South Africa now ranks 110 out of 162 in the Economic Freedom of the World (EFW) 2018 index. It had been reported that SA’s ranking was 94. However, following an error in World Bank data, spotted and investigated by Free Market Foundation’s (FMF) Eustace Davie and Neil Emerick, that figure has been revised.
This matters because economically free countries have higher levels of growth, better health, and lower levels of unemployment. Dropping into the the bottom third on this index does not bode well for South Africa’s investment story.
Released annually by the Fraser Institute (and the Free Market Foundation in South Africa), the report makes an important contribution to the analysis of economic policy. For this reason, accuracy is critical in producing a set of data upon which academics are happy to base their papers.
The error lay in the World Bank’s (WB) calculation of private versus public sector investment in South Africa. Before the error came to light, SA’s ratio of private sector investment as a percentage of total investment indicated an 8/10 mark on the index. A higher score indicates a higher percentage of private sector investment while a lower score would indicate ‘crowding out’ by the public sector. The score, as presented, ranked SA surprisingly in the top 30 countries in the world in this investment category.
However, the FMF team realised this number did not reflect the extent of South Africa’s state owned enterprises. Davie and Emerick found the WB source data erroneously added private sector investment and public enterprises together. Where the historic ratio of private sector to government investment had been consistently around 65/35(%), the new WB data suggested the private sector had been responsible for 85% of all fixed capital investment and government only 15%. The incorrect data remains available on the WB website.
The Free Market Foundation will work with the World Bank to correct the statistics distorting South Africa’s investment data and its ranking in the Economic Freedom of the World report.