My first encounter with the term economic freedom must have been about four years ago when I heard of Julius Malema’s Economic Freedom Fighters Party. Well, I didn’t make much of it then as I was more fixated on the person of Julius Malema.
My second and most overt encounter with the term came under very interesting circumstances. While awaiting my turn at a shoeshine stall I frequent, I overheard one of the customers quip, “What Africa needs, now more than ever, is economic freedom. Economic freedom is the magic bullet that could lift Africa out of poverty.” I am not too sure whether his audience knew what he was talking about but his statement heightened my curiosity in the subject matter.
A week after the encounter, I stumbled upon a book titled The Tyranny of Experts: Economists, Dictators and the Forgotten Rights of the Poor by William Easterly, a former World Bank economist and an economics professor at New York University. The crux of Mr Easterly’s argument in his book is that poverty is really about a shortage of rights and freedoms and the institutions that emerge as a result.
However, I was left with a lingering question: What is economic freedom and why does it matter?
What is economic freedom?
Economic freedom is the degree to which individuals and businesses can make and execute economic decisions without interference from the government or other external forces. It involves the ability to make choices regarding consumption, production and investment without coercion or undue influence, allowing for greater autonomy in economic activities. Some of the tenets of economic freedom include; personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights.
Essentially, economic freedom proponents argue that economic development can be achieved by creating the right institutions that empower citizens to solve their own problems rather than meticulous central planning by the government. They proffer that these “right institutions” can only be enshrined by promoting and preserving the citizens’ economic rights and freedoms.
Time and again, their argument has been vindicated. To put this into perspective, according to the latest annual economic freedom report by the Fraser Institute, nations in the top quartile of economic freedom had an average per capita GDP of $48, 569 in 2021, compared to $6324 for nations in the bottom quartile. Further, 0.98 per cent of the population of nations in the top quartile experience extreme poverty ($US2.15 a day) compared to 31.86 per cent in the lowest quartile.
China is often cited as a perfect example of how a marginal increase in economic freedom could spur economic development. From 1979 to 1974, Chinese productivity increased at an annual rate of about 3.9 per cent as compared to 1.1 per cent during 1953 – 1978. While the impressive growth rate was attributed to increased capital investment in new machinery, better technology and investment in infrastructure, further research showed that the 1978 market-oriented reforms instituted by China were instrumental in spurring productivity.
Primarily, the market-oriented reforms allowed more room for private ownership of production, entrenched property rights, and granted greater autonomy to state enterprise managers. The enterprise managers were able to set production goals and sell products in the market for competitive prices. Additionally, China revised its erstwhile protectionist policy to allow foreign firms to invest and produce in China which not only created more jobs but also led to the transfer of technology.
An example closer to home is Botswana. Picture this, at the time of attaining self-governance in 1965, Botswana’s GDP per capita was just $80.20 more than half the African average. When it gained independence in 1966, Botswana was experiencing its worst drought in 30 years. So bad was the drought that one in every three Batswana relied on government food rations to survive.
However, by 2021, Botswana’s GDP per capita was 4.1 times more than the sub-Saharan average. Additionally, life expectancy levels had grown from an average of 53 years in 1966 to an average of 63 years in 2020. Academics and researchers have pinned Botswana’s steady growth on economic freedom fundamentals majorly; protection of property rights, minimal government intervention, low taxation, and attention to sound money.
How can African countries accelerate growth?
The African Continental Free Trade Area (AfCFTA) agreement could be a key accelerator for not only growth in trade but also economic development in Africa. Conceived in 2012, the AfCFTA is a trade pact designed to transform Africa into a single free market for goods and services.
The World Bank estimates that upon full implementation, the trade pact could help create 18 million more jobs in the continent. Further, the World Bank projects that the resulting jobs and income growth will raise up to 50 million Africans from extreme poverty by 2035.
Still, in its nascent implementation stages, only eight countries (Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, Tanzania and Tunisia) have been able to trade under the AfCFTA pact thus far. Countries are presently still working to streamline non-tariff barriers and negotiating the adoption of the various draft protocols.
By signing into the AfCFTA pact and committing to lower non-tariff barriers African countries will have expanded the freedom to trade on the continent. This ought to increase competition through the exploitation of opportunities for scale production as well as increase the scope for value addition to various products.
However, for member countries to fully reap from the trade pact, they should also provide a conducive economic environment for local businesses to prosper by further entrenching economic freedom on two fronts namely; sound money (money with relatively stable purchasing power over time) and property rights.
African governments should ensure that laws governing property rights are clear and consistent. Regulations should:
- foster voluntary and mutual exchange of property,
- ensure that no individuals or entities have an unfair competitive advantage in the transfer and acquisition of property.
When property rights are safeguarded, individuals and businesses are able to own property which they can use as collateral to acquire loans for investment and expansion of businesses.
A combination of the Ukraine-Russia war, the Israel-Palestine conflict and debt obligations saw inflation rates for most African countries rise steadily for much of last year heading into this year. This rise in inflation affects sound money because it erodes the purchasing power of individuals and even investors. Secondly, high and unpredictable rates (for example in Zimbabwe, which experienced an inflation rate of 172.2% in 2023) make it difficult for individuals and businesses to plan for the future. This uncertainty hinders economic growth and investment.
While there’s no single surfeit means to counter inflation since it is driven by multiple factors, African countries can improve their responses to it. To properly manage inflation, governments should implement prudent fiscal policies that prioritise sustainable budget deficits and debt management. Further, they should avoid excessive government spending financed through money printing or unsustainable borrowing.
Due to the fact that taxes have distortionary effects because they distort the large set of possible choices for both consumers and producers, they negatively impact sound money. This implies that to foster the economic freedom of producers and consumers’ governments should carry out tax reforms targeted towards broadening the tax base and reducing tax evasion as opposed to increasing the rate of taxation as has been happening in Kenya recently.
Going by evidence from China and Botswana pointed out earlier in the article, economic freedom is indeed a sure path to economic development. That the AfCFTA trade pact brings together a market of almost 1.3 billion people under a single market is an opportunity to boost trade and economic development of both the continent and individual countries. However, for countries to ensure that citizens and resident businesses benefit, they have to set them up for success by allowing them greater economic freedom.
