Download Economic Freedom VS. Real GDP Growth

Economic Freedom V.S.
Real GDP growth, or other
indicators of economic
outcome
04015304 Choi Kit Ying
04015290 Wong Kim On
04013786 Lam King Nin
04010140 Chan Hing Kwok
Introduction


To evaluate the economic
performance among different
countries, a lot of economic indicator
are used
For example, level of output, static
efficiency, dynamic
efficiency……….etc

One of them is the index of economic
freedom announced by the Heritage
Foundation (a unique institution
public policy research organization,
founded in 1973)
Economic freedom index


The goal for this index is to develop
a systematic, empirical measurement
of economic freedom in countries
throughout the world.
The Index is a careful theoretical
analysis of the factors that most
influence the institutional setting of
economic growth.
Methodology


1.
2.
3.
4.
5.
6.
7.
Total 157 countries are graded
Due to economic or political instability , a
few countries were not ranked
Democratic Republic of the Congo
Iraq
Papua New Guinea
Samoa
Serbia and Montenegro
Somalia
Sudan
10 broad factors
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
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
Informal market activity
Weighing

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
All factors are weighted equally
Each factor is graded according to a
unique scale
The scales run from 1 to 5
1
The most
conductive

5
The least
conductive
overall score based on the simple average
of the 10 individual factor scores
4 broad categories of economic
freedom
categories
average
overall
score
Free
Mostly
Free
Mostly
Unfree
1.99
2.00
3.00
or less to 2.99 to 3.99
Latest rating
Repressed
4.00
or
higher
Trade policy


The degree government hinders
access to and the free flow of
foreign commerce
affect the ability of individuals to
pursue their
economic goals
Components :
2.
weighted average tariff rate
non-tariff barriers (e.g. import quotas,
licensing requirements)
3.
corruption within the customs service
1.
Fiscal burden of government


Government expenditures increases,
the level of economic freedom in a
society reduces, vice versa
Expenditure is financed-by taxation
resources are diverted from the
potentially more productive private
sector
expenditures reflect the total fiscal
burden

1.
2.
3.
Components :
Top marginal income tax rate
Top marginal corporate tax rate
Year-to-year change in government
expenditures as a share of GDP
*double weight on the top
corporate tax rate
Government intervention in the
economy


1.
2.
3.
Measures government's direct use
of scarce resources for its own
purposes and government’s control
over resources through ownership
Components :
Government consumption as a
percentage of GDP
Size of the state-owned sector
the state of privatization programs
Monetary policy


Stable monetary policy
can rely on market prices for the
foreseeable future
longer-term plans are easier to
make
individuals enjoy greater economic
freedom
There is no singularly accepted
theory of the right monetary
institutions for a free society now


1.
Most monetary theorists support for
low or zero inflation
Components :
weighted average annual rate of
inflation of the past 10 years
Capital flows and foreign
investment


1.
2.
3.
4.
5.
6.
Restrictions on foreign investment limit
the inflow of capital and thus hamper
economic freedom, vice versa
Components :
foreign investment code
restrictions on access to foreign exchange
restrictions on payments, transfers, and capital
transactions
Equal treatment under the law for both foreign
& domestic companies
Foreign ownership of land
Availability of local financing for foreign
companies
Banking and finance


1.
2.
3.
4.
Banks provide the essential financial
services that facilitate economic growth
heavy bank regulation, the less free
they are to engage in these activities
restricts economic freedom
Components :
Government regulations
Government ownership of financial Institutions
Restrictions on the ability of foreign banks to
open branches & subsidiaries
Government influence over the allocation of
credit
Wages and prices


If prices are determined freely
allocate resources to their highest
use
Governments mandate wage and
price controls
inhibit information, restrict economic
activity
lower level of economic freedom

1.
2.
3.
4.
Components :
Degree of freedom to set prices
Minimum wage laws
Government price controls
Government subsidies to business
that affect prices
Property rights

1.
2.


