whythawk ratings: measuring effective development

"Ooh! Let's kill it!"

Why should he be forced to wait an entire day for one golden egg? He and his wife kill the goose and cut it open to get at all the gold in one go. They discover that, dead, it's just an ordinary goose.

The fable is a warning to those who take unearned wealth that is not freely given. It is a lesson few governments in Africa have cared to learn.

Last week saw Robert Mugabe's thuggish regime claim ownership of Olivine, a large cooking-oil producer. Many governments believe that businesses – the gold – can be separated from those that produce it. Mugabe assumes that his nation is poor because business owners and investors refuse to share the wealth of their companies with the "people".

Last week the Free Market Foundation released the Economic Freedom of the World report for 2007. "There is a strong correlation between economic freedom and wealth," says Neil Emerick, of the Foundation.

It should come as no surprise that Zimbabwe is considered the least economically free nation on Earth.

Economic freedom is distinct from democracy. Singapore ranks second in terms of economic freedom but is politically autocratic. Democracies place the needs of the majority over the actions of the individual and this can create winners and losers. The majority could, for instance, vote to ban hunting and so disadvantage the few who enjoy it. Free market trades, by comparison, are win-win transactions since people only trade with each other for mutual advantage.

Since democracies prize collective bargaining over win-win transactions the inevitable result is lobbying where special interest groups campaign to have their own needs prioritised. This can lead to unexpected outcomes and inefficient economies.

In South Africa the minister of telecommunications gets to decide whether or not there is a market need for a new telephone service and lobbyists from existing businesses spend a great deal of money convincing her that this isn't necessary. The result is that consumers lose. Without free competition prices are fixed artificially higher than they would otherwise be.

One argument against free markets is that it leads to inequality between the rich and poor. Research indicates that the level of inequality is marginally higher in countries that are the least economically liberal.

A more significant observation is that the richest people in the world's least liberal economies are poorer than the poorest people in the most liberal economies.

How does South Africa stand in the ratings? Over the past five years our overall score has remained virtually unchanged but our ranking has dropped from 44th to 60th as other countries make efforts to improve their economies. We're not even the best in Africa. That's Mauritius, which has made dramatic efforts to liberalise and improve their investment environment. They are the 22nd most economically liberal economy in the world.

South Africa falls down in terms of the level of government ownership of the economy, tax levels, and the low level at which the top marginal tax rate kicks in. Our inflation rate, especially in terms of increasing money supply, our taxes on international trade and the inflexibility of our labour legislation are also all areas of concern.

Why does a ranking like this matter? It depends on your views of wealth creation. If you believe that people can vote themselves rich and that governments can legislate wealth creation then our level of economic freedom may not concern you.

On the other hand, investors looking for easy places to do business have 59 countries higher up the ladder to invest in before they get to us.

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