Why Economic Freedom Matters

This article was originally published by Ashesh Shrestha in the Himalayan Times on September 29, 2019.

Fraser Institute, a think-tank based in Canada recently published Economic Freedom of the World index, which ranks country based on how free these countries are economically. The countries are ranked on the basis of their performance in five sub-indicators, size of government, legal system and property rights, sound money, freedom to trade internationally and regulation. This year’s report indicates that Nepal’s rank dropped from 102 to 110. This shows that Nepal has become relatively less free this year.

Now, an important question is why does this index matter and even more importantly why does economic freedom matter in general?

Economic freedom and growth

Economic freedom might not be a goal in itself and therefore its importance usually remains in shade. However, it bears a direct relationship with various other economic variables which indicate standard of living of citizens in a particular country. Economic freedom directly correlates with national income or per capita GDP. Studies have shown that countries which are most economically free are some of the richest country in the world with per capital income of more than 50,000 USD. On the other hand, the least economically free countries tend to be poor; their per capital income amount to less than 7000 USD. The studies have suggested that as economic freedom increases in a country, the size of the economy grows in similar proportion as to increase in economic freedom.

Economic freedom and Poverty

According to Heritage Foundation, a think tank based in US, those countries that have adopted some version of freemarket capitalism, supported by efficient regulations and trade openness, and  have participated in an era of globalization and economic integration have taken hold and generated real improvements in living standards. Countries with greater economic freedom have not only been able to reduce the number of poor population but have also lessened the people deprived of health and education.

Promotion of mobility

Even though economic freedom and free capitalist economic system has brought massive improvements in lives of the people, it has been feared that free market economy increases class difference. It has been criticized on the grounds that in a capitalist economy, the difference between the rich and poor is intensified, where poor do not have chances of upward mobility. However, free market capitalist economy has been proven the most efficient in promoting mobility. Many of yesterday’s disadvantaged have become today’s privileged and it has also provided opportunity to today’s disadvantaged to become tomorrow’s privileged.  The claim that free market has produced more unequal society can be debunked by evidences. Evidences have shown that free market economy has been the most feasible economic system to promote social progress. Upward mobility is not the result of massive redistribution of wealth by the government but it is a result of competitiveness and openness to ideas and innovation with low barriers to enter the market, freedom to trade internationally and low government intervention.

Beyond financial benefits

The positive effect of higher economic freedom goes beyond materialistic and financial well being. Countries with higher economic freedom enjoy higher levels of overall human development as measured by the United Nation’s Human Development Index, which measures life expectancy, literacy and standard of living in the countries around the world. Interestingly, the countries which have resorted to free market economy have been able to better cope up with environmental challenges. Free market has been able to spur innovation tackling environmental hazards and improving overall environmental performance.

The report published by The Heritage foundation also states that greater economic freedom provides fertile ground for effective and democratic governance. Scholars like Milton Friedman, a nobel prize winning economists has stated that economic freedom is a precondition for political freedom and forms a strong foundation for democracy. As the country moves above in the path of economic freedom, its political system becomes more inclusive and transparent.

One of the major objectives of economic policies should be to create wide range of opportunities to the people that can lead to increased prosperity. The countries which are not very rich in natural resources have been able to achieve high level of economic growth and prosperity by adopting policies which empower businesses and individuals with more choices, encouraging greater entrepreneurship. The economies which enjoy greater economic freedom are the ones who are able to achieve these. Hence, policy which improve the economic freedom is the way we can achieve dream of prosperity.