2009 Index of Economic Freedom

Quick Facts

Population:

• 47.4 million

GDP (PPP):

• $430.7 billion
• 5.4% growth
• 4.4% 5-year compound annual growth
• $9087 per capita

Unemployment:

• 24.3%

Inflation (CPI):

• 7.1%

FDI Inflow:

• $-323500.0 million

South Africa's economic freedom score is 63.8, making its economy the 61st freest in the 2009 Index. Its score is 0.4 point better than last year, reflecting improvements in four of the 10 economic freedoms. South Africa is ranked 3rd out of 46 countries in the Sub-Saharan Africa region, and its overall score is higher than the world average.

South Africa scores above the world average in eight economic freedoms. Only eight enterprises remain state-owned, and government expenditure equals less than 30 percent of GDP. Monetary stability is relatively sound, but the government controls the prices of a few commodities. The financial system is one of the most developed in Africa and continues to grow.

South Africa scores below the world average in fiscal freedom. The corporate tax rate has fallen to 28 percent, but income tax rates remain high. Non-transparent regulations still discourage foreign investment. The judicial system is slow, and race laws and unclear regulations hamper foreign investment, but the legal environment is free from political interference and the threat of expropriation. Corruption is low compared to other countries in the region.

Background Back to the top

The economic hub of Sub-Saharan Africa, South Africa is in many ways two economies. Its mining, services, manufacturing, and agriculture sectors rival those in the developed world, but poverty is widespread, and much of the population is poorly educated and lacks access to adequate infrastructure and services. The government has sought to increase land ownership by black South Africans and exerts extensive influence over the economy through affirmative-action mandates that threaten private property rights. Crime, HIV/AIDS, and high unemployment remain serious problems. President Thabo Mbeki succeeded Nelson Mandela in 1999 and was re-elected in 2004. The peaceful process of political reconciliation that followed the end of apartheid has created a solid basis for democratic governance and respect for human rights.

Business Freedom 74.6 Back to the top

The overall freedom to conduct a business is relatively well protected under South Africa's regulatory environment. Starting a business takes 22 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 18 procedures and 225 days. Closing a business is fairly simple and straightforward.

Trade Freedom 74.8 Back to the top

South Africa's weighted average tariff rate was 5.1 percent in 2006. Import and export restrictions, services market barriers, some import and export permit requirements, burdensome technical standards, non-transparent government procurement procedures, burdensome and inefficient bureaucracy, weak enforcement of intellectual property rights, inconsistent customs administration, and corruption add to the cost of trade. Fifteen points were deducted from South Africa's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 68.9 Back to the top

South Africa has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 40 percent, and the top corporate tax rate is 28 percent, down from 29 percent. Other taxes include a value-added tax (VAT), a property tax, and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 26.9 percent.

Government Size 77.6 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 27.3 percent of GDP. The state still exerts monopolistic control of enterprises in some sectors, including transportation and electric utilities. Eight enterprises remain state-owned.

Monetary Freedom74.3 Back to the top

Inflation is moderately high, averaging 6.2 percent between 2005 and 2007. Prices are generally set by the market, but the government controls the prices of petroleum products, coal, paraffin, and utilities. Prices are also influenced through regulation, state-owned enterprises, and support programs. Ten points were deducted from South Africa's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign and domestic investments are treated equally under the law. South Africa permits foreign investment in most sectors, generally without restricting its form or extent. Non-transparent regulations, rigid labor laws, and crime are disincentives for investment. Residents may establish foreign exchange accounts through authorized dealers, subject to government approval and quantitative limits. Non-residents may hold them with authorized dealers. Most purchases of foreign exchange, payments, capital transactions, and transfers are subject to restrictions, controls, quantitative limits, and prior approval.

Financial Freedom60.0 Back to the top

South Africa's well-developed financial system continues to grow. The financial sector has evolved into one of the largest and most deregulated within the emerging markets, accounting for 20 percent of GDP. Under the Financial Services Charter, banks must have 25 percent black ownership by 2010, direct a portion of after-tax profits to specific projects, and employ a fair representation of disadvantaged individuals in management. Banking is dominated by five large banks that account for over 80 percent of operations and offer a full spectrum of services. Consolidation has reduced the number of domestic banks by 40 since 2001. There are many microfinance institutions, and many credit operations of traditionally disadvantaged black South Africans are outside of formal banks. Capital markets are well developed and centered around the Johannesburg Securities Exchange, which is one of the world's 20 largest in terms of market capitalization.

Property Rights50.0 Back to the top

The threat of expropriation is low. The judiciary is independent, and contracts are generally secure, but the courts are slow, understaffed, underfunded, and overburdened. Optical disc piracy is substantial, and end-use piracy is not a crime. The courts impose undue burdens and costs on rights holders pursuing infringement cases. The Medicines Control Council is notoriously inefficient and tardy with approvals.

Freedom From Corruption51.0 Back to the top

Corruption is perceived as significant. South Africa ranks 43rd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007, a slight improvement over 2006. Official corruption, particularly in the police and the Department of Home Affairs, is viewed as widespread. South Africa has not signed the OECD Convention on Combating Bribery but has signed the U.N. Convention Against Corruption.

Labor Freedom56.8 Back to the top

South Africa's inflexible labor regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is low, but the difficulty of firing a worker creates a disincentive for additional hiring.