Economic Freedom of the World 2008

Economic Freedom of the World: 2008 Dr. Mark Mullins Executive Director The Fraser Institute Celebrate Hong Kong, September 16, 2008 菲沙研究所 FRASER INSTITUTE THANK YOU FOR COMING! • The key to changing policy in the world is changing the climate of opinion about what works and what does not work in encouraging world development • The key to changing the climate of opinion is providing the widest possible audience with good information about the causes of development and underdevelopment Economic Freedom of the World Project • Objective: find a way to measure economic freedom and explore the connection between it and other variables • 20 year project • Led by Professor Milton Friedman, Rose Friedman and Michael Walker • Involved 60 of the world’s top scholars What is the Economic Freedom of the World Index?  An annual compilation of data representing factors which make a country economically free  Authors: James Gwartney and Robert Lawson  A compendium of 42 government policies affecting economic freedom based on objective data or independent surveys  A ranking of 141 countries representing 95% of the world’s population according to the extent to which they permit their citizens to be economically free  Now a collaboration of Institutes in over 70 different countries What is Economic Freedom? Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. An index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions. James Gwartney et al. 1996 Economic Freedom of the World Index • 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 Based entirely on objective, third party data or independent surveys for 141 countries Talk about making a difference … Member Institutes of the Economic Freedom of the World Network Albanian Center for Economic Research (ACER), Albania Fundación Libertad, Argentina Institute of Public Affairs, Australia TIGRA®, Austria Center for Economic and Political Research, Azerbaijan The Nassau Institute, Bahamas Making Our Economy Right (MOER), Bangladesh Scientific Research Mises Center, Belarus Centre for the New Europe, Belgium Fundacion Libertad y Democracia (FULIDE), Bolivia Instituto Liberal do Rio de Janeiro, Brazil Institute for Market Economics, Bulgaria Le Centre des Affaires Humaines (CEDAH), Burkina Faso Cambodia Institute of Development Study, Cambodia The Fraser Institute, Canada Instituto Libertad y Desarrollo, Chile Instituto Libertad y Progreso (ILP), Colombia Instituto para la Libertad y el Análisis de Políticas, Costa Rica The Institute of Economics, Croatia Liberální Institut, Czech Republic Center for Politiske Studier (CEPOS), Denmark Fundación Economía y Desarrollo Inc., Dominican Republic Instituto Ecuatoriano de Economía Política, Ecuador International University Audentes, Audentes University, Estonia Association pour la Liberté Economique et le Progrès Social (ALEPS), France Society for Disseminating Economic Knowledge:“New Economic School – Georgia”, Georgia Liberales Institut, Germany The Institute of Economic Affairs, Ghana Centro de Investigaciones Económicas Nacionales, Guatemala Institut de Recherche pour la Liberte Economique et la Prosperite (IRLEP), Haiti Hong Kong Centre for Economic Research, Hong Kong Szazadveg Foundation, Hungary Centre for Social and Economic Research (RSE), Iceland Centre for Civil Society, India The Institute for Development of Economics and Finance, Indonesia Open Republic Institute, Ireland Jerusalem Institute for Market Studies, Israel Centro Einaudi, Italy Bureau d'Analyse d'Ingenierie et de Logiciels (BAILO), Ivory Coast African Research Center for Public Policy and Market Process, Kenya Center for Free Enterprise, Korea Economic Policy Institute-Bishkek Consensus, Kyrgyz Republic Lithuanian Free Market Institute, Lithuania D'Letzeburger Land, Luxembourg Centro de Investigación para el Desarrollo A.C., Mexico Open Society Forum, Mongolia The Center for Entrepreneurship and Economic Development (CEED), Montenegro The Prosperity Foundation, Nepal The New Zealand Business Roundtable, New Zealand Institute of Public Policy Analysis, Nigeria Center for Business and Society Incorporated (Civita), Norway International Research Foundation (IRF), Oman Alternate Solutions Institute, Pakistan Pal-Think for Strategic Studies, Palestine Fundación Libertad, Panama Centro de Investigación y Estudios Legales (CITEL), Peru The Center for Research and Communication, Philippines Centrum im. Adama Smitha, Poland Causa Liberal, Portugal Romania Think Tank, Romania Institute of Economic Analysis, Russia Free Market Center (FMC), Serbia The F.A. Hayek Foundation, Slovak Republic Free Society Institute (FSI), Slovenia The Free Market Foundation of Southern Africa, South Africa Pathfinder Foundation, Sri Lanka Timbro, Sweden Liberales Institut, Switzerland Arthur Lok Jack Graduate School of Business, The University of the West Indies, Trinidad and