The Economic Freedom of the World Annual Report of the Fraser Institute, Canada, is considered ‘the best available and the most comprehensive index of economic freedom in the world and the only one that uses reproducible measures appropriate for peer-reviewed research. It provides a reliable measure of cross-country differences in economic freedom using to help ensure objectivity. It makes use of third-party data such as International Country Risk Guide (it is directed toward investors seeking information about financial and political risks that might affect their investments in different countries) and Global Competitiveness Report (its focus is the use of technology, quality of infrastructure, skill of the labour force, and other factors influencing the attractiveness of a country for business activity.).
The present report is based on data for the year 2004, and analyses the performance of 130 countries.
The various indices or reports define economic freedom basically as the relative non-existence of government control on economic activity of the people. The Index of Economic Freedom published by The Heritage Foundation and The Wall Street Journal defines economic freedom as “the absence of government coercion or constraint on the production, distribution, and consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, people are free to work, produce, consume, and invest in the ways they feel are most productive.”
According to the Fraser Report, “the key ingredients of economic freedom are personal choice, voluntary exchange, freedom to compete, and protection of person and property. (‘Along with formulating and implementing policies consistent with these ingredients’) . . . economic freedom also requires governments to refrain from many activities. They must refrain from actions that interfere with personal choice, voluntary exchange, and the freedom to enter and compete in labour and product markets. Economic freedom is reduced when taxes, government expenditures, and regulations are substituted for personal choice, voluntary exchange, and market coordination. Restrictions that limit entry into occupations and business activities also retard economic freedom.” (See tables)
Area-1
In this area, overall score for most of the components may be termed better. The declining score in the component of Transfers and Subsidies is alarming. Another component of this area, Government Enterprises and Investment, requires special attention: despite privatisation of government enterprises, there is no improvement in the score. It means there is still too much to be privatised and that increasing government investment needs to be curtailed.
In conclusion, it is recalled that our performance in Area 2 requires immediate attention. Without improving in all of the component domains of this area, the gains made in other domains and areas could never be sustained and strengthened. Besides, by improving in the domains of other areas where our performance is not good enough and bolstering where we are making progress, we could be able to create a business-friendly and competitive atmosphere in Pakistan.
Area-2
As regards judicial independence, our score is too bad. We are losing fast the little judicial independence we had. The score has fallen from 3.0 to 2.3, and in 2004 improved a bit only.
In the case of Impartial Courts, our nose-diving continues unhindered. The improvement of 0.1 does not make any difference.
In view of the efforts initiated by the government in the last few years, the score for Protection of Intellectual Property has started improving.
As to the Military Interference in rule of law and the political process, our score has got a fixation on zero. We are enjoying absolute military interference!
However, in the domain of integrity of the legal system, the score is a bit better, but shows no signs of improving. It demonstrates that there is no improvement in the perception about the integrity of legal system. This may be explained as an illusion of quantification since practically the integrity of our legal system is in complete disarray. Also, if read in conjunction with other components of this area, this score is unintelligible: when there is little judicial independence, almost non-existing impartial courts, and absolute military interference in the rule of law and political process, how the integrity of legal system can remain intact!
Area-3
Under this area, the scoring for all of the components is on the decline.
Area-4
For the first component of this area, taxes on international trade, the score has improved a bit. This year we have a gain as the taxes on international trade are being reduced under the pressure of globalisation and WTO.
The score for taxes as percentage of exports and imports starts improving again.
In the mean tariff rate, as compared to the last years, it is better this year.
The progress in the variability of tariff rates is at a stop.
As regards regulatory trade barriers, a steeply downward trend is apparent.
For Hidden Import Barriers, the score had a steep fall: gone down from 6.0 to 4.7, but is improving now.
As to the costs of importing, we are slopping downward.
In the size of trade sector, our performance seems static.
For the difference between official and black market exchange rates, finally there is an inkling of improvement.
The declining score for Restrictions on capital markets warns that the government must loosen the controls.
For access to foreign capital, the score is getting bad to worse.
Finally, for restrictions on capital transactions with foreigners the little score shows no signs of improving.
Area-5
Under the first main component of this area, regulation of credit market, almost all of the sub-components are improving.
In the component of regulation of labour markets, the score on the whole is bettering.
Regarding the regulation of business, again there is movement toward improvement. But it seems the government bureaucracy is tightening its grip that caused a decline of 1.3 in the relevant score.
