HOMBRES DE GUERRA Y ERA ACEPTO A LOS OJOS de todo el

The final and ultimate objective of the SADC is to achieve a monetary union. If the SADC can successfully achieve a monetary union, economic integration between the member states will then be complete.

The SADC is working on a programme to establish a common central bank in the region by 2016, and a common currency by 2018. A monetary union is attractive because it will promote macroeconomic stability and economic growth among the Member States (SADC 2010).

Economic freedom is a tool that will help the SADC Member States come a step closer to achieving a monetary union. It is therefore important to explore the relevant monetary freedom indices, as well as their impact and ability to promote a monetary union.

As previously discussed, the inflation rate has been set as one of the indicators the SADC is using to monitor the progress towards macroeconomic convergence. The most recent results indicate

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that the majority of the SADC states have not yet achieved their set target of reaching single-digit inflation.

A closer look at economic freedom is required – in order to find a solution to the inflationary problem facing the SADC. Attempts should be made to allow the monetary authorities more freedom, to reduce government intervention, and to let the market take its course.

The Heritage Foundation‘s measure of monetary freedom combines a measure of price stability with an assessment of price controls. Both inflation and price controls stability distort market activity. Price stability without microeconomic intervention is the ideal state for the free market.

The score for the monetary freedom factor is based on two factors:

 Weighted average inflation rate for the three most recent years; and

 Price controls (Miller & Holmes 2010: 461).

According to Gwartney and Lawson (2009: 7), sound money is essential to protect property rights -- and thence, economic freedom. Inflation erodes the value of any property held in monetary instruments. When governments finance their expenditure by creating money, in effect, they are expropriating the property and violating the economic freedom of their citizens.

The Fraser Institute classifies its monetary freedom variable, Access to Sound Money, into four categories:

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 Money Growth;

 Standard deviation of inflation;

 Inflation: most recent year; and

 Freedom to own foreign currency (Gwartney & Lawson 2009: 6).

Figure 5.3 shows a time-series trend line for the monetary freedom index, derived from the Heritage Foundation for all the SADC members. This figure provides a possible explanation for why the SADC members have not had success in co-ordinating their monetary union.

Figure 5.3 The Heritage Foundation Time Series Trend Line for Monetary Freedom (All SADC Member States)

Since the beginning of the decade, monetary freedom and price stability have been declining. The negative relationship of the freedom index represents the increase in government intervention,

R² = 0.0296

58.0 60.0 62.0 64.0 66.0 68.0 70.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Monetary Freedom

The Heritage Foundation

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price controls -- as well as the constant increase in inflation. It appears that over time, the majority of the SADC member states have become less free.

A relatively big drop can be observed between 2009 and 2010 -- indicating some form of major government intervention. This could be due to the lagged effect from 2008, of government trying to stabilise the economy after the world economic meltdown.

Figure 5.4 shows a time-series trend line of the exact same monetary freedom index, derived from the Heritage Foundation, with one exception. Zimbabwe has been omitted. Zimbabwe‘s hyperinflation is estimated at over 10,000 percent. This is distorting the overall SADC index.

Figure 5.4 The Heritage Foundation Time Series Trend Line for Monetary Freedom

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Monetary Freedom

The Heritage Foundation

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Another interesting observation from Figure 5.4 is the stability of the trend line. While Figure 5.3 trend line appears volatile, with some movement, that of Figure 5.4 appears much more stable.

Between 2001 and 2009, the index only varies by 0.37 points from the mean, indicating a much more stable environment in the remainder of the SADC members.

Figure 5.5 illustrates a derivative of the Fraser Institute index variable to measure monetary freedom, Access to Sound Money. A derivative is used, as only three of the four components are relevant and can be used: Money Growth, Inflation in the most recent year, and the freedom to own foreign currency.

Figure 5.5 The Fraser Institute Time Series Trend Line for Access to Sound Money

The lack of most recent, as well as historic data, does not allow for any concrete conclusions.

Figure 5.5 illustrates that money growth has been relatively constant over the period, even though

0.0

2000 2001 2002 2003 2004 2005 2006 2007

Access to Sound Money

The Fraser Institute

Money Growth Inflation

Foreign Currency Freedom

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inflation has been steadily increasing. The freedom to own foreign currency component has varied over time, but returned, approximately, to its initial level.

