Defining Economic Freedom of the World (EFW)
Introduction
We know from history that the human spirit flourishes on fairness, opportunity, transparency, and liberty.Yet there are those who persist in attacking individual freedom in the name of collectivism, solidarity, and social justice. These false idols of socialist nirvanas may have emotional appeal for some, but the economic and social results when they become the touchstones of government policy are all too predictable: poverty, deprivation, and oppression.
With global economic recovery far from secure, many economies are at a critical stage and governments face important policy choices. Debt, recession, and financial instability have slowed progress in countries everywhere, and economic crises have become political crises, particularly in countries where governments play a large role in directing economic activity. South Asian countries are basically fallen in this category. If those who govern acknowledge the limits of government and make necessary policy adjustments, economic freedom can blossom and high growth can once again liberate millions from poverty and joblessness. If leaders instead carry on with ill-guided policies that empower their governments rather than their people, the result is likely, at best, to be economic stagnation and ever-increasing dependence.
We must have the courage to make a new start, to build a better free economy to be flourished completely. We must overcome the obstacles that created by our system and still feeding well to grab us all. This presentation is to show the complete view of the reality and to show the position where ours’ economies could be. It is to clarify the decisions that imposed on us to send us back far from the real improvement, so; in that sense it is the guideline for future path for freedom of economies of the South Asian countries along with Bangladesh.
Literature Review
One of the initial measures of economic freedom was developed by Freedom House (a U.S. based non-governmental organization, NGO, that conducts research and advocacy on democracy, political freedom and human rights), which has done extensive work on the measurement of political and cultural freedom. This measure included a range of indicators including freedom to establish a business and freedom of union organization. Somewhat in response to dissatisfaction with the Freedom House index from advocates of a libertarian (Libertarianism refers to the group of political philosophies which emphasize freedom, liberty, and voluntary association) or market liberal viewpoint, Milton Friedman (July 31, 1912 – November 16, 2006 was an American economist, statistician) and Michael Walker ( born 1945, in Corner Brook, Newfoundland is a Canadian economist. He is best known as the founder of The Fraser Institute) of the Fraser Institute hosted a series of conferences on economic freedom. Ultimately this resulted in a report on worldwide economic freedom, Economic Freedom of the World. Later the Heritage Foundation (is an American conservative think tank based in Washington, D.C.) and the Wall Street Journal (is an American English-language international daily newspaper) created another similar index, the Index of Economic Freedom.
In 2005, the Fresher Institute report states “When the functions of the minimal state—protection of people and their property from the actions of aggressors, enforcement of contracts, and provision of the limited set of public goods like roads, flood control projects, and money of stable value—are performed well, but the government does little else, a country’s rating on the EFW summary index will be high. Correspondingly, as government expenditures increase and regulations expand, a country’s rating will decline.”
In practice, the index measures:
- Size of Government: Expenditures, Taxes, and Enterprises
- Legal Structure and Security of Property Rights
- Access to Sound Money
- Freedom to Trade Internationally
- Regulation of Credit, Labor, and Business
The report uses 42 distinct variables, from for example the World Bank, to measure this. Some examples: tax rates, degree of juridical independence, inflation rates, costs of importing, and regulated prices. Each of the 5 areas above is given equal weight in the final score.
The claimed correlation between economic freedom and growth has been critically analyzed by a number of studies. De Hann and Siermann (Further Evidence on the Relationship Between Economic Freedom and Economic Growth, Public Choice. 95: 363–380) find that the relationship is not robust, while Heckelman and Stroup (Which Economic Freedoms Contribute to Growth?’, Kyklos, 53(4), 527-44) argue that the weighting procedure used in the construction of the index is arbitrary. They examine the components of the index individually and find that many – including a low top marginal tax rate – are negatively, rather than positively correlated with economic growth.
A frequent criticism is that China, and other developing nations, have high growth rates but relatively low economic freedom. Developing nations can have higher growth rates than developed nations, as they have cheap labor and can import investment, technology and organizational skills from rich countries.
On the other hand The Heritage Foundation’s states that the index’s 2008 definition of economic freedom is “The highest form of economic freedom provides an absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself.”
The index scores nations on 10 broad factors of economic freedom using statistics from organizations like the World Bank, the International Monetary Fund and the Economist Intelligence Unit: named –
- Business Freedom
- Trade Freedom
- Monetary Freedom
- Government Size/Spending
- Fiscal Freedom
- Property Rights
- Investment Freedom
- Financial Freedom
- Freedom from Corruption
- Labor Freedom
The 10 factors are averaged equally into a total score. Each one of the 10 freedoms is graded using a scale from 0 to 100, where 100 represent the maximum freedom. A score of 100 signifies an economic environment or set of policies that is most conducive to economic freedom. The methodology has shifted and changed as new data and measurements have become available, especially in the area of Labor freedom, which was given its own indicator spot in 2007.
Critics such as Jeffrey Sachs (The End of Poverty: Economic Possibilities for our Time (Penguin Books, 2005), pp. 320–321) have contested the Index’s assumption that economic openness necessarily leads to better growth. In his book Sachs graphed countries’ ratings on the index against GDP per capita growth between 1995 and 2003, claiming to demonstrate no correlation between a country’s rating and its rate of economic growth. Sachs pointed out, as examples, that countries with good ratings such as Switzerland and Uruguay had sluggish economic performances, others, like China, with poorer rating had very strong economic growth.
