If somebody else decides for you …
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Imagine if it is not you who decides your own affairs and your own destiny. Well, if you didn’t get my point clearly, let me explain it further. Imagine a situation where it is somebody else who decides what you should eat, what you should wear, how you should travel, and after all how much you should pay for all that.
Let’s explain a little further and expand it to say that it is somebody else who decides how much you should earn, what kind of living you should have, and what your own destiny should be. Even though people have dreams and aspirations for themselves as well as for their children, how terrible it is, if it is somebody else who decides how “poor” they should be and how far their children should progress.
This is exactly a situation where we have to live in, when there is no “economic freedom”. But the problem is that, perhaps, we may not understand the value of “freedom” if we have adapted to the system that we used to live in. We usually don’t admire freedom if we have never experienced it. Probably, that’s why in the society we live in we don’t attribute much value to “economic freedom” as we do with “political freedom”.
After living so long in our Third World democracies, we are quite appreciative of the concept of “political freedom”. But I am not sure whether we appreciate the concept of “economic freedom” to the same extent.
Economic freedom is the road to progress and prosperity of a nation. As Friedrich Hayek, an Austrian-British economist and a philosopher who wrote the famous book “The Road to Serfdom” said, “a policy of freedom for the individual is the only truly progressive policy”. Economic freedom is the right of everybody to decide for themselves how to direct their lives. This right is deprived, when somebody else decides it, while that “somebody else” could be a person, or a government, or even a system that has been in place.
Global picture of freedom
What is our status of “economic freedom” as a nation? I thought of focusing on this question so that it would also allow us to understand what it means to be “economically free”. According to the Economic Freedom Index 2020 published by the Heritage Foundation in the US, a nation’s economic freedom depends on 12 indicators that are classified under the four headings: (1) rule of law, (2) government size, (3) regulatory efficiency and (4) market openness.
Before we turn to Sri Lanka, let’s have a look at the global picture of economic freedom. Out of 180 countries, there are six countries which have the highest economic freedom and are classified as “free” – Singapore, Hong Kong, New Zealand, Australia, Switzerland, and Ireland. The second category is called “mostly free” and it includes 31 countries. This category includes mainly the rich nations such as the US, Japan, and Western European countries as well as Chile from Latin America, the UAE and Israel from West Asia, Malaysia, South Korea and Macau from Asia, and Rwanda from Africa. The third category is called “moderately free” which include 62 countries from all over the world. The fourth category of 62 nations in the world is called “mostly unfree”, while the last category which includes 19 nations is called “repressed” countries.
Economic freedom in Sri Lanka
File picture of cranes at the Colombo Port.
Sri Lanka is in the category of “mostly unfree” occupying 112th position among 180 countries. This means that Sri Lanka is not a country with economic freedom, while there are 111 countries which are better than Sri Lanka. There are also many African countries scoring more than Sri Lanka such as Uganda, Ghana, Tonga and Senegal.
Sri Lanka’s lowest scores are to be found in the category of “rule of law” which includes property rights, judicial effectiveness and government integrity. The second area that Sri Lanka’s score is low is the “market freedom”, which includes freedom for trade, investment and finance, while the freedom for the latter two is strictly restricted. Business freedom, monetary freedom and labour freedom are included in the category of “regulatory efficiency” where Sri Lanka has a moderate score, while the score is again poor in the area of labour freedom. Under the category of “government size” again Sri Lanka has a very low score for fiscal health.
Among all 12 indicators, the highest freedom score can be found in two indicators; tax burden and government spending. Nevertheless, in this case too both tax revenue and government spending as a percentage of GDP are low not because of higher “freedom”, but because of the government’s revenue collection inefficiency which also constrained government spending as well. In this context, Sri Lanka is “mostly (an) unfree” economy in the world.
Lack of choices in life
Lack of economic freedom means that the “choices” are limited for individuals as well as for the nation. The lack of “rule of law” means that people do not have the real “ownership” to property so that they have no choice to convert their property to create wealth. The lack of judicial effectiveness and government’s integrity means that there is uncertainty and unfairness which constrain people’s choices, blocking their way to progress.
Unhealthy fiscal management means that people’s choices are constrained by the resulting macroeconomic issues, including higher public debt. Regulatory inefficiency makes businesses more difficult so that it would be difficult for the country to generate incomes and create jobs, which keep the people poor. This is further aggravated by the lack of market freedom for trade, investment, financing constrain, economic progress and keeps the nation poor.
Lack of economic freedom limits the possibility of pursuing dreams and aspirations of the people. They want to have jobs and higher incomes, and then to lift up their living standards; they want to give even better jobs for their children and also to raise them above their standards. They wish to live in a rich country enjoying the prosperity as the people in rich countries do. But the lack of economic freedom has made that path to progress and prosperity more difficult.
Who is against freedom?
Generally free economies have a higher per capita income, lower poverty and, even more food security. They also have better and more livable environments. More economic freedom also means better health and better education. However, not many would understand that many countries which suffer from the lack of these fruits of progress and prosperity is mainly due to the lack of economic freedom. In order to understand that, it is necessary for us to fly away from our mental prisons.
Speaking of economic freedom can easily run into the risk of misunderstanding and denying its value. I must emphasise the fact that there is no country in the world with “absolute freedom”; if so then it could result in anarchy. The purpose of economic freedom is not the absence of government actions as well as rules and regulations, but rather the establishment of a “system” that works efficiently and effectively for every citizen equally.
In the absence of a system as such the choices are limited; when the choices are limited, you need to go after somebody – often, a politician or an official, to get things done for you and your family. Or you may even want to bribe someone and get things done. In fact, generally bribery and corruption are rampant in “less-free countries”. What is even more interesting is that politicians or bureaucrats who used to live on bribery and corruption never want economic freedom for their people.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
Source: Heritage Foundation, Economic Freedom Index 2020