2010 January 26 Gb540: Economics for Global Decision Makers Try L. Muller
[ASSESSING THE DYNAMICS OF ECONOMIC FREEDOMS] This short paper highlights the relationship between economic freedoms and a country’s economic health and prosperity as it pertains to the 2009 Index of Economic Freedom. It shows some of the variability in economic wealth exhibited by countries based on the effectiveness of some of their stronger economic freedoms.
Dynamics of Economic Freedom
Introduction The Index for Economic Freedom brings out a very strong point that has direct implications for a country’s economic wealth: “If a government limits its involvement in economic activity, so as to maximize opportunities for individuals to reach their full economic potential, then it will be on a path leading to the greatest levels of prosperity and human well-being for society as a whole” (Miller, Holmes, Kim, 2009). Too much government interference inhibits the mutually beneficial interactions and transactions that occur every day. These transactions are the catalysts to increased productivity— ultimately leading to economic growth and wealth. By imposing exhaustive restrictions and barriers on what would normally be mutually beneficial transactions, the government stifles the economic activity stimulated by freedoms. Instead of transactions where both parties receive the expected benefit, the situation is now marked by taxes, fees, and lack of choice. This diminishes the value of the products and services that each party set out to obtain. The public-choice theory really characterizes this situation well because it gives validity to the idea that the public sector has no incentive to provide superior goods and services to attract consumers (Shaw, 2007). This provides even more affirmation to the fact that government interference beyond the minimal level necessary actually debilitates the people’s ability to create economic prosperity. To draw a stronger line between the variation in wealth among countries and their economic freedom, it is important to look at how some of the economic freedoms play a role in obtaining economic prosperity— specifically business freedom, trade freedom, and labor freedom.
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Hong Kong An outstanding example of a country devoted to business and trade freedom would definitely be Hong Kong. This is evident by its 89.7% economic freedom rating which is the number ranking in the 2010 Index for Economic Freedom. For the most part, the Hong Kong government has avoided owning and running business enterprises, engaging in trade protectionism, or imposing regulatory controls (The Economist, 2009). They also understand and promote competition as evidence by the many entrepreneurial activities and private producers that are prevalent in the country. It is also important to note that Hong Kong has very limited import or export duties and a significant amount of entrepot trading opportunities (The Economist, 2009). While economic times have hurt Hong Kong— as it would with most free market economies— it is still a great example of how economic freedom allows the people to have control over how to move forward with their lives. Economic power and decision-making is clearly dispersed throughout society and it is reflected in the economic prosperity we see from the country now. The Importance of Trade Freedom To put further emphasis on how trade translates to wealth, the index makes a great assertion: “No single nation has the natural resources, infrastructures, and human capital in sufficient quality and quantity to maintain the standard of living that developed nations have become accustomed to and developing nations aspire to” (Miller, Holmes, Kim, 2009). Thus, countries that have unnecessary restrictions on trade would also have to experience a less than efficient allocation of resources. Specialization and trade increase domestic production because comparative advantage will allow producers to
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Dynamics of Economic Freedom
obtain the products it would normally suffer a high opportunity cost to produce. Hence, domestic producers will be more incentivized to undertake work because they will be able to obtain the resources they need to provide quality products. The index points out the economic benefit of specialization and trade as it notes that there is a strong direct correlation between GDP Per Capita and Merchandise Trade (Miller, Holmes, Kim, 2009). To illustrate the potential ill-effects of a government that imposes debilitating trade restrictions, we can look at Vietnam. The Vietnamese people do not have complete freedom to ship and trade rice in their own country (Sanchez, 2004). This may partially explain why the country’s overall economic score is 49.8% with a below average trade freedom score. An increasing percentage of the world’s production for agriculture comes from these developing countries (Sanchez, 2004). If they are not flexible enough to respond to demand, they not only inhibit their own economic growth, but it will cause shortages and high prices on a more frequent basis for everyone they trade with. That is why it is so important for governments to emphasize less-restrictive international trade. It is a vital component of enabling progress toward economic wealth and prosperity. The European Social Model The European Social Model is followed by many Western European countries. It adheres to a principle of significant government intervention and those who follow this model intent to sustain such a system. Which is why it is easy to highlight the how inefficient the labor market is for the countries under that system. The labor market is a hub for protectionism and the number of unemployed who could not find jobs within in a year of being unemployed was 44% (compared to 13% in the U.S.) (Kane, 2007). The
