Economic Freedom: 2007 Edition

The feverish march of globalisation has resulted in ever integrated expenditure, capital and information flows across borders... and left many many international ranking tables in its wake :P

Here is another just released one:

2007 Index of Economic Freedom

by The Wall Street Journal and the Heritage Foundation (Washington’s think tank). I am taking the liberty to summarise some of the relevant findings of the latest publication for your reading pleasure.

1. What is economic freedom?

The highest form of economic freedom provides an absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, individuals are free to work, produce, consume, and invest in any way they please, and that freedom is both protected by the state and unconstrained by the state.

2. How does economic freedom help an economy grow?

Studies in previous editions of the Index confirm the tangible benefits of living in freer societies. Not only is a higher level of economic freedom clearly associated with a higher level of per capita gross domestic product (GDP), but GDP growth rates also increase as a country’s economic freedom score improves.

3. Where Does Malaysia stand?
Malaysia was ranked at 48th globally (out of 161) and 8th regionally (out of 30), which is an okay'ish ranking with an average index of 65.8.

Malaysia scored well in:

Labor Freedom - 89.5%
The labor market operates under flexible employment regulations that enhance employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not difficult. The government restricts the number of expatriates that foreign and domestic firms may hire. Malaysia does not have a national minimum wage.

Fiscal Freedom - 87.8%
Malaysia has moderate tax rates. Both the top income tax rate and the top corporate tax rate are 28 percent. The government has announced that it will reduce individual and corporate tax rates when introducing a value-added tax (VAT). Other taxes include a capital gains tax and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 16 percent.

But did quite badly in:

Investment Freedom - 40.0%
Foreign investment rules have been eased over the years, but foreign investors still face such restrictions as limited voting shares, prior approval, and mandatory hiring of ethnic Malays. In September 2005, the government eased restrictions for domestic residents to buy foreign-listed securities and for foreigners to sell shares in the domestic market. Residents and non-residents may hold foreign exchange accounts, but government approval is required in many cases. Nearly all capital transactions are prohibited, are subject to restrictions, or require government approval.

Financial Freedom - 40.0%
Malaysia's financial sector is relatively well developed but subject to extensive government intervention. Of the 29 commercial banks operating as of September 2005, 10 were domestically owned and 13 were foreign-owned. Six Islamic banks (five domestic and one foreign) account for over 10 percent of baking assets. The government owns a majority of Malaysia's two largest local commercial banks. Foreign equity in banks is restricted, with participation in commercial banking limited to a maximum of 30 percent. The government influences the allocation of credit. There are several offshore banks, insurance companies, and other financial institutions. Numerous restrictions apply to the insurance industry, including restrictions on expatriate employment and foreign equity. Foreigners may trade in securities and derivatives, but foreign participation in stockbrokerages and trust management companies is restricted.

Policy recommendation opportunity, anyone?

4: Here are the global and regional top tens:

5. Sala-i-Martin: Convergence, Period

For those who are interested in the growth literature (or in poverty and inequility), chapter one of this report (which is also available online) is a shortened version of Sala-i-Martin recent'ish paper on global growth, poverty and inequality. It is a very interesting and good read, and has a co-title: Convergence, Period. (contrast with Lant Pritchett influential paper in 1997: Divergence, Big Time, haha.)

Have a good weekend ahead :)

Elanor