Do we have economic freedom?

Pakistan has achieved a growth rate of 5.3 per cent, the highest in nine years. Now what can be done to sustain this growth? Economists believe that governments should pursue policies advancing economic freedom to stimulate growth and the rest can be taken care of by private enterprises and individuals.

In 2017, Pakistan’s economic freedom score hit the lowest-ever mark, bringing down the country’s ranking to 141 amongst 186 countries, all the way from 126 in 2016 and 121 in 2015. While there could be endless debates on whether this is an accurate reflection of future growth potential, it is hard to ignore the clear correlation between economic freedom and prosperity.

The recently released Economic Freedom Index 2017 revealed that countries lying in the top 25 per cent of economic freedom scores are six times as prosperous as those in the bottom quartile. Moreover, the top countries’ GDP per capita has been growing at more than double the rate of growth for bottom countries. In layman’s terms, this means the difference in prosperity of these two groups with varying economic freedom will widen over time and one cannot have one without the other. In Pakistan, on the one hand, the federal and provincial governments are trying to lure in foreign direct investments through incentives, one-window facilitation and investment roadshows, while on the other, the lack of economic freedom is constraining existing businesses. It, therefore, calls for some introspection on where exactly are we going wrong. Economic freedom means that individuals and businesses are free to own and control their labour, capital and goods with minimal intervention by the state institutions. The Economic Freedom Index, created by Heritage Foundation and The Wall Street Journal, is based on four pillars: rule of law, government size, regulatory efficiency and open markets. These pillars in turn depend on 12 indicators ranging from property rights to fiscal health and from business freedom to financial freedom.

A closer look at these indicators reveals that Pakistan has scored extremely low on six counts: property rights, judicial effectiveness, government integrity, fiscal health, labour freedom and financial freedom. Three of these indicators constitute the ‘rule of law’ pillar, making it the weakest area for the country.

It will be unfair to attribute this low score to any recent development, as since 1996, Pakistan has been categorised as a ‘mostly unfree’ country. If at all, since 2013 Pakistan has shown steady improvements in government integrity as well as in monetary, trade and investment freedom. Judicial effectiveness and fiscal health have recently been added to the index so there is no historical trend available. But there has been little improvement in property rights, no improvement at all in financial freedom and a steady decline in labour freedom.

Looking at property rights, while the government does allow private ownership, it is quite difficult to protect personal property in case of disputes due to prolonged litigation, deterring entrepreneurial activity. It must be noted that property rights here pertain to both real and intellectual properties as well as to investor protection and quality of land administration.

Labour freedom, on the other hand, refers to excessive labour regulations in the country, limiting businesses’ ability to deal with redundancies. The low labour force participation rate of 15 per cent, much below the world average of 62 per cent, manifests poor labour opportunities in Pakistan and negatively affects their freedom. Lastly, financial freedom depends on factors like government influence on allocation of credit and capital market development, both of which are weak spots for Pakistan. Domestic credit to private sector for instance, is merely 15 per cent of Pakistan’s GDP, as opposed to 44 per cent in Bangladesh and 52 per cent in India. Claims on the central government, on the other hand, stand at 29 per cent of the GDP.

The Economic Freedom Index is not a sacrosanct scorecard neither is it a predictor of investors’ confidence. However, it does provide a lens through which many investors look at investment prospects and also presents a menu of options to governments where targeted reforms can be undertaken.

Published in The Express Tribune, June 2^nd, 2017.

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