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 |  Subject: New Zealand: More freedom and we'd be better off  Mon Feb 11, 2008 11:26 pm | |
| Economies with higher levels of economic freedom enjoy higher living standards.
This insight in economics goes back at least to Adam Smith's The Wealth of Nations, which argued that basic institutions that protect the freedom of individuals to pursue their own economic interests while constraining anti- social behaviour result in greater prosperity for the larger society.
Contemporary research confirms that free institutions create an environment that allows a virtuous cycle of entrepreneurship, innovation and sustained economic growth to flourish. The freest economies also tend to have lower rates of unemployment and lower inflation.
For more than a decade, two North American think-tanks, the US Heritage Foundation (in association with the Wall Street Journal) and the Fraser Institute in Canada have compiled indices measuring economic freedom.
The 2008 Heritage/WSJ Index appeared last month; the Fraser Institute's will appear in September. Over the years, the two indices have painted a similar but not identical picture. The Heritage/WSJ Index grades countries on 10 criteria: business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights protection, freedom from corruption and labour freedom.
The index reports that the freest 20 per cent of the world's economies have twice the per capita income of those in the second quintile and five times that of the least-free 20 per cent.
For 2008, Hong Kong-China retains its position as the world's freest economy. Singapore, often wrongly thought of as a government-run country, remains in second place. Ireland and Australia have climbed the ladder in recent years and are now in third and fourth place, followed by the United States.
New Zealand has slipped in the latest index from its third position in 2004 to sixth place. In the past year its overall economic freedom score has fallen further than that of all but one country in the top 20. Falls have occurred in five of the 10 freedom categories.
The commentary notes that after 20 years of sound policies and reforms, New Zealand transformed itself into a modern, flexible economy with one of the lowest unemployment rates in the OECD. In terms of economic freedom it has basically flatlined since the mid- 1990s, however, and it has fallen back in recent years. It scores poorly for the size of government; the commentary notes that total government expenditures and tax rates are high.
The freedom indices are a much more comprehensive indicator of a country's economic health than the World Bank's annual Doing Business survey. This looks at the ease of doing business in a country, and government ministers have often pointed to the fact that New Zealand has been in second place after Singapore. The Heritage/ WSJ Index confirms that New Zealand scores exceptionally well for business freedom, but it is only one of the 10 categories of the index.
The World Bank's survey focuses only on regulations affecting things such as starting and closing a business, dealing with licences, registering property and enforcing contracts. Other issues, many of which are covered in the freedom indices, such as government spending and taxation, quality of infrastructure and underlying strength of institutions, are not included.
The freedom indices line up reasonably well with the World Economic Forum's Global Competitiveness Report. The latest report had New Zealand falling to 24th place and ranked it poorly (40th place or worse) for wastefulness of government spending, burden of government regulations, quality of overall infrastructure and extent of taxation, among other things.
The overall picture is that New Zealand has a far better economy than 20 years ago but has been losing ground in economic freedom and competitiveness.
A commitment to freedom has to be maintained. As Wolfgang Kasper noted in a report on New Zealand's economic reforms (www.nzbr.org.nz), countries need to stay on a consistent path to sustain investment certainty and confidence.
The costs of policy changes that reduce economic freedom and competitiveness often show up later. New Zealand's trend rates of productivity and gdp growth have been sagging at a time when the economy should have been booming, given record terms of trade.
The indices have signalled accurately that New Zealand has been making policy changes in the wrong direction and the outcomes are no surprise.
http://www.stuff.co.nz/stuff/4397006a1865.html |
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