economic freedom final
TRANSCRIPT
Economic Freedom as Catalyst for Trade Economic Freedom as Catalyst for Trade Enhancement: Enhancement:
Circularity in Causal RelationsCircularity in Causal Relations
““SAARC Governments commitment SAARC Governments commitment to to
Economic Freedom in South Asia”Economic Freedom in South Asia”
Dr. Ayub MeharDr. Ayub Mehar Director General (R&D)Director General (R&D)
The Federation of Pakistan Chambers of Commerce & Industry (FPCCI)The Federation of Pakistan Chambers of Commerce & Industry (FPCCI)
Seminar organized bySeminar organized bySAARC Chamber of Commerce & Industry (SCCI)SAARC Chamber of Commerce & Industry (SCCI)
Islamabad Islamabad 1111thth August, 2009 August, 2009
Economic Freedom in Economic Freedom in South AsiaSouth Asia
Economic Freedom: Scope and Limitations
o Economic Freedom (asociated with a classical liberal Economic Freedom (asociated with a classical liberal viewpoint): “The freedom to produce, trade and viewpoint): “The freedom to produce, trade and consume any goods and services acquired without the consume any goods and services acquired without the use of force, fraud or theft”. use of force, fraud or theft”.
o Another more philosophical perspective emphasizes Another more philosophical perspective emphasizes its context in distributive justice and basic freedoms of its context in distributive justice and basic freedoms of all individuals.all individuals.
o This is embodied in the rule of law, property rights and This is embodied in the rule of law, property rights and freedom of contract, and characterized by external freedom of contract, and characterized by external and internal openness of the markets, the protection and internal openness of the markets, the protection of property rights and freedom of economic initiative. of property rights and freedom of economic initiative.
Indicators of Economic Freedomo Time dealing with officials of taxation & regulatory authorities as % of management timeTime dealing with officials of taxation & regulatory authorities as % of management time
o Average number of times management met with tax officialsAverage number of times management met with tax officials
o Time required to obtain operating licenseTime required to obtain operating license
o Unofficial payments to public officialsUnofficial payments to public officials
o Losses due to theft, robbery, vandalism and arson of SalesLosses due to theft, robbery, vandalism and arson of Sales
o Firms that do not report all sales for tax purposes of firmsFirms that do not report all sales for tax purposes of firms
o Firms with female participation in ownership of firmsFirms with female participation in ownership of firms
oCont….
o Firms using banks to finance investment of firms
o Value lost due to electrical outages of Sales
o ISO certification ownership of firms
o Average time to clear exports through customs days
o Firms offering formal training
Indicators of Economic Freedom
Economic Freedom in Selected SAARC Countries
Banglades
hIndia
Pakistan
Sri Lanka China Malaysia
Regulations and tax
Time dealing with officials % of management time 3.2 6.7 8.7 3.5 18.3 7.3
Average number of times management met with
tax officials1.4 3.1 4.2 5.1 14.4 5.2
Permits and licenses
Time required to obtain operating license days 6.1 - 35.2 49.5 11.8 -
Corruption Unofficial payments to public officials % of firms 85.1 47.5 57.0 16.3 72.6 -
CrimeLosses due to theft, robbery,
vandalism and arson % of Sales
1.2 0.1 0.1 0.5 0.1 0.3
InformalityFirms that do not report all
sales for tax purposes % of firms
- 59.2 - 42.2 49.5 -
GenderFirms with female
participation in ownership % of firms
16.1 9.1 - - - -
Finance Firms using banks to finance investment % of firms 24.7 19.4 3.6 16.2 9.8 23.8
Infrastructure Value lost due to electrical outages % of Sales 10.6 6.6 25* - 1.3 1.8
Innovation ISO certification ownership % of firms 7.8 22.5 17.0 - 35.9 31.4
TradeAverage time to clear
exports through customs days
8.4 15.6 9.7 7.6 6.7 2.5
Workforce Firms offering formal training % of firms 16.2 15.9 11.1 32.6 84.8 42.0
Economic Freedom Index
o Indices of economic freedom attempt to measure (free Indices of economic freedom attempt to measure (free market) economic freedom, and some empirical studies market) economic freedom, and some empirical studies based on some these rankings have found it to be based on some these rankings have found it to be correlated with higher living standards, self-reported correlated with higher living standards, self-reported happiness, and peace.happiness, and peace.