Tobago Association for Liberal Thinking, Turkey The Ukrainian Center for Independent Political Research, Ukraine The Institute of Economic Affairs (IEA), United Kingdom CATO Institute, USA The Centre for the Dissemination of Economic Knowledge (CEDICE), Venezuela Research Center for Entrepreneurship Development, Vietnam Zambia Institute for Public Policy Analysis (ZIPPA), Zambia Sample of Press Coverage for Fraser Institute’s Economic Freedom of the World 2007 All Africa, Africa Business Day, Africa Business.lafrica.com, Africa La Nacion, Argentina Universia, Argentina Hetq Online, Armenia Gulf Daily News, Bahrain Zero Hora, Brazil Portal Acionista, Brazil O'Globo, Brazil Sofia Echo, Bulgaria Bulgarian Paper, Bulgaria Calgary Sun, Canada Globe and Mail, Canada National Post, Canada Toronto Sun, Canada Toronto Star, Canada Vancouver Sun, Canada China Post, China China Knowledge online, China Xinhua News, China Chinese Paper, China Business Day, Colombia Listin Diaro, Dominican Republic El Universon, Ecuador Faz.net, Germany German paper, Germany Die Presse, Germany Hong Kong Daily, Hong Kong Living in Hong Kong, Hong Kong Portfolio, Hungary Business Standard, India India Paper, India Business Standard, International El Economista, International Economist, International US4Arabs, International Reuters, International Globes Israel, Israel Israel Business Area, Israel Jerusalem Post, Israel Il Sole, Italy Al Ghad, Jordan Alrai Newspaper, Jordan Addustour Newspaper, Jordan Greaterkashmir.com, Kashmir Donga Daily, Korea Segye Daily, Korea Baltic Business Weekly, Latvia Latvian News Agency, Latvia Baltic Business Weekly, Latvia Nufooz web, Lebanon Edge Financial, Malaysia Edge Daily, Malaysia Agencia Mexicana de Noticias, Mexico La Jordana, Mexico La Cronica, Mexico UB Post, Mongolia Republika, Montenegro Market Montenegro, Montenegro Scoop, New Zealand Press, New Zealand Arabic Paper, Oman Oman Tribune, Oman Times of Oman, Oman Pakistan Press International, Pakistan The Post, Pakistan Pakistan Defence, Pakistan AHN, Pakistan Dawn, Pakistan Invertia Peru, Peru Philippine Daily Enquirer, Philippines Poland Press, Poland Rompres, Romania Russian Paper, Russia Blic Online, Serbia Finance, Slovenia Izvoznookno, Slovenia Slovanian Press agency, Slovenia The Strait Times, Singapore IVO.co.za, South Africa Mail and Guardian, South Africa News 24, South Africa Actualidad Economica, Spain Agencia EFE, Spain Europa Press, Servicio Economico, Spain Invertia, Spain Terra Espana, Spain Sudanile website, Sudan Al Khaleej Newspaper, UAE Khaleej Times, UAE Bull & Bear Financial Report, US Business Journal, US OpEdNews.com (Newtown,PA) Public Choice, US TradingMarkets.com, US Wall Street Journal, US Yahoo Finance, US El Universal, Venezuela El Nacional, Venezuela Invertia, Venezuela Business News, Zambia Zimbabwe Guardian, Zimbabwe Zimbabwe Standard, Zimbabwe Sub-National and Regional Indices Marketization Index of Chinese Provinces Economic Freedom of Indian States Economic Freedom of the Arab World Economic Freedom of Argentine Provinces Economic Freedom of German States Economic Freedom of North America Why is Economic Freedom Important? • Economic rights are fundamental rights in the sense that without them there can be no political or civil freedoms • They are a prerequisite for economic growth and development • They are a prerequisite for broader human development The impact on economic growth and development Per Capita Income and Economic Freedom Quartile $35,000 GDP Per Capita (ppp), 2006 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Least Free ………………... Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. Income (per person) of the Top 10 Singapore United States Ireland Hong Kong Switzerland Canada Australia United Kingdom New Zealand Chile $0 $10,000 $20,000 $30,000 $40,000 $50,000 GDP per Capita, 2006 (ppp) Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. Income (per person) of the Bottom Ten Venezuela Angola Congo, Rep. Of Chad Myanmar Central Afr. Rep. Niger Guinea-Bissau Congo, Dem. R. 0 10,000 20,000 30,000 40,000 50,000 GDP per Capita, 2006 (ppp) Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. Foreign Direct Investment and Economic Freedom Quartile Foreign direct investment, net inflows (% of GDP), 1990-2006 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Least Free ……………...…... Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. Economic Freedom,the Poor, and Inequality Income Share of the Poorest 10% and Economic Freedom Income Share Held by Lowest 10%, 1990-2006 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Least Free …………….. Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. Income Level of the Poorest 10% and Economic Freedom $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Income Level of the Poorest 10%, 1990-2006 Least Free …………….. Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. Economic Freedom, Other Freedoms and Democracy Economic Freedom and Political Rights Higher ratings indicate higher levels of political rights 10.0 8.0 6.0 4.0 2.0 0.0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Political Rights (out of 10) Least Free …………………. Most Free Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2006, available at http://www.freedomhouse.org/. Economic Freedom and Civil Liberties Higher ratings indicate higher levels of civil liberties 10.0 Civil Liberties (out of 10) 8.0 6.0 4.0 2.0 0.0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Least Free …………………… Most Free Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2006, available at http://www.freedomhouse.org/. Economic Freedom and Corruption Lower values indicate lower levels of corruption 10.0 Corruption Rating (out of 10) 8.0 6.0 4.0 2.0 0.0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Least Free …………………. Most Free Sources: The Fraser Institute; Transparency International, Corruption Perceptions Index, 2006/2007, available at http://www.transparency.org. The impact of Economic Freedom on the UN’s Human Development Index and other indicators of well-being Human Development Index and Economic Freedom Quartiles Higher ratings indicate higher levels of development 1.0 0.8 0.6 0.4 0.2 0.0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile United Nations Human Development Index Least Free ……………. Most Free Sources: The Fraser Institute; United Nations Development Programme, Human Development Indicators 2008, available at http://hdr.undp.org/. Life Expectancy at Birth and Economic Freedom Quartiles 80 60 Years 40 20 0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Least Free ……………. Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. Infant Mortality and Economic Freedom Quartile Per 1,000 live births, 2006 80 60 40 20 0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Least Free ………..………. Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. % of Population Using Improved Water Sources 100 80 Percentage 60 40 20 0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Least Free ………………... Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. Environmental Performance and Economic Freedom Quartile Higher ratings indicate higher levels of environmental performance 100 Index (out of 100) 80 60 40 20 0 Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile Least Free ………..……….. Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008. Introducing the 2008 Economic Freedom of the World Index Results Hong Kong Tops the Rankings Number One for Three Decades Overall Economic Freedom Index and the Top 10 Hong Kong Singapore New Zealand Average of top 10 Switzerland United Kingdom Chile Canada Australia United States Ireland 0 2 4 6 8 10 Score (out of 10) Source: The Fraser Institute. Overall Economic Freedom Index and the Bottom Ten Chad Central Afr. Rep. Guinea-Bissau Congo, Dem. R. Venezuela Niger Congo, Rep. Of Myanmar Angola Zimbabwe 0 2 4 6 8 10 Score (out of 10) Source: The Fraser Institute. Economic Freedom Over Time 10 Economic Freedom Score 8 6 6.1 4 2 0 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 5.5 5.4 5.5 5.7 6.0 6.4 6.4 6.4 6.4 6.4 6.6 6.6 Source: The Fraser Institute. Economic Freedom and the Top 10 Size of Government and the Top 10 Hong Kong Switzerland Singapore Chile Average of top 10 United States Canada Australia New Zealand United Kingdom Ireland 0 2 4 6 8 10 Source: The Fraser Institute. Score (out of 10) Size of Government 10 8 6 4 2006 2 0 World Top Ten Hong Kong 1995 2000 Source: The Fraser Institute. Transfers and subsidies 10.00 8.00 6.00 4.00 2.00 0.00 World Top Ten Hong Kong 1995 2000 2006 Source: The Fraser Institute. Wrong-Sizing Government Policies • Industrial subsidies distort investment and increase political intervention in economy • Spending down recently but the government is caught in vocal demands for more interventions • This is how a democratic system operates Legal System and Property Rights and the Top 10 New Zealand Australia Switzerland Singapore Canada United Kingdom Average of top 10 Hong Kong Ireland United States Chile 0 2 4 6 8 10 Score (out of 10) Source: The Fraser Institute. Integrity of the legal system 10 8 6 4 2006 2 0 World Top Ten Hong Kong 1995 2000 Source: The Fraser Institute. Judicial independence 10 8 6 4 2 0 World Top Ten Hong Kong 1995 2000 2006 Source: The Fraser Institute. Politics and the Law Policies Perceptual issues regarding politicization of legal systems • Integration with China may be part of the problem – producer and intellectual property rights are still an issue there • Democratization begets politicization Judicial independence is however improving Sound Money and the Top 10 United States Canada Switzerland Ireland Australia United Kingdom Average of top 10 Hong Kong New Zealand Chile Singapore 0 2 4 6 8 10 Source: The Fraser Institute. Score (out of 10) Sound