The UAE questioned the rating of their country’s economic freedom in 2008, comparing its middling rating with the high rating they had received from other indicators such as Transparency International and Moody’s. They also argued that the report is “unreliable” (“UAE challenges its economic freedom ranking in paper by Heritage Foundation “Business Intelligence Middle East. 31 January 2008. Retrieved 31 January 2008) because its methodology had changed twice in the last two years.
Stefan Karlsson of the Ludwig von Mises Institute (“The Failings of the Economic Freedom Index” Ludwig von Mises Institute. 21 January 2005. Retrieved 18 April 2008), challenged the usefulness of the index due to the fuzziness of many of the categories used to determine freedom. John Miller roundly criticizes the “Index”, writing in Dollars & Sense (http://www.dollarsandsense.org/archives/2005/0305miller.html), “In the hands of the Wall Street Journal and the Heritage Foundation, Washington’s foremost right-wing think tank, however, an economic freedom index merely measures corporate and entrepreneurial freedom from accountability. Upon examination, the index turns out to be a poor barometer of either freedom more broadly construed or of prosperity.” According to Left Business Observer, the Index has only a 33% statistical correlation with a standard measure of economic growth, GDP per capita ( Comparisons of Index of Economic Freedom with GDP/capita).
On the other hand Eliezer B. Ayal and Georgios Karras stated (Journal of Developing Areas, Vol.32, No.3, Spring 1998) reports from around the world strongly suggest that countries which have reduced the direct involvement of governments in economic activities show rising rates of growth. These reports often connect such alleged relationship to policies of privatization, changes in laws which make the relevant countries more accommodating to foreign and domestic private business, as well as to other measures which allow citizens to enjoy the fruit of their labor. They also conclude that culture may be important for economic growth, but economic institutions that support private property and rule of law are the foundation for a country’s successful economic growth. As De Haan and Sturm (De Haan, J. and Sturm, J. (2003) note, “since the time of Adam Smith, if not before, economists and economic historians have argued that the freedom to choose and supply resources, competition in business, trade with others and secure property rights are central ingredients for economic progress.”
The studies are in debate that is there any relation between economic freedom and economic growth or prosperity. So, It is also important that whether all components or areas of economic freedom index are equally important for economic prosperity or not? Researchers find that some areas of index of economic freedom have better positive correlation with growth than others. Hanke and Walters (1997) study the relationship between economic freedom and GDP per capita and find the positive correlation. De Haan and Siermann (1998) conclude that the economic freedom index established by Scully and Slottje is linked with growth but only in some out of the nine developed schemes. Wu and Davis (1999) probe the correlation between economic freedom, political freedom and growth and find that economic freedom has its unique importance especially for the purpose of economic growth. Carlsson and Lundstrom (2002) investigate those four out of seven areas of index of economic freedom (economic structure and use of markets, freedom to use alternative currencies, legal structure and security of ownership, and freedom of exchange in capital markets) are positively and significantly associated with growth. Two areas/components (size of government and international exchange, and freedom to trade with foreigners) are negatively and statistically significantly related to economic growth. And remaining one component (monetary policy and price stability) of economic freedom has statistically insignificant relationship with economic growth.
Theoretical Review and Conceptual Framework:
Defining Economic Freedom of the World (EFW)
Economic freedom is an important part of human liberty, without which rights of a person to life, liberty, and the pursuit of happiness may be fundamentally negotiation. As Friedrich Hayek once observed, “To be controlled in oureconomic pursuits means to be controlled in everything.” (Friedrich A. Hayek, The Road to Serfdom). According to Terry Miller and Anthony B. Kim (The Heritage Foundation: 2012 Index of Economic Freedom) Hayek’s keen and timeless observations on economic freedom are based on the truth that each person is, as a matter of natural right, a free and responsible individual with absolute dignity and fundamental liberties that righteous and effective political systems will regard as unassailable.
To build a better world, we must have the courage to make a new start. We must clear away the obstacles with which human folly has recently encumbered our path and release the creative energy of individuals. We must create conditions favorable to progress rather than “planning progress.”… The guiding principle in any attempt to create a world of free men must be this: a policy of freedom for the individual is the only truly progressive policy.
—Friedrich A. Hayek
A new line of research on economic freedom answers as Adam Smith did long ago. “Economic freedom” means the degree to which a market economy is in place, where the central components are voluntary exchange, free competition, and protection of persons and property (Gwartney and Lawson 2002)
“The property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable.”
– Adam Smith
In addition to that Niclas Berggren stated, Economic freedom is a composite that attempts to characterize the degree to which an economy is a market economy—that is, the degree to which it entails the possibility of entering into voluntary contracts within the framework of a stable and predictable rule of law that upholds contracts and protects private property, with a limited degree of interventionism in the form of government ownership, regulations, and taxes. Economic freedom is distinct from political freedom (participation in the political process on equal conditions, actual competition for political power, and free and fair elections) and from civil freedom (protection against unreasonable visitations, access to fair trials, freedom of assembly, freedom of religion, and freedom of speech). (Niclas Berggren, The Independent Review)
Economic Freedom Index
Both the Fraser Institute and the Heritage Foundation have indexes to measure and track economic freedom in the world.
