Economic Freedom, Larger Freedoms and State Intervention
The past three decades have seen an unprecedented and a dramatic reduction in extreme poverty. Spearheaded by progress in China and India, many in the world have been able to escape the burdens of extreme impoverishment and begin to enjoy improved access to food, education and health care. Yet at the same time, many countries have become poorer and millions of families have been thrown into poverty. While overall global wealth has grown it is less and less evenly distributed within countries, within regions and in the world as a whole. Today, more than a billion people--one in every six human beings--still live on less than a dollar a day, and 20,000 die from poverty each day, lacking the means to stay alive in the face of chronic hunger, disease and environmental hazards. In other words, this is a poverty that kills. We live in a world in which every year 11 million children die before their fifth birthday and three million people die of AIDS. Very many people across the world suffer from many other varieties of unfreedom. Famines continue to occur in particular regions, denying to millions the basic freedom to survive. Further, inequality between men and women afflicts the lives of millions of women and severely restricts the substantive freedoms that women enjoy. This is definitely not a world with larger freedoms.
The absence of economic growth implies the continued existence of poverty and hardship. Neoclassical economic theory explains economic growth as a function of four factors, namely capital, labour, human capital and technology. But according to a new line of research, the policies that are most favourable to growth are the ones that promote economic freedom. The freedom to produce and trade- to earn an honest living- without undue interference is the essence of economic freedom (EF). It includes the right to own, use and dispose property, right to proper and speedy resolution of disputes and enforcement of contracts, and overall protection of life and property so that everyone can earn their livelihood safely and peacefully. The Fraser Institute's Economic Freedom Index (EFI) measures the degree of economic freedom in five major areas (1).
i) Size of government: When government spending increases relative to spending by individuals, households, and businesses, government decision-making is substituted for personal choice and economic freedom is reduced.
ii) Legal structure and security of property rights: Security of property rights, protected by the rule of law, is essential to economic freedom.
iii) Access to sound money: Countries that follow policies and adopt institutions that lead to low (and stable) rates of inflation and avoid regulations that limit the use of alternative currencies, should citizens want to use them, have greater economic freedom.
iv) Freedom to trade internationally: This implies that the country must have low tariffs, a large trade sector, efficient administration of customs, a freely convertible currency, and few controls on capital.
v) Regulation of credit, labour and business: Countries that allow markets to determine prices and refrain from regulatory activities that retard entry into business and increase the cost of producing products have greater EF (2).
In other words economic freedom promotes free markets. In fact, it is well documented that in the absence of imperfections such as natural monopolies, externalities and public goods (also including the informational asymmetries) free markets achieve better economic efficiencies and higher per capita incomes. The levels of real income that people enjoy are important in giving them corresponding opportunities to purchase goods and services and to enjoy living standards that go with those purchases. But sometimes, income levels may often be inadequate guides to such important matters as the freedom to live long, or the ability to escape avoidable morbidity, or the opportunity to have worthwhile employment. …