The Index of Economic Freedom in China and Haiti - Statistics Project Example

Introduction

Economic freedom is a basic human right in which an individual should have control over his or her work and property. In an economically free country, all human beings have the right to work, create, use, and participate in any way they want, and their liberty should be secured by the state and unrestrained by the state (Wu, 2011).

The purpose of this essay is twofold. The first is to analyze the relationship between economic freedom and economic growth of two countries, Haiti and China, and to compare the economic growth of these two countries with an analysis on both countries’ economic and political systems, and which systems have a better chance of economic growth and development. First, we focus on Haiti and divert our attention on the fast-growing economy and the political system of China. The final phase of this article will be a comparison of the economies of both countries.

The Index of Economic Freedom measures ten elements of economic freedom, providing a grade for each element on a scale of 0 to 100, in which 100 symbolizes the maximum freedom. The ten component scores are added to get the mean and the economic freedom score for each country. The ten components are: “business freedom, trade freedom, fiscal freedom, government spending, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, and labor freedom” (Wu, 2011, p. 107). Economic growth is measured by a country’s real gross domestic product (GDP).

Haiti

The Caribbean country of Haiti is located on the western end of the island of Hispaniola with the neighboring Dominical Republic on the east. The island lies between the Caribbean Sea and the North Atlantic Ocean. With Port-au-Prince as the capital city, Haiti is slightly smaller than the state of Maryland and has a population of 10.5 million (2016 Index of Economic Freedom, 2015).

The Haiti government is characterized as corrupt and the judicial system is not fully functional because of a backlog of unresolved cases, obsolete legal codes and poor facilities, the civil registry is not well kept and citizens do not have titles to their property. On a scale of 1-100, Haiti obtained a score of 10 in property rights (2016 Index of Economic Freedom, 2015). Haiti struggles with corruption and a weak government, which results in serious economic development problems. For example, majority of the population operated without electricity, purified water, medical care, and education. Table 1 shows data of the poor economic situation in Haiti.

Human Poverty Index (HPI-1) Rank, 2007

97

Human Poverty Index (HPI-1) Value (%), 2007

31.5

Adult Illiteracy Rate (% aged 15 and above) 1999-2007

37.9

Population Not Using and Improved Water Source (%) 2006

42

Population Living Below $1.25 a day (%) 2000-2007

54.9

Population Living Below $2 a Day (%) 2000-2007

72.1

Table 1. Haiti’s Development Indicators

SOURCE: Human Development Report, 2009 (as cited in Joseph, 2011)

The Central Intelligence Agency (as cited in Joseph, 2011) cites Haiti as one of the poorest countries in the world and the poorest in the Western Hemisphere. Its corrupt government offers minimal public services to citizens. Most of the local NGOs and local government agencies lack project absorption capacity, in which much of international aid funds are underutilized and incapable to bring an economy of scale and transfer of technology to the local regions. The basic needs of four fifths of the Haitian population are not being met on a daily basis. Seventy-eight percent of the population live with less than US$2 a day (UNDP/WRHD as cited in Tippenhauer, 2010). The government survives through foreign aid. Government spending – taken from income and corporate taxes, value-added and capital gains taxes – can reach 28 percent of total domestic output (2016 Index of Economic Freedom, 2015).

Two-fifths of the population depends agriculture, which remained vulnerable to damage from frequent natural disasters (Central Intelligence Agency, 2015). In 2005, the International Monetary Fund (IMF), helped in introducing a macroeconomic program to boost the economy, which resulted in 1.8% growth, the highest growth rate since 1999 (Central Intelligence Agency as cited in Joseph, 2011).

Haiti’s business environment is taxing for starting a business venture and politics puts more pressure in the efficiency of the government’s regulatory agencies. Many of Haiti’s laborers are unemployed, or depend on the informal or underground economy. The IMF has helped in providing credit facility and has asked the government to lower fuel subsidies to tone down the large fiscal deficit (2016 Index of Economic Freedom, 2015).