— (The author is associated with the Alternate Solutions Institute dedicated to the promotion of economic freedom in Pakistan. His email address is khalil@asinstitute.org)
The overall and area-wise score award for Pakistan on the scale of Economic Freedom of the World 2006 Annual Report for the last three years is as under:
Year Score
2002 5.7
2003 5.6
2004 5.7
Area___________________________________________________________
2002 2003 2004
1. Size of Government: Expenditures, Taxes and Enterprises 7.2 7.3 7.2
2. Legal Structure and Security of Property Rights 2.7 2.3 2.5
3. Access to Sound Money 6.9 6.8 6.4
4. Freedom to Exchange with Foreigners 5.7 5.8 5.8
5. Regulation of Credit, Labor and Business 6.0 5.8 6.5
This shows that during the period, Pakistan, in fact, has been standing still. In real terms, it gained nothing. The weaker points spotted in 2002 remained the same in 2004.
Let’s have a detailed look at Pakistan’s score in particular areas and their components:
Area 1: ______________________________________________________________________________________
Size of Government: Expenditures, Taxes and Enterprises 2002 2003 2004
A. Government Consumption 7.9 8.5 8.8
B. Transfers and Subsidies 9.9 9.7 9.1
C. Government Enterprises and Investment 6.0 4.0 4.0
D. Top Marginal Tax Rate 7.0 7.0 7.0
(i) Top Marginal Income Tax Rate 7.0 7.0 7.0
(ii) Top Marginal Income and Payroll Tax Rate 7.0 7.0 7.0
Area 2: ______________________________________________________________________________________
Legal Structure and Security of Property Rights 2002 2003 2004
A. Judicial Independence 3.0 2.3 2.6
B. Impartial Courts 2.8 2.2 2.3
C. Protection of Intellectual Property 2.5 2.0 2.7
D. Military Interference 0.0 0.0 0.0
E. Integrity of Legal System 5.0 5.0 5.0
Area 3: ______________________________________________________________________________________
Access to Sound Money 2002 2003 2004
A. Growth of Money Supply 8.8 8.3 7.8
B. Inflation Variability 9.3 9.4 9.3
C. Recent Annual Inflation 9.3 9.4 8.5
D. Freedom to Own Foreign Currency 0.0 0.0 0.0
Area 4: _______________________________________________________________________________________
Freedom to Exchange with Foreigners 2002 2003 2004
A. Taxes on International Trade 5.5 5.3 5.5
(i) Taxes as Percentage of Exports and Imports 7.5 7.1 7.4
(ii) Mean Tariff Rate 6.6 6.6 6.8
(iii) Variability of Tariff Rates 2.3 2.3 2.3
B. Regulatory Trade Barriers 6.9 6.3 5.7
(i) Hidden Import Barriers 6.0 4.7 5.1
(ii) Costs of Importing 7.9 8.0 6.3
C. Size of Trade Sector 4.0 4.6 4.5
D. Difference between Official and Black Market Exchange Rates 8.3 8.3 8.9
E. Restrictions on Capital Markets 4.6 4.5 4.2
(i) Access to Foreign Capital 8.4 8.2 7.6
(ii) Restrictions on Capital Transactions with Foreigners 0.8 0.8 0.8
Area 5: ______________________________________________________________________________________
Regulation of Credit, Labour and Business 2002 2003 2004
A. Regulation of Credit Markets 7.1 7.1 7.6
(i) Private Ownership of Banks 5.0 5.0 5.0
(ii) Competition from Foreign Banks - - 8.0
(iii) Extension of Credit to Private Sector 6.2 6.4 7.4
(iv) Avoidance of Negative Real Interest Rates 10.0 10.0 10.0
(v) Controls on Interest Rates - - -
B. Regulation of Labor Markets 7.1 6.6 7.8
(i) Impact of Minimum Wage - - 7.6
(ii) Flexibility in Hiring and Firing 4.2 4.7 5.8
(iii) Collective Bargaining 7.2 5.0 7.9
(iv) Incentives from Unemployment Benefits - - -
(v) Military Conscription 10.0 10.0 10.0
C. Regulation of Business 3.9 3.8 4.2
(i) Price Controls 4.0 4.0 4.0
(ii) Administrative Obstacles for New Businesses 2.2 2.0 2.6
(iii) Time Spent with Government Bureaucracy 4.3 6.0 4.7
(iv) Ease of Starting a New Business 4.0 4.0 5.8
(v) Irregular Payments to Government Officials 4.9 2.8 3.8
A careful perusal of the above-tables leads us to developing a list of measures to be taken urgently to improve the state of economic freedom in Pakistan. This will help achieve the economic growth necessary for the well being and prosperity of people.
Pakistan needs to ensure the independence of its judicial system, streamline its taxation regime and curtail government's role in doing business to improve its score on economic freedom indices.
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Dr. Khalil Ahmad is the founder and Executive Director of the Alternate Solutions Institute, Pakistan's first free market think-tank
This article appeared in Business Recorder on December 29, 2006.
