January 10, 2006

Economic Freedom.

The Index of Economic Freedom published by the Washington-based Heritage Foundation runs along expected lines (at the top at least). This index is supposed to measure the economic freedom among the countries of the world. And according to them,

Economic freedom is defined as the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, people are free to work, produce, consume, and invest in the ways they feel are most productive.

More on their methodology here.

I do not question the accuracy of their study. It probably is true that Hong Kong and Singapore are the freest countries according to their parameters. And I take their definition of economic freedom as the correct representation of the economic structure of a truly free market society. My point is that Hong Kong and Singapore, while doing better than any other countries, DO NOT, on the whole, meet the true criterion of economic freedom and that it is a fallacy to use the example of these countries to argue for the efficacy of laissez-faire. To large extent the economy of Singapore (and to a lesser extent that of Hong Kong) has numerous instances of government coercion or constraint, as Heritage Foundation likes to put it.

Some of these cases are as follows.

  • In Singapore the government controls virtually all the major industries.
  • In both countries the governments own most of the land (particularly in Singapore) and provide cheap housing to people. 83% of population of Singapore and 40% of Hong Kong's live in such housing.
  • In Singapore the Central Provident Fund, administered by the government is a compulsory service which takes about 33% of the wages.
  • In Hong Kong the government implements many labor regulations and there is an active debate on the issue of minimum wages.

This article has more details. More on Singapore's economy (with emphasis on the government's role in it) can be read here.

Whether these actions by the governments are correct or not (in other words, whether these actions contributed to the general health of these economies or held them back) is debatable. But it is clear that these economies do not represent truly free market economies.


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