For­mer com­mu­nist coun­tries have passed SA by open­ing their mar­kets

Plung­ing eco­nomic free­dom rank­ing shows why job­less in­crease while Bul­garia’s GDP per capita has rock­eted

Business Day - - OPINION - Davie is a di­rec­tor of the Free Mar­ket Foun­da­tion.

In 2000, SA was listed as the world’s 42nd most eco­nom­i­cally free coun­try. That same edi­tion of the Eco­nomic Free­dom of the World (EFW) re­port listed Bul­garia, a for­mer com­mu­nist coun­try, at 108, 66 places lower on the rank­ings. Four­teen years later, the po­si­tions were re­versed: Bul­garia had shot up the rank­ings to 45 and SA had plunged to 105, 60 places lower than Bul­garia.

The gains in GDP per capita of Bul­garia and other for­mer com­mu­nist or so­cial­ist coun­tries that have opted for greater eco­nomic free­dom, are strik­ing. With­out fail, they have out­per­formed coun­tries such as SA that are slid­ing down the rank­ings. It is time for SA to take note and change di­rec­tion.

The loss of eco­nomic free­dom re­flected in SA’s plung­ing rank­ing re­flects why the coun­try is in re­ces­sion, why un­em­ploy­ment mea­sured by the ex­panded def­i­ni­tion to­tals 9.3-mil­lion peo­ple (36.4% of the po­ten­tial work­force), why the economies of other coun­tries such as Bul­garia, with an un­em­ploy­ment rate of 9.8%, are do­ing so much bet­ter than SA’s in the dif­fi­cult eco­nomic con­di­tions world­wide.

The di­rec­tion of change in the eco­nomic free­dom rat­ings and rank­ings have con­se­quences. The EFW analy­ses, which have been car­ried out an­nu­ally for more than two decades, show con­clu­sively that in­creased eco­nomic free­dom leads to higher eco­nomic growth, higher in­comes per capita, higher in­comes for the poor­est peo­ple, higher life ex­pectancy and greater po­lit­i­cal and civil rights.

The changes in eco­nomic free­dom rank­ings show that, since 2000, South African cit­i­zens have lost some of their free­doms, while cit­i­zens of Bul­garia and many other for­mer Soviet and east­ern bloc coun­tries have gained.

It re­ally mat­ters that the coun­try’s EFW rank­ing has de­clined so badly, while Bul­garia’s has im­proved by a sim­i­lar num­ber.

A sim­ple test in­di­cates how much it mat­ters. The World Bank re­ported that in 2000, SA’s GDP per capita (in cur­rent US dol­lar) was $3,037, and Bul­garia’s $1,609. In 2014, SA’s was $6,480 and Bul­garia’s $7,853.

SA’s GDP per capita in­creased by a mere 113% in the 14 years, com­pared with Bul­garia’s 388%. Con­sider how much bet­ter off South African cit­i­zens would have been if their in­come growth had av­er­aged the same as Bul­garia’s or those of other for­mer com­mu­nist or so­cial­ist coun­tries that opted for greater eco­nomic free­dom. Bul­garia gained in the rat­ings by sell­ing gov­ern­ment en­ter­prises and in­vest­ment by pub­lic auc­tion, which re­duced the gov­ern­ment’s role in the econ­omy and boosted the share of the pri­vate sec­tor. It dras­ti­cally re­duced the in­fla­tion rate by rein­ing in the rate of money growth, re­moved re­stric­tions on the free­dom to own for­eign cur­rency bank ac­counts and sig­nif­i­cantly re­duced tax rates. Gov­ern­ment en­ter­prises and in­vest­ment as a share of the econ­omy de­clined from 38.95% (2000), to 15.41% (2014), hav­ing been 98.40% in 1990 un­der com­mu­nist or so­cial­ist rule.

In­fla­tion de­clined in the same 14 years from 10.32%, to -1.42% and the an­nual money growth, from 76.68%, to 9.34%. The top mar­ginal tax rate was cut from 38%, to 10% for in­di­vid­u­als and com­pa­nies and the top mar­ginal and pay­roll tax, from 56%, to 34%.

SA should free up the econ­omy to achieve the high growth rate that is es­sen­tial for in­creas­ing in­comes and re­duc­ing poverty, rather than pur­su­ing poli­cies based on ide­olo­gies that for­mer com­mu­nist and so­cial­ist coun­tries have al­ready learnt first-hand cre­ate poverty and mis­ery.

SA’s rapid de­cline in the EFW rank­ings and slug­gish per-capita GDP growth was caused by a sub­stan­tial in­crease in the gov­ern­ment’s share of the econ­omy, from 17.80% in 2000, to 36.34% in 2014, crowd­ing out the pri­vate sec­tor in the process. There was a slight re­duc­tion in the mar­ginal and pay­roll tax rate but, at 41%, the tax rate re­mains high by in­ter­na­tional stan­dards. For­eign ex­change con­trols, which ham­per trade and in­vest­ment, re­main in place, and there has been a large in­crease in reg­u­la­tory trade bar­ri­ers and com­pli­ance costs for im­port­ing and ex­port­ing, a sub­stan­tial in­crease in bu­reau­cracy costs and an es­ca­la­tion in the pay­ment of bribes.

SA’s state-owned en­ter­prises (SOEs) have be­come mill­stones around the econ­omy’s neck. In­stead of con­tribut­ing to wealth and job creation, they con­sume tax­payer re­sources and pro­vide pow­er­ful ev­i­dence about the rea­sons that gov­ern­ment of­fi­cials, even in the ab­sence of cor­rup­tion, can­not be ex­pected to run busi­nesses ef­fi­ciently.

One rea­son is that de­ci­sion-mak­ing is po­lit­i­cal and not strictly busi­ness-ori­ented.

An­other is that in most cases, SOEs are mo­nop­o­lies, pro­tected from the dis­ci­pline of com­pe­ti­tion from al­ter­na­tive providers by pro­hi­bi­tions that pre­vent al­ter­na­tive providers from com­pet­ing with them.

While pri­vate firms are com­pelled to func­tion ef­fi­ciently or lose busi­ness, get taken over, or go bank­rupt, SOEs are shielded from those very eco­nomic forces that would com­pel them to func­tion more ef­fi­ciently.

The 21st cen­tury has seen a rapid change in the poli­cies fol­lowed by for­mer Soviet and east­ern bloc coun­tries. Most have moved away from the poli­cies they were forced to fol­low in the past to­wards greater in­di­vid­ual and eco­nomic free­doms. The di­rec­tion of change has had a sig­nif­i­cant ef­fect on their eco­nomic out­comes. A change in the di­rec­tion of greater eco­nomic free­dom re­sults in higher eco­nomic growth — a wors­en­ing eco­nomic free­dom score in­evitably leads to eco­nomic de­cline.

The peo­ple and gov­ern­ments of the coun­tries listed in the ac­com­pa­ny­ing ta­ble that have climbed up the eco­nomic free­dom lad­der are to be con­grat­u­lated. Their coun­tries rank in the top 37% of the most eco­nom­i­cally free coun­tries in the world, a po­si­tion SA was in at the turn of the cen­tury. Some of them have per­formed spec­tac­u­larly sim­ply by adopt­ing sen­si­ble eco­nomic poli­cies.

The 2017 edi­tion of EFW is to be re­leased later in Septem­ber.

SA will then dis­cover whether the listed coun­tries have con­tin­ued to progress and if there has been a pos­i­tive turn­around in SA’s rat­ings and free­dom rank­ing.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.