Post-war Sri Lanka has seen gains since last year in an international Index on Economic Freedom, securing 2.5 points more in 2011 than in 2010 and being placed 107th in the new list issued by the promoters of the index, The Wall Street Journal and The Heritage Foundation, Washington's pre-eminent think tank.
In a statement this week, the promoters said Sri Lanka’s economic freedom score is 57.1 and its increased score this year reflects ‘major gains in trade, monetary, and investment freedom’.
Sri Lanka is ranked 19th out of 41 countries in the Asia–Pacific region, and its score improvement is one of the 10 largest in the 2011 Index, it said. The two Washington organizations have tracked the ‘march of economic freedom around the world with the influential Index of Economic Freedom’.
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| File photo shows garment factory workers.Sri Lanka’s labour regulations are rigid, although enforcement of the labour code remains inefficient. The non-salary cost of employing a worker is moderate, but dismissing an employee is difficult. |
Since 1995, the Index which covers 10 freedoms - from property rights to entrepreneurship – in 183 countries, has created 10 benchmarks that gauge the economic success of 183 countries around the world. With its user-friendly format, readers can see how 18th century theories on prosperity and economic freedom are realities in the 21st century, the statement said.
Here are excerpts of the statement:
Sri Lanka’s economy is characterized by poor governance, ongoing political instability that undermines credible reform progress, and heavy reliance on foreign assistance. Overall, weak reform efforts have failed to stimulate broad-based economic growth. The heavy presence of the state in the economy continues to hamper private-sector development.
Challenges to economic freedom in Sri Lanka are considerable. The average applied tariff rate has dropped significantly, but the persistence of non-tariff barriers still adds to the costs of trade. A lack of transparency and a burdensome approval process continue to impede much-needed growth in private investment. Property rights are undermined by an inefficient judicial system, which is also subject to substantial corruption and political influence.
Sri Lanka depends heavily on foreign assistance, and China has become a significant lender for infrastructure projects.
Business Freedom
Bureaucratic bottlenecks increase the cost of conducting business. Despite some progress in streamlining the process for launching a business, other time-consuming requirements reduce the efficiency of the overall regulatory system.
Trade Freedom
Sri Lanka’s simple average tariff rate was 6.4 % in 2009. Import bans and restrictions, services market barriers, import fees, import licensing, restrictive standards and regulations, non-transparent government procurement, weak enforcement of intellectual property rights, export subsidies, and corruption add to the cost of trade. Fifteen points were deducted from Sri Lanka’s trade freedom score to account for non-tariff barriers.
Fiscal Freedom
Sri Lanka has relatively high tax rates. The top income tax rate is 35 % (33.33 % for companies listed for less than five years), and the top corporate tax rate is 35.5 % (when a Social Responsibility Levy amounting to a 1.5 % surtax is counted). Other taxes include a value-added tax (VAT) and a stamp duty on the transfer of immovable property. In the most recent year, overall tax revenue as a percentage of GDP was 13.3 %.
Government Spending
In the most recent year, total government expenditures, including consumption and transfer payments, held relatively steady at 22.6 % of GDP. State-owned electricity and oil companies are not on solid financial ground.
Monetary Freedom
Inflation has been high but declining, averaging 9.2 % between 2007 and 2009. The government influences prices through regulations, state-owned enterprises, and subsidies for a wide array of goods. Fifteen points were deducted from Sri Lanka’s monetary freedom score to account for measures that distort domestic prices.
Investment Freedom
Sri Lanka allows 100 % foreign ownership in some sectors of the economy but imposes ownership limits in others. Foreign investment is screened by the government. Security concerns, inconsistent and non-transparent regulation, inadequate infrastructure, and cumbersome bureaucracy are other impediments to investment. Residents and non-residents may hold foreign exchange accounts subject to requirements, including government approval in some cases. Payments, capital transactions, and transfers are subject to reporting requirements, limits, or government approval. Private land ownership is limited to 50 acres per person. Foreign investors can purchase land, but there is a 100 % tax on such transfers.
