redistribution via the budget, which has greatly benefited
the poor over the past 20 years.
However, if South Africa embarks upon the path advocated by the
EFF and implicitly endorsed by the ANC, the country could drop into
the ‘least free’ category within the index. As illustrated by Zimbabwe
and Venezuela, investment would then diminish while the growth
rate would deteriorate, joblessness would worsen, and inflation
would soar.
By contrast, if South Africa could be freed from outdated Marxist
ideology and dirigiste state interventions, the country could start
rising up the index of economic freedom. This, in turn, would lead to
more investment, faster growth, additional jobs, and increased
prosperity for all – including the poorest and most marginalised.


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