SOUTH AFRICA

South Africa's economy is 63.2 per cent free, according to our 2008 assessment, which makes it the world's 57th freest economy. Its overall score is slightly lower than last year, reflecting worsened scores in three of the 10 economic freedoms. South Africa is ranked 4th out of 40 countries in the sub-Saharan Africa region, and its overall score is much higher than the regional average.

South Africa scores above average in seven areas. The government has been working to increase the transparency of commercial regulations. Income tax rates are high, but corporate taxes are moderate, and overall tax revenue is moderate as a percentage of GDP. Inflation is moderate, and the government subsidises the market prices of only a few staple goods. The financial system is Africa's most advanced.

South Africa scores slightly below the world average in fiscal freedom and labor freedom. The judicial system is slow, and race laws and unclear regulation hamper foreign investment, but the legal environment is free from political interference and the threat of expropriation.

Background

Two Boer republics and the British colonies of Cape and Natal formed the Union of South Africa in 1910, with whites retaining all political power. International pressure and popular uprisings led the apartheid government to lift bans on the African National Congress and other groups in 1990. Nelson Mandela won the first nonracial elections in 1994. Thabo Mbeki of the ANC won the 1999 election and was re-elected in 2004. 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 much of the population is poorly educated, and infrastructure and services remain inadequate. A decade of economic reform has helped growth rates. Crime, HIV/AIDS, and high unemployment remain serious problems.

Business freedom - 71.2%

The overall freedom to start, operate, and close a business is relatively well protected by South Africa's regulatory environment. Starting a business takes an average of 31 days, compared to the world average of 43 days. Obtaining a business license takes less than the world average of 19 procedures and 234 days. Closing a business is fairly simple and straightforward.

Trade freedom - 74.2%

South Africa's weighted average tariff rate was 5.4 per cent in 2005. Import and export restrictions, service market barriers, burdensome technical standards, non-transparent and inefficient bureaucracy, excessive regulation, weak enforcement of intellectual property rights, inconsistent customs administration, and corruption add to the cost of trade. An additional 15 percentage points is deducted from South Africa's trade freedom score to account for non-tariff barriers.

Fiscal freedom - 69.5%

South Africa has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 40 per cent, and the top corporate tax rate is 29 per cent. 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 24.6 per cent.

Freedom from Government - 76.8%

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 27.8 per cent of GDP. The state still exerts monopolistic control of enterprises in some sectors.

Monetary freedom - 77.2%

Inflation is moderate, averaging 4.1 per cent between 2004 and 2006. Relatively stable prices explain most of the monetary freedom score. Prices are generally set by the market, but the government controls the prices of petroleum products, coal, paraffin, and utilities and influences prices through regulation, state-owned enterprises, and support programs. An additional 10 percentage points is deducted from South Africa's monetary freedom score to account for policies that distort domestic prices.

Investment freedom - 50%

South Africa permits foreign investment in most sectors, generally without restricting its form or extent. A $2.7 billion aluminum smelting project was announced by Canadian investors in November 2006. The Black Economic Empowerment strategy establishes targets for equity ownership, management, procurement, and employment equality for "historically disadvantaged" individuals. Unclear regulations, a very high crime rate, and rigid labor laws are disincentives. Residents may establish foreign exchange accounts through authorised dealers, subject to government approval and quantitative limits. Non-residents may hold them with authorised dealers. Many payments, capital transactions, and transfers are subject to restrictions, controls, quantitative limits, and prior approval.

Financial freedom - 60%

Regulation is generally consistent with international standards and should be further improved by a new set of capital guidelines. Under the Financial Services Charter, banks must have 25 per cent 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 86 per cent 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. There were 184 insurers as of mid-2006. Capital markets are well developed, and the JSE Securities Exchange is one of the world's 20 largest.

Property rights - 50%

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 corruption - 46%

Corruption is perceived as significant. South Africa ranks 51st out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Official corruption, particularly in the police and the Department of Home Affairs, is viewed as widespread. South Africa is not a signatory of the OECD Convention on Combating Bribery but is a signatory of the U.N. Convention against Corruption.

Labour freedom - 57.5%

Inflexible employment regulations hinder overall productivity growth and employment opportunities. The non-salary cost of employing a worker is low, but the rigidity of hiring and firing a worker creates a risk aversion for companies that would otherwise employ more people and grow.

— Courtesy: The Heritage Foundation

Quick Facts

*          Population     46.9 million

*        GDP (PPP)  $520.9 billion

                    5.1% growth in 2005

                    4.2% 5-yr. comp. ann. growth

                    $11,110 per capita

*          Unemployment          26.6%

*          Inflation (CPI)          3.4%

*        FDI (net inflow)          $6.3 billion

*        Off. Dev. Assist.          $549.8 million

                    (24.8% from the U.S.)

*          External Debt          $30.6 billion

*          Exports        $66.4 billion

          Primarily gold, diamonds, platinum, other metals and minerals, machinery and equipment

*          Imports        $68.6 billion

          Primarily machinery and equipment, chemicals, petroleum products, scientific instruments, foodstuffs