Amid the crisis, many people lost much of their faith in private enterprise and free markets, which they accused of reckless risk-taking and uncontrolled greed. Scared of another global depression, they urged their governments to bail out the troubled financial institutions and to tighten regulation of the financial system to end the global financial crisis, although the government itself had been the root cause of the eruption of the crisis in the US. They also pressured their governments to jump-start the economy by increasing public expenditures, which would swell budget deficits and public debt, and by loosening monetary spigots, which would eventually fuel inflation. The US and many other governments readily obliged, as they directly and indirectly intervened in their macro and micro economies, often haphazardly and opaquely, with dubious outcomes. The US electorate has begun to notice this.
Although governments have an indispensible role of setting and enforcing the rules of the game as well as providing public goods in a well-functioning capitalist economy, and their intervention might have helped mitigate the crisis, any government action, especially if coerced, has costs as well as benefits. One such cost is the danger that as the government, through ad hoc and myopic quick fixes, excessively intervenes in and exerts overbearing control over the economy, it will curtail economic freedom. Less economic freedom will discourage the entrepreneurship, competition and innovation that have proven to be essential for rapid economic growth and rising prosperity.
How do we define economic freedom, how can we measure it and why is it essential for growth and prosperity? Two annual surveys, “Economic Freedom of the World” (EFW) by the Frazer Institute in Canada and the “Index of Economic Freedom” (IEF) by the Heritage Foundation-Wall Street Journal in the US, have tackled these questions. The latest EFW survey was published last September. I will focus on the better-known 2010 IEF report, released last week, which defines economic freedom as “the fundamental right of every human to control his or her own labor and property.”
According to the IEF report, when economic freedom exists “individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state … [and] governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.” The IEF emphasizes the basic principles of individual empowerment, equitable treatment and the promotion of competition.
The IEF report, based on data for the second half of 2008 and first half of 2009, ranks 183 countries according to 10 specific factors: Business Freedom, Trade Freedom, Fiscal Freedom, Government Freedom, Monetary Freedom, Investment Freedom, Financial Freedom, Property Rights, Freedom from Corruption and Labor Freedom. Each factor is graded from 0 to 100, and the scores for the 10 factors are averaged to get the overall IEF for each country. The closer the IEF is to 100, the greater the degree of economic freedom. The report, stressing the pervasive and multidimensional importance of economic freedom, shows that there is strong positive correlation between the IEF and (1) GDP per capita measured by purchasing power parity, (2) the Economist Intelligence Unit’s Index of Democracy, (3) the UN Human Development Index, and (4) the Environmental Performance Index. The freer countries also have not only lower rates of unemployment and inflation but also higher rates of economic growth.
The report classifies 179 countries into five quintiles according to their IEF scores: Free (80-100) with seven countries, Mostly Free (70-79.9) with 23 countries, Moderately Free (60-69.9) with 58 countries, Mostly Unfree (50-59.9) with 55 countries, and Repressed (0-49.9) with 36 countries. Four countries, Afghanistan, Iraq, Liechtenstein and Sudan, could not be numerically graded due to a lack of data. For all countries ranked in both 2009 and 2010, the overall average IEF decreased from 59.5 to 59.4 after five years of modest but steady increases. The top-10-ranked countries (with their total scores) are: Hong Kong (89.7), Singapore (86.1), Australia (82.6), New Zealand (82.1), Ireland (81.3), Switzerland (81.1), Canada (80.4), United States (78.0), Denmark (77.9) and Chile (77.2). Remarkably, among these 10 countries seven registered lower scores than in the previous year, with the US losing 2.7 points, the most, and dropping from the 6th to 8th position. With a score below 80, the US dropped from the “Free” status to the “Mostly Free” status for the first time in 16 years, reflecting the extraordinary and intrusive government interventions in the US economy during the crisis. Although four Asia–Pacific economies lead the world in economic freedom, North America has the highest regional IEF of 75.6, followed by Europe’s 66.8, with Europe accounting for nine of the world’s 20 freest countries. Sub-Saharan Africa has the lowest regional average IEF of 52.9.
According to the table below, Turkey’s IEF, above the global average since 2007, has risen significantly during the last five years, catapulting Turkey from “Mostly Unfree” status to “Moderately Free” status since 2009, a significant and praiseworthy achievement.
The increase of 2.2 points in its score in 2010, reflecting improvements especially in investment freedom, freedom from corruption and fiscal freedom, enabled Turkey to rank 67th globally. According to the chart below, Turkey’s scores improved in four areas but deteriorated in another four of the ten freedoms. Turkey’s Labor Freedom score, although slightly higher than in 2009, is the 20th lowest in the world due to rigid labor market regulations such as inefficient work rules and obstacles to hiring/laying off workers. It is not only the lowest among Turkey’s 10 scores but also the farthest below the global average for that score. Labor market rigidity worsens unemployment, discourages investment and lowers growth.
Turkey, which ranked only 31st among 43 countries in the European region, a region with a rising average IEF, has a huge potential for greater economic freedom waiting to be fully realized.
