Economic freedom means opportunity to escape poverty

If you are poor and live in a place lacking free markets and personal economic freedom, then you’re out of luck compared to those in economically free places, who make their own economic, work and business decisions free from domineering government or crony elites.

More economic freedom means greater opportunity to escape poverty and climb to prosperity. That is the crucial message of a newly released study, “Economic Freedom Promotes Upward Income Mobility”, published by Canada’s Fraser Institute and prepared by Justin Callais of Texas Tech University and Vincent Geloso of George Mason University.

With Covid-19 government lockdowns further devastating SA’s already crippled economy, it has become ever more urgent that government implements pro-economic freedom, pro-growth reforms. As Stats SA reported on August 24, SA’s unemployment rate on the expanded definition is now at 44.4%. Youth unemployment is at a record 74,8%. Policies that have increased the control of government over all aspects of the economy — stifling the private sector — have not produced the oft-repeated promises of millions of new jobs and growth.

Opponents of freedom claim that income inequality is the sharpest economic issue of the day; they aim the pointy end of the stick at free market economies. They falsely claim free markets promote inequality. Yet income inequality is no more prevalent in economically free nations than nations economically dominated by government or crony elites.

However, there is an important difference between economically free and other nations, one at the heart of fairness and equity - opportunity. As the new research shows, income and social mobility are significantly stronger in free than in unfree states. In the SA context, citizens are told that by giving government more power their economic problems will be solved. However, the opposite has been the case. As shown by widespread looting and violence in Gauteng and KwaZulu-Natal, ever more people are frustrated with what they perceive to be their fixed lot in life.

Economic opportunities are becoming more concentrated in the hands of those who are well-connected politically. More frustration will boil over in the future if people are not afforded the necessary economic freedom to improve their own lives and that of their families. If people believe the amount of wealth is forever unalterable, and that it can only ever be seized by force and redistributed (rather than created by individuals, communities, and firms), they will seek other ways to improve their quality of life.

Opportunity is greater in those countries with more economic freedom. Even those from the poorest backgrounds are able to climb the income and social ladder. The study by Callais and Geloso looked at 82 states, using income and social mobility data from the World Bank and World Economic Forum, and freedom data from the Fraser Institute’s Economic Freedom of the World Index (EFW). In the latest EFW rankings SA came in at 84th — down from 58th in 2000.

The insight that more economic freedom brings more opportunity and mobility matches other evidence. The average per person output in the top-quarter economically free state is over $50,000 (R748,000) (purchasing power adjusted) a year, compared to under $6,000 (R89,700) in the least free states. The income of the poorest 10% in the freest states is over $14,000 (R209,400) but under $1,600 (R23,900) in the least free states.

The EFW includes a number of factors necessary for economic freedom, but the two most important for income mobility are the rule of law and reasonable regulation. It is easy to see why. In uneconomically free countries, domineering government and crony elites use the rule of law not to protect the freedom of all, but to entrench the privilege of their cliques while undermining the rights of everyone else.

Similarly, regulations are too often used to exclude people from work and opportunity, even in countries with a relatively robust rule of law. Government regulation may require workers to purchase occupational licences or train to acquire credentials before they can work. This takes time and money, which low-income people may not possess, creating a barrier that prevents them from fully participating and advancing in the labour market.

Regulations such as B-BBEE and the national minimum wage in SA slow wage growth for low-income workers. But that’s not all: onerous business and hiring regulations can slam the door shut on poor entrepreneurs who simply don’t have the resources to satisfy the regulator. Bigger businesses have the resources to handle more government bureaucracy — SA’s small-to-medium businesses (many of which have been destroyed by lockdowns) do not have the same wiggle-room.

Immediately postapartheid SA did precisely what the EFW recommends (and what has delivered more prosperity around the world) — economic liberalisation and fiscal responsibility. As a consequence, SA’s black middle class in particular grew exponentially. Unfortunately, the gains pre-2008 are steadily being whittled away due to misguided ideas and policies, which focus on more government control, redistributionism and dependency, rather than wealth creation.

The further SA has slid down the EFW rankings the more entrenched artificial inequality has become a reality. Between 2003 and 2019 the real average pre-tax income of the top 10% of earners rose 30%; that of the bottom half fell 30%. The trend of rising artificial inequality became worse after the financial crisis of 2008, and the decade of state capture under the Zuma administration. Implementing new grants and other forms of welfare — such as a basic income grant — will only be a plaster for people’s economic frustrations. State dependence is nothing compared with real economic freedom and the resultant prosperity.

Many people seem to believe free markets victimise the vulnerable. This is curious on the surface since it is obviously false. Just look around the world at quality of life. Where would you rather live — even if you were poor? Economically free countries such as Canada, Denmark, the US, Taiwan and Switzerland? Or unfree states such as Russia, Egypt and Brazil, or those one-time darlings of free-market critics, Venezuela and Cuba? You pretty much have to have a Berlin Wall in your mind to isolate facts from ideology to believe the free market critics.

Flexible, fluctuating inequality is a feature of freedom. It should not concern us, either morally or practically speaking. If we want people to be able to use their skills and resources to mutual benefit with others — and to thus increase their prosperity — we should opt for ideas and policies that increase economic freedom, as opposed to policies that entrench artificial inequality between those with political power versus the rest of the population; in this latter scenario, fixed inequality does become a moral problem.

SA should not pursue yet more grants and other redistributionist measures as the solution for our economic woes. Protecting property rights, repealing punitive labour legislation, limiting government spending and lowering tax rates are just a few of the examples of easy, highly beneficial reforms the country should pursue. Positive transformation and meaningful upward mobility will only come about in the right environment, where people are free to work, grow businesses, have more disposable income and invest in their children’s futures.

• Hattingh is deputy director at the Free Market Foundation in SA. McMahon is Michael Walker chair of economic freedom research at the Fraser Institute, Canada.