Sri Lanka ranked 92nd in Economic Freedom of the World Index; it can do much better

By Fred McMahon

Originaly appeared in Daily FT

As Sri Lanka celebrates the enormous benefits brought forward by four decades of the open economy, Advocata Institute looks back at the economic progress of the country and the benefits that have been passed onto the man on the street. 

From 1977 to date Sri Lanka’s economic growth over the last 40 years has expanded four-and-a-half fold on a person basis on an inflation-adjusted term. However, despite Sri Lanka opening its doors 40 years ago, the benefits and prosperity would be much greater if the economic freedom of Sri Lankans was increased. In the just released 2017 Economic Freedom of the World Report, produced by Canada’s Fraser Institute, Sri Lanka ranks 94th out of 159 jurisdictions.

Sri Lanka’s Advocata Institute studies and promotes sound economic policy for the nation. Starting 11 October, Advocata will hold an innovative conference – Economic Freedom Summit – which I am honoured to attend, to help build increased economic freedom for the people of Sri Lanka.

Sri Lanka’s growth may sound impressive, but consider Taiwan, which has long had a high level of economic freedom and ranks 32nd in the world. Its economy on a per person basis is eight times larger than it was in 1977, almost double the growth of Sri Lanka.

The longer-term effects of economic freedom are even more impressive, leading to greatly increased prosperity. Consider Hong Kong and Singapore, two tiny resource-poor places, but now number one and two in the world for economic freedom.

Singaporeans, averaged over the population, produce 14 times as much wealth per person as Sri Lankans; for Hong Kong, it’s 10 times as much. Taiwanese, with a lower level of economic freedom than Singapore or Hong Kong, but much higher than Sri Lanka, produce nearly seven times as much per person.

Why does economic freedom create such prosperity? Economic freedom is the ability of individuals and families to make their own economic decisions—what to buy, whether to set up a business, where to work or whom to hire, and so on—without interference from government or powerful interests of its cronies.

More than a century of experience has shown that the drive and ingenuity of individuals beats government planning or cronyism hands down in growth and prosperity.

With economic freedom, businesses can freely enter the market and consumers have choices. With a world of choice, every exchange must benefit both parties or the party that would come up short would reject the exchange and go elsewhere. This forces producers to constantly improve price, quality and innovation, driving productivity and economic growth and creating jobs.

The results are amazing, and not just for the rich. In the quarter least free nations globally, the average per capita income of the poorest 10% is $1,100; in the quarter freest nations, the income of the poorest 10% is $12,000, more than 10 times greater. Life expectancy rises from 64 years in the least free nations to 81 years in the freest nations.

The list could go on—over 600 studies have looked at the impact of economic freedom and found improvement in virtually all aspects of life. When people are free to look after themselves and their families, they do a good job.

The Fraser Institute studies economic freedom in five dimensions:

1.Size of government: When government taxes or spends too much, it reduces the space for free exchange and thus economic freedom. This is the one area in which Sri Lanka does well, but Sri Lankans should still ask whether the money they give the government by the way of taxes is well-spent.

2.Rule of Law and Property Rights: Everyone, not just the rich and powerful, should be able to depend on the rule of law to protect their property, ensure contracts are fairly enforced, and receive equal treatment in the courts.

3.Sound Money: Without sound money, inflation eats away at the value of your money and pay.

4.Free Trade: Sri Lankans should be able to buy from and sell to anyone, anywhere in the world. A small nation like Sri Lanka needs the world as its marketplace.

5.Regulation of credit, labour and business: Sri Lankans should be able to borrow from and lend to whom they wish; work for and hire whom they wish; start a business, or close it, as they wish.

Sri Lanka scores worst in sound money and freedom to trade, 135th out of 159 jurisdictions in both. Lack of sound money creates uncertainty undermining economic growth, an area to be looked at seriously. 

The country’s score in Freedom to Trade is inexcusable. Trade has been the path to prosperity for scores of nations. Sri Lanka must be open to sell to the world. The task of 1977’s opening remains incomplete with such barriers in place such as para tariffs that makes Sri Lanka’s trading regime complex to navigate compared to other economies.   

Sri Lanka ranks 92nd in regulation. To create economic dynamism, obstacles to work, business and credit must be removed.

In Rule of Law and Property Rights, Sri Lanka ranks 73rd. This may sound good compared to other areas, but it’s a huge problem because of its key importance to economic freedom. Freedom is not safe unless protected by the law. No nation has reached a high prosperity unless its citizens and their property are protected equally by an efficient and fair rule of law.

The challenges are great for Sri Lanka. Advocata, through research and advocacy, is seeking the solutions to provide a better, more prosperous life for the people of Sri Lanka. Stay tuned.

(Fred McMahon is a Fraser Institute resident fellow and holder of the Dr. Michael A. Walker Research Chair in Economic Freedom.  Mr. McMahon will deliver a talk on state of Economic Freedom in Sri Lanka on 12 October at Advocata Economic Freedom Summit.)