South Africa needs Economic Freedom now more than Ever

Living standards “are likely to be set back a decade and tens of millions of people … could be pushed into extreme poverty,” according to the World Bank’s January 2021 Global Economic Prospects. The Bank points out that growth in the Sub-Saharan African region shrank by an estimated 3.7 percent in 2020. For 2021-22, growth is projected to “resume at a moderate average pace of 3 percent – essentially zero in per capita terms”.  The report also indicates weakened “potential growth and income over the longer term”. That a global pandemic was going to hit economies and people’s lives hard and cause much damage, was always the case. However, governments around the world’s general approach of lockdown – with the aim of tackling COVID-19 – have exposed the damage caused by years of misguided policies that have undermined economic freedom and exacerbated hardships for middle-income and poorer people across the globe.

The policies that a government implements directly affect people’s quality of life; where the state grows larger, the private sector is crowded out. Innovation and progress – two of the central features of human dynamism and activity – are inhibited when people live in an environment where things such as the rule of law, property rights, freedom of speech, and the freedom to run a business and work, are either suffocated by regulations or prevented altogether by the state.

A joint report published by Columbia University and the Brenthurst Foundation finds that Africa is expected to experience its first recession in 25 years – to avoid that kind of low needs a radical re-evaluation of the path that governments have been on for the last 50 years.

Policies – and wider pro-growth environments – that enhance economic freedom have been relatively scarce in the Southern African region; in 2020, South Africa was ranked 90th (out of 162 countries) on the Fraser Institute’s Economic Freedom of the World (EFW) Index. Zimbabwe ranked 155th; Angola 159th; Namibia 107th; Eswatini 119th; Lesotho 96th; Malawi 143rd; and Mozambique 134th. The two standout Southern African countries are Botswana at 43rd, and Zambia at 69th.

The lower occurrence of economic freedom across the Southern African region serves to partly explain why progress in improving living standards has been slower, relative to other regions. With the recent lockdowns, even the partial gains will suffer significant setbacks – and then remain at lower levels if more adequate policies are not implemented.

According to the South African Reserve Bank, GDP is expected to grow by 3.6 percent in 2021, 2.4 percent in 2022, and 2.5 percent in 2023. This will merely be trying to get back to where we were before the pandemic – thus not truly meaningful or transformative. The International Monetary Fund pegs South Africa’s GDP growth in 2021 at 2.8 percent, and down to 1.4 percent in 2022.

South Africa will need consistent growth of at least 4 percent per annum to make real progress in addressing problems. And we must bear in mind the low base from which any ‘progress’ will come – last year’s hard lockdown with its myriad irrational regulations, and various iterations of lockdown since have caused widespread damage; economic activity cannot just be ‘switched’ back on. Along with implementing the necessary policies, countries need to experience a substantive shift in thinking, away from presuming that governments can bring about true economic activity through redistributionism.

The country can let go of any dream of increased growth if the government continues to advocate for policies – such as the expropriation of property without compensation, and the construction of a National Health Insurance – that fundamentally undermine the capabilities of the private sector. Capital investment and growth will never occur to a substantive level where people are not secure in the businesses they build, and the property they acquire after years of work.

There will be no serious progress in lifting people out of poverty without the implementation of policies that eliminate government-imposed barriers to job creation and labor markets, lowering taxes, easing tariffs and other trade barriers, and entrenching the protection of property rights. Job creation and provision cannot happen without the growth of businesses (of varying sizes), and that in turn cannot happen without the inflow of capital investment, leading to capital formation. Those countries and regions that encourage a business-friendly, pro-economic freedom environment will experience greater capital formation, job creation, and the concomitant rise in living standards.

Chris Hattingh is Project Manager, and a researcher, at the Free Market Foundation. He is a Senior Fellow at African Liberty.

Photo by Stephen Leonardi on Unsplash.