By: Richard J Grant, Professor of Finance & Economics, Lipscomb University, Nashville, Tennessee & Publications Editor, Free Market Foundation
For each resident of a society, increased uncertainty about the social and political constraints under which one lives will reduce one’s ability to make wise choices in the present and to plan for the future. When a government increases its role in the lives of those who live within its jurisdiction, the complexity of the government’s structure and its relationship with its residents will also increase. Some elements of that relationship might reduce uncertainty in several aspects of life. This is both true and beneficial when the government limits itself to the application of the rule of law in the protection of its citizens’ lives, liberty, and property. But when a government’s role grows beyond what is necessary to protect these essentials, the overall effect is increasingly to limit freedom of action and to impose greater uncertainty on a citizen’s pursuit of a livelihood.
The Economic Freedom of the World Index (EFW) offers South Africans detailed insights into the levels of political restriction within which they live. The 2017 Annual Report contains new measures and provides data up to 2015, the latest available reporting period. In terms of international rank among the 159 countries rated, in 2015 South Africa placed 95th, which is the same rank as the previous year. In last year’s report, the ranking that actually appeared was 105th place. The difference is explained by the inclusion of new data and measures, such as the inclusion of a new Gender Inequality Index, which moved South Africa’s ranking favourably relative to many other countries.
The recent stability of South Africa’s rank is a respite from the long-term downtrend in South Africa’s economic freedom relative to the rest of the world. But in absolute terms, South Africa’s EFW rating has declined during the past three years and has trended downward since the year 2000. This decline undoubtedly helps explain South Africa’s recent losses of productivity, its susceptibility to recession, and persistently high levels of unemployment.
In the year 2000, South Africa ranked 46th in economic freedom but has since been surpassed by 49 other countries. Thirteen African countries now rank higher, if we include Mauritius, the Seychelles, and Cape Verde. This means that, not only is South Africa losing its standing in the world, it is in the process of falling behind in Africa also. This remarkable loss of position in the world implies a loss of economic competitiveness relative to most other countries, thereby exacerbating the lost opportunities for productive activity.
The Economic Freedom of the World Index is composed of five broad areas: 1) Size of Government; 2) Legal System and Property Rights; 3) Sound Money; 4) Freedom to Trade Internationally; 5) Regulation. The component scores in two of those areas, Sound Money and Regulation, both improved slightly during 2015. But the other three areas declined.
South Africa’s strongest area score continues to be in the category of Sound Money, for which it achieves an index score of 8.07 but a ranking of 99th, which is below the world median. The score would be much higher if South Africans were less restricted in their access to foreign currency and in the right to own foreign-currency bank accounts. But the South African rand has a reasonably predictable inflation rate and, relative to other institutions, people generally have confidence in the management of the South African Reserve Bank. During 2015, the inflation rate remained within the Bank’s target range of 3% to 6% – though it did subsequently overshoot, rising as high as 7%, and spent most of 2016 outside the target range before falling back below 5% in mid-2017. That period of increased inflation, and the volatility through its rise and fall, give us reason to expect that next year’s Sound Money rating will show a decline with possible improvement the following year.
Within the area of Regulation (Area 5), credit market regulations showed the most significant improvement. But labour market regulations continue to pull down the area score. In particular, the already burdensome hiring and firing regulations worsened, as did the regulations concerning centralised collective bargaining. Business regulations are increasingly onerous with administrative requirements and bureaucracy costs continuing to weigh heavily.
No one who lives in South Africa can avoid noticing the high levels of official corruption that affect the operations of most businesses and many aspects of daily life. The EFW rating reflects the deterioration in the score that measures the pressures on business for extra payments, bribes, and favouritism. This shows up also in Area 2, Legal System and Property Rights, through the falling score for reliability of police. The integrity of the legal system scores poorly, as does the legal enforcement of contracts. Current events offer little hope for improvement in these scores.
Area 1, Size of Government, consistently shows the lowest scores and in 2015 contributed the worst deterioration. Increased tax burdens, as measured by top marginal tax rates, explain most of the deterioration. The government consumption score shows a slight improvement with little change in the previous five years – though the long-term trend still shows a worsening since the time of the transition.
Similarly, the Freedom to Trade Internationally (Area 4) shows little recent change but a longer-term downtrend. Regulatory trade barriers and compliance costs of importing and exporting remain among the most burdensome items. Of all the EFW subcomponents, the category of capital controls continues to show the poorest rating by far. Despite a relaxation in the past two decades, South Africans have long been subject to highly restrictive regimes of exchange controls, which inhibit all international trade and investment but place domestic residents at a particular disadvantage.
Our measures of economic freedom give us insight into our history and to the current events that swirl around us. Losses of economic freedom are commensurate with lost potential. The ability of people to make a living and to flourish is hampered by government that is ineffective in those functions appropriate to its nature and the maintenance of civil society just as surely as it is hampered by the intrusion of government into those aspects of life where it can be only a net burden.
It is worth reminding ourselves that the direction of changes in South Africa’s Economic Freedom of the World rating ultimately shows itself not only in the daily news but in our daily lives.
This article is the preface to the Economic Freedom of the World: 2017 Annual Report – South African Edition