Wednesday, January 17, 2007


The newest Index of Economic Freedom has been published. The 2007 methodology has been revised to provide an even clearer picture of economic freedom by using data-driven equations rather than performance brackets which allows countries to be graded using a percent score rather than a 1–5 rating. In addition, labor freedom has been added as a variable.

Xavier Sala-i-Martin and Johnny Munkhammar have enriched the renewed index with astonishing articles about the importance of economic growth in a sustainable perspective of the worlds’ tomorrow.

This year's Index of Economic Freedom is a clear and simple message to stubborn defenders of the so called European social model which heavily relies on government intervention instead of implementing very seriously demanded free market reforms. The reason why mostly and moderately free European economies have failed on their exam from economic freedom is basically that when burdensome regulation is coupled with high tax rates and increasing government intervention in various aspects, then the economic freedom is very limited. Especially government intervention causes the decline of the economic freedom's level. Government intervention is seen through high taxes and economic and social policy of protectionism. Such policies are frequently justified on the basis of creating a better and safer tomorrow. Neither is accomplished when the government expands its role.

High tax rates on personal and corporate income distort productive behavior as well as high rates of taxation impair the ability of business sector to create new jobs and opportunities. Government intervention is the worst form of taxing work, saving and investment. There are of course several wheels of prosperity and economic freedom. The economic policy of successful and prosperous nations is streaming toward further liberalization of international trade. The removal of barriers and tariffs which impede the international trade is the greatest challenge to be met in the future. Protectionism in international trade is hidden behind the rhetoric of making jobs and markets safer while, in reality, policies based on protectionism prolong the agony of unemployment.

Politicians and many unsophisticated experts claim, for example, that labor market is a touching issue in the need of government intervention. The labor market is not truly unique as its critics suggest. Free market is a superior institution for labor yielding greater opportunities to increase the productivity and well-being of workers. Labor markets are often the most exploding experiment of government intervention. Left leaning governments tend to strongly intervene the labor market in order to improve its efficiency thereof. But stricter regulations yield exactly the opposite results. Without collected information, any kind of improvement in efficiency is made impossible.

Certain instruments of labor market interventions are usually given to politically privileged groups, mostly trade unions under the protection of government. But does the process of collective bargaining really yield sufficient results superior to individual choice and voluntary exchange? My answer is clear and simple: No, it does not. The core principle, upon which the free market is floating, is a free voluntary exchange between businesses and individuals seen through free price mechanism, free choice and free competition.

A dynamic feature of free markets is also their ability to unleash productivity and change much faster than under the regulatory government framework. Every day, entrepreneurs, designers and developers compete to satisfy their consumers. The result of the transmission of information and of spontaneous competition is the growth of output. No government regulation of entrepreneurial activity has produced neither a fraction of gains and benefits which have been achieved through competitive markets and the ability of individuals to choose freely. Results of free market have been thoroughly impressive.

In countries where free market reforms have firmly taken place, structural indicators of prosperity and progress have grown significantly. Between 1970 and 2003, the employment in the U.S. increased by 75 percent while in France, Italy and Germany, it increased by only 26 percent (Gersemann, 2004). Youth unemployment rates yields even more striking results. In Ireland and Netherlands, the youth unemployment rate is below 8 percent while in Greece, Italy, France, Sweden and Finland, the rate of youth unemployment was far above 20 percent. In the last decade, the dynamics of employment varied significantly among European states. In Ireland, Netherlands and Spain, the growth rate of employment was the highest while in Austria and Germany, the growth of employment was almost zero. The results show that freer markets substantially transformed in freer opportunities and choice in the market. Regulation of labor and business tripled its effect when the creation of new dynamic enterprises almost stopped. Together with the liberalization of labor market, lower tax rates created freer business environment and impressively improved quality of entrepreneurial framework.

Left-leaning policymakers often stress their care for the poor. But right after taking a closer look at the income structural, we see that those intentions are nothing else but a myth. In Sweden, the average growth of income between 1995 and 2004 was 29 percent. In the United Kingdom where labor market is much freer than in Sweden, between the same period, personal income grew by 72 percent in average. The message from this experience is: freer the market, freer the people. Policymakers in advanced as well as in certain developing economies often face severe difficulties when they try to implement free market reforms. The main source of objection to free market reforms is hidden within particular interest groups. They are simply afraid of economic growth and cutting politically granted privileges. Youth is oftenly the main voice of opposition to free market reforms.

