Economic Freedom in South Africa

What is the state of Economic Freedom in South Africa at the end of 2015? Is Economic Freedom increasing or decreasing? Are we on the road to a more prosperous country driven by innovation, entrepreneurship and market-based solutions to social problems? Or are we on the road to increased regulations, more unnecessary interference in the economy and entrenched poverty?

What do we mean by Economic Freedom?

Before we begin a discussion about Economic Freedom, its important to define exactly what we are talking about.

Economic freedom is the degree of freedom someone to control his or her own labour and property. In a society with economic freedom, individuals are free to work, produce, consume, and invest in any way they want.

In economically free societies, governments allow labour, capital, and goods to move freely, and refrain from coercion or constraining liberty beyond the extent necessary to protect and maintain liberty itself.

Who measures Economic Freedom?

The are two major indices of Economic Freedom in the world today;

The Economic Freedom of the World Report (compiled by the Fraser Institute)
The Index of Economic Freedom (compiled by the Heritage Foundation and the Wall Street Journal)

What do they measure?

Both major indices measure the level of freedom that someone has in relation to running a business.

The Economic Freedom of the World report categorizes its measurements as:

Size of government: expenditures, taxes, and enterprises
Legal structure and security of property rights
Access to sound money
Freedom to trade internationally
Regulation of credit, labor, and business

The Index of Economic Freedom categorizes its measurements as:

Rule of Law (property rights, freedom from corruption)
Limited Government (fiscal freedom, government spending)
Regulatory Efficiency (business freedom, labor freedom, monetary freedom)
Open Markets (trade freedom, investment freedom, financial freedom)

What are the benefits of Economic Freedom?

Economic freedom brings greater prosperity. Economic Freedom indices document the positive relationship between economic freedom and a variety of positive social and economic goals. The ideals of economic freedom are strongly associated with healthier societies, cleaner environments, greater per capita wealth, human development, democracy, and poverty elimination.

What is the relationship between Economic Freedom and Entrepreneurship?

In many ways, economic freedom is shorthand for an openness to entrepreneurial activity that increases opportunity for people to succeed in their own endeavors.

The graph below shows the close relationship between economic freedom and entrepreneurial opportunity as measured by the Entrepreneurship and Opportunity sub-index of the Legatum Prosperity Index, which “measures a country’s entrepreneurial environment, its promotion of innovative activity, and the evenness of opportunity.”

Above: Data showing the correlation between entrepreneurship and economic freedom.

Given such a strong correlation, it should be apparent that a government’s most effective activity will not be to increase its own spending or increase the amount of regulation, both of which reduce economic freedom.

Instead, the best results are likely to be achieved through policy reforms that improve the incentives that drive entrepreneurial activity, creating more opportunities for greater dynamism and innovation in the economy. Read more at this link.

Which Countries have the greatest Economic Freedom?

According to the Economic Freedom of the World	According to the Index of Economic Freedom
1. Hong Kong	1. Hong Kong
2. Singapore	2. Singapore
3. New Zealand	3. New Zealand
4. Switzerland	4. Australia
5. United Arab Emirates	5. Switzerland
6. Mauritius	6. Canada
7. Jordan	7. Chile
8. Ireland	8. Estonia
9. Canada	9. Ireland
10. United Kingdom and Chile (tied)	10. Mauritius

Above: Economic Freedom around the world, as measured by the Index of Economic Freedom

Which Countries have the least Economic Freedom?

According to the Economic Freedom of the World	According to the Index of Economic Freedom
10. Angola	10. Argentina
9. Zimbabwe	9. Rep. of Congo
8. Central African Republic	8. Iran
7. Algeria	7. Turkmenistan
6. Argentina	6. Equatorial Guinea
5. Syria	5. Eritrea
4. Chad	4. Zimbabwe
3. Libya	3. Venezuela
2. Republic of Congo	2. Cuba
1. Venezuela	1. North Korea

How much Economic Freedom does South Africa currently have?

