Economic Freedom- what does it mean and what it can do for Nepal

Rakesh Wadhwa

Extensive studies have documented that economically free countries prosper while those which are controlled stagnate. The correlation between wealth creation and economic freedom is extremely strong. A joint publication of The Wall Street Journal, the leading international business daily, and The Heritage foundation of USA, Washington’s pre-eminent think tank rates 156 countries annually based on 10 factors of this freedom. The publication is rightly called "Index of Economic Freedom". In the 2002 index Hongkong, Singapore and New Zealand occupy the top 3 positions while North Korea and Iraq are at the bottom.

The following chart makes clear that no country has become rich without a relatively free economy and every country which remains poor has put its citizens under severe economic controls. 71 countries fall under the ‘free or ‘mostly free’ category and 85 are ‘mostly unfree’ or ‘repressed’. The chart is revealing: your income will vary with the degree of economic freedom you possess. If you are lucky enough to be a citizen of an ‘economically free’ country your income will be 7 times higher than if you are in a country which is economically ‘mostly unfree’

The evidence is out and is undisputable- if you are poor, free your economy and you will prosper. Nepal and India with their rankings as 108 and 121 respectively both list as having their economies ‘ mostly unfree’. The results have been less than flattering. India remains a 3rd world country while Nepal inspite of its warmly hospitable and industrious people, its great climate, and worlds envy Mount Everest remains mired in heart-rending poverty.

Each Monday I will, in this column, discuss economic issues related to these factors and how Nepal can easily become an economic powerhouse by freeing its economy. It is possible. It can be done. It is easier than it seems and the time to begin the march to achieve wealth for its citizens, matching that of Switzerland, can start right now.

The 10 factors are

Trade policy,

Fiscal burden of government,

Government intervention in the country,

Monetary policy,

Capital flow and foreign and investment,

Banking and finance,

Wages and prices,

Property rights,

Regulation, and

Black market activity

Nepal can with ease replicate the success of Estonia, a country in Eastern Europe which few have heard of. In 1991 Estonia became free after 50 years of Soviet occupation and misrule. Prior to 1991 Estonia was among the most ‘unfree’ economies in the world.

The Estonian economy had been ruined under the Soviets - the spirit of its people shattered under a socialist communist regime. Shops were empty. Money no longer had value. Inflation ran at over 1000% while people stood in queues for several hours to buy food to live.

Today 11 years on Estonia had changed beyond recognition- it is a modern and vibrant country integrated with European Union. All this happened at an awesome pace. How? Estonia went from ‘unfree’ to one of the world’s ‘freest’ economies.

In 1992 it abolished all import tariffs and became one big "free trade zone’. It sharply decreased income taxes and simplified them, and also became one of the select few countries to have a zero corporate income tax on earnings reinvested in the country. Not surprisingly it’s ranking in the 2002 Index of Economic Freedom is 4. Along with this economic freedom for its people the government did its job by providing clear property rights, rule of law and a well functioning justice system. The people performed and transformed Estonia. Under this kind of ‘freedom’ the people of Nepal will do no less and similarly make Nepal an example to emulate for the rest of the world.

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