Part I. Introduction It has become apparent in recent years that the issue of vast globalization, economic development and its impact on various aspects of state wellbeing is the one that needs to be looked at very carefully. Moreover, direct investments into the country’s development and as a result improved quality of life are an additional incentive to increase the economic freedom level.
Throughout the centuries scholars and economists have argued on whether economic freedom based on private property and free markets is the only beneficial and effective form of economy formation or centralized system of governing is better. Myriad researches have been brought to public, however, our group believes economic freedom is currently in increasing phase of its development, and thus should be thoroughly examined and reviewed basing on country background and scores obtained.
This, in our view, will help to accelerate the wellbeing of Kazakhstan and possibly attract additional cash inflows from external market players. The paper will examine the issue of economic freedom and indices it defines in more details, will cover all the aspects included in consideration of the latter concept and will try to assess the relationship between economic freedom and potential investments rise. Brief definition of basic concepts In order to be in line with the topic and understand it deeply, below we present some underlying definitions of basic concepts that will be used throughout the paper.
The classic definition of economic freedom and its index is outlined below: “Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others” James Gwartney and Robert Lawson Economic Freedom of the World: 1996 Annual Report As obtained from www. economicfreedom. org, “economic freedom is the key to greater opportunity and an improved quality of life.
It’s the freedom to choose how to produce, sell, and use your own resources, while respecting others’ rights to do the same. While a simple concept, economic freedom is an engine that drives prosperity in the world and is the difference between why some societies thrive while others do not. ” Considering economic freedom is the issue of highest importance as it deals with each and every aspect of our life. Having greater economic freedom, the society ensures higher income levels, decreased poverty, less unemployment percentages and overall healthier state position in terms of economical, financial and political development.
Economic freedom index (EFI) is defined as “a ranking of countries based on the number and intensity of government regulations on wealth-creating activity. Metrics that an economic freedom index evaluates include international trade restrictions, government spending relative to GDP, occupational licensing requirements, private property rights, minimum wage laws and other government-controlled factors that affect people’s ability to earn a living and keep what they earn. ” (Extracted from www. investopedia. com).
For all over the years, The Heritage Foundation in partnership with The Wall Street Journal has tracked the trends in economic freedom around the world and assigned indices to each country. It is a valuable source to gather information from, and the current paper is mostly based on the latter findings. The key factors influencing the level of economic freedom are the personal choice, voluntary exchange coordinated by markets, freedom to enter and compete in markets and protection of individual property from aggression of other including the government intervention.
This implies that in economically free society government protects the individuals and their property, maintain stable monetary environment, refrain from creating barriers to trade and fairly allocate benefits; however, in case a government substitutes taxes, government expenditures, and regulations for personal choice, voluntary exchange, and market coordination, it may reduce economic freedom and thus diminish quality of life of the whole state.
Five broad areas are considered when summarizing and stating the index for a country: * Size of the government: meaning sound taxing (low marginal tax rates) and wise spendings from the side of the government. * Legal Structure and Security of Property Rights: this indicates the consistence of a state’s legal framework with property protection and application of the laws in various spheres of business conducting and everyday life. * Access to sound money: the essence of this concept is whether a government is able not to abuse its monopolistic power. To get high ratings here, a country’s inflation must be low and stable, and the government must permit people to own currencies of other nations” (Lawson, Robert A. , Economic Freedom, Library of Economics and Liberty) * Freedom to Trade Internationally: the core idea here is the presence of any barriers to free trade (quotas, restrictions or tariffs). * Regulation of Credit, Labor and Business: such concepts as minimum wages for workers, price controls, business licensing ; potential barriers to entry the business might be reviewed at this stage.
Having examined the surface of the issue to be researched, we formulated the research question we are going to obtain the answer to at the end of the paper. Research question: Do countries that exhibit greater degrees of economic freedom perform better than those that do not and will the latter help Kazakhstan to attract more potential investments? Part II. Economic Freedom: Kazakhstani case In 2012 Kazakhstan scored 63. 6 in terms of economic freedom level, and thus ensuring Kazakhstani economy to be number 65th in the world list.
As per the Heritage Foundation Report as of 2012, current country score is 1. 5 points higher in comparison with last year index. This amount represents slight improvements in property rights freedom, freedom from corruption and public spendings. Figure 1. 1 represents the history of indices obtained by the state in the last 5 years. Country| Year| Overall Freedom| Business Freedom| Financial Freedom| Kazakhstan| 2008| 61. 10| 56. 80| 60| Kazakhstan| 2009| 60. 10| 57. 90| 60| Kazakhstan| 2010| 61| 73. 50| 50| Kazakhstan| 2011| 62. 10| 74. 30| 50| Figure 1. 1 Figure 1. shows the overall trends of economic freedom indices throughout the time. It is clearly seen than in 2009 Kazakhstan scored the lowest, and the backup for this might be the substantial rise of global economic crisis. At that time the state encountered myriad barriers to healthy economic, financial and political environments, as it should have sustained positive financial balances all over the country, diminished bankruptcy potential, saved money of its citizens and remained attractive for the external investments. From that time on Kazakhstan tend to increase its economic reedom index and the line of indicating the latter steadily goes up throughout the years 2010-2012, and the last Heritage Foundation Report proves the fact that the country continues its positive trend of advancing economic freedom and ensuring constant development. As presented in the graph on Figure 1. 2, the state has become one of the first to turn back to the expansion and recovery from the global crisis. This is ensured by the enhanced regulation efficiency (at least endeavors towards that) and constant policy reforms in various areas of country wellbeing.
