The Heritage Foundation and Wall Street Journal released the 2014 version of the Index of Economic Freedom on January 14. Globally, this measure of economic freedom is improving, with the global average freedom score reaching an all-time record of 60.3 out of 100 (where 100 is best). The global average score increased by 0.7 points compared to the 2013 index, and has risen 2.7 points in the 20 years that the index has been compiled. In the past year, economic freedom has improved in four of the six regions specified in the index, with Asia-Pacific making the most headway. From an African perspective, it is encouraging that sub-Saharan Africa (SSA) performed second-best, with the region’s average score improving by 0.9 points. Furthermore, six of the 11 countries that moved up the rankings by 10 places or more in 2014 are from SSA. Europe and South & Central America also experienced improvements over the past year. The Middle East and North Africa (MENA) region was the only region to experience a deterioration in economic freedom, with its score declining by 0.3 points. North America’s average score was unchanged despite a further deterioration in the US.
The top performer in Africa was, once again, Mauritius. The country is ranked eighth in the world and was lauded by the Heritage Foundation for having “demonstrated persistent commitment to the rule of law, limited government, regulatory efficiency, and open markets through good times and bad.” Botswana (ranked 27th globally), Rwanda (65th), and Ghana (66th) also perform reasonably well. Ghana’s score improved by 2.9 points over the past year on the back of a massive improvement in the control of government spending; we are however sceptical of this as fiscal indiscipline has deteriorated significantly during 2012-13. We believe that the Heritage Foundation’s figure for government spending as a percentage of GDP of 24% is much too low; we estimate that this ratio was 33% in 2013. South Africa’s score also improved compared to last year; however, it has deteriorated over the last decade. Africa’s other economic giant – Nigeria – has also failed to impress in recent years. The country’s score deteriorated by 0.8 points over the past year and has been on a downward trend over the past four years, with labour freedom, business freedom and freedom from corruption deteriorating significantly.
North African countries have generally performed poorly since the Arab Spring uprisings in 2011. Egypt, in particular, has seen its score decline from 59in the 2011 index to 52.9 in the 2014 index, making it one of the worst performers in the world in recent years. Its ranking has deteriorated from 96th to 135th over this period. Both the scores and rankings of Morocco, Tunisia and Algeria have also deteriorated over the same period, while Libya (which has always been repressed economically) is no longer included in the rankings. As shown in the accompanying graph, economic freedom in Africa is constrained mainly by a lack of property rights (average score of 30.7 out of 100), high levels of corruption (29.5 out of 100), and a lack of financial freedom (40.2 out of 100).
WHY DO WE CARE? Economic freedom is a key determinant of sustainable long-run economic development. The authorities of Mauritius, Botswana and Rwanda have therefore given their economies the best opportunity to thrive. Most African countries still have little economic freedom, but the upward trend in SSA is very encouraging. North Africa, on the other hand, is not performing well, with political turmoil and uncertainty constraining progress.
Analyst: Jacques Verreynne