Op-Ed: Greater economic freedom reaps resounding benefits

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By Eustace Davie

The data could not be more clear. Countries that pursue greater levels of economic freedom reap resounding benefits.

Citizens die, on average, 20 years earlier, suffer more from poverty, battle greater unemployment, receive lower average incomes and suffer higher inflation in countries with governments that follow policies opposed to economic freedom and thus have lower economic growth.

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The Economic Freedom of the World: 2017 Annual Report (EFW), published by Canada’s Fraser Institute last month with a South African edition published by the FMF, is the 21st edition of this remarkable report, and reflects economic data for 159 countries covering up to 35 years for countries for which data were available.

People living in freest countries are seven times better off

The data in the report shows that if you create four groups (quartiles) placing countries into the least free, to the third, second and most free quartiles, their 2015 incomes per capita in PPP constant 2011 US$ were: $6,036, $9,416, $21,720, and $42,463. The people living in the freest countries were seven times better off, on average than those living in the least free countries.

The per capita incomes of the poorest 10% of people in the freest quartile, $11,998, were higher than the average incomes ($9,416) of the people, such as South Africans, falling under the third quartile. As economist Walter Williams said, “If you are destined to be poor, make sure you do it in the country with the freest economy.”

The source of the data for rating the countries is organisations such as the IMF, World Bank and World Economic Forum, and, as far as possible, the index uses objective components. Five areas of activity are measured in the EFW reports. They are, Size of Government, Legal System and Property Rights, Sound Money, Freedom to Trade Internationally, and Regulation.

Government crowding out the private sector

It is no surprise to find that SA’s size of government ranks 134th out of 159 countries, and is SA’s worst area ranking. Government enterprises and investment grew from 17.8% of economic activity in 2000 to 37.02% in 2015, crowding out the private sector and absorbing a large amount of taxpayer funding and indebtedness in the process. By comparison, Romania divested itself of government enterprises and investments, down from 60.7% in 2000 to 17.63% in 2015.

SA’s economic freedom rating and ranking declined badly between 2000 and 2015, the overall rating had declined by 0.41 (out of 10) – from 7.04 to 6.63 and the ranking from 46th to 95th. Romania’s rating during the same period improved by 2.35 and its ranking from 109th to 19th. The implications of these opposing directions of change in economic freedom are having substantial outcomes for the populations of the two countries.

During the 15 years, SA’s GDP per capita (PPP International US$) grew from $7,700 to $13,229 (72%), Romania’s grew from $5,873 to $22,070 (276%), almost four times the rate at which SA grew. Had SA’s GDP per capita grown at the same rate as Romania’s, the SA per capita GDP would have been R28,952 making the average South African more than twice as wealthy than they are now – a life-changing difference. Romania is merely one country that has opted for economic freedom.

There are also Estonia, Georgia, Lithuania and Latvia, all former Soviet bloc and communist countries that have experienced communism/socialism, have rejected it, and are now in the top quartile of economically free countries. In Africa, we have Mauritius (7th) and Rwanda (31st), that are in the top quartile.

If there is a recipe to avoid creating misery it is EFW

If ever there was a policy recipe book for governments to follow on how to avoid creating misery for their people, EFW is it. Equally; if ever there was a policy recipe book for governments to follow in guiding their people out of poverty, unemployment, and misery to a better life for all, EFW is it.

This wealth of information is available without charge from www.fraserinstitute.org/economic-freedom/dataset. Also, EFWdata.com is a digital tool that allows researchers to analyse the data across three dimensions: countries, time and statistics. A hard copy of the 2017 report is available from the FMF.

If South African decision-makers truly wish to improve the lives of all the people in the country, the EFW Annual Report is compulsory reading for them. It contains hard facts. It is a compendium of policy successes and failures in 159 countries, not only in the broadest sense, but compares and rates 42 different variables based on objective data from reliable sources.

S.A. in bottom 40% of economically free countries

Regrettable, is it not, that, in 2000, South Africa made it into the top 35% of economically free countries, only to decline in the next 15 years to be among the bottom 40% because policies that were on balance less favourable from an economic freedom point of view started being adopted. With democracy, SA started on the right track, but then switched to policies that have left its people at least 50% poorer than they should have been. An unnecessary and costly diversion. The sooner economic freedom policies are adopted, the better it will be for all South Africans, especially the poor.

With democracy, SA started on the right track but then switched to policies that have left its people at least 50% poorer than they should have been. An unnecessary and costly diversion. The sooner economic freedom policies are adopted, the better it will be for all South Africans, especially the poor.

Sound economics has nothing to do with ideology. It has everything to do with practical policies based on the experience of what works and what does not work. It is surely better to study the countries that are improving the quality of life of their citizens than to seek to emulate policies that have caused poverty and misery in the past and will continue to cause poverty and misery into the future.

 

Eustace Davie is a director of the Free Market Foundation

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