The Virtues of a Free Market System

Many attempts to discredit free market economics have been made by many writers. However, most of them inadvertently actually provide sufficient evidence of its efficacy as an economic system for Africa. Many proponents of a socialist system envy the European model of social welfare systems but forget to point out that economically many run market systems that allow competition amongst the private sector. The capitalist system is efficient precisely because it generates wealth and jobs which in turn provide tax revenue to Government to provide the social welfare schemes we would like for poor countries in Africa to copy. Some of the countries cited as examples (Britain and Scandinavian countries) are some of the most well run free market economies with huge multinational firms, like, BP, Nokia, Philips, British Airways, and KLM to name but a few originating from those same countries.

More importantly, Britain is the MOTHER of privatisation and deregulation. It should also be noted that even though privatisation in Britain started under the Tories (Conservative Party) the current Labour government has not reversed this process. In fact, Labour has extended privatisation to the health, social security and education sectors successfully. More importantly, the Labour Government soon after taking power in 1997 immediately imposed a “windfall” tax on UK utility companies as a way of financing social programmes aimed at creating new jobs.

Donor agencies from the UK, Sweden and the Netherlands are the biggest proponents of so called “pro-poor” market reforms in Africa. DFID is financing a major part of Africa’s public sector reform; SIDA is financing the financial sector reforms in Africa, while the Dutch are the major financiers of the agriculture sector and private sector development reforms. Free market economic systems are the best way for a country to create wealth and get out of poverty. If we look at the top ten countries based on the UN Human Development Index, we find that highly deregulated countries are in the top ten, namely; 1. Norway 2. Iceland 3. Australia 4. Luxembourg 5. Canada 6. Sweden 7. Switzerland 8. Ireland 9. Belgium 10. United States

As you will note from the above there is no country in the top ten that is socialist in any shape or form. Further, if we look at the top ten countries in terms of GDP per capita you find the same story and basically the same countries. When you compare a list of the top ten countries, with the lowest-ranking country (Malawi), by GDP per capita (in terms of Purchasing Power Parity, or PPP) it shows the following:

1. Luxembourg 69,800

2. Norway 42,364

3. United States 41,399

4. Ireland 40,610

5. Iceland 35,586

6. Denmark 34,737

7. Canada 34,273

8. Austria 33,615

9. Hong Kong, SAR 33,411

10. Switzerland 32,571

179. Malawi 596

In economics, purchasing power parity (PPP) is an estimate of the exchange rate required to equalise the purchasing power of different currencies, given the prices of goods and services in the countries concerned. PPP exchange rates are used for a number of purposes, most notably to compare the standard of living of two or more countries. It is necessary because comparing the gross domestic products (GDP) using market exchange rates does not accurately measure differences in income and consumption. Market exchange rates fluctuate widely, and the purchasing power parity hypothesis suggests that the long run equilibrium value is that which yields purchasing power parity.

From the above figures it is plain to see that statistics do not match the theory of capitalism as some dangerous animal out to steal people’s wealth. In actual fact it is a catalyst to economic development and it distributes wealth much better than using corrupt state controlled means which do not reach the intended masses. In 1755, the great economist and philosopher Adam Smith declared “little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and the tolerable administration of justice”. This leading advocate of laissez-faire capitalism is widely regarded as the father of modern economics around the developed world.

While he never used the term capitalism, he referred to his ideal as “the system of natural liberty”. Indeed what is known today as capitalism is all about liberty. Those who strongly support individual liberty, as most Africans do, see that it is government interference in people’s lives that is a great barrier to freedom. Anything that impinges on individual freedom is likely to have seriously negative consequences. We should not discard a system of free market economics just because the governments around Africa may have failed to implement effective market deregulation.

Instead we should learn from our mistakes and improve the system. Socialism or Marxism works only in the minds of academics and failed politicians, the reality on the ground is stark. Socialist countries are the poorest countries in the world. If China, India and Russia can embrace market economics, who are we in Africa to advocate a return to the dark ages? We should get away from ideology and begin to reflect on how we can create systems that will ensure we can create new jobs and diversify our economy and get the over 70% of our people out of poverty!! Let us take a serious look at the success and experience of India and China.