Most of the Haitian private sector enterprises today are undercapitalized, inefficient and non-competitive by global standards. The civil society and the political leadership are not addressing the real issues that are critical to the sustainability of the Haitian society. Traditional political leaders are still using obvious class and color deception as a populist weapon to misdirect attention from the real issues. The result is a “winner takes all” mentality, where the capacity to win an argument at all costs and the conquering of power by a political clan are used to satisfy the economic interests of that group individuals, thus abusing the silent majority whose urgent demands are never met. As a result, statistics reveal that the basic human rights of the most of the people are being violated on a daily basis through a blind “Democratic Consensus” and incapacity of the existing leadership to solve essential problems: “health investment per habitant is $82; 25 doctors per 100,000 habitants, 46% of the population being underfed, and only 54% have access to clean water” (Tippenhauer, 2010).

China

China’s economy grew at an average of 10 percent annually, the fastest growth worldwide. This is good but what is questionable is that the growth is accompanied by a relatively undeveloped legal and financial system (Wu, 2011). China placed 124th in the 2008 Index of Economic Freedom, which runs counter to the theory that economic freedom is linked with economic growth (Wu, 2011).

China’s freedom from corruption was graded 52.0% for 2015 to early 2016 (2016 Index of Economic Freedom, 2016). China’s GDP reached US$4,326 billion by 2008, making it the third-largest economy behind the United States and Japan. As shown in the Index of Economic Freedom, China’s transition has been slow (Wu, 2011, p. 117). In 2008, China’s GNI per capita was US$6,020 under the PPP approach and was US$2,940 using the market exchange rates. China’s annual real GDP growth rate is between 8percent and 13 percent.The average growth rate is 9.64 percent, more than twice the world average. China’s growth rate was the ninth fastest during this period.

The free market or the capitalist system gives way to strong economic performance. The market economy is the system that leads to economic progress. In China, the government draws its legitimacy from strong economic performance, but there is little freedom and certain human rights are suppressed while the Marxist philosophy is giving way to pragmatic capitalism (Monshipouri, Welch, & Egoávil, 2011). The capitalist regimes of the People’s Republic of China (PRC) still hold the authoritarian power while their economic condition grow, although some experts argue that “it is not the same kind of authoritarian state that it was two or three decades ago” (Wasserstrom as cited in Monshipouri et al., 2011, p. 291).

China is turning back into an economically successful authoritarian capitalist power. China’s change from a planned economy to a market economy has led to a far more efficient brand of authoritarianism (Monshipouri et al., 2011). China has created a strong and stable government and economy with both authoritarian and free-market components. However, the system is hardly democratic or sustainable. China has also to consider that constitutionalism, including democracy, human rights, and the rule of law, is essentially significant to its continuing fast-paced development. The authoritarian model may someday falter. Constitutionalism leads to public support and political confidence needed for sustainable development (Monshipouri et al., 2011).

In Haiti, informal relations struggle for control with formal institutions, usually winning concessions as manifested in the consistent ‘lack of political will’ explanations. Interests of political leaders are better served leading to have little interest and political will to implement and enforce anti-corruption reforms. It is the informal relations that determine who benefits from access to state resources that establish social relations within the Haiti society and create a culture of impunity. According to neopatrimonialism theories, there is something fundamentally wrong with such society that makes it favor informal relations that ultimately underpin the political and economic malaise that has characterized countries like Haiti and other African and Asian countries (Wachira, 2012).

In our analysis of Haiti and China, we can conclude that their politics are devoid of ideals, struggle for ideas, notions of equality, or other societal values that serve the public interest. So, for example if Haiti rejects neoliberal economic reforms, neopatrimonialism scholars tend to explain this policy action as serving vested material interests rather than exhaustively considering other factors such as leaders’ ideological rejection of neoliberal economic ideas. Some neoparimonialism theorists, like van Walle (as cited in Wachira, 2012) have expanded their accounts to include a role for ideas.

