Economic freedom, small business and paying your damn invoices on time

Last week, the Canadian Fraser Institute released its yearly reminder that “liberty leads to well-being”.

The Economic Freedom of the World Report looks at some 40 data points grouped roughly into five broad categories which allow the researchers to rank the 162 countries they follow. The categories are: the size of government, legal system and property rights, sound money, freedom to trade internationally, and that old bug-bear, regulation.

Unsurprisingly, South Africa continued its downward trajectory, coming in at 101^st for 2017 (the latest year for which data was available). The previous year we ranked 99^th. Way back in the heady days of 2003 we peaked at 45^th, which means we’ve dropped 56 places over the past 14 years, making us less and less economically free. This matters, because the study concludes that nations which are economically free outperform non-free nations in essentially every indicator of well-being.

One of the authors of the study, Fred McMahon, said that it is “unambiguously true that the nations operating under a free market system bring the best quality of life to people,” asking whether we’d rather live in South Korea or the Philippines; Taiwan or Malaysia. He singles out Botswana, too, as an “African Tiger” which is the only consistently economically free nation in Africa with about the same growth rate as Singapore and Hong Kong, better than South Korea and tied with Taiwan. How did we get it so wrong with a Tiger on our border?

Since the Small Business Institute advocates for better – evidence-based – policy to enable SMEs to start, run and grow, we turned quickly to the section in the report on entrepreneurialism. The chapter cites a considerable amount of research (mostly their own) to show that more economically free countries enjoy not just more entrepreneurial activity, but more innovative entrepreneurship.

What does that mean for policy? Predictably, the study cautions against government intervention and small business support, but for good reason: Most new businesses, it says, create very few jobs and high-growth firms are disproportionate contributors to wealth and job creation. But even if government shifts its focus from supporting the formation of start-ups to those with growth potential, how will it identify these high-growth firms? How could it amass the right information and incentives to make an intervention to benefit such firms? If private sector investors with skin in the game have a hard time picking the winners, what government official could do better?

In the end, the Fraser Institute, like South Africa’s White Paper on Small Business (written in 1995) and every other policy document since, encourages government rather to foster “an environment in which innovative, job-creating firms flourish.” It suggests lowering taxes; removing barriers to entry; lowering transaction costs; and minimising the regulatory burden. To this, we would add “pay your damned invoices on time”.

For the economy overall, McMahon suggested that finding low-hanging fruit to fix is not the most important thing. Parliament has the power to restrain government, reform taxes and sell off government enterprises “overnight”, he says, but continually improving the rule of law matters most for South Africa. “No society,” he said, “has ever become wealthy without an impartial and firm rule of law. When law becomes politicised, the rich and powerful gain and the weak and poor lose.”

In the meantime, we’d be delighted to see the policy branches picked clean and Parliament waking up to finally legislate for competition, ease of doing business, regulatory impact assessments and thinking small first. Only by allowing businesses to do business, particularly those small ones poised for growth, will South Africa join the 100 nations more economically free enjoying all of that well-being. BM

Bernard Swanepoel is executive director of the Small Business Institute.