Financial Freedom
Sri Lanka’s financial system remains vulnerable to government influence. Banking dominates the financial sector, but high credit costs discourage more dynamic business activity. Regulations permit 100 % foreign control of banks, insurance companies, and stock brokerages. Regulations are largely consistent with international standards, but supervision and enforcement are insufficient. The banking sector is dominated by two state-owned banks, although the presence of foreign banks is considerable. The two state banks, which have accumulated considerable bad debt, account for around 40 % of total assets. The Central Bank is not fully independent. The government influences the allocation of credit and uses domestic financial resources to finance government borrowing. Capital markets are centered on the Colombo Stock Exchange, which is modern but relatively small.
Property Rights
The judiciary is influenced by other branches of government, and extensive delays lead investors most often to pursue out-of-court settlements. A fairly reliable registration system exists for recording private property including land, buildings, and mortgages, but there are problems due to fraud and forged documents. Intellectual property rights come under both criminal and civil jurisdiction. International recording, software development, motion picture, clothing, and consumer product companies claim that lack of IPR protection damages their businesses.
Freedom from Corruption
Corruption is perceived as widespread. Sri Lanka ranks 97th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009. Anti-corruption laws and regulations are unevenly enforced. The police and judiciary are viewed as the most corrupt public institutions. Corruption in customs clearance enables wide-scale smuggling of certain consumer items. In 2008, the Supreme Court removed the Secretary to the Treasury from his position and ruled that he may not hold any public office in the future. In 2009, the Supreme Court, chaired by a new Chief Justice, allowed the former Treasury Secretary to resume his duties.
Labour Freedom
Sri Lanka’s labour regulations are rigid, although enforcement of the labour code remains inefficient. The non-salary cost of employing a worker is moderate, but dismissing an employee is difficult.
In a separate press release on the performance in the Asia-Pacific region, the two organizations said for the 17th straight year, Hong Kong and Singapore finished 1-2 and North Korea finished dead last in the Index of Economic Freedom rankings.
The Asian Pacific region boasted the world’s four freest economies. Australia finished third despite a 0.1 drop in its overall score. New Zealand finished fourth, and had the world’s best scores in two of the 10 Index categories: business freedom (99.9 out of 100) and freedom from corruption (94).
Three economies—Macau, Japan and Taiwan—finished in the “mostly free” category with overall scores of 70 or better.
North Korea’s overall score of 1 was more than 22 points lower than any other country and nearly 37 points below the next lowest score in the region. The economies of six other states in the region—Burma, Timor-Leste, Turkmenistan, Kiribati, Uzbekistan, the Solomon Islands and the Maldives—also were rated as “repressed.”
The region’s two largest economies—India and China—ranked as “mostly un-free,” as did 17 smaller Asia-Pacific states.
The statement said the Asia-Pacific region performs above the world average on only three of the 10 economic freedoms: fiscal freedom, government spending and labor freedom. But corruption, murky property rights and limited progress on investment and financial freedom continue to plague the region.
Corruption is perhaps the biggest drawback to economic success in the region. Nearly half of the 41 countries in the region scored less than 30 for this component; only eight scored better than 50.
“Asian countries could make the most progress by strengthening their banking and investment institutions and by enhancing transparency and corporate governance,” the editors of the Index wrote.
On the bright side, twice as many Asia-Pacific states had ratings improvements this year as had ratings downgrades. Sri Lanka’s score jumped 2.5 points—the largest gain in the region. Tonga, Malaysia and Bangladesh registered significant gains as well.
Hong Kong led the world in four categories of economic freedom: business freedom (98.7), fiscal freedom (93.3), investment freedom (90) and property rights (90). Singapore gained ground on the strength of its world-best score in labor freedom (98) and moved closer to the top spot with a 1.1-point improvement this year.
“Nowhere is the difference in quality of life between economically free and unfree countries more pronounced than in this region. Per capita gross domestic product in the five top-rated countries is nearly 15 times greater than that of the bottom five, where average earners take home only $3,042 per year,” the statement added. |
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