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economic freedom



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This is the unedited version of an op-ed article published in the
Economic Times on 15 Jan 2000. For the Econ Times version see:

http://www.economictimes.com/150100/15opin01.htm

comments welcome!

yazad jal


A New Freedom Movement
- Yazad Jal

In India, the fight for independence and freedom from foreign rule began
in earnest around 1900.  It took us less than fifty years after that to
boot the British.  But were the next fifty years really the era of
prosperity in India? India is the under-achiever of the 20th Century,
with too many promises and too little progress.  What went wrong?  And
more importantly, what can we do right?

Any usual trot of excuses would list an exploding population, lack of
education, poor infrastructure, inequality of income, corruption, the
caste system, our "Indian mentality," etc.

All of the above mislead us into making wrong policies.  Japan has a
higher population density and is far richer.  Many countries in Africa
have a far thinner population density and are poorer than India.  We
have enough to sustain our one billion and more.  Kerala’s literacy rate
is above 90% but its per capita income is half of Punjab’s whose
literacy rate is barely 60%.  Is the "Indian mentality" such a terrible
stumbling block?  Indians do very well all around the world, except in
India itself!

Looking deeper, the missing component that explains India’s poor
progress is freedom.  Yes—freedom, economic freedom.  In 1947 we gained
independence from an alien British Empire, but in 2000 we are still
shackled by the omnipresent Indian State, a little better since 1991,
but not enough.

Canada’s Fraser Institute, along with 54 other institutes around the
world including India’s Centre for Civil Society have published the
Economic Freedom of the World: 2000 Annual Report.  The report is the
fourth in a series that rates the level of economic freedom in 123
countries.

In the 2000 Report, Hong Kong and Singapore share the top rating of 9.4
on a scale of 10.  New Zealand, the United States, and the United
Kingdom make up the five freest economies in the world.  The least free
economy is Myanmar (Burma), with the Democratic Republic of Congo
(Zaire), Sierra Leone, Rwanda, and Madagascar ranking in the last five.
India at 86th is barely above the bottom.

There are astounding differences in economic and social outcomes between
nations that are more economically free than those that are less free.
Life expectancy is 20 years longer for people in the 24 most free
countries (the top 20%) than in the 24 least free countries (the bottom
20%).  Average income per person in the top 20% was $18,000 in 1997,
compared to less than $2,000 for the bottom 20%.  No country with a
persistently high economic freedom rating during the two decades failed
to achieve a high level of income.  The extent of income inequality is
lesser is the top 20% compared to any other segment.

Even social indicators show a wide gap between the economically free and
not-so-free.  The average Human Development Index for the top 20% is 0.9
compared to less than 0.45 for the bottom 20% (maximum is 1).  For a
variety of social and political indicators, economically freer countries
fared better than the not-so-free.  Countries in the top 20% have far
lower rates of adult illiteracy, poverty, and corruption.  They have
better access to safe drinking water, more political rights and civil
liberties, higher labour productivity, a more diverse ethnic structure.

This isn’t a developed North versus underdeveloped South divide.
Several countries from all areas in the world have improved remarkably
in economic freedom, with corresponding benefits for their people.
Chile's rating rose from 3.7 in 1975 to 8.2 in 1997.  Chile now ranks
18th, up from 54th in 1975.  Thailand, with a score of 8.2, also ranked
18th in 1997, rated 5.8 and ranked 36th in 1985.  The Phillipines scored
4.9 in 1985 and 7.9 in 1997 and its ranking shot up from 67th to 31st.
Peru ranked 108th with 2.3 in 1985 tripled its score to 7.9 and is
ranked 31st in 1997. Between 1990 and 1997, El Salvador's rating rose
from 5.0 to 8.3, and its ranking jumped from 67th to 14th.

India’s progress has been rather slow; our score did improve from 4.1 to
5.8 in the 90’s but that is not enough.  We need to dramatically improve
in three major areas.

