If ever there was a golden age in the long and troubled history of mankind it is now:
- The 14 years since the beginning of the millennium have – despite the current conflicts in the Middle East – been the most peaceful period in human history.
- Between 1950 and 2011 global life expectancy rose from 47 to 70 years. Infant and maternal deaths and deaths from tuberculosis dropped by half.
- The UNDP Human Development Index – which measures income, education and health levels – rose from .559 in 1980 to .702 in 2013.
- The percentage of people living in absolute poverty – below US$1.25 – declined from 40% in 1980 to only 14% in 2010.
- Those living on US$2 a day dropped from 57% in 1981 to 34% in 2010 – but the actual numbers fell only from 2.6 billion to 2.4 billion.
So, the reality remains that, despite all this progress, a third of the world’s population continues to live in unacceptable poverty. The question is what can be done to remedy this situation?
I should like to suggest that governments should implement the approach that has worked so well throughout so much of the world since World War II.
- Their first duty is to protect the lives and property of their people.
- Governments should establish sound systems of law presided over by independent courts – to protect civil, economic and political rights and freedoms.
- They must create the circumstances in which free markets can flourish.
- They must ensure accountability, integrity and the elimination of corruption.
- Governments must provide cost-effective education, health and social services and basic care for those who cannot care for themselves.
- They must build and maintain public infrastructure.
- They should adopt sound fiscal and economic policies based on low taxation and balanced budgets.
- Governments should encourage free and open international trade.
- Finally, they must be open, responsive and accountable to the people through independent institutions, free media and regular elections.
There is an absolute correlation between countries that promote economic freedom – including all the above-mentioned factors – and positive economic and social outcomes.
- According to the Heritage Foundation’s annual Index of Economic Freedom the top 20% of countries in terms of economic freedom have an average per capita income of US$36 950 – more than seven times that of the bottom 20%.
- They have an average Human Development Index of .85 compared with an average HDI of only .58 for the bottom 20%.
- They are also freer. Only five of the 35 states in the top 20% are not free. Only five countries in the bottom 20% are free.
- States that best promote economic freedom are also the most equal. They have an average GINI index of 34.4 compared with 42.9 for the bottom 20%.
We must counter the growing tendency – following the 2008 global financial crisis – to downplay the role of free markets in the generation of wealth and the alleviation of poverty.
Free markets – and not governments – create wealth. They can nevertheless be driven recklessly as was undoubtedly the case before 2008.
Governments must enforce financial traffic rules and ensure that the free market vehicle is driven responsibly. However, before 2008 some governments were actively encouraging reckless financiers to break the speed limit by guaranteeing worthless sub-prime bonds. After the inevitable crash, they failed to allow irresponsible banks to go out of business.
Big government is not the solution to economic growth, wealth creation and the eradication of poverty:
- The greater the share of national income that is consumed by government, the fewer resources there are for the private sector to generate wealth.
- Excessive government expenditure can be financed only by growth-limiting taxation or ruinous borrowing.
- Governments are not subject to rigorous market discipline. They do not go out of business if they overspend or fail to provide services that people want.
- They generate large and well-paid bureaucracies that often justify their existence by over-regulating the activities of private citizens and companies – always, as they of course claim, in the public interest.
- Unlike the private sector, governments are accountable to their market – the voters – in elections that take place only once every four or five years. On such occasions the temptation for competing parties is always to promise the electorate benefits that can be paid for only by more taxation and borrowing.
Hong Kong is one of the best examples of the benefits of economic freedom and limited government. It also points to the best route to the generation of wealth, sustained economic growth and the eradication of poverty.
In 1960 Hong Kong had about the same per capita income as South Africa. Today, its per capita income is US$49 000 – almost five times higher than South Africa’s and US$12 000 higher than Britain’s.
Hong Kong has been successful because it has the freest economy in the world. It has a strong system of law, maximum personal tax of only 17%, low corruption, free trade and government expenditure of only 19.2% of GDP. And yet, despite its small government, Hong Kong has the 15th highest Human Development Index in the world – which indicates a very high level of wellbeing, health and education among the population.
The downside is high inequality. Hong Kong has a high GINI index of 53 and one-fifth of its population live in relative poverty. However, in Hong Kong poverty is defined as half of the median income – or US$50, per day. This is 40 times higher than the international extreme poverty standard – and higher than the per capita incomes of countries like Russia, Brazil and Chile.
In the rest of China Deng Xiaoping’s introduction of greater economic freedom has, during the past 30 years, led to the most spectacular enrichment of the largest number of people in the shortest period in history. More than 300 million people – more than the entire US population – have migrated from rural poverty to relative urban affluence in this period.
The basic formula for combating of poverty is clear: it includes free markets, the rule of law, and sound governance.
Mankind has, indeed, made spectacular progress during the past 30 years. We should address the fact that a third of the human population still lives in unacceptable poverty by encouraging governments to implement tried-and-tested policies based on economic and political freedom.
Issued by the FW de Klerk Foundation Cape Town
8 September 2014