Examines …
the extent to which the government
protects private property by enforcing
the laws
how safe private property is from
expropriation.
Secure property rights give citizens the
confidence to undertake commercial
activities freely
less protection private property receives,
lower level of economic freedom

1.
2.
3.
4.
5.
Components :
Independence of the judiciary
Delays in receiving judicial
decisions
Corruption within the judiciary
Government expropriation of
property
Commercial code defining contracts
Regulations



Measures how easy or difficult it is to
open and operate a business
Most important Regulations are
associated with licensing new
companies and businesses
If regulations applies evenly and
transparently
regulatory burden lowers

1.
2.
3.
4.
5.
Components :
Degree of corruption in government
Licensing requirements to operate a
business
Labor regulations
Environmental, consumer safety, &
worker health regulations
Extent to which regulations impose
a burden on business
Informal market



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A government regulation or
restriction in one area may create an
informal market
Captures the effects of government
interventions that are not always
fully measured elsewhere
Reflects restrictions, taxes, or
imperfections in the private market
larger the informal market, the lower
the country's level of economic
freedom

1.
2.
3.
Components :
Mainly relies on Transparency
International's Corruption
Perceptions Index (CPI)
Smuggling
Piracy of intellectual property in
the informal market
Economic Freedom
VS.
Real GDP Growth
Real GDP



Real GDP = Nominal GDP – Inflation
rate
Real GDP measures the value of output
in two or more different years by
valuing the goods and services adjusted
for inflation.
For year over year GDP growth, "real
GDP" is usually used as it gives a more
accurate view of the economy.
Economic Freedom
VS.
Real GDP Growth
Generally, real GDP is positively
related to the economic freedom
 A free economy can allocate the
resource more efficient
 if prices are determined freely,
 resources go to their most productive
use



Better protection of private
property, Increase incentive of
production
More free capital flows and
foreign investment can boost the
GDP


China is a good
example
Since the reform
period, the market
is more open and
the GDP growth is
increase
China
15000.00
10000.00
China
5000.00
0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
The more Economic
Freedom , the
more Real GDP
Growth?
Improving economic
freedom will raise
real GDP growth
rate, but not the
only factor.
Economic Freedom
VS.
Gini Coeffecient
Gini coefficient


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It is usually used to measure income
inequality, but can be used to measure
any form of uneven distribution.
Using the Gini can help quantify
differences in welfare and compensation
policies and philosophies.
The Gini coefficient is a number between 0
and 1, where 0 corresponds with perfect
equality (where everyone has the same
income) and 1 corresponds with perfect
inequality (where one person has all the
income, and everyone else has zero
income).
Gini coefficient
South Korea
Iran
China
Hong Kong
September 2005
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Hong Kong is the champion in
economic freedom
However, its Gini coefficient is the
highest compare with other
developed countries
0.525 in 2001
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The welfare is low in Hong Kong,so the
fiscal burden of Hong Kong is low
Compare with Sweden ,its welfare is
high(scored 3.6 at the category of Fiscal
burden), so Sweden have low gini
coefficient. Although Sweden will loss
some degree of freedom due to higher
welfare
More free, better living standard of people?
Economic Freedom
VS.
Unemployment rate
Unemployment Rate
unemployment rate of 2004
12
10
8
6
4
2
0
unemployment rate of
2004
South
Korea
China
Hong
Kong
Iran
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
Economic freedom is negatively
related to the unemployment rate
More foreign investment
more labour demand
lower unemployment rate
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In the category of Fiscal burden of
government , more unemployment
benefit and other welfare, the
economic freedom is lower
Working incentive is lower and
unemployment rate will be higher

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Overall, unemployment rate will be
low if the score which in Index of
Economic Freedom is low.
Exceptional case: Under the central
planning system, there is no
unemployment
The problem about
accuracy of these
indicator
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
We get the basic knowledge of these
economic indicators and their
correlation
Do they reflect the reality situation?
We discovered some problems about
the calculation of these index
About category: wages and prices
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It only considers the direct wage
control by the government.
Ignores the other factors which
control the wages. For example,
union
The score of Sweden, Finland and
Denmark at this category are 2
We think these countries should not
get such good score at this category
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The strong union power in these
control the wage of the market
They are often given direct and
indirect financial support from the
government
Are they free??
About the category: Informal
market
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As the Heritage foundation argued: it
is a kind of indirect measurement of
how freedom is restricted within the
formal market
If the formal market is free, people
have no incentive to engage at
informal market
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However, in our point of view, the
size of informal market is not highly
correlated with economic freedom
The efficiency and attitude of the
government in cracking down on the
informal sector is more important
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For example: tax evasion of third
world countries with low tax rates v.s
Scandinavia with high tax rates
Imagine the consequence if Hong
Kong Customs and Excise
Department do nothing
So, this category should not weight
as same as other categories
About real GDP growth rate
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Very often, the growth rate is higher
in developing countries
the development of advanced
countries is relatively slow
Many inefficient investment are
counted in the GDP


For example, the large number of
empty building and low utilization
highway in China
Also, the GDP reported by the
countries their own is not accurate
This is the end of the
presentation.
~Thank you very much~
Question and Answer
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