Analysis by Rehab El- Bakry
Earlier this year, the Heritage Foundation, a US-based think tank, and the Wall Street Journal jointly issued the "2007 Index of Economic Freedom," which ranks the degree of economic freedom of 157 countries. The index was conceived as a way of simplifying the comparison of the levels of economic freedom of the various countries around the world.
"The goal [...] was to develop a systematic, empirical measurement of economic freedom in countries throughout the world. To this end, the decision was made to establish a set of objective economic criteria that [...] have been used to study and grade various countries."
The index is based on the overall rankings of countries in 10 different categories: business freedom, trade freedom, fiscal freedom, freedom from government, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labor freedom. Scoring in each category is out of 100; the greater the level of freedom, the higher the country's score and the higher its overall ranking on the index.
Since the index was first published 13 years ago, world economic freedom scores have shown some improvement. In recent years, however, they appear to have leveled off.
"Global economic freedom holds steady [in 2007] but there is much room for improvement. The average economic freedom score is 60.0 percent, the second highest level since the index began in 1995 and down by 0.3 percent from last year. Each region has experienced an increase in economic freedom during the past decade."
The best performers in terms of overall rank are former British colonies in Asia, with Hong Kong coming in first, as it has for the past 13 years, Singapore ranked second, and Australia rounding off the top three. More than half of the top 20 performing countries are in Europe or North America, with the US ranked fourth at 81.98 percent.
"Of the 157 countries graded numerically in the 2007 Index, only seven have very high freedom scores of 80 percent or more, making them what we categorize as 'free' economies. Another 23 are in the 70-percent range, placing them in the 'mostly free' category. This means that less than one-fifth of all countries have economic freedom scores higher than 70 percent. The bulk of the countries - 107 economies - have freedom scores of 50 percent -70 percent. Half are 'moderately free' (scores of up 60 percent-70 percent), and half are 'mostly unfree' (scores of 50 percent-60 percent). Only 20 countries have 'repressed economies' with scores below 50 percent."
According to the report, there is a direct link between the degree of economic freedom and other economic indicators within any given country such as the level of foreign investment, unemployment and per capita income. In recent years, some developing countries, such as India, China and Dubai, have started to attract more FDI due to cost effective labor, cheap energy and government perks tied into investment-friendly environments. High levels of economic freedom for movement of capital, reduced trade and hidden tariff barriers, strong monetary policy as well as investment freedom are driving companies to invest in these markets. Yet these countries continue to under-perform when compared to developed nations.
"Across the five regions, Europe is clearly the most free using an unweighted average (67.5 percent), followed at some distance by the Americas (62.3 percent). The other three regions fall below the world average: Asia-Pacific (59.1 percent), Middle East/North Africa (57.2 percent) and sub-Saharan Africa (54.7 percent)."
Egypt falls into the category of countries with "mostly unfree" economies. The country falls towards the bottom end of the list of Middle East/North Africa coming in 13th of 17 ranked countries, and its overall ranking is 127th of the 157 ranked countries - the same ranking it has occupied for the past two years.
"Egypt's economy scores well in a few of the 10 factors of economic freedom. Fiscal freedom is rated highly, and its freedom from government and monetary freedom also score reasonably well. The top income and corporate tax rates are impressively low, and government tax revenue relative to GDP is not high. Total government expenditures are moderately low, although Egypt receives a significant part of its income from state-owned business."
The ranking is likely to come as a disappointment to the reformers who took the helm of the Egyptian government in 2004. Despite efforts to improve the overall performance of the economy, the fact that Egypt still occupies the same rank it had since the beginning of their reforms would seem to suggest these reforms are not working. Yet it should be pointed out that while Egypt has improved its performance, other countries have also improved theirs, and so its relative rank has remained static.
"Egypt could improve in several areas, however. Business freedom, financial freedom, property rights and corruption are all serious problems. Licensing, operating or closing a business is difficult and heavily regulated by an intrusive bureaucracy. Fairly high tariff rates and non-tariff barriers impede trade and foreign investment alike. Corruption is rampant, and the fair adjudication of property rights cannot be guaranteed."
Egypt ranks below world average in seven of the 10 different categories, while ranking above average on two, fiscal freedom and freedom from government intervention. As far as investment goes, Egypt falls exactly at the world average. The country's lowest rank was on financial freedom, where it only scored 30 percent, well below the world average of 52 percent. Its highest score was on fiscal freedom, where it earned 93.6 percent. The world average is 82.8 percent.
But there are several areas that need prompt attention from officials if Egypt is to move up the ranks, the report noted.
"Corruption is perceived as significant [rated at 34 percent]. Egypt ranks 70th out of 158 countries in Transparency International's Corruption Perception Index for 2005 [...] The government has made gradual progress toward a more competitive and flexible labor market, adopting a new labor code in recent years [rating 49.8 percent]. However, the labor market still operates under restrictive employment regulations that hinder employment and productivity growth. The non-salary cost of employing a worker can be high, and dismissing a redundant employee is costly. There are rigid restrictions on increasing or contracting working hours."
Whether due to actual regulation or perception, Egypt seems to have much work to do in order to it to live up to its ambitious plan of becoming a regional business and industrial hub. The report's findings suggest that there are no quick fixes.
Details on this report can be found online at www.heritage.org/index
© Business Monthly 2007
