Economic Freedom
Economic freedom is similar to free trade, and it is the liberty of the markets of a country from government control (Wadhwa, 2004). According to Stossel, economic freedom is attained when the market is free from many government regulations; businesses are free to produce the goods and services that they want, and consumers have the freedom to choose what to consume. Until the early twentieth century, democratic countries like the United States of America were viewed as the most prosperous in the world because they had prospered economically, with high levels of Gross Domestic Product and high per capita income (Haan, 2008). Apart from democracy, states like the United States also prospered as a result of abundant resources. In the early nineteenth century, however, economists found out that countries succeed as a result of economic freedom. John Stossel found out that countries that have free markets, such as Hong Kong and America, have attained a stable growth rate while states such as India have failed to grow due to lack of freedom. Stossel’s research shows that a country can succeed without resources as long as the markets are free to make their own decisions. Despite of the benefits of economic freedom such as high levels of economic growth and a variety of products in the market, there are limitations such as neglect of the production of public goods and uneven distribution of resources within a state.
The economic freedom of countries can be measured using a standard index known as an economic freedom index. In 2009, the average economic freedom index was 6.79, while in 2010, the index rose to 6.83; the index increased by 0.04. The positive difference shows that economic freedom of the world is rising meaning more countries are liberating the markets of their economies than in previous centuries. Hong Kong has the highest index of freedom of 8.90 followed by Singapore with an index of 8.69. The United States has remained the third position in ranking until the year 2000; from this year onwards, the economic freedom index of America has been declining and its ranking had dropped to position 18 in 2010. The economic freedom of the U.S. has declined because of factors such as; protection of the citizen by the state, high levels of taxation, and protection of domestic industries from external competition. Other economies with a high economic index are Japan, Mexico and China. Bahrain and Finland have replaced United Kingdom and U.S in the top ten countries with a high index. India is ranked the 119th state with an index of 55.2 according to the 2013 report. Cuba, on the contrary, has the third lowest economic freedom index of 28.5 that is below the expected value. The Cuban economy has no private sector since anybody who establishes a private business has to face many bureaucratic regulations from the state before putting up such a business (Flynn & Brue, 2011). Venezuela and Zimbabwe are other countries that have low levels of economic freedom with indexes of 36.1 and 28.6 in the year 2013.
Hong Kong is not a democratic nation but it is the world’s most prosperous nation because of economic liberty. John says Hong Kong has been doing better than India because of reduced government regulation. The government of Hong Kong performs duties such as giving business permits to businesses and providing defense in the country. It does not decide what people consume nor does it decide what businesses produce. In India, however, the administration decides the products to be consumed by the citizen and the type of businesses to operate in the market. This means that markets in Hong Kong are freer than markets in India. The two governments, however, have a similar role of providing licenses and permits to people who are starting new businesses. The difference in this role of government, in these countries, is that, in India, it takes a longer time to acquire a license and begin operations compared to Hong Kong. This is because of the bureaucracy that is present in India; bureaucracy is a condition whereby one has to pass many stages before acquiring a trade permit or a license. In order to begin business operations in India, a person has to get approval from the government, a trade permit and a license. To get approval from the government means that, the politicians have to discuss your business idea and decide whether to allow or discard the idea; this process takes up to one, two or more years. On the other hand, the process of acquiring a license and permit in Hong Kong involves filling out a single form and getting approval from the authorities in twenty four hours. Having studied the weaknesses associated with government regulation in India, John advises government to allow free markets in their economies for them to achieve better results. He notes that democracy alone without free markets in the state leads to failure as observed in India.
