Let me begin by reporting that Aco had just stolen the show of the 2006 Conference of the Economic Freedom Network Asia in Kuala Lumpur. By arguing that Free Trade Areas or Preferential Trade Areas are basically an impediment for the real free trade, he was crowned as the true liberal in the forum of Asian liberals. OK, I am exaggerating. There was no crowning ceremony. But at least, in the forum Aco was called an (liberal) activist. Not only liberal economist, but activist...
Also in the conference was the launching of the 2006 Economic Freedom of the World Report and Index. According to its official publication, the Economic Freedom Index was based on Milton Friedman's concept of economic freedom:
[it] measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. Thirty-eight data points are used to construct a summary index and to measure the degree of economic freedom in five areas: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labour and business.
One hundred and thirty eight countries was surveyed in the 2006 publication (the 2006 report publishes the data in 2004). The index takes value of zero to ten; zero means completely unfree, and ten means completely free. The overall index is based on 38 data points measuring the five components. In each component, each country also received the 0-10 score. The index is constructed from various secondary data. So it is not a direct survey of perception or a panel expert.
As the other indices (Human Development Index, Freedom House Political and Civil Liverty, Polity Index of Democratization, even Consumer Price Index), of course the Economic Freedom Index may suffer from the typical problems: measurement error, construction, defintion, level of aggregation etc. But still, it is worth having it as a quantitative measurement of quality of economic institution. The thing is, we need to be cautious in interpreting the data and translating into policy action. But let's just have fun and see what it says.
Hong Kong and Singapore are the two most free economies in the world, followed by Switzerland, New Zealand and the United States. Venezuela, two Congos, Myanmar and Zimbabwe are in the bottom five. Although Hong Kong and Singapore tops the overall score, they are not always the first in each categories. For example, El Savador ranks first in the 'government size' category; Denmark in the 'legal system and property rights'; Sweden (access to sound money) and Iceland (regulatory).
Taking a cross-country analysis, the Economic Freedom Index score is positively correlated with Human Development Index, life expectancy, income level of the poorest 10%, environmental quality and access to improved water sources. Meanwhile, it is negatively correlated with infant mortality, unemployment, share of children in the labor force and corruption. Of course, we can't imply anything from this correlation because it suffers from the usual reverse causality and omitted variable problems. But these simple correlations can at least challenge a popular perception: that liberalizing the economy is bad for the poor and quality of life in general.
Generally, countries with better EF Index also score better in the Freedom House' civil and political liberties. But we may see countries like Singapore, United Arab Emirates or Kuwait who are under the 'partially or totally unfree' politically score well in the EF Index. (We can also add Hong Kong in the list if we consider it is part of China now.) However, those who economically are not free are consistently not free politically. Note that we are still unable to answer what causes what. Whether economic freedom causes political freedom or vice versa, or nothing causes anything, is still an open field to disagree.
What about Indonesia?
The country's overall score in 2004 is 6.0 -- it ranks 83 out of 132 countries in the survey. Lower than Malaysia, Thailand, the Philippines, even Egypt and Iran (!). Well, at least Indonesia ranks better than the likes of Vietnam, Brazil, Turkey or Fiji.
The country's score in 2004 is lower than that in 2003, in which it ranked 73. Breaking down by components, the country's government size score is not different from that in 1985, the period when Indonesia just started the deregulation (and worse, means bigger, than that in 1990-2000). Regulation quality score is worse compared to 1990, and virtually unchanged during the 2000s. Legal system and property rights is also worse than that in 1985, 1990 and 2003 (although higher than that in 2000 -- if that's something to cheer about). The country also scores lower in the access to sound money category compared with 1985-90. Although in terms of freedom to trade internationally, the situation in 2004 is much better than in 1985-90, althogh worse than that in 2000.
So who says that our economy is getting freer and more liberal?
Economic Freedom Index
Hi A.P.
ReplyDeleteI am intrigued by what "liberal" means (honestly, I don't know). Can someone be so "liberal" that he/she allows a group people to live in an "unliberal" way (given this is based on fair consensus among the people involved). Can a "liberal" person allow another to be "unliberal" if that's his/her own choice? Thanks.
liberal economic means if our country gets into recession, thanks to the exogenous factors. otherwise, just migrate to overseas, it's your money anyway. sayonara...
ReplyDeletefreedom is a state of mind.
