Economic freedom Essay

Does economic freedom help explain why the standard of living improves in some countries and declines in others? First of all we have to understand, what economic freedom is? Economic freedom according to William W. Beach and Tim Kane, PhD. â€Å" Economic freedom is that part of freedom that is concerned with the material autonomy of the individual in relation to the state and other organized groups. An individual is economically free who can fully control his or her labor and property.† (Taken from 2007 Index of economic freedom chapter no.3 by William W. Beach and Tim Kane, PhD). Or in simple words we can also say that everybody in his or her own country is said to be economically free, if their respective government protects their rights in every possible way and without any constraint. i.e. if an individual wants to learn anything, to do any kind of business or wants a job, then, he or she has a right to do that, while it is the responsibility of the government to make it convenient and possible for them. The first study of economic freedom was published in the year 1995, and it was improved over the years. There are about ten different types of economic freedoms, which are known as index of economic freedoms. The main purpose of defining these freedoms is to rank the countries in order to pave the way for foreign investment. Following is the list of ten economic freedoms: (taken from 2007 Index of economic freedom from chapter no.3 by William W Beach and Tim Kane, PhD). 1) Business freedom: To check the status of starting, operating and closing any business in how much time. 2) Trade freedom: To check the barriers and constraints in tariffs, import and export in the country. 3) Monetary freedom: To check the measure of price stability and how governments are controlling the prices, inflation etc. 4) Freedom from government: To check either state is providing public goods with minimum expenditure or not. 5) Fiscal freedom: To check the burden on the government with respect to revenue side. 6) Property rights: To check whether the public have keeping the private property rights, defined and secured by the laws, and are clearly defined by the government. 7) Investment freedom: To check whether the government deserves to have the foreign investment or not. 8) Financial freedom: To check the operation of financial institutions i.e. banking systems; are they out of government control or not. 9) Freedom from corruption: To check the status of corruption in the society, i.e. in the business system, judiciary, and administrative system in the country. 10) Labor freedom: To check the status of growth of labor and business either they are working without government interruption or not. (Taken from 2007 index of economic freedom from chapter no.3 by William W Beach and Tim Kane, PhD). Each one of the ten freedoms is measured on a 0-100 percent scale, 100 as the maximum freedom while 0 is the least or minimum freedom. The study of economic freedom was conducted on about 157 countries of the world. To show how it works, I choose two countries that are North Korea and South Korea. North Korea has a communist form of government and is ranked at no.157 in the index of 157 countries, its economy is 3% free. It has exports of $1.3 billion, it exports: minerals, metallurgical products, manufacturing (including armaments), textiles, fishery products etc. and imports of   $2.3 billion, it imports: petroleum, coking coal, machinery and equipment, textile grains etc. In communist form of government every asset in the country belongs to the state, therefore there is no business freedom i.e. 0 % (in 0-100 % scale) in N. Korea. Also government controls all the imports and exports so trade freedom i.e. 0 % is also nil. No data on income or corporate taxes is available so fiscal freedom i.e. 0 % is also zeroed. Also government owns all the property including businesses therefore freedom from government i.e. 0% is also nil. No publicly record of inflation data therefore monetary freedom i.e. 0% is also zero. Also no private financial sector, therefore financial freedom i.e. 0% is also nil. Wages and incentives are also controlled by government therefore labor freedom i.e. 0% is also nil, also corruption is heavily present in the country so corruption freedom i.e. 10% is also negligible, but there is some investment freedom i.e. 10%, after the opening of foreign investment zone in the far remote area of rajin sonberg where basic facilities are also not provided till date. The government does not cover property rights i.e. 10%, so they are also negligible.   (Taken from 2007 index of economic freedom from chapter no.5). While South Korea has democratic form of government and it is ranked at no.36 out of 157 in the index of economic freedom, and its economy is 68.6% free. S. Korea has export of $299.2 billion, it exports: semi conductors, wireless telecommunication, equipment, motor vehicles, computers, steel, ships and petrochemicals etc. It has imports of $269.8 billion, it imports: machinery, electronics, electronic equipment, oil, steel, transport, organic chemicals and plastics etc. As South Korea has democratic form of government, in that form, the government tries every possible effort to please its citizens, therefore starting, operating and closing the business in that country is relatively easy, there is a lot of business freedom i.e. 83.1% present in the country. S. Korea as compared to N. Korea has good trade freedom i.e. 64.2% present but there are some restrictions in its some activities like import, non-transparent regulations and standards etc. S. Korea has high income tax rate of about 38.5% and relatively low corporate tax of about 27.5%, so we can say that it has a good fiscal freedom i.e. 0-100 bracket it has about 81% free. After the foreign investment promotion act of Nov 1998 the government opens the doors to foreign investment in almost every sector except media, electric power and some agricultural sectors, and also residents and non residents can now holds foreign exchange accounts, so there is a lot of investment freedom i.e. about 70% free. The private property right i.e. 70% is secure by the government; corruption i.e. 50% is present at some extent in the country. The labor i.e. 57.7% market is working under restrictive employment regulations due to which employment and production growth rate is very low. Government interference in private sector is negligible, so freedom from government is 81.5%. The government regulates the prices in some sectors like agriculture, telecommunication and other utilities, which monetary freedom 79%, the government in retained some ownerships, second largest domestic bank is under them, which makes the financial freedom about 50% free. (Taken from 2007 index of economic freedom from chapter no.5).   In short economic freedom in South Korea is much superficial than North Korea, and it is mainly due to democratic and communism forms of governments, democratic people are enjoying the fruits of freedom while others do not.