The Fraser Institute’s annual report, The Economic Freedom of the World Report, is produced in partnership with Florida State University and Southern Methodist University, and itanalyzes five subcomponents to measure a country’s level of economic freedom. These subcomponents include the size of government based on expenditures and taxes; the legal structure and its protection of property rights; access to sound money; freedom to trade internationally; and regulation of credit, labor, and business. The Fraser Institute also maintains the Economic Freedom Network website, (www.freetheworld.com), which contains all previous economic freedom research including regional and sub-national reports and downloadable data sets. The Heritage Foundation, in partnership with the Wall Street Journal, publishes the Index of Economic Freedom, which evaluates various subcomponents of economic freedom, including levels of business, trade, fiscal, monetary, and labor freedom; government spending; and property rights.
(http://www.economicfreedom.org/about/what-is-economic-freedom/)
Economic freedom may constitute an explanatory factor for growth and the distribution of income. In econometric analysis, economic freedom is thus an independent variable. However, economic freedom may also be affected by other variables and thereby constitute a dependent variable, possibly influenced by factors such as political freedom, wealth, or democracy
According to Niclas Berggren (The Benefits of Economic Freedom A Survey) The most ambitious attempt to quantify economic freedom is the Economic Freedom Index (EFI) reported annually in Economic Freedom of the World (Gwartney and Lawson 2002). Since 1996, data updated yearly have been published, and the data now cover the years 1970, 1975, 1980, 1985, 1990, 1995, and 2000. These data have begun to be used in scholarly research, which has contributed to increasing our knowledge of the importance of economic freedom. Another such index is published by the Heritage Foundation in cooperation with the Wall Street Journal (O’Driscoll, Holmes, and O’Grady 2002). This index and the EFI are similar in their overall implications, but because the EFI has been used more extensively in academic contexts (in part because the other index goes back only to 1995 and uses more subjective variables), it is the focus of this article, which surveys the recent literature in the field.
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Economic freedom is a condition or state of being in which individuals can act with autonomy while in the pursuit of livelihood. Any discussion of economic freedom has at its heart consideration of the relationship between individuals and governments or other organized groups. The key ingredients (Economic Freedom of the World, Annual Report 2011) of economic freedom are:
i) Personal Choice
ii) Voluntary exchange coordinated by markets
iii) Freedom to enter and compete in markets, and
iv) Protection of persons and their property from aggression by others.
Economic Freedom: Autonomy, Not Anarchy
In general, state action or government controlthat interferes with individual autonomylimits economic freedom. The Index of EconomicFreedomis not, however, a call for anarchy.The goal of economic freedom is not simply anabsence of government force or constraint,but the creation and maintenance of a mutualsense of liberty for all. As individuals enjoy theblessings of economic freedom, they in turnhave a responsibility to respect the economicrights and freedoms of others. Governments areinstituted to ensure basic protections againstthe ravages of nature or the predations of onecitizen over another so that positive economicrights such as property and contracts are givensocietal as well as individual defense against thedestructive tendencies of others. A comprehensive definition of economic freedom should encompass all liberties and rights of production, distribution, or consumption of goods and services. The highest form of economic freedom should provide an absolute right of property ownership; fully realized freedoms of movement for labor, capital, and goods; and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself. – Terry Miller and Anthony B. Kim (The Heritage Foundation: 2012 Index of Economic Freedom)
In otherwords, individuals in an economically free societywould be free and entitled to work, produce,consume, and invest in any way they chooseunder a rule of law, with their freedom at onceboth protected and respected by the state.
Why Economic Freedom Important?
Economic freedom is important because it affects every aspect of an individual’s life. Living in a society with high levels of economic freedom leads to higher incomes, lower poverty, less unemployment, longer life expectancies, and cleaner environments, among a host of other benefits. More economic freedom improves well-being and leads to a higher quality of life (www.economicfreedom.org).
Using sensitivity analysis, De Haan and Siermann (1998, p. 372) show that whether or not ‘economic (sic) freedom is very important in explaining cross-country differences in growth performance quite clearly depends upon the indicator of economic (sic) freedom chosen’
With the reference of Economic Freedom of the World, Annual Report 2011, here it would be clearer about why economic freedom is important by mentioning just four areas:
A) Economic Freedom and Investment, Income and Growth
B) Economic Freedom, Reduction in Poverty and Improvements in Human Welfare
C) Economic Freedom, Cooperation, Tolerance, and Peaceful Relations
D) Economic Freedom, Entrepreneurship and Honesty in Government
A) Economic Freedom and Investment, Income and Growth
Economic freedom leads to more investment, higher per capita incomes, and growth rates. There are dozens of studies conducted and most of them found that higher levels of economic freedom or certain components of economic freedom exert an independent positive impact on investment, economic growth and income per capita. (Economic Freedom of the World, Annual Report 2011)
B) Economic Freedom, Reduction in Poverty and Improvements in Human Welfare
Economic freedom leads to less poverty and improvements in the general living condition s of a society. Critics sometimes charge that economic freedom and market allocation often result in the poor being left behind but research in this area is inconsistence with this view, countries with persistently high levels of economic freedom have lower poverty rates. Moreover, those that move toward more economic freedom enjoy better living standards across multiple dimensions. (Economic Freedom of the World, Annual Report 2011)
C) Economic Freedom, Cooperation, Tolerance, and Peaceful Relations
Economic freedom encourages cooperation, tolerance and peaceful relations. Political allocation promotes divisiveness and polarization. This encourages various groups to bind together in order to gain advantageous relative to other groups. Countries with higher levels of economic freedom are less likely to experience both internal and external use of violence. (Economic Freedom of the World, Annual Report 2011)
D) Economic Freedom, Entrepreneurship and Honesty in Government
Economic freedom leads to entrepreneurial business activity; political allocation leads to crony capitalism and political corruption. When resources are allocated by political decision-making, a system of crony capitalism will emerge. Predictable, politicians will allocate resources toward the politically powerful – those who can provide the advantages like votes, campaign funds, high paying jobs for political allies and yes, even bribes. (Economic Freedom of the World, Annual Report 2011)
Ten specific components of Economic Freedom Index
(As per 2012 Index of Economic Freedom by the Heritage Foundation & the Wall Street Journal)
1) Property Rights: It is the degree protection of rights on his own property of an individual or organization. The more certain the legal protection of property, the higher a country’s score; similarly, the greater the chances of government expropriation of property, the lower a country’s score.
