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Is freedom contagious?
December, 01st 2007

I am neither an economist nor an entrepreneur, said Dr Rene Klaff, Regional Director, South Asia, Friedrich Naumann Stiftung fur die Freiheit, when delivering the opening remarks at a round table on liberalism and status of MSMEs (micro, small and medium enterprises).

The event, organised by TANSTIA (Tamil Nadu Small and Tiny Industries Association), in Chennai on November 30, had a mix of participants, drawn from the industry, bureaucracy, academia and media. And they had something interesting to see on the screen: a walk-through of Economic Freedom of the World: 2007 Annual Report ( ), brought out by Centre for Civil Society ( ) and Friedrich Naumann Stiftung ( ).

Freedom is an abstraction. More so, economics, you may fret. Which is why, the work assumes importance. It talks about EFW (Economic Freedom of the World) Index, measuring the degree of freedom in five major areas, viz. size of government (expenditures, taxes and enterprises), legal structure and security of property rights, access to sound money, freedom to trade internationally, and regulation of credit and labour.

The index is based on 42 distinct pieces of data such as top marginal income-tax rate, impartial courts, inflation, freedom to own foreign currency bank accounts, black market exchange rates, foreign bank competition, hiring and firing regulations, extra payments/bribes, and cost of tax compliance.

Hong Kong is at the top with a score of 8.9, followed by Singapore, New Zealand, Switzerland, and the US. At the bottom of the 141-country-list are Myanmar (3.8) and Zimbabwe (2.9). India is at rank 69 with a score of 6.6, in the company of Namibia, Bolivia, Kenya, the Philippines, Belize and Tunisia.

Cost of tax-compliance has been based on the World Banks Doing Business data on the time required per year for a business to prepare, file, and pay taxes on corporate income, value added or sales taxes, and taxes on labour.

And the extra payments/bribes component, based on Global Competitiveness Report, has an explicit question: In your industry, how commonly would you estimate that firms make undocumented extra payments or bribes connected with the following: A-Import and export permits; B-Connection to public utilities (e.g., telephone or electricity); C-Annual tax payments; D-Awarding of public contracts (investment projects); E-Getting favourable judicial decisions. Common (=1) Never occur (=7).

Is freedom contagious? The answer is perhaps in the affirmative. Economic freedom does in fact spread, says the report.

If the average level of economic freedom of a countrys neighbours (or trading partners) were to rise by one unit in the Summary Economic Freedom Ratings, the country in question would experience a 0.2 unit increase in its Economic Freedom Rating.

For instance, when a country liberalises its economy by lowering taxes and regulation, it is likely to attract additional foreign businesses and direct investment.

The firms and citizens that find this move the least costly are those in neighbouring nations that share a border with the liberalising economy, reasons the EFW study.

Their movement or potential movement puts pressure on neighbouring countries to undertake similar market-oriented reforms to avoid losing their tax base. If these nations neighbours in turn liberalise to avoid losing their tax base to their liberalising neighbours, and so, the resulting competition spreads greater economic freedom throughout a region

A bonus for the participants of the round table was a bar chart that Dr Klaff unveiled, showing the application of the EFW methodology to Indian States. At the top of the league table was Tamil Nadu, followed by Gujarat.

Merits serious study.


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