Figure 1. 2 The country also scores higher results if compared to the world and regional averages. As according to The Heritage Foundation, Kazakhstan ranks 11th out of 41 countries in Asia-Pacific region, and it is recorded one of the 20 largest score improvements in the 2012 Index considerations. Figure 1. 3 summarizes the above stated information and graphically represents Kazakhstani standpoint in comparison with global and regional averages indices. Figure 1. 3
The government of Kazakhstan being aware of the increased significance of economic freedom stability makes efforts in order to continue its positive index rising over time trend and adapts vast amount of laws, amendments and promotes individual’s freedom protection. “The link between economic freedom and prosperity is undeniable: the countries that score highly in terms of economic freedom also offer their people the best quality of life” (Azis Isa, Central Asian Free Market Institute Policy Analyst).
Many empirical studies using the Economic Freedom Index reveal that a country’s economic freedom is highly correlated with its level of capital investment and the rate of economic growth (Gwartney and Lawson ; Holcombe, 2006). Non-monetary measures such as social welfare and peaceful and healthy state environment also directly correlate with EFI. Scully (2002) has found that economic freedom is correlated with more equal distributions of income across countries. Rise of GDP per capita levels, promotion of decreased poverty percentages in a given country are also affected by the economic freedom situation of the country.
Below is the session of graphs analyzing the correlation of economic freedom levels with various aspects of a state development. Countries with more economic freedom have substantially higher per-capita incomes ans thus more stable economic wellbeing of the society. Figure 1. 4. As seen from the graphical representation, those states that fall into “most free” group tend to have more vast growth rates and as a result higher level of economic growth throughout the country.
The difference between the first and the last groups is rather big, and that proves the above stated assumption. Figure 1. 6 represents the correlation between economic growth and income per capita among the poorest strata of the society. As per the graph, we can suppose there is a direct positive relationship between the variables. Figure 1. 6 Kazakhstan has mostly faced economic freedom challenges throughout its history. Being a young state, it had no solid experience to rely upon rather than remaining habits and regimes obtained during Soviet Union times of ruling.
Kazakhstani people do not have much influence over the government and its regulations and laws and majority of them encounter many difficulties in business sphere entry levels, further conducting and maintaining of the latter as well as improving their own individual micro economy. However, there are some positive trends in formation of economic freedom in Kazakhstan, and year to year steady development as shown in the Heritage Foundation Report proves that same fact.
As according to the Heritage Foundation Report, “excessive dependence on raw commodity exports makes the economy particularly vulnerable to global price changes. Rising commodity prices and improved domestic conditions encouraged substantial economic growth in 2010 and 2011”. The organization in partnership with the World Bank states Kazakhstan has an ambitious economic development program, which is planned to be outperformed in the nearest years, and outlines some problematic zones government of the country should pay intent attention to.
The further section of the paper discusses the inefficient potential risk spheres the state should work on in order to relieve the situation in the future and continue its positive trend in developing economic freedom. Economic Freedom in Kazakhstan: Challenging restrictions Once the Annual 2012 Report is over and the country obtained its rating results, we recommend the government to consider the following currently inefficient spheres of the state wellbeing.
Kazakhstan still faces many challenges on the way of improving its economic freedom level. * Rule of Law As stated in the Heritage Foundation Report, legal framework is currently very inefficient and actually does not cover some spheres of the freedom the way it should. For instance, intellectual property rights are still in a very shaky position and there is no clearly stated and stable position on that sophisticated issue from the side of the government.
Although in the beginning of the current 2012 year there were some endeavors made in order to improve intellectual property rights in the country (banning some Internet resources sites, increased fines and jurisdiction cases), this particular policy just raised a new set of problems and questions and was vastly criticized from the side of the business owners as well as general public, because the new Law on Intellectual Property Rights interfered with basic Constitutional rights of every citizen to express the opinion and thoughts.
In addition, the court system lacks the capacity to prove its stability and honesty – this year there were many cases of court system failure: judges were taken with bribes, inefficient cases regulations and many more. Recent changes in anti-corruption law only deepened the definition and presence of the latter in the society as it implies indirect potential involvement from the side of the governmental bodies. * Limited government
Overall tax burden that exist in the country amounts in 21. 5 % of total domestic income. Government spendings are equivalent to 23. 5 percent of total domestic output. The difference between the two variables kept the substantially large oil revenues, thus relieving the whole situation and leaving public state debt standing at less than 15% of GDP. (as per the Heritage Foundation Annual 2012 report). * Regulatory efficiency ; Open markets
Business freedom, labor freedom, monetary freedom inefficiencies cases could be considered in that particular section. They in overall have many problems, bureaucratic barriers and lack of regulation from the side of the government. Business freedom in Kazakhstan, for instance, lack the easy entry possibilities for the individuals, as it is very costly and takes much more time than it is expected to, moreover, increased level of governmental taxes, quotas and tariffs are also barriers to free trade between people and states.
However, there are some positive sides in that area – potential WTO entry, expansion of Customs Union are the positive measures Kazakhstan is undertaking in this regard. As for the labor freedom, there is a tendency to think only about employers, leaving the employees aside. Thus, it is very cheap for a company to hire new employee, and it costs nothing to fire him/her. Moreover, in many national companies and even governmental bodies working day are non-scheduled and overtimes are not paid at all.
This is a large problem for the whole country. Child labor issue should also be considered attentively when pondering about economic freedom rise. Monetary freedom could be interfered by the government as it may tend to distort domestic prices and try to influence many industries in a row. Inflation rate is also increasing from year to year. This year it tends to be fluctuating thus leaving the individual suffer from potential commodity prices rise. Below is the summary of inflation rates statistics.