Measuring Economic Freedom

Transcription

1 Advisory Committee on Voluntary Foreign Aid Measuring Economic Freedom Rachid Benjelloun May 22, 2002

2 Economic Freedom Basics Defining economic freedom Correlation with growth and human dev. Measuring economic freedom, off-the-shelf The Heritage Foundation/Wall Street Journal The CATO Institute Using economic freedom measurements for the MCA 1

3 Defining Economic Freedom Heritage Foundation/WSJ: the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. CATO Institute: the core ingredients of economic freedom are personal choice, protection of private property, and freedom of exchange. 2

4 Economic Freedom s Strong Correlation with Dev. Indicators Income Growth Corruption Human development Human poverty Life expectancy 3

5 Economic Freedom Index (The Heritage Foundation/WSJ) Focus on extent of government interference 161 countries 10 components rated from 1 to 5 (1 free, 5 repressed), 50 independent variables All factors weighted equally to come up with a country average 4

6 Economic Freedom Index HF/WSJ 10 components Trade policy Fiscal burden of government Government intervention in the economy Monetary policy Capital flows and foreign investment Banking and finance Wages and prices Property rights Regulation Black market 5

7 Economic Freedom Index HF/WSJ Trade Policy Average tariff rate Non-tariff barriers Corruption in the customs service 6

8 Economic Freedom Index HF/WSJ Fiscal Burden of Government Top income tax rate Tax rate faced by average taxpayer Top corporate tax rate Government expenditures 7

9 Economic Freedom Index HF/WSJ Gov t Intervention in Economy Government consumption as a percentage of the economy Government ownership of businesses and industries Share of government revenues from state-owned enterprises and government ownership of property Economic output produced by the government 8

10 Economic Freedom Index HF/WSJ Monetary Policy Average inflation rate for previous 10 years 9

11 Economic Freedom Index HF/WSJ Capital Flows & Foreign Inv. Foreign investment code Restrictions on foreign ownership of business Restrictions on the industries and companies open to foreign investors Restrictions and performance requirements on foreign companies Foreign ownership of land Equal treatment for domestic and foreign firms Restrictions on repatriation of earnings Availability of local financing for foreign firms 10

12 Economic Freedom Index HF/WSJ Banking and Finance Government ownership of banks Restrictions on the ability of foreign banks to open branches and subsidiaries Government influence over allocation of credit Government regulations Freedom to offer all types of financial services, securities, and insurance policies 11

13 Economic Freedom Index HF/WSJ Wages and Prices Minimum wage laws Freedom to set prices privately without government influence Government price controls Extent to which government price controls are used Government subsidies to businesses that affect prices 12

14 Economic Freedom Index HF/WSJ Property Rights Freedom from government influence over the judicial system Commercial code defining contracts Sanctioning of foreign arbitration of contract disputes Government expropriation of property Corruption within the judiciary Delays in receiving judicial decisions Legally granted and protected private property 13

15 Economic Freedom Index HF/WSJ Regulation Licensing requirements to operate a business Ease of obtaining a business license Corruption within the bureaucracy Labor regulations, such as established work weeks, paid vacations, and parental leave, as well as selected labor regulations Environmental, consumer safety, and worker health regulations Regulations that impose a burden on business 14

16 Economic Freedom Index HF/WSJ Black Market (CPI as proxy) Smuggling Piracy of intellectual property in the black market Agricultural production supplied on the black market Manufacturing supplied on the black market Services supplied on the black market Transportation supplied on the black market Labor supplied on the black market 15

17 EFI (HF/WSJ) Sample Measure Trade Policy Grading Scale 1 (very low protectionism): Average tariff rate less or equal to 4% 2 (low): Average tariff rate greater than 4% but less than or equal to 9% 3 (moderate): Average tariff rate greater than 9% but less than or equal to 14% 4 (high): Average tariff rate greater than 14% but less than or equal to 19% 5 (very high): Average tariff rate of greater than 19% 16

18 EFI (HF/WSJ) Trade Policy Grading Scale Tariff measurement fairly objective Non-tariff barriers and customs corruption more subjective (just add points to scale) Sources of data: EIU, International Financial Statistics, National Trade Estimate Report on Foreign Trade Barriers, World Development Indicators, Country Commercial Guides, and official government publications 17

19 The CATO Institute: Economic Freedom of the World 123 countries Seven areas and 21 components Areas and components are not equally weighted: Principal component analysis partitions the variance of a set of variables and uses it to determine the linear combination weights of these variables that maximizes the variation of the underlying components most fully. Focus on personal choice, protection of private property, and freedom of exchange 18

20 The CATO Institute: Economic Freedom of the World Seven areas: Size of government (11%) Economic structure and use of markets (14.2%) Monetary policy and price stability (9.2%) Freedom to use alternative currencies (14.6%) Legal structure and security of private ownership (16.6%) Freedom to trade with foreigners (17.1%) Freedom of exchange in capital markets (17.2%) 19

