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 the citizens to protect and maintain the liberty itself (Peláez, 2008; Peterson, 2013). It means that the people of the country are free to work, produce, consume, and even invest in their own way which they think is the most productive to them (Peterson, 2013). Economic freedom is also known as economic liberty or right to economic liberty. The main important factors in economic freedom are the personal choice, voluntary exchange, freedom to compete in markets, and protection of person and property. Economic freedom is the main key to achieve a greater opportunity and also to have an improved quality of life. Economic freedom is one of the most important determinant of the economic outcomes of a country (Hefner & Witte, 2008).
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Government can promote the economic freedom by implementing a legal structure and law enforcement rules that will protect their citizen’s rights. At the same time, the government does not have the right to interfere with the personal right of the citizens. The economic freedom is reduced if the government interfere by substituting the taxes, government expenditures, and regulations for personal choice, voluntary exchange, and market coordination.
In order to measure the economic freedom of a country, it is hard to measure it in term of numerical number (Akin, Aytun, & Aktakas, 2014). Currently, there are four institutions that are measuring the level of economic freedom of a country (Akin et al., 2014). The four institutions are:
- Fraser Institute
- Heritage Foundation
- Freedom House
- Scully and Slottje
The Fraser Institute and Heritage Foundation will always renew their data sets on a regular basis every year while. So it is more comprehensive to use the data from either Fraser Institute or Heritage Foundation. The Index of Economic Freedom was published since 1995 by Dow Jones and Heritage Foundation (Peterson, 2013). The Index of Economic Freedom includes some factors that are used to determine the economic freedom. The factors are:
- Corruption in the judiciary
- Non-tariff barriers to trade
- Fiscal burden of government
- Rule of law
- Regulatory burden on business
- Restrictions on banks regarding financial services
- Labour market regulations
- Informal market activities
There are ten categories of the factors of the economic freedom (Peterson, 2013). The categories are:
- Business freedom: is the ability to create, operate, and close an enterprise quickly and easily. Burdensome, redundant regulatory rules are the most harmful barriers to business freedom
- Trade freedom: is a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services.
- Fiscal freedom: is a measure of the burden of government from the revenue side. It includes both the tax burden in terms of the top tax rate on income (individual and corporate separately) and the overall amount of tax revenue as a portion of gross domestic product (GDP).
- Government freedom: is defined to include all government expenditures, including consumption and transfers. Ideally, the state will provide only true public goods, with an absolute minimum of expenditure.
- Monetary freedom: combines a measure of price stability with an assessment of price controls. Both inflation and price controls distort market activity. Price stability without microeconomic intervention is the ideal state for the free market.
- Investment freedom: is an assessment of the free flow of capital, especially foreign capital.
- Financial freedom is a measure of banking security as well as independence from government control. State ownership of banks and other financial institutions such as insurer and capital markets is an inefficient burden, and political favouritism has no place in a free capital market.
- Property rights is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state.
- Freedom from corruption is based on quantitative data that assess the perception of corruption in the business environment, including levels of governmental legal, judicial, and administrative corruption.
- Labour freedom is a composite measure of the ability of workers and businesses to interact without restriction by the state.
From many researches that have been done on the economic freedom of countries, there is a positive relationship between the economic freedom and the economic growth of a country(Akin et al., 2014; Cebula, Clark, & Mixon, 2013; F. Gohmann, K. Hobbs, & J. McCrickard, 2013; Hefner & Witte, 2008). The levels of the economic freedom of any country are usually in a random manner (Hefner & Witte, 2008). When the economic freedom of a country have increased in the year, it is not confirmed or necessary for the country to have a increasing pattern of the economic freedom in the coming year (Hefner & Witte, 2008). It is likely that there will be some decrement on their economic freedom.
Poverty and Economic Freedom
Numerous studies have shown that countries with more economic freedom grow more rapidly and achieve higher per-capita income levels than those that are less free (Berggren, 2003; Cole, 2003; Dawson, 1998, 2003; de Haan, Lundstrom, and Sturm, 2006; Easton and Walker, 1997).The reduction and elimination of poverty in the developing world has been an important, perhaps the most important, goal of development economics. The growth literature indicates that economic freedom is related to higher average per capita income levels, but is it also related to higher incomes for the poor in the developing world
Less economically free countries maintain barriers that stifle the entrepreneurial aspirations of the poor. Increased economic freedom implies a reduction of these barriers allowing the poor to flourish (Vargas Llosa 2008).
Others are less certain about how economic freedom may impact the poor. Increased economic growth may only benefit those in the highest income strata (Galor and Zeira 1993) and in spite of improved institutions (i.e. more economic freedom) the poor may still be left behind (Ray 2010).
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Based on previous research by Joseph Connors, 2013 it found that countries with more economic freedom had lower rates of extreme poverty. Moreover, countries that experienced increases in economic freedom had larger reductions in the extreme poverty rate. Countries with higher levels of economic freedom initially, experienced larger declines in poverty during the subsequent period.
Reducing Poverty through Economic Growth
Reductions in poverty are closely tied to economic growth. The poverty rates in countries such as Chile, Peru, Thailand, Malaysia, South Korea, China, and India have fallen sharply in recent decades because these countries have achieved rapid economic growth. Growth is the driving force underlying reductions in poverty. Thus, if you want to reduce poverty rates, it is vitally important to understand the growth process.