Why economic freedom matters

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Sindile Vabaza | Writer and aspiring Economist | Free Market Foundation | mail me | 


Economic freedom enshrines personal choice, voluntary exchange and protection of private property.

It is the freedom to start a business or hire an employee without government interference, or to invest and trade with whomever you please.

It is development from the bottom up by individuals, as opposed to top down by governments.

Economic freedom can be fleshed out into three broad categories:

  • Low regulation
  • Strong legal structure and secure property rights
  • Limited government

Low regulation

In the Global Competitiveness Report 2019, South Africa ranked 101st out of 141 countries on the burden of government regulations, 129th out of 141 when it comes to time required to start a business, 124th in the flexibility of wage determinations, and 129th in hiring and firing practices.

Taken together these rankings show the regulatory miasma which permeates the South African economy and why it is difficult and unnecessarily burdensome to do business here.

This is supported by the World Bank Doing Business 2020 study which measured regulations in 12 areas of business activity across 190 economies. South Africa ranked at position 84, with an overall ‘ease of doing business’ score of 67 out of 100.

It is no wonder then that the country suffers from low economic growth, below average entrepreneurship rates and poor job creation. This regulatory swamp becomes even more pungent when put alongside South Africa’s unemployment rate on the expanded definition (as reported by Stats SA on August 24th), which sits at 44.4%, and youth unemployment which sits at 74.8%.

These numbers are staggering and require a government committed to a regulatory environment which unburdens established and potential entrepreneurs who can form businesses and create jobs.

Strong legal structure and secure property rights

The spectre of Expropriation Without Compensation looms large in South Africa and it is important to highlight why secure property rights matter.

Secure property rights are a cornerstone of any modern economy. They give confidence to individuals and businesses to invest in land, allow private companies to borrow – using land as collateral – to expand job opportunities, and enable governments to collect property taxes which are necessary to finance the provision of infrastructure that serves citizens.

Today, potential urban investors and entrepreneurs look at Africa and see crowded, disconnected, and costly cities. Such cities inspire low expectations for the scale of urban production and for returns on invested capital. How can these cities become economically dense, not merely crowded? How can they acquire efficient connections? And how can they draw firms and skilled workers with a more affordable, liveable urban environment? From a policy standpoint, the answer must be to address the structural problems affecting African cities. Foremost among these problems are institutional and regulatory constraints that misallocate land and labour, fragment physical development, and limit productivity.

– According to the World Bank report, Africa’s Cities: Opening Doors to the World

In other words, the formation of crowded informal settlements has an adverse effect on investment because not enough emphasis is being placed on strengthening secure property rights and land tenure and registration systems in our cities for the poor and vulnerable.

This phenomenon is motivated by both a desire for opportunity from migrants from the rural areas, and the inflammatory rhetoric from pro-Expropriation Without Compensation politicians which leads to land grabs. Expropriation Without Compensation will have a destructive effect on the land market and discourage future investment.

Limited government

The domestic challenges that plague the economy mostly include, amongst others, governmental overspending, rising government debt partially fuelled by extravagant demands from public sector workers, and the bloated public sector wage bill.

The ballooning of the public sector wage bill coincided with the presidency of former president Jacob Zuma starting in 2009 and has been steadily climbing ever since.

According to Philippe Burger, University of the Free State Vice-Chancellor for Poverty, Inequality and Economic Development, the salary bill’s size originated mainly in 2009 and 2010 when it grew substantially as a percentage of GDP from 9% in 2008/09 to 11% in 2010/11, ‘whereafter there was a continuous slow upward drift to almost 13% in 2019/20, almost 4 percentage points higher than in 2008/09‘.

This expansion of government and profligate spending has resulted in South Africa’s annual debt-servicing costs reaching R225 billion, and for years has been the fastest growing item in the budget.

This poses a structural risk to the economy especially in light of government plans to not only implement an expensive National Health Insurance (NHI) but also to implement a basic income grant (BIG), both of which would require new taxes and more government spending (borrowing).

Simply put this unsustainable spending, and the government’s plans to expand the state via the NHI and the BIG, will ultimately affect how credit ratings agencies assess our country and will mean that more and more of the government’s spending will go towards debt repayments.

This in turn will mean that government will struggle to honour its various welfare commitments; this represents a not inconsiderable social risk when seen in light of sluggish economic and jobs growth.

So what can be done?

As a vital component of human dignity, autonomy, and personal empowerment, economic freedom is valuable as an end itself. Just as important, however, is the fact that economic freedom provides a proven formula for economic progress and success.

There are a number of policies which can be taken to entrench economic freedom in South Africa, these include doing away with minimum wages and other wage controls, restrictions on hiring and firing because onerous labour laws penalize businesses and workers alike.

Rigid labour regulations prevent employers and employees from freely negotiating changes in terms and conditions of work, and the result is often a chronic mismatch of labour supply and demand.

The government must also abandon its pursuit of Expropriation Without Compensation and rather focus on entrenching secure property rights for everyone – especially the rural poor, which includes rural women. Women are often disenfranchised culturally even as government recognises that for women’s rights to be substantive, their right to property in rural areas has to be secure.

The World Bank Group’s gender strategy highlights access to assets (land) as one of the three main pillars for women’s empowerment.

In conclusion

Economic freedom is a cornerstone of income and social mobility. This is echoed by a recently 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.

Economically free nations afford their citizens more opportunity, which correlates strongly with the rule of law, secure property rights and reasonable regulation.

In economically unfree nations cronyist government elites can use an expansive state to seize ill-gotten wealth, pushing out productive citizens and competitive businesses in favour of inefficient and uncompetitive businesses who are close to government elites.

The expansive state itself takes up more and more room, pushing out the private sector and its job creating function and therefore incentivizing state dependency for citizens and leaving small local economies dependent on the redistributed value gains of more productive sectors and places in the country -usually our biggest metropolitan areas.


 



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