“The human spirit is the real wellspring of economic prosperity. That spirit is at its most inspired when it is unleashed from the chains in which it has been bound.” — Heritage Foundation.
Last week we looked at the economic success of Singapore over the last five decades. Not surprisingly, Singapore ranks second in the 2015 Heritage Foundation Economic Freedom Index. Last year, the Heritage Foundation survey, co-published by the Wall Street Journal and the Heritage Foundation, celebrated its 20th anniversary. For two decades, the index, by cataloguing economic policy developments of the globe, has served as a beacon for people around the world who recognise enhanced economic liberty and individual opportunity as the surest path to greater prosperity.
It is based on a similar approach to Adam Smith’s in The Wealth of Nations, which states that “basic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society”. Economic freedom and opportunity are closely linked to the long-term success of any country.
This week we look at the Heritage Foundation index and see where Zimbabwe ranks in the world in terms of economic freedom and what are the key factors used to measure economic freedom. The index is useful in helping policy makers focus on the key success factors in attracting foreign direct investment.
The economic freedom index is based on 10 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom: rule of law (property rights, freedom from corruption); limited government (fiscal freedom, government spending); regulatory efficiency (business freedom, labour freedom, monetary freedom); and open markets (trade freedom, investment freedom and financial freedom).
These can be broken down further below:
Business freedom: It is a quantitative measure of the ability to start, operate and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process.
Trade freedom: Being a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services. Different imports entering a country can, and often do, face different tariffs.
Monetary freedom: This combines a measure of price stability with an assessment of price controls. Both inflation and price controls distort market activity. Price stability without micro-economic intervention is the ideal state for the free market.
Government spending: This component considers the level of government expenditures as a percentage of GDP. Government expenditures, including consumption and transfers, account for the entire score. Fiscal freedom: Entails a measure of the tax burden imposed by government.
Property rights: Is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state.
Investment freedom: In an economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be allowed to move their resources into and out of specific activities internally and across the country’s borders without restriction.
Financial freedom: This is a measure of banking efficiency as well as a measure of independence from government control and interference in the financial sector.
Freedom from corruption: Corruption erodes economic freedom by introducing insecurity and uncertainty into economic relationships. The higher the level of corruption, the lower the level of overall economic freedom and the lower a country’s score.
Labour freedom: This is a quantitative measure that looks into aspects of the legal and regulatory framework of a country’s labour market.
There is a robust relationship between improving economic freedom and achieving higher per capita economic growth. Whether long-term (20 years), medium-term (10 years), or short-term (five years), the relationship between changes in economic freedom and changes in economic growth is consistently positive. As economies gain economic freedom and thus achieve dynamic growth, individuals and companies are empowered to build businesses, create jobs, and generate greater innovation for their communities and societies.
Zimbabwe is considered to be repressed and was ranked 175 out of 186 countries with a score of 37,6. Mauritius, on the other hand, was ranked 10th with a score of 76,4.
Zimbabwe did, however, record a significant improvement in 2014 with its score increasing by 2,1. Policy makers are certainly taking positive steps to improve the investment climate with the Ministry of Finance recently announcing its intention to cut the civil servants wage bill by 50% by 2018.
Much more needs to be done to improve the investment environment if Zimbabwe is to become successful again. Key factors include, respect for property rights, labour market flexibility, fiscal discipline, banking sector reforms and finally government needs to address corruption that is becoming rife in our economy.
The country is moving in the right direction and is expected that over the next 10 years, Zimbabwe will be ranked in the top 100 countries in terms of economic freedom. Much has been done to improve the investment environment, but much more needs to be done before investors feel comfortable investing in the country.
According to economist Milton Friedman: “(A) society that puts freedom first will, as a happy by-product, end up with both greater freedom and greater equality. Though a by-product of freedom, greater equality is not an accident. A free society releases the energies and abilities of people to pursue their own objectives. It prevents some people from arbitrarily suppressing others”.