Countries with abundant resources such as America achieve better results economically than countries with insufficient resources. Despite this fact, Stossel notes that lack of freedom to utilize the resources in a country would lead to a situation where states with scarce resources to perform better than the states with plenty of resources. He concludes this after noting that Hong Kong’s performance has risen above that of the United States although Hong Kong is an island with scarce resources. United states also experience federal regulation, although the regulations and procedures there are better than the regulations in India; consequently, the U.S. performs better than India. John also observes that high population cannot prevent the growth of an economy. He says that a country with high population can prosper if people are free to make their own decisions. Hong Kong, for example, has a higher population than India, but it achieves higher economic growth and lower levels of poverty than India. This has been possible because the people in India cannot make decisions that are not in line with the governments wishes. This is despite some of their decisions being better than the decisions of the government. John, therefore, concludes that freedom is necessary for a country to grow whether it has resources or not even when there is high population in the country. His conclusions are supported by the fact that Indians who migrate to countries, like U.S. and Hong Kong, put up businesses that create thousands of jobs and earn higher incomes than they did while at home. John concludes that a country with abundant resources still needs to have free markets for their Gross Domestic Product to grow at a stable rate.
Countries with free markets have benefits such as efficient utilization of resources; inputs used in the production process are utilized more effectively in a free country like Hong Kong than in a controlled country like Cuba. The government does not decide where capital or labor should be used, therefore, these assets are free to be used in any industry where they produce maximum output. Industries in the country compete for the inputs, labor and capital, and they end up being used by the industry that makes the best use of them. Goods produced by these industries are high quality and the price charged by producers to customers in order to acquire them reflects the true value of the goods. Resources and goods in a country with freedom are optimal.
In a free economy, producers have the freedom to choose the number of goods or services to produce. Different manufacturers produce similar but differentiated goods (Wadhwa, 2004); customers choose the good to consume from the variety in the market. Consumers choose the good that provides them with the highest utility according to their likes and preferences. Controlled countries do not have a variety of goods in the market. For example, in India the government had banned the importation of coca cola drinks until the twentieth century; the drinks that were in the market were purely Indian. This shows that there was a lack of variety in the market.
A country buys products from another country using its currency; the country selling the product earns foreign exchange. This currency is used to make future transactions between the two countries. Economic growth is an increase in the overall output of a country (Wadhwa, 2004). It results from high income of people and businesses and can be measured by calculating income per person; it is gotten by dividing total output by total population. Free economies have higher per capita income than socialist economies, and they have higher economic growth as a result of high foreign exchange earnings.
States that promote free trade also operate with many challenges such as unequal distribution of resources. The competition that exists in free economies leads to the survival of the strongest businesses in an economy. The businesses that survive are mainly the large enterprises that enjoy economies of scale in production. These enterprises end up using the resources in the economy to benefit themselves only. Small enterprises that do not have economies in production are left without sufficient resources, and they may end up being closed. For example, in Hong Kong small enterprises do not flourish if they do not have abundant resources and are not managed properly. This phenomenon shows that assets are owned by the rich people only while poorer people become poorer.
Economic freedom is associated with capitalist economies where capital is owned by the private people. The private sector manufactures goods that earn high returns while goods that do not earn profit but are essential are not produced. For example, health and education are public goods, which are basic to human beings but are not produced in a free economy. Consequently, capitalist economies are characterized by profit motivated producers who do not manufacture essential social goods (Haan, 2008). Lack of social goods such as education may lead to backward growth in a country.
There are ideal and imperfect markets in economic theory; Ideal markets refer to markets that produce similar goods at the same prices, for example, perfectly competitive market. Imperfect markets are markets such as oligopoly and monopoly (Wadhwa, 2004); these markets operate under some inefficiency which results in exploitation of consumers by charging them higher prices. This is not the case in economies controlled by the government.
Free trade is the uncontrolled movement of assets and labor within and outside an economy. It is supported by economists for promoting efficient use of resources, foreign exchange and giving rise to the low prices of output. Other policy makers discourage it by stating that it leads to imperfect markets, inequality in resource allocation and neglects public goods.
References
Flynn, S. and Brue, S. (2011). Economics: Principles, Problems, and Policies. London: McGraw-Hill
Haan, J. (2008). Economic freedom. Amsterdam: Elsevier.
Wadhwa, R. (2004). India, the Third World, why?: God made only one! : Can India overtake the USA? New Delhi: IMH.