The Heritage Foundation reports an average score of 63.7 for the monetary freedom of the SADC countries, and 70.6 for the world average. It is evident that the monetary freedom index score is the furthest from the world average, when looking at the ten freedom variables in Appendix C.

However, once Zimbabwe is removed the SADC, the average jumps to 68.2, which is more in line with the world average.

The Fraser Institute reports an average score of 6.93 for the Access to Sound Money variable, for the SADC, and 7.92 for the world average. Although the most recent data are not available, Zimbabwe reports a score of zero for the said index; and it is rated in last place for the Sound Money variable (as shown in Appendix D).

5.4 FISCAL BALANCE

The SADC set itself a goal to maintain a budget deficit of 5 percent or less of GDP. The budget balance comprises total central government expenditure and net lending, less total revenue. The majority of the SADC members have made progress in reducing their fiscal deficits; and some members reported budget surpluses (Zyuulu 2008: 99).

The Heritage Foundation, as well as the Fraser Institute provide indices to measure the freedom of a public entity. The Heritage Foundation uses two variables, namely: Fiscal Freedom and Government Spending as their measures. The Fraser Institute uses a variable called Size of

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Government: Expenditures, Taxes, and Enterprises, to measure the freedom of government.

These variables need to be discussed in the analysis of the SADC macroeconomic convergence goal of achieving fiscal balance.

The Heritage Foundation defines Fiscal freedom as a measure of the tax burden imposed by government. It includes both the direct tax burden -- in terms of the top tax rates on individual and corporate incomes -- and the overall amount of tax revenue, as a percentage of GDP. The Fiscal freedom component is composed of three quantitative factors:

 The top tax rate on individual income;

 The top tax rate on corporate income; and

 Total tax revenue, as a percentage of GDP.

Fiscal freedom scores are calculated by means of a quadratic cost function, to reflect the diminishing revenue returns from very high rates of taxation (Miller & Holmes 2010: 460).

Government spending considers the level of government expenditures as a percentage of GDP.

Government expenditures, including consumption and transfers, account for the entire score. Zero government spending is the benchmark, and underdeveloped countries with little government capacity may, consequently, receive artificially high scores.

However, such governments, which can provide few if any public goods, will be penalised by lower scores on some of the other components of economic freedom. Government spending that

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is close to zero is lightly penalised, while levels of government spending that exceed 30 percent of GDP receive much worse scores. Thus, only really large governments receive very low scores (Miller & Holmes 2010: 461).

The Fraser Institute uses four components to measure the freedom index, dubbed Size of Government: Expenditures, Taxes, and Enterprises. These are:

 General government consumption spending, as a percentage of total consumption;

 Transfers and subsidies, as a percentage of GDP;

 Government enterprises and investment; and

 Top marginal tax rate, consisting of:

 Top marginal income tax rate;

 Top marginal income and payroll tax rates (Gwartney & Lawson 2009: 6).

According to Miller and Holmes (2010: 12), because of the financial crisis and the recession, many countries have limited economic freedom and increased government intervention. The countries that have adopted this approach will experience the negative effect in future growth rates. This impact of government fiscal stimulus has had no positive impact on growth rates (See Figure 5.6 below), and the negative effects will only be fully measurable in future years.

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Figure 5.6 Fiscal Stimulus: No Impact on Growth

Source: Miller & Holmes (2010: 3)

Countries that moved from a higher category of economic freedom to a lower category, experienced lower economic growth than did their counterparts, that moved up to the next higher category. Thus, countries with higher levels grew more slowly during an economic crisis. (Refer to Figure 5.7 below). The deadweight loss -- from government inefficiency -- and the burdens associated with financing government deficits, make fiscal stimulus a poor policy choice in a recession (Miller & Holmes 2010: 13).

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Figure 5.7 Higher Government Spending during the Recession caused Lower Growth Rates

Source: Miller & Holmes (2010: 13)

To compare the performance of the SADC with that of the rest of the world with respect to government intervention and growth, the relevant variables need to be analysed. Table 5.1 illustrates each region‘s economic freedoms in comparison with the world average. It shows that the sub-Saharan Africa is below the world average for all freedoms, except government spending.

-3.3%

-3.9%

-5.3%

Less than 40% 40% - 50% More than 50%

GDP Growth, Q2 2008 to Q2 2009

Higher Government Spending, Lower