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Less freedom, lower growth: What we should learn from international indices

Less freedom, lower growth: What we should learn from international indices
  • In 2000, SA ranked 46; now we rank 94

It is a common temptation, in the months before an election, for politicians to promise the moon to those voters they fear might be attracted to the similarly lofty promises of a rival party. But it would be easier to send someone to the moon than to deliver on many of the more shameless promises made by desperate politicians. The latest attention-grabbing promise, through which South African politicians have made world headlines, is that the expropriation of land without compensation will assure greater prosperity through enhanced economic efficiency and improved food security through the diversity of farm ownership.

Although there are conditions under which a reasonable argument for “land reform” could be made, governments that make such promises of expropriation under electoral duress rarely understand, or are willing to implement, the policies needed to assure the fair and efficient allocation of property in the future. That is why most such politically expedient reforms have resulted in Zimbabwe-style poverty and widespread hunger.

Recent political pressure in South Africa for uncompensated land confiscation seems intended more to satisfy a factional lust for retribution – and the enrichment of cronies – than a desire to improve the general welfare or even to assure food security. Such demands invariably come unaccompanied by any recognition of what is necessary for such a policy to have a hope of succeeding.

In South Africa, the legal processes for the transfer of property ownership are inefficient, expensively slow, and often seen to be corrupt. The inefficiency of the normal property transfer process makes it less likely that efficient patterns of land ownership will emerge in the future. Current land ownership patterns are almost certainly less well allocated than they would have been were the government capable of instituting a more competently operated property transfer system. Experience gives us no reason to believe that an arbitrary expropriation of land and its redistribution to politically favored individuals would benefit the broader population or even maintain current levels of food production. In the absence of genuine respect for private property rights and equal legal treatment of its owners, the opposite is more likely.

Property ownership is important not because of the specific physical or intellectual assets that are susceptible to seizure. Those items can be seized only once. The creative source or steward of those expropriated assets cannot be compelled to replicate past creativity or productivity – or even to apply the attentiveness of a good manager. Governments with a reputation for theft, even under the guise of a popular redistribution of wealth, always elicit a counterproductive response from those creative individuals who are perceptive enough to see themselves as the latest political goats to be milked. They take the creativity and skills with which they once served the people of their communities and either move to less politically visible endeavors or emigrate to new jurisdictions where their personhood is better respected.

In that sense, the Economic Freedom of the World: 2018 Annual Report is a global measure of respect. It is a measure of how well governments respect the humanity of their residents and how well they maintain policies compatible with that humanity and the need to be free and to flourish. It is a broad-based index that should be taken seriously as a guide to all those interested in good governance. Countries with high, or rising, Economic Freedom of the World (EFW) ratings are invariably those with the highest, or most rapidly improving, standards of living.

Since the economic successes of the Reagan and Thatcher years, and the subsequent collapse of the Soviet Union and other socialistic regimes, economic freedom has been increasing worldwide, reducing poverty and increasing the potential prosperity of those people blessed by their increased freedom. But since the turn-of-the-century, South Africa has failed to keep up with that trend and has, thereby, failed to reap the promised rewards of the 1994 transition.

In this year’s EFW report, South Africa ranks 94th out of 162 countries. This leaves South Africa in the third quartile of the rankings based on data from 2016, which are the latest data available. The EFW Panel Dataset, which is adjusted to improve year-to-year comparisons, shows South Africa losing economic freedom in absolute terms. Each of the five categories of economic freedom that comprise the EFW index declined since the last report. Although there were some improvements in minor components within the area of Regulation, the most significant changes were downward within the area of Legal System and Property Rights.

Despite a record of low and slowly declining scores for the legal system overall, the judiciary had long been seen with respect, and its relatively high EFW component scores reflected that. The ratings fluctuated over time, but in the last measured year the ratings for “judicial independence” and “impartial courts” declined by 18% and 26% respectively. And as if to set the stage for, and perhaps to predict, the headlines of 2018, the rating for “protection of property rights” also dropped by just over 20%. A parliament unconstrained by respect for either constitutional limits or an independent judiciary is an institutional force that bodes badly for economic freedom. The political attacks on private property rights, not only for land but also for the right fully to exercise ownership of a business, are a symptom of the institutional and moral decline that presages economic and cultural stagnation.

Even the (largely symbolic) calls for the “nationalization” of the South African Reserve Bank should give pause, not because the private shareholders exercise any control (they do not), but because those shareholders ostensibly oversee and bring a modicum of transparency to the operations of a government agency. In the EFW category of “Sound Money,” South Africa ranks 102nd in the world. The inflation rate remains within its official target range of 3% to 6%, with consumer price inflation showing an annual rate of 5.1% through July 2018. The Producer Price Index showed a higher rate of 6.1% through the same period. By world standards, these inflation rates are high, though they are reasonably stable and predictable.

Within South Africa, the Reserve Bank is one of the better-run institutions. The calls to nationalize an agency that has always been de facto nationalized suggest that the thin façade of central bank independence could suddenly be torn away as the ruling ANC responds to shifting political pressures. Fiat money has always served the ruling class as a pre-election anodyne and as a convenient, and at times blatant, means of redistributing wealth to government and supporting politically favored businesses. The depressing effect of inflation on standards of living goes beyond the mere loss of purchasing power, disrupting the structure of production and affecting lives in a way that few can detect.

Of more pressing concern in daily life are matters of livelihood and personal safety. The rate of economic growth has trended downward in recent years, just as economic freedom has slowly declined. Crime has long been a problem in South Africa and has been reflected in low EFW scores for “reliability of police” and “business costs of crime.” Crime rises in any society that fails to protect and show respect for life – and for the property that is part of each life. A government that fails to protect economic freedom and private property will eventually lose its ability to maintain civil order. Ultimately it will lose the respect of the people and any claim to its own legitimacy.

By Richard J Grant, Professor of Finance & Economics, Cumberland University & Publications Editor, Free Market Foundation

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