21 Components of Economic Freedom of the World (CI) Area I Size of government General government consumption expenditures as a percentage of total consumption Transfers and subsidies as a percentage of GDP 20

22 Components of Economic Freedom of the World (CI) Area II Structure of the economy and use of markets Government enterprises and investment as a percentage of the economy Price controls: extent to which businesses are free to set their own prices Top marginal tax rate Use of conscripts to obtain military personnel 21

23 Components of Economic Freedom of the World (CI) Area III Monetary policy and price stability Average annual growth rate of money supply in past five years minus growth rate of real GDP during last 10 years Standard deviation of annual inflation rate during last five years Annual inflation rate during most recent year 22

24 Components of Economic Freedom of the World (CI) Area IV Freedom to use alternative currencies Freedom of citizens to use currency bank accounts domestically and abroad Difference between the official exchange rate and black market rate 23

25 Components of Economic Freedom of the World (CI) Area V Legal Structure and property rights Legal security of private ownership rights Rule of law (legal institutions supportive of the principles of rule of law 24

26 Components of Economic Freedom of the World (CI) Area VI International exchange: freedom to trade with foreigners Taxes on international trade Revenue from taxes on international trade as a percent of exports plus imports Mean tariff rate Standard deviation of tariff rates Actual size of trade sector compared to expected size 25

27 Components of Economic Freedom of the World (CI) Area VII Freedom of exchange in capital and financial markets Ownership of banks: percentage of deposits held in privately owned banks Extension of credit: percentage of credit extended to private sector Interest rate controls and regulations that lead to negative interest rates Restrictions on the freedom of citizens to engage in capital transactions with foreigners 26

28 Economic Freedom of the World (CI): Sources of Data Similar to HF/WSJ International Country Risk Guide Business Environment Risk Intelligence PriceWaterhouseCoopers OECD, IMF, World Bank, IDB, etc. 27

29 Comprehensive Economic Freedom of the World (CI) More comprehensive for 58 countries Uses survey data to assess impact of regulations High correlation between regular EFW and more comprehensive-efw but some important result differences 28

30 Comprehensive-EFW: Freedom to Trade with Foreigners (example) Taxes on international trade Revenue from taxes on int l trade as a percentage of exports plus imports Mean tariff rate Standard deviation of tariff rates Non-tariff regulatory trade barriers Hidden import barriers: no barriers other than published tariffs and quotas (GCR) Customs administration (WCY) Costs of importing (GCR) Actual size of trade sector compared to expected size Difference between official exchange rate and black market rate 29

31 Top 10 for EFI (HF/WSJ 2002 report) Hong Kong, 1 Singapore, 2 New Zealand, 3 Estonia, 4 Ireland, 4 Luxembourg, 4 Netherlands, 4 U.S., 4 Australia, 4 Chile, 4 Estonia, 4 El Salvador, 17 Bolivia, 45 Jordan, 45 Mexico, 60 China, 121 Egypt,

32 Top 10 for EFW (CI 2001 Annual Report) Hong Kong, 1 Singapore, 2 New Zealand, 3 United Kingdom, 4 U.S., 5 Australia, 6 Ireland, 6 Switzerland, 6 Luxembourg, 9 Netherlands, 9 Bolivia, 11 El Salvador, 20 Estonia, 36 Jordan, 52 Egypt, 52 Mexico, 62 China, 81 31

33 Top 10 for Comprehensive-EFW (CI 2001 Annual Report) Hong Kong Singapore U.S. New Zealand United Kingdom Ireland Canada Switzerland Australia Luxembourg Canada, +6 spots Japan, +6 Taiwan, +15 Jordan, +13 Argentina, -18 Bolivia,

34 Using Existing Economic Freedom Measurements for MCA Some data necessarily subjective, also subject to availability and credibility Countries do not have total control over variables (inflation, trade policy, capital flows, etc.) Target of EFI/EFW is impact on business, is it equipped to handle policy progress with multidimensional impacts (poverty, health )? Can these measures be used to reward non-reformminded governments? A U.S.-imposed vs. neutral measurement for economic freedom? 33

35 Do We Need a Customized Solution to Measure Economic Freedom? Indices are ok as background information but perhaps not a one-size-fits-all Expert Panel to assess economic freedom progress on case-by-case basis? National competitiveness councils: Can local reformminded groups, incl. NGOs/PVOs/donors, be involved in setting targets, conducting measurements, and having a say in fund management? A bi-national commission to regularly measure economic reform progress against owned targets? 34

36 Do We Need a Customized Solution? Add l Guidelines Better to use existing structures where possible Make sure eligible countries not only understand importance of reform but also lead reform process; no substitute for ownership Technical assistance needed for sequencing, analysis of policies impact (e.g. trade lib.) 35