17 January 2008
South Africa’s economy is 63% free, according by the latest Index of Economic Freedom, ranking it 57th out of 157 countries worldwide and fourth out of 40 in sub-Saharan Africa. Despite obtaining a score that is above the world average, the country’s overall score is lower than last year’s figure.
The report, a product of the Washington-based Heritage Foundation and the Wall Street Journal, finds that the South Africa scores above average in seven out 10 categories of economic freedom.
While its scores for fiscal freedom, government size and monetary freedom declined from last year’s survey, South Africa’s score of 63.2% comes in higher than the sub-Saharan average of 54.5% and the global average of 60.3%.
Among major emerging markets, South Africa places ahead of Brazil (101 worldwide), India (115), China (126, termed “mostly un-free”), and Russia (134, termed “repressed”), and is only bettered by Mexico (44, termed “moderately free”).
Worldwide, the freest countries were Hong Kong, Singapore and Ireland, while the bottom of the list was propped up by North Korea, Cuba and Zimbabwe.
“The South African government has been working to increase the transparency of commercial regulations,” the report states.
“Income tax rates are high, but corporate taxes are moderate, and overall tax revenue is moderate as a percentage of gross domestic product. Inflation is moderate, and the government subsidises the market prices of only a few staple goods. The financial system is Africa’s most advanced.”
The report finds that starting a business and obtaining a business licence take less time in South Africa than the world average, while closing a business is also fairly simple and straightforward, giving the country a score of 71.2% for business freedom.
Despite scoring an above average 74.2% for trade freedom, the report warns that import and export restrictions, burdensome technical standards, excessive regulation, weak enforcement of intellectual property rights, inefficient bureaucracy and inconsistent customs administration add to costs of trade with the country.
“An additional 15 percentage points is deducted from South Africa’s trade freedom score to account for non-tariff barriers,” the report adds.
The report gives the country a score of 60% for financial freedom, above the world average, pointing to the existence of well-developed financial and capital markets, and to the JSE, which ranks among the world’s top 20 stock exchanges.
“Regulation is generally consistent with international standards and should be further improved by a new set of capital guidelines,” the researchers found.
SA received a score of 77.2% for monetary freedom, above the world average but lower than last year’s score. Researchers mention that the good score is due to relatively stable prices. They did, however, deduct 10 percentage points to account for policies that distort domestic prices.
“Prices are generally set by the market, but the government controls the prices of petroleum products, coal, paraffin and utilities and influences prices through regulation, state-owned enterprises and support programmes,” the report finds.
South Africa scored 50% for investment freedom, similar to the world average. While the researchers state that unclear regulations and rigid labour laws as disincentives, they point out that the country permits foreign investment in most sectors, generally without restricting its form or extent, while foreigners are allowed to establish foreign exchange accounts.
The country was given a score of 76.8% for government size, with the report pointing out that government spending equalled 27.8% of gross domestic product, while the state still exerts monopolistic control of enterprises in certain sectors.
It scored 50% for property rights, though the report finds that optical disc piracy is substantial and end-use piracy not a crime.
In addition, the researchers add that while South Africa’s judiciary is independent, and contracts are generally secure, the country’s courts are slow and understaffed and might impose undue burdens and costs on rights holders pursuing infringement cases.
With a freedom from corruption score of 46%, the report finds that corruption is perceived as significant, with South Africa ranking 51st out of 163 countries in Transparency International’s Corruption Perceptions Index for 2006. “Official corruption, particularly in the police and the Department of Home Affairs, is viewed as widespread,” the report states.
The only two areas where South Africa scores below the world average is for fiscal freedom (69.5%) and labour freedom (57.5%).
“Inflexible employment regulations hinder overall productivity growth and employment opportunities,” the researchers state. “The non-salary cost of employing a worker is low, but the rigidity of hiring and firing a worker creates a risk aversion for companies that would otherwise employ more people and grow.”