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irony is that this number is derived from European countries who are said to be more “advanced” but place more complex restrictions on labor freedom in order to “protect” the worker (Kane, 2007). Hence, the lower the score in the labor freedom category clearly translates to a more stagnant economy and poor employment numbers. The point is that labor freedom has very serious implications for how well the economy does. It can be the difference between a healthy, prosperous economy and a nostalgic, suffering economy. This is because in order to create new jobs labor markets must be significantly freer. With highly restricted labor markets, income taxes and payroll taxes will diminish the population’s purchasing power and eventually diminish the incentive for individuals to contribute their resources to progressive economic activity. The most successful and economically prosperous countries are characterized by freer labor markets and lower taxes. This lays the groundwork for economic productivity that leads to wealth and prosperity because the country realizes that the “free market is the only reliable predictor of labor” (Miller, Holmes, Kim, 2009). Examining how business, trade, and labor freedom relates to economic wealth has given us a snapshot of the pivotal roles that each plays in a liquid, prosperous economy. The combination of these three freedoms alone has great implications for the opportunities individuals will have to access resource, education, and healthcare. Thus, people will take ownership of their role in the economy and efficiently allocate resources to the free market in order to increase wealth. Understanding Jordan The country of Jordan’s economic freedom score is 66.1, making it the 52 nd freest economy in the world. It has experienced an increase in its economic freedom over the 5
Dynamics of Economic Freedom
past five years (Miller, Holmes, Kim, 2009). This can probably be attributed to an average economic growth of 7% over the past few years. However, its current score reflects a 4% drop over the past 10 years (Miller, Holmes, Kim, 2009). While this may be due to many factors, it is no secret that Jordan has been endured political unrest for some time now. The economy will not bode well if consumed by oppressed people. 2001 – 2002 Around 2000 Jordan peaked on the Index of Economic Freedom with a 70% score. Much of this can be attributed to the country joining the WTO (World Trade Organization) in 2000 and signing a free trade agreement with the U.S. (Miller, Holmes, Kim, 2009). This probably has a lot to do with why trade freedom is one of the countries three strongest freedoms. Jordan has notably relaxed trade restrictions and recognizes the need to participate in international trade in order to maintain its economic prosperity. Thus, we can see how their economic freedom was stimulated by the steps it took to keep a steady flow of resources moving in and out of the economy. Obtaining the necessary resources for the U.S. allowed Jordan’s economy clearly allowed Jordan to pick up steam. It is also important to note that constants such as modest tax rates and flexible labor regulations also provided—and still provides— a decent level of stability to their economy. 2003 – 2006 Unfortunately, politics is the major dictating force in Jordan when it comes to economic freedom. Between 2003 and 2004 the country experience relative stability until political unrest began to set in. A National Agenda Committee was supposed to draft the beginning of what would be a plan for political, economic, and social reforms (Freedom 6
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House, 2006). However, many committee members were corrupt and decided to come to a solution for reform that would appease the political elite— not the people. The bill was passed between 2005 and 2006 and put serious restrictions on the independence of professional associations. It is not surprising that this was met with great criticism and social unrest. This instance illustrates why Jordan scored so poorly in the corruption freedom category. Civil liberties and rights of the people are always in jeopardy when such a corrupt and volatile political system exists. It is impossible to maintain economic stability— much less wealth and prosperity— if the people do not feel that decision are made for their benefit. In addition to this instance, several serious cases of embezzlement and abuse of authority by members of government were prosecuted between 2005 and 2006 (Freedom House). 2006 – Present Political actions and resulting social unrest has caused Jordan to tighten up how the government operates society. This is evident because in 2006, Jordan dropped to it lowest economic freedom rating since 1996 (approximately 63%). The index shows that the next three years (2007-2008) were consistently low years for Jordan. Freedom of assembly has become heavily restricted and requests by professional associations to convene has been rejected repeatedly (Serwer, 2009). Imposing such political restrictions has clearly stifled the economy flow because individuals cannot function freely enough. Jordan’s Implications The only reason Jordan has seen as small increase it economic freedom grade is because of the consistency and marginal improvements in the county’s stronger 7
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freedoms: trade, labor, and fiscal. However, the government interference in the daily lives of its people is hurting the economic productivity of the economy. Jordanian citizen are not even protected from arbitrary arrest and detention (Serwer, 2009). Suspected criminals can be detained 47 hours without a warrant and up to 10 days without formal charges. Jordan has experienced its 4% drop over the past 10 years because the government fails to “shape a fair and secure environment while also putting individuals first� (Miller, Holmes, Kim, 2009).
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Bibliography “Freedom in the World – Jordan”. (2006). Retrieved from the Freedom House database.
http://www.freedomhouse.org/inc/content/pubs/fiw/inc_country_detail.cfm?year=2 006&country=6989&pf “Suffrage City”(2209). Retrieved from The Economist database: January 25, 2009
http://www.economist.com/countries/Hongkong/ Holmes, K., Kim, B., Miller, T. (2009). 2009 Index of Economic Freedom. Published by The Wall Street Journal and The Heritage Foundation. Kane, T. (2007) “American Competitiveness: Why Well-Intentioned Labor Regulations Can Hurt More Than Help”. Retrieved The Heritage Foundation database: January 26,2009. http://www.heritage.org/Research/Economy/hl1037.cfm Serwer, A. (2009). “Can Jordan Build on its Relative Success?” Retrieved from Fortune Magazine database: January 26, 2009
http://money.cnn.com/2009/08/05/magazines/fortune/jordan_success_amman.for tune/index.htm?section=money_captainsblog Shaw, J.S. (2007) ”Public-Choice Theory”. Retrieved from Library of Economics database: January 25,2009.
http://www.econlib.org/library/Enc1/PublicChoiceTheory.html
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