Money 10 8 6 4 2 0 World Top Ten Hong Kong 1995 2000 2006 Source: The Fraser Institute. Sound Money Policies • Peg is secure and system was tested through Asian crisis and deflation • Monetary Authority retains its independence • Steady progress to renminbi-based trade and finance • A bit of recent slippage owing to inflation Freedom to Trade Internationally and the Top 10 Hong Kong Singapore Chile Ireland Average of top 10 New Zealand United Kingdom United States Australia Canada Switzerland 0 2 4 6 8 10 Source: The Fraser Institute. Score (out of 10) International capital market controls 10 8 6 4 2006 2 0 World Top Ten Hong Kong 1995 2000 Source: The Fraser Institute. Restrictions on engaging in capital market exchange with foreigners 10 8 6 4 2006 2 0 World Top Ten Hong Kong 1995 2000 Source: The Fraser Institute. Trade and Capital Policies • Is a non-preferential capital investment policy being eroded through industrial subsidies? • Capital restrictions must be addressed Regulations and the Top 10 New Zealand Hong Kong United States United Kingdom Chile Singapore Canada Average of top 10 Switzerland Australia Ireland 0 2 4 6 8 10 Score (out of 10) Source: The Fraser Institute. Regulations 10 8 1995 6 4 2 0 World Top Ten Hong Kong 2000 2006 Source: The Fraser Institute. Credit Market Regulations and the Top 10 New Zealand United Kingdom Australia United States Canada Average of top 10 Singapore Chile Hong Kong Switzerland Ireland 0 2 4 6 8 10 Source: The Fraser Institute. Score (out of 10) Extension of credit: percentage of credit extended to private sector 10 8 6 4 2 0 World Top Ten Hong Kong 1995 2000 2006 Source: The Fraser Institute. Business Regulations and the Top 10 Singapore Hong Kong New Zealand Canada Switzerland Average of top 10 Australia Ireland United Kingdom Chile United States 0 2 4 6 8 10 Score (out of 10) Source: The Fraser Institute. Time with government bureaucracy 10 8 6 4 2 0 World Top Ten Hong Kong 1995 2000 2006 Source: The Fraser Institute. Labor Market Regulations and the Top 10 United States Hong Kong Chile New Zealand Switzerland Average of top 10 United Kingdom Canada Australia Singapore Ireland 0 2 4 6 8 10 Score (out of 10) Source: The Fraser Institute. Labor Market Regulations 10 8 6 4 2 0 World Top Ten Hong Kong 1995 2000 2006 Source: The Fraser Institute. Red Tape Policies • Government is squeezing out private credit • Labour market is sound but watch out for hiring and firing regulations and minimum wage • Dramatic increase in time management spends with bureaucracy Economic Freedom in Action: Minimum Wages and the Wage Protection Movement Overview • Good intentions but many misconceptions • Not effective in alleviating poverty • Serious negative impacts on the labour market - especially for those people targeted for assistance • Wages are linked to productivity and labour market – neither of these change with a minimum wage Impact • Creates barriers for low-skilled workers – Fewer voluntary contracts – Takes first rung away from career ladder – Capital-labour and labour-labour substituting • Economic effects – Reduction in employment and hours worked – Reduction in training and benefits – More school dropouts • Impact exacerbated with more labour market regulations Evidence • Prof. Neumark and Dr. Wascher (2007): – Over 100 studies covering 20 countries – “overwhelming majority” of studies show minimum wage reduces employment – Stronger effect on “least-skilled groups” • Prof. Gunderson (2007): – Ontario government commissioned study – “no effect on reducing overall poverty” Wage Protection Movement • Regulatory approach with threat of legislation – a degree of coercion • Newspeak – “wage protection, vulnerable workers, reasonable wage, decent living” • Cleaners and guards today – who else tomorrow? WPM – How It Works • Average wage target biases wages higher • No link to productivity or market diversity • Firms act as regulators of subcontractors – agents of the government • Contracts introduce work practice rigidities • Complicated administration and enforcement • Loss of competitiveness – no change in productivity WPM – Ultimate Impact • Perverse outcome: fewer jobs for cleaners and guards and fewer opportunities for low skill workers • Thin edge of the wedge effect – damage will magnify • Is this the way to deal with the opening of the labour market to China? Better Policy Solutions • Address skills gaps with training and education • Address poverty gaps with general income support programs • Reduce entry barriers for low skill and new workers – including welfare programs • Avoid unnecessary interventions • Replace politics with economics in policy development Websites www.freetheworld.com www.fraserinstitute.org Today … Celebrate Hong Kong’s Economic Freedom Economic Freedom of the World: 2008 Dr. Mark Mullins Executive Director The Fraser Institute Celebrate Hong Kong, September 16, 2008