Wednesday, October 27, 2010

Declining econ freedom of the Philippines

(Note: this is my article for last weekend.)

Economic freedom has four components: (a) personal choice, (b) voluntary exchange coordinated by markets, (c) freedom to enter and compete in markets, and (d) protection of persons and their property from aggression by others.

That is the official definition in the construction of the annual Economic Freedom of the World (EFW, annual reports, produced by the Fraser Institute in Canada, and its publication and launching in many countries around the world is sponsored by the Friedrich Naumann Foundation for Liberty (FNF).

In the EFW 2010 Report, the Philippines ranked low once more, 76th out of 141 countries covered for 2008. This is a deterioration from the country’s earlier ranking of 68th in 2007 and 47th in 2005.

What caused the deterioration in Philippine ranking in the global economic freedom contest?

There are five areas that determine the economic freedom of the people in each country surveyed. These are (1) size of government, (2) legal system and property rights, (3) sound money, (4) freedom to trade internationally, and (5) regulation. The last is composed of 3 sub-areas: (a) credit market regulation, (b) labor market regulation, and (c) business regulations.

The Philippines ranked low in all 4 areas except area no. 1. It ranked 101st in area 2, 78th in area 3, 80th in area 4, and 84th in area 5. Business regulations – meaning very bureaucratic procedures for private businesses in dealing with government – pulled down its overall rank in area 5.

The country ranked “high” in area 1, because government consumption as a share of GDP was low, only about 12 percent. But this is tricky because the data refers only to the national government. If local government consumption and expenditures are included, the ratio should reach almost 18 percent or higher. In addition, because of corruption in revenue collections, actual payment by the public (taxes and fees plus cost of compliance) is high but officially registered revenues are low. So government budget is relatively “low.”

The low score and ranking of the country in area 2, legal system and property rights, is a cause for alarm. This means that: there is low judicial independence, low protection of property rights, low integrity of the legal system, and there is high military interference in the rule of law and the political process.

The economic team of the new government should reverse this declining level of economic freedom of the country. High economic freedom means more businesses and job creation in the country.

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