ReplyDeleteas for liberal, most of the time it means freedom to define everything else.
Muli, "liberal" is not "wild" -- far from it. Liberalism (I prefer "libertarianism", but anyways) embraces individual freedom that is limited to one another. "Unliberal" persons (as you call them) should be free to do whatever they like so long as they don't interfere other's rights.
ReplyDeleteMuli -- the short answers to your questions are yes and yes. A liberal will allow unliberal people to coexist. As long as the unliberal guy does not take away other people's liberty or freedom.
ReplyDelete(you are free to be an unliberal; you are also free to express your unliberalism. in fact, many unliberals are free to live, and unliberal views are free to be expressed, in the liberal countries. As long as you don't force other people to follow your unliberalism.)
the long answers are, well, long. it can't be answered in this comment forum. it also requires a series of philosophical discussion. there are also diasgreement among liberals about the limit of an unliberal action that can be tolerated. but let's postpone that for now
anonymous -- I assume you are being sarcastic. because that's the only circumstance in which we (I) don't have to bother whether your statement is correct or not.
if your are not being sarcastic, then you've just made your new, own definition of liberal economic. just like MUI made their own definition of secularism, liberalism and pluralism.
in that case, the correctness of your statement is also irrelevant.. :-)
We can narrow this liberal thing within the context of open economy for capital flows between countries relaxing as well as for that the production and distribution process.
ReplyDeleteI can blame economic liberalism for causing some international economic crises, can't I?
As asset prices fell and hi interest rate in Japan (89-90), Tigers and SE Asian liberally received "tumpahan" capital.
Then, we liberally grew too fast (91-96), again supported by liberal free market, boomed in domestic market and export via lending. Some external factors (meant by anonymous), perhaps China had successfully competed the market by lowering exchange rate (94), won the market and the rest of the "growing Asians" might had been panic and started mess with the financial market. Exchange rate was something that cannot be fooled by domestic economic fundamentals.
Within the context of a man, I can be a liberal after being sophisticated, so nobody can fool me. Believe it or not, logically, a liberal has a broader scope as capturing different sets of some unliberals (as meant by Muli via Venn diagram).
Btw, I'm Indonesian and not a liberal.
you guys have to stop this bad habit of heating things up, then dropping dead out of sight.
ReplyDeletehallloooo?? anybody there at all??
is the cafe open? can i steal the Pippi now?
I am Indonesian and I am Liberal, responding anymatter comment, and do not matter for me. I think A.P and Aco explained clearly enough how important for us opening our economic system, accepting competition and free market.
ReplyDeleteThe "index" show's us. Why we so botter when we talked about economy but not when we talked about education, communication, culture, human right, freedom of expression, freedom of the press, freedom of religion, etc. Don't we know that those all values are also the principle of "LIBERALISM."
Why we so hypocrite?
Election, the one that we accepted as our constitutional political process, apply one of the basic principle of liberalism, that is freedom to choose and freedom to be chosen.
What system that allow us having different choices?
Can we imagine living in a society or system that only allow us having one choice, wearing the same jeans, same shirt, same shoes, same T-shirt, etc?
Let's open our mind and thinking that liberalism is not a narrow concept, even sometimes we are living in and enjoy it.
OOT :
ReplyDeleteno one doing column on World Bank/IMF meeting output yet?
no one's doing anything. i think the cafe's closed.
ReplyDeleteAnymatters --
ReplyDelete"I can blame economic liberalism for causing some international economic crises, can't I?"
A: Sure you can. similarly, we can also attribute higher overall welfare and living standard of the world population to openness (if we don't want to say liberalism). just like, for example, we can attribute the famine in China during cultural revolution, and the current devastation in Myanmar to unliberalism. and so on.
"Then, we liberally grew too fast (91-96), again supported by liberal free market, boomed in domestic market and export via lending."
A: I would dispute that. 91-96 is actually the period of 'deregulation fatigue.' (deregulation is a euphemism for domestic liberalization, since liberalization was a bad word during Suharto era). even at that time, our economy started to switch from a somewhat liberal period to growing state and crony capitalism. remember the national car project, BPPC, Tata Niaga jeruk, growing subsidy for IPTN?
