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Doing business report and beyond — II

Unlike the Doing Business Report of the World Bank, which primarily focuses on business regulations, the report, ‘Index of Economic Freedom’, produced by the Heritage Foundation, estimates the overall economic freedom index (EFI) of a country, covering multi-faceted aspects relevant to the efficient functioning of economic exchanges among economic agents.

The Index covers 12 economic freedoms (or factors), grouped into four pillars for better ‘analytical understanding and presentational clarity’, and include a) rule of law, and within it i) property rights, ii) judicial effectiveness, and iii) government integrity; b) government size, and including i) tax burden, ii) government spending, and iii) fiscal health; c) regulatory efficiency, and within it i) business freedom, ii) labour freedom, and iii) monetary freedom; and d) market openness, and which includes i) trade freedom, ii) investment freedom, and iii) financial freedom. In addition, what is important to understand here is that the Index is based on multiple data sources for covering a variety of important aspects, including World Bank’s Doing Business Report, in turn, making it far more useful in understanding the state of economic freedoms that among other aspects influence economic exchanges, significantly impact business conditions.

Moreover, in terms of years covered, the EFI Report goes further back: 25 years to 17 years of Doing Business Report. At the same time, the Report covers almost the same number of countries at 180 with partial analysis, and no index of six more countries at the back of insufficient data reliability due to very difficult political situation there against the coverage of Doing Business Report of 190 countries/economies.

The level of economic freedom is of paramount importance to both businesses and economy in general, not to mention the positive impact of such freedoms on the quality and depth of democracy. In fact, as the Report celebrates its 25th anniversary this year, the very first issue of this Report highlighted ‘in striving for peace and prosperity, freedom is what counts most’.

At the same time, EFI is widely used in economic research literature as a proxy (or representative) of economic institutional quality (EIQ). Here, it is significant to underscore that research during almost last four decades or so (including the doctoral thesis of this writer himself) amply highlights, especially produced in the post-Alan Greenspan era, or after the Global Financial Crisis of 2007/08, the importance of economic institutional quality for both raising economic growth, and in reducing macroeconomic imbalances.

In fact, it is also indicated in such research that the growth neutral or negative impact of IMF (International Monetary Fund) programmes, with little sustained positive consequences for reducing macroeconomic imbalances, could have produced more favourable results in these directions, had improving economic institutional quality was prioritized and better targeted under programme conditionalities; especially on the back of understanding the significant relevance of transaction costs, and the heterodox approach to economy and institutions.

It is, therefore, important for countries overall, and particularly for developing countries like Pakistan with weak economic institutional quality where according to the latest EFI report released in January 2019, Pakistan was ranked at 131st position, and belonged to the group of ‘mostly un-free’ countries to internalize the findings of the EFI report, and plan more meaningfully for improving institutional quality, for better consequences for business and economy overall.

Furthermore, to quote the Report for better understanding the relevance of EFI ‘…the Index provide(s) real-world examples of the impact of government policies on the economic well-being of individuals and families. Policies that enhance economic freedom tend to be associated with greater economic and social progress… [and having]… higher levels of political stability and higher levels of income’. Yet there existed and which needs to change the lack of reporting on this Index in both national media here, and in terms of its tracking in publications of Pakistan’s government authorities. This is quite surprising, given as the Report highlights ‘the Index has become a known and trusted reference in capitals throughout the world… [and globally]… the Index rankings are reported annually in countless broadcast and print media’.

In the case of Pakistan, the EFI or EIQ has not improved much, whereby during the last 25 years the maximum and minimum levels of EFI score stood at 58.4 (in 1996) and 52.8 (in 2017), respectively; and while the scores remained within this range, the last available for 2019 stood at 55. This shows a long-term inertia in the overall level of economic freedom index or economic institutional quality, and represents a far more meaningful picture of economy than economic growth or income per capita; especially in terms of consequences for business conditions, employment opportunities, poverty, income inequality, and even democracy.

No wonder then that the country is stuck in an overall low-growth equilibrium (being well below the potential), frequent macroeconomic slippages, and stubborn persistence of inflation and unemployment levels; not to mention the abysmal situation of state-owned enterprises, and recurring circular debt crises, since these all are a direct outcome of the economic environment produced by low-quality economic institutions. As a consequence, levels of foreign investment and exports have also remained weak.

In this regard, the Report for 2019 highlights, ‘Pakistan is ranked 32nd among 43 countries in the Asia-Pacific region, and its overall score is below the regional and world averages. Although, some aspects of economic freedom have advanced modestly in Pakistan in recent years, decades of internal political disputes and low levels of foreign investment have led to erratic growth and underdevelopment. Excessive state involvement in the economy and inefficient and omnipresent regulatory agencies inhibit private business formation. Lack of access to bank credit undermines entrepreneurship, and the financial sector’s isolation from the outside world slows innovation. The judicial system suffers from a serious backlog and poor security, and corruption continues to taint the judiciary [contrary to this most authoritative reviews and opinions, including that of the writer, believe this is applicable to lower judiciary basically, and not the higher level of judiciary] and civil service.’

(To be continued)

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund) He tweets @omerjaved7

Dr Omer Javed, "Doing business report and beyond — II," Business Recorder. 2019-11-08.
Keywords: Economics , Economic Freedom index , Economic institutional quality , Economic exchanges , Fiscal health , Property rights , Political situation , Economic research , Economic growth , Foreign investment , Entrepreneurship , EFI , EIQ