Figures in brackets relate to India’s score in the relevant area in 1997

The structure of our economy—(3.5).  

We have the government running far too many industries that should be
wholly in private hands – from hotels to aluminium and steel factories.
Private enterprise will do a far better job (and does so!) Price
controls on a variety of areas distort economic activity and lead to
exactly the opposite of what is intended. A classic example is the onion
shortage in 1998.  The top marginal tax rate is 40% in India.  Better
than earlier, but the plethora of confusing tax laws and poor policies
exact a huge price. We need to privatise large swathes of our public
sector, remove price controls and rationalise tax laws.

Freedom to trade—(4.1) 
Since Nehruvian times there has been the mistaken conception that
manufacturing is all-important and foreign trade should be side-stepped.
The bogey of neo-colonialism resurfaces now as "swadeshi jagaran."  This
attitude ignores basic human instinct as well as the rich tradition of
Indian traders through millennia.  Barriers to trade deprive ordinary
citizens, both producers and consumers of cheaper products. Import
licences and quotas simply help those industries that are willing to pay
off politicians for their economic protection.  We need a far more
liberal trade policy and a reduction of import duties.

Freedom of Exchange in Capital and Financial Markets—(3.8)  
"We’ve escaped the Asian Crises"–the smug smiles on Indian policy makers
and pseudo-intellectuals were very evident during 1997-98.  Well, the
East Asian economies have now recovered and are back on the prosperity
track.  India still has exchange control.

Economic freedom is not just an after dinner discussion topic over
Belgian chocolates and Colombian coffee.  The lack of freedom and
excessive regulation of the Indian State affects the poorest hardest.
One small example is the knot of regulations covering cycle-rickshaw
pullers in Delhi.  Delhi has approximately 2 lakh cycle-rickshaws that
ply largely in residential colonies and university areas providing an
affordable and available service compared to buses or auto-rickshaws.
The Municipal Corporation of Delhi has mandated that rickshaw pullers
have to be licensed and only 50,000 licences shall be given out.  In one
fell sweep three-fourths of cycle-rickshaws are now illegal operations.
Another seemingly irrational rule is that the holder of the 
cycle-rickshaw has to ply his cycle-rickshaw himself and cannot rent it
out (corollary: one person can own only one cycle-rickshaw).  You can
own multiple taxies or auto rickshaws or buses–but not the cheapest
means of transport–the cycle-rickshaw!  These laws are manna from heaven
for the police and petty bureaucracy who excel at squeezing bribes out
of some of the poorest inhabitants of our capital city.  Economic
freedom means removing such absurd laws and rules.  

We need a new freedom movement to remove the shackles still on us.

Table: Economic Freedom in India
                            		Year
Components 			1970 	1980	1990 	1997
I   Size of Government 		8.9 	8.7 	8.2 	8.0
II  Structure of The Economy 	2.3 	1.7 	2.4 	3.5
    and Use of Markets 
III Monetary Policy  		8.9 	8.1 	8.6 	8.7
    and Price Stability
IV  Freedom to Use Alternative 	0.0 	4.5 	4.0 	7.0
    Currencies
V   Legal Structure and  	3.2 	5.9 	4.0 	7.6
    Property Rights
VI  International Exchange: 	N/A 	0.7 	1.1	4.1
    (Freedom to Trade with 
     Foreigners) 
VII Freedom of Exchange in 	3.6 	3.5 	3.5 	3.8
    Capital and Financial Markets 

Weighted Average 		4.0 	4.3 	4.1 	5.8

Ranking 			51 	77 	93 	86
Total no. of countries ranked  	57 	107 	115 	123
Percentile (best=99, worst=1) 	10.5 	28.0 	23.8 	30.1

Source: Economic Freedom of the World: 2000 Annual Report.  


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Yazad Jal
Research Associate, Centre for Civil Society
B-12, Kailash Colony, New Delhi 110048, INDIA

yazad@ccsindia.org or yazad@usa.net
http://www.ccsindia.org
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