Ergo, your basic proposition:
"We can narrow this liberal thing within the context of open economy for capital flows..."
proved to be problematic. because when we talk about economic liberalism, it is not just about the openness of an economy; particulary the openness of capital regime.
then we tend to single out one thing, then try to form a causal relationship, while other factors and dimensions of the problem are ignored.
Why is pure market mechanism (important for the social welfare?
ReplyDeleteI reckon that theoretically, under certain conditions,the social effect of market mechanism (decentralized market) and social planner is just the same? (please correct me if I am wrong)
Thus, if the aboved statement is correct, then it doesn't matter whether you are a libertarian or social planner activist, or which economic system you proposed.
The most important thing is how to make these condition/circumstances satisfied. :D
What do you think?
Btw, Timor is actually Korean's car freely imported with different brand. Tata Niaga Cengkeh and Jeruk only dealt with domestic price, had nothing to do with overseas market. IPTN subsidy was to support overseas purchase order.
ReplyDeleteI can understand that the advent of neoliberalism is believed by some Indonesian economists. It's a good thing anyway. But, just wanna make sure if we are ready for that, in terms of, for example, technological advance or regulatory issues.
One question, in what context or specific product kind, Indonesia can win the free market? We can sell cheap weapons made by Pindad for private security purposes, can't we? I know "Indomie Mie Goreng" has won the market as the cheapest noodle in Australasia market. Or, how about "love"? (considering Indonesians are lovely people)
Thanks for the discussion. It's very interesting and could be hotter if discussed in political-economic context. For example, how Indonesia can govern this liberal market in Australasia.
Ape: "But these simple correlations can at least challenge a popular perception: that liberalizing the economy is bad for the poor and quality of life in general."
ReplyDeletePart of "liberalizing" is stripping government from "inessential" social responsibilities. In the US, this is reflected by the trend to give up on social security and pushing families to fend for themselves on things
Ape: "But these simple correlations can at least challenge a popular perception: that liberalizing the economy is bad for the poor and quality of life in general."
ReplyDeletePart of "liberalizing" is stripping government from "inessential" social responsibilities. In the US, this is reflected by the trend to give up on social security and pushing families to fend for themselves on things such as health care. A recent series of report in LA Times (re: If Ameica is Richer, Why are its families so much less secure?)demonstrate how the government and corporations in the US has pushed families to take over risks and burdens that they used to absorb, resulting in a more volatile economic stability in lower-middle class families. In macro-sense, it is possible that the economy is prospering, but upon closer examination, one sees 1) the disproportionate distribution of this wealth (see LA Times report on CEO's salary), and 2) the heightened sense of insecurity among lower-middle class Americans (this would fall into "quality of life" category, won't it?).
Indonesians are experiencing similar sense of insecurity, I would guess, but from a different front.
Now, I am not sure what you Salemba liberals position towards securing "economic stability" for the poor and the not-so-poor is -as I haven't followed your musings in this blog, (if you ever mulled over it at all). I would be interested in seeing some kind of thoughts on these issues.
With salaams Brekele' ;)
Upik D
anymatters -
ReplyDeleteTimor was not a case of free trade. when you have only one company allowed to trade without tariff while the others weren't, by definition it is not free trade.
BPPC and other Tata Niagas are domestic market issues. but that's the point. you only point out that we had an open capital regime than concluded that Indonesian economy was liberal. the fact that we had many domestic distortins means that it was not a liberal one.
as for 'winning the free trade' -- I thought it means bringing prosperity to the people, not just dominating the global productt market, no? at least that's the neoclassical idea of free trade.
Upik --
during the Indonesian deregulation period ('80s), Gini coefficient was declining. why? because liberalizing the economy means promoting labor intensive industries, which is our comparative advantage. the result: real wage increased.
compare it with the oil boom period when the highly interventionistic government pushed the development of capital-intensive industry, at the cost of lower real wage. or with the mid-1990s period when domestic distortions due to cronyism was on the rise. in both periods, Gini coefficient was higher.
in India -- economic liberalization raised the living standar of the poor as well as narrowing the income gap.
OK, even if we can't conclude that liberalization CAUSES welfare and equity, those examples suggest that it IS NOT associated with welfare deterioration and higher inequality.
Upik --
ReplyDeleteduring the Indonesian deregulation period ('80s), Gini coefficient was declining. why? because liberalizing the economy means promoting labor intensive industries, which is our comparative advantage. the result: real wage increased.