2) Freedom from Corruption: The degree of having free from corruption from every public and private sectors by proper implementation and practice of laws and jurisdiction The higher the level of corruption, the lower the level of overall economic freedom and the lower a country’s score.
3) Fiscal Freedom: Fiscal Freedom is the level of independence that how much an individual or a organization can reduce its tax burden. 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
• The total tax burden as a percentage of GDP.
4) Government Spending: This component considers the level of government expenditures as a percentage of GDP. No attempt has been made to identify an ideal level of government expenditures. The ideal level will vary from country to country, depending on factors ranging from culture to geography to level of development.
5) Business Freedom: Business freedom is a freedom consists of the degree of having convenience starting a business, the start-up cost the exit of the business.
6) Labor freedom: Labor freedom consist flexibility of hiring, firing, refraining and wage issues according to market forces. Less rigidity better lifestyle could be added for labor freedom.
7) Monetary Freedom: Monetary freedom combines a measure of price stability with an assessment of price controls. Both inflation and price controls distort market activity. Price stability without microeconomic intervention is the ideal state for the free market.
8) Trade Freedom: Trade freedom is a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services.
9) Investment Freedom: In an economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be allowed to move their resources into and out of specific activities, both internally and across the country’s borders, without restriction.
10) Financial Freedom: Financial freedom is a measure of banking efficiency as well as a measure of independence from government control and interference in the financial sector. In an ideal banking and financing environment where a minimum level of government interference exists, independent central bank supervision and regulation of financial institutions are limited to enforcing contractual obligations and preventing fraud. Credit is allocated on market terms, and the government does not own financial institutions. Banks are free to extend credit, accept deposits, and conduct operations in foreign currencies. Foreign financial institutions operate freely and are treated the same as domestic institutions.
Analysis and Findings
Economic Freedom: A Comparative Scenario in South Asian Countries
The South Asian countries are developing countries consisting many more economical problems, political conflicts and judicial constraints. All this countries are trying to cop up with corruption, financial and Investment constraints and other crimes against economic freedom. The scores of 05 economies of the South Asian countries improved, but 02 countries lost economic freedom, and 01 showed no change. While the global scenario is 75 economies improved, but 90 countries lost economic freedom, and 14 showed no change. It is very impressive that South Asian countries are at improving stage where a large numbers of economies are loosing their economic freedom gradually.
Table: A Comparative Scenario in South Asian Countries
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
Findings: In the South Asian region, Sri Lanka is leading at the position of 97th in the world ranking with 58.3 score. Then, Bhutan 111th with 56.0 score; Pakistan 122nd with 54.7 score; India 123rd with 54.6 score; Bangladesh 130th 53.2 score; Nepal 147th with 50.2 score; Maldives 151st with 49.2 score; Myanmar 173rd with 38.7 score. Five economies, Sri Lanka, Myanmar, Maldives, Nepal and Bangladesh, of the South Asian countries improved to prove that they are working on economic freedom, but two countries, Bhutan and Pakistan lost economic freedom that they have before. Bhutan lost 1.0 score while Pakistan lost 0.4 score as well and India showed no change.
Change of Economic Freedom From 2011
Table: 4.2: Economic Freedom Positions of South Asian Countries
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
Discussions: It is very impressive that South Asian countries are in the improving stage of economic freedom so far. Because in the 2012 world economic freedom index the global scenario is 75 economies improved, but 90 countries lost economic freedom, and 14 showed no change.
A Comparative Scenario on Individual Areas of Economic Freedom of South Asian Countries
Comparative Economic Freedom Position in Property Rights Point of view
Findings: In this area of economic freedom we see that most of the South Asian economies get poor score. Only two countries Bhutan and India scored 60 and 50 respectively those are over the global average 43.4.
