Without economic freedom, economic development is unlikely. Whether you are starting a new business, claiming ownership of a piece of land, not being a victim of corruption, or paying low and simple taxes that don't swallow up most of your income, virtually all aspects of a healthy economy link back to economic freedom. Regrettably, according to a new report that measures economic freedom, many African states rank among the lowest in the world.
The Economic Freedom of the World Report, which is published annually by the Fraser Institute, a Canadian think tank, measures to what extent the policies and institutions of countries are supportive of economic freedom. This matters, especially for African countries, because there is robust evidence that freer economies are richer, healthier and grow faster when compared to less freer economies.
To rank economic freedom, the Fraser Institute’s 2021 report, which was published last month, analysis 165 countries across five major categories (size of government, legal systems and property rights, sound money, freedom to trade internationally, and regulation) which were further split into components and sub-components. A total of 42 indices are analysed in the report.
Amongst the top 10 countries where the concept of self-ownership is upheld in tandem with minimum government intervention in the economy, there was no African country present. Hong Kong, as usual, remained in the top position followed by Singapore, New Zealand, Switzerland, Georgia, United States, Ireland, Lithuania, Australia, and Denmark.
However, at the bottom of the EFW league table, seven of the 10 least free economies in the world were African; Central African Republic, Democratic Republic of Congo, Republic of Congo, Zimbabwe, Algeria, Libya and Sudan.
The rankings are important because they can influence decision-making for foreign investors and reassure or discourage prospective ones hoping to dip their toes into African markets. However, beyond investment, the EFW report highlights the drastically different outcomes between countries that have high economic freedom and those that experience the heavy-handedness of government interference.
The average GDP per-capita in countries that rank in the top quartile (i.e., the top twenty-five percent of countries ranked) for economic freedom is a staggering $50,619 compared to a meagre $5,911 for economies ranked in the bottom quartile. Similarly, the poorest 10% in countries where citizens are most economically free have an average income of $14,400. In contrast, the poorest 10% of people the least economically free countries have a per capita income of $1,549.
The EFW report also shows that while 34.1% of the population in the least free nations live in extreme poverty (defined as living on less than US$1.90 a day), only 0.9% of the population in the highest ranked countries do. Undoubtedly, economic freedom has strong links to lifting people out of poverty.
Interestingly, people in the freest countries tend to live 15 years longer than those in countries where government play a significant role in the economy. As people live longer in freer economies, it is not surprising to note that these states also have the lowest infant mortality rate, which is almost ten times lower when compared to nations in the lowest quartile of economic freedom. Among other beneficial educational outcomes, the data also reveals that school enrolment, especially at secondary school level, is much higher in the most economically free countries of the world.
A broad continental outlook of the EFW data reveals that the average economic freedom rating in Africa decreased from 6.8 out of 10 in 2000 to 6.71 in 2019, with a peak of 6.85 in 2012 (see figure 1). Taking a more in depth look at the data, Mauritius is ranked the highest in Africa, followed by Cabo Verde, Seychelles, Botswana, Uganda, Rwanda, Zambia, Gambia, South Africa and Nigeria. Mauritius and Cabo Verde are the only African countries in the most economically free quartile in the 165 countries analyzed in the report.
Furthermore, Mauritius ranks 11th globally, ranking higher than major countries such Canada, Japan, Germany, France and China. Sound money, one of the indicators of economic freedom which looks at components such as inflation, the freedom to own currency in foreign bank accounts and money growth is one of the biggest contributors to the success of Mauritius where the country scores an impressive 9.54 out of 10.
Despite the fall over time in economic freedom in Africa, it is not all doom and gloom for the continent. The introduction of the African Continental Free Trade Area (AfCFTA) will provide the needed boost for nations in Africa to catalyze economic freedom. With tariffs being slashed on as much 97% of goods and a commitment to intellectual property laws, integral components of economic freedom such as property rights and freedom to trade internationally could increase Africa’s overall position in the rankings drastically in future reports. This will go a long way in improving the wellbeing of millions of people.
While the AfCFTA will not suddenly fix all of Africa’s problems, it is a step in the right direction towards economic freedom which is strongly tied to prosperity and, in turn, it will assist in the upliftment of millions of people on the continent out of poverty.
Nana Fredua Agyeman is an Intern at the Initiative for African Trade and Prosperity.