* This is my article for the December issue of this magazine, published in Kathmandu, Nepal.
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Economic freedom is a major factor for an economy and its
people to move from a low income country (LIC) to middle income country (MIC),
and ultimately to a high income country (HIC).
People need to be given enough leeway to be creative and
innovative in introducing new products and services to their consumers,
resulting in continuous and endless process of innovation and healthy competition
among the various players in the economy.
This fact is among the lessons drawn from the two-days
Economic Freedom Network (EFN) Asia conference
in Bangkok, Thailand in October.
Among the prominent speakers of the conference was Dr.
Razeen Sally of the European Center for International Political Economy, also a
vising faculty at the National University of Singapore (NUS). He said that a poor country or LIC must “get the basics
rights” to catch up with growth. Among such “basics” are 1st
generation reforms, “product market liberalization.” This includes the
following: macroeconomic stability in fiscal
and monetary policy, rule of law and property rights, free international trade,
and good skills and education of the people.
The next generation reforms are more structural and more
complicated. They are the “factor market
liberalization” reforms. Increasing
globalization and free market does increase income inequality among the people.
While this is a natural economic result, this is also a political challenge how
to face this reality and find ways to address it.
Penalizing more efficient, hard working people via higher
taxation, more business regulations and restrictions is not the way to do it.
Rather, it is encouraging those in the lower end of society to keep working.
They may feel “poor” when in fact, their economic status is already comparable
to the upper middle class of a LIC or even a MIC.
In the last session, I was one of four rapporteurs for
the four discussion groups on other issues raised during the conference. Among
the issues raised in our group was shared by Dr. Chung-ho Kim of Freedom
Factory Ltd. in Seoul, that many people
in HICs like S. Korea feel and complain
that they are poor, despite the high standard of living they enjoy compared to
what the poor in low income and middle income countries experience.
I made this chart in my report on stage that day.
Middle income is broadly defined as having a per capita
GDP income at purchasing power parity (PPP) valuation of between $3,000 to
$16,000 per year. Thus, an economy with
per capita GDP of only $3,000 or less for many years is said to be caught in a low
income trap shown by growth path AB. Economies which have been stuck at $16,000
or less per capita GDP for several years is said to be caught in a middle
income trap, shown by growth path AC.
There are several factors why an economy can be stuck at
AB or AC path. Foremost of which are: lack of economic freedom of the people --
where a big portion of the economy is held by a few oligarchs or business cronies
of high political leaders or monarchy. Another reason is the lack of the rule
of law, where rules are applied differently to different people due to arbitrary
powers of lawmakers.
These two factor can also contribute to a retrogression
of an economy from a lower middle income
to an LIC and go back to low income country. Or for an HIC to become an MIC.
The way some member- economies of the European Union are
being managed, it is possible that they might plunge into growth path A’E
someday, meaning may fall back to MIC status. When entrepreneurs are shacked by
too many taxes and regulations, either they will experience production
shrinkage or quit altogether, migrating to another country where their economic
freedom is more respected. Heavily regulated country will experience more debt and
fiscal constraints as the number of net tax payers will flatline if not
decline.
Whether aspiring to move a status, ensuring the economic
freedom of the citizens and limiting the role of government to enforcing the
rule of law and protecting property rights, are the basic ingredients of
success.
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See also:
Business 360 10: Foreign Aid as Band Aid Solution, August 11, 2013
Business 360 11: Avoiding Middle Income Trap, September 19, 2013
Business 360 12: Optimum Size of Government, October 13, 2013
Business 360 13: US Government Shutdown and Lessons for Asia, November 28, 2013
EFN Asia 30: Conference 2013, Day 1, October 23, 2013
EFN Asia 31. Friends in the Asian Free Market Movement, November 07, 2013
EFN Asia 32: Day 2 of Conference 2013 in Bangkok, November 09, 2013