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
Discussions: Bhutan and India scored 60 and 50 which indicates that Bhutan is facing little possibility of corruption, influence on judiciary and enforcement of properties. Where India is facing possibility of corruption, inefficient judiciary possibility of enforcement of properties and Expropriation is possible but rare. Sri Lanka is facing highly inefficient court system, and delays are so long that they deter the use of the court system. Corruption is present, and the judiciary is influenced by other branches of government. Expropriation is possible. Nepal & Pakistan are facing same average degree of economic freedom. Nepal and Pakistan both scored 30 which indicate that Property ownership is weakly protected. The court system is highly inefficient. Corruption is extensive, and the judiciary is strongly influenced by other branches of government. Expropriation is possible. Maldives is facing common expropriation and highly corrupt system with the score of 25. Bangladesh is in great danger in this section of economies where scored 20 indicates weakly protected private property, the court system is so inefficient and corrupt that outside settlement and arbitration is the norm. Property rights are difficult to enforce. Judicial corruption is extensive. Expropriation is common. The economy of Myanmar is completely close to chaos situation where private property is rarely protected, and almost all property belongs to the state. The country is in such chaos (for example, because of ongoing war) that protection of property is almost impossible to enforce. The judiciary is so corrupt that property is not protected effectively. Expropriation is common.
Comparative Economic Freedom Positions in Corruptions
Findings: In this point of view all the South Asian countries failed to cross the global average 40.4 except Bhutan with 57.0. Corruption is common and the most important problem to economic freedom in this region.
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
Discussions: Bhutan with 57.0 indicates that the government’s Anti- Corruption Commission has identified misuse of resources, bribery and collusion, and nepotism as major forms of corruption.India 33.0, Corruption continues to erode confidence, particularly in connection with government procurement and defense contracts.Sri Lanka 32.0, Mistrust of government is considerable due to widespread public-sector corruption.Bangladesh 24.0,the effectiveness of Bangladesh’s Anti-Corruption Commission is under threat from proposed amendments to the Anti-Corruption Commission Act, which contains a number of procedural changes.Pakistan 23.0Pervasive corruption continues to erode the foundations of economic freedom Maldives 23.0,Corruption remains systemic throughout the economy, considerably undermining the foundations of economic freedom. Nepal 22.0, Public-sector corruption continues to be a serious concern. Effective anti-corruption measures are not in place, and government officials exploit their positions for personal gain.Myanmar 14.0, in the absence of institutional reforms, corruption is rampant and continues to be a serious barrier to sustained economic development.
Comparative Positions in Fiscal Point of View
Findings: Most of the economies of the South Asian region scored very well here. Bangladesh scored very poor here compare to the other countries of the South Asia. The global average of Fiscal Freedom calculated 76.9. So, three of our countries are took positions below the average.
Discussions: Maldives performance is extremely well scored 98.0 in this section of economic freedom implies that there is no income or corporate tax. Bank profits are subject to a profits tax. Overall tax revenue is estimated to be 14.1 percent of total
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
domestic income. Nepal 86.0, the top income and corporate tax rates are 25 percent. Other taxes include a value-added tax (VAT) and a property tax, with the overall tax burden amounting to 12.2 percent of total domestic income.Bhutan 83.8, the top income tax rate is 25 percent, and the corporate tax rate is 30 percent. Other taxes include a property tax and an excise tax, with the overall tax burden equal to 9.9 percent of total domestic income. A value-added tax (VAT) is set to be introduced in an effort to broaden the tax base. Myanmar 82.0, the top income and corporate tax rates are 30 percent. Official fiscal statistics are not regularly available. Overall tax revenue is estimated to be less than 5 percent of GDP, although income tax revenue has been rising rapidly in recent years.Pakistan 80.6, the top income tax rate is 25 percent, and the top corporate tax rate is 35 percent. Taxation is poorly administered. Other taxes includea general sales tax (GST) and an interest tax. The overall tax burden amounts to 9.3 percent of total domestic income. India 76.1, the top income tax rate is 30.9 percent (30 percent plus an education tax of 3 percent), and the top corporate tax rate is 33.22 percent (30 percent plus a reduced 7.5 percent surcharge and a 3 percent education tax on that total). The overall tax burden equals 16.8 percent of total domestic income,Sri Lanka 73.5, the top income tax rate is 35 percent, and the top corporate tax rate is 35.5 percent. Other taxes include a value-added tax (VAT), with the overall tax burden amounting to 12.8 percent of total domestic income. Bangladesh 72.8, the top income tax rate is 25 percent, and the top corporate tax rate is 45 percent. Other taxes include a value-added tax (VAT) that is currently being reformed. The overall tax burden amounts to 8.6 percent of total domestic income.
Comparative Govt. Spending
Findings: The ideal level of government spending will vary from country to country, depending on factors ranging from culture to geography to level of development. The global average of this section of economic freedom is 59.8, except Bhutan all the countries of South Asia scored over it.
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49 Repressed
Discussions: Myanmar has government spending has increased to 11.5 percent of total domestic output, resulting in widening deficits. Public debt corresponds to 42.8 percent of GDP. Bangladesh has government spending equals 14.3 percent of total domestic output, and public debt has declined to below 50 percent of GDP. The overall effectiveness of government is poor due to heavy bureaucracy.Nepal has government spending is equivalent to 19.9 percent of total domestic output. The budget balance has been in deficit in recent years, and public debt stands at around 36 percent of GDP. Government spending of Pakistan is equivalent to 19.9 percent of GDP. The deficit has been over 5 percent of GDP, and public debt amounts to over 50 percent of total domestic output. Sri Lankan government spending has risen to a level equivalent to 24.9 percent of GDP. The budget deficit continues to be over 5 percent of GDP, and public debt remains at over 80 percent of GDP. Government spending of India is equivalent to 29 percent of GDP. The budget balance remains in deficit, and public debt has reached 64.1 percent of GDP. In Bhutan government spending has increased to 38.6 percent of total domestic output, with public debt reaching 70 percent of GDP. Government spending of Maldives remains quite high at a level equivalent to 65 percent of GDP. The budget deficit has been chronically high at over 10 percent of total domestic output, and public debt has reached around 60 percent of GDP.