In Slovenia (the country where I live), anti-capitalist youth marched against economic and education reforms. High tax rates make hiring and firing more expensive. As fewer can afford to hire, the desire to work strongly decreases. Many unsophisticated experts and critics suggest that minimum wage is a solution to the problem. It is not. Minimum wage, wage subsidies and collective bargaining cause the unemployment of low productivity workers. As trade unions fanatically struggle to keep their jobs, they prevent them from having an opportunity to re-educate and thus easily avoid the threat of being unemployed. As a result of union monopolies, extensive welfare and social security programs have occurred but it seems that politicians don't want to recognize that the existence of such programs will become unsustainable in the future as positive demographic trends will quickly disappear. Instead of deregulating labor market and making work incentives far more profitable than unemployment benefits, policymakers in mostly and moderately free countries are keeping regulation as well as they talk about different kinds of duty and legal discipline. This is a threat to economic freedom as well as it is a threat to the survival in the future.

The findings of this year's Index of Economic Freedom surprise many experts, economists, individuals, businesses and policymakers around the globe. Anglo-Saxon economies once again emerged as "free". This is a sign of being mature enough to graduate from economic freedom. Despite being congratulated by many, there is no Nordic country among free economies. Denmark and Iceland are economically the freest, and also the smallest, competitors from the North. This year's Index of Economic Freedom is a warning signal to Slovenia, the country in which I live. Strong government intervention, rigid labor markets and disrespectful protection of private property are the main ingredients of Slovenia's disastrous position on the scale of economic freedom. Inflexible employment regulations retard productivity growth. In Slovenia, labor freedom is virtually non-existent. The pursuit of privatization is very slow as the government effectively dominates the two largest bank and life insurance provider.

It is somehow hard to understand why such a small as Slovenia rampantly ruins its future potentials and real comparative advantages consistently through the lack of economic freedom.


Martin Rojko said...

And adopting the euro isn´t also a kind of freedom advancement...
Keep doing your writting!

Rocks said...

The adoption of euro is a result of monetary stabilization. Monetary freedom, has indeed, advanced but the problem is that the degree of economic freedom was decreased mostly in sectors which are essential to economic growth (financial sector, labor market, the efficiency of government, property rights protection) and increased international competitiveness.

Rocks said...

In Slovenia, price stabilization and the advancement of structural indicators have been achieved as required by Maastricht criteria. It will be interesting to see how price behavior will perform after the replacement of the currency. It is quite reasonable to expect further convergence of productivity in non-exchangable sector, what could potentially stimulate unexpected price pressures as inflation targeting framework before the adoption of euro was not set to target inflation in search of a nominal anchor.

Generally speaking, Slovenia launched the engine toward the market economy in a highly gradual features of economic policy. High tax rates and the absence of very much foreign investment have helped to boost structural unemployment. This was paralleled with strong monopoly position of the unions. Under restrictive government regulations coupled with instantly degressive behavior of trade unions, the labor market impaired its responsibe ability to human capital investment through which the engine of economic growth starts growing accordingly.

European policymakers and professional experts often forget to put an emphasis on international competitiveness through productivity growth and globally sustainabile business models. In Europe, the promotion of competitiveness is enchained within the expansionary fiscal policy and not in the view of cutting taxes, softening regulation, structural advancements, and various liberalization processes. High tax rates on capital gains and individual income inevitably reduce the ability of entrepreneurial sector to sustain high levels of competitiveness in a global sphere through innovative business models and productity growth.

Slovenia has not done much in this respect. Policymakers focused on implementing economic policies from various Nordic countries while these kinds of policies, including the enforcement of rigid rules on the labor market coupled with high tax rates, have been remarked as a tool through which the competitiveness of Nordic countries was impaired.

Some of us who live in Slovenia, really don't want to see the economy being blown in a black hole of relative stagnation in the future. If Slovenian economy continued to grow at 4,2 percent, then it would catch-up with the GDP per capital level of Iceland in 52 years. There is still a bulk of serious structural problems such as an increasing volume of age-dependent pension population and explicitly threatening red-alarm pressures on public finance.

Thank you for visiting my blog. I have already seen yours. It's excellent. Keep doing on it as well!

Regards, Rocks

Martin Rojko said...

I´m searching for a co-operative writers on my blog. If you would like to post some piece regarding to private property, state regulations and interventions or other you´re welcomed...