Economics

Economics

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Economics

Economic freedom refers to the rights of individuals to “work, produce, consume and invest in a free and protected manner. The economic freedom index measures ten variables, which include business freedom, fiscal freedom, government spending, fiscal freedom, freedom from corruption, property rights, monetary freedom, financial freedom, trade freedom and labor freedom” (Skousen, 2009). The recent financial meltdown affected many countries around the world. While some of the countries have reported continued recovery, other countries are still struggling. This has affected their level of financial freedom. There are high rates of unemployment that have been reported in some of the countries. Although most of the developing countries are not ranked among the highest, they have recorded significant growth from previous periods, as they continue with efforts of poverty reduction. However, most of them have scored poorly in freedom from corruption. Some of the countries with the highest economic freedom include Hong Kong, Singapore, Australia, New Zealand, Switzerland and Canada. There are disparities between some of the richest countries in the world, measured as GDP (PPP) per capita, and countries with the highest economic freedoms (Skousen, 2009).

The top ranked richest countries in the world include Qatar, Luxembourg, Norway, Singapore, Brunei, United Arab Emirates, United States, Hong Kong, Switzerland, Netherlands and Australia. Of these countries, only Hong Kong, Singapore, United States and Australia are among the top ten countries with the highest economic freedom. Luxembourg and Qatar rank thirteenth and twenty-seventh respectively. Qatar ranks poorly in investment and financial freedom. The index of economic freedom considers many factors, which are usually not considered when measuring a country’s wealth. Factors such as restrictions on foreign investment contribute to the final score of economic freedom (Chu, 2011). This means that countries that restrict foreign investment by putting strict measures and tariffs score poorly in economic freedom rankings. Countries with the highest overall marks rank record high changes in most freedoms. They however, have mixed results in government spending. High business, trade, financial and investment freedom are beneficial to a country’s economy (Heritage, 2011).

On the other hand, countries with the least economic freedom have low controls on corruption, and many of them have high government spending. They also record low property rights. Many of the countries with low economic freedom have low GDP (PPP). They have high rates of unemployment, high inflation and rampant corruption, and this affects the growth of the economy. Financial freedom is one of the indicators of economic growth. Countries, which have low scores in financial freedom, indicate the governments’ interference in financial institutions. Economic freedom is directly linked to economic growth and prosperity among people. This is because economic freedom creates a favorable environment for innovation and creativity. This enhances job creation, thus improving employment. When more people are employed, the country benefits in numerous ways such as increase in taxes, which mean that the government has more money at its disposal. The living standards of people also increases and this contributes to economic growth (Chu, 2011).

Lack of economic freedom, on the other hand, means that people have to tolerate excessive government interference. They are discouraged from exploiting their creativity. They have to go through many restrictions before starting a business, and this discourages entrepreneurship. Excessive government restrictions also discourage foreign investment. Investors usually look for countries where they will trade freely and where they will be allowed to compete with the other businesses fairly (Skousen, 2009). Countries with the highest level of economic freedom register high growth than those with moderate or little economic freedom, as they attract more investment and they use their resources more productively. Although many developing countries have poor economic scores, they report some of the biggest improvement in the world. This is because they are concerned about poverty reduction and factors such as business that can be used as pillars of development (Skousen, 2009).

Iceland recorded the biggest drop in the rankings from the previous years. It has an average score of 68.2, which is above the world’s average of 59.7. It ranked high in business freedom, trade freedom and property rights. Its highest economic freedom ranking is business freedom at 92.7 (Skousen, 2009). This means that it is relatively easy to create and operate businesses in the country. This encourages economic growth since people intending to start a business do not have to worry about burdensome rules and tiring procedures. It has a score of 90 in property rights. People in the country can acquire and accumulate private property with ease. They do not have to worry about their property since the government ensures that it protects it (Skousen, 2009).