Comparative Business Freedom Scenario
Findings: Business freedom is a freedom consists of the degree of having convenience starting a business, the start-up cost the exit of the business. Global average of this point of view is 64.7. The world averages to launch a business are seven procedures and 30 days.
Discussions: Maldives is leading here in this category of economic index where the regulatory framework has become streamlined and less cumbersome. Launching a business takes less than the world averages of seven procedures and 30 days. After
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49 Repressed
Maldives we see Sri Lanka following the table with 78.0 score which implies that procedures for setting up a business have been streamlined, and the number of licensing requirements has been reduced. With no minimum capital required, launching a business takes four procedures and slightly longer than the world average of 30 days. Little progress has been made Pakistan in improving the entrepreneurial environment. Starting a business takes an average of 21 days, compared to the world average with 70.0 score. Recent reforms have improved regulatory efficiency of Bangladesh. Business start-up is simpler, with start-up time shortened by 19 days, and the costs of getting necessary permits and establishing a company have been reduced considerably. Bhutan 59.7 scored, a modern regulatory framework has not been fully developed. Despite recent efforts, the business climate is still hampered by inconsistent enforcement of regulations. On average, it takes 36 days to start a company. Despite some progress in streamlining the process for launching a business, in Nepal 53.6, other requirements are time-consuming and costly. Completing licensing requirements takes more than 200 days and costs over seven times the level of annual average income. In India 35.5, Entrepreneurs continue to face severe challenges. The regulatory framework is burdensome. Completing licensing requirements takes more than 200 days and costs over 16 times the level of average annual income. The regulatory environment of Myanmar 20.0 is severely hampered by lack of legal transparency, and much business activity is concentrated in state-owned enterprises. Political influence is strong in regulatory decision-making, and poor enforcement of laws undermines private-sector development.
Comparative Independence in Labor Issue
Findings: In the labor issue we see that four of our south Asian countries doing well standing over the global average 61.4 while the other is in development stage. Wage conflict and influential recruitment and dismiss are the regular problems here.
Discussions: Bhutan scored the highest among the South Asian countries in the labor freedom situation. Here the imbalance between labor supply and demand persists. Economic diversification has not progressed significantly, and unemployment has risen in
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
recent years. India scored 74.2, which implies that the labor regulatory framework is still evolving, and the informal economy remains an important source of employment. Enforcement of labor regulations is not effective in Maldives 71.9, and the labor market is underdeveloped. Much of the labor force is employed in the large public sector. In Sri Lank 62.1, the cost of completing licensing requirements is now significantly lower. Labor regulations are rigid, though enforcement can be lax. Although Bangladesh 55.9, a well-functioning labor market has not been fully developed, and labor productivity growth has been slightly higher than wage hikes. The labor market remains stagnant in Pakistan 47.8. A large portion of the workforce is underemployed in the informal sector. Labor regulations are Obsolete in Nepal 45.4. Labor–management tension has grown, and high underemployment persists. In Myanmar 20.0, the government sets public-sector wages and influences wage-setting in the private sector.
Comparative Monetary Freedom Scenario
Findings: Uprising and uncontrolled inflation is a great problem for each and every country in South Asia. The global average of monetary freedom is 74.4.
Discussions: Maldives has scored 75.3 just crossed the world average, here, lack of competition in the market has inflated price levels, hurting the standard of living. Inflation has been unstable and significant in Nepal 74.9. In Bhutan inflation has moderated slightly but remains worrisome. In Sri Lanka 68.5, Inflation has been high but declining. Bangladesh is facing inflationary pressure is high, and price control measures have been in place. Pakistan 66.3, where inflation has been quite high, disrupting monetary stability. India has scored quite a low score 62.9, the state maintains price controls on a range of products, and monetary stability has weakened notably. The situation of monetary freedom of Myanmar 61.2 can be state as other state price controls are in place, distorting domestic prices.
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
Comparative Trade Freedom Situation
Findings: In these days most of the countries in world are trying to be open and less constraint imposing to trade. In South Asia all the countries are in improving stage but only Sri Lanka made its position over the average 74.5.
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
Discussions: Sri Lanka is leading here with the score 77.1 among the South Asian countries. The trade weighted average tariff rate is 6.4 percent, and extensive non-tariff barriers further constrain freedom to trade. Trade freedom of Myanmar 73.6, remains constrained by myriad non-tariff barriers that increase the cost of trade. In Pakistan 66.0, the trade weighted average tariff rate is highly restrictive at 9.5 percent, and complex nontariff barriers further constrain freedom to trade. The trade weighted average tariff rate remains burdensome in India 64.1, at 7.9 percent, and complex nontariff barriers further impede dynamic growth in trade. In Nepal 61.5, the trade weighted average tariff rate is prohibitively high at 14.3 percent, with pervasive nontariff barriers further suppressing freedom to trade. The trade weighted tariff rate is 13 percent in Bangladesh 54.0, with myriad non-tariff barriers further increasing the cost of trade. In Bhutan 49.5, high tariff and non-tariff barriers prevent dynamic growth in trade. The trade weighted average tariff rate is prohibitively high in Maldives 43.7, at 20.6 percent, with non-tariff barriers adding further to the cost of trade.
