A Diamond’s Eye View of the World

a multi-faceted look at the middle east, and the middle west

Economic Freedom

Posted by adiamondinsunlight on May 5, 2007

How free are you?

Economic freedom is “the freedom to engage in economic transactions, without government interference but with government support of the institutions necessary for that freedom, including the rule of law, sound money [i.e., a national currency carefully managed to prevent inflation], and open markets”. (Source: Deardorff’s Glossary of International Economics)

The results of the 2007 Index on Economic Freedom, which ranks 161 countries on the basis of how they perform in ten areas, have recently been released.

Hong Kong, Singapore, Australia, the United States, New Zealand, the United Kingdom and Ireland are the top seven, with freedom indices of 80% or higher. These are the world’s “free” countries, at least in economic terms.

Many Arab world states fall into the Index’s “moderately free” category, with indices ranging from 60.0 to 69.9% free:

Bahrain is #39/68.7%.

Jordan is #53/64% .

Oman is #54/63.9%

Kuwait is #57/63.7%.

Qatar is #72/60.7%.

The UAE is #74/60.4%.

Lebanon is #77/60.3%.

The Index defines states with indices from 50.0 to 59.9% as mostly unfree, including:

KSA is #85/59.1%.

Yemen is #122/53.8%.

Only Syria, at 142/48.2%, falls into the Index’s “repressed” category.

(Iraq is listed as unranked while Palestine is not listed.)

The Arab state rankings are interesting because they present several puzzles:

Why is the Emirates doing so well financially, while Bahrain is languishing, when their rankings suggest the reverse should be true? Economic freedom is important, but clearly by no means the sole determinant of a particular country’s business appeal.

As a follow-up, I note that Lebanon and the UAE differ by only 0.1%. Why is Lebanon languishing in such doldrums? During last month’s trip to Dubai, I spent considerable time thinking of the emirate as what-Lebanon-could-be if only its leaders had made smarter business decisions over the past fifteen years. This index makes me wonder what I am missing – whether even an incredibly transparent economic climate here could compensate for all the rotten politics.

What is little Oman up to, with its friendly business climate? I remember the country as being beautiful and the people warm and welcoming, but I know little about its business activities.

And finally, Syria. Two summers ago I attended a World Bank conference in Damascus, in which several Syrians became irate when the economists presenting their findings stated that Syria’s productivity levels are no higher than Yemen’s. Apparently, productivity was only the tip of the economic iceberg – Yemen is considerably more free than Syria. Certainly sectors of the Syrian economy – including the growing private sector – are booming today, but … what a damning statistic, to see the country ranked 20 below any other Arab state and 70 or 90 below its immediate neighbors.

A bit of background information on the Index:

Research for the Index is undertaken by the Heritage Foundation, a major pro-free enterprise Washington think tank, and the Wall Street Journal. Both the foundation and the paper have a small government and highly capitalist bent, but also a commitment to accuracy. In other words, the Index is created by organizations with a particular vision, but the research is still good, as long as you remember that the economic freedom measured here is more relevant to entrepreneurs and business owners than wage workers.

The Index’s website lists the ten freedoms under consideration and defines them as follows:

  • Business freedom is the ability to create, operate, and close an enterprise quickly and easily. Burdensome, redundant regulatory rules are the most harmful barriers to business 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.
  • 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.
  • Freedom from government is defined to include all government expenditures—including consumption and transfers—and state-owned enterprises. Ideally, the state will provide only true public goods, with an absolute minimum of expenditure.
  • Fiscal freedom is a measure of the burden of government from the revenue side. It includes both the tax burden in terms of the top tax rate on income (individual and corporate separately) and the overall amount of tax revenue as portion of GDP.
  • Property rights is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state.
  • Investment freedom is an assessment of the free flow of capital, especially foreign capital.
  • Financial freedom is a measure of banking security as well as independence from government control. State ownership of banks and other financial institutions such as insurer and capital markets is an inefficient burden, and political favoritism has no place in a free capital market.
  • Freedom from corruption is based on quantitative data that assess the perception of corruption in the business environment, including levels of governmental legal, judicial, and administrative corruption.
  • Labor freedom is a composite measure of the ability of workers and businesses to interact without restriction by the state.

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