The financial freedom score is not impressive at a score of 60. It also scores poorly on labor and monetary freedom. This reflects changes from previous years. In 2008, the country had an economic freedom of 76.5 (Heritage, 2011). It scored highly in freedom from corruption, business freedom and property rights. It had a score of 70 in financial freedom (Heritage, 2011). In 2009, the country had an economic freedom score of 75.9 with low scores in government size. It increased investment freedom from 60 to 70. In 2010, Iceland had a score of 73.7. It had a score of less than seventy in government spending, monetary freedom, investment freedom, and financial freedom (Heritage, 2011). The country has maintained low scores in government spending while, at the same time, it has ensured that it is free from corruption, and has made it possible for people to own private property. The country has also maintained high scores in business and trade freedom (Heritage, 2011).

The major changes in the country’s economic freedom are registered in financial freedom, and these changes can be attributed to the financial meltdown that affected many countries in the world especially in 2008. Iceland was affected by the global financial crisis especially in the financial sector. The score on financial freedom can largely be attributed to the government’s decision to place stricter measures on financial institutions, after the credit bust before 2008. Due to the collapse of the largest banks in the country, many people lost their savings and investment. The country also suffered inflation especially in 2008 and 2009, where the inflation was in double digits. The unemployment rate rose to more than 9% in 2009, and the local currency depreciated (Chu, 2011).

The government has been forced to take strict fiscal and monetary measures to deal with the inflation in the country. It has increased the interest rates, which is meant to discourage borrowing. Part of the reasons why the financial crisis occurred was due to the large size of the banking institutions compared to the country’s population, and the government was compelled to put more restrictions on the institutions. The government has restricted access to foreign currency, and it has imposed other capital controls. The bankers had issued bonds to many foreigners. The country’s decision to impose capital controls is a way of ensuring that it has some securities since it discourages the investors from selling the bonds. The depreciation of the local currency means that the country’s exports are cheaper. The country mainly exports fish and aluminum and increase in the exports have started to boost the country’s economy. These exports are, however, not enough to cater for the needs of the people. The country depends largely on imports, and a weak currency means that they have to pay more for the products. In addition, many of the people had taken loans in foreign currencies, and these loans have increased in value because of the weak currency. The people are, therefore, not able to pay back their loans. The living standards of people have gone down, and they have adopted a simpler lifestyle. Before the financial crash, many of the people took millions in loans, which they were not able to service. They now have to live with what they can afford since the interest rates have become too high. This has discouraged economic growth and increased the rate of unemployment (Heritage, 2011).

All the measures that the country has taken to deal with inflation and to resolve the economic crisis that developed have affected the country’s economic freedom. The country’s fiscal freedom has continued to decrease over the years, from 73.6 in 2008 to 69.8 in 2011. This is because of the tax increases that have been introduced in the country over this period. On the other hand, trade freedom has increased from 85 to 88.2 over the same period. The increase in inflation and the depreciation of the domestic currency has affected the monetary freedom, which has continued to decrease from a score of 74.8 in 2008 to 68.6 in 2011. Some of the banks collapsed during the crisis, and this ultimately affected financial freedom. The country had a financial freedom score of 70 in 2008, but this has since reduced to 60 in 2011. The financial sector was the most affected during the crisis. It had previously recorded tremendous growth prior to the financial crisis (Chu, 2011).

Economic freedom is essential to a country’s economic growth. It encourages progress and creativity. It encourages entrepreneurship and foreign investment. People are encouraged to start and operate businesses when they do not have to deal with burdensome restrictions, and when they are ensured that their property is safe. The economic freedom index measures key elements in a country. It shows some of the factors that might be contributing to the country’s lack of progress. This is important since it helps a country to know some of the weak areas in the country’s economy. Individual factors such as implementation of fiscal and monetary policies contribute to determining a country’s economic freedom.

References

Chu, B. (2011). Iceland: The broken economy that got out of jail. The Independent. Retrieved from http://www.independent.co.uk/news/business/analysis-and-features/iceland-the-broken-economy-that-got-out-of-jail-2349905.html

Heritage (2011). 2011 index of economic freedom. Retrieved from http://www.heritage.org/Index/Country

Skousen, M. (2009). The making of modern economics: The lives and ideas of the great thinkers. Armonk, NY: M.E. Sharpe