Comparative Freedom Positions in Investment Point of view
Findings: Only Bangladesh playing a quite a courageous and challenging role in the South Asian region regarding investments. The global average of investment freedom is 50.7.
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free, 50–59.9 Mostly Unfree, 0–49.9 Repressed
Discussions: In Bangladesh 55.0, although foreign investment is welcome, potential investors face a host of challenges. In general, government laws and regulations and their implementation create rather than reduce impediments to investment. The investment regime remains inefficient in Pakistan 35.0. Foreign direct investment has been on the decline, impeded by political instability, sectarian conflict, and heavy bureaucracy. India’s 35.0, bureaucratic investment regime creates an unfavorable environment for new investment. In Maldives 35.0, heavy bureaucracy in the investment approval process severely hampers the already weak investment regime. Inadequate infrastructure and burdensome bureaucracy hinder much-needed dynamic growth in private investment of Sri Lanka 30.0. Foreign investment has been a sensitive issue in Bhutan 20.0, largely due to concerns about its effect on culture and traditions and possibly because of the domestic private sector’s unwillingness to lose the benefits those restrictions. In Nepal 10.0, private investment is hamstrung by political instability, and the inefficient investment regime is a further impediment to much-needed foreign investment. In Myanmar 0.0, foreign and domestic private investment is approved case-by-case, with many sectors reserved for domestic and government-controlled activity provide.
Comparative Financial Freedom Positions
Findings: Financial inclusions are not convincing in the South Asian region so far. All the financial institutions are strictly influenced by the government through central banks. But it is a good sign that many private financial institutions are taking place these days instead of government institutions. The global average in the financial freedom is 48.6.
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free,50–59.9 Mostly Unfree, 0–49.9 Repressed
Discussions: Non-performing loans in the banking system remain a problem in Sri Lanka 40.0, and the state continues to influence the allocation of credit. The non-banking financial sector remains underdeveloped. In Pakistan 40.0, a majority of commercial banks are private, but the banking sector remains vulnerable to state interference. Despite some liberalization, state owned institutions dominate the banking sector and capital markets in India 40.0. Foreign participation is limited in capital markets, which remain illiquid. The Bank of Bhutan 30.0, enjoyed a monopoly for many years, but competition has improved with the opening of the sector to more foreign partnerships. In Nepal 30.0, the financial sector remains fragmented, and government ownership continues to be substantial. Banking has expanded, with short-term financing widely available. However, high costs and limited access to financial services contribute to the overall shallowness of the financial sector of Maldives 30.0. In Bangladesh 20.0, Government ownership and interference in the financial sector remain considerable, undermining the sector’s efficiency. In Myanmar Banking is dominated by state owned banks, although several private banks have been in operation. Most loans are directed to government projects, and access to credit is highly controlled.
Section – 02
Economic Freedom: A Comparative Outline between South Asian and East Asian Countries Considering Different Economic Indicators
The South Asian countries are developing countries consisting many more economical problems, political conflicts and judicial constraints. All this countries are trying to cop up with corruption, financial and Investment constraints and other crimes against economic freedom. The scores of 05 economies of the South Asian countries improved, but 02 countries lost economic freedom, and 01 showed no change. While the global scenario is 75 economies improved, but 90 countries lost economic freedom, and 14 showed no change. It is very impressive that South Asian countries are at improving stage where a large numbers of economies are losing their economic freedom gradually. On the other hand East Asian Countries are mostly Advanced Developing countries 02 of them are standing on the first two positions of 2012 Index of Economic Freedom by The Heritage Foundations. Five economies, Sri Lanka, Myanmar, Maldives, Nepal and Bangladesh, of the South Asian countries improved to prove that they are working on economic freedom, but two countries, Bhutan and Pakistan lost economic freedom that they have before. Bhutan lost 1.0 score while Pakistan lost 0.4 score as well and India showed no change in 2012 world economic freedom index. The global scenario is 75 economies improved, but 90 countries lost economic freedom, and 14 showed no change. It is very impressive that South Asian countries are in the improving stage so far.
