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, writes Eustace Davie
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.
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
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.
• Davie is a director of the Free Market Foundation.