o One of the leading ‘Economic Freedom Index’ is jointly One of the leading ‘Economic Freedom Index’ is jointly prepared by the Fraser Institute, Yale Center for prepared by the Fraser Institute, Yale Center for Environmental Law and Policy (YCELP), Center for Environmental Law and Policy (YCELP), Center for International Earth Science Information Network (CIESIN) International Earth Science Information Network (CIESIN) at Columbia University, World Economic Forum (WEF) at Columbia University, World Economic Forum (WEF) and Joint Research Center (JRC) of European Comission.and Joint Research Center (JRC) of European Comission.
o The key ingredients of the Economic Freedom Index are:The key ingredients of the Economic Freedom Index are:
Factors of Economic Freedom Index
o Size of GovernmentSize of Government
o Legal System & Property RightsLegal System & Property Rights
o Sound MoneySound Money
o Freedom to Trade Internationally Freedom to Trade Internationally
o Credit Market Regulations Credit Market Regulations
o Labor Market Regulations Labor Market Regulations
o Business RegulationsBusiness Regulations
Economic Freedom in Selected SAARC Countries
CountriesCountriesSize ofSize of
GovernmentGovernment
Legal Legal System System
&&Property Property RightsRights
Sound Sound MoneyMoney
Freedom to Freedom to Trade Trade
InternationallInternationallyy
RegulationRegulationss
PakistanPakistan 4848 111111 122122 115115 7676
IndiaIndia 4141 5454 113113 7171 9898
Sri LankaSri Lanka 4646 9393 129129 9494 9898
BangladeshBangladesh 1010 131131 116116 119119 101101
United United KingdomKingdom 6363 1515 2424 1717 88
United United StatesStates 4242 2121 44 2727 77
(Rank: Out of 141 Countries)
Regional Trade in South Regional Trade in South Asia: Asia:
An overviewAn overview
Merchandise Trade of SAARC Trade BlocMerchandise Trade of SAARC Trade Bloc $ Millions$ Millions
Year
SAARC Trade Within Bloc
SAARC Total
Trade with world
World's total Trade
% share of SAARC
total trade with world in World's total Trade
Exports Imports Total
1995 2024 2242 4266 106426104480
001
2000 2,680 3,141 5821 144826131830
001
2004 5,830 6,072 11902 245950187930
001
2005 7,266 7,419 14685 326958213500
002
2006 9,109 9,097 18206 390816245530
002
2007 10,222 11,155 21377 470626282680
002
Regional TradeRegional Tradeas % of total bloc exportsas % of total bloc exports
Year of creation
1990 1995 2000 2004 2005 2006 2007
European Union
1957 68 66 67 68 67 67 68
NAFTA 1994 42 46 56 56 56 54 51
ASEAN 1967 20 25 23 25 25 25 25
ECO 1985 3 8 6 7 8 9 9
SAARC 1985 4 4 4 6 6 5 5
Regional TradeRegional Tradeas % of world exportsas % of world exports
Year Of
creation
1990 1995 2000 2004 2005 2006 2007
European Union
1957 40 38 38 41 39 38 39
NAFTA 1994 17 17 19 15 14 14 13
ASEAN 1967 5 6 7 6 6 7 6
ECO 1985 1 1 1 2 2 2 2
SAARC 1985 1 1 1 1 1 1 1
Indicators of Trade Indicators of Trade Liberalization and BarriersLiberalization and Barriers
Enabling Trade IndexEnabling Trade Index
Indicators Bangladesh Pakistan Sri Lanka India
Market Access
Tariff Barriers (Trade-weighted average tariff rate)
13.0 11.5 8.2 10.9
Non-tariff barriers (Index: average of two non-tariff barriers related variables)
48.0 30.9 20.3 34.1
Complexity of tariffs (average of the variance of tariffs)
6.7 10.4 6.2 4.0
Burden of Custom Procedures 2.4 3.6 3.7 3.7
Import - Export procedures
Documents for imports (No. of documents required to import)
8 8 6 9
Documents for Exports (No. of documents required to export)
6 9 8 8
Regulatory environment
Property rights 3.1 3.8 4.4 4.6
Ease of hiring foreign labor 3.7 4.8 4.2 4.2
Business impact of rules on FDI 5.4 5.7 5.7 5.3
Capital controls 3.2 4.8 4.2 4.4Source: World Economic ForumSource: World Economic Forum
Scores (1-7)Scores (1-7)
Enabling Trade IndexEnabling Trade Index
(Rank out of 121)(Rank out of 121) Indicators Bangladesh
Pakistan
Sri Lank
aIndia
Market Access
Tariff Barriers 108 95 78 94
Non-tariff barriers 76 43 31 48
Complexity of tariffs 27 48 59 107