| World Rank | Country | Overall Score | Change From 2011 | Property Rights | Freedom from Corruption | Fiscal Freedom | Govt. Spending | Business Freedom | Labor Freedom | Monetary Freedom | Trade Freedom | Investment freedom | Financial Freedom |
| 01 | Hong kong | 89.9 | 0.2 | 90.0 | 84.0 | 93.1 | 91.0 | 98.9 | 86.5 | 85.8 | 90.0 | 90.0 | 90.0 |
| 02 | Singapore | 87.5 | 0.3 | 90.0 | 93.0 | 91.3 | 91.3 | 97.2 | 92.1 | 84.8 | 90.0 | 75.0 | 70.0 |
| 18 | Taiwan | 71.9 | 1.1 | 70.0 | 58.0 | 80.4 | 92.3 | 88.5 | 46.6 | 83.1 | 85.0 | 65.0 | 50.0 |
| 53 | Malaysia | 66.4 | 0.1 | 50.0 | 44.0 | 84.5 | 72.5 | 78.1 | 79.3 | 81.6 | 78.8 | 45.0 | 50.0 |
| 60 | Thailand | 64.9 | 0.2 | 45.0 | 35.0 | 75.1 | 87.5 | 72.5 | 79.0 | 69.3 | 75.2 | 40.0 | 70.0 |
| 115 | Indonesia | 56.4 | 0.4 | 30.0 | 28.0 | 83.5 | 91.6 | 54.6 | 52.1 | 75.2 | 73.9 | 35.0 | 40.0 |
| 138 | China | 51.2 | -0.8 | 20.0 | 35.0 | 70.4 | 84.1 | 46.4 | 55.4 | 74.2 | 71.6 | 25.0 | 30.0 |
| Global Average | 59.5 | 43.4 | 40.4 | 76.9 | 59.8 | 64.7 | 61.4 | 74.4 | 74.5 | 50.7 | 48.6 | ||
2012 Index of Economic Freedom World Rankings: East Asian Countries
(Data Source: 2012 Index of Economic Freedom)
Economic Freedom Scenario of East Asian Countries
In the East Asian region, Hong Kong is not only leading at the list but also in the world ranking with1st position, 89.9 score. Then, Singapore 2nd with 87.5 score; Taiwan 18th with 71.9 score; Malaysia 53rd with 66.4 score; Thailand 60th with 64.9 score;
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free,50–59.9 Mostly Unfree, 0–49.9 Repressed
Indonesia 115th with 56.4 score; China 138th with 51.2 score; Myanmar 173rd with 38.7 score. This scenario implies that East Asia is far more advanced in the economic freedom positions.
Average Score Comparisons Considering Ten Components of Economic Freedom between South Asian and East Asian Countries
Table: 4.3.13: Average Score of Ten Components of Economic Freedom
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free,50–59.9 Mostly Unfree, 0–49.9 Repressed
(Data Source: 2012 Index of Economic Freedom)
80–100 Free, 70–79.9 Mostly Free, 60–69.9 Moderately Free,50–59.9 Mostly Unfree, 0–49.9 Repressed
Here we found that East Asia is much more advance in almost all the indicators of the economic freedom index. South Asia is the worst here in financial freedom and; Investment freedom and freedom from corruption are just following it. In the shadow of Heritage Foundation’s 2012 Index of Economic Freedom the suggestions would be- South Asia has to improve law and order implications to remove corruptions, should be open in entrepreneurial activities of the inward or outward investments and create a healthy relation with central bank and the others imposing less restriction, the government should practice more transparency for better governance.
Comparisons between Economic Freedom and Economic Growth
Findings: A measure of economic growth from one period to another in percentage terms. This measure does not adjust for inflation; it is expressed in nominal terms.
In practice, it is a measure of the rate of change that a nation’s gross domestic product goes through from one year to another. Gross national product can also be used if a nation’s economy is heavily dependent on foreign earnings.
The economic growth rate provides insight into the general direction and magnitude of growth for the overall economy.
Table: Economic Freedom Vs Economic Growth: South Asia
| Country | 2008 | 2009 | 2010 | 2011 | ||||
| Economic Growth | EFI | Economic Growth | EFI | Economic Growth | EFI | Economic Growth | EFI | |
| Bangladesh | 6.2 | 44.2 | 5.7 | 47.5 | 6.1 | 51.1 | 6.5 | 53.0 |
| India | 7.5 | 54.1 | 7.0 | 54.4 | 9.0 | 53.8 | 7.6 | 54.6 |
| Nepal | 6.1 | 54.1 | 4.4 | 53.2 | 4.6 | 52.7 | 3.9 | 50.1 |
| Pakistan | 1.6 | 55.6 | 3.6 | 57.0 | 4.1 | 55.2 | 3.3 | 55.1 |
| Sri Lanka | 6.0 | 58.4 | 3.5 | 56.0 | 8.0 | 54.6 | 7.9 | 57.1 |
A Baseline scenario forecasts, based in part on Project LINK and UN/DESA World Economic Forecasting Model
Source: United Nations, World Economic Situation and Prospects 2012 and 2012 Index of Economic Freedom
Table: Economic Freedom Vs Economic Growth: East Asia
| Country | 2008 | 2009 | 2010 | 2011 | ||||
| Economic Growth | EFI | Economic Growth | EFI | Economic Growth | EFI | Economic Growth | EFI | |
| China | 9.60 | 53.1 | 9.20 | 53.2 | 10.40 | 51.0 | 9.3 | 52.0 |
| Hong Kong | 2.30 | 89.7 | -2.7 | 90.0 | 7.00 | 89.7 | 4.90 | 89.7 |
| Indonesia | 4.90 | 53.2 | 4.6 | 53.4 | 6.10 | 55.5 | 6.50 | 56.0 |
| Malaysia | 4.80 | 63.9 | -1.6 | 64.6 | 7.20 | 64.8 | 4.60 | 66.3 |
| Singapore | 1.50 | 87.3 | -0.8 | 87.1 | 14.50 | 86.1 | 5.00 | 87.2 |
| Thailand | 2.50 | 62.3 | -2.3 | 63.0 | 7 | |||