Despite slow improvement during the 1990s, South Africas economic-freedom rating continues to fall midway among rated countries: its ranking remained steady, 48th (out of 115) in 1990 and 47th together with South Korea (out of 123) in 1997. Government expenditure (31.6 percent of GDP in 1997) remains extremely high for a low-income country ($4,513 per-capita GDP in 1996) but fiscal discipline has been improved and the level of expenditure as well as the size of the budget deficit is declining.
With the disappearance of apartheid, the first government of the new democracy and the 1996 Constitution greatly improved the overall legal structure. Conscription has been abolished and other pro-market changes have been made. However, while controls on the movement of capital have been substantially reduced, exchange controls remain in place and the inflation rate, while declining, has been consistently higher than the rates of South Africas major trading partners. The currency exchange rate has consequently been falling continuously.
Trade tariffs have been reduced and the powers of the former agricultural marketing boards removed. Farmers and long-protected industries have had to adjust to the changed circumstances and formal unemployment has consequently increased to around one-third of the potential work-force. New labour laws have exacerbated the problem by imposing increased costs on employers. The high unemployment level and restrictive labour laws also make it difficult for the government to implement its planned reduction in the number of civil servants and employees at state-owned industries. The government has re-stated its commitment to privatisation but the process is proceeding very slowly.
South Africa can improve its economic freedom rating and prospects of higher growth by continuing to reduce the growth rate of the money supply, replacing the existing limited rights to own foreign currency with total freedom to maintain foreign currency accounts in local banks, abolishing the remaining limitations on the ownership of bank accounts abroad, substantially reducing government expenditure as a percentage of GDP, privatising rapidly, and reducing marginal tax rates.
The State of Economic Freedom
In the intellectual battle between state control of resources and free markets, some argue that the market economy now reins supreme. The Berlin Wall has fallen. Maoism has given way to joint ventures in China. In the U.S. and England, New Democrats and New Labour both claim to support the basics of free markets. The hegemony of free markets appears so complete that noted author Francis Fukuyama has declared that we have arrived at the End of History.
Ideology is one thing, reality is another. Much of the worlds population still experiences insecure property rights, corrupt courts, and arbitrary bureaucracies. Thugs and petty tyrants are only slowly changing their ways. Just how much progress has been made to liberate people from the yoke of government control?
For the last decade and a half, we have been involved with more than 100 other researchers in a project to measure economic freedom in the world. Our publication Economic Freedom of the World: 2000 Annual Report is the fourth in a series that rates 123 countries in terms of the consistency of their institutions and policies with free market principles. The report is published by a network of institutes in 55 countries, including South Africas Free Market Foundation, headed by Canadas Fraser Institute.
The economic freedom ratings in the report are based on 23 indicators in seven areas: size of government, economic structure and use of markets, monetary policy and price stability, freedom to use alternative currencies, legal structure and security of private ownership, freedom to trade with foreigners, and freedom of exchange in capital markets.
In the 2000 Report, Hong Kong and Singapore shared the top rating of 9.4 on a scale of 10. New Zealand, the United States, and the United Kingdom were next on the list of the five freest economies in the world. The five least free economies (in order from the bottom) were Myanmar (formerly Burma), Democratic Republic of Congo (formerly Zaire), Sierra Leone, Rwanda, and Madagascar.
Changes in Economic Freedom Since 1980
We were able to calculate economic freedom ratings of many countries every five years since 1970. This makes it possible to examine changes in economic freedom over long periods.
The average economic freedom rating was 6.6 in 1997, up from 5.3 in 1980. Changes in the components of the index pinpoint the major respects in which the world is now freer. Monetary policy has been reined in, and fewer people suffer the devastating effects of excessive inflation. The median inflation rate of the countries in our study fell from 14.5 percent in 1980 to 5.8 percent in 1997. Correspondingly, the number of countries with an annual inflation rate less than 5 percent rose from ten to fifty-five.
Freedom to engage in international trade has also increased. The mean tariff rate imposed by the countries in the study fell from 27 percent in 1980 to less than 12 percent in 1997. On average, the volume of trade relative to GDP increased by 43 percent during the last three decades. Exchange and interest rate controls are now much less common than in 1980.
