FreedomWorks

Recently, President Bush embarked upon a five-day, five-country tour of Africa that includes stops in Senegal, South Africa, Botswana, Uganda, and Nigeria. While the escalating civil war in Liberia may drive the news surrounding the trip, President Bush’s agenda includes promoting important reforms to promote economic growth. Africa provides a telling example of the importance of basic institutions such as the rule of law, property rights, free trade, and government accountability and transparency. While Africa is a continent rich in natural resources, institutional shortfalls and poor governance have left a trail of poverty, disease, and war that has destroyed the lives of millions of people.

By any measure, Africa is a continent that is struggling. According to the U.S. Agency for International Development, Africa contains 11 percent of the world’s population, but accounts for only 1 percent of the world’s economic activity, with an average GDP per capita of only $594. It has the lowest agricultural yields, with 40 million people facing the risk of starvation. Literacy rates are among the lowest in the world, and 42 million children are not enrolled in school. Tragically, HIV/AIDS is also exacting a toll on Africa; 20 million people have already died of the disease, and the total is expected to climb to 55 million by the year 2020. Twenty-four of the 25 nations hardest hit by HIV/AIDS are in Africa.

While present-day Africa is confronted by a number of challenges, this was not always the case. In the past, Africa was home to large trading empires, and by the 12th century Timbuktu (located in Mali) had become a renowned center of learning. The history of post-colonial Africa also provides interesting insights. When Ghana became independent in 1957, per capita income in that West African nation matched the per capita income of South Korea. With its educated population and rich base of natural resources, including diamonds, gold, agricultural resources, and timber, many economists thought growth in Ghana would far exceed growth in South Korea. In 2002, however, GDP per capita in Ghana was $1,900, while GDP per capita in South Korea was $16,000.

What accounts for the divergence in growth between the two nations, and the lackluster economic performance throughout Africa in the post-colonial era? Much of the difference has to do with the economic institutions and policies followed by the different nations. South Korea, for example, adopted an export-oriented growth model that utilized the nation’s comparative advantage while maintaining stable macroeconomic policies. In other words, South Korea followed a market-driven growth policy that generated considerable gains for the people of that nation. Other countries also adopted such policies, most notably the other Asian tigers—Singapore, Taiwan, and Hong Kong. Today these nations have achieved high a degree of prosperity while attracting foreign capital.

Many nations in the post-colonial world, however, followed much different economic policies that isolated themselves from the world while establishing ill-fated centrally planned economies. Sadly, the period of independence for many nations occurred in an era when economic planning was at its zenith, and development economists were promoting a host of damaging policies, from import substitution and protectionism to Marxist regimes. Governments rather than individuals made critical resource allocation decisions, leading to economic distortions, malinvestment, and government growth. Consider Ghana, for example. After achieving independence its new leader, Kwame Nkrumah centralized economic power, nationalized industries, and established farm policies that forced farmers to sell their crops to the government at fixed prices. In short order, foreign capital dried up, consumer prices soared, and Ghana’s lucrative cocoa market collapsed.

To put it simply, the difference in economic performance among nations comes down to economic freedom. Those nations that established laws and institutions to protect that freedom have fared well over time. This includes a legal system that protects property rights and enforces contracts, economic policies that promote stable prices and free trade, and a government that avoids overregulation, public sector expansion, and corruption. The International Monetary Fund notes that empirical studies find a strong correlation between the quality of institutions and economic performance.

With strong institutions entrepreneurship can flourish and prosperity increases; by contrast, the economic benefits of providing foreign aid to an inefficient or corrupt regime are questionable. To further demonstrate the importance of economic freedom, a recent study released by the Cato Institute ranked most African nations ranked low on the list of economic freedom while ranking such strong economic performers as Hong Kong and Singapore first and second, respectively (the United States ranks third). On his trip to Africa, President Bush needs to reiterate the importance of institutional reform if African nations hope to capitalize on their wealth of natural resources. As CSE Co-Chairman Dick Armey is fond of saying, “freedom works.” It works at home, and it works abroad.