Related Articles


GDP growth: A mixed bag


Bruce's List: Eskom puts SA economy in danger

Eskom; a clear and present danger to SA

Boardroom Tails: When stats don’t count

Mentioned in this Article

People: FM Edition:

In 2000, SA was ranked 42nd out of 159 nations in terms of economic freedom. But the 2016 Economic Freedom of the World (EFW) report, released by the Fraser Institute this week, now has SA languishing at 105th.

The 63-place drop is an unwelcome barometer of SA’s decline, matched by Venezuela, which also lost 63 places over that period. Venezuela, however, is now ranked last at 159th and is described in the report as having been "trapped in a lengthy decline in economic freedom". SA, the figures suggest, is in a similar decline.

In a chapter titled "The Critical Role of Economic Freedom in Venezuela’s Predicament", the report concludes that "virtually no country in the world performs well" when they have a low ranking for legal and property rights. "Without a good legal structure there is no room for progress," they say.

The report argues that "state ownership of the commanding heights of the economy is another insidious socialist institution that deprives people of democracy as well as an accountable high-quality government".

One piece of good news from the research on Venezuela is that countries that use the British common law legal system — such as SA — are much more likely to succeed economically than those that adopted the French legal system.

But there’s also a word of warning: any decline in economic freedom is likely to be followed by a decline in political freedom.

These annual ratings provide a useful indicator of a country’s future economic performance: an upward trajectory predicts a better performance; a falling rating foretells economic decline.

At the top are Hong Kong, Singapore, New Zealand and Switzerland. Five nations — Canada, Georgia, Ireland, Mauritius and the UAE — are tied in 5th place, with Australia and the UK tied for 10th place.

On the other end of the scale lie Iran (150th), Algeria, Chad, Guinea, Angola, Central African Republic, Argentina, Republic of Congo, Libya and Venezuela at 159th.

Of course, compared to our Brics peers, SA doesn’t rank badly. Russia is best at 102 (and a rating of 6.66 out of 10), SA is 105th (with 6.64/10), India 112 (6.5/10), China 113 (6.45/10) and Brazil 125 (6.27/10).

However, SA has lost more ground than the other Brics countries over the past 16 years: Brazil and India have fallen 37 places, China has shed 13 places, and Russia has fallen 10 places. By comparison, Russia and China are almost holding steady.

Whereas SA was once a leader in sub-Saharan Africa, it is now way down the list. It trails Mauritius (5th), Seychelles (36th), Rwanda (49th), Uganda (54th), Botswana (59th), Liberia (65th), Kenya (71st), The Gambia (73rd), Zambia (78th), Tanzania (93rd) Namibia (94th), Swaziland (95th) and Lesotho (102nd). Yet 16 years ago, only Mauritius and Botswana lay ahead of SA.

Finland 20, Denmark 21, Norway 32, and Sweden 38, often described as having "socialist government systems", are in the top quartile of economically free countries, which appears to contradict the socialist tag. All four have high income and payroll tax rates and high government consumption expenditure rates as a percentage of total consumption. But in most other respects, such as private ownership of property, they are economically free. Equally, government enterprises and investment are not higher than that of a country such as the US.

However, in a pure socialist country, all property and the means of production would be owned and controlled by the state — which isn’t the case with Finland or the others.

People living in "freer" countries also had a better quality of life. The top quartile of economically free nations had an average GDP per capita of US$41 228 in 2014, compared to $5 471 for bottom quartile nations.

Even the "poor" were better-off in "freer" countries. The average income of the poorest 10% of people living in the top quartile of economically free nations was $11 283, compared to $1 080 in the bottom quartile. Perhaps more alarmingly, the average income of the poorest 10% in the most economically free nations is twice the average per capita income in the least free nations.

Other factors underscore this. Life expectancy is 80.4 years in the top quartile compared to 64 years in the bottom quartile, while political and civil liberties are considerably higher in economically free nations than in unfree nations.

The index measures the degree to which the policies and institutions of countries support economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to enter markets and compete, and security of people and their privately owned property.

In all, forty-two data points are used to construct an index and measure economic freedom in five broad areas: first, size of government; second, the legal structure and security of property rights; third, access to sound money; fourth, freedom to trade internationally; and fifth, regulation of credit, labour, and business.

Of course, small changes can make a considerable difference in the rankings. For example, had SA’s rating remained at 6.74 — just 0.10 higher — it would have been nine places higher on the list. On the other hand, if the rating were still at the 2000 level at 7.08, SA would be tied with Uruguay at 74th.

For SA to improve the country’s ranking to 42nd, the rating would have to improve to 7.4, tied with Albania, El Salvador and South Korea. But for the country to do that, government would have to make fairly major policy changes.

Delving into the rankings reveals where SA has fallen short. Government enterprises and investment, for example, scored only 4 out of 10. The category for the "business cost of crime" scored only 2.95 out of 10, while "hiring and firing regulations" scored an even worse 2.48 out of 10.

Government consumption spending also scored only 4.37 out of 10; while the legal enforcement of contracts scored only 3.93 out of 10, while reliability of police scored only 4.39 out of 10, while "bureaucracy costs" also scored only 3.11 out of 10.

Of course it’s easy to say what needs to be fixed, less easy to implement it.

The short list is this: cut the size of government, take government out of the business of business, give the courts greater independence and fund them properly, make the police force professional, abolish exchange controls, relax the labour laws, and cut down drastically on red tape.

Still, it should be borne in mind that a country’s diminished ranking is also, in part, due to improvements in other nations. The ratings of advanced countries, for example, have improved from 6.9 to 7.7 since 1985. But developing countries have improved even faster, with their score growing from 5 to 6.7 — in part, thanks to a growth rate of per-capita GDP during the period 2000 to 2014 more than six times greater than that of high-income economies.

Unlike some other reports, the index uses objective components as far as possible — including data from the International Monetary Fund, the World Bank, and the World Economic Forum.

Eustace Davie is a director of the Free Market Foundation (FMF)