Burden of Custom Procedures 119 76 64 65
Import - Export procedures
Documents for imports 66 66 30 85
Documents for Exports 42 98 83 83
Regulatory environment
Property rights 111 83 56 51
Ease of hiring foreign labor 113 53 93 98
Business impact of rules on FDI 50 25 24 54
Capital controls 112 63 79 75Source: World Economic ForumSource: World Economic Forum
Financial Development IndexFinancial Development IndexScore (1-7) Score (1-7)
Indicators Pakistan India
Burden of government regulation 3.0 2.9
Centralization of economic policymaking 2.4 3.9
Number of procedures to enforce a contract
47 46
Time to enforce a contract (No. of days) 880 1420
Cost of enforcing contracts (as a % of debt)
23.8 39.6
Domestic financial sector liberalization 2.0 2.0
Financial Development IndexFinancial Development Index(Rank out of 52)(Rank out of 52)
Indicators Pakistan India
Burden of government regulation 31 32
Centralization of economic policymaking 44 18
Number of procedures to enforce a contract 49 48
Time to enforce a contract 46 51
Cost of enforcing contracts 27 46
Domestic financial sector liberalization 49 38
Tariff BarriersTariff Barriers
Bangladesh
Bhutan
IndiaMaldive
sNepal
Pakistan
Sri Lanka
All Products %Binding Coverage 15.1 - 74.0 97.1 99.4 44.8 36.8
Simple mean bound rate 161.7 - 50.0 37.0 26.0 52.2 29.6
Simple mean tariff 15.5 22.2 17.0 21.3 12.5 14.8 11.0
Weighted mean tariff 19.9 21.5 15.0 20.5 13.4 12.2 7.0
Share of tariff lines with international peaks 41.5 61.6 16.0 72.3 16.8 43.2 23.1
Share of tariff lines with Specific rates 0.1 0 0 0 0.6 0.5 1.5
Primary Products %Simple mean tariff 15.6 42.6 24.0 17.8 12.5 14.1 15.2
weighted mean tariff 8.8 37.7 17.0 18.0 9.9 8.8 9.5
Manufactured products %Simple mean tariff 15.5 17.5 16.0 22.2 12.5 14.9 10.5
weighted mean tariff 26.1 14.5 13.0 22.0 15.2 14.6 5.9
Causality AnalysisCausality Analysis
Circularity in RelationsCircularity in Relations
Factors of Economic Freedom
Trade Enhancement & Liberalization
Trade Competitivenes
s
Causal RelationsDependent variable: Goods Market Efficiency
Legal System & Property Rights
Goods Market
Efficiency
Size of Government
Explanatory Explanatory VariablesVariables
Legal System & Legal System & Property RightsProperty Rights
Size of Size of GovernmenGovernmen
tt
Coefficient of Coefficient of CorrelationCorrelation 0.860.86 -0.10-0.10
T-StatisticsT-Statistics 4.94.9 4.74.7
Causal RelationsDependent variable: Labour Market Efficiency
Labour Market
Efficiency
ExplanatoryExplanatory VariablesVariablesLegal System & Legal System & Property RightsProperty Rights
Labour Labour Market Market
RegulationsRegulations
Freedom to Freedom to Trade Trade
InternationalInternationallyly
Coefficient of CorrelationCoefficient of Correlation 0.640.64 0.580.58 0.460.46
T-StatisticsT-Statistics 3.213.21 8.478.47 5.665.66
Legal System & Property Rights
Labour Market Regulations
Freedom to Trade Internationally
Causal RelationsDependent variable: Financial Market Sophistication
ExplanatoryExplanatory VariablesVariablesLegal System Legal System
& Property & Property RightsRights
Freedom to Freedom to Trade Trade
InternationalInternationallyly
Credit Credit Market Market
RegulatioRegulationsns
Sound Sound MoneyMoney
Coefficient of CorrelationCoefficient of Correlation 0.810.81 0.600.60 0.460.46 0.490.49
T-StatisticsT-Statistics 9.159.15 5.395.39 8.488.48 7.877.87
Legal System & Property Rights
Financial Market Sophistication
Freedom to Trade
Internationally
Credit Market
Regulations
Sound Money
Causal RelationsDependent variable: Technology Readiness
ExplanatoryExplanatory VariablesVariablesFreedom to Freedom to
Trade Trade InternationallyInternationally
Coefficient of CorrelationCoefficient of Correlation 0.550.55
T-StatisticsT-Statistics 8.828.82
Freedom to Trade
Internationally
Technology Readiness
Causal RelationsDependent variable: Innovation
ExplanatoryExplanatory VariablesVariablesSoft Business Soft Business RegulationsRegulations
