Commitment to state capitalism drives SA’s plunge down economic freedom rankings
Bad politics can play havoc with an economy, and in SA we are certainly experiencing the fallout of such a game.
The government has increasingly been pursuing the model of a developmental state, continuing to add large doses of excessive regulation, especially regarding labour, business and credit. It is increasingly influencing and damaging the economy and free market through social engineering and high levels of state ownership conducted through the substantial economic participation of state-owned enterprises (SOEs).
Such an approach has resulted in even higher unemployment, a weak currency and declining industries, and has choked economic growth. The recently released Economic Freedom of the World Report 2018 confirms SA’s continuing and devastating slump into shameful territory.
Analysing this report at a Free Market Foundation presentation, Neil Emerick, of tourism software company NightsBridge, explains that economic freedom is when individuals are permitted to choose for themselves. “When economic freedom is present, the choices of individuals and markets will decide when, what and how goods and services are produced.”
The Economic Freedom Index shows which way a country leans in this regard, either tending towards state intervention or preferring a model based on individual choice. The index covers key categories evident in policy: the extent of private property; rule of law; freedom to trade, including with foreigners; sound money; and the limited role of government. Its data components are objectively drawn from measurements in other reports such as those of the World Bank, the IMF and the World Economic Forum.
In the latest report, and out of 162 countries, SA now ranks at 110 having been at 46th place nearly two decades ago, as it has become increasingly developmental and gradually trended towards more government intervention.
We have been beaten by Russia and several engaging African peers, including Rwanda, Uganda and Gambia.
The most economically free countries are Hong Kong, Singapore and New Zealand, with Georgia at position seven and Mauritius in eighth place.
At the bottom, being the least economically free, is Venezuela, keeping company with several African countries.
On the issue of size of government, SA has declined from a ranking of 53 in 2000 to a current position of 107, as other countries increasingly embrace economic freedom.
Regarding how sound our money is which includes considerations such as stability of currency, oscillation of inflation and capital controls SA now ranks at 102 (previously position 64 in 2000). It has one of the worst inflationary environments in the world, with the value of money halving every 12 years.
Emerick says state economic intervention in SA looks set to stay, highlighting that President Cyril Ramaphosa is busy with a master’s thesis on SA state corporations. Working on the premise that large state capitalism will be a feature of our economy for some time, Emerick then looks at which nuance of such intervention is preferable. In countries where this model has worked, SOEs are efficient organisations. Executive appointments are based on merit rather than politics; state corporates are responsive to public input and compete in the market with private businesses; there are restrictions on elite enrichment; and state capital is wisely spent on quality projects.
Emerick describes state capitalism as a dangerous concept that in many cases has not worked. “Preferable is efficient markets driven by [the] private sector, with social security nets and supportive government structures.”
He also wants to see more spend from all sectors. SA has been spending on average 20% of GDP on gross fixed capital formation every year. Emerick wants this raised to 25% to achieve growth.
“We are ‘low’ investors and do not renew capital stock as often as high-growth countries.”
WE HAVE BEEN BEATEN BY RUSSIA AND SEVERAL ENGAGING AFRICAN PEERS, INCLUDING RWANDA, UGANDA AND GAMBIA
INTERVENTION LOOKS SET TO STAY, WITH PRESIDENT CYRIL RAMAPHOSA BUSY ON A MASTER ’ S THESIS ON STATE CORPORATIONS