Philippines lacks economic freedom

By John Mangun / Outside the Box

EVERY year the Heritage Foundation publishes its Index of Economic Freedom. The latest issue, ratings for 2011, shows once again that the Philippines in its overall economic freedom ranks alongside some of the worst hellhole countries on the planet.

When your next door neighbors are Mozambique and Swaziland and you are way behind Mongolia, Lebanon and Uganda, it may be time to rethink your government policies.

By the Heritage Foundation’s definition, “Economic freedom [EF] is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume and invest in any way they please, with that freedom both protected by the state and unconstrained by the state.”

They measure EF in four categories: Rule of Law; Limited Government; Regulatory Efficiency; and Open Markets. Overall, on a scale of 1 to 100, PHL received a score of 57.

However, in the subcategories, the score is worse. For Property Rights, it is a 30 and for Freedom from corruption, the score is a 24. On Property, we rank right up there with Syria, Indonesia and Nigeria. For corruption, we proudly stand with Nigeria and Bangladesh. Greece is less corrupt than the Philippines.

Before you start thinking that ending corruption and fixing the judicial system is the answer, the other factors are just as interesting. Remember the heart of the definition of economic freedom, “In an economically free society, individuals are free to work, produce, consume and invest in any way they please.”

“Business freedom is a quantitative measure of the ability to start, operate and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process.” In Business Freedom, PHL has a score of 54, similar to Indonesia and Ecuador, but way behind Vietnam (61), Chile (69) and Thailand (72).

“Labor Freedom is a quantitative measure that looks into various aspects of the legal and regulatory framework of a country’s labor market.” Here the nation is scored at 52 along with highly socialist France and also Spain. Thailand scores a very high 79 and India is at 74.

Business and labor freedom are critical aspects to investment. “In an economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be allowed to move their resources into and out of specific activities, both internally and across the country’s borders, without restriction.” And how did the Philippines score as to Investment Freedom? We got a 40, interestingly, the same as Thailand.

Yet Thailand’s overall rank is 60 with PHL at 107 and Thailand’s overall score is 65 versus ours at 57.

What could be the variables that place Thailand so far ahead of the Philippines both in economic freedom and the resulting better economic growth and poverty reduction?

Thailand’s freedom from corruption score is much better at 35 versus 24 and its protection of property rights is scored at 45 against ours at 30. Case closed as to what the problem is.

Not exactly.

Investment in Thailand, both domestic and foreign, is what makes the Philippines look in comparison like a basket case. Yet their investment freedom ranking is the same as PHL. They have almost exactly the same foreign-investment restrictions on company and property ownership. Yes, their corruption and property rights ratings are both 55 ranks higher than PHL out of 179 countries.

The huge difference is business freedom and labor freedom. Thailand is 74 ranks higher in business freedom and 96 ranks higher in labor freedom.

There is of course a correlation between economic success and the rule of law, which is absolutely combined with freedom from corruption.

However, from foreign direct investment numbers and employment figures, decreased corruption and rule of law might be slightly offset by a better business climate. Russia has a worse score in the negatives but is much higher on the business freedoms.

Further, this economic freedom study has been done since 1995. The Philippines has improved little since its 1995 score of 55.

When you look at the longer-term picture, two trends appear. With countries having similar problems of corruption, greater business and labor freedom will create a better economy. Decreased government intervention and manipulation of business and labor creates a less corrupt environment. It makes sense. Make it easier to do business with less contact with government, then less opportunities for corruption.

On a personal note, e-mail me at john@mangunonmarkets.com for details on my upcoming stock-trading seminar. I guarantee the seminar is worth every peso. Registration is very limited and will end this week. You will not be disappointed. Attendees get a one-month subscription to the Premium Area of MangunOnMarkets.com.

E-mail to mangun@gmail.com and Twitter @mangunonmarkets. PSE stock-market information and technical-analysis tools provided by CitisecOnline.com Inc.