Sound Sound MoneyMoney
Coefficient of CorrelationCoefficient of Correlation 0.740.74 0.420.42
T-StatisticsT-Statistics 8.928.92 5.275.27
Soft Business
Regulations
Innovation
Sound Money
Causal RelationsDependent variable: Institutional Governance
ExplanatoryExplanatory VariablesVariablesSize of Size of
GovernmentGovernment
Coefficient of CorrelationCoefficient of Correlation -0.20-0.20
T-StatisticsT-Statistics 5.085.08
Size of Government
Institutional Governance
Causal RelationsDependent variable: Business Sophistication
ExplanatoryExplanatory VariablesVariablesSoft Business Soft Business RegulationsRegulations
Sound Sound MoneyMoney
Coefficient of CorrelationCoefficient of Correlation 0.740.74 0.740.74
T-StatisticsT-Statistics 3.933.93 8.928.92
Soft Business
Regulations
Business Sophistication
Sound Money
Business Competitiveness
Export of Goods
Market Size
Simultaneity in International Trade
Import of Services
Import of Goods
GDP
Institutional Governance
Innovations
Export of Services
Dependent Dependent VariableVariable
Independent Independent VariablesVariables
CoefficienCoefficientsts
T-T-StatisticStatistic
ss
Adusted Adusted R-squareR-square
F-F-StatisticStatistic
ss
Export of Goods Export of Goods (EXG)(EXG) ConstantConstant
--664223.2664223.2
66-5.609-5.609 0.33010.3301 43.37943.379
BCIBCI 181713181713 6.5866.586
Import of Goods Import of Goods (IMG)(IMG) ConstantConstant 6174.2826174.282 1.8821.882 0.9890.989 3859.103859.10
33
GDPGDP 0.0990.099 33.10233.102
EXGEXG 0.5940.594 28.09328.093
Export of Export of Services (EXS)Services (EXS)
ConstantConstant -75101.1-75101.1 -3.604-3.604 0.42390.4239 32.64132.641
INOVINOV 66902.7966902.79 6.3276.327
INSTINST--
32215.0832215.0899
-3.123-3.123
Import of Import of Services (IMS)Services (IMS)
ConstantConstant -80974.4-80974.4 -5.894-5.894 0.84820.8482 161.216161.216
GDPGDP 0.0220.022 13.81713.817
MSIZMSIZ 7558.8887558.888 2.992.99
BCIBCI 15463.3215463.32 3.8813.881
Estimated Parameters: Regression Results
ConclusionConclusion
Trade enhancement and liberalization and factors of Economic Freedom are jointly determined through trade competitiveness.
The Factors of Economic Freedom (Legal System, Size of Government, Freedom to Trade Internationally, Sound Money and Regulations) are significant determinants of Trade Competitiveness (Goods Market Efficiency, Labour Market Efficiency, Financial Market Sophistication, Governance, Technology Readiness and innovations).
The factors of Competitiveness (Innovations and Governance etc.) determine the magnitude of regional and international trade.
Without insuring Economic Freedom Trade enhancement cannot
be achieved.
Causality Analysis
Trade Barriers in South AsiaTrade Barriers in South Asia
Losses due to electrical outages and average time to clear exports through customs are identified as major hurdle in South Asia.
Extremely high non-tariff barriers in South Asia are observed.
Regulatory Environment in South Asia has also been
identified as trade barrier.
Dependency of Trade Relations on Freedom & Competitiveness
The simultaneous relations show that the commerce departments and their associated institutions are not only responsible for the trade promotional activities. Regulatory framework and competitiveness are the catalysts for enhancement in trade relations.
For trade enhancement and liberalization the role of interior and foreign ministries are also important. Free Trade Agreements, Bilateral Treaties and Monetary Union can not achieve the targeted goals unless the interiors and foreign affairs ministries participate in these agreements. The roles of planning authorities, transportation and communication departments are also important in trade promotion among the nations.
At the time of agreements of the mutual economic relations, the recommendations of the planning commission, interiors and foreign affairs ministries and the concerned departments of the transportation and communication ministries must be incorporated.