Although transfer payments and subsidies continue to rise–averaging 11.3% of GDP in 1997–government consumption of goods and services has levelled off. Top marginal tax rates, the rates imposed on a countrys most productive citizens, have fallen sharply. In 1980, the average top marginal tax rate was 58%; in 1997 it was 37%. South Africa has joined the trend by cutting its corporate tax rate to 30%, but the top marginal rate for individuals remains persistently high and uncompetitive at 45%.
Economic Freedom and Quality of Life
There are astounding differences in economic and social outcomes between nations that are more economically free than those that are less free. Life expectancy is 20 years longer for people in the 24 most free countries (the top fifth) than in the 24 least free countries (the bottom fifth). Average income per person in the top fifth was $18,000 in 1997, compared to less than $2000 for the bottom fifth.
Several countries have improved remarkably in economic freedom, with corresponding benefits for their people. On our 10-point scale, Chile’s rating rose from 3.7 in 1975 to 6.0 in 1985 to 8.2 in 1997. Chile now ranks 18th, up from 54th in 1975. Between 1985 and 1997, Ireland’s rating rose from 6.7 to 8.7, and its ranking jumped from 26th to 6th. New Zealand’s rating rose from 6.2 in 1985 to 9.1 in 1997; this makes it the 3rd freest economy in the world, up from 32nd in 1985. Between 1990 and 1997, El Salvador’s rating rose from 5.0 to 8.3, and its ranking jumped from 67th to 14th.
An important aid to researchers and policy makers
The Economic Freedom of the World: 2000 Annual Report provides researchers and policy makers with the empirical support needed to document objectively the impact of greater or lesser reliance on freely operating markets. Although the data show that many people still face governments that are hostile to private property, personal choice, and freedom of exchange, economic freedom is advancing across the world, and the prospects for freedom and prosperity look brighter than ever.
Robert Lawson is an associate professor of economics at Capital University in Columbus, Ohio. James Gwartney is a professor of economics at Florida State University. More information about Economic Freedom of the World: 2000 Annual Report can be obtained from the web site: www.freetheworld.com.
Economic Freedom Rankings, 1997/98
1 Hong Kong
1 Singapore
3 New Zealand
4 United States
5 United Kingdom
6 Ireland
7 Canada
7 Australia
9 Netherlands
9 Luxembourg
9 Switzerland
12 Argentina
12 Denmark
14 Belgium
14 Japan
14 Panama
14 El Salvador
18 Spain
18 Finland
18 Thailand
18 Chile
22 Germany
22 Norway
22 Costa Rica
25 Portugal
25 Bolivia
25 Iceland
25 France
25 Sweden
25 Austria
31 Bahrain
31 Italy
31 Philippines
31 Peru
35 Mexico
36 Oman
36 Mauritius
36 Paraguay
39 Malaysia
39 Trinidad & Tob.
39 Kuwait
42 Guatemala
42 Uruguay
42 Hungary
42 Jamaica
42 Greece
47 South Africa
47 South Korea
49 Indonesia
49 Unit. Arab Em.
51 Taiwan
51 Czech Rep.
53 Ecuador
53 Dominican Rep.
53 Honduras
56 Nicaragua
57 Kenya
57 Estonia
57 Cyprus
60 Latvia
60 Bahamas
62 Lithuania
62 Turkey
62 Botswana
62 Egypt
66 Sri Lanka
66 Israel
68 Namibia
68 Ghana
70 Belize
70 Slovenia
70 Malta
70 Tunisia
70 Barbados
75 Haiti
75 China
75 Guyana
78 Fiji
78 Jordan
78 Uganda
78 Slovakia
82 Morocco
82 Venezuela
82 Poland
85 Brazil
86 India
87 Cote d’Ivoire
88 Colombia
88 Pap. New Guinea
88 Pakistan
88 Tanzania
92 Zambia
93 Russia
94 Bangladesh
94 Bulgaria
94 Nepal
97 Cameroon
97 Gabon
99 Iran
99 Zimbabwe
101 Benin
102 Niger
103 Mali
103 Nigeria
103 Croatia
103 Senegal
107 Romania
107 Malawi
107 Togo
110 Ukraine
110 Chad
112 Syria
113 Cent
113 Albania
115 Congo, Rep. Of
115 Burundi
117 Algeria
118 Guinea-Bissau
119 Madagascar
120 Rwanda
121 Sierra Leone
122 Congo, Dem. R.
123 Myanmar