…
OK, even if we can't conclude that liberalization CAUSES welfare and equity, those examples suggest that it IS NOT associated with welfare deterioration and higher inequality.
Ape:
1. It is easier to defend economic liberalization if we take partial view of it. The example above does not take into account the repressive labor law that choked off possibility of labor demanding good working condition. Do you still remember Marsinah?
2. With economic liberalization in the US ongoing since –uhm… pardon my limited knowledge on this- at least Reagan era(?), what has happened to the US Gini Coefficient Index? It has increased from 0.394 to 0.469 per US Census Bureau (although the change of data collection method is said to make estimates between pre and post 1992 is not strictly comparable). I wonder about India’s Gini coefficient in the last 10 years.
3. The basis of free-trade argument is that letting countries with particular comparative advantage to lead production in that sector will bring better prosperity for all, with the assumption that the country that suffers job loss will adjust eventually. In the case of the US, job loss in manufacturing sectors will be compensated by job creation in hi-tech sectors. This is not happening in the US. The hi-tech jobs are outsourced to India. In the meantime, the cohort that used to populate manufacturing sectors in the US can not adjust instantly, and there is hardly any money or facilities for retraining. But the US lower-middle class need to stay afloat, and at the same time is expected to continue consuming products that are now made in China. Where does the money come from? This is a mystery no. 1 for me.
4. Is financial liberalization also part of economic liberalization? (My economic vocabulary is rusty after giving up on economics more than a decade ago :D). If yes, then how do we explain the 1997 melt down of Indonesian economy? Why do failed private loans have to be taken over by the thin and already battered backs of Indonesian poor? Was IMF being a watchdog of liberalism then, or was it only doing thug service for private commercial lenders?
5. We are yet to talk about liberalization in the context of stripping governments’ role in protecting its citizen from economic shocks. But I guess this is irrelevant for Indonesia, since we do not have any protection from the government at all. :D heheee… In that sense, Indonesians is more liberal than the US, no?
Upik D
Upik,
ReplyDeleteOn number 3: what's wrong with jobs moving from the US to India? Look at it this way. Forget about nationality for a moment. If you line up all workers in the world according to their income or their purchasing power (after adjusting for the costs of living), the US workers who lost their manufacturing jobs to the Indians would've been in the very high income bracket among workers in the world (again, even after adjusting for the costs of living). The Indians who took the job from the Americans would've been in the lower income bracket. If anything, the world's Gini coefficient - if there was ever such a thing- would've been made smaller Is this a good thing or a bad thing?
Given that you've been reading that LA Times series, you might feel very sympathetic towards the lower-middle class of the U-S-of-A right now. That's okay, but there's a whole world of poor people outside the US, India and elsewhere.
“Upik,
ReplyDeleteOn number 3: what's wrong with jobs moving from the US to India? Look at it this way. Forget about nationality for a moment.”
Anonymous,
There’s nothing wrong about jobs moving. But the argument was that free trade was supposed to be win-win. Is it really? With manufacturing jobs moving elsewhere and alternatives yet at their doors, the American lower-middle class is losing big time. I think that we need to open the “ceteris paribus” box to understand the deeper social consequences of free-trade and liberalism.
“That's okay, but there's a whole world of poor people outside the US, India and elsewhere.”
Anonymous,
My point on the LA Times report is on liberalism where the (US) government and corporations are no longer responsible to provide social services. Families are taking over risks that used to be absorbed by the corporations and the government: costs are not gone, they are simply shifted to families, making them more vulnerable to poverty.
Upik D
I know this thread is dead by now :D but I can't resist to post an update here, that backs up my argument about foreign investors (read liberalism) preferring draconian labor law that would suppress unionism or labor rights to the minimum.
ReplyDeleteBelow is an excerpt of a report on the New York Times.
SHANGHAI, Oct. 12 — China is planning to adopt a new law that seeks to crack down on sweatshops and protect workers’ rights by giving labor unions real power for the first time since it introduced market forces in the 1980’s.
The move, which underscores the government’s growing concern about the widening income gap and threats of social unrest, is setting off a battle with American and other foreign corporations that have lobbied against it by hinting that they may build fewer factories here.
Upik
more at:
http://www.nytimes.com/2006/10/13/business/worldbusiness/13sweat.html?hp&ex=1160798400&en=a6f855fccccf9c59&ei=5094&partner=homepage