How limits to economic freedom are behind SA’s failures
Economics is entirely about human relationships. None of the other “scarce resources” would have any value at all without people.
No resources are employed without the employment or attention of at least one person. And there is no “economy” without an exchange between at least two people. We are blessed, though, to have millions of people with whom we might find friendship and with whom we might engage in mutual service through exchange.
Throughout the centuries people have engaged in trade with others near and far. Today we can buy goods made by people from almost anywhere in the world, people we are unlikely to meet. Yet, through a complex supply chain, we have a network of friendships, mostly anonymous and distant, each of which is consummated through the mutual benefits of trade.
Our connection to those people makes possible the lives we lead and the standard of living derived from all the services and goods available to us. Our relationship with them protects us from the loneliness and poverty of self-sufficiency.
Employment is central to our humanity, and it is natural that we seek out others whom we might serve and, rightly, from whom we might expect some consideration or service in return. When each of us is free to seek out such others, and to agree voluntarily on the terms of any exchange, then we will learn to serve and prosper in mutual respect. From what nature has given us, together we make a better place to live.
Yet our experience tells us that life is not that simple. There is something thwarting our ability to trade. Millions of people have experienced what we call “unemployment”. To be unemployed is to experience personally what it means to be separated from the larger world, to be disconnected from that wider network of human relations through which one finds purpose and sustenance beyond that of one’s close friends and family.
The many structural problems faced by South Africans are not the primary problem but rather the symptom of a loss of economic freedom.
Why is it that 29% of SA’s working age population is listed officially as unemployed? Why is the youth unemployment rate near 52%? By the conventional definition, “unemployment” is not voluntary. Our understanding of human nature also tells us that unemployment on such a scale cannot be voluntary.
What is thwarting so many of our neighbours from experiencing the employment relationships that would otherwise come so naturally to them?
Our knowledge of economic history shows us that countries in which people are freest to engage in economic relationships are also those people most likely to enjoy a prosperous community and to be employed in beneficial, productive activity.
In such communities, the role of government is primarily that of protecting the lives and property of residents from physical harm or fraud. Though some governments might define their protective roles more broadly, they do so at the expense of their people’s livelihoods and standards of living. Governments cannot force prosperity; they can only allow it.
We can measure the likelihood that a country will prosper. The Economic Freedom of the World: 2019 Annual Report offers us several decades of data showing that in countries where economic freedom increases, commensurate prosperity soon follows.
Countries that score highest on the Economic Freedom of the World (EFW) index are also among the most prosperous, healthiest, cleanest and safest places to live. People tend to get along better and to respect one another in such countries. But the more that governments encroach or threaten to encroach on their day-to-day lives, the less is the reward for virtuous conduct.
Daily life in SA is affected by the fact that, despite a growing population, electricity production peaked in 2007 and has been flat, if not in slow decline since then. The daily blackouts — euphemistically called “load-shedding” — are a symbol, not of a government failure to provide electricity, but rather a failure of government to refrain from interference in the production and supply of an important service. Despite a virtual monopoly in electricity supply, Eskom is projected to lose more than R20bn this fiscal year. It will use more resources than it creates in value.
The story of Eskom is just one example of what happens when governments limit the types of services that private individuals can offer to one another. Even when such private services are allowed, governments can ruin everything by interfering in how those services are offered.
We can easily agree on a rational standard for the imposition of safety regulations where such are helpful. But we must not deceive ourselves that political control of a vital industry will somehow serve “the people” better than would private suppliers who have invested their own resources and have a clear interest in serving their customers.
In the EFW rankings SA peaked during the same decade that Eskom’s production peaked. In 2000 SA ranked 47th in the world in terms of economic freedom with an overall rating of 7.04 on the EFW index. By 2017, as revealed in the latest annual report, SA’s ranking had fallen to 101st place, with a rating of 6.61 on the EFW index. That places SA in the middle of the third quartile among the 162 countries for which data is measured.
In other words, South Africans enjoy less economic freedom than do the residents of 60% of the countries in the world.
During the past decade EFW ratings have been gradually rising on average. That would partially explain SA’s fall in the rankings, but it does not explain the downward trend in the absolute EFW rating.
Despite the good intentions expressed by politicians, they have been headed in the wrong direction. Taking a cue from economists, it is common for politicians to speak of “structural problems” in the economy.
These perceived problems are often invoked as an excuse for past policy failures but also as a justification for future policy actions and economic interventions. This is, unfortunately, the wrong interpretation. The many structural problems faced by South Africans are not the primary problem but rather the symptom of a loss of economic freedom.
The Economic Freedom of the World: 2019 Annual Report is an international publication and the SA edition is available now from the Free Market Foundation. With decades of data correlating economic freedom with economic performance and social conditions, the EFW offers all of us an indicator to inform our representatives and to guide our next steps.
• Grant is a professor of finance and economics at Cumberland University.