Institutional quality is what Haiti and China lack. Many studies have shown the importance of institutions in protecting human rights and boosting a country’s economy. Economists have provided evidence that institutions play an integral role in the overall development of a nation. Beck and Levine (as cited in Dutta, 2009) indicate that extractive colonizers have the tendency to create extractive institutions which do not protect private property rights but support an elite group. However, producer-friendly institutions created by settler colonizers support private property.

Political liberalization or expansion of political freedom is usually termed as democratization of an economy. Economists argue that democracy is both a facilitator and impediment of growth. Proponents of democracy argue that such institutional structure enhances fundamental civil liberties, maximizes economic freedom, promotes property rights protection, allows for the most efficient use of resources and discourages corruption and anarchy (Dutta, 2009).

Furthermore, North and Weingast (as cited in Dutta, 2009) showed that political institutions characterized by checks and balances can allow governments to credibly commit and, thus, there is little danger of opportunism. Democracy also imposes sufficient checks on elite groups who tend to restrict participation in the political system and protect their own interests. Research shows that trade openness enhances the prospects of financial development through the channel of better institutional groups. Autocrats, on the other hand, are better able to handle societal demands and can efficiently deal with labor unions, wages and consumer demands (Dutta, 2009).

Improvement of political institutions is crucial for the efficient functioning of financial markets. Enforcement of laws is much more erratic where executive powers are concentrated in the hands of a privileged few such as in autocratic regimes. Both legal and political institutions curb insider trading and, thus, reduce the information risk in sock trading. Weak legal institutions tend to create narrow capital markets due to the information lag between insiders and outsider (La Porta et al. as cited in Dutta, 2009). This enhances the risk of investing in such environments. Political risk has also been shown to be deterrent factor for investing in stock markets. Portfolio investment is affected when people is unable to anticipate the changes in the business environment resulting from political instability.

Investors are more confident in investing in economies with efficient legal protection and less prone to political risks. Autocracies are more susceptible to factors causing political instability and, thus, have a negative impact on portfolio investment by firms.

The term economic freedom implies the encouragement of market economy where voluntary exchange can take place smoothly, greater competition is supported and there is high respect for property rights. Economic freedom has been 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 themselves” (Dutta, 2009, p. 25). The components involves factors like the amount of tax regulations on trade, the extent of government expenditures, the structure of legal system and property rights of a nation, the extent of regulations on credit and labor market and the stability of the monetary system. Thus, it is reasonable to assume that the investment decisions should be definitely determined to a great extent by the amount of economic freedom of a nation. Thus, research has recognized the importance of economic freedom in generating growth and prosperity of a nation. Some literature has established the importance of economic freedom in the context of foreign direct investment inflows to a nation. Foreign investors look for transparency in economic policies and also lesser constraints in business environment. The same argument is true for domestic investors. Lack of the factors mentioned above will lead to lack of information in the market and also about the intention of the government.

Economic freedom of a country is more important for the growth and development prospects on an economy rather than the inherent democratic institutions of the nation. There are countries which have autocratic institutions but are ranked very high on the economic freedom ranking, for example and Japan, which have advanced at an astonishing pace in the past few decades and have per capita income comparable to nations like United States, United Kingdom and Canada.

Conclusion

The indispensable role of political institutions in the overall development of an economy is well stated here. Political institutions also have a crucial impact on the financial infrastructure of an economy. Enhancement of political institutions implies more political stability due to the inherent link between them. Such economies create investor friendly environments for the investors who can invest under low-risk conditions. Democratic institutions provide an environment with secured property rights, lower risks of expropriation by the government, well developed capital markets and favorable investment condition. Firms in autocratic regimes have higher average returns that exceed the required returns which is consistent with the fact that autocratic institutions are more prone to political and financial risks.