According to the Economic Freedom of the World Report 2015 South Africa ranks 96th most economically free country in the world, with a score of 6.74 / 10. Other countries with similar scores were Swaziland (6.79), Suriname (6.77), Kyrgyz Republic (6.73) and Madagascar (6.71).

Here is a breakdown of the various categories measured and rated:

Category	Size of Government	Legal System and Property Rights	Sound Money	Freedom to Trade Internationally	Regulation
South Africa Rating (Rank)	5.5 (121)	5.8 (61)	8.2 (85)	7.0 (88)	7.2 (75)

Above: Economic Freedom in South Africa, according to the Index of Economic Freedom

According to the Index of Economic Freedom South Africa’s economic score is 62.6, making its economy the 72nd freest in the 2015 Index.

A summary of South Africa’s ranking from the Index of Economic Freedom:

“South Africa’s economic freedom score is 62.6, making its economy the 72nd freest in the 2015 Index. Its score is essentially unchanged from last year, with a 0.1-point gain reflecting improvements in labor freedom, fiscal freedom, trade freedom, and freedom from corruption that are largely offset by declines in investment freedom, business freedom, and the management of government spending. South Africa is ranked 6th out of 46 countries in the Sub-Saharan Africa region, and its overall score is higher than the world and regional averages.

South Africa’s large domestic market and natural resource base make it a promising candidate for economic freedom–led growth. However, recent labor unrest and falling commodity prices have undermined growth and tarnished the economy’s investment reputation.

More committed structural and institutional reform is needed. Pervasive corruption jeopardizes the rule of law. Rigid labor market regulations and the inefficient regulatory framework perpetuate high unemployment and underemployment. Non-tariff barriers constrict gains from global trade. The regionally significant financial sector has been helped by deregulation and remains a model for further reforms.”

The Index also goes into detail on the various categories it measures:

Rule of Law and Property Rights in South Africa

“Notwithstanding more than 700 charges of fraud and corruption controversially dropped before his first election in 2009, President Zuma was re-elected in 2014. Public procurement is often politically driven and opaque, and enforcement of anti-corruption statutes is inadequate. Although judicial and prosecutorial independence is under political pressure, property rights are relatively well protected. Contracts are generally secure.”

Limited Government in South Africa

“The top individual income tax rate is 40 percent, and the top corporate tax rate is 28 percent. Other taxes include a value-added tax and a capital gains tax. The overall tax burden equals 25.8 percent of domestic income. Public expenditures amount to 32.6 percent of domestic production, and government debt equals 45 percent of gross domestic product.”

Regulatory Efficiency and Business Freedom in South Africa

“With no minimum capital required, it takes five procedures and 19 days to launch a company. Completing licensing requirements still takes more than a month on average. Labor regulations are not applied effectively, and the labor market lacks flexibility. The government has eliminated price controls on all but a few items such as gasoline, coal, and paraffin.”

Open Markets and Trade Freedom in South Africa

“South Africa’s average tariff rate is 4.2 percent. Government procurement favors domestic firms. The government cancelled bilateral investment treaties with Germany, Spain, and several other countries in 2013. The financial system has undergone modernization, and banking has been resilient and sound. Four big banks account for over 80 percent of banking-sector assets. The capital market is well developed.”

What happens if we don’t increase economic freedom in South Africa?

If we do not increase economic freedom, South Africa will continue to experience high levels of poverty, unemployment, crony capitalism and crime.

If our economy is to grow rapidly, reduce unemployment, reduce poverty and inequality, the first requirement is for government to reduce the regulations and barriers for entrepreneurs and businesses.
The courts and the legal systems must function properly and maintain the rule of law. This includes rooting out corruption among police departments and making sure the SAPS keeps people and their property safe.
The labour laws must be changed to allow the unemployed to compete for jobs and red tape must be cut drastically.

We know from historical evidence and by observing how policy affects the economy that these changes will make a difference and help create prosperity and economic growth.