Freedom score

A bunch of economists trooped over to the New World hotel last week to enjoy a free dinner (always a guaranteed crowd drawer), courtesy of the Friedrich Naumann Foundation for Liberty (Philippine office) and co-hosted by the Foundation for Economic Freedom. The FNF and FEF represent their respective countries within the Economic Freedom Network, a global community of like-minded think tanks with a shared commitment to promoting economic freedom.

The occasion was the launch of the Philippine edition of the 2010 Annual Report on the “Economic Freedom of the World” , a project that the EFN has undertaken for nearly thirty years. The long-term record is encouraging—among the total 102 countries that were tracked, the average EFW rating has been rising every year, from 5.53 in 1980 to 6.74 in 2007 (scale of 1-10). The biggest five-year improvement was from 1990 (5.87) to 1995 (6.25), and it can’t be a coincidence that period also saw the collapse of the communist system.

However, from 2007 to 2008, the index fell for the first time ever, from 6.74 to 6.67. Again it isn’t a coincidence that period also saw the start of the global financial near-meltdown, one that provoked massive government interventions to avert system collapse and pump-prime the painful climb out of economic recession, the world’s worst since the Great Depression.

The numbers haven’t come out yet for the two years since, but I don’t expect to see improvements on economic freedom, as governments have had to battle the recessionary threat with traditional nostrums like more spending, massive bail-outs, and tighter regulation. These prescriptions may make macroeconomic sense in this short-term emergency, but their chilling effect on the world’s economic freedom may have the perverse effect of stifling market entrepreneurship, the only true driver of long-term growth.

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Here in our country, as shown in Table 1, the picture is also one of steady improvement over the decades—particularly during the term of FVR—but with a downturn also in 2008. Since then, we’ve had continuing growth while the rest of the world dropped into recession, but I’m sure we’ll be seeing the price we paid for this resiliency when the latest economic freedom numbers come out no longer looking so pretty.

A closer look at the numbers behind these ratings yields up more insights that might warm the hearts of former President Arroyo’s critics. Some of the sub-indices underlying the EFW ratings started to decline even before the global recession, in 2005, after she had finished her caretaker term and was starting on her elected tenure. Specifically, these declines are seen in the sub-ratings for “Access to sound money” and “Freedom to trade internationally”, as shown in Table 2.

Because of this, a comparison of the Philippines with its regional neighbors would also show, since the year 2000, a slight but perceptible widening of the spread against us. Slowly but surely, it seems that we are being left behind by our neighbors on key aspects of economic freedom. If this decline is real and continuing, it ought to warrant closer attention from President Aquino, whose single-issue corruption agenda is already wearing thin.

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A closer inspection of the numbers behind the sub-ratings turns up several specific measures underlying the possibility that we might be getting left behind by our neighbors on economic freedom. What we might label as fiscal/monetary evidence shows, in Table 3, an expanding economic role for government, seemingly creeping inflation, and partial restrictions on foreign currency bank accounts:

The inflation ratings are misleading, and a good reminder why statistics of any sort should be read with care. After double-digit inflation in the two years shown for FM and Cory, inflation dropped to single digits thereafter. Under GMA, the inflation in both years rated above were actually 2.8 percent and 9.3 percent respectively–the first one hardly worrisome, the second one largely imported through our food and oil import bills.

Government investment comprised over 20 percent of total investment under FM and Cory above, over 30 percent under Estrada –thus his poor 4.00 rating. Government’s share dropped to 17.5 percent under FVR’s privatization agenda, even lower to 14.9 percent under GMA1, then bounced back to 22.5 percent in 2008 as a result of expanded GOCCs and her ambitious infrastructure spending. This brings up valid question: whether or not economic freedom—at least as measured by this rating—can temporarily be set aside for the sake of a crash program of public construction that no one can deny was essential, and overdue.

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Another group of sub-ratings effectively measures the openness of our external transactions, whether it is goods or money that is moving in and out of the country. This is where we come up more clearly short, mainly because of the conventional wisdom that more trade is always better than less. We’ve been sliding backward on some measures of external openness, as shown in Table 4:

Again, the numbers may be saying more—or less—than they seem. The relative size of tariffs and other taxes on traded commodities was lowest under Erap, but has been gradually increasing since then. This may simply reflect improving Customs collections, certainly a fiscal positive.

Likewise, the size of our trade sector under Erap was closest to what it “ought to be”, given our country’s population, geography, and relocation. Since then, the spread of actual below ideal has widened. But this may simply mean that–with the increase in our migrant workers –we have gotten better at exporting our people themselves, rather than the commodities they might otherwise be making at home. Whether this is better or worse for economic strategy and welfare—not to mention freedom—is a valid question for debate.

Foreign investment in our economy—whether direct or portfolio–is something on which we tend to blow hot and cold, given our historical schizophrenia on the issue. Until the recent global financial crisis, the consensus was to always keep our doors wide open to the rest of the world. These days, though, if a chill wind is blowing outside, wouldn’t it be prudent to shut the windows for a while? In a unipolar world where other countries catch a cold whenever Uncle Sam sneezes, what’s to be done if his sneezing develops into full-blown pneumonia? –Gary Olivar, Manila Standard Today

Gary Olivar is a director of the Center for Strategy, Enterprise & Intelligence (CenSEI), providing expertise in strategy and management, enterprise development, intelligence, Internet and media. He